Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

United Insurance Holdings Corp. (“UIHC”, “we”, the “Company”), formerly known as FMG Acquisition Corp. (“FMG”), was originally formed under the laws of the State of Delaware in 2007 as a blank-check company. We were formed specifically as a vehicle to effect a merger, acquisition or similar business combination with one operating business, with efforts focused on seeking a business combination within the insurance industry. We consummated our initial public offering (“IPO”) on October 11, 2007. On September 30, 2008, we completed a merger pursuant to the Amended and Restated Agreement and Plan of Merger, dated August 15, 2008, as amended on September 23, 2008, by and among UIHC, United Subsidiary Corp., a Florida corporation (“Merger Sub”) and our wholly-owned subsidiary, and United Insurance Holdings, L.C., a Florida limited liability company (“UIH”), whereby Merger Sub was merged into UIH, with UIH remaining as the surviving entity (the “Merger”). In connection with the Merger, we changed our name from “FMG Acquisition Corp.” to “United Insurance Holdings Corp.” Our certificate of incorporation in Delaware has been amended to reflect our new status as an insurance holding company.

Through our wholly-owned UIH subsidiary, and UIH’s three wholly-owned subsidiaries, UIHC is engaged in the property and casualty insurance business in the State of Florida. The three subsidiaries of UIH include United Property & Casualty Insurance Company (“UPCIC”), United Insurance Management, LC (“UIM”) and Skyway Claims Services, LC (“Skyway”). We operate under one business segment.

UPCIC was formed in 1999 under the laws of the State of Florida and is authorized by the Florida Office of Insurance Regulation (“OIR”) to underwrite homeowners’ and dwelling property and casualty lines. UPCIC began operations by both assuming policies from Citizens Property Insurance Corporation (“Citizens”), and by actively writing our own policies throughout the State of Florida utilizing our vast, independent agency network. In 2004 and 2005, UPCIC supplemented its voluntary writings by assuming policies from Citizens. Our assumed policies comprise approximately 25% of UPCIC’s in-force premium. Beginning in October 2008, UPCIC plans to assume additional policies from Citizens under a new agreement with Citizens (see Note 15 for further details). The OIR has also authorized UPCIC to write flood coverage and a smaller commercial auto (“Garage”) line of business.

UIM is a managing general agent (“MGA”) formed in 1999 under the laws of the State of Florida. UIM manages all aspects of UPCIC’s operations, including underwriting, policy administration, collections and disbursements, accounting and claims processes.

Skyway was formed in 2004 under the laws of the State of Florida to provide claims appraisal services. Skyway is currently one of several companies that provide such services to UPCIC, and it mainly provides appraisal services for claims arising from Dade, Broward and Palm Beach counties.

The accompanying condensed consolidated interim financial statements are unaudited and are prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.

Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year or any other future period as a result of the presentation described above.

All significant intercompany transactions and accounts have been eliminated.

8

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

In the opinion of management, our condensed consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our condensed consolidated statements of operations, financial position, cash flows and stockholders’ equity as of September 30, 2008, and for all periods presented. These condensed consolidated financial statements and footnotes should be read in conjunction with FMG’s financial statements and UIH’s consolidated financial statements for the year ended December 31, 2007, contained within FMG’s Form S-4/A filed on September 2, 2008.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

We accounted for the Merger as a reverse acquisition and recapitalization since UIH was deemed to be the accounting acquirer. Accordingly, the historical assets, liabilities and operations reflected in these financial statements are those of UIH, and are recorded at the historical cost basis of UIH. UIHC’s assets and liabilities were recorded at their fair value on the date of the Merger and are consolidated with the assets and liabilities of UIH after consummation of the Merger.

Since we accounted for the Merger as a reverse acquisition and recapitalization, we have retroactively restated certain equity accounts for periods prior to the Merger [see Notes 2(c) and 5]. Also, certain amounts in the 2007 financial statements have been reclassified to conform to the 2008 presentation.

On October 10, 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”). In FSP 157-3, the FASB clarifies the application of Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), Fair Value Measurements when the market for that financial asset is not active. FSP 157-3 was effective upon issuance and applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. The adoption of FSP 157-3 will have no material effect on our consolidated financial statements. See Note 7 for further information on fair value measurements.

