Edgar Filing: UNITED INSURANCE HOLDINGS CORP.

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________

FORM 10-K

___________________________________

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Commission File Number 001-35761

United Insurance Holdings Corp.



	Delaware		75-3241967
	(State of Incorporation)		(IRS Employer Identification Number)

800 2nd Avenue S

St. Petersburg, Florida 33701

727-895-7737



Securities registered pursuant to Section 12(b) of the Act:
	COMMON STOCK, $0.0001 PAR VALUE PER SHARE	NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
	PREFERRED SHARE PURCHASE RIGHTS

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No R

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £

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



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

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

Non-affiliates held common stock issued by the registrant with an aggregate market value of $277,928,371 as of June 30, 2016, calculated using the closing sales price reported for such date on the NASDAQ Stock Market. For purposes of this disclosure, shares of common stock held by persons who hold more than 10% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

As of March 15, 2017, 21,676,125 shares of common stock, par value $0.0001 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference certain information from the Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2016.

UNITED INSURANCE HOLDINGS CORP.



Forward-Looking Statements		3
Part I.
	Item 1. Business	4
	Item 1A. Risk Factors	15
	Item 1B. Unresolved Staff Comments	23
	Item 2. Properties	24
	Item 3. Legal Proceedings	24
	Item 4. Mine Safety Disclosures	24
Part II.
	Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
	Item 6. Selected Financial Data	29
	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	31
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk	47
	Item 8. Financial Statements and Supplementary Data
	Auditor's Report	49
	Consolidated Balance Sheets	50
	Consolidated Statements of Comprehensive Income	51
	Consolidated Statements of Stockholders' Equity	52
	Consolidated Statements of Cash Flows	53
	Notes to Consolidated Financial Statements	54
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	94
	Item 9A. Controls and Procedures	94
	Item 9B. Other Information	95
Part III.
	Item 10. Directors, Executive Officers and Corporate Governance	97
	Item 11. Executive Compensation	97
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	97
	Item 13. Certain Relationships and Related Transactions, and Director Independence	97
	Item 14. Principal Accounting Fees and Services	97
Part IV.
	Item 15. Exhibits, Financial Statement Schedules	98
	Exhibit Index	105
	Item 16. Form 10-K Summary	108
Signatures		109

Throughout this Annual Report on Form 10-K (Annual Report), 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 Annual Report, we show full values rounded to the nearest thousand.

UNITED INSURANCE HOLDINGS CORP.

FORWARD-LOOKING STATEMENTS

Statements in this Form 10-K for the year ended December 31, 2016 or in documents incorporated by reference contains “forward-looking statements” within the meaning of the Private Securities Reform Litigation Act of 1995. These forward-looking statements include statements about anticipated growth in revenues, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. 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. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” "endeavor," "project," “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. 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:


•	the regulatory, economic and weather conditions 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, viability and availability of reinsurance;


•	assessments charged by various governmental agencies;


•	pricing competition and other initiatives by competitors;


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


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


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


•	our exposure to catastrophic events and severe weather conditions;


•	downgrades in our financial strength ratings;


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


•	other risks and uncertainties described under "Risk Factors" below.

We caution you to not place reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise. In addition, we prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP), which prescribes when we may reserve for particular risks, including litigation exposures. Accordingly, our results for a given reporting period could be significantly affected if and when we establish a reserve for a major contingency. Therefore, the results we report in certain accounting periods may appear to be volatile and past results may not be indicative of results in future periods.

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the Securities and Exchange Commission (SEC). The forward-looking events that we discuss in this Form 10-K are valid only as of the date of this Form 10-K and may not occur, or may have different consequences, in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “RISK FACTORS” in Part I, Item 1A of this Form 10-K. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

UNITED INSURANCE HOLDINGS CORP.

PART I

Item 1. Business

INTRODUCTION

Company Overview

United Insurance Holdings Corp. serves as the holding company for United Property & Casualty Insurance Company and its affiliated companies (referred to in this document as we, our, us, the Company or UPC Insurance). We conduct our business principally through the seven wholly owned operating subsidiaries shown below. Collectively, including United Insurance Holdings Corp., we refer to these entities as “UPC Insurance,” which is the preferred brand identification we are establishing for our Company.

UPC Insurance is primarily engaged in the homeowners' property and casualty insurance business in the United States. We currently write in Connecticut, Florida, Georgia, Hawaii, Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Texas, and we are licensed to write in Alabama, Delaware, Maryland, Mississippi, New Hampshire, and Virginia. Our target market currently consists of areas where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies. In such areas we believe an opportunity exists for UPC Insurance to write profitable business. We manage our risk of catastrophic loss primarily through sophisticated pricing algorithms, avoidance of policy concentration, and the use of a comprehensive catastrophe reinsurance program. UPC Insurance has been operating continuously in Florida since 1999, and has successfully managed its business through various hurricanes, tropical storms, and other weather related events. We believe our record of successful risk management and experience in writing business in catastrophe-exposed areas provides us a competitive advantage as we grow our business in other states facing similar perceived threats.

We conduct our operations under one business segment.

UNITED INSURANCE HOLDINGS CORP.

Our Strategy

The Company's vision is: "to be the premier provider of property insurance in catastrophe exposed areas."

Our mission is to build a sustainable franchise that delivers quality insurance products in select markets in order to produce superior risk-adjusted returns for investors. Our strategy is to grow in our target markets by building a team of insurance professionals that can (i) provide agents and policyholders quality insurance products with world-class service and systems; (ii) raise and manage capital to support business growth; and (iii) build and maintain relationships with external partners. We believe the team of professionals we have assembled has proven its ability to do each of these things, thereby providing us a source of sustainable competitive advantage as we continue to grow our footprint.

Our emphasis on growing in areas with an ongoing threat of natural catastrophes exposes our company to risk and volatility. We manage the inherent volatility associated with our risk profile in three primary ways: 1) strategically, through geographic and product diversification; 2) financially, through the use of robust reinsurance programs, low financial and operating leverage, and a conservative investment approach; and 3) operationally, by insourcing key insurance functions and establishing strong external distribution partnerships.

To achieve our goals in 2017, UPC Insurance seeks to:


•	Grow our premium base in existing states;


•	Complete our merger with AmCo Holding Company;


•	Expand our product offerings in several states where we can leverage existing distribution capabilities;


•	Utilize and add strategic partnerships to expand distribution and service capabilities in all states;


•	Improve the efficiency of our catastrophe reinsurance programs; and


•	Leverage investments in technology and analytics to manage exposure growth and improve profitability.

Corporate Information

On December 11, 2012, in connection with an underwritten public offering of 5,000,000 shares of our common stock, we were approved to begin trading our common stock on The NASDAQ Capital Market (NASDAQ). On February 3, 2015, we successfully completed the acquisition of FSH and its two wholly owned subsidiaries in an all-stock transaction which resulted in the issuance of 503,857 shares of our common stock. On April 29, 2016, we completed the acquisition of IIC. The purchase price for IIC consisted of $48,450,000 in cash, $8,550,000 in a note payable, and an accrued liability for $3,471,000 which we paid during July 2016.

Our principal executive offices are located at 800 2nd Avenue S, St. Petersburg, FL 33701 and our telephone number at that location is (727) 895-7737.

Recent Events

On February 22, 2017, our Board of Directors declared a $0.06 per share quarterly cash dividend. For additional information regarding this declaration, see Part II, Item 5 of this report.

During the fourth quarter of 2016, we assumed more than 3,100 wind-only residential policies from Citizens Property Insurance Company (Citizens), representing approximately $4,600,000 of annualized premiums. We also assumed more than 3,900 wind-only policies from the Texas Windstorm Insurance Association (TWIA), representing approximately $6,600,000 of annualized premiums. The total amount of assumed premium may be reduced by additional opt outs and cancellations by policyholders.

During the fourth quarter of 2016, Hurricane Matthew impacted Florida and Georgia before making landfall in South Carolina and also impacting North Carolina. We write property insurance in all four states and are working diligently to provide claim service to our insureds who were impacted by the storm. We have received over 5,000 claims related to Hurricane Matthew and incurred approximately $30,000,000 of pre-tax catastrophe losses, net of reinsurance recoveries, during the fourth quarter of 2016 from this event.

UNITED INSURANCE HOLDINGS CORP.

subsidiaries, American Coastal and BlueLine Cayman Holdings, through a series of mergers. American Coastal is engaged in the commercial residential property and casualty insurance business and writes coverage for Florida condominiums, homeowners' associations, apartments and townhomes through AmRisc, its managing general agent. BlueLine Cayman Holdings is a Cayman Islands holding company that holds an interest in BlueLine Re, a protected cell whose sole business is the entry into and performance of quota share agreements. At the effective time of the mergers, each issued and outstanding share of common stock of AmCo will be converted into shares of common stock of UIHC equal to 209,563.55 multiplied by the lesser of (a) one and (b) a fraction, the numerator of which is 130% of $14.81 and the denominator of which is the 30-day trailing volume-weighted average closing stock price of UIHC common stock as of the day of the closing of the mergers. Immediately following the completion of the mergers, current UIHC stockholders and RDX members will own approximately 51% and 49% of the outstanding shares of UIHC common stock, respectively.

PRODUCTS AND DISTRIBUTION

Homeowners policies and related coverage account for the vast majority of the business that we write, but we are diversifying by product as well as geography. We offer the following insurance products:

On our flood, equipment breakdown and identity theft policies, we earn a commission while retaining no risk of loss, since all such risk is ceded to other private companies and the federal government via the National Flood Insurance Program. Policies we issue under our homeowners' programs in the various states where we conduct business provide structure, content and liability coverage. We offer standardized policies for a broad range of exposures, and our policies include coverage options for standard single-family homeowners, renters, and condominium unit owners.

In 2016, personal property policies (by which we mean both standard homeowners', dwelling fire, renters and condo owners' policies) produced written premium of $669,007,000 and accounted for 95% of our total gross written premium. The remaining product mix is categorized between commercial residential and flood and has been distributed as seen below for 2016 and 2015.

We have developed a unique and proprietary homeowners' product we refer to as "UPC 1.0". This new product uses a granular approach to pricing for catastrophe perils. Our objective is to create specific geographic areas such that within each territory or "catastrophe band" the expected losses are within a specified range of error or approximation from a central estimate. These areas may have millions of data points that help us create distance-to-coast factors that provide a sophisticated

UNITED INSURANCE HOLDINGS CORP.

market segmentation that is highly correlated to our risk exposure and reinsurance costs. UPC 1.0 has been filed and approved for use in Florida, Connecticut, Georgia, Louisiana, New Jersey, South Carolina and Texas and we plan to file it for use in all our states.

We currently market and distribute our policies to consumers through approximately 12,000 independent agents representing over 7,500 agencies. UPC Insurance has focused on the independent agency distribution channel since its inception, and we believe we have built significant credibility and loyalty with the independent agent communities in the states in which we operate. We recruit, train and appoint the full-service insurance agencies that distribute our products. Typically, a full-service agency is small to medium in size and represents several insurance companies for both personal and commercial product lines. We depend heavily upon our independent agents to produce new business for us. We compensate our independent agents primarily with fixed-rate commissions that we believe are consistent with those generally prevailing in the market. In addition to our relationships with individual agencies, we have important relationships with aggregators of underlying agency demand. The two most significant of these relationships are with Allstate in Florida, which, through its Ivantage program, refers homeowners to our company and other partner companies, and with the Florida Association of Insurance Agents (FAIA), which serves as a conduit between UPC Insurance and many smaller agencies in Florida with whom we do not have direct appointments.

Our sales representatives monitor and support our agents and also have the principal responsibility for recruiting and training our new agents. We manage our relationships with independent agents through periodic business reviews using established benchmarks and goals for premium volume and profitability.

UNITED INSURANCE HOLDINGS CORP.

GEOGRAPHIC MARKETS

UPC Insurance Company began operations in Florida in 1999, and has operated continuously there since that time. In 2010, we began writing business outside of Florida and we currently write business in twelve states. The table below shows the years in which we began to actively write in each state:



State	Year Became Active
Florida	1999
South Carolina	2010
Massachusetts	2011
Rhode Island	2012
North Carolina	2013
New Jersey	2013
Texas	2013
Louisiana	2014
Georgia	2015
Hawaii	2015
Connecticut	2016
New York	2016

UPC Insurance is also licensed to write, but has not commenced writing business in Alabama, Delaware, Maryland, Mississippi, New Hampshire, and Virginia. It is a fundamental part of our strategy to diversify our operations outside of Florida and to write in multiple states where the perceived threat of natural catastrophes has caused large national insurance companies to reduce their concentration.

