United Insurance Holdings Corp. Reports Financial Results for Its Fourth Quarter and Year Ended December 31, 2017

United Insurance Holdings Corp. (Nasdaq: UIHC) (UPC Insurance or the Company), a property and casualty insurance holding company, today reported its financial results for the fourth quarter ended December 31, 2017.

"Our team produced a very strong ending to an eventful year," said John Forney, President & CEO of UPC Insurance. "Earnings for the quarter were the largest in Company history, and all our businesses had excellent momentum as we entered 2018. We are working hard to build on that momentum during the rest of the year."

Return on Equity and Core Return on Equity

Return on Equity is a ratio the Company calculates by dividing the net income for the most recent twelve months by the average stockholder's equity for the most recent twelve months. Core Return on Equity (see calculation below) is a ratio calculated using non-GAAP measures. It is calculated by dividing the core income for the most recent twelve months by the average stockholders’ equity for the most recent twelve months. Core income is an after-tax non-GAAP measure that is calculated by excluding from net income the effect of non-cash amortization of intangible assets, special items such as merger-related professional fees, and realized gains or losses on the Company's investment portfolio. In the opinion of the Company’s management, core income, core income per share and core return on equity are meaningful indicators to investors of the Company's underwriting and operating results, since the excluded items are not necessarily indicative of operating trends. Internally, the Company’s management uses core income, core income per share and core return on equity to evaluate performance against historical results and establish financial targets on a consolidated basis. The table above reconciles core income to net income, the most directly comparable GAAP measure.

The calculations of the Company's combined ratio and underlying combined ratio are shown below.

Quarterly Financial Results

Net income for the fourth quarter of 2017 was $27.0 million, or $0.63 per diluted share, compared to net loss of $10.5 million, or a $0.49 loss per diluted share for the fourth quarter of 2016. The increase in net income was primarily due to the increase in gross premiums earned and improvement in the Company's underlying loss ratio for the fourth quarter of 2017 compared to the fourth quarter of 2016.

The Company's total gross written premium increased by $85.3 million, or 51.1%, to $252.4 million for the fourth quarter of 2017 from $167.1 million for the fourth quarter of 2016, primarily reflecting the Company's merger with AmCo on April 3, 2017, as well as organic growth in new and renewal business generated in all regions. The breakdown of the quarter-over-quarter changes in both direct written and assumed premiums by region and gross written premium by line of business are shown in the table below.

Loss and LAE decreased by $26.6 million, or 26.9%, to $72.1 million for the fourth quarter of 2017 from $98.7 million for the fourth quarter of 2016. Loss and LAE expense as a percentage of net earned premiums decreased 38.1 points to 43.4% for the quarter, compared to 81.5% for the same period last year. Excluding catastrophe losses and reserve development, the Company's gross underlying loss and LAE ratio for the fourth quarter of 2017 would have been 25.7%, a decrease of 6.9 points from 32.6% during the fourth quarter of 2016.

Policy acquisition costs increased by $16.6 million, or 49.4%, to $50.1 million for the fourth quarter of 2017 from $33.6 million for the fourth quarter of 2016. The primary driver of the increase in costs was the result of the managing general agent fees related to AmCo commercial premiums. The remaining change was the result of policy acquisition costs varying directly with changes in gross premiums earned and were generally consistent with the Company's growth in premium production and higher average market commission rates outside of Florida.

Operating and underwriting expenses increased by $3.5 million, or 66.5%, to $8.7 million for the fourth quarter of 2017 from $5.2 million for the fourth quarter of 2016, primarily due to increased costs related to the Company's ongoing growth, incurred expenses related to software improvements and costs related to the increase in underwriting reports.

General and administrative expenses increased by $11.7 million, or 104.8%, to $22.9 million for the fourth quarter of 2017 from $11.2 million for the fourth quarter of 2016, primarily due to amortization costs related to the merger with AmCo.

Year to Date Financial Results

Net income for the year ended December 31, 2017 was $10.1 million, or $0.27 per diluted share, compared to net income of $5.7 million, or $0.26 per diluted share for the year ended December 31, 2016. The increase in net income was primarily due to an increase in gross premiums earned and improvement in the Company's underlying loss ratio.

