United Insurance Holding Corp. (NASDAQ: UIHC)

Kendyl Flinn, Jonathan Chang, Tianhao Fan

March 13, 2015

Section I Industry Overview

Industry

Competitors

Section II Company Overview

Company and Market

Business Model

Section III Investment Thesis

Section IV Valuation

Section V Recommendation

Risks

Catalysts

Agenda

Section I

Industry Overview

Industry Overview

3

Background:

Increased Demand:

Insurance

There are two types of companies in the insurance industry: Life Insurers and Property & Casualty Insurers

Insurers generally generate profits through underwriting and investing

Underwriting:

They underwrite or insure businesses, individuals, cars, home, etc. at premium

The premiums from all insurance policies a company holds are pooled, and a percent has to be held in reserve for claims and expense

The rest is used for operating expense or brought down to the bottom line for the company.

Investing:

Insurance companies also typically hold a large investment portfolio to generate excess return

Investments are predominately in Fixed Income because insurance companies hold their risk in the policies they sell

Through bonds, insurance companies generate interest income

Portfolios also include equity which generates dividend income

Both forms of investment contribute to a firms realized gain when sold off

During the 2008 financial crisis, insurance companies incurred larger losses and the industry shrunk

Since 2010, the market as improved through increases in policy prices, and a higher demand for insurance

As the housing market and individual wealth continue to increase, more people will have the needs and means to buy insurance

Historically, there have been industry surpluses post-crisis which is what we are seeing now after 2008. The industry will continue its growth, and smaller firms will have an opportunity to develop market share that didnt previously exist.

*Merrill Insurance Primer

State Farm, 12%

Berkshire Hathaway, 8%

Allstate, 6%

Liberty Mutual, 5%

Travelers, 5%

AIG, 4% Nationwide,

4%

The Major Players by NPW:

Industry Overview

4

Market Sentiment:

Breakdown of Industry:

Property & Casualty Insurance

Personal Auto 36%

Medical Malpractice

2% Other

Liability 9%

Commercial Multi-Peril

7%

Other 23%

Workers' Compensati

on 8%

Homeowners

15%

The market is not bullish on P&C insurance because there is a view of limited growth in the space

Policy price increases have been going up for two years and are expected to decelerate in growth

Due to low interest rates, investment incomes have seen less growth and return

The reinsurance business is lagging because companies are now bouncing back from recession, and not interested

Closest Competitors:

Post 2008, many regulations were put in regarding insurance reserves for losses

The regulations are run at a state level and vary in severity

However, P&C firms were not at high risk during the financial crisis because they write policies based on tangible assets

This is an industry that will likely only see deregulation in the future, and has been overlooked with major events being concentrated on banks

Regulatory Environment:

State Auto Financial Corp. (STFC) Regional P&C insurer throughout Midwest and

northeast P/E 183.95X ROE 7.4%

Selective Insurance Group (SIGI) Serve customers including small businesses,

government entities, individuals, and families P/E 12.69 ROE 11.7%

Section II

Company Overview

Company Overview

6

United Insurance Holding Corp. is a holdings company that runs a Property & Casualty Insurance company and its affiliates

They started in Florida in 1999 and became a publicly traded company in 2008.

The P&C insurer currently operates in seven states with just over 100 employees

Lines of business include: homeowners, commercial residence, condominiums, renters, dwelling fire, flood

Use Cat Banding pricing model

CEO: John L. Forney, CFO: B. Bradford Martz, Chairman: Gregory Branch

The Company

Market Cap $485.3 million - EV $429.41 million - P/E 11.41 - EPS $2.05 Price $23.40

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Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15

Historical Price

Capitalization Table:

United Insurance (UIHC) St.Petersberg, FL

2008 IPO

Price per Share $27.75 Financia ls - P&C Insurance

Shares Outstanding 20.91M

Market Capitalization 572,380,817$

Total Debt + 13,824,000

Preferred Share + 0

Minori ty Interest + 0

Cash - 83,318,000

Enterprise Value 502,886,817$

Total Revenue 267,500,000$

Insurance Cla ims 116,300,000

Underwriting Costs 90,700,000

EBITDA 60,500,000

Interest Expense 400,000

EBIT 60,100,000

Income Tax 23,100,000

Net Income 37,000,000$

Total Assets 441,200,000$

Total Liabi l i ties 333,600,000$

2014

Cash from Operating Activi ty 88,500,000$

Free Cash Flow 86,200,000$

FCF to Equity 82,700,000$

Tangible BV / Share 9.16$

% of Ins ider Shares Held 18.04 (+1.71%)

Cash Position

Company Overview

7

Financial Metrics: Recent News:

Ownership Breakdown:

March 3rd, 2014 United Insurance files 8-K and holds press conference on

2014 10-K February 9th, 2015

Increased 4th quarter cash dividend to $0.05 per share from $0.04 per share

February 3rd, 2015 Completed acquisition of Family Security Holdings LLC., it

was a $9 million all stock transaction of 503,883 shares July 29th, 2014

United Insurance Net Premiums Earned for Q2 was up 40% year-over-year

Market Summary

Investment Advisor, 59.23%

Individual , 26.61%

Hedge Fund Manager, 10.41%

Private Equity , 2.48% Pension Fund , 0.91%

Price: $27.50 Net Premiums Earned: $197.4 mill ion

52-week Range: $12.59-$28.43 % YoY Growth: 61.8%

P/E: 13.92X Catas Loss as % of Net Prem: 1.82%

EPS: $1.26 Net Prem/Equity: 183.46

% YoY Growth: 38% Operating Income/Net Prem: 17.66

Dividend: $0.05 /share Investment Income: $3.9 mill ion

Dividend Yield: 0.55%

P/B: 2.99 Reserves/Assets: 54.59

Reserves Growth: 46.45%

EV/Total Revenue: 1.88

EV/Net Income: 13.62

Total Debt/EV: 0.04 Debt/Equity: 13.67

CFO/Total l iabilities: 32.30

Combined Ratio: 84.80 Total Debt/Total Assets: 3.33

Loss Ratio: 46.30

Expense Ratio: 38.50

Company Overview

8

Business Model

United Insurance Holding Corp.

United Property and Casualty Insurance

Company

Main Insurer

United Insurance Management

Management Services

Skywalk Claims Service

Non-catastrophe claims inspector

UPC Re

Reinsurance program

Company Overview

9

Annotated Price Chart

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February 2015: Q4 Dividend $0.05

November 2014: Earnings

Announcement beat est. by 9.92%

August 2014: Earnings

Announcement beat est. by 7.73%

May 2014: Earnings Announcement beat

est. by 105.05%

March 2014: Q4 2013 Dividend

$0.04

March 2014: Earnings Announcement beat

est. by 57.89%

May 2013: Q1 2013 Dividend

$0.03

October 2013: Q3 2013

Dividend $0.03

August 2013: Earnings Announcement beat

est. by 23.40%

October 2014: Announced acquisition of Citizens Property

Insurance Corp.

December 2014: Completed acquisition of Family Security

Holdings LLC

Section III

Investment Thesis

Investment Thesis

11

Niche

Market

Expansion Potential

Earnings Growth

United Insurance (UPC) operates in seven states, specifically concentrating on areas that are of high risk for natural catastrophe

This is a untapped market, as most firms shy away from the added risk

UPC started in Florida, and therefore understands environment and how to properly allocate reserves to mitigate risk

UPC restructured their operations in 2011 and hired new management

Since the restructuring they have been able to continually generate sizable earnings growth

Their earnings growth is attributable to increased underwritings and a strong cost-cutting structure

UPC has a license to operate in nine additional states along the eastern coast

The holdings corporation has announced a number of acquisitions

In order to grow their reinsurance business, UPC will have to become a larger and more sturdy company, so management has tangible goal

Investment Thesis

12

Natural Catastrophes: Geographic Breakdown of Policies:

Risk Premium:

Niche Market

Main areas of coverage: Homeowners Flood Liability Windstorm mitigation

Focus on areas with exposure to hurricanes

Becoming experts on a profitable industry

FL 74%

SC 8%

MA 7%

RI 6%

[CATEGORY NAME] [PERCENTAGE]

Other 26%

United does an excellent job of controlling their exposure to risk through geographic diversification of policies, and pricing an appropriate premium to generate return

They also reduce risks in their investing portfolio to compensate

Investment Thesis

13

Company Tactics:

Planned Growth

The company operates in seven states

They have licence to work in nine more along east coast

Their pricing strategy is successful in a variety of geographic locations so organic growth is not dependent on geographic market share

UPC just completed acquisition of Family Security Holdings and announced acquisition of citizens property insurance

Macro Growth:

As the market continues to improve, climbing away from 2008, the company will continue to see growth in Policies in Force (PIC)

They are a smaller company, so they are able to grow with the market

UPC is not stressed over regulation because it operates in a high risk market, it already keeps good reserves and is able to generate the premiums to match

Licensed App. Pending Future

Investment Thesis

14

Company Tactics: Revenue Growth:

Revenue Breakdown: EPS Growth:

Earnings Breakdown and Growth

The company is keeping employee costs and overhead low in order to generate a larger operating margin

UPC has increased the amount of policy held and are focused on increasing premiums written

In this niche market, only a small increase in policies generates a large increase in premiums

Total Investments are at $288.9 million and have grown 89.9% YoY investment income was $3.9 million in 2013 (25%) increase

As interest rates begin to rise, we will see investment income continue to increase as a percent of net premiums

ROIC increased 81.17% in 2013 to 31.78

Five year revenue growth is 15.54%, and I believe, will continue to be sustainable

Book Value per share has also increased by 10.28% over past 5 years

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Revenue Operating Margin

0.78

1.27

1.97

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2012

2013

2014

Net Premiums Earned Capital Gains

Investment Income Operating Income

Section IV

Valuation

Valuation

16

UPC is one of the smallest P&C insurance companies in the United States

They have a smaller revenue due to their size, but still have a competitive EPS

UPC, as discussed, is also making a far better return then any of their competitors

They are able to keep their operating margin high meaning their underwriting and claim expenses are lower than competitors

Even if their return was halved, United would still be doing better than 80% of comparable competitors

Additionally, I believe they will not only be able to sustain this return, but also grow their market share as they increase policies and states of operation

Comparable Analysis

Market P / E Dividend Combined

Cap ($MM) BVPS TBVPS LTM 2015E 2016E Yield ROE % Ratio

American Catastrophe Insurance Companies

Cincinnati Financial Corp. $8,719.7 $40.2 $40.2 16.7 x 19.5 x 18.9 x 3.4% 8.3% 95.6

Arch Capital Group Ltd. 7,768.0 46.3 45.4 10.2 x 15.9 x 15.2 x - 12.9% 87.2

W.R. Berkley Corporation 6,366.0 36.2 34.3 10.4 x 14.7 x 13.6 x 0.9% 14.4% 93.8

Kemper Corporation 2,013.4 39.9 33.9 18.4 x 15.6 x 13.8 x 2.5% 5.4% 103.7

Selective Insurance Group Inc. 1,633.5 22.5 22.4 11.6 x 12.0 x 11.5 x 1.9% 11.7% 95.8

State Auto Financial Corp. 970.4 21.3 21.3 9.1 x 14.3 x 12.9 x 1.7% 13.0% 105.5

Mean 4,578.5 34.4 32.9 12.7 x 15.3 x 14.3 x 2.1% 11.0% 96.9

Median 4,189.7 38.0 34.1 11.0 x 15.2 x 13.7 x 1.9% 12.3% 95.7

United Insurance Holding Corporation $502.3 $9.8 $9.8 11.4 x 13.6 x 11.7 x 0.9% 26.3% 81.4

Discount to Mean (10%) (11%) (18%) (57%) 140% (16%)

Discount to Median 4% (10%) (15%) (53%) 114% (15%)

Valuation

17

Residual Income Model

($ in Millions Except Per Share Data)

United Insurance Holding Corp. - Residual Income Model Residual Income Assumptions

Historical Projected

October 31 2014 2015 2016 2017 2018 2019 Maturity Year Begins: 2019

Normalized Net Income to Common: 20$ 41.0$ 59$ 73$ 79$ 95$ 98$

% Growth: 44.2% 23.5% 7.8% 20.6% 3.4% Return on Common Equity:

Common Dividends: 1.90 3.3 5.3 7.3 8.7 11.4 12.8 Development: 26.0%

% Growth: 61.3% 37.2% 18.6% 31.5% 12.0% Maturity: 23.0%

Payout Ratio: 8.1% 9.0% 10.0% 11.0% 12.0% 13.0% Long-Term: 20.0%

Cost of Equity: 9.98%

Beginning Common Equity: 108$ 204$ 251$ 311$ 374$ 451$

Plus: Net Income to Common: 59 73 79 95 98 Present Value of Equity Calculations:

Plus: SBC and Forex Effects 0.6 0.6 0.6 0.6 0.6 Current Value of Common Equity: 204$

Less: Common Dividends: (5) (7) (9) (11) (13) Sum of PV of Residual Income: 171

Less: Deferred Policy Costs (7) (7) (7) (7) (7)

Ending Common Equity: 204$ 251$ 311$ 374$ 451$ 530$ Terminal NI Growth Rate: 0.0%

Estimated Year 6 NI to Common: 106

Return on Common Equity: 26.3% 26.0% 26.0% 23.0% 23.0% 20.0% Residual Income Terminal Value: 532

Residual Income / Excess Returns: 36$ 45$ 45$ 54$ 49$ PV of Res. Inc. Terminal Value: 331

Present Value of Equity: 706$

Discount Period: 0.0 1.0 2.0 3.0 4.0 5.0 Diluted Shares: 21.5

PV of Residual Income: 33$ 37$ 34$ 37$ 31$ Implied Share Price: 32.87$

MetLife - Net Present Value Sensitivity - Long-Term Return on Common Equity

Cost of Equity

32.87$ 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5%

22.0% 44.80 41.46 38.49 35.84 33.46 31.31 29.36 Risk Free Rate (10yr) 2.0%

21.0% 42.86 39.68 36.84 34.31 32.03 29.97 28.11 5 Year Beta 0.92

20.0% 40.93 37.89 35.19 32.78 30.60 28.64 26.86 Equity Risk Premium 6.5%

19.0% 39.00 36.11 33.54 31.24 29.18 27.31 25.62 Risk Premium for Catastrophe 2.0%

18.0% 37.07 34.33 31.89 29.71 27.75 25.98 24.37 Cost of Equity 9.98%

Cost of Equity Calculation

Valuation

18

Summary

$28.28

$31.26

$22.66

32.03

$29.48

$31.60

$26.23

33.54

P / E 2016E

P / E 2015E

P / E LTM

RIV Model

Price Target: $30

Implied Upside

of 30.4%

Section V

Recommendation

Recommendation

20

Too Small to Trust: High Risk Locations:

Macro Trends:

They purposefully write policies in areas with high risk for natural disaster

This could been seen as a risk if a large unexpected hurricane happened, and UPC incurred large claim losses

However, UPC combats this fear with their geographic policy diversification

Additionally, UPC has a reserve to asset ratio of 54.59 and has enough capital on its books to sustain a disaster

It knows how to price policies in areas with natural disasters, and keeps a strong reserve

This knowledge allows them to not only decrease loss but also pending claims, which are only at 2.9%

Risks

If the market continues to be bearish on P&C and insurance in general, it could take a while for a significant re-correction in Uniteds price

Realization is already being seen through 25% stock price increase in the past month

Interest rates staying low could keep investment income from growing, but the majority of UPCs profit is through increase in net premiums

Have been operating since 1999 in the areas with highest loss risk

They are not highly levered, and purposefully keep a safe investment portfolio in order to minimize risk

They are actively making acquisitions in the industry, showing that they are not yet at risk to be bought out

Being small allows them to increase their operating margin, and retain a larger percent of their premiums as profit

Recommendation

21

Niche Market: Generate High Return:

Future Opportunities:

The company has been generating incredible returns on all metrics, and has generated a substantial safety net of reserves

The ROE has been steadily increasing since 2011. It was 20.8% in 2013 which was a 53.23% increase

This impressive ROE with the higher P/B ratio signifies that investors are willing to pay more based on the estimated book value growth

Catalysts

Very few companies will add risk to their policies by focusing on areas with high risk for natural catastrophes

UPC already has an advantage in gaining market share an increasing policies

Additionally, they understand the market and are able to price appropriately and keep adequate reserves

In case of an extreme disaster, UPC also has a four layer catastrophe reinsurance plan; however this plan has never been needed thus far

Negative market sentiment resulted in the company being undervalued

It has the capital and acquisition opportunities to build a marketable brand

Dedicating 100% of capital to growing UPCs insurance business

A marketable brand will create recognition of the company value and generate a satisfying return on investment

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We recommend United Insurance Holding Corporation as a buy.

Appendix

CEO: John L Forney

23

Overview:

Has been at UPC since 2012

Attended Princeton then received MBA from Wharton

Went into the army then returned to banking and got his CFA

Worked as managing director at Raymond James

Previously managed residential natural catastrophe risk at State Farm and Allstate

Cat Banding

24

Objective:

To create geographic areas so that within each Cat Band the expected losses are within a specified range of error from central estimate.