The table below shows the geographic distribution of our 451,155 policies in-force as of December 31, 2016, and 347,015 policies in-force as of December 31, 2015.



Policies In-Force By Region⁽¹⁾	2016 Policies	%		2015 Policies	%
Florida	187,414	41.5	%	188,748	54.4	%
Gulf	103,207	22.9		55,555	16.0
Northeast	93,258	20.7		52,738	15.2
Southeast	67,276	14.9		49,974	14.4
Total	451,155	100.0	%	347,015	100.0	%

⁽¹⁾Each region is comprised of the following states: Gulf includes Hawaii, Louisiana and Texas, Northeast includes Connecticut, Massachusetts, New Jersey, New York and Rhode Island, and Southeast includes Georgia, North Carolina and South Carolina.

UNITED INSURANCE HOLDINGS CORP.

As of December 31, 2016, our total insured value of all polices in-force was approximately $214,114,964,000, an increase of $54,509,072,000, or 34.2%, from the same date in 2015. We have approximately 37.6% of our total insured value in Florida compared to roughly 49.1% as of December 31, 2015. The following table provides evidence of our improving geographic diversification by illustrating the breakdown of total insured value:



Total Insured Value By Region⁽¹⁾	2016 TIV		%		2015 TIV		%
Florida	$	80,444,296	37.6	%	$	78,539,211	49.1	%
Northeast	61,327,280		28.6		34,920,238		22.0
Gulf	40,411,989		18.9		22,467,968		14.1
Southeast	31,931,399		14.9		23,678,475		14.8
Total	$	214,114,964	100.0	%	$	159,605,892	100.0	%

UNITED INSURANCE HOLDINGS CORP.

COMPETITION

Our target market for homeowners' insurance, our primary product offering, includes the 18 states in which we are currently licensed plus the State of Maine where we plan to obtain a license at some point in the future. The following table summarizes the homeowners' insurance market countrywide for the year ending December 31, 2016, the date for which the most current data is available:



Countrywide Property Insurance Market - 2016 Homeowners DWP *
2016 Rank	Company Name	Direct Written Premium		Market Share
1	State Farm Group	$	17,613,109	19.3	%
2	Allstate Insurance Group	7,903,530		8.7	%
3	Liberty Mutual Group	6,164,379		6.8	%
4	Farmers Insurance Group	5,515,277		6.0	%
5	USAA Group	5,341,021		5.9	%
6	Travelers Group	3,387,144		3.7	%
7	Nationwide Corp. Group	3,299,236		3.6	%
8	American Family Insurance Group	2,855,835		3.1	%
9	Chubb Ltd. Group	2,697,841		3.0	%
10	Erie Insurance Group	1,538,085		1.7	%
11	Auto Owners Group	1,246,574		1.4	%
12	Metropolitan Group	1,135,803		1.2	%
13	Hartford Fire & Casualty Group	1,113,000		1.2	%
14	American International Group	1,093,643		1.2	%
15	Progressive Group	925,018		1.0	%
16	Universal Insurance Holdings Group	880,902		1.0	%
17	CSAA Insurance Group	874,444		1.0	%
18	Auto Club Enterprises Insurance Group	857,774		0.9	%
19	Amica Mutual Group	777,210		0.9	%
20	Country Insurance & Financial Services Group	672,139		0.7	%
21	AmTrust, NGH Group	668,332		0.7	%
22	United Insurance Holdings Group	627,825		0.7	%
23	Tower Hill Insurance Group	607,919		0.7	%
24	Assurant, Inc. Group	558,206		0.6	%
25	The Hanover Insurance Group	551,336		0.6	%
	Total - Top 25 Insurers	68,905,582		75.6	%
	Total - All Insurers	$	91,276,900	100.0	%

* The information displayed in the table above is compiled and published by the National Association of Insurance Commissioners (NAIC) as of December 31, 2016 based on information filings submitted annually by all licensed insurance companies. The information above is presented on a consolidated or aggregated basis for each insurance company group. The amounts shown in the table above are also on a statutory basis and exclude non-Homeowners lines of business that are included in the Company's total direct written premium for 2016.

We compete primarily on the basis of product features, the strength of our distribution network, high-quality service to our agents and policyholders, and our reputation for long-term financial stability and commitment. Our long and successful track record writing homeowners insurance in catastrophe-exposed areas has enabled us to develop sophisticated pricing techniques that endeavor to accurately reflect the risk of loss while allowing us to be competitive in our target markets. This pricing segmentation approach allows us to offer products in areas that have a high demand for property insurance yet are under-served by the national carriers.

UNITED INSURANCE HOLDINGS CORP.

We price our product at levels that we project will generate an acceptable underwriting profit. We try to be extremely granular in our approach, so that our price can accurately reflect the risk and profitability of each potential customer. In our pricing algorithm, we consider insurance credit scores (where allowable) and historical attritional loss costs for the rating territory in which the customer resides, as well as projected reinsurance costs based on the specific geographic and structural characteristics of the home. In addition to the specific characteristics of the policy being priced, we also evaluate the reinsurance cost of each incremental policy on our portfolio as a whole. In this regard, we seek to optimize our portfolio by diversifying our geographic exposure in order to limit our probable maximum loss, total insured value and average annual loss. We use the output from third-party modeling software to analyze our risk exposures, including wind exposures, by zip code or street address as part of the optimization process.

We have established underwriting guidelines designed to provide a uniform approach to our risk selection and designed to achieve underwriting profitability. Our underwriters review the property inspection report during their risk evaluation and if the policy does not meet our underwriting criteria, we have the right to cancel the policy within 90 days in Florida and within 60 days in other states.

We strive to provide excellent service to our independent agents and our policyholders. We continue to enhance our web-based systems which allow our agents to prepare and process new policies and policy changes online and deliver policy declarations quickly. We work with a select group of third party vendors to develop, manage and maintain our information technology systems. This allows us to obtain up-to-date technology at a reasonable cost and to achieve economies of scale without incurring significant fixed-overhead expenses. As agent and consumer behaviors evolve we continue to enhance our technology platforms to offer solutions that meet their needs.

REGULATION

We are subject to extensive regulation in the markets we serve, primarily at the state level. In general, these regulations are designed to protect the interests of insurance policyholders. They have a substantial effect on our business and relate to a wide variety of matters, including insurer solvency, reserve adequacy, insurance company licensing and examination, agent and adjuster licensing, policy forms, rate setting, the nature and amount of investments, claims practices, participation in shared markets and guaranty funds, transactions with affiliates, the payment of dividends, underwriting standards, statutory accounting methods, trade practices, and corporate governance. Some of these matters are discussed in more detail below. From time to time, individual states and/or the National Association of Insurance Commissioners (NAIC) propose new regulations and/or legislation that affect us. We can neither predict whether any of these proposals in the various jurisdictions might be adopted, nor what effect, if any, their adoption may have on our results of operations or financial condition. For a discussion of statutory financial information and regulatory contingencies, see Note 13 to our Notes to Consolidated Financial Statements which is incorporated in this Part I, Item 1 by reference.

Our insurance affiliates provide audited statutory financial statements to the various insurance regulatory authorities. With regard to periodic examinations of an insurance company's affairs, insurance regulatory authorities, in general, defer to the insurance regulatory authority in the state in which an insurer is domiciled; however, insurance regulatory authorities from any state in which we operate may conduct examinations at their discretion. UPC is domiciled in Florida, FSIC is domiciled in Hawaii, and IIC is domiciled in New York.

The ratio of gross and net premiums written to statutory surplus is a common measure of operating leverage used in the property-casualty insurance industry and serves as an indicator of a company’s premium growth capacity. Florida state law requires insurance companies to maintain premium-to-surplus ratios not in excess of 10:1 and 4:1 for gross premiums-to-surplus and net premiums-to-surplus, respectively. The table below shows the premium-to-surplus ratios for our Florida regulated entity at December 31, 2016 and 2015.



	December 31,
	2016	2015
UPC ⁽¹⁾
Gross premiums-to-surplus ratio	3.7	3.7
Net premiums-to-surplus ratio	2.2	2.5

⁽¹⁾Florida insurance statute §624.4095 requires property insurance premiums to be multiplied by a factor of 90%

for the purposes of this calculation

UNITED INSURANCE HOLDINGS CORP.

Risk-Based Capital Requirements

To enhance the regulation of insurer solvency, the NAIC has published risk-based capital (RBC) guidelines for insurance companies designed to assess capital adequacy and to raise the level of protection statutory surplus provides for policyholders. The guidelines measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks. Most states, including Florida, Hawaii and New York, have enacted the NAIC guidelines as statutory requirements, and insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. Insurance regulatory authorities could require our insurance subsidiaries to cease operations in the event it fails to maintain the required statutory capital.

The level of required risk-based capital is calculated and reported annually. There are five outcomes to the RBC calculation set forth by the NAIC which are as follows:


1.	No Action Level - If RBC is greater than 200%, no further action is required.


2.	Company Action Level - If RBC is between 150% -200%, the insurer must prepare a report to the regulator outlining a comprehensive financial plan that identifies conditions that contributed to the insurer's financial condition and proposes corrective actions.


3.	Regulatory Action Level - If RBC is between 100% -150%, the state insurance commissioner is required to perform any examinations or analyses to the insurer's business and operations that he or she deems necessary as well as issuing appropriate corrective orders.


4.	Authorized Control Level - If RBC is between 70% - 100%, this is the first point that the regulator may take control of the insurer even if the insurer is still technically solvent and is in addition to all the remedies available at the higher action levels.


5.	Mandatory Control Level - If RBC is less than 70%, the regulator is required to take steps to place the insurer under its control regardless of the level of capital and surplus.

At December 31, 2016, UPC's, FSIC's, and IIC's RBC ratios were 339%, 433%, and 867% respectively.

Underwriting and Marketing Restrictions

During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations (i) created “market assistance plans” under which insurers are induced to provide certain coverage; (ii) restrict the ability of insurers to reject insurance coverage applications, to rescind or otherwise cancel certain policies in mid-term, and to terminate agents; (iii) restrict certain policy non-renewals and require advance notice on certain policy non-renewals; and (iv) limit rate increases or decrease rates permitted to be charged.

Most states also have insurance laws requiring that rate schedules and other information be filed with the insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The insurance regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory.

Most states require licensure or insurance regulatory authority approval prior to the marketing of new insurance products. Typically, licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, character of its officers and directors, rates, forms and other financial and non-financial aspects of a company. The insurance regulatory authorities may prohibit entry into a new market by not granting a license or by withholding approval.

Limitations on Dividends by Insurance Subsidiaries

As a holding company with no significant business operations of our own, we rely on payments from our insurance affiliates as one of the principal sources of cash to pay dividends and meet our obligations. Our insurance affiliates are regulated as property and casualty insurance companies and their ability to pay dividends is restricted by Florida, Hawaii and New York law.

UNITED INSURANCE HOLDINGS CORP.

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 or adjusted net investment income. 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 and the amount of dividends or distributions that would require prior approval of the insurance regulatory authorities in those states. Statutory risk-based capital requirements may further restrict our insurance affiliates' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum risk-based capital requirements.

For additional information regarding those restrictions, see Part II, Item 5 of this report.

Insurance Holding Company Regulation

As a holding company of insurance subsidiaries, we are subject to laws governing insurance holding companies in Florida, Hawaii and New York. These laws, among other things, (i) require us to file periodic information with the insurance regulatory authority, including information concerning our capital structure, ownership, financial condition and general business operations, (ii) regulate certain transactions between our affiliates and us, including the amount of dividends and other distributions and the terms of surplus notes and (iii) restrict the ability of any one person to acquire certain levels of our voting securities without prior regulatory approval. Any purchaser of 5% or more of the outstanding shares of our common stock could be presumed to have acquired control of us unless the insurance regulatory authority, upon application, determines otherwise.

Insurance holding company regulations also govern the amount any affiliate of the holding company may charge our insurance affiliates for services (i.e., management fees and commissions). We have a long-term management agreement between UPC and UIM, which presently provides for monthly management fees. The Florida Office of Insurance Regulation must approve any changes to this agreement.