The Company's total gross written premium increased by $332.7 million, or 47.0%, to $1.0 billion for the year ended December 31, 2017 from $708.2 million for the year ended December 31, 2016, primarily reflecting the Company's merger with AmCo on April 3, 2017, as well as organic growth in new and renewal business generated in the Company's Gulf and Northeast regions. The breakdown of the year-over-year changes in both direct written and assumed premiums by region and gross written premium by line of business are shown in the table below.

Loss and LAE increased by $67.2 million, or 22.5%, to $365.5 million for the year ended December 31, 2017 from $298.4 million for the year ended December 31, 2016. Loss and LAE expense as a percentage of net earned premiums decreased 2.9 points to 62.4% for the year ended December 31, 2017, compared to 65.3% for the year ended December 31, 2016. Excluding catastrophe losses and reserve development, the Company's gross underlying loss and LAE ratio for the year would have been 25.5%, a decrease of 8.3 points from 33.8% during the year ended December 31, 2016.

During the third quarter of 2017, the Company's catastrophe losses included claims from Hurricane Harvey, which made landfall as a category 4 storm in Texas, and Hurricane Irma, which was also a category 4 storm making landfall in Florida. The Company's catastrophe excess of loss and quota share reinsurance limited retained losses to $83.0 million.

Policy acquisition costs increased by $57.8 million, or 49.1%, to $175.4 million for the year ended December 31, 2017 from $117.7 million for the year ended December 31, 2016. The primary driver of the increase in costs was the result of the managing general agent fees paid to AmRisc in relation to AmCo commercial premium. The remaining change was the result of policy acquisition costs varying directly with changes in gross premiums earned and were generally consistent with the Company's growth in premium production and higher average market commission rates outside of Florida.

Operating and underwriting expenses increased by $7.2 million, or 34.8%, to $27.7 million for the year ended December 31, 2017 from $20.5 million for the year ended December 31, 2016, primarily due to increased costs related to the Company's ongoing growth, incurred expenses related to software improvements and costs related to the increase in underwriting reports.

General and administrative expenses increased by $38.8 million, or 90.3%, to $81.8 million for the year ended December 31, 2017 from $43.0 million for the year ended December 31, 2016, primarily due to amortization costs related to the merger with AmCo.

Combined Ratio Analysis

The calculations of the Company's loss ratios and underlying loss ratios are shown below.

The calculations of the Company's expense ratio and underlying expense ratios are shown below.

UPC Insurance experienced favorable reserve development in the current year and its historical impact on the Company's net loss and net underlying loss ratios is outlined in the following table.

Reinsurance Costs as a % of Earned Premium

Excluding the Company's flood business, for which it cedes 100% of the risk of loss, reinsurance costs in the fourth quarter of 2017 were 37.6% of gross premiums earned, compared to 30.8% of gross premiums earned for the fourth quarter of 2016. The increase in this ratio was driven primarily by the Company's quota share reinsurance program, which was in effect for two months in the fourth quarter of 2017 but for only one month during the fourth quarter of 2016. If not for the effects of the quota share reinsurance program, the Company's reinsurance costs as a percent of earned premium would have decreased by 4.1 points during the quarter.

Investment Portfolio Highlights

The Company's cash and investment holdings totaled $1.1 billion at December 31, 2017 compared to $679.3 million at December 31, 2016. UPC Insurance's cash and investment holdings consist of investments in U.S. Government and agency securities, corporate debt and 100% investment grade money market instruments. Fixed maturities represented approximately 76.9% of total investments at December 31, 2017 with a modified duration of 3.9 years compared to 85.3% at December 31, 2016 with a modified duration of 3.7 years.

Book Value Analysis

Book value per share increased 12.6% from $11.15 at December 31, 2016, to $12.56 at December 31, 2017, and underlying book value per share increased 11.2% from $11.11 at December 31, 2016 to $12.35 at December 31, 2017. An increase in the Company's retained earnings, along with an increase in paid in capital as a result of the AmCo merger, drove the increase in our book value per share and underlying book value per share. The increase in accumulated other comprehensive income, as shown in the table below, also impacted our underlying book value per share.

