AMERICAN COASTAL INSURANCE (ACIC) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________

FORM 10-Q

_______________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

Commission File Number 001-35761

_____________________

United Insurance Holdings Corp.

(Exact Name of Registrant as Specified in its Charter)

Delaware	75-3241967
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification Number)
800 2nd Avenue S	33701
St. Petersburg, Florida	(Zip Code)
(Address of Principal Executive Offices)

727-895-7737

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share	UIHC	Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  R    No  £

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  R    No  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	£	Accelerated filer	þ
Non-accelerated filer	£	Smaller reporting company	£
		Emerging growth company	£

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  £    No  R

As of November 1, 2019, 43,234,488 shares of common stock, par value $0.0001 per share, were outstanding.

UNITED INSURANCE HOLDINGS CORP.

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements	4
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	5
	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
	Item 4. Controls and Procedures	44
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	45
	Item 1A. Risk Factors	45
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
	Item 3. Defaults Upon Senior Securities	45
	Item 4. Mine Safety Disclosures	45
	Item 5. Other Information	45
	Item 6. Exhibits	46
Signatures		47

Throughout this Quarterly Report on Form 10-Q (Form 10-Q), we present amounts in all tables in thousands, except for share amounts, per share amounts, policy counts or where more specific language or context indicates a different presentation. In the narrative sections of this Form 10-Q, we show full values rounded to the nearest thousand.

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UNITED INSURANCE HOLDINGS CORP.

FORWARD-LOOKING STATEMENTS

Statements in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about anticipated growth in revenues, gross written premium, earnings per share, estimated unpaid losses on insurance policies, investment returns, and diversification and expectations about our liquidity, our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “endeavor,” “project,” “believe,” "plan," “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

• our exposure to catastrophic events and severe weather conditions;

• the regulatory, economic and weather conditions present in Florida, the state in which we are most concentrated;

• our ability to cultivate and maintain agent relationships, particularly our relationship with AmRisc, LLC (AmRisc);

• the possibility that actual claims incurred may exceed our loss reserves for claims;

• assessments charged by various governmental agencies;

• our ability to implement and maintain adequate internal controls over financial reporting;

• our ability to maintain information technology and data security systems, and to outsource relationships;

• our reliance on key vendor relationships, and the ability of our vendors to protect the personal information of our customers;

• our ability to attract and retain the services of senior management;

• risks and uncertainties relating to our acquisitions, including our ability to successfully integrate the acquired companies;

• our ability to generate sufficient cash to service all of our indebtedness and comply with covenants related to our indebtedness;

• our ability to increase or maintain our market share;

• changes in the regulatory environment present in the states in which we operate;

• the impact of new federal or state regulations that affect the property and casualty insurance market;

• the cost, variability and availability of reinsurance;

• our ability to collect from our reinsurers on our reinsurance claims;

• dependence on investment income and the composition of our investment portfolio and related market risks;

• the possibility of the pricing and terms for our products to decline due to the historically cyclical nature of the property and casualty insurance and reinsurance industry;

• the outcome of litigation pending against us, including the terms of any settlements;

• downgrades in our financial strength ratings;

• the impact of future transactions of substantial amounts of our common stock by us or our significant stockholders on our stock price;

• our ability to pay dividends in the future;

• the ability of R. Daniel Peed and his affiliates to exert significant control over us due to substantial ownership of our common stock, subject to certain restrictive covenants that may restrict our ability to pursue certain opportunities; and

• other risks and uncertainties described in the section entitled "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2018.

We caution you not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements to reflect new information, the occurrence of unanticipated events or otherwise.

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UNITED INSURANCE HOLDINGS CORP.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)

	September 30, 2019			December 31, 2018
ASSETS
Investments, at fair value:
Fixed maturities, available-for-sale (amortized cost of $902,712 and $874,445, respectively)	$	921,212		$	862,345
Equity securities	104,629			80,978
Other investments (amortized cost of $9,245 and $8,288, respectively)	10,024			8,513
Total investments	$	1,035,865		$	951,836
Cash and cash equivalents	270,563			112,679
Restricted cash	74,849			71,441
Total cash, cash equivalents and restricted cash	$	345,412		$	184,120
Accrued investment income	6,037			6,017
Property and equipment, net	28,874			17,137
Premiums receivable, net	86,365			95,816
Reinsurance recoverable on paid and unpaid losses	648,372			625,998
Ceded unearned premiums	367,550			217,885
Goodwill	73,045			73,045
Deferred policy acquisition costs, net	115,158			105,582
Intangible assets, net	27,403			31,351
Other assets	20,590			12,641
Total Assets	$	2,754,671		$	2,321,428
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	824,147		$	661,203
Unearned premiums	726,297			627,313
Reinsurance payable on premiums	321,994			175,272
Payments outstanding	56,761			56,534
Accounts payable and accrued expenses	79,201			71,048
Operating lease liability	356			—
Other liabilities	49,874			29,571
Notes payable, net	159,523			160,118
Total Liabilities	$	2,218,153		$	1,781,059
Commitments and contingencies (Note 10)
Stockholders' Equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding	$	—		$	—
Common stock, $0.0001 par value; 50,000,000 shares authorized; 43,056,310 and 43,029,845 issued, respectively; 43,234,488 and 42,984,578 outstanding, respectively	4			4
Additional paid-in capital	391,433			389,141
Treasury shares, at cost: 212,083 shares	(431		)	(431		)
Accumulated other comprehensive income (loss)	13,714			(9,030		)
Retained earnings	111,122			140,546
Total stockholders' equity attributable to United Insurance Holdings Corp. (UIHC) stockholders	$	515,842		$	520,230
Noncontrolling interests (NCI)	20,676			20,139
Total Stockholders' Equity	$	536,518		$	540,369
Total Liabilities and Stockholders' Equity	$	2,754,671		$	2,321,428

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
REVENUE:
Gross premiums written	$	317,184		$	295,935		$	1,085,505		$	960,214
Change in gross unearned premiums	27,499			8,021			(98,984		)	(87,667		)
Gross premiums earned	344,683			303,956			986,521			872,547
Ceded premiums earned	(151,763		)	(132,626		)	(422,475		)	(365,011		)
Net premiums earned	192,920			171,330			564,046			507,536
Net investment income	7,803			6,888			22,668			19,665
Net realized investment gains (losses)	18			(447		)	186			(674		)
Net unrealized gain on equity securities	2,609			6,109			15,519			5,046
Other revenue	4,248			3,772			12,276			11,280
Total revenue	207,598			187,652			614,695			542,853
EXPENSES:
Losses and loss adjustment expenses	148,125			120,552			368,924			286,393
Policy acquisition costs	61,849			54,200			178,717			153,716
Operating expenses	12,167			10,976			33,577			28,976
General and administrative expenses	19,105			15,358			53,488			51,326
Interest expense	2,443			2,455			7,379			7,371
Total expenses	243,689			203,541			642,085			527,782
Income (loss) before other income	(36,091		)	(15,889		)	(27,390		)	15,071
Other income	17			19			44			106
Income (loss) before income taxes	(36,074		)	(15,870		)	(27,346		)	15,177
Provision (benefit) for income taxes	(7,859		)	(4,163		)	(5,912		)	3,815
Net income (loss)	$	(28,215	)	$	(11,707	)	$	(21,434	)	$	11,362
Less: Net income attributable to noncontrolling interests	$	65		$	1		$	280		$	1
Net income (loss) attributable to UIHC	$	(28,280	)	$	(11,708	)	$	(21,714	)	$	11,361
OTHER COMPREHENSIVE INCOME (LOSS):
Change in net unrealized gains (losses) on investments	5,606			(3,354		)	30,561			(30,706		)
Reclassification adjustment for net realized investment losses (gains)	(18		)	447			(186		)	674
Income tax benefit (expense) related to items of other comprehensive income (loss)	(1,486		)	699			(7,374		)	7,110
Total comprehensive income (loss)	$	(24,113	)	$	(13,915	)	$	1,567		$	(11,560	)
Less: Comprehensive income attributable to NCI	101			1			537			1
Comprehensive income (loss) attributable to UIHC	$	(24,214	)	$	(13,916	)	$	1,030		$	(11,561	)
Weighted average shares outstanding
Basic	42,795,414			42,677,893			42,750,710			42,636,515
Diluted	42,795,414			42,677,893			42,750,710			42,791,208
Earnings available to UIHC common stockholders per share
Basic	$	(0.66	)	$	(0.27	)	$	(0.51	)	$	0.27
Diluted	$	(0.66	)	$	(0.27	)	$	(0.51	)	$	0.27

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Statements include related party transactions as detailed in Note 12.

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UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended

(Unaudited)

	Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income (loss)			Retained Earnings			Stockholders' Equity Attributable to UIHC			NCI		Total Stockholders’ Equity
	Number of Shares	Dollars
June 30, 2018	42,822,187	$	4	$	388,193	$	(431	)	$	(11,493	)	$	168,461		$	544,734		$	—	$	544,734
Net income (loss)	—	—		—		—			—			(11,708		)	(11,708		)	1		(11,707		)
Other comprehensive loss, net	—	—		—		—			(2,209		)	—			(2,209		)	—		(2,209		)
Stock Compensation	88,392	—		627		—			—			—			627			—		627
Cash dividends on common stock ($0.06 per common share)	—	—		—		—			—			(2,569		)	(2,569		)	—		(2,569		)
Net increase due to acquisitions																		20,000		20,000
September 30, 2018	42,910,579	$	4	$	388,820	$	(431	)	$	(13,702	)	$	154,186		$	528,877		$	20,001	$	548,878

	Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income (loss)		Retained Earnings			Stockholders' Equity Attributable to UIHC			NCI		Total Stockholders’ Equity
	Number of Shares	Dollars
June 30, 2019	43,231,184	$	4	$	390,719	$	(431	)	$	9,648	$	141,973		$	541,913		$	20,575	$	562,488
Net income (loss)											(28,280		)	(28,280		)	65		(28,215		)
Other comprehensive income, net									4,066					4,066			36		4,102
Stock Compensation	3,304			714										714					714
Cash dividends on common stock ($0.06 per common share)											(2,571		)	(2,571		)			(2,571		)
September 30, 2019	43,234,488	$	4	$	391,433	$	(431	)	$	13,714	$	111,122		$	515,842		$	20,676	$	536,518

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Stockholders’ Equity For the Nine Months Ended

(Unaudited)

	Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income (loss)			Retained Earnings			Stockholders' Equity Attributable to UIHC			NCI		Total Stockholders’ Equity
	Number of Shares	Dollars
December 31, 2017	42,753,054	$	4	$	387,145	$	(431	)	$	9,221		$	141,186		$	537,125		$	—	$	537,125
Net income	—	—		—		—			—			11,361			11,361			1		11,362
Other comprehensive loss, net	—	—		—		—			(13,585		)	—			(13,585		)	—		(13,585		)
Reclassification due to adoption of ASU 2016-01		—		—		—			(9,338		)	9,338			—			—		—
Stock Compensation	157,525	—		1,675		—			—			—			1,675			—		1,675
Cash dividends on common stock ($0.06 per common share)	—	—		—		—			—			(7,699		)	(7,699		)	—		(7,699		)
Net increase due to acquisitions		—		—		—			—			—						20,000		20,000
September 30, 2018	42,910,579	$	4	$	388,820	$	(431	)	$	(13,702	)	$	154,186		$	528,877		$	20,001	$	548,878

	Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income (loss)			Retained Earnings			Stockholders' Equity Attributable to UIHC			NCI		Total Stockholders’ Equity
	Number of Shares	Dollars
December 31, 2018	42,984,578	$	4	$	389,141	$	(431	)	$	(9,030	)	$	140,546		$	520,230		$	20,139	$	540,369
Net income (loss)												(21,714		)	(21,714		)	280		(21,434		)
Other comprehensive income, net									22,744						22,744			257		23,001
Stock Compensation	249,910			2,292											2,292					2,292
Cash dividends on common stock ($0.06 per common share)												(7,710		)	(7,710		)			(7,710		)
September 30, 2019	43,234,488	$	4	$	391,433	$	(431	)	$	13,714		$	111,122		$	515,842		$	20,676	$	536,518

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2019			2018
OPERATING ACTIVITIES
Net income (loss)	$	(21,434	)	$	11,362
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization	8,984			16,192
Bond amortization and accretion	3,884			3,822
Net realized (gains) losses on investments	(186		)	674
Net unrealized gains on equity securities	(15,519		)	(5,046		)
Provision for uncollectable premiums	186			112
Deferred income taxes, net	(4,584		)	3,232
Stock based compensation	2,292			1,675
Changes in operating assets and liabilities:
Accrued investment income	(20		)	(194		)
Premiums receivable	9,265			(3,254		)
Reinsurance recoverable on paid and unpaid losses	(22,374		)	(37,780		)
Ceded unearned premiums	(149,665		)	(118,012		)
Deferred policy acquisition costs, net	(9,576		)	(1,882		)
Other assets	(8,031		)	(1,473		)
Unpaid losses and loss adjustment expenses	162,944			46,610
Unearned premiums	98,984			87,667
Reinsurance payable on premiums	146,722			148,056
Payments outstanding	227			9,003
Accounts payable and accrued expenses	8,153			5,506
Operating lease liability	356			—
Other liabilities	17,513			(44,715		)
Net cash provided by operating activities	$	228,121		$	121,555
INVESTING ACTIVITIES
Proceeds from sales, maturities and repayments of:
Fixed maturities	168,342			152,461
Equity securities	1,978			2,471
Other investments	5,461			1,087
Policy loans	—			20,000
Purchases of:
Fixed maturities	(200,208		)	(248,652		)
Equity securities	(11,011		)	(26,731		)
Other investments	(6,395		)	(1,100		)
Cost of property, equipment and capitalized software acquired	(16,437		)	(2,675		)
Net cash used in investing activities	$	(58,270	)	$	(103,139	)
FINANCING ACTIVITIES
Investment in subsidiary - NCI	—			20,000
Repayments of borrowings	(849		)	(849		)
Payments of debt issuance costs	—			(62		)
Dividends	(7,710		)	(7,699		)
Net cash provided by (used in) financing activities	$	(8,559	)	$	11,390
Increase in cash, cash equivalents and restricted cash	161,292			29,806
Cash, cash equivalents and restricted cash at beginning of period	184,120			276,275
Cash, cash equivalents and restricted cash at end of period	$	345,412		$	306,081
Supplemental Cash Flows Information
Interest paid	$	4,930		$	4,990
Income taxes paid	$	284		$	4,673

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

1)    ORGANIZATION, CONSOLIDATION AND PRESENTATION

(a)Business

United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes and services residential personal and commercial property and casualty insurance policies using a network of agents, four wholly-owned insurance subsidiaries, and one majority-owned insurance subsidiary. Our largest insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our four other insurance subsidiaries are Family Security Insurance Company, Inc. (FSIC), acquired via merger on February 3, 2015; Interboro Insurance Company (IIC), acquired via merger on April 29, 2016; American Coastal Insurance Company (ACIC), acquired via merger on April 3, 2017; and Journey Insurance Company (JIC). JIC was formed in strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited (Kiln) on August 30, 2018. The Kiln subsidiary holds a noncontrolling interest in JIC.

Our other subsidiaries include United Insurance Management, L.C. (UIM), a managing general agent that manages

substantially all aspects of UPC and FSIC's business; Skyway Claims Services, LLC, which provides claims adjusting services to UPC, FSIC and IIC; AmCo Holdings Company, LLC (AmCo) and Family Security Holdings, LLC (FSH), which are holding company subsidiaries that consolidate their respective insurance companies; BlueLine Cayman Holdings (BlueLine), which reinsures portfolios of excess and surplus policies; UPC Re, which provides a portion of the reinsurance protection purchased by our insurance subsidiaries when needed; and Skyway Reinsurance Services, LLC, which provides reinsurance brokerage services for our insurance companies.

Our primary product is homeowners' insurance, which we currently offer in 12 states, under authorization from the insurance regulatory authorities in each state. In addition, we write commercial residential insurance in the state of Florida. We are also licensed to write property and casualty insurance in an additional six states; however, we have not commenced writing in these states.

We conduct our operations under one reportable segment, property and casualty insurance policies. Our chief operating decision maker is our Chief Executive Officer, who makes decisions to allocate resources and assesses performance at the corporate level.

(b)Consolidation and Presentation

We prepare our unaudited condensed consolidated interim financial statements in conformity with U.S. generally accepted accounting principles (GAAP). We have condensed or omitted certain information and footnote disclosures normally included in the annual consolidated financial statements presented in accordance with GAAP. In management's opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of interim periods. All intercompany balances and transactions have been eliminated. Our unaudited condensed consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2018.

While preparing our unaudited condensed consolidated financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include our reserves for unpaid losses and loss adjustment expenses, investments and goodwill. Except for the captions on our Unaudited Condensed Consolidated Balance Sheets and Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.

We reclassified certain amounts in the 2018 financial statements to conform to the 2019 presentation, including reclassifying the presentation of outstanding checks in excess of funds on deposit in the financing section of the Unaudited Condensed Consolidated Statements of Cash Flows to change in payments outstanding in the operating section, to provide the users of the financial statement with more transparency. These reclassifications had no impact on our results of operations or stockholders' equity, as previously reported.

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate our results for the remainder of the year or for any other future period.

2)    SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to Significant Accounting Policies

We have made no changes to our significant accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2018, except for the standards adopted in 2019 as noted below.

(b) Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02). This update is intended to replace existing lease guidance by requiring a lessee to recognize substantially all leases (whether operating or finance leases) on the balance sheet as a right-of-use asset and an associated lease liability. Short-term leases of 12 months or less are excluded from this standard. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. We adopted this standard as of January 1, 2019 using a modified retrospective approach, which allowed us to initially apply the new lease standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings for 2019, with no adjustment to prior periods presented. The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the standard resulted in the recognition of a right-of-use asset of $482,000 at January 1, 2019, which was recorded within Other Assets on our Unaudited Condensed Consolidated Balance Sheets, and a corresponding lease liability of $482,000 at January 1, 2019 for our operating leases. Additionally, we elected the practical expedients that permit the exclusion of leases considered to be short-term and with value that falls under our capitalization threshold. We also elected the practical expedient of not segregating lease and nonlease components for the leases on our office equipment.

(c) Pending Accounting Pronouncements

We have evaluated recent accounting pronouncements that have had or may have a significant effect on our financial statements or on our disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). This update modifies the existing disclosure requirements on fair value measurements in Topic 820 by changing requirements regarding Level 1, Level 2 and Level 3 investments. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. Entities are permitted to early adopt any removed or modified disclosures of ASU 2018-13 immediately and delay the adoption of the additional disclosures until their effective date. We have early adopted the guidance on removed and modified disclosures. We do not intend to early adopt the additional disclosures and are assessing the impact of retrospectively adopting the additions from this new accounting standard on our fair value disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-07 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted for certain requirements. We do not intend to early adopt and are assessing the impact of prospectively adopting this new accounting standard on our condensed consolidated financial statements and related disclosures. Any impact of the standard on our unaudited condensed consolidated financial statements and related disclosures will be dependent on market conditions of the reporting units at the time of adoption.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of

Credit Losses on Financial Instruments (ASU 2016-13). This update is intended to replace the incurred loss impairment

methodology in current GAAP with a method that reflects expected credit losses and requires consideration of a broader range

of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will provide users with more useful

10

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

information regarding the expected credit losses on financial instruments and other commitments to extend credit held by a

reporting entity at each reporting date. In addition, credit losses on available-for-sale debt securities will now have to be

presented as an allowance rather than as a write-down. ASU 2016-13 is effective for fiscal years beginning after December 15,

2019, including interim periods within those fiscal years, with early adoption permitted for certain requirements. We do not

intend to early adopt and are assessing the impact of adopting this new accounting standard on our unaudited condensed consolidated financial statements and related disclosures.

3)    INVESTMENTS

The following table details fixed-maturity available-for-sale securities, by major investment category, at September 30, 2019 and December 31, 2018:

	Cost or Adjusted/Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2019
U.S. government and agency securities	$	114,446	$	1,168	$	201	$	115,413
Foreign government	3,980		93		1		4,072
States, municipalities and political subdivisions	134,605		2,892		50		137,447
Public utilities	29,394		763		29		30,128
Corporate securities	289,456		7,155		118		296,493
Mortgage-backed securities	269,252		6,245		243		275,254
Asset backed securities	59,459		849		21		60,287
Redeemable preferred stocks	2,120		46		48		2,118
Total fixed maturities	$	902,712	$	19,211	$	711	$	921,212
December 31, 2018
U.S. government and agency securities	$	100,240	$	50	$	1,315	$	98,975
Foreign government	3,993		5		16		3,982
States, municipalities and political subdivisions	145,415		354		1,301		144,468
Public utilities	24,560		11		681		23,890
Corporate securities	307,875		272		6,159		301,988
Mortgage-backed securities	227,004		333		3,483		223,854
Asset-backed securities	64,071		105		139		64,037
Redeemable preferred stocks	1,287		3		139		1,151
Total fixed maturities	$	874,445	$	1,133	$	13,233	$	862,345

Equity securities are summarized as follows:

	September 30, 2019				December 31, 2018
	Estimated Fair Value		Percent of Total		Estimated Fair Value		Percent of Total
Mutual funds	$	60,137	57.5	%	$	50,016	61.8	%
Public utilities	2,917		2.8	%	1,759		2.2
Other common stocks	39,774		38.0	%	27,198		33.6
Nonredeemable preferred stocks	1,801		1.7	%	2,005		2.4
Total equity securities	$	104,629	100.0	%	$	80,978	100.0	%

11

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the three and nine months ended September 30, 2019 and 2018:

	2019					2018
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
Three Months Ended September 30,
Fixed maturities	$	66		$	34,282	$	12		$	4,864
Equity securities	3			272		8			411
Short-term investments	—			2,511		—			—
Total realized gains	69			37,065		20			5,275
Fixed maturities	(48		)	2,033		(441		)	46,268
Equity securities	(3		)	14		(26		)	387
Short-term investments	—			10		—			—
Total realized losses	(51		)	2,057		(467		)	46,655
Net realized investment gains (losses)	$	18		$	39,122	$	(447	)	$	51,930
Nine Months Ended September 30,
Fixed maturities	$	597		$	129,364	$	68		$	11,745
Equity securities	94			814		517			1,593
Short-term investments	—			3,571		—			—
Total realized gains	691			133,749		585			13,338
Fixed maturities	(287		)	36,661		(1,233		)	116,587
Equity securities	(217		)	1,163		(26		)	387
Short-term investments	(1		)	1,035		—			—
Total realized losses	(505		)	38,859		(1,259		)	116,974
Net realized investment gains (losses)	$	186		$	172,608	$	(674	)	$	130,312

The table below summarizes our fixed maturities at September 30, 2019 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations.