On September 30, 2008, UIHC completed the acquisition of UIH and merged UIH with a transitory, wholly-owned subsidiary created specifically for that purpose. We accounted for the transaction as a reverse acquisition and recapitalization with UIH being the surviving entity. In exchange for 100% of the membership units in UIH, we paid the members of UIH $25,000 cash, we issued 8,929,819 shares of our common stock (at a quoted market value of $7.91 per share on September 29, 2008) and we granted warrants to purchase 1,273,569 shares of our common stock (at a quoted market value of $0.35 per warrant on September 29, 2008). If certain income targets are met, we will also pay up to $5,000 in cash of additional consideration to the former members of UIH. The warrants are exercisable at $6.00 per share beginning October 4, 2008, and expire on October 4, 2011.

The $2,901 transaction costs associated with the Merger are recorded to additional paid-in-capital on the Condensed Consolidated Balance Sheets since the transaction costs did not exceed the $25,000 cash received in the transaction.

9

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

We did not present in our footnotes any pro forma information regarding the effects of the Merger as if it took place on January 1, 2008, because, prior to the Merger, UIHC was a blank-check company with no material operations.

As part of a policy assumption (“Takeout”) agreement with Citizens that ended in 2006, UPCIC received takeout bonuses for policies assumed from Citizens during multiple assumptions in 2004 and 2005. The bonuses were calculated at 17.5% of the written premium originally assumed, net of adjustments related to policies that we did not renew or retain. The bonus money due to UPCIC was on deposit with an escrow agent, as specified by the terms of the takeout agreement. To receive the bonuses, UPCIC was required to offer to renew the assumed policies for a period of three years at UPCIC’s approved rates and on substantially similar terms. Approximately three years after each assumption date, the escrow agent distributed the bonus funds to UPCIC, and will distribute to UPCIC the investment income earned thereon in November 2008. During the three months ended September 30, 2008 and 2007, UPCIC recognized takeout bonuses of $2,158 and $902, respectively, which included $217 and $128 of investment income, respectively, from the 2004 and 2005 takeout periods. During the nine months ended September 30, 2008 and 2007, UPCIC recognized takeout bonuses of $6,442 and $11,575, respectively, which included $739 and $1,041 of investment income, respectively, from the 2004 and 2005 takeout periods.

Earnings per share (“EPS”) amounts are calculated in accordance with SFAS No. 128, Earnings per Share . Basic EPS is computed by dividing net income by the weighted-average number of common stock shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common stock shares and common stock equivalents outstanding, computed using the treasury stock method during the periods presented.

The table below reflects the diluted weighted average number of common stock shares outstanding using the treasury stock method:

We have a unit purchase option outstanding for 350,000 units; each unit consists of a share of common stock and a warrant to purchase a share of common stock. For the three- and nine-month periods ended September 30, 2008 and 2007, the unit purchase option was anti-dilutive; therefore, the shares associated with the unit purchase option are not included in the diluted weighted average shares outstanding in the table above.

On the Condensed Consolidated Statement of Operations, we retroactively restated EPS for periods prior to the Merger. We accounted for the Merger as a reverse acquisition and recapitalization [see Note 2(c)] and since the consideration paid was cash and common stock, the shares outstanding at the time the Merger was effective were deemed to be the historical shares outstanding prior to the Merger. Since our IPO occurred during October 2007, for the three- and nine-month periods ended September 30, 2007 there was no quoted market price; therefore, we used the average quoted market price of our common stock for the first 15 days subsequent to the IPO as the average market price in our treasury stock method calculation to compute our dilutive common stock equivalents for the 2007 periods shown in the table above.

On the Condensed Consolidated Statements of Operations, the pro forma computation of income taxes for the three- and nine-month periods ended September 30, 2008 and 2007, represents the tax effects that would have been reported had all of our subsidiaries been subject to U.S. Federal and State income taxes as C-corporations for all periods presented. Pro forma taxes are based upon the statutory income tax rates and adjustments to income for estimated permanent differences occurring during each period. Actual rates and expenses could have differed had all our subsidiaries actually been subject to U.S. Federal and State income taxes for all periods presented. Therefore, the pro forma amounts are for informational purposes only and are not intended to be indicative of the results of operations had we been subject to U.S. Federal and State income taxes as a C-corporation for all periods presented.

10

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

Prior to September 30, 2008, UIH had elected to be treated as a partnership for income tax purposes (UPCIC was taxed as a C-corporation from its inception). The taxable income and all tax credits of UIH and its two limited liability company subsidiaries, UIM and Skyway, were reportable by the entities’ members on their individual tax returns.