We also have a management agreement between FSIC and FSU, which presently provides for monthly management fees. The Hawaii Insurance Division must approve any changes to this agreement.

The New York Department of Financial Services does not permit the use of a managing general agent and therefore we do not have a management agreement between IIC and any other company. Instead, UPC Insurance allocates a portion of relevant expenses to IIC for statutory accounting purposes.

FINANCIAL STABILITY RATING

Financial stability ratings are important to insurance companies in establishing their competitive position and such ratings may impact an insurance company’s ability to write policies. Demotech maintains a letter-scale financial stability rating system ranging from A** (A double prime) to L (licensed by insurance regulatory authorities); they have assigned our insurance subsidiaries a financial stability rating of A, which is the third highest of six rating levels. According to Demotech, "Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating of A possess Exceptional financial stability related to maintaining surplus as regards policyholders at an acceptable level.” With a financial stability rating of A, we expect our property insurance policies will be acceptable to the secondary mortgage marketplace and mortgage lenders. This rating is intended to provide an independent opinion of an insurer’s financial strength and is not an evaluation directed at our investors. At least annually, based on year-to-date results as of the third quarter, Demotech reviews our rating and may revise it upward or downward or revoke it at their sole discretion.

EMPLOYEES

As of March 2017, we have 167 full time employees, which includes our executive officers. We are neither party to any collective bargaining agreements nor have we experienced any work stoppages or strikes as a result of labor disputes. We believe we have good working relationships with our employees.

AVAILABLE INFORMATION

We make available, free of charge through our website, www.upcinsurance.com, our Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

UNITED INSURANCE HOLDINGS CORP.

These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. You may also access this information at the SEC’s website (www.sec.gov). This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

UNITED INSURANCE HOLDINGS CORP.

Item 1A. Risk Factors

Many factors affect our business and results of operations, some of which are beyond our control. Additional risks and uncertainties we are unaware of, or we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial conditions or results of operations may be materially and adversely affected. In that event, the trading price of our securities could decline, and our stockholders could lose all or part of their investment in our securities. This discussion contains forward-looking statements. See the section entitled FORWARD-LOOKING STATEMENTS for a discussion of uncertainties, risks and assumptions associated with these statements.

RISKS RELATED TO OUR BUSINESS

As a property and casualty insurer, we may experience significant losses, and our financial results may vary from period to period, due to our exposure to catastrophic events and severe weather conditions, the incidence and severity of which could be affected by climate change.

Our property and casualty insurance operations expose us to risks arising from catastrophes. Catastrophes can be caused by various natural events, including hurricanes, windstorms, earthquakes, hail, severe winter weather and fires; they can also be man-made, such as terrorist attacks (including those involving nuclear, biological, chemical or radiological events) or consequences of war or political instability. We may incur catastrophe losses that exceed the amount of:

•catastrophe losses that we experienced in prior years;

•catastrophe losses that, using third-party catastrophe modeling software, we projected could be incurred;

•catastrophe loss estimates that we used to develop prices for our products; or

•our current reinsurance coverage (which would cause us to have to pay such excess losses).

The incidence and severity of weather conditions are largely unpredictable, but the frequency and severity of property claims generally increase when severe weather conditions occur. Climate change, to the extent that it may affect weather patterns, may cause an increase in the frequency and/or the severity of catastrophic events or severe weather conditions which, in addition to the attendant increase in claims-related costs, may also cause an increase in our reinsurance costs and/or negatively impact our ability to provide homeowners insurance to our policyholders in the future. Governmental entities may also respond to climate change by enacting laws and regulations that may increase our cost of providing homeowners insurance in the future, which could adversely affect demand.

Catastrophes may have a material adverse effect on our results of operations during any reporting period due to increases in our loss and loss adjustment expense. Catastrophes may also cause us to increase our reserve for unpaid losses and loss adjustment expenses, which could materially harm our financial condition and our liquidity and could impair our ability to raise capital on acceptable terms or at all. In addition to catastrophes, the accumulation of losses from several smaller weather-related events in any reporting period may have a similar impact to our results of operations and financial condition.

Because we conduct a significant portion of our business in Florida, our financial results substantially depend on the regulatory, economic and weather conditions present in that state.

A significant portion of our policies in-force is concentrated in Florida. Moreover, if our proposed merger with AmCo Holding Company (“AmCo”) and its wholly owned subsidiaries (including American Coastal Insurance Company) is completed, our risk exposure in Florida will significantly increase because substantially all of AmCo’s business is conducted in respect of risk located in the State of Florida. Therefore, the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in Florida will likely have a more significant impact on our revenues and profitability compared to such conditions in other jurisdictions in which we operate. Furthermore, changes in conditions could make doing business in Florida less attractive for us, which could have a more pronounced effect on us than it would on other insurance companies that are more geographically diversified.

In addition, due to Florida’s climate, we are subject to increased exposure to certain catastrophic events such as hurricanes, as well as an increased risk of losses. The occurrence of one or more catastrophic events or other conditions affecting losses in Florida may cause a material adverse effect on our results of operations and financial condition.

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Our diversification strategy may not be effective.

Although we intend to continue focusing on Florida as a key market for our insurance products, we plan to take advantage of prudent opportunities to expand our core business into other states where we believe the potential for underwriting profit is strong. However, we may not be successful in this diversification strategy due to several factors, including the difficulties of finding appropriate expansion opportunities and the challenges of operating in new and unfamiliar markets.

Because we rely on insurance agents, the loss of these agent relationships or our ability to attract new agents could have an adverse impact on our business.

We currently market our policies to a broad range of prospective policyholders through approximately 12,000 independent agents representing over 7,000 agencies. Many of these agents are independent insurance agents that own their customer relationships, and our agency contracts with them limit our ability to directly solicit business from our existing policyholders. Independent agents commonly represent other insurance companies and we do not control their activities. Historically, we have used marketing relationships with two well-known national insurance companies that do not write new homeowners insurance policies in Florida and two associations of independent insurance agents in Florida to attract and retain agents and agency groups. The loss of these marketing relationships could adversely impact our ability to attract new agents or retain our agency network. Failure to grow or maintain our agency relationships or a failure to attract new agents could adversely affect sales of our insurance products.

Additionally, AmCo’s subsidiary, American Coastal Insurance Company (“American Coastal”), has an exclusive contract with AmRisc, pursuant to which AmRisc serves as American Coastal’s exclusive managing general agent for binding and writing commercial residential property lines for condominium, townhome and homeowners association insurance written in Florida. Under that contract, AmRisc must produce a certain volume of business for American Coastal. Therefore, if our proposed acquisition of AmCo (including American Coastal) is completed, failure of AmRisc to produce the required volume of business could cause the combined company to lose substantial premiums and could require us to seek one or more alternative managing general agents. If we were unable to find a replacement managing general agent or otherwise increase the production of premiums, our revenues could decrease, which could have a material adverse effect on our business, financial condition and results of operations.

Actual claims incurred may exceed our loss reserves for claims, which could adversely affect our results of operations and financial condition.

Loss reserves represent our estimate of ultimate unpaid losses for claims that have been reported and claims that have been incurred but not yet reported. Loss reserves do not represent an exact calculation of liability, but instead represent our best estimate, generally utilizing actuarial expertise, historical information and projection techniques at a given reporting date.

The process of estimating our loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, legislative changes, and varying judgments and viewpoints of the individuals involved in the estimation process, among others.

Because of the inherent uncertainty in estimating loss reserves, including reserves for catastrophes, additional liabilities resulting from one insured event, or an accumulation of insured events, may exceed our existing loss reserves. If our reserves are inadequate, it may cause us to overstate our earnings for the periods during which our reserves for expected losses was insufficient.

Our financial results may vary from period to period based on the timing of our collection of government-levied assessments from our policyholders.

Our insurance affiliates are subject to assessments levied by various governmental and quasi-governmental entities in the states in which we operate. While we may have the ability to recover these assessments from policyholders through policy surcharges in some states in which we operate, our payment of the assessments and our recoveries may not offset each other in the same reporting period in our financial statements and may cause a material adverse effect on our results of operations in a particular reporting period.

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Our failure to implement and maintain adequate internal controls over financial reporting in our business could have a material adverse effect on our business, financial condition, results of operations and stock price.

“Internal controls over financial reporting” refer to those procedures within a company that are designed to reasonably ensure the accuracy of the company’s financial statements. Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to annually assess the effectiveness of our internal controls over financial reporting. Based on its most recent assessment, management believes that our internal controls during 2016 and 2015 were effective.

If we fail to achieve and maintain adequate internal controls, or if we have material weaknesses in our internal controls, in each case in accordance with applicable standards, we may be unable to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Because effective internal controls are necessary for us to produce reliable financial reports, our business, financial condition and results of operations could be harmed, investors could lose confidence in our reported financial information, and the market price for our stock could decline if our internal controls are ineffective or if material weaknesses in our internal controls are identified. Moreover, if we complete our merger with AmCo, any deficiencies or material weaknesses in AmCo’s internal controls over financial reporting could also have a material adverse impact on the combined company for the above-mentioned reasons.

If we experience difficulties with technology, data security and/or outsourcing relationships, our ability to conduct our business could be negatively impacted.

While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. Our business is highly dependent upon our information technology systems and upon our contractors' and third-party administrators' ability to perform, in an efficient and uninterrupted fashion, necessary business functions such as the processing of policies and the adjusting of claims. Because our information technology and telecommunications systems interface with and often depend on these third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions.

Despite our implementation of security measures, our information technology systems are vulnerable to computer viruses, natural disasters, unauthorized access, cyber-attacks, system failures and similar disruptions. A material breach in the security of our information technology systems and data could include the theft of our confidential or proprietary information, including trade secrets and the personal information of our customers, claimants and employees. From time to time, we have experienced threats to our data and information technology systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. To the extent that any disruptions or security breaches result in a loss or damage to our data or inappropriate disclosure of proprietary or confidential information, it could cause significant damage to our reputation, adversely affect our relationships with our customers, result in litigation, increased costs and/or regulatory penalties, and ultimately harm our business. Third parties to whom we outsource certain of our functions are also subject to the risks outlined above, any one of which may result in our incurring substantial costs and other negative consequences, including a material adverse effect on our business, financial condition, results of operations and liquidity.

Loss of key vendor relationships or failure of a vendor to protect personal information of our customers, claimants or employees could affect our operations.

We rely on services and products provided by many third-party vendors. These include, for example, vendors of computer hardware and software and vendors of services such as claim adjustment services and human resource benefits management services. In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services, or fails to protect personal information of our customers, claimants or employees, we may suffer operational impairments and financial losses. Moreover, in the event of a data breach involving any of our third-party vendors, our customers’ data and personal information could also be put at risk. For example, many of the recent significant data breaches were a result of security breaches of third-party vendors. Any such data breach involving our third-party vendors could result in significant mitigation or legal expenses for us, which could materially and adversely affect our results of operations and financial condition.

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Our success has been and will continue to be greatly influenced by our ability to attract and retain the services of senior management.

Our senior executive officers play an integral role in the development and management of our business. We cannot guarantee that any such officers will continue their employment with us. Additionally, we do not maintain any key person life insurance policies on any of our officers or employees. The loss of the services of any of our senior executive officers could have an adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.

Our acquisitions and other strategic transactions may be difficult to integrate, divert management resources, result in unanticipated costs or dilute our stockholders.

Part of our continuing business strategy is to evaluate opportunities to merge with and acquire companies that complement our business model or make other strategic transactions that facilitate or expedite the accomplishment of our business goals. Even if we enter into an agreement in respect of a merger with or acquisition of another business, we may not be able to finalize a transaction after significant investment of time and resources, including our proposed merger with AmCo. Further, we may not have the ability to finalize a transaction due to a lack of regulatory approval or imposition of a burdensome condition by the regulator.

In connection with an acquisition or merger, we could incur debt, amortization expenses related to intangible assets, large and immediate write-offs, assume liabilities or issue stock that would dilute our current stockholders' percentage of ownership. As a result, there is a risk of transaction related litigation. Such transactions could pose numerous risks to our operations, including:


•	incurring substantial unanticipated integration costs;


•	assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business;


•	acquisitions and mergers could result in the loss of key employees, particularly those of the acquired operations;


•	difficulty retaining the acquired business' customers;


•	failing to realize the strategic benefits or the potential cost savings or other financial benefits of the acquisitions or mergers; and


•	incurring unanticipated liabilities or claims from the acquired businesses and contractually-based time and monetary limitations on the seller's obligation to indemnify us for such liabilities or claims.

We are also subject to a certain level of risk regarding the actual condition of the businesses that we acquire. Until we actually assume operating control of such businesses and their assets and operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. As a result, we may not be able to complete acquisitions or mergers or integrate the operations, products or personnel gained through any such acquisition or merger without a material adverse effect on our business, financial condition and results of operations, including our proposed merger with AmCo, which has not yet been consummated.

RISKS RELATED TO THE INSURANCE INDUSTRY

Because we are operating in a highly competitive market, we may lack the resources to increase or maintain our market share.

The property and casualty insurance industry is highly competitive, and we believe it will remain highly competitive for the foreseeable future. The principal competitive factors in our industry are price, service, commission structure and financial condition. We compete with other property and casualty insurers that write coverage in the same geographic areas in which we write coverage and some of those insurers have greater financial resources and have a longer operating history than we do. In addition, our competitors may offer products for alternative forms of risk protection that we presently do not offer, which could adversely affect the sales of our products. Competition could limit our ability to retain existing business or to write new business at adequate rates, and such limitation may cause a material adverse effect on our results of operations and financial position.

UNITED INSURANCE HOLDINGS CORP.

Changes in state regulation may adversely affect our results of operation and financial condition.

As an insurance company, we are subject to the laws and regulations of the various states in which we operate. From time to time, states have passed legislation, and regulators have taken action, that has the effect of limiting the ability of insurers to manage catastrophe risk, such as legislation prohibiting insurers from reducing exposures or withdrawing from catastrophe-prone areas, or mandating that insurers participate in residual markets. In addition, following catastrophes, legislative initiatives and court decisions can seek to expand insurance coverage for catastrophe claims beyond the original intent of the policies, which could cause our actual loss and loss adjustment expense to exceed our estimates. Further, our ability to increase pricing to the extent necessary to offset rising costs of catastrophes requires approval of insurance regulatory authorities.

One example of such legislation occurred following the 2004 and 2005 hurricane seasons, when the Florida legislature required all insurers issuing replacement cost policies to pay the full replacement cost of damaged properties without depreciation, whether or not the insureds repaired or replaced the damaged property. Under prior law, insurers paid the depreciated amount of damaged property on covered losses until an insured commenced repairs or replacement. Under the current law, there is an increase in disputes over the amount of loss, since full payment is made before actual repairs begin and without documentation supporting the actual cost of repair. Despite our efforts to promptly calculate and pay meritorious amounts, our operating results have been affected by the change in law, coupled with a claims environment in Florida that creates opportunities for fraudulent or overstated claims.

Our ability or willingness to manage our catastrophe exposure by raising prices, modifying underwriting terms or reducing exposure to certain geographies may be limited due to considerations of public policy, the evolving political environment and our ability to penetrate other geographic markets, which may cause a material adverse effect on our results of operations, financial condition and cash flows. We cannot predict whether and to what extent the adoption of new legislation and regulations would affect our ability to manage our exposure to catastrophic events.

The insurance industry is heavily regulated and further restrictive regulation may reduce our profitability and limit our growth.

The insurance industry is extensively regulated and supervised. Insurance regulatory authorities generally design insurance rules and regulations to protect the interests of policyholders, and not necessarily the interests of insurers, their stockholders, and other investors. We are subject to comprehensive regulation and supervision by state insurance departments in all states in which our insurance subsidiaries are domiciled, as well as all states in which they are licensed, sell insurance products, issue policies, or handle claims. The regulations of each state are unique and complex and subject to change, and certain states may have regulations that conflict with the regulations of other states in which we operate. As a result, we are subject to the risk that compliance with the regulations in one state may not result in compliance with the regulations in another state.

State statutes and administrative rules generally require each insurance company to register with the department of insurance in its state of domicile and to furnish information concerning the operations of the companies within the holding company system which may materially affect the operations, management or financial condition of the insurers. As part of its registration, each insurance company must identify material agreements, relationships and transactions with affiliates, including loans, investments, asset transfers, transactions outside of the ordinary course of business, certain management, service, and cost sharing agreements, reinsurance transactions, dividends, and other financial and non-financial components of an insurer’s business. Some states impose restrictions or require prior regulatory approval of specific corporate actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow our business profitably. Our ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner is, and will continue to be, critical to our success.

Currently, the federal government's role in regulating or dictating the policies of insurance companies is limited. However, from time to time Congress has considered and may in the future consider proposals that would increase the role of the federal government in insurance regulation, either in addition to or in lieu of state regulation.

In recent years, the state insurance regulatory framework has come under increased federal scrutiny. Changes in federal legislation, regulation and/or administrative policies in several areas, including changes in financial services regulation and federal taxation, could negatively affect the insurance industry and us. In addition, Congress and some federal agencies from time to time investigate the current condition of insurance regulation in the United States to determine whether to impose federal or national regulation or to allow an optional federal charter, similar to the option available to most banks. Further, the NAIC and state insurance regulators continually reexamine existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws and

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regulations. We cannot predict what effect, if any, proposed or future legislation or NAIC initiatives may have on the manner in which we conduct our business.

As part of potential, or future, industry-wide investigations, we may from time to time receive requests for information from government agencies and authorities at the state or federal level. If we are subpoenaed for information by government agencies and authorities, potential outcomes could include law enforcement proceedings or settlements resulting in fines, penalties and/or changes in business practices that could cause a material adverse effect on our results of operations. In addition, these investigations may result in changes to laws and regulations affecting the industry.

Changes to insurance laws or regulations, or new insurance laws and regulations, may be more restrictive than current laws or regulations and could significantly increase our compliance costs, which could have a material adverse effect on our results of operations and our prospects for future growth. Additionally, our failure to comply with certain provisions of applicable insurance laws and regulations could result in significant fines or penalties being levied against us and may cause a material adverse effect on our results of operations or financial condition.

Our inability to obtain reinsurance on acceptable terms would increase our loss exposure or limit our ability to underwrite policies.

We use, and we expect to continue to use, reinsurance to help manage our exposure to property risks. Reinsurance is insurance for insurers and is fundamentally a promise by the reinsurer to pay possible future claims in exchange for the payment of a premium by the insurance company seeking reinsurance. The availability and cost of reinsurance are each subject to prevailing market conditions beyond our control, which can affect business volume and profitability. We may be unable to maintain our current reinsurance coverage, to obtain additional reinsurance coverage in the event our current reinsurance coverage is exhausted by a catastrophic event, or to obtain other reinsurance coverage in adequate amounts or at acceptable rates. Similar risks exist whether we are seeking to replace coverage terminated during the applicable coverage period or to renew or replace coverage upon its expiration. We provide no assurance that we can obtain sufficient reinsurance to cover losses resulting from one or more storms or other events in the future, or that we can obtain such reinsurance in a timely or cost-effective manner. If we are unable to renew our expiring coverage or to obtain new reinsurance coverage, either our net exposure to risk would increase or, if we are unwilling to accept an increase in net risk exposures, we would have to reduce the amount of risk we underwrite. Either increasing our net exposure to risk or reducing the amount of risk we underwrite may cause a material adverse effect on our results of operations and our financial condition.

Our inability to collect from our reinsurers on our reinsurance claims could cause a material adverse effect on our results of operation and financial condition.

We use reinsurance as a tool to manage risks associated with our business. However, we remain primarily liable as the direct insurer on all risks that we obtain reinsurance for. Our reinsurance agreements do not eliminate our obligation to pay claims to insured. As a result, we are subject to counterparty risk with respect to our ability to recover amounts due from reinsurers. The risk could arise in two situations: (i) our reinsurers may dispute some of our reinsurance claims based on contract terms, and we may ultimately receive partial or no payment, or (ii) the amount of losses that reinsurers incur related to worldwide catastrophes may materially harm the financial condition of our reinsurers and cause them to default on their obligations.

While we will attempt to manage these risks through underwriting guidelines, collateral requirements and other oversight mechanisms, our efforts may not be successful. As a result, our exposure to counterparty risk under our reinsurance agreements may cause a material adverse effect on our results of operations, financial condition and cash flow.

Our investments are subject to market risks that may result in reduced returns or losses.

We invest a portion of the premiums we collect in various securities and expect returns from our investments in these securities to contribute to our overall profitability. Accordingly, fluctuations in interest rates or in the fixed-maturity, equity or alternative-investment markets may cause a material adverse effect on our results of operations.

Changes in the general interest rate environment will affect our returns on, and the fair value of, our fixed-maturity and short-term investments. A decline in interest rates reduces the interest rate payable on new fixed income investments, thereby negatively impacting our net investment income. Conversely, rising interest rates reduce the fair value of existing fixed maturities. In addition, defaults under, or impairments of, any of these investments as a result of financial problems with the issuer and, where applicable, its guarantor could reduce our net investment income and net realized investment gains or result in investment losses.

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We are subject to risks associated with potential declines in credit quality related to specific issuers and a general weakening in the economy. While we have put in place procedures designed to monitor the credit risk of our invested assets, it is possible that we may experience credit or default losses in our portfolio, which could adversely affect our results of operations and financial condition.

We may decide to invest an additional portion of our assets in equity securities or other investments, which are subject to greater volatility than fixed maturities. General economic conditions, stock market conditions and many other factors beyond our control can adversely affect the fair value of our equity securities or other investments, and could adversely affect our realization of net investment income. As a result of these factors, we may not realize an adequate return on our investments, we may incur losses on sales of our investments and we may be required to write down the value of our investments, which could reduce our net investment income and net realized investment gains or result in investment losses.

The fair value of our investment portfolio is also subject to valuation uncertainties. The valuation of investments is more subjective when the markets for these investments are illiquid and may increase the risk that the estimated fair value of our investment portfolio is not reflective of prices at which actual transactions would occur.

Our determination of the amount of other-than-temporary impairment to record varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective investment type. We revise our evaluations and assessments as conditions change and new information becomes available, and we reflect changes in other-than-temporary impairments in our Consolidated Statements of Comprehensive Income. We base our assessment of whether other-than-temporary impairments have occurred on our case-by-case evaluation of the underlying reasons for the decline in fair value. However, we may not accurately assess whether the impairment of one or more of our investments is temporary or other-than-temporary and the recorded amounts for other-than-temporary impairments in our financial statements may be inadequate. Furthermore, historical trends may not be indicative of future impairments and additional impairments may need to be recorded in the future.

Our portfolio may benefit from certain tax laws, including those governing dividends-received deductions and tax credits. Federal and/or state tax legislation could be enacted that would lessen or eliminate some or all of these tax advantages and could adversely affect the value of our investment portfolio. This result could occur in the context of deficit reduction or various types of fundamental tax reform.

The property and casualty insurance and reinsurance industry is historically cyclical and the pricing and terms for our products may decline, which would adversely affect our profitability.

Historically, the financial performance of the property and casualty insurance and reinsurance industry has been cyclical, characterized by periods of severe price competition and excess underwriting capacity, or soft markets, followed by periods of high premium rates and shortages of underwriting capacity, or hard markets. We cannot predict when such a period may occur or how long any given hard or soft market will last. Downturns in the property and casualty market may cause a material adverse effect on our results of operations and our financial condition.

Losses from legal actions may be material to our operating results, cash flows and financial condition.

Trends in the insurance industry regarding claims and coverage issues, such as increased litigation, the willingness of courts to expand covered causes of loss, and the escalation of loss severity may contribute to increased litigation costs and increase our loss exposure under the policies that we underwrite.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. Examples of emerging claims and coverage issues include, but are not limited to:


•	judicial expansion of policy coverage and the impact of new theories of liability;


•	plaintiffs targeting property and casualty insurers in purported class-action litigation relating to claims-handling and other practices; and


•	adverse changes in loss cost trends, including inflationary pressures in home repair costs.

Loss severity in the property and casualty insurance industry may increase and may be driven by the effects of these and other unforeseen emerging claims and coverage issues. Multiparty or class action claims may present additional exposure to substantial economic, non-economic or punitive damage awards. The loss of even one of these claims, if it resulted in a

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significant award or a judicial ruling that was otherwise detrimental, could create a precedent in our industry that could have a material adverse effect on our results of operations and financial condition. This risk of potential liability may make reasonable settlements of claims more difficult to obtain.

We may be named a defendant in a number of legal actions relating to those emerging claim and coverage issues. The propensity of policyholders and third party claimants to litigate and the willingness of courts to expand causes of loss and the size of awards may result in increased costs associated with litigation, render our loss reserves inadequate, and may be material to our operating results and cash flows for a particular quarter or annual period and to our financial condition. In addition, claims and coverage issues may not become apparent to us for some time after our issuance of the affected insurance policies. As a result, we may not know the full extent of liability under insurance policies we issue for many years after the policies are issued.

A downgrade in our financial strength rating could adversely impact our business volume and our ability to access additional debt or equity financing.

Financial strength ratings have become increasingly important to an insurer’s competitive position. Rating agencies review their ratings periodically, and our current ratings may not be maintained in the future. A downgrade in our rating could negatively impact our business volumes, as it is possible demand for our products in certain markets may be reduced or our ratings could fall below minimum levels required to maintain existing business. Additionally, we may find it more difficult to access the capital markets and we may incur higher borrowing costs. If significant losses, such as those resulting from one or more major catastrophes, or significant reserve additions were to cause our capital position to deteriorate significantly, or if one or more rating agencies substantially increase their capital requirements, we may need to raise equity capital in the future to maintain our ratings or limit the extent of a downgrade. For example, a trend of more frequent and severe weather-related catastrophes may lead rating agencies to substantially increase their capital requirements.

We cannot guarantee that our insurance affiliates, UPC, FSIC and IIC will maintain their current A (Exceptional) ratings by Demotech. Any downgrade of this rating could impact the acceptability of our products to mortgage lenders that require homeowners to buy insurance, reduce our ability to retain and attract policyholders and agents and damage our ability to compete, which may cause a material adverse effect on our results of operations and financial condition.

RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK

Future sales of substantial amounts of our common stock by us or our existing stockholders could cause our stock price to decrease.

We have registered up to $75,000,000 of our securities (including our common stock), which we may sell from time to time in one or more offerings. Additional equity financings or other share issuances by us could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public trading market (or in private transactions), or the perception that such additional sales could occur, could cause the market price of our common stock to decrease. Additionally, if we complete our merger with AmCo, we will issue shares representing approximately 49% of the issued and outstanding common stock of the combined company (on a pro forma basis) as consideration in the merger. Assuming our merger with AmCo is consummated, our existing shareholders will incur substantial dilution and will own approximately 51% of our issued and outstanding common stock on a pro forma basis.

Dividend payments on our common stock in the future are uncertain.

We have paid dividends on our common stock in the past. However, the declaration and payment of dividends will be at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal and regulatory restrictions on the payment of dividends from our subsidiaries, general business conditions and such other factors as our Board of Directors deems relevant. Therefore, investors who purchase our common stock may only realize a return on their investment if the value of our common stock appreciates.

If we complete our merger with AmCo, the substantial ownership of our common stock by R. Daniel Peed and his affiliates may allow him to exert significant control over us.

If we complete our merger with AmCo, R. Daniel Peed, the controlling member of RDX Holding, LLC (“RDX”), which is the parent company of AmCo, will beneficially own approximately 32% of our issued and outstanding common stock. Mr. Peed also expects to receive a proxy from another member of RDX who will beneficially own approximately 8% of our issued and outstanding common stock upon consummation of our merger with AmCo. As a result, Mr. Peed may be able to exert

UNITED INSURANCE HOLDINGS CORP.

substantial control over us. Moreover, Mr. Peed’s interests may conflict with the interests of other holders of our common stock and he may take actions affecting us with which other stockholders may disagree. Mr. Peed may have the ability to exert significant influence over the following:


•	the nomination, election and removal of our Board of Directors;


•	the adoption of amendments to our charter documents;


•	management and policies; and


•	the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets.

Additionally, upon consummation of our proposed merger with AmCo, we will enter into a stockholder’s agreement with the members of RDX, including Mr. Peed, which will provide those shareholders with rights that our other shareholders will not have, including the right to appoint three of the 10 members of our Board of Directors and registration rights with respect to the shares being issued in the merger. Although the stockholder’s agreement requires shares beneficially owned by Mr. Peed and his affiliates to be voted in proportion to the votes cast by other stockholders on any proposal on which our stockholders are entitled to vote, this restriction will terminate on the earlier of (i) the fifth anniversary of the closing date of our merger with AmCo and (ii) the date that Mr. Peed and his affiliates beneficially own less than 25% of our voting securities.

Provisions in our charter documents and the shareholder rights plan that we adopted may make it harder for others to obtain control of us even though some stockholders might consider such a development to be favorable.

Our charter and bylaws contain provisions that may discourage unsolicited takeover proposals our stockholders may consider to be in their best interests. Our Board of Directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. At a given annual meeting, only a portion of our Board of Directors may be considered for election. Since our “staggered board” may prevent our stockholders from replacing a majority of our Board of Directors at certain annual meetings, it may entrench our management and discourage unsolicited

stockholder proposals that may be in the best interests of our stockholders.

Further, our Board of Directors has the ability to designate the terms of and issue a new series of preferred stock.

We have also adopted a shareholder rights plan that could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, our Company or a large block of our common stock. A third party that acquires 20% or more of our common stock could suffer substantial dilution of its ownership interest under the terms of the shareholder rights plan through the issuance of common stock to all stockholders other than the acquiring person. In certain circumstances the foregoing threshold may be reduced to 15%.

Together these provisions may make the removal of our management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

Additionally, we have taken action to render our rights plan to be inapplicable to the issuance of shares to RDX (and its members) in connection with our proposed merger with AmCo by reason of the approval, execution, announcement or consummation of the transactions contemplated by the merger agreement.

Item 1B. Unresolved Staff Comments

None.

UNITED INSURANCE HOLDINGS CORP.

Item 2. Properties

On September 5, 2014, we acquired approximately 40,000 square feet of commercial office space and associated property located at 800 2nd Avenue South, St. Petersburg, Florida, for use as our principal executive offices. We completed the renovation of that property in 2015 and moved our principal executive offices in December 2015.

On September 9, 2015, we acquired approximately 7,800 square feet of commercial office space at 724 2nd Avenue South, St. Petersburg, FL. The building is currently unoccupied but is being held for future use and expansion purposes.

During 2016, we renewed our lease of approximately 800 square feet of office space at 7192 Kalanianaole Highway, Honolulu, Hawaii. We paid approximately $22.08 per square foot in 2015 and approximately $23.16 per square foot during 2016.

Item 3. Legal Proceedings

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 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 December 31, 2016, we were not involved in any material non claims-related legal actions.

Item 4. Mine Safety Disclosures

Not applicable.

UNITED INSURANCE HOLDINGS CORP.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

MARKET INFORMATION

Our common stock trades on the NASDAQ Capital Market (NASDAQ) under the symbol "UIHC". We have one class of authorized common stock for 50,000,000 shares at a par value of $0.0001 per share.

The table below sets forth, for the calendar quarter indicated, the high and low sales prices of our common stock as reported on NASDAQ.



	Sales Prices
	High		Low
2016
Fourth Quarter	$	17.04	$	9.52
Third Quarter	17.16		14.29
Second Quarter	19.73		14.50
First Quarter	20.04		13.46
2015
Fourth Quarter	19.77		12.83
Third Quarter	16.79		12.12
Second Quarter	22.98		13.78
First Quarter	28.43		20.23

HOLDERS OF COMMON EQUITY

As of March 15, 2017, we had 4,260 holders of record of our common stock.

DIVIDENDS

We declared and paid dividends per share each quarter during 2016 and 2015 as follows:



	2016		2015
Quarterly data, per share

First Quarter	$	0.05	$	0.05
Second Quarter	$	0.06	$	0.05
Third Quarter	$	0.06	$	0.05
Fourth Quarter	$	0.06	$	0.05

Total Dividends Paid	$	4,974,000	$	4,302,000

Any future dividend payments will be at the discretion of our Board of Directors and will depend upon our profits, financial requirements and other factors, including legal and regulatory restrictions on the payment of dividends, general business conditions and such other factors as our Board of Directors deems relevant.

UNITED INSURANCE HOLDINGS CORP.

Under Florida law, a Florida-domiciled insurer like UPC, may not pay any dividend or distribute cash or other property to its shareholders except out of its available and accumulated surplus funds which are derived from realized net operating profits on its business and net realized capital gains. Additionally, Florida-domiciled insurers may not make dividend payments or distributions to shareholders without the prior approval of the insurance regulatory authority if the dividend or distribution would exceed the larger of:


1.	the lesser of:


a.	10% of the insurer's capital surplus, or


b.	net income, not including realized capital gains, plus a two-year carryforward


2.	10% of the insurer's capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains, or


3.	the lesser of:


a.	10% of the insurer's capital surplus, or


b.	net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains.

Alternatively, UPC may pay a dividend or distribution without the prior written approval of the insurance regulatory authority when:


1.	the dividend is equal to or less than the greater of:


a.	10% of the insurer's surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains, or


b.	The insurer's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, and:


i.	The insurer will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend or distribution is made, and


ii.	The insurer files a notice of the dividend or distribution with the insurance regulatory authority at least ten business days prior to the dividend payment or distribution, and


iii.	The notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution the insurer will have at least 115% of required statutory surplus as to policyholders.

Except as provided above, a Florida-domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the insurance regulatory authority, or (ii) 30 days after the insurance regulatory authority has received notice of intent to pay such dividend or distribution and has not disapproved it within such time. As of December 31, 2016 we are in compliance with these requirements.

Under the insurance regulation of Hawaii, the maximum amount of dividends that FSIC, Inc. may pay to its parent company without prior approval from the Insurance Commissioner is:


1.	the lesser of:


a.	10% of the insurer's surplus as of December 31 of the preceding year, or


b.	10% of the net income, not including realized capital gains, for the twelve-month period ending December 31 of the preceding year.

UNITED INSURANCE HOLDINGS CORP.

In performing the net income test, property and casualty insurers may carry-forward income from the previous two calendar years that has not already been paid out as dividends. This carry-forward shall be computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and immediately preceding calendar years. As of December 31, 2016 we are in compliance with these requirements.

Under the insurance regulations of New York, no company may declare or distribute any dividend to shareholders which, together with all dividends declared or distributed by it during the next preceding twelve months, exceeds:

1.the lesser of:


a.	10% of the insurer's surplus to policyholders as shown on its latest statement on file with the Superintendent, or

b.100% of "adjusted net investment income" during that period.

N.Y. Ins. Law 4105(a)(2) (McKinney 2000) defines "adjusted net investment income" to mean:

Net investment income for the twelve months immediately preceding the declaration or distribution of the current dividend increased by the excess, if any, of net investment income over dividends declared or distributed during the period commencing 36 months prior to the declaration or distribution of the current dividend and ending 12 months prior thereto.

Under an agreement with the New York Department of Financial Services, we will not issue dividends on behalf of IIC within two years of the acquisition date. As of December 31, 2016 we are in compliance with these requirements.

See Note 13 to our Notes to Consolidated Financial Statements for further discussion of restrictions on future payments of dividends by our insurance affiliates.

PERFORMANCE GRAPH

Set forth below is a line graph comparing the dollar change in the cumulative total shareholder return on our common stock from December 31, 2010 through December 31, 2016 as compared to the cumulative total return of the Russell 2000 index, the NASDAQ Insurance index and the S&P Insurance ETF (KIE). The cumulative total shareholder return is a concept used to compare the performance of a company's stock over time and is the ratio of the stock price change plus the cumulative amount of dividends over the specified time period (assuming dividend reinvestment), to the stock price at the beginning of the time period. The chart depicts the value on each December 31 from 2011 through 2016 of a $100 investment made on December 31, 2010 with all dividends reinvested.

UNITED INSURANCE HOLDINGS CORP.



	December 31,
	2010		2011		2012		2013		2014		2015		2016
United Insurance Holdings Corp.	$	100.00	$	143.55	$	198.68	$	469.44	$	737.16	$	581.00	$	522.22
Russell 2000 index	100.00		94.55		108.38		148.49		153.73		144.95		173.18
NASDAQ Insurance index	100.00		103.09		117.01		150.69		163.56		174.12		201.34

The foregoing performance graph and data shall not be deemed "filed" as part of this Annual Report for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section and should not be deemed incorporated by reference into any other filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates it by reference into such filing.

RECENT SALES OF UNREGISTERED SECURITIES

During 2016, we did not have any unregistered sales of our equity securities.

REPURCHASES OF EQUITY SECURITIES

During 2016, we did not repurchase any of our equity securities.

UNITED INSURANCE HOLDINGS CORP.

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and our consolidated financial statements and the related notes appearing in Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of this Annual Report. The consolidated statements of income data for the years ended December 31, 2016, 2015 and 2014 and the consolidated balance sheet data at December 31, 2016 and 2015 are derived from our audited financial statements appearing in Item 8 of this Annual Report. The consolidated statements of income data for the years ended December 31, 2013 and 2012 and the balance sheet data for the years ended December 31, 2014, 2013 and 2012 are derived from our audited consolidated financial statements that are not included in this Annual Report. The historical results shown below are not necessarily indicative of the results to be expected in any future period.



	As of and for the Years Ended December 31,
	2016			2015			2014			2013			2012
Income Statement Data:
Revenue:
Gross premiums written	$	708,156		$	569,736		$	436,753		$	381,352		$	254,909
Gross premiums earned	666,829			504,215			400,695			316,708			226,254
Net premiums earned	$	456,931		$	335,958		$	264,850		$	197,378		$	121,968
Net investment income and realized gains	11,226			10,039			6,775			3,742			5,243
Other revenue	18,960			11,572			8,605			6,960			4,023
Total revenue	$	487,117		$	357,569		$	280,230		$	208,080		$	131,234
Expenses:
Loss and loss adjustment expenses	298,353			183,108			118,077			98,830			58,409
Other operating expenses	181,138			132,569			97,410			74,397			57,241
Interest expense	723			326			410			367			355
Total expenses	$	480,214		$	316,003		$	215,897		$	173,594		$	116,005
Income before income taxes	7,003			41,860			64,410			34,487			15,714
Provision for income taxes	1,305			14,502			23,397			14,145			6,009
Net income	$	5,698		$	27,358		$	41,013		$	20,342		$	9,705
Earnings per share
Basic	$	0.27		$	1.29		$	2.06		$	1.26		$	0.91
Diluted	$	0.26		$	1.28		$	2.05		$	1.26		$	0.91
Cash dividends declared per share	$	0.23		$	0.20		$	0.16		$	0.12		$	0.08

Return on average equity, trailing twelve months	2.4		%	12.4		%	27.2		%	20.8		%	16.1		%

Ceded ratio⁽¹⁾	31.5		%	33.4		%	33.9		%	37.7		%	46.1		%

Ratios to net premiums earned:
Loss and loss adjustment expenses	65.3		%	54.5		%	44.6		%	50.0		%	47.9		%
Expenses	39.6		%	39.5		%	36.8		%	37.7		%	46.9		%
Combined Ratio	104.9		%	94.0		%	81.4		%	87.7		%	94.8		%
Effect of current year catastrophe losses on combined ratio	12.2		%	8.5		%	0.3		%	1.8		%	3.0		%
Effect of prior year (favorable) development on combined ratio	3.7		%	(0.7		)%	(1.5		)%	2.1		%	0.5		%
Underlying Combined Ratio⁽²⁾	89.0		%	86.2		%	82.6		%	83.8		%	91.3		%

⁽¹⁾ Calculated as ceded premiums earned divided by gross premiums earned.

⁽²⁾ Underlying combined ratio, a measure that is not based on accounting principles generally accepted in the United States of America (GAAP), is reconciled above to the combined ratio, 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" in Part II Item 7 of this document.

UNITED INSURANCE HOLDINGS CORP.



	As of and for the Years Ended December 31,
	2016		2015		2014		2013		2012
Balance Sheet Data:
Cash and invested assets	$	679,335	$	537,500	$	443,018	$	326,548	$	223,385
Prepaid reinsurance premiums	132,564		79,399		63,827		55,268		49,916
Total Assets	$	999,686	$	740,021	$	584,169	$	441,230	$	314,715

Unpaid loss and loss adjustment expenses	$	140,855	$	76,792	$	54,436	$	47,451	$	35,692
Unearned premiums	372,223		304,653		229,486		193,428		128,785
Reinsurance payable	99,891		64,542		45,254		39,483		26,063
Notes payable	54,175		12,353		13,529		14,706		15,882
Total Liabilities	$	758,359	$	500,810	$	380,406	$	333,643	$	225,628
Total Stockholders' Equity	$	241,327	$	239,211	$	203,763	$	107,587	$	89,087

Statutory Surplus	$	212,298	$	150,860	$	126,249	$	78,362	$	68,007

UNITED INSURANCE HOLDINGS CORP.

Item 7. 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 consolidated financial statements and related notes appearing elsewhere in this Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control.

EXECUTIVE SUMMARY

Overview

UIHC serves as the holding company for UPC and its affiliated companies. We conduct our business principally through seven wholly owned operating subsidiaries: UPC, UIM, FSIC, FSU, Skyway Claims Services, LLC (our claims adjusting affiliate), UPC Re (our reinsurance affiliate) and IIC. Collectively, including United Insurance Holdings Corp., we refer to these entities as “UPC Insurance,” which is the preferred brand identification we are establishing for our Company.

We manage our risk of catastrophic loss primarily through sophisticated pricing algorithms, avoidance of policy concentration, and the use of a comprehensive catastrophe reinsurance program. UPC Insurance has been operating continuously in Florida since 1999, and has successfully managed its business through various hurricanes, tropical storms, and other weather related events. We believe our record of successful risk management and experience in writing business in catastrophe-exposed areas provides us with a competitive advantage as we grow our business in other states facing similar perceived threats.

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 the following factors: liquidity, financial strength, ratings, book value per share and return on equity.

Recent Events

During the fourth quarter of 2016, Hurricane Matthew impacted Florida and Georgia before making landfall in South Carolina and also impacting North Carolina. We write property insurance in all four states and are working diligently to provide claim service to our insureds who were impacted by the storm. We have received over 5,000 claims related to Hurricane Matthew and incurred approximately $30,000,000 of pre-tax catastrophe losses, net of reinsurance recoverable, during the fourth quarter of 2016 from this event.

On February 22, 2017, our Board of Directors declared a $0.06 per share quarterly cash dividend payable on March 15, 2017, to stockholders of record on March 8, 2017.

On August 17, 2016, we entered into a Merger Agreement with AmCo Holding Company (AmCo), a North Carolina corporation and a wholly owned subsidiary of RDX Holding, LLC (RDX), to acquire AmCo and its two wholly owned subsidiaries, American Coastal and BlueLine Cayman Holdings, through a series of mergers. American Coastal is engaged in the commercial residential property and casualty insurance business and writes coverage for Florida condominiums, homeowners' associations, apartments and townhomes through AmRisc, its managing general agent. BlueLine Cayman Holdings is a Cayman Islands holding company that holds an interest in BlueLine Re, a protected cell whose sole business is the entry into and performance of quota share agreements. At the effective time of the mergers, each issued and outstanding

UNITED INSURANCE HOLDINGS CORP.

share of common stock of AmCo will be converted into shares of common stock of UIHC equal to 209,563.55 multiplied by the lesser of (a) one and (b) a fraction, the numerator of which is 130% of $14.81 and the denominator of which is the 30-day trailing volume-weighted average closing stock price of UIHC common stock as of the day of the closing of the mergers. Immediately following the completion of the mergers, current UIHC stockholders and RDX members will own approximately 51% and 49% of the outstanding shares of UIHC common stock, respectively.

2016 Highlights



($ in thousands, except per share, ratios and policies in-force)	Year Ended December 31,
	2016			2015

Gross written premium	$	708,156		$	569,736
Net premium earned	$	456,931		$	335,958
Investment income	$	10,679		$	9,212
Net realized gains	$	547		$	827
Total revenues	$	487,117		$	357,569
Losses and loss adjustment expenses	$	298,353		$	183,108
Total expenses	$	480,214		$	316,003
Consolidated net income	$	5,698		$	27,358

Net income per diluted share	$	0.26		$	1.28

Combined ratio ⁽¹⁾	104.9		%	94.0		%
Return on average equity, trailing twelve months	2.4		%	12.4		%

Policies in-force	451,155			347,015

⁽¹⁾ Combined ratio is the sum of the loss ratio, net and the expense ratio, net.



($ in thousands, except per share and ratios)	December 31, 2016		December 31, 2015		% Change

Investment and Cash holdings	$	679,335	$	537,500	26.4	%

Book value per share	$	11.15	$	11.11	0.4	%

UNITED INSURANCE HOLDINGS CORP.

CONSOLIDATED NET INCOME



	Year Ended December 31,
	2016			2015			2014
REVENUE:
Gross premiums written	$	708,156		$	569,736		$	436,753
Increase in gross unearned premiums	(41,327		)	(65,521		)	(36,058		)
Gross premiums earned	666,829			504,215			400,695
Ceded premiums earned	(209,898		)	(168,257		)	(135,845		)
Net premiums earned	456,931			335,958			264,850
Net investment income	10,679			9,212			6,795
Net realized gains (losses)	547			827			(20		)
Other revenue	18,960			11,572			8,605
Total revenue	487,117			357,569			280,230
EXPENSES:
Losses and loss adjustment expenses	298,353			183,108			118,077
Policy acquisition costs	117,658			87,401			65,657
Operating expenses	20,524			15,316			11,746
General and administrative expenses	42,956			29,852			20,007
Interest expense	723			326			410
Total expenses	480,214			316,003			215,897
Income before other income	6,903			41,566			64,333
Other income	100			294			77
Income before income taxes	7,003			41,860			64,410
Provision for income taxes	1,305			14,502			23,397
Net income	$	5,698		$	27,358		$	41,013
Net income per diluted share	$	0.26		$	1.28		$	2.05
Book value per share	$	11.15		$	11.11		$	9.75
Return on average equity, trailing twelve months	2.4		%	12.4		%	27.2		%
Loss ratio, net¹	65.3		%	54.5		%	44.6		%
Expense ratio, net²	39.6		%	39.5		%	36.8		%
Combined ratio (CR)³	104.9		%	94.0		%	81.4		%
Effect of current year catastrophe losses on CR	12.2		%	8.5		%	0.3		%
Effect of prior year development on CR	3.7		%	(0.7		)%	(1.5		)%
Underlying combined ratio⁴	89.0		%	86.2		%	82.6		%

¹ Loss ratio, net is calculated as losses and loss adjustment expenses relative to net premiums earned.

² Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned.

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 accounting principles generally accepted in the United States of America (GAAP), is reconciled above to the combined ratio, 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 document.

Definitions of Non-GAAP Measures

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

Combined ratio excluding the effects of current year catastrophe losses and reserve development (underlying combined ratio) is a non-GAAP ratio, which is computed as the difference between three GAAP operating ratios: the combined ratio, the effect of current year catastrophe losses on the combined ratio and the effect of prior year development on the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our business that may be

UNITED INSURANCE HOLDINGS CORP.

obscured by current year catastrophe losses, losses from lines in run-off 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 direct comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business.

Net Loss and LAE excluding the effects of current year catastrophe losses and reserve development (underlying Loss and LAE) is a non-GAAP measure which is computed as the difference between loss and LAE, current year catastrophe losses and prior year reserve development. 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 three items can have a significant impact on our loss trend in a given period. The most direct comparable GAAP measure is net loss and LAE. The underlying loss and LAE figure should not be considered a substitute for net losses and LAE and does not reflect the overall profitability of our business.

Consolidated net loss ratio excluding the effects of current year catastrophe losses, reserve development (underlying loss ratio) is a non-GAAP ratio, which is computed as the difference between three GAAP operating ratios: the consolidated net loss ratio, the effect of current year catastrophe losses on the loss ratio, and the effect of prior year development on the loss ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our consolidated net loss ratio that may be obscured by current year catastrophe losses and prior year development. As discussed previously, these two items can have a significant impact on our consolidated net loss ratio in a given period. The most direct comparable GAAP ratio is our net consolidated Loss and LAE ratio. The underlying loss ratio should not be considered as a substitute for net consolidated loss ratio and does not reflect the overall profitability of our business.

RECENT ACCOUNTING STANDARDS

Please refer to Note 2(r) in our Notes to Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining:


•	reserves for unpaid losses,


•	fair value of investments,


•	investment portfolio impairments, and


•	goodwill.

In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance industry. It is reasonably likely that changes in these estimates could occur from time to time and result in a material impact on our consolidated financial statements.

UNITED INSURANCE HOLDINGS CORP.

Reserves for Unpaid Losses and Loss Adjustment Expenses

Reserves for unpaid losses and loss adjustment expenses represent the most significant accounting estimate inherent in the preparation of our financial statements. These reserves represent management’s best estimate of the amount we will ultimately pay for losses and we base the amount upon the application of various actuarial reserve estimation techniques as well as considering other material facts and circumstances known at the balance sheet date.

As discussed in Note 10 in our Notes to Consolidated Financial Statements, we determine our ultimate losses by using multiple actuarial methods to determine an actuarial estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the actuarial estimate is influenced by the analysis of our historical loss and claims experience since inception. For each accident year, we estimate the ultimate incurred losses for both reported and unreported claims. In establishing this estimate, we reviewed the results of various actuarial methods discussed in Note 10 in our Notes to Consolidated Financial Statements.

Fair Value of Investments

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. We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We use quoted prices from active markets and we use an independent third-party valuation service to assist us in determining fair value. We obtain only one single quote or price for each financial instrument.

As discussed in Note 3 in our Notes to Consolidated Financial Statements, we value our investments at fair value using quoted prices from active markets, to the extent available. For securities for which quoted prices in active markets are unavailable, we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We have several investments in limited partnerships that require us to use unobservable inputs.

Investment Portfolio Impairments

For investments classified as available for sale, the difference between fair value and cost or amortized cost for fixed income securities and cost for equity securities is reported as a component of accumulated other comprehensive income on our Consolidated Balance Sheet and is not reflected in our net income of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when a write-down is recorded due to an other-than-temporary decline in fair value. We have a portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

For each fixed income security in an unrealized loss position, we assess whether management with the appropriate authority has made the decision to sell or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, 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 not more likely than not we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We use our best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security's original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if we determine that the security is dependent on the liquidation of collateral for ultimate settlement. If the

UNITED INSURANCE HOLDINGS CORP.

estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

There are a number of assumptions and estimates inherent in evaluating impairments of equity securities and determining if they are other-than-temporary, including: (1) our ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; (2) the length of time and extent to which the fair value has been less than cost; (3) 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; and (4) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity.

Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income or equity security is other-than-temporarily impaired, including: (1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; (2) changes in the facts and circumstances related to a particular issue or issuer's ability to meet all of its contractual obligations; and (3) changes in facts and circumstances that result in changes to management's intent to sell or result in our assessment that it is more likely than not we will be required to sell before recovery of the amortized cost basis of a fixed income security or cause a change in our ability or intent to hold an equity security until it recovers in value. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on stockholders' equity, since our securities are designated as available for sale and carried at fair value and as a result, any related unrealized loss, net of taxes would already be reflected as a component of accumulated other comprehensive income in stockholders' equity.

The determination of the amount of other-than-temporary impairment is an inherently subjective process based on periodic evaluations of the factors described above. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations quarterly and reflect changes in other-than-temporary impairments in results of operations as such evaluations are revised. The use of different methodologies and assumptions in the determination of the amount of other-than-temporary impairments may have a material effect on the amounts presented within the consolidated financial statements

See Note 2(b) in our Notes to Consolidated Financial Statements for further information regarding our impairment testing.

UNITED INSURANCE HOLDINGS CORP.

Measurement of Goodwill and Related Impairment

Goodwill is the excess of cost over the estimated fair value of net assets acquired. Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. We test goodwill for impairment by either performing a qualitative assessment or a two-step quantitative test and goodwill is impaired when it is determined that carrying value of a reporting unit is in excess of the fair value of that reporting unit. The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments.

As discussed in Note 2 in our Notes to Consolidated Financial Statements, the qualitative assessment is an assessment of historical information and relevant events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment and perform a two-step quantitative impairment test.

ANALYSIS OF FINANCIAL CONDITION - DECEMBER 31, 2016 COMPARED TO DECEMBER 31, 2015

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

Investments

With respect to our investments, we primarily attempt to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that we believe represent the most attractive relative value, and we maintain a moderate equity exposure. We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance affiliates 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 the 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. We direct our asset managers to make changes and to hold, buy or sell securities in our portfolios. The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis.

Our cash, cash equivalents and investment portfolios totaled $679,335,000 at December 31, 2016 compared to $537,500,000 at December 31, 2015. The increase is a result of the addition of the IIC portfolio during 2016.

The following table summarizes our investments, by type:

UNITED INSURANCE HOLDINGS CORP.



	December 31, 2016				December 31, 2015
	Fair Value		Percent of Total		Fair Value		Percent of Total
U.S. government and agency securities	$	149,952	22.1	%	$	81,647	15.2	%
Foreign governments	2,061		0.3	%	2,075		0.4	%
States, municipalities and political subdivisions	169,112		24.9	%	155,905		29.0	%
Public utilities	7,730		1.1	%	8,493		1.6	%
Corporate securities	164,536		24.2	%	146,758		27.2	%
Redeemable preferred stocks	1,125		0.2	%	1,820		0.3	%
Total fixed maturities	494,516		72.8	%	396,698		73.7	%
Mutual fund	—		—	%	26,343		4.9	%
Public utilities	1,507		0.2	%	1,352		0.3	%
Common stocks	24,048		3.6	%	20,694		3.9	%
Nonredeemable preferred stocks	2,843		0.4	%	2,417		0.4	%
Total equity securities	28,398		4.2	%	50,806		9.5	%
Other long-term investments	5,733		0.8	%	5,210		1.0	%
Total investments	$	528,647	77.8	%	$	452,714	84.2	%
Cash and cash equivalents	$	150,688	22.2	%	$	84,786	15.8	%
Total cash, cash equivalents and investments	$	679,335	100.0	%	$	537,500	100.0	%

We classify all of our investments as available-for-sale. Our investments at December 31, 2016 and 2015 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 December 31, 2016, approximately 90% of our fixed maturities were U.S. Treasuries, or corporate bonds rated “A” or better, and 10% were corporate bonds rated “BBB” or “BB”.

At December 31, 2016, securities in an unrealized loss position for a period of twelve months or longer reflected unrealized losses of $236,000; approximately $26,000 of the total related to one fixed maturity security, while twenty-four equity securities reflected unrealized losses of $210,000. We currently have no plans to sell these twenty-five securities, and we expect to fully recover our cost basis. We reviewed all of our securities and determined that we did not need to record impairment charges at December 31, 2016. Similarly, we did not record impairment charges at December 31, 2015.

Reinsurance Payable

We follow 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.

During the second quarter of 2016, we placed our reinsurance program for the 2016 hurricane season. We purchased catastrophe excess of loss reinsurance protection of $1,515,197,000. The contracts reinsure for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements were effective as of June 1, 2016, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund. The private agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes. Effective January 1, 2017, we placed a reinsurance agreement to provide coverage against accumulated losses from specified catastrophe events, that will expire on December 31, 2017.

See Note 9 in our Notes to Consolidated Financial Statements for additional information regarding our reinsurance program.

UNITED INSURANCE HOLDINGS CORP.

Unpaid Losses and Loss Adjustments

We generally use the term "loss(es)" to collectively refer to both loss and loss adjusting expenses. 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 loss adjustment expenses totaled $140,855,000 and $76,792,000 as of December 31, 2016 and December 31, 2015, respectively.

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 10 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our losses and loss adjustments.

RESULTS OF OPERATIONS - 2016 COMPARED TO 2015

Revenues

Net income for the year ended December 31, 2016 was $5,698,000, or $0.26 per diluted share, compared to $27,358,000, or $1.28 per diluted share for the year ended December 31, 2015. The decrease in net income was primarily due to increases in loss and loss adjustment expenses during 2016 as compared to 2015.

Our total gross written premium increased by $138,420,000, or 24.3%, to $708,156,000 for the year ended December 31, 2016 from $569,736,000 for the year ended December 31, 2015, primarily due to the strong organic growth in new and renewal business generated in our Gulf and Northeast regions. Increases in direct written premium of over $159,335,000 were partially offset by reductions in assumed premium as we sharply curtailed our takeout activity in 2016 compared to the prior year. The breakdown of the year-over-year changes in both direct written and assumed premiums by region is shown in the table below.



Direct and Assumed Written Premium By Region ⁽¹⁾	2016			2015		Change
Florida	$	336,591		$	314,588	$	22,003
Gulf	160,520			91,303		69,217
Northeast	123,964			73,128		50,836
Southeast	87,176			69,897		17,279
Total direct written premium	$	708,251		$	548,916	$	159,335
Assumed premium ⁽²⁾	(95		)	20,820		(20,915		)
Total gross written premium	$	708,156		$	569,736	$	138,420

⁽²⁾ Assumed premiums written includes $1,610,000 of homeowners premium assumed from Maidstone Insurance Company in conjunction with the IIC acquisition in 2016, as well as premiums assumed from Citizens Property insurance Corporation (Citizens) in 2015 and 2016 as well as the Texas Windstorm Insurance Association in 2016.

UNITED INSURANCE HOLDINGS CORP.



New and Renewal Policies* By Region ⁽¹⁾	2016	2015	Change
Florida	192,921	175,284	17,637
Gulf	105,334	58,752	46,582
Northeast	89,512	54,172	35,340
Southeast	69,018	52,522	16,496
Total	456,785	340,730	116,055

* 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.

UNITED INSURANCE HOLDINGS CORP.

Expenses

Expenses for the year ended December 31, 2016 increased $164,211,000, or 52.0%, to $480,214,000 for the year ended December 31, 2016 from $316,003,000 for the same period in 2015, primarily due to increased losses, policy acquisition costs, operating costs and general and administrative expenses. The calculation of our underlying loss and combined ratios is shown below.



	Year Ended December 31,
	2016			2015			Change
Net Loss and LAE	$	298,353		$	183,108		$	115,245
% of Gross earned premiums	44.7		%	36.3		%	8.4		pts
% of Net earned premiums	65.3		%	54.5		%	10.8		pts
Less:
Current year catastrophe losses	$	55,842		$	28,565		$	27,277
Prior year reserve development	16,988			(2,368		)	19,356
Underlying loss and LAE*	$	225,523		$	156,911		$	68,612
% of Gross earned premiums	33.8		%	31.1		%	2.7		pts
% of Net earned premiums	49.4		%	46.7		%	2.7		pts

Policy acquisition costs	$	117,658		$	87,401		$	30,257
Operating and underwriting	20,524			15,316			5,208
General and administrative	42,956			29,852			13,104
Total Operating Expenses	$	181,138		$	132,569		$	48,569
% of Gross earned premiums	27.2		%	26.3		%	0.9		pts
% of Net earned premiums	39.6		%	39.5		%	0.1		pts

Interest Expense	$	723		$	326		$	397
Total Expenses	$	480,214		$	316,003		$	164,211

Combined Ratio - as % of gross earned premiums	71.9		%	62.6		%	9.3		pts
Underlying Combined Ratio - as % of gross earned premiums*	61.0		%	57.4		%	3.6		pts

Combined Ratio - as % of net earned premiums	104.9		%	94.0		%	10.9		pts
Underlying Combined Ratio - as % of net earned premiums*	89.0		%	86.2		%	2.8		pts


*	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" in Part II, Item 7 of this document.

Loss and LAE increased $115,245,000, or 62.9%, to $298,353,000 for the year ended December 31, 2016 from $183,108,000 for the year ended December 31, 2015. Loss and LAE expense as a percentage of net earned premiums increased 10.8 points to 65.3% for the year, compared to 54.5% for the same period last year. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year was 33.8%, an increase of 2.7 points from 31.1% during 2015, due primarily to an increase in fire and weather related losses as well as lower average premiums. Retained catastrophe losses of $55,842,000 during 2016 included losses from spring storms in Florida and Texas, the August Louisiana storms, Hurricane Hermine, Tropical Storm Colin, Hurricane Matthew, and certain other losses not covered by our reinsurance programs. Prior year loss reserve development of $16,988,000 for the year was driven primarily by non-catastrophe claims in Florida for accident year 2015.

Policy acquisition costs increased $30,257,000, or 34.6%, to $117,658,000 for the year ended December 31, 2016 from $87,401,000 for the year ended December 31, 2015. These costs vary directly with changes in gross premiums earned and were generally consistent with our growth in premium production and higher average market commission rates outside of Florida.

UNITED INSURANCE HOLDINGS CORP.