	September 30, 2019
	Cost or Amortized Cost		Percent of Total		Fair Value		Percent of Total
Due in one year or less	$	101,063	11.2	%	$	101,143	11.0	%
Due after one year through five years	297,049		32.9	%	301,240		32.7	%
Due after five years through ten years	168,910		18.7	%	175,932		19.1	%
Due after ten years	6,979		0.8	%	7,356		0.8	%
Asset and mortgage backed securities	328,711		36.4	%	335,541		36.4	%
Total	$	902,712	100.0	%	$	921,212	100.0	%

12

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

The following table summarizes our net investment income by major investment category:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Fixed maturities	$	5,757		$	5,725		$	17,379		$	15,929
Equity securities	614			525			1,728			1,455
Cash and cash equivalents	1,611			588			3,407			1,427
Other investments	83			41			847			830
Other assets	11			9			108			24
Investment income	8,076			6,888			23,469			19,665
Investment expenses	(273		)	(267		)	(801		)	(756		)
Net investment income	$	7,803		$	6,621		$	22,668		$	18,909

Portfolio monitoring

We have a comprehensive portfolio monitoring process to identify and evaluate each fixed-income security whose carrying value may be other-than-temporarily impaired.

For each fixed-income security in an unrealized loss position, we determine if the loss is temporary or other-than-temporary. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, then the security's decline in fair value is considered other-than-temporary and is recorded in earnings.

If we have not made the decision to sell the fixed-income security and it is more likely than not that we will be required to sell the fixed-income security before recovery of its amortized cost basis, we evaluate whether we expect the security to receive cash flows sufficient to recover the entire cost or amortized cost basis of the security. We calculate the estimated recovery value by discounting the best estimate of future cash flows at the security's original or current effective rate, as appropriate, and compare this to the cost or amortized cost of the security. If we do not expect to receive cash flows sufficient to recover the entire cost or amortized cost basis of the fixed-income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income (loss).

Our portfolio monitoring process includes a quarterly review of all fixed-income securities to identify instances where the fair value of a security compared to its cost or amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using information relevant to the collectability or recovery of the security that is reasonably available. Inherent in our evaluation of other-than-temporary impairment for these fixed-income securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or cost.

13

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

The following table presents an aging of our unrealized investment losses by investment class:

	Less Than Twelve Months					Twelve Months or More
	Number of Securities(1)	Gross Unrealized Losses		Fair Value		Number of Securities(1)	Gross Unrealized Losses		Fair Value
September 30, 2019
U.S. government and agency securities	20	$	50	$	18,550	40	$	151	$	34,669
Foreign governments	—	—		—		2	1		600
States, municipalities and political subdivisions	24	40		21,349		4	10		3,188
Public utilities	9	28		4,634		2	1		250
Corporate securities	49	62		21,686		45	56		18,617
Mortgage-backed securities	52	84		25,835		56	159		16,691
Asset backed securities	14	12		7,466		6	9		2,260
Redeemable preferred stocks	3	12		1,104		2	36		199
Total fixed maturities	171	$	288	$	100,624	157	$	423	$	76,474
December 31, 2018
U.S. government and agency securities	45	$	111	$	28,464	55	$	1,204	$	61,264
Foreign governments	5	16		2,978		—	—		—
States, municipalities and political subdivisions	49	272		38,469		91	1,029		68,115
Public utilities	30	374		13,685		19	307		7,805
Corporate securities	351	3,149		144,769		208	3,010		117,351
Mortgage-backed securities	87	1,303		88,754		135	2,180		70,510
Asset-backed securities	67	136		41,871		7	3		1,372
Redeemable preferred stocks	8	62		711		2	77		8,377
Total fixed maturities	642	$	5,423	$	359,701	517	$	7,810	$	334,794

⁽¹⁾ This amount represents the actual number of discrete securities, not the number of shares or units of those securities. The numbers are not presented in thousands.

During our quarterly evaluations of our securities for impairment, we determined that none of our investments in fixed-income securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt security investments continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. Due to the adoption of ASU 2016-01 as of January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in the valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales. During the three and nine months ended September 30, 2019 and 2018, we recorded no other-than-temporary impairment charges.

14

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

Fair value measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on our Unaudited Condensed Consolidated Balance Sheets at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.

Level 2: Assets and liabilities whose values are based on the following:

(a) Quoted prices for similar assets or liabilities in active markets;

(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or

(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect our estimates of the assumptions that market participants would use in valuing the assets and liabilities.

We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, Nasdaq and NYSE American. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on September 30, 2019 and December 31, 2018. Changes in interest rates subsequent to September 30, 2019 may affect the fair value of our investments.

The fair value of our fixed maturities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed-income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector and, where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience.

Any change in the estimated fair value of our fixed-income securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income (loss) on our Unaudited Condensed Consolidated Balance Sheet as of September 30, 2019.

15

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

The following table presents the fair value of our financial instruments measured on a recurring basis by level at September 30, 2019 and December 31, 2018:

	Total		Level 1		Level 2		Level 3
September 30, 2019
U.S. government and agency securities	$	115,413	$	—	$	115,413	$	—
Foreign government	4,072		—		4,072		—
States, municipalities and political subdivisions	137,447		—		137,447		—
Public utilities	30,128		—		30,128		—
Corporate securities	296,493		—		296,493		—
Mortgage-backed securities	275,254		—		275,254		—
Asset-backed securities	60,287		—		60,287		—
Redeemable preferred stocks	2,118		594		1,524		—
Total fixed maturities	921,212		594		920,618		—
Mutual funds	60,137		56,730		3,407		—
Public utilities	2,917		2,917		—		—
Other common stocks	39,774		39,774		—		—
Non-redeemable preferred stocks	1,801		1,801		—		—
Total equity securities	104,629		101,222		3,407		—
Other investments (1)	763		300		463		—
Total investments	$	1,026,604	$	102,116	$	924,488	$	—
December 31, 2018
U.S. government and agency securities	$	98,975	$	—	$	98,975	$	—
Foreign government	3,982		—		3,982		—
States, municipalities and political subdivisions	144,468		—		144,468		—
Public utilities	23,890		—		23,890		—
Corporate securities	301,988		—		301,988		—
Mortgage-backed securities	223,854		—		223,854		—
Asset-backed securities	64,037		—		64,037		—
Redeemable preferred stocks	1,151		790		361		—
Total fixed maturities	862,345		790		861,555		—
Mutual Funds	50,016		47,223		2,793		—
Public utilities	1,759		1,759		—		—
Other common stocks	27,198		27,198		—		—
Non-redeemable preferred stocks	2,005		2,005		—		—
Total equity securities	80,978		78,185		2,793		—
Other investments (1)	300		300		—		—
Total investments	$	943,623	$	79,275	$	864,348	$	—

⁽¹⁾ Other investments included in the fair value hierarchy exclude these limited partnership interests that are measured at estimated fair value using the net asset value per share (or its equivalent) practical expedient.

The carrying amounts for the following financial instrument categories approximate their fair values at September 30, 2019 and December 31, 2018, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, other assets, and other liabilities. The carrying amount of the notes payable to the Florida State Board of Administration, the Branch Banking & Trust Corporation (BB&T) and our senior notes approximate fair value as the interest rates and terms are variable.

16

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

We are responsible for the determination of fair value and the supporting assumptions and methodologies. We have implemented a system of processes and controls designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded.

At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During the quarter ended September 30, 2019, we transferred no investments between levels.

For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from our investment custodians, which use a third-party valuation service. The valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, and adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in its calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.

Other investments

Our investments in limited partnerships, recorded in the other investments line of our Unaudited Condensed Consolidated Balance Sheets, are accounted for at fair value utilizing a net asset value per share equivalent methodology. The estimated fair value of our investments in the limited partnership interests at September 30, 2019 was $9,261,000.

The information presented in the table below is as of September 30, 2019:

	Book Value		Unrealized Gain		Unrealized Loss		Fair Value
Limited partnership investments (1)	$	8,482	$	779	$	—	$	9,261
Certificates of deposit	300		—		—		300
Short-term investments	463		—		—		463
Total other investments	$	9,245	$	779	$	—	$	10,024

⁽¹⁾ Distributions will be generated from investment gains, from operating income, from underlying investments of funds, and from liquidation of the underlying assets of the funds. We estimate that the underlying assets of the funds will be liquidated over the next two to ten years.

Restricted Cash

We are required to maintain assets on deposit with various regulatory authorities to support our insurance operations. The cash on deposit with state regulators is available to settle insurance liabilities. We also hold funds in trust for certain reinsurance transactions.

The following table presents the components of restricted assets:

	September 30, 2019		December 31, 2018
Trust funds	$	73,607	$	70,208
Cash on deposit (regulatory deposits)	1,242		1,233
Total restricted cash	$	74,849	$	71,441

17

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

4)    EARNINGS PER SHARE (EPS)

Basic EPS is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from the vesting of outstanding restricted stock awards, restricted stock units, performance stock units and stock options. The following table shows the computation of basic and diluted EPS for the three and nine-month periods ended September 30, 2019 and 2018, respectively:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator:
Net income (loss) attributable to UIHC common stockholders	$	(28,280	)	$	(11,708	)	$	(21,714	)	$	11,361
Denominator:
Weighted-average shares outstanding	42,795,414			42,677,893			42,750,710			42,636,515
Effect of dilutive securities	—			—			—			154,693
Weighted-average diluted shares	42,795,414			42,677,893			42,750,710			42,791,208
Earnings available to UIHC common stockholders per share
Basic	$	(0.66	)	$	(0.27	)	$	(0.51	)	$	0.27
Diluted	$	(0.66	)	$	(0.27	)	$	(0.51	)	$	0.27

See Note 15 of these Notes to Unaudited Condensed Consolidated Financial Statements for additional information on the stock grants related to dilutive securities.

5)    PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:

	September 30, 2019				December 31, 2018
Land	$	2,114			$	2,114
Building and building improvements (construction in progress of $1,264 and $0, respectively)	10,399				6,651
Computer hardware and software(software in progress of $3,284 and $1,348, respectively)	28,948				17,932
Office furniture and equipment	3,218				2,800
Leasehold improvements	20				20
Leased vehicles(1)	1,498			—	568
Total, at cost	46,197				30,085
Less: accumulated depreciation and amortization	(17,323		)		(12,948		)
Property and equipment, net	$	28,874			$	17,137

⁽¹⁾ Includes vehicles under capital leases. See Note 10 of these Notes to Unaudited Condensed Consolidated Financial Statements for further information on leases.

Depreciation and amortization expense under property and equipment was $2,924,000 and $1,819,000 for the three months ended September 30, 2019 and 2018, respectively, and $4,700,000 and $3,382,000 for the nine months ended September 30, 2019 and 2018, respectively.

18

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

6) GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill, both at September 30, 2019 and December 31, 2018, was $73,045,000. There was no goodwill acquired or disposed of during the three or nine-month periods ended September 30, 2019.

We completed our most recent goodwill impairment testing during the fourth quarter of 2018 and determined that there was no impairment in the value of the asset as of December 31, 2018. No impairment loss in the value of goodwill was recognized during the three or nine months ended September 30, 2019. Additionally, there was no accumulated impairment related to goodwill at September 30, 2019 or December 31, 2018.

Intangible Assets

The following is a summary of intangible assets excluding goodwill recorded as intangible assets on our Unaudited Condensed Consolidated Balance Sheets:

	September 30, 2019		December 31, 2018
Intangible assets subject to amortization	$	23,765	$	27,795
Indefinite-lived intangible assets(1)	3,638		3,556
Total	$	27,403	$	31,351

⁽¹⁾ Indefinite-lived intangible assets are comprised of state insurance and agent licenses, as well as perpetual software licenses.