On September 30, 2008, UIHC’s subsidiary merged with UIH. Since UIHC is a C-corporation, UIH and its two limited liability company subsidiaries will convert to C-corporations for tax purposes, effective on October 1, 2008. UIHC and its subsidiaries have adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires the use of the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

On January 1, 2008, we adopted SFAS No. 157, which provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under SFAS No. 157, 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 (an exit price). SFAS No. 157 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (observable inputs) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (unobservable inputs). The fair value hierarchy in SFAS No. 157 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:

We do not have any investments in our portfolio which require us to use unobservable inputs. For fair value measurements of 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.

11

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

The following table presents our fair value measurements of investments by level:

The following table depicts our realized and unrealized gains (losses) by fixed maturities and equity securities:

The following table depicts the balance of unrealized gains (losses):

We follow industry practice of reinsuring a portion of our risks and paying for that protection based primarily upon modeled projected maximum losses and total insured values of all policies in effect and subject to such reinsurance. Reinsurance involves an insurance company transferring, or “ceding”, all or a portion of its exposure on insurance underwritten by it to another insurer, known as a reinsurer. The ceding of insurance does not legally discharge the insurer from its primary liability for an amount up to the policy limits. To the extent that reinsurers are unable to meet the obligations they assume under these reinsurance agreements, the ceding company remains liable for the insured loss.

Reinsurance agreements provide UPCIC with increased capacity to write more and larger risks and maintain our exposure to loss within our capital resources. We use per-occurrence, excess-of-loss agreements for our catastrophe program; per-risk, excess-of-loss agreements for our non-catastrophe homeowners’ and dwelling program; and a quota share agreement for our non-catastrophe Garage program. Our catastrophe reinsurance agreements are designed to coincide with the seasonality of Florida’s hurricane season; therefore, our agreements have a term that runs from June 1 ^st to May 31 ^st , and we make quarterly installment payments on July 1 ^st , October 1 ^st , January 1 ^st and April 1 ^st . Each year, upon commencement of our new reinsurance agreements, we debit prepaid reinsurance premiums and credit reinsurance payable for the entire contract amount.

12

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

In 2008 and 2007, the per-occurrence, excess-of-loss catastrophe programs had two components, one of which was obtained through the private market and a component obtained from the Florida Hurricane Catastrophe Fund (“FHCF”). In 2008, the second layer contract (first private layer) includes one reinstatement of coverage at 100% additional premium; the remaining private layer contracts include one reinstatement of coverage at no additional premium. To protect UPCIC in the event a reinstatement of coverage of the first private layer contract becomes necessary, UPCIC purchased a Reinsurance Premium Protection policy from a private reinsurer that reimburses UPCIC the amount of any reinstatement premium that UPCIC pays. In 2007, the private layer contracts included one reinstatement of coverage at no additional premium. In 2008 and 2007, the FHCF provided one reinstatement of the full coverage amount at no additional premium on the limited apportionment layer (or lower layer); however, the FHCF only provides one instance of coverage on its other contracts.

In 2008, the entire catastrophe program provides for reimbursement of up to $405,074 of qualified loss and loss adjustment expense (“LAE “) in excess of UPCIC’s retained loss and LAE of $15,510. The first layer of coverage was obtained from the FHCF and provides for reimbursement of up to $10,000 in excess of the first $15,510. The second layer of coverage was obtained from the private market and provides for reimbursement of up to $43,005 in excess of $25,510. The third layer was obtained from the private market and provides for reimbursement of up to $18,341 in excess of $68,514. The fourth layer was also obtained from the private market and provides for reimbursement of up to $13,315 in excess of $86,855. The top layer of coverage was obtained from the private market and provides reimbursement up to $10,000 in excess of $100,170. The 2008 reinsurance program also provides mandatory FHCF coverage and optional Temporary Increase in Coverage Layer (“TICL”) coverage. The mandatory coverage obtained from the FHCF is projected to be 90% of $199,834 in excess of $74,649. The TICL coverage is projected to be 90% of $145,070 in excess of $274,483. The FHCF mandatory and TICL coverage act as a single layer of reinsurance and inure to the benefit of the private reinsurance coverage.