Operating expenses increased by $5,208,000, or 34.0%, to $20,524,000 for the year ended December 31, 2016 from $15,316,000 for the year ended December 31, 2015, primarily due to increased costs related to our ongoing growth and continuing expansion into new states.

General and administrative expenses increased $13,104,000, or 43.9%, to $42,956,000 for the year ended December 31, 2016 from $29,852,000 for the year ended December 31, 2015, primarily due to increases in personnel costs related to our continued growth and higher depreciation and amortization costs resulting from the acquisition of IIC during the second quarter of 2016.

We experienced unfavorable reserve development in the current year and its historical impact on our net loss and net underlying loss ratios is outlined in the following table.



	Historical Reserve Development
($ in thousands, except ratios)	2012			2013			2014			2015			2016
Prior year reserve development (unfavorable)	$	(670	)	$	(4,078	)	$	4,037		$	2,368		$	(16,988	)
Development as a % of earnings before interest and taxes	4.3		%	11.7		%	6.2		%	5.7		%	219.9		%
Consolidated net loss ratio (LR)	47.9		%	50.0		%	44.6		%	54.5		%	65.3		%
Prior year reserve unfavorable (favorable) development on LR	0.6		%	2.1		%	(1.5		)%	(0.7		)%	3.7		%
Current year catastrophe losses on LR	3.0		%	1.8		%	0.3		%	8.5		%	12.2		%
Underlying net loss ratio*	44.3		%	46.1		%	45.8		%	46.7		%	49.4		%

* Underlying Net Loss Ratio is a non-GAAP measure and is reconciled above to the Consolidated Net Loss Ratio, 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" Part II Item 7 of this document.

Overall our attritional loss experience by accident year excluding catastrophes has been trending upwards for the last two accident years due to lower premiums per unit of exposure resulting from our growth outside of Florida and higher overall frequency and severity of water-related losses.

UNITED INSURANCE HOLDINGS CORP.

RESULTS OF OPERATIONS - 2015 COMPARED TO 2014

Revenues

Net Income for the year ended December 31, 2015 was $27,358,000, compared to $41,013,000 for the twelve months ended December 31, 2014. The decrease in net income was primarily driven by an increase in losses and loss adjustment expense (LAE) resulting from multiple current year catastrophe events totaling $28,565,000. Our gross written premium increased by $132,983,000, or 30.4%, to $569,736,000 primarily due to strong organic growth in new and renewal business outside of Florida. The breakdown of the year-over-year growth in total gross written premiums broken down by region and direct versus assumed is shown in the following table:



Direct and Assumed Written Premium By Region ⁽¹⁾	2015		2014		Change
Florida	$	314,588	$	304,604	$	9,984
Gulf	91,303		13,034		78,269
Northeast	73,128		53,348		19,780
Southeast	69,897		46,783		23,114
Total direct written premium	$	548,916	$	417,769	$	131,147
Assumed premium ⁽²⁾	20,820		18,984		1,836
Total gross written premium	$	569,736	$	436,753	$	132,983

⁽¹⁾Each region is comprised of the following states: Gulf includes Hawaii, Louisiana and Texas, Northeast includes Massachusetts, New Jersey, New York and Rhode Island, and Southeast includes Georgia, North Carolina and South Carolina.

⁽²⁾All assumed premiums shown above are from policy assumptions from Citizens that are written in Florida and are shown net of opt-outs.



New and Renewal Policies* By Region ⁽¹⁾	2015	2014	Change
Florida	175,284	168,668	6,616
Gulf	58,752	9,865	48,887
Northeast	54,172	39,816	14,356
Southeast	52,522	32,392	20,130
Total	340,730	250,741	89,989

⁽¹⁾Each region is comprised of the following states: Gulf includes Hawaii, Louisiana and Texas, Northeast includes Massachusetts, New Jersey, and Rhode Island, and Southeast includes Georgia, North Carolina and South Carolina.

* 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 write policies and as we expand into other states that we are licensed to write property and casualty insurance.

UNITED INSURANCE HOLDINGS CORP.

Expenses

Expenses for the twelve months ended December 31, 2015 increased $100,106,000, or 46.4%, to $316,003,000 for the year ended December 31, 2015 from $215,897,000 for the same period in 2014, primarily due to increased losses, policy acquisition costs, operating costs and general and administrative expenses. The calculation of our underlying loss and combined ratios is shown below:



	Year Ended December 31,
	2015			2014			Change
Net Loss and LAE	$	183,108		$	118,077		$	65,031
% of Gross earned premiums	36.3		%	29.5		%	6.8pts
% of Net earned premiums	54.5		%	44.6		%	9.9pts
Less:
Current year catastrophe losses	$	28,565		$	829		$	27,736
Prior year reserve development	(2,368		)	(4,037		)	1,669
Underlying loss and LAE*	$	156,911		$	121,285		$	35,626
% of Gross earned premiums	31.1		%	30.3		%	0.8pts
% of Net earned premiums	46.7		%	45.8		%	0.9pts
Policy acquisition costs	$	87,401		$	65,657		$	21,744
Operating and underwriting	15,316			11,746			3,570
General and administrative	29,852			20,007			9,845
Total Operating Expenses	$	132,569		$	97,410		$	35,159
% of Gross earned premiums	26.3		%	24.3		%	2.0pts
% of Net earned premiums	39.5		%	36.8		%	2.7pts
Interest Expense	$	326		$	410		$	(84	)
Total Expenses	$	316,003		$	215,897		$	100,106

Combined Ratio - as % of gross earned premiums	62.6		%	53.8		%	8.8pts
Underlying Combined Ratio - as % of gross earned premiums*	57.4		%	54.6		%	2.8pts

Combined Ratio - as % of net earned premiums	94.0		%	81.4		%	12.6pts
Underlying Combined Ratio - as % of net earned premiums*	86.2		%	82.6		%	3.6pts


*	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 document.

Losses and LAE increased $65,031,000, or 55.1% to $183,108,000 for the year ended December 31, 2015, from $118,077,000 in 2014 primarily due to the growth of policies in-force and a $27,736,000 increase in current year catastrophe losses. Current year catastrophe losses increased to $28,565,000 for the twelve months ended December 31, 2015 from $829,000, for the same period in 2014.

Policy acquisition costs increased $21,744,000, or 33.1% to $87,401,000 for the year ended December 31, 2015 from

$65,657,000 for the same period in 2014, primarily due to our ongoing growth in gross earned premium.

Operating expenses increased $3,570,000, or 30.4% to $15,316,000 for the year ended December 31, 2015 from $11,746,000 for the same period in 2014 due to increased costs related our ongoing growth and continuing expansion into new states.

General and administrative expenses increased $9,845,000, or 49.2%, to $29,852,000 for the year ended December 31, 2015, from $20,007,000 for the same period in 2014 primarily due to an increase in personnel costs and infrastructure development related to our continued growth and ongoing systems migrations.

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 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, as well as to 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 affiliates to pay our general and administrative expenses. Insurance regulatory authorities in the states in which we operate heavily regulate our insurance affiliates, including restricting any dividends paid by our insurance affiliates and requiring approval of any management fees our insurance affiliates pay to our management affiliates for services rendered; however, nothing restricts our non-insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency. In accordance with Florida law, UPC may pay dividends or make distributions out of that part of its statutory surplus derived from its net operating profit and its net realized capital gains. Under the insurance regulatory laws of Hawaii, FSIC may pay dividends or make distributions out of its statutory surplus or net income less realized capital gains. In accordance with New York state law, IIC may pay dividends or make distributions out of its statutory surplus not to exceed 10% of the insurer's surplus or adjusted net investment income. See Part II Item 5 for additional information regarding the limitations on dividend payments by our insurance affiliates. The risk-based capital guidelines published by the National Association of Insurance Commissioners may further restrict the ability of our insurance affiliates to pay dividends or make distributions if the amount of the intended dividend or distribution would cause their respective surplus as regards policyholders to fall below minimum risk-based capital guidelines. Most states, including Florida, Hawaii and New York, have adopted the NAIC requirements, and insurers having less surplus as regards policyholders than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require us to cease operations in the event we fail to maintain the statutory surplus required in our insurance affiliates.

Our non-insurance company subsidiaries may pay us dividends from any positive net cash flows that they generate. Our management affiliates pay us dividends primarily using cash from the collection of management fees from our insurance affiliates, pursuant to the management agreements in effect between those entities.

On April 29, 2016, we acquired all of the outstanding common stock of IIC for $60,471,000. We paid $48,450,000 in cash at closing and issued an $8,550,000 promissory note to the Seller, which will mature 18 months from the acquisition date and bear interest at an annual rate of 6%. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion on the additional terms associated with this note. The purchase price also consisted of an accrued liability of $3,471,000 which was paid during July 2016.

On May 26, 2016, we issued a $5,200,000, 15-year term note payable to Branch Banking &Trust (BB&T) with the intent to use the funds to purchase, renovate, furnish and equip our home office. The note bears interest at 1.65% in excess of the one month LIBOR. The interest rate resets monthly and was 2.44% at December 31, 2016. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion on the additional terms associated with this note.

On December 5, 2016, we issued $30,000,000 of senior notes to private investors. The notes bear interest at 5.75% in excess of the three month LIBOR. The notes will mature ten years after the issue date, have no scheduled amortization, and may be redeemed at par value any time without a pre-payment penalty. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion on the additional terms associated with these notes.

During the first quarter of 2016 we contributed $5,000,000 of capital to FSIC, during the second quarter of 2016 we contributed $6,000,000 of capital to UPC Re, and during the fourth quarter of 2016 we contributed $30,000,000 of capital to UPC. We will continue to contribute capital as required to fund the growing operations of our insurance affiliates. We did not contribute any capital to our insurance affiliates during 2015; however, we contributed $30,845,000 of capital during 2014.

Operating Activities

During the year ended December 31, 2016, our operations generated cash of $65,747,000, compared to generating $98,319,000 of cash during the same period in 2015. The $32,572,000 year over year decrease in operating cash was primarily driven by a $107,163,000 increase in claims payments as a result of the increase in exposures and payments on claims from current and prior accident years and an increase in reinsurance payments of $62,568,000 because we purchased more reinsurance coverage under our 2016-2017 contracts than we purchased under our 2015-2016 contracts. Operating expenses and agents' commission payments increased $29,381,000 and $22,727,000, respectively, due to our continuing growth. Partially

UNITED INSURANCE HOLDINGS CORP.

offsetting these increases in cash outflows was the increase in cash inflows related to an increase in premiums collected of $173,688,000. In addition, we paid $7,194,000 of income taxes during the year ended December 31, 2016 compared to paying $13,223,000 of income taxes for the same period in 2015.

Investing Activities

During the year ended December 31, 2016, our investing activities used $49,757,000 of cash compared to using $67,015,000 of cash in 2015. The $17,258,000 year over year decrease in investing cash used was primarily a result of fewer investments purchased during the year ended December 31, 2016 compared to the same period in 2015. In addition, our investments in property and equipment decreased $7,767,000 primarily due to the renovation of our new headquarters which occurred in 2015. Partially offsetting the decrease in investing cash used in 2016 was $32,896,000 of cash used in the acquisition of IIC, while in 2015 the acquisition of FSH provided $14,467,000 of cash.

See Note 3 in our Notes to Consolidated Financial Statements for a table that summarizes our fixed maturities at December 31, 2016, by contractual maturity periods.

Financing Activities

During the year ended December 31, 2016, our financing activities provided cash of $49,912,000 compared to using $(7,909,000) of cash in 2015. The increase in cash provided by financing activity primarily relates to the $35,200,000 in net proceeds from borrowings generated during 2016, while no such borrowings proceeds were generated during 2015. See Note 11 in our Notes to Consolidated Financial statements for additional information on the borrowings. In addition, repayments of borrowings decreased $2,043,000 because we paid off the outstanding loan payable balance acquired in the FSH transaction during the first quarter of 2015, while no such repayment occurred in 2016.

We believe our current capital resources, together with cash provided from our operations, will be sufficient to meet currently anticipated working capital requirements. We cannot provide assurance, however, that such will be the case in the future.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2016, we had no off-balance-sheet arrangements.

CONTRACTUAL OBLIGATIONS

The following table summarizes our expected payments for contractual obligations at December 31, 2016:

Payment Due by Period

Total

Less than 1 Year

1-3 Years

4-5 Years

More than 5 Years

Leases ⁽¹⁾