Intangible assets subject to amortization consisted of the following:

	Weighted-average remaining amortization period (in years)	Gross carrying amount		Accumulated amortization			Net carrying amount
September 30, 2019
Value of business acquired	—	$	42,788	$	(42,788	)	$	—
Agency agreements acquired	6.9	34,661		(14,535		)	20,126
Trade names acquired	4.5	6,381		(2,742		)	3,639
Total		$	83,830	$	(60,065	)	$	23,765
December 31, 2018
Value of business acquired	—	$	42,788	$	(42,788	)	$	—
Agency agreements acquired	7.3	34,661		(11,164		)	23,497
Trade names acquired	5.2	6,381		(2,083		)	4,298
Total		$	83,830	$	(56,035	)	$	27,795

No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the three and nine months ended September 30, 2019 and 2018.

Amortization expense of our intangible assets was $1,326,000 and $1,365,000 for the three months ended September 30, 2019 and 2018, respectively. Amortization expense of our intangible assets was $4,030,000 and $12,555,000 for the nine months ended September 30, 2019 and 2018, respectively.

19

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

Estimated amortization expense of our intangible assets to be recognized by the Company over the next five years is as follows:

Year ending December 31,	Estimated Amortization Expense
Remaining in 2019	$	1,326
2020	4,267
2021	3,555
2022	3,246
2023	3,246
2024	2,640

7)    REINSURANCE

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. Our program provides reinsurance protection for catastrophes, including hurricanes, tropical storms and tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our stockholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders. Although reinsurance agreements contractually obligate our reinsurers to reimburse us for the agreed-upon portion of our gross paid losses, they do not discharge our primary liability.

Our program includes excess of loss, aggregate excess of loss and quota share treaties. Our excess of loss contract, in effect from June 1, 2019 through May 31, 2020, provides coverage for catastrophe losses from named or numbered windstorms and earthquakes up to a $3,200,000,000 exhaustion point. In addition to this contract, we have an aggregate excess of loss contract in effect from January 1, 2019 to December 31, 2019, which provides coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes. We ceded $30,000,000 of catastrophe losses under this treaty for the nine months ended September 30, 2019. The quota share agreement, effective June 1, 2019 to May 31, 2020, provides coverage for all catastrophe perils and attritional losses incurred by two of our insurance subsidiaries, UPC and FSIC. For all catastrophe perils, the quota share agreement provides ground-up protection effectively reducing our retention for catastrophe losses.

Reinsurance recoverable at the balance sheet dates consists of the following:

	September 30,		December 31,
	2019		2018
Reinsurance recoverable on unpaid losses and loss adjustment expenses	$	573,037	$	477,870
Reinsurance recoverable on paid losses and loss adjustment expenses	75,335		148,128
Reinsurance recoverable	$	648,372	$	625,998

We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the federal government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $394 and $408 for the three-month periods ended September 30, 2019 and 2018, respectively, and $1,034 and $1,194 for the nine-month periods ended September 30, 2019 and 2018, respectively.

8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE)

We determine the reserve for unpaid losses on an individual case basis for all incidents reported. The liability also includes amounts for incurred but not reported (IBNR) claims as of the balance sheet date.

The table below shows the analysis of our reserve for unpaid losses for the nine months ended September 30, 2019 and 2018 on a GAAP basis:

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

	September 30,
	2019		2018
Balance at January 1	$	661,203	$	482,232
Less: reinsurance recoverable on unpaid losses	477,870		305,673
Net balance at January 1	$	183,333	$	176,559
Incurred related to:
Current year	335,708		290,600
Prior years	33,216		(4,207		)
Total incurred	$	368,924	$	286,393
Paid related to:
Current year	185,257		163,589
Prior years	115,890		102,750
Total paid	$	301,147	$	266,339
Net balance at September 30	$	251,110	$	196,613
Plus: reinsurance recoverable on unpaid losses	573,037		332,229
Balance at September 30	$	824,147	$	528,842
Composition of reserve for unpaid losses and LAE:
Case reserves	$	271,073	$	259,678
IBNR reserves	553,074		269,164
Balance at September 30	$	824,147	$	528,842

Based upon our internal analysis and our review of the annual statement of actuarial opinion provided by our actuarial consultants at year end, we believe that the reserve for unpaid losses reasonably represents the amount necessary to pay all claims and related expenses that may arise from incidents that have occurred as of the balance sheet date.

As reflected by our losses incurred related to prior years, the unfavorable development experienced for the nine months ending September 30, 2019 was primarily the result of greater losses than expected, as compared to the same period in the 2018 accident year due to increased severity and frequency. The favorable development experienced at September 30, 2018, in contrast, was primarily the result of lower losses than expected.

9)    LONG-TERM DEBT

Long-Term Debt

The table below presents all long-term debt outstanding as of September 30, 2019 and December 31, 2018:

		Effective Interest Rate	Carrying Value at
	Maturity		September 30, 2019		December 31, 2018
Senior Notes Payable	December 15, 2027	6.25%	$	150,000	$	150,000
Florida State Board of Administration Note Payable	July 1, 2026	2.01%	8,235		8,824
BB&T Term Note Payable	May 26, 2031	3.81%	4,044		4,304
Total long-term debt			$	162,279	$	163,128

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

Senior Notes Payable

On December 13, 2017, we issued $150,000,000 of 10-year senior notes (the Senior Notes) that will mature on December 15, 2027 and bear interest at a rate equal to 6.25% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2018. The Senior Notes are senior unsecured obligations of the Company. We may redeem the Senior Notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to the date that is three months prior to maturity. On or after that date, we may redeem the Senior Notes at par.

Florida State Board of Administration Note Payable

On September 22, 2006, we issued a $20,000,000, 20-year note payable to the Florida State Board of Administration (the SBA Note). For the first three years of the SBA Note we were required to pay interest only. On October 1, 2009, we began to repay the principal in addition to interest. The SBA Note bears an annual interest rate equivalent to the 10-year Constant Maturity Treasury rate (as defined in the SBA Note agreement), which resets quarterly.

BB&T Term Note Payable

On May 26, 2016, we issued a $5,200,000, 15-year term note payable to BB&T (the BB&T Note), with the intent to use the funds to purchase, renovate, furnish and equip our principal executive office. The BB&T Note bears interest at 1.65% in excess of the one-month LIBOR, which resets monthly. In the event of default, BB&T may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our principal executive office, which has been pledged to the bank as security for the loan.

Financial Covenants

Senior Notes - Our Senior Notes provide that the Company and its subsidiaries shall not incur any indebtedness unless no default exists and the Company’s leverage ratio as of the last day of any annual or quarterly period (the balance sheet date) immediately preceding the date on which such additional indebtedness is incurred would have been no greater than 0.3:1, determined on a pro forma basis as if the additional indebtedness and all other indebtedness incurred since the immediately preceding balance sheet date had been incurred and the proceeds therefrom applied as of such day. The Company and its subsidiaries also may not create, assume, incur or permit to exist any indebtedness for borrowed money that is secured by a lien on the voting stock of any significant subsidiary without securing the Senior Notes equally. The Company may not issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, any of the capital stock of the Company’s significant subsidiaries as of the issue date of the Senior Notes (except to the Company or to one or more of the Company’s other subsidiaries, or for the purpose of qualifying directors or as may be required by law or regulation), subject to certain exceptions. At September 30, 2019, we were in compliance with the covenants in the Senior Notes.

SBA Note - Our SBA Note requires that UPC maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA Note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note. Should UPC fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, UPC's interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate, which was 2.01% at the end of September 2019. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note. Our SBA Note further provides that the Florida State Board of Administration may, among other things, declare its loan immediately due and payable upon any default existing under the SBA Note; however, any payment is subject to approval by the insurance regulatory authority. At September 30, 2019, we were in compliance with the covenants in the SBA Note.

BB&T Note - Our BB&T Note requires that, at all times while there has been no losses from our insurance subsidiaries' operations (non-recurring losses), we will maintain a minimum cash flow coverage ratio of 1.2:1. The cash flow coverage ratio is defined as the ratio of our cash flow to debt service charges. This ratio will be tested annually, based on our audited financial statements. For the one-year period following a non-recurring loss, we are required to maintain a minimum cash flow coverage ratio of 1.0:1. This covenant will only be effective if the pre non-recurring losses test is failed, and is only available and effective for one annual test period. Thereafter, the non-recurring loss cash flow coverage ratio of 1.2:1 will immediately apply.

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

At the time of the most recent annual test period, December 31, 2018, we were in compliance with the minimum cash flow coverage ratio covenant in the BB&T Note.

In addition, the BB&T Note requires that we establish and maintain with BB&T at all times during the term of the loan a non-interest bearing demand deposit account with a minimum balance of $500,000, and an interest-bearing account with a minimum balance of $1,500,000. In the event of default, BB&T may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our corporate headquarters, which has been pledged to the bank as security for the loan. At September 30, 2019, we were in compliance with the covenants in the BB&T Note.

Debt Issuance Costs

The table below presents the rollforward of our debt issuance costs paid, in conjunction with the debt instruments described above, during the nine months ended September 30, 2019 and 2018:

	2019			2018
Balance at January 1,	$	3,010		$	3,287
Additions	—			63
Amortization	(254		)	(255		)
Balance at September 30,	$	2,756		$	3,095

10)    COMMITMENTS AND CONTINGENCIES

Litigation

We are involved in claims-related legal actions arising in the ordinary course of business. We accrue amounts resulting from claims-related legal actions in unpaid losses and LAE during the period that we determine an unfavorable outcome becomes probable and we can estimate the amounts. Management makes revisions to our estimates based on its analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages, and (iv) trends in general economic conditions, including the effects of inflation.

At September 30, 2019, we were not involved in any material non-claims-related legal actions.

Commitments to fund partnership investments

We have fully funded two limited partnership investments and have committed to fund our remaining four limited partnership investments. The amount of unfunded commitments was $2,251,000 and $2,454,000 at September 30, 2019 and December 31, 2018, respectively.

Leases

We, as lessee, have entered into leases of commercial office space of various term lengths. In addition to office space, we lease office equipment and a parking lot under operating leases and vehicles under finance leases. We evaluate if a leasing arrangement exists upon inception of a contract. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Identified property, plant or equipment for all of our leases are physically distinct and explicitly identified. In addition, we assess whether a contract implicitly contains the right to control the use of a tangible asset that is not already owned.

Our leases expire at various dates and may contain renewal options. Our leases do not contain termination options. The exercise of lease renewal options are at our sole discretion and are only included in the determination of the lease term if we are reasonably certain to exercise the option. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.

Right-of-use assets and lease liabilities are based on the present value of the minimum lease payments over the lease term. As stated in Note 2 to these Notes to Unaudited Condensed Consolidated Financial Statements, we have elected the practical

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

expedient related to lease and non-lease components, as an accounting policy election for our office equipment leases, which allows a lessee to not separate non-lease from lease components and instead account for consideration received in a contract as a single lease component. We have also elected the practical expedients to exclude leases considered to be short-term and with values that fall under our capitalization threshold.

A portion of our lease agreements include variable lease payments which are not recorded in the initial measurement of the lease liability and right-of-use asset balances. For our parking lot lease, base rental payments may be escalated according to annual changes in the Consumer Price Index (CPI). The escalated rental payments based on the estimated CPI at the lease commencement date are included within minimum rental payments; however, changes in CPI are considered variable in nature and are recognized as variable lease costs in the period in which the obligation is incurred. Our office equipment lease agreements may include variable payments based on usage of the equipment.

We utilized discount rates to determine the present value of the lease payments based on information available at the commencement date of the lease. We used an incremental borrowing rate based on factors such as lease term to determine the appropriate present value of future lease payments as the rate implicit in the lease is not always readily available. When determining the incremental borrowing rate, we considered the rate of interest we would pay on a secured borrowing in an amount equal to the lease payments for the underlying asset under similar terms.

The classification of operating and finance lease asset and liability balances within the Unaudited Condensed Consolidated Balance Sheets was as follows:

	Financial Statement Line	September 30, 2019
Assets
Operating lease assets	Other assets	$	371
Financing lease assets	Property and equipment, net	1,202
Total lease assets		$	1,573
Liabilities
Operating lease liabilities	Operating lease liability	$	356
Financing lease liabilities	Other liabilities	32
Total lease liabilities		$	388

The components of lease expenses were as follows:

	Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019
Operating lease expense	$	46		$	137
Financing lease expense:
Amortization of leased assets	115			261
Interest on lease liabilities	1		1	1
Short-term lease expense	9			133
Net lease expense	$	171		$	532

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

At September 30, 2019, future minimum gross lease payments relating to these non-cancellable operating and finance lease agreements were as follows:

	Operating Leases			Finance Leases			Total
Remaining in 2019	$	51		$	4		$	55
2020	176			15			191
2021	133			14			147
2022	45			4			49
2023	22			—			22
Thereafter	1,216			—			1,216
Total undiscounted future minimum lease payments	1,643			37			1,680
Less: Imputed interest	(1,287		)	(5		)	(1,292		)
Present value of lease liabilities	$	356		$	32		$	388

Weighted average remaining lease term and discount rate related to operating and finance leases were as follows:

	September 30, 2019
Weighted average remaining lease term (months)
Operating leases	170
Financing leases	30
Weighted average discount rate
Operating leases	3.98	%
Financing leases	3.27	%

Other cash and non-cash related activities were as follows:

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Investing cash flows from financing leases	$	414	$	891
Right-of-use assets obtained in exchange for new financing lease liabilities	$	425	$	915

See Note 9 of these Notes to Unaudited Condensed Consolidated Financial Statements for information regarding commitments related to long-term debt, and Note 11 of these Notes to Unaudited Condensed Consolidated Financial Statements for information regarding commitments related to regulatory actions.

11)    STATUTORY ACCOUNTING AND REGULATION

The insurance industry is heavily regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers' ability to pay dividends, specify allowable investment types and investment mixes, and subject insurers to assessments. Our insurance subsidiaries UPC, ACIC and JIC are domiciled in Florida, while FSIC and IIC are domiciled in Hawaii and New York, respectively. At September 30, 2019, and during the three and nine months then ended, our insurance subsidiaries met all regulatory requirements of the states

25

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

in which they operate. We did not receive any significant assessments from regulatory authorities in the states in which our insurance subsidiaries operate.

The National Association of Insurance Commissioners (NAIC) has Risk-Based Capital (RBC) guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. Most states, including Florida, Hawaii and New York, have enacted statutory requirements adopting the NAIC RBC guidelines, and insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital.

The state laws of Florida, Hawaii and New York permit an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and net realized capital gains. The state laws further provide calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authorities in those states and the amount of dividends or distributions that would require prior approval of the insurance regulatory authorities in those states. Statutory RBC requirements may further restrict our insurance subsidiaries' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum RBC requirements.

The SBA Note is considered a surplus note pursuant to statutory accounting principles. As a result, UPC is subject to the authority of the Insurance Commissioner of the State of Florida with regard to its ability to repay principal and interest on the SBA Note. Any payment of principal or interest requires permission from the insurance regulatory authority.

Our insurance subsidiaries must each file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, statutory net income (loss) and surplus as regards policyholders, which is called stockholders' equity under GAAP. For the three and nine months ended September 30, 2019, our combined recorded statutory net loss was $25,464,000 and $32,045,000, respectively. Our combined recorded statutory net loss for the three months ended September 30, 2018 was $13,134,000 and our combined recorded statutory net income for the nine months ended September 30, 2018 was $8,342,000.

Our insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. At September 30, 2019, we met these requirements. The amount of surplus as regards policyholders for our regulated entities at September 30, 2019 and December 31, 2018 was $425,624,000 and $437,449,000, respectively.

12)    RELATED PARTY TRANSACTIONS

Groelle & Salmon, PA

One of our former executive officers who acted as an executive officer during a portion of the three and nine months ended September 30, 2018, Ms. Kimberly Salmon, is a former partner at the law firm of Groelle & Salmon, PA, where her spouse remains partner and co-owner. Groelle & Salmon, PA provides legal representation to us related to our claims litigation, and also provided representation to us for several years prior to Ms. Salmon joining UPC Insurance in 2014. During the three and nine months ended September 30, 2018, Groelle & Salmon, PA billed us approximately $982,000 and $2,407,000, respectively. Ms. Salmon's spouse has a 50% interest in these billings, or approximately $491,000 and $1,204,000, for the three and nine months ended September 30, 2018, respectively. Effective September 7, 2018, Ms. Salmon stepped down from her role at UPC Insurance.

AmRisc, LLC

AmRisc, a managing general agent, handles the underwriting, claims processing, premium collection and reinsurance review for AmCo. R. Daniel Peed, Vice Chairman of our Board of Directors (Board), beneficially owned approximately 7.7% of AmRisc and was also the Chief Executive Officer of AmRisc during 2018. On December 31, 2018, Mr. Peed sold his interest in AmRisc and, effective January 1, 2019, became Non-Executive Vice Chairman of AmRisc.

In accordance with the managing general agency contract with AmRisc, we recorded $58,867,000 and $329,530,000 of gross written premiums for the three and nine-month periods ended September 30, 2019, respectively, and $55,476,000 and $277,239,000 for the three and nine-month periods ended September 30, 2018, respectively, resulting in gross fees and commission (including a profit commission) of $12,177,000 and $87,170,000, for the three and nine-month periods ended

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

September 30, 2019, respectively, and $18,162,000 and $75,012,000 for the three and nine-month periods ended September 30, 2018, respectively, due to AmRisc. Receivables are stated net of the fees and commission due under the contract.

In addition to the direct premiums written, we recorded $1,066,000 and $4,944,000 in ceded premiums to AmRisc as a reinsurance intermediary for the three and nine-month periods ended September 30, 2019, respectively, and $750,000 and $4,116,000 for the three and nine-month periods ended September 30, 2018, respectively.

Net premiums receivable (net of commissions) of $32,010,000 were due from AmRisc as of September 30, 2019. These premiums were paid by AmRisc to our premium trust account by wire transfer within 15 days of collection pursuant to the underwriting contract with AmRisc.

13)    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

We report changes in other comprehensive income items within comprehensive income (loss) on the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), and we include accumulated other comprehensive income (loss) as a component of stockholders' equity on our Unaudited Condensed Consolidated Balance Sheets.

The table below details the components of accumulated other comprehensive income (loss) at period end:

	Pre-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount
December 31, 2018	$	(11,910	)	$	2,880		$	(9,030	)
Changes in net unrealized gains on investments	30,211			(7,247		)	22,964
Reclassification adjustment for realized gains	(176		)	(44		)	(220		)
September 30, 2019	$	18,125		$	(4,411	)	$	13,714

14)    STOCKHOLDERS' EQUITY

Our Board declared dividends on our outstanding shares of common stock to stockholders of record as follows for the periods presented (in thousands except per share amounts):

	Nine Months Ended September 30,
	2019				2018
	Per Share Amount		Aggregate Amount		Per Share Amount		Aggregate Amount
First Quarter	$	0.06	$	2,569	$	0.06	$	2,565
Second Quarter	$	0.06	$	2,570	$	0.06	$	2,565
Third Quarter	$	0.06	$	2,571	$	0.06	$	2,569

In July 2019, our Board of Directors authorized a stock repurchase plan of up to $25,000,000 of our common stock. As of September 30, 2019 we had not yet repurchased any shares under this stock repurchase plan. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of UIHC common stock, and general market conditions. The plan has no expiration date, and the plan may be suspended or discontinued at any time.

See Note 15 in these Notes to Unaudited Condensed Consolidated Financial Statements for information regarding stock-based compensation activity.

15) STOCK-BASED COMPENSATION

We account for stock-based compensation under the fair value recognition provisions of ASC Topic 718 - Compensation - Stock Compensation. We recognize stock-based compensation cost over the award’s requisite service period on a straight-line

27

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

basis for time-based restricted stock grants and performance-based restricted stock grants. We record forfeitures as they occur for all stock-based compensation.

The following table presents our total stock-based compensation expense:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Employee stock-based compensation expense
Pre-tax	$	536	$	248	$	1,482	$	736
Post-tax (1)	424		196		1,171		581
Director stock-based compensation expense
Pre-tax	178		379		810		940
Post-tax (1)	141		299		640		743

⁽¹⁾The after tax amounts are determined using the 21% corporate federal tax rate.

We had approximately $4,087,000 of unrecognized stock compensation expense at September 30, 2019 related to non-vested stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 2.1 years. We had approximately $424,000 of unrecognized director stock-based compensation expense at September 30, 2019 related to non-vested director stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 0.6 years.

Restricted stock, restricted stock units and performance stock units

Stock-based compensation cost for restricted stock awards, restricted stock units and performance stock units is measured based on the closing fair market value of our common stock on the date of grant and the grants vest in equal installments over the requisite service period of typically three years. Restricted stock awards granted to non-employee directors vest over a one-year period. Each restricted stock unit and performance stock unit represents our obligation to deliver to the holder one share of common stock upon vesting.

Performance stock units vest based on the Company's return on average equity compared to a defined group of peer companies. On the grant date, we issue the target number of performance stock units. They are subject to forfeitures if performance goals are not met. The actual number of performance stock units earned can vary from zero to 150 percent of the target for the 2018 and 2019 awards.

We granted 843 and 133,421 shares of restricted common stock during the three and nine-month periods ended September 30, 2019, respectively, which had a weighted-average grant date fair value of $12.82 and $16.26 per share, respectively. We granted 88,392 and 174,602 shares of restricted common stock during the three and nine-month periods ended September 30, 2018, respectively, which had weighted-average grant date fair values of $20.44 and $20.07 per share, respectively. Additionally, during the nine-month period ended September 30, 2019, the Company granted 45,000 shares of restricted common stock, with a fair value of $15.70 per share, which is contingent upon stockholder approval of an increase in the number of shares of our common stock that may be issued pursuant to the 2013 Omnibus Incentive Plan. Stockholders will vote on this matter at our 2020 annual meeting of stockholders.

The following table presents certain information related to the activity of our non-vested common stock grants:

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UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2019

	Number of Restricted Shares	Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2018	217,936	$	18.96
Granted (1)	133,421	16.26
Less: Forfeited	6,059	20.15
Less: Vested	131,613	19.22
Outstanding as of September 30, 2019	213,685	$	17.51

⁽¹⁾ Contingent shares have been excluded from the calculations in the table above.

Stock options

Stock option fair value was estimated on the grant date using the Black-Scholes-Merton formula. Stock options vest in equal installments over the requisite service period of typically three years. The following weighted-average assumptions were used to value the stock options granted:

	2019
Expected annual dividend yield	1.28	%
Expected volatility	41.07	%
Risk-free interest rate	3.11	%
Expected term	6	years

Expected annual dividend yield is based on the current quarterly dividend of $0.06 per share and the stock price on the grant date. The expected volatility is a historical volatility calculated based on the daily closing prices over a period equal to the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the grant date. Expected term takes into account the three-year graded vesting term and the 10-year contractual term of the option.

We granted 99,181 stock options during the nine-month period ended September 30, 2019, which had a weighted-average grant date fair value of $5.96 per share. We granted 29,464 stock options during the nine-month period ended September 30, 2018, which had a weighted-average grant date fair value of $8.01 per share.

The following table presents certain information related to the activity of our non-vested stock option grants:

	Number of Stock Options	Weighted Average Exercise Prices		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2018	107,888	$	20.94	—	$	—
Granted	99,181	16.25		—	—
Less: Forfeited	—	—		—	—
Less: Exercised	—	—		—	—
Outstanding as of September 30, 2019	207,069	$	18.69	9.25	$	—
Vested as of September 30, 2019	9,822	$	20.44	8.98	$	—
Exercisable as of September 30, 2019	9,822	$	20.44	8.98	$	—

16)    SUBSEQUENT EVENTS

On November 5, 2019, our Board declared a $0.06 per share quarterly cash dividend payable on November 26, 2019, to stockholders of record on November 19, 2019.

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UNITED INSURANCE HOLDINGS CORP.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Form 10-Q, as well as with the Consolidated Financial Statements and related footnotes under Part II. Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed or implied in these forward-looking statements as a result of certain known and unknown risks and uncertainties. See "Forward-Looking Statements."

EXECUTIVE SUMMARY

Overview

United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a holding company primarily engaged in residential personal and commercial property and casualty insurance in the United States. We conduct our business principally through four wholly-owned insurance subsidiaries and one majority-owned insurance subsidiary: United Property & Casualty Insurance Company (UPC); American Coastal Insurance Company (ACIC); Family Security Insurance Company, Inc. (FSIC); Interboro Insurance Company (IIC); and Journey Insurance Company (JIC). Collectively, we refer to the holding company and all our subsidiaries, including non-insurance subsidiaries, as “UPC Insurance,” which is the preferred brand identification for our Company.

Our Company’s primary source of revenue is generated from writing insurance in Connecticut, Florida, Georgia, Hawaii,

Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, South Carolina and Texas. We are also licensed to write property and casualty insurance in an additional six states; however, we have not commenced writing in these states. Our target market in such areas consists of states where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies. We believe an opportunity exists for UPC Insurance to write profitable business in such areas.

We have historically grown our business through strong organic growth complemented by strategic acquisitions and partnerships, including our acquisitions of AmCo Holdings Company, LLC (AmCo) and its subsidiaries, including ACIC, in April 2017, IIC in April 2016, and Family Security Holdings, LLC (FSH), including its subsidiary FSIC, in February 2015, and our strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited, which formed JIC in August 2018. As a result of these transactions, along with the organic growth of premium in states in which we currently write premium, we have grown our policies in-force by 9.8% from 569,444 policies in-force at September 30, 2018 to 625,445 policies in-force at September 30, 2019.

The following discussion highlights significant factors influencing the consolidated financial position and results of

operations of UPC Insurance. In evaluating our results of operations, we use premiums written and earned, policies in-force and

new and renewal policies by geographic concentration. We also consider the impact of catastrophe losses and prior year

development on our loss ratios, expense ratios and combined ratios. In monitoring our investments, we use credit quality,

investment income, cash flows, realized gains and losses, unrealized gains and losses, asset diversification and portfolio

duration. To evaluate our financial condition, we consider our liquidity, financial strength, ratings, book value per share and

return on equity.

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UNITED INSURANCE HOLDINGS CORP.

2019 Highlights

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Gross premiums written	$	317,184		$	295,935		$	1,085,505		$	960,214
Gross premiums earned	344,683			303,956			986,521			872,547
Net premiums earned	192,920			171,330			564,046			507,536
Total revenues	207,598			187,652			614,695			542,853
Earnings before income tax	(36,074		)	(15,870		)	(27,346		)	15,177
Consolidated net income (loss) attributable to UIHC	(28,280		)	(11,708		)	(21,714		)	11,361
Net income (loss) available to UIHC stockholders per diluted share	$	(0.66	)	$	(0.27	)	$	(0.51	)	$	0.27
Reconciliation of net income (loss) to core income (loss):
Plus: Non-cash amortization of intangible assets	$	1,326		$	1,365		$	4,030		$	12,555
Less: Realized gains (losses) on investment portfolio	18			(447		)	186			(674		)
Less: Unrealized gain on equity securities	2,609			6,109			15,519			5,046
Less: Net tax impact (1)	(359		)	(1,074		)	(3,220		)	2,046
Core income (loss)(2)	(29,222		)	(14,931		)	(30,169		)	17,498
Core income (loss) per diluted share(2)	$	(0.68	)	$	(0.35	)	$	(0.71	)	$	0.41
Book value per share							$	11.93		$	12.33

⁽¹⁾ In order to reconcile the net income (loss) to the core income (loss) measure, we included the tax impact of all adjustments using the effective rate at the end of each period.

⁽²⁾ Core income (loss), a measure that is not based on U.S. generally accepted accounting principles (GAAP), is reconciled above to net income (loss), the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-Q is in "Definitions of Non-GAAP Measures" below.

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UNITED INSURANCE HOLDINGS CORP.

Consolidated Net Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
REVENUE:
Gross premiums written	$	317,184		$	295,935		$	1,085,505		$	960,214
Change in gross unearned premiums	27,499			8,021			(98,984		)	(87,667		)
Gross premiums earned	344,683			303,956			986,521			872,547
Ceded premiums earned	(151,763		)	(132,626		)	(422,475		)	(365,011		)
Net premiums earned	192,920			171,330			564,046			507,536
Net investment income	7,803			6,888			22,668			19,665
Net realized investment gains (losses)	18			(447		)	186			(674		)
Net unrealized gains on equity securities	2,609			6,109			15,519			5,046
Other revenue	4,248			3,772			12,276			11,280
Total revenue	207,598			187,652			614,695			542,853
EXPENSES:
Losses and loss adjustment expenses	148,125			120,552			368,924			286,393
Policy acquisition costs	61,849			54,200			178,717			153,716
Operating expenses	12,167			10,976			33,577			28,976
General and administrative expenses	19,105			15,358			53,488			51,326
Interest expense	2,443			2,455			7,379			7,371
Total expenses	243,689			203,541			642,085			527,782
Income (loss) before other income	(36,091		)	(15,889		)	(27,390		)	15,071
Other income	17			19			44			106
Income (loss) before income taxes	(36,074		)	(15,870		)	(27,346		)	15,177
Provision (benefit) for income taxes	(7,859		)	(4,163		)	(5,912		)	3,815
Net income (loss)	$	(28,215	)	$	(11,707	)	$	(21,434	)	$	11,362
Less: Net income attributable to noncontrolling interests	65			1			280			1
Net income (loss) attributable to UIHC	$	(28,280	)	$	(11,708	)	$	(21,714	)	$	11,361
Earnings available to UIHC common stockholders per diluted share	$	(0.66	)	$	(0.27	)	$	(0.51	)	$	0.27
Book value per share							$	11.93		$	12.33
Return on equity based on GAAP net income (loss)							(5.5		)%	4.2		%
Loss ratio, net (1)	76.8		%	70.4		%	65.4		%	56.4		%
Expense ratio (2)	48.3		%	47.0		%	47.1		%	46.1		%
Combined ratio (3)	125.1		%	117.4		%	112.5		%	102.5		%
Effect of current year catastrophe losses on combined ratio	26.0		%	20.2		%	13.8		%	11.5		%
Effect of prior year development on combined ratio	6.3		%	(1.6		)%	5.9		%	(0.8		)%
Underlying combined ratio (4)	92.8		%	98.8		%	92.8		%	91.8		%

⁽¹⁾ Loss ratio, net is calculated as losses and LAE, net of losses ceded to reinsurers, relative to net premiums earned. We use this operating metric to analyze our loss trends.

⁽²⁾ Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned. We use this operating metric to analyze our expense trends.

⁽³⁾ Combined ratio is the sum of the loss ratio, net and the expense ratio, net.

⁽⁴⁾ Underlying combined ratio, a measure that is not based on GAAP, is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-Q is in "Definitions of Non-GAAP Measures" below.

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Definitions of Non-GAAP Measures

We believe that investors' understanding of our 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 and prior year reserve development (underlying combined ratio) is a non-GAAP measure, which is computed by subtracting the effect of current year catastrophe losses and prior year development. We believe that this ratio is useful to investors and it is used by management to highlight the trends in our business that may be obscured by current year catastrophe losses and prior year development. Current year catastrophe losses cause our 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. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly 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 our 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 net loss and LAE. We use underlying loss and LAE figures to analyze our loss trends that may be impacted by current year catastrophe losses and prior year development on our reserves. As discussed previously, these two items can have a significant impact on our loss trends in a given period. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net loss and LAE and does not reflect the overall profitability of our business.

Net income excluding the effects of amortization of intangible assets, realized gains (losses) and unrealized gains (losses) on equity securities, net of tax (core income) is a non-GAAP measure, which is computed by adding amortization, net of tax, to net income and subtracting realized gains (losses) on our investment portfolio, net of tax, and unrealized gains (losses) on our equity securities, net of tax, from net income. Amortization expense is related to the amortization of intangible assets acquired through mergers and therefore the expense does not arise through normal operations. Investment portfolio gains (losses) and unrealized equity security gains (losses) vary independent of our operations. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly 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 our business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

When we prepare our consolidated financial statements and accompanying notes in conformity with GAAP, we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the three and nine months ended September 30, 2019, we reassessed our critical accounting policies and estimates as disclosed in Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements and our Annual Report on Form 10-K for the year ended December 31, 2018; however, we have made no material changes or additions with regard to those policies and estimates, except for those standards adopted in 2019 as described in Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements.

RECENT ACCOUNTING STANDARDS

Please refer to Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.

ANALYSIS OF FINANCIAL CONDITION - SEPTEMBER 30, 2019 COMPARED TO DECEMBER 31, 2018

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying unaudited condensed consolidated interim financial statements and related notes, and in conjunction

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with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2018.

Investments

The primary goals of our investment strategy are to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that represent the most attractive relative value, and we maintain a moderate equity exposure. Limiting equity exposure manages risks and helps to preserve capital for two reasons: first, bond market returns are less volatile than stock market returns, and second, should the bond issuer enter bankruptcy liquidation, bondholders generally have a higher priority than equityholders in a bankruptcy proceeding.

We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance subsidiaries can make; therefore, our current investment policy limits investment in non-investment-grade fixed maturities and limits total investment amounts in preferred stock, common stock and mortgage notes receivable. We do not invest in derivative securities.

Two outside asset management companies, which have authority and discretion to buy and sell securities for us, manage our investments subject to (i) the guidelines established by our Board of Directors and (ii) the direction of management. The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis.

Our cash, cash equivalents and investment portfolio totaled $1,381,277,000 at September 30, 2019, compared to $1,135,956,000 at December 31, 2018.

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The following table summarizes our investments, by type:

	September 30, 2019				December 31, 2018
	Estimated Fair Value		Percent of Total		Estimated Fair Value		Percent of Total
U.S. government and agency securities	$	115,413	8.4	%	$	98,975	8.7	%
Foreign government	4,072		0.3	%	3,982		0.4	%
States, municipalities and political subdivisions	137,447		10.0	%	144,468		12.7	%
Public utilities	30,128		2.2	%	23,890		2.1	%
Corporate securities	296,493		21.3	%	301,988		26.6	%
Mortgage-backed securities	275,254		19.9	%	223,854		19.7	%
Asset-backed securities	60,287		4.4	%	64,037		5.6	%
Redeemable preferred stocks	2,118		0.2	%	1,151		0.1	%
Total fixed maturities	921,212		66.7	%	862,345		75.9	%
Mutual funds	60,137		4.4	%	50,016		4.4	%
Public utilities	2,917		0.2	%	1,759		0.2	%
Other common stocks	39,774		2.9	%	27,198		2.4	%
Non-redeemable preferred stocks	1,801		0.1	%	2,005		0.2	%
Total equity securities	104,629		7.6	%	80,978		7.2	%
Other investments	10,024		0.7	%	8,513		0.7	%
Total investments	1,035,865		75.0	%	951,836		83.8	%
Cash and cash equivalents	270,563		19.6	%	112,679		9.9	%
Restricted cash	74,849		5.4	%	71,441		6.3	%
Total cash, cash equivalents, restricted cash and investments	$	1,381,277	100.0	%	$	1,135,956	100.0	%

We classify all of our fixed-maturity investments as available-for-sale. Our investments at September 30, 2019 and December 31, 2018 consisted mainly of U.S. government and agency securities, states, municipalities and political subdivisions and securities of investment-grade corporate issuers. Our equity holdings consisted mainly of securities issued by companies in the energy, consumer products, financial, technology and industrial sectors. Most of the corporate bonds we hold reflected a similar diversification. At September 30, 2019, approximately 86.0% of our fixed maturities were U.S. Treasuries or corporate bonds rated “A” or better, and 14.0% were corporate bonds rated “BBB” or "BB".

Reinsurance

We follow the industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or "ceding", all or a

portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are

unable to meet the obligations they assume under our reinsurance agreements, we remain primarily liable for the entire insured loss under the policies we write.

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophe losses. According to the Insurance Service Office (ISO), a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25,000,000 or more in U.S. industry-wide direct insured losses to property and that affect a significant number of policyholders and insurers (ISO catastrophes). In addition to ISO catastrophes, we also include as catastrophes those events (non-ISO catastrophes), which may include losses, that we believe are, or will be, material to our operations which we define as incidents that result in $1,000,000 or more in losses for multiple policyholders.

During the second quarter of 2019, we placed our reinsurance program for the 2019 hurricane season. We purchased catastrophe excess of loss reinsurance protection of $3,200,000,000. The contracts reinsure for personal and commercial lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms and tornadoes. The agreements became effective as of June 1, 2019, for a one-year term, and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund.

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Effective June 1, 2019, we renewed our quota share agreement that was set to expire on May 31, 2019, for a one-year term. This quota share reinsurance agreement has a cession rate of 22.5% for all subject business. We also included coverage for our subsidiary, FSIC, under this renewal. Effective January 1, 2019, we renewed the aggregate excess of loss agreement to provide coverage against accumulated losses from specified catastrophe events, for a term of 12 months.

Excluding our business for which we cede 100% of the risk of loss, reinsurance costs in the third quarter of 2019 were 42.3% of our gross premiums earned, compared to 42.0% of gross premiums earned for the third quarter of 2018. The increase in this ratio was driven by the changes to our quota share agreement as described above.

We amortized our ceded unearned premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss). The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of ceded unearned premiums:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Quota Share	$	(45,352	)	$	(24,852	)	$	(136,254	)	$	(72,824	)
Excess-of-loss	(4,611		)	$	(28,450	)	(411,413		)	(392,541		)
Equipment & identity theft	(2,714		)	(2,375		)	(7,700		)	(7,126		)
Flood	(6,489		)	(5,897		)	(16,773		)	(15,136		)
Ceded premiums written	$	(59,166	)	$	(61,574	)	$	(572,140	)	$	(487,627	)
Change in ceded unearned premiums	(92,597		)	(71,052		)	149,665			122,616
Ceded premiums earned	$	(151,763	)	$	(132,626	)	$	(422,475	)	$	(365,011	)

Current year catastrophe losses disaggregated between name and numbered storms and all other catastrophe loss events are shown in the following table.

	2019					2018
	Number of Events	Incurred Loss and LAE (1)		Combined Ratio Impact		Number of Events		Incurred Loss and LAE (1)		Combined Ratio Impact
Three Months Ended September 30,
Current period catastrophe losses incurred
Named and numbered storms	3	$	31,295	16.2	%	3		$	25,019	14.6	%
All other catastrophe loss events	2	18,873		9.8	%	6		9,574		5.6	%
Total	5	50,168		26.0	%	9		$	34,593	20.2	%
Nine Months Ended September 30,
Current period catastrophe losses incurred
Named and numbered storms	3	$	31,295	5.6	%	4		$	26,233	5.2	%
All other catastrophe loss events	26	46,332		8.2	%	22	22,000	32,017		6.3	%
Total	29	77,627		13.8	%	26		$	58,250	11.5	%

⁽¹⁾ Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. Incurred loss and LAE and number of events includes the development on storms during the year in which it occurred.

See Note 7 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our reinsurance program.

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Unpaid Losses and Loss Adjustments

We generally use the term “loss(es)” to collectively refer to both loss and LAE. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration costs of our insured claims incurred and unpaid.

Unpaid losses and LAE totaled $824,147,000 and $661,203,000 as of September 30, 2019 and December 31, 2018, respectively. The balance increased from year end as a result of increased reserves for both weather-related and non weather-related activity during the first nine months of 2019 compared to the same period in 2018.

Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments as necessary.

See Note 8 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our losses and loss adjustments.

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UNITED INSURANCE HOLDINGS CORP.

RESULTS OF OPERATIONS - COMPARISON OF THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018

Net loss attributable to UIHC for the three months ended September 30, 2019 increased $16,572,000, or 141.5%, to a net loss of $28,280,000 for the third quarter of 2019 from $11,708,000 for the same period in 2018. The increase in net loss was primarily due to an increase in losses and LAE expense during the third quarter of 2019 compared to the third quarter of 2018.

Revenue

Our gross written premiums increased $21,249,000, or 7.2%, to $317,184,000 for the third quarter ended September 30, 2019 from $295,935,000 for the same period in 2018, primarily reflecting 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 is shown in the table below.

($ in thousands)	Three Months Ended September 30,
	2019		2018		Change
Direct Written and Assumed Premium by Region (1)
Florida	$	157,278	$	141,524	$	15,754
Gulf	62,970		58,632		4,338
Northeast	55,665		50,695		4,970
Southeast	32,047		27,854		4,193
Total direct written premium by region	307,960		278,705		29,255
Assumed premium (2)	9,224		17,230		(8,006		)
Total gross written premium by region	$	317,184	$	295,935	$	21,249
Gross Written Premium by Line of Business
Personal property	$	259,187	$	240,456	$	18,731
Commercial property	57,997		55,479		2,518
Total gross written premium by line of business	$	317,184	$	295,935	$	21,249

⁽¹⁾ "Gulf" is comprised of Hawaii, Louisiana and Texas; "Northeast" is comprised of Connecticut, Massachusetts, New Jersey, New York and Rhode Island; and "Southeast" is comprised of Georgia, North Carolina and South Carolina.

⁽²⁾ Assumed premium written for 2019 and 2018 is primarily commercial property business assumed from unaffiliated insurers.

	Three Months Ended September 30,
New and Renewal Policies by Region (1)	2019	2018	Change
Florida	65,589	63,616	1,973
Northeast	41,946	37,624	4,322
Gulf	38,303	35,549	2,754
Southeast	26,014	24,207	1,807
Total	171,852	160,996	10,856

⁽¹⁾ Only includes new and renewal homeowner, commercial and dwelling fire policies written during the quarter.

We expect our gross written premium growth to continue as we increase our policies in-force in the states in which we currently write policies and as we expand into other states in which we are currently licensed to write property and casualty insurance.

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Expenses

Expenses for the three months ended September 30, 2019 increased $40,148,000, or 19.7%, to $243,689,000 from $203,541,000 for the same period in 2018. The increase in expenses was primarily due to a $27,573,000 increase in loss and LAE expenses, as well as a $7,649,000 increase in policy acquisitions costs in the third quarter of 2019 compared to the third quarter of 2018. The calculations of our loss ratios and underlying loss ratios are shown below.

	Three Months Ended September 30,
	2019			2018			Change
Net loss and LAE	$	148,125		$	120,552		$	27,573
% of Gross earned premiums	43.0		%	39.7		%	3.3 pts
% of Net earned premiums	76.8		%	70.4		%	6.4 pts
Less:
Current year catastrophe losses	$	50,168		$	34,593		$	15,575
Prior year reserve (favorable) development	12,249			(2,656		)	14,905
Underlying loss and LAE (1)	$	85,708		$	88,615		$	(2,907	)
% of Gross earned premiums	24.9		%	29.2		%	(4.3) pts
% of Net earned premiums	44.4		%	51.7		%	(7.3) pts

⁽¹⁾ Underlying loss and LAE is a non-GAAP measure and is reconciled above to Net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this Form 10-Q.

The calculations of our expense ratios are shown below.

	Three Months Ended September 30,
	2019			2018			Change
Policy acquisition costs	$	61,849		$	54,200		$	7,649
Operating and underwriting	12,167			10,976			1,191
General and administrative	19,105			15,358			3,747
Total Operating Expenses	$	93,121		$	80,534		$	12,587
% of Gross earned premiums	27.0		%	26.5		%	0.5 pts
% of Net earned premiums	48.3		%	47.0		%	1.3 pts

Loss and LAE increased $27,573,000, or 22.8%, to $148,125,000 for the third quarter of 2019 from $120,552,000 for the third quarter of 2018. Loss and LAE expense as a percentage of net earned premiums increased 6.4 points to 76.8% for the third quarter of 2019, compared to 70.4% for the same period last year. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the third quarter of 2019 was 24.9%, a decrease of 4.3 points from 29.2% during the third quarter of 2018.

Policy acquisition costs increased $7,649,000, or 14.0%, to $61,849,000 for the third quarter of 2019 from $54,200,000 for the third quarter of 2018. The primary driver of the increase in costs was a $8,680,000 increase in agent commissions. This increase was consistent with our increase in premium and higher average market commission rates outside of Florida.

Operating and underwriting expenses increased $1,191,000, or 10.9%, to $12,167,000 for the third quarter of 2019 from $10,976,000 for the third quarter of 2018, primarily due to increased investments in technology of approximately $2,601,000. This was partially offset by a decrease in agent related costs of $564,000, as well as a decrease in assessments of $548,000.

General and administrative expenses increased $3,747,000, or 24.0%, to $19,105,000 for the third quarter of 2019 from $15,358,000 for the third quarter of 2018, primarily due to a $2,786,000 increase in salaries and related benefits as the number of personnel has increased and a $1,057,000 increase in amortization related to our capitalized software.

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UNITED INSURANCE HOLDINGS CORP.

RESULTS OF OPERATIONS - COMPARISON OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018

Net earnings attributable to UIHC for the nine months ended September 30, 2019 decreased $33,075,000, or 291.1%, to a net loss of $21,714,000 for 2019 from net income of $11,361,000 for the same period in 2018. Net loss was primarily due to an increase in loss and LAE expenses, partially offset by an increase in net premiums earned for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

Revenue

Our gross written premiums increased $125,291,000, or 13.0%, to $1,085,505,000 for the nine months ended September 30, 2019 from $960,214,000 for the same period in 2018, primarily reflecting organic growth in new and renewal business generated in all regions. The breakdown of the year-over-year changes in both direct and assumed written premiums by region and gross written premium by line of business are shown in the table below.

($ in thousands)	Nine Months Ended September 30,
	2019		2018		Change
Direct Written and Assumed Premium by Region (1)
Florida	$	576,028	$	504,362	$	71,666
Gulf	174,070		162,451		11,619
Northeast	153,234		132,932		20,302
Southeast	89,059		79,174		9,885
Total direct written premium by region	992,391		878,919		113,472
Assumed premium (2)	93,114		81,295		11,819
Total gross written premium by region	$	1,085,505	$	960,214	$	125,291
Gross Written Premium by Line of Business
Personal property	$	755,974	$	682,991	$	72,983
Commercial property	329,531		277,223		52,308
Total gross written premium by line of business	$	1,085,505	$	960,214	$	125,291

⁽¹⁾ "Gulf" is comprised of Hawaii, Louisiana and Texas; "Northeast" is comprised of Connecticut, Massachusetts, New Jersey, New York and Rhode Island; and "Southeast" is comprised of Georgia, North Carolina and South Carolina.

⁽²⁾ Assumed premium for 2019 and 2018 is primarily commercial property business assumed from unaffiliated insurers.

	Nine Months Ended September 30,
New and Renewal Policies By Region (1)	2019	2018	Change
Florida	209,580	191,668	17,912
Northeast	117,485	100,959	16,526
Gulf	106,762	102,429	4,333
Southeast	72,880	69,037	3,843
Total	506,707	464,093	42,614

⁽¹⁾ Only includes new and renewal homeowner, commercial and dwelling fire policies written during the year.

We expect our gross written premium growth to continue as we increase our policies in-force in the states in which we currently write policies and as we expand into other states in which we are currently licensed to write property and casualty insurance.

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UNITED INSURANCE HOLDINGS CORP.

Expenses

Expenses for the nine months ended September 30, 2019 increased $114,303,000, or 21.7%, to $642,085,000 from $527,782,000 for the same period in 2018. The increase in expenses was primarily due to a $82,531,000 increase in loss and LAE, as well as a $25,001,000 increase in policy acquisition costs. The calculations of our loss ratios and underlying loss ratios are shown below.

	Nine Months Ended September 30,
	2019			2018			Change
Net loss and LAE	$	368,924		$	286,393		$	82,531
% of Gross earned premiums	37.4		%	32.8		%	4.6 pts
% of Net earned premiums	65.4		%	56.4		%	9.0 pts
Less:
Current year catastrophe losses	$	77,627		$	58,250		$	19,377
Prior year reserve (favorable) development	33,216			(4,207		)	37,423
Underlying loss and LAE (1)	$	258,081		$	232,350		$	25,731
% of Gross earned premiums	26.2		%	26.6		%	(0.4) pts
% of Net earned premiums	45.8		%	45.8		%	0.0 pts

⁽¹⁾ Underlying loss and LAE is a non-GAAP measure and is reconciled above to net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this Form 10-Q.

The calculations of our expense ratios are shown below.

	Nine Months Ended September 30,
	2019			2018			Change
Policy acquisition costs	$	178,717		$	153,716		$	25,001
Operating and underwriting	33,577			28,976			4,601
General and administrative	53,488			51,326			2,162
Total operating expenses	$	265,782		$	234,018		$	31,764
% of Gross earned premiums	26.9		%	26.8		%	0.1 pts
% of Net earned premiums	47.1		%	46.1		%	1.0 pts

Loss and LAE increased $82,531,000, or 28.8%, to $368,924,000 for the nine months ended September 30, 2019 from $286,393,000 for the same period in 2018. Loss and LAE expense as a percentage of net earned premiums increased 9.0 points to 65.4% for the nine months ended September 30, 2019, compared to 56.4% for the same period in 2018. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the nine months ended September 30, 2019 was 26.2%, a decrease of 0.4 points from 26.6% during the nine months ended September 30, 2018.

Policy acquisition costs increased $25,001,000, or 16.3%, to $178,717,000 for the nine months ended September 30, 2019 from $153,716,000 for the same period in 2018. The primary drivers of the increase in costs were the managing general agent fees related to commercial premiums, which increased by approximately $10,857,000, and an increase in our assumed ceding commission of $8,992,000.

Operating expenses increased $4,601,000, or 15.9%, to $33,577,000 for the nine months ended September 30, 2019 from $28,976,000 for the same period in 2018, primarily due to increased investments in technology of approximately $3,394,000 as well as increased printing and postage costs of $730,000.

General and administrative expenses increased $2,162,000, or 4.2%, to $53,488,000 for the nine months ended September 30, 2019 from $51,326,000 for the same period in 2018, primarily due to a decrease of approximately $7,203,000 in amortization expense, offset by a $8,422,000 increase in salaries and related benefits as the number of personnel has increased and a $1,211,000 increase in cost of professional service fees.

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UNITED INSURANCE HOLDINGS CORP.

LIQUIDITY AND CAPITAL RESOURCES

We generate cash through premium collections, reinsurance recoveries, investment income, the sale or maturity of invested assets, the issuance of debt and the issuance of additional shares of our stock. We use our cash to pay reinsurance premiums, claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, acquire subsidiaries and pay associated costs, as well as to repay debts and purchase investments.

As a holding company, we do not conduct any business operations of our own and, as a result, we rely on cash dividends or intercompany loans from our management subsidiaries to pay our general and administrative expenses. Insurance regulatory authorities heavily regulate our insurance subsidiaries, including restricting any dividends paid by our insurance subsidiaries and requiring approval of any management fees our insurance subsidiaries pay to our management subsidiaries for services rendered; however, nothing restricts our non-insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency. Our management subsidiaries pay us dividends primarily using cash from the collection of management fees from our insurance subsidiaries, pursuant to the management agreements in effect between those entities. In accordance with state laws, our insurance subsidiaries may pay dividends or make distributions out of that part of their statutory surplus derived from their net operating profit and their net realized capital gains. The Risk-Based Capital (RBC) guidelines published by the National Association of Insurance Commissioners may further restrict our insurance subsidiaries’ ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause their respective surplus as it regards policyholders to fall below minimum RBC guidelines. See Note 11 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information.

During the three-month period ended September 30, 2019, we made a $12,000,000 capital contribution to our insurance subsidiary FSIC and received a dividend of $13,579,000 from our insurance subsidiary ACIC. During the nine-month period ended September 30, 2019, we made capital contributions of $4,000,000 and $13,000,000 to our insurance subsidiaries UPC and FSIC, respectively. In addition, we refunded a dividend of $1,764,000 to our insurance subsidiary IIC, which was originally paid to UIHC in December 2018.

During the three and nine-month periods ended September 30, 2018, we contributed $40,000,000 to fund a new subsidiary, JIC. JIC is owned 66.7% by the Company, and 33.3% by RJ Kiln & Co. (No. 3 Limited), which contributed an additional $20,000,000 in initial funding for total funding of $60,000,000. We may make future contributions of capital to our insurance subsidiaries as circumstances require.

Cash Flows for the nine months ended September 30, 2019 and 2018 (in millions)

Operating Activities

The principal cash inflows from our operating activities come from premium collections, reinsurance recoveries and investment income. The principal cash outflows from our operating activities are the result of claims and related costs,

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UNITED INSURANCE HOLDINGS CORP.

reinsurance premiums, policy acquisition costs and salaries and employee benefits. A primary liquidity concern with respect to these cash flows is the risk of large magnitude catastrophe events.

During the nine months ended September 30, 2019, operating assets and liabilities continued to be impacted by developing loss payments on catastrophe events from 2018 and 2017 named storms, including Hurricanes Irma, Florence and Michael. Additionally, unpaid losses increased during the nine months ended September 30, 2019 due to Hurricane Dorian and Tropical Storm Imelda, which both made landfall during the third quarter of 2019 and were fully retained, as well as from several other weather-related events taking place during the nine months ended September 30, 2019.

Investing Activities

The principal cash inflows from our investing activities come from repayments of principal, proceeds from maturities and sales of investments. We closely monitor and manage these risks through our comprehensive investment risk management process. The principal cash outflows relate to purchases of investments and cost of property, equipment and capitalized software acquired. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. During the nine months ended September 30, 2019, we had a decrease of $44,869,000 in cash used in investing activities as the result of a decrease of $58,631,000 in net purchases of investments in 2019 compared to net purchases of investments made during the nine months ended September 30, 2018.

Financing Activities

The principal cash outflows from our financing activities come from repayments of debt and payments of dividends. The primary liquidity concern with respect to these cash flows is market disruption in the cost and availability of credit. We believe our current capital resources, together with cash provided from our operations, are sufficient to meet currently anticipated working capital requirements. During the nine months ended September 30, 2019, cash used in financing activities decreased by $19,949,000 as the result of a $20,000,000 capital contribution by a subsidiary of Tokio Marine to JIC, the Company's subsidiary, during the formation of such subsidiary in 2018, which did not recur in 2019.

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UNITED INSURANCE HOLDINGS CORP.

OFF-BALANCE SHEET ARRANGEMENTS

At September 30, 2019, we did not have any off-balance-sheet arrangements or material changes to our contractual obligations during the quarter.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including interest rate risk related to changes in interest rates in our fixed-maturity securities, credit risk related to changes in the financial condition of the issuers of our fixed-maturities and equity price risk related to changes in equity security prices. These risks are disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2018. We had no material changes in our market risk during the nine months ended September 30, 2019.

Item 4. Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that the information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level, due to a previously disclosed material weakness in internal control over financial reporting as discussed below. The material weakness was identified and discussed in Part II, Item 9A of our Form 10-K for the year ended December 31, 2018 (the 2018 Form 10-K).

Notwithstanding the material weakness, management has concluded that the condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, the financial position, results of operations and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles.

Material Weakness in Internal Control Over Financial Reporting

We identified the following material weakness in the operation of our internal control over financial reporting as previously disclosed in our 2018 Form 10-K:

• We did not perform ongoing monitoring to ascertain whether the components of internal control are present and functioning. Specifically, given the timing of implementation of the new and or modified internal controls that were implemented during 2018 to address the material weaknesses identified in the prior year, we did not have an opportunity to fully execute monitoring activities over the new and or modified internal controls.

Remediation Plans

Our management, with oversight from our Audit Committee, has initiated a plan to remediate the material weakness previously identified in the 2018 Form 10-K. Management will work to ensure that all designed monitoring activities are executed appropriately in 2019. Management believes that such activities will allow the Company to select, develop, and perform ongoing and or separate evaluations to ascertain whether our components of internal control are present and functioning. Because the reliability of the internal control process requires repeatable execution, the material weakness cannot be considered fully remediated until all remedial processes and procedures have been implemented, each applicable control has operated for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively. Until the material weakness is remediated, we will not be able to assert that our internal controls are effective.

Changes in Internal Control over Financial Reporting

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UNITED INSURANCE HOLDINGS CORP.

Except for the material weakness remediation efforts identified above, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended September 30, 2019.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in routine claims-related legal actions arising in the ordinary course of business. We accrue amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that we determine an unfavorable outcome becomes probable and we can estimate the amounts. Management makes revisions to our estimates based on its analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation.

At September 30, 2019, we were not involved in any material non-claims-related legal actions.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2019, we did not sell any unregistered equity securities or repurchase any of our equity securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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UNITED INSURANCE HOLDINGS CORP.

Item 6. Exhibits

The following exhibits are filed or furnished herewith or are incorporated herein by reference:

Exhibit	Description
3.1	Amendment to Bylaws, effective November 5, 2019.
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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UNITED INSURANCE HOLDINGS CORP.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		UNITED INSURANCE HOLDINGS CORP.
November 5, 2019	By:	/s/ John Forney
		John Forney, Chief Executive Officer  (principal executive officer and duly authorized officer)

November 5, 2019	By:	/s/ B. Bradford Martz
		B. Bradford Martz, Chief Financial Officer (principal financial officer and principal accounting officer)

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