In 2007, the entire catastrophe program provided for reimbursement of up to $374,327 of qualified loss and LAE in excess of UPCIC’s retained loss and LAE of $16,500. The first layer of coverage was obtained from the FHCF and provides for reimbursement of up to $10,000 in excess of the first $16,500. The next two layers of coverage were obtained from the private market; the first of these two layers provides for reimbursement of up to $14,172 in excess of $26,500 and the second provides for reimbursement of up to $33,622 in excess of $40,672. The next layer of coverage was obtained from both the private market and from the FHCF. The FHCF portion provides for reimbursement of up to 90% of $212,539 in excess of $70,980 while the private portion provides for reimbursement of up to $21,254 in excess of $70,980. The final layer of coverage was also obtained from both the private market and the FHCF. The FHCF portion provides for reimbursement of up to 90% of $107,309 and the private portion provides reimbursement up to $10,731 in excess of $283,519.

For 2008, the per-risk, excess-of-loss program provides coverage for losses arising out of property business up to $1,700 in excess of $1,000 per risk, subject to a maximum recovery on any one loss occurrence, regardless of the number of risks involved, of $3,400. The contract also provides coverage for losses arising out of a combination of property and casualty business up to $1,700 for property and $500 for casualty in excess of $1,000 per occurrence, subject to a maximum recovery on any one loss occurrence, regardless of the number of risks involved for property or the number or type of insureds for casualty, of $2,200. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the contracts, one reinstatement of coverage is included at no additional premium and another reinstatement of coverage is included at 100% additional premium. For 2007, the per-risk, excess-of-loss program provided coverage up to $1,300 in excess of $1,000 per risk. The maximum recovery on any one loss occurrence, irrespective of the number of risks involved, was $1,300. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the contracts, one reinstatement of coverage was included at 100% additional premium.

There were no material changes to the Garage reinsurance program during the three or the nine months ended September 30, 2008.

13

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

For the 2008-2009 contract year, we agreed to pay $49,849 in catastrophe and per-risk premiums, pending receipt from the FHCF of the final adjustment to our FHCF contract. Premiums ceded under our various agreements are summarized in the following table:

We amortize our prepaid reinsurance premiums over the 12-month contract period, and we record that amortization in Decrease (increase) in net unearned premiums on our Condensed Consolidated Statements of Operations. The table below depicts the components of that line item:

We have a $20,000 note payable to the FSBA which we amended on November 7, 2008, with an effective date of July 1, 2008. UPCIC agreed to certain covenants, the violation of which could cause an event of default. Among others, these covenants include: 1) maintaining statutory surplus above $50,000, 2) refraining from the payment of dividends when principal and/or interest payments related to the note are past due, and 3) maintaining a Minimum Writing Ratio (“Writing Ratio”). UPCIC may meet either:

For purposes of calculating the writing ratio on a quarterly basis, the amended note defines surplus as the sum of the $20,000 new capital contributed to UPCIC at the time the note was executed and the outstanding principal balance of the note. UPCIC will be assessed an interest rate penalty of 25 basis points or 450 basis points above the stated rate of the note if it fails to meet the writing ratios discussed above. The stated rate for the FSBA note is a rate equivalent to the 10-year Treasury Bond rate.

14

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

Beginning on January 1, 2010, if UPCIC’s writing ratio based on net written premium to surplus falls below 1:1 for three consecutive quarters, and if UPCIC’s writing ratio based on gross written premium to surplus falls below 3:1 for three consecutive quarters, UPCIC will be obligated to repay a portion of the FSBA note such that the Writing Ratio will be obtained for the following quarter provided that UPCIC is capable of repayment without creating a financially hazardous condition. In addition, if UPCIC defaults on any covenant, the FSBA may, at its sole discretion, increase the interest rate to 25%, which is the maximum interest rate permitted by law; accelerate the repayment of principal and interest; shorten the term of the note or call the note and demand full repayment. As of September 30, 2008, UPCIC was in compliance with each of the loan covenants, as amended.

During the second and third quarters we incurred an additional 450 basis points of interest expense as we did not meet the Writing Ratio as stated in the initial note agreement with the FSBA. At September 30, 2008, we met the Writing Ratio as defined in the amended agreement and we will not incur an additional interest rate charge for the fourth quarter of 2008. At September 30, 2008, our interest rate was 8.49% on this note.

In March 2008, we amended the loan agreement between UIM and CB&T. The note accrues interest at a rate equivalent to the 30-day LIBOR rate plus 300 basis points (reduced from 400 basis points above 30-day LIBOR). At September 30, 2008 and December 31, 2007, the interest rate on the note was 6.2% and 9.8%, respectively and the balance of the note was $4,327 and $23,833, respectively.