Definitions of Non-GAAP Measures

We believe that investors' understanding of UPC Insurance's performance is enhanced by our disclosure of the following non-GAAP measures. Our methods for calculating these measures may differ from those used by other companies and therefore comparability may be limited.

Combined ratio excluding the effects of current year catastrophe losses, prior year reserve development and ceding commission income earned (underlying combined ratio) is a non-GAAP ratio, which is computed by subtracting the effect of current year catastrophe losses, prior year development, and ceding commission income earned related to the Company's quota share reinsurance agreement from the combined ratio. The Company believes that this ratio is useful to investors and it is used by management to reveal the trends in the Company's business that may be obscured by current year catastrophe losses, losses from lines in run-off, prior year development, and ceding commission income earned. Current year catastrophe losses cause the Company's loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under the Company's quota share reinsurance agreement. The Company believes it is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company's performance. The most direct comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of the Company's business.

Net Loss and LAE excluding the effects of current year catastrophe losses and prior year reserve development (underlying Loss and LAE) is a non-GAAP measure which is computed by subtracting the effect of current year catastrophe losses and prior year reserve development from Loss and LAE. The Company uses underlying loss and LAE figures to analyze the Company's loss trends that may be impacted by current year catastrophe losses and prior year development on the Company's reserves. As discussed previously, these two items can have a significant impact on the Company's loss trends in a given period. The Company believes it is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company's performance. The most direct comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net losses and LAE and does not reflect the overall profitability of the Company's business.

Operating Expenses excluding the effects of ceding commission income earned, merger expenses, and amortization of intangible assets (underlying expense) is a non-GAAP measure which is computed by subtracting ceding income earned related to the Company's quota share reinsurance agreement, merger expenses and amortization of intangibles. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under the Company's quota share reinsurance agreement. Merger expenses are directly related to past mergers and are not reflective of current period operating performance. Similarly, amortization expense is related to the amortization of intangible assets acquired through mergers and therefore the expense does not arise through normal operations. The Company believes it is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company's performance. The most direct comparable GAAP measure is operating expenses. The underlying expense measure should not be considered a substitute for the expense ratio and does not reflect the overall profitability of the Company's business.

Net Income excluding the effects of merger expenses, non-cash amortization of intangible assets and realized gains (losses), net of tax (core income) is a non-GAAP measure which is computed by adding merger expenses, net of tax, and amortization, net of tax, to net income and subtracting realized gains (losses) on our investment portfolio net of tax, from net income. Merger expenses are directly related to past mergers and are not reflective of current period operating performance. Similarly, amortization expense is related to the amortization of intangible assets acquired through merger and therefore the expense does not arise through normal operations. Investment portfolio gains (losses) vary independent of the Company's operations. The Company believes it is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company's performance. The most direct comparable GAAP measure is net income. The core income measure should not be considered a substitute for net income and does not reflect the overall profitability of the Company's business.

About UPC Insurance

Founded in 1999, UPC Insurance is an insurance holding company that sources, writes and services personal and commercial residential property and casualty insurance policies using a group of wholly owned insurance subsidiaries through a variety of distribution channels. The Company currently writes policies in Connecticut, Florida, Georgia, Hawaii, Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, South Carolina and Texas, and is licensed to write in Alabama, Delaware, Maryland, Mississippi, New Hampshire, and Virginia. From its headquarters in St. Petersburg, UPC Insurance's team of dedicated professionals manages a completely integrated insurance company, including sales, underwriting, customer service and claims. UPC Insurance is a company committed to financial stability and solvency.

Forward-Looking Statements

Statements made in this press release, or on the conference call identified above, and otherwise, that are not historical facts are “forward-looking statements” that anticipate results based on our estimates, assumptions and plans and are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words such as “may,” “will,” “expect,” "endeavor," "project," “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology. We believe these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements may be found in our filings with the U.S. Securities and Exchange Commission, including the “Risk Factors” section in our most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and, except as required by applicable law, we undertake no obligation to update or revise any forward-looking statement.

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