On August 11, 2008, we entered into a Second Amendment to the loan agreement with CB&T. The Second Amendment calls for principal payments to cease after the July 2008 installment and recommence with the April 2009 installment. During the period from August 1, 2008 through March 31, 2009, interest only payments will be made to CB&T. See Note 11 for a discussion of related party transactions with CB&T.

Our loan agreement with CB&T contains certain covenants, including the maintenance of minimum specified financial ratios and balances. On August 13, 2008, CB&T waived, until January 1, 2009, the debt covenant related to maintenance of a minimum debt service coverage ratio of at least 2:1 on a quarterly basis. We were in compliance with the terms of the covenants at September 30, 2008.

On August 15, 2008, we entered into a note purchase agreement with five noteholders. The issuance of any notes under this agreement was contingent upon our stockholders voting for the Merger transaction. Upon approval of the Merger on September 29, 2008, by our stockholders, we issued unsecured notes payable with a total face amount of $18,280. In exchange, we received $10,000 cash from certain accredited investors and 869,565 shares of our common stock from two former UIHC stockholders, the shares being valued at $6,878 at the time the notes were issued. We recorded a discount on these notes of $1,402 which will be amortized to interest expense over the three-year term. The notes bear interest at 11% per year, and require semi-annual interest-only payments each April 1 ^st and October 1 ^st . The entire principal balance is due and payable on September 29, 2011; however, we have the option to prepay in full any principal amount then outstanding within 30 days after each of the first and second anniversary dates of the notes. Any such prepayment will be made at 105% of the principal amount prepaid. Management currently does not intend to prepay these notes. At September 30, 2008 and December 31, 2007, the balances on the notes were $16,878 (net of $1,402 discount on notes) and zero, respectively.

We agreed to certain covenants, the violation of which could cause an event of default. Among others, these covenants include refraining from incurring debt that would cause our aggregate debt balance, including the $18,280 incurred under this note agreement, to exceed $58,280 (excluding the FSBA note amount), and refraining from making any payments (e.g., dividends or distributions), whether in cash, securities or other property, that would reduce consolidated net worth, as defined in the note agreement, to less than $45,000. We were in compliance with the terms of the covenants at September 30, 2008; however, since our consolidated net worth at September 30, 2008 was below $45,000, we could not make any dividends or distributions to our stockholders.

15

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

On September 10, 2006, UIH and York entered into a $20,000 loan agreement (“York Note”). In connection with the transaction, York received a 4.75% equity interest in UIH (“Ownership Interest”) and entered into a redeemable Put Agreement (the “Put”) with UIH. The Put provided the holder of the Ownership Interest with an option to sell its entire interest back to UIH at a purchase price of two times the consolidated book value of UIH at the end of the fiscal quarter immediately preceding the Put date. The Put date would have been the date within the periods of September 15, 2009 through September 15, 2010, or September 15, 2011 through September 15, 2012 upon which the holder of the Put would have had to provide written notice of its intent to exercise the option. When the Merger between FMG and UIH became effective, York exchanged its Ownership Interest (including the ability to exercise the Put) for the merger consideration. To account for the fact that the Put no longer represents a liability to us as of the close of the merger on September 30, 2008, we reversed the liability of $2,564 we had recorded prior to the Merger and recorded it in Other Income on the Condensed Consolidated Statement of Operations.

We are involved in claims-related legal actions arising in the ordinary course of business. Amounts resulting from claims-related legal actions are accrued in Unpaid Losses and Loss Adjustment Expenses during the period an unfavorable outcome becomes probable and the amounts can be estimated. Revisions to our estimates are based on our 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. Management revises the estimates based on the results of their analysis. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity. We are not currently involved in any material non-claims-related litigation.

We operate in a regulatory environment where certain entities have the authority to require us to participate in assessments. Currently these entities include, but are not limited to, the Florida Insurance Guaranty Association (“FIGA”), Citizens, and FHCF. There have been no changes in our co-insurance participation that occurred in the first nine months of 2008 that would impact us. The Board of Directors of FIGA held separate meetings to discuss their continued financial challenges in connection with the insolvency of a particular insurance company assumed subsequent to the 2005-2006 hurricane season. During the second quarter of 2008, indications became clear that the FHCF may not be able to raise sufficient money to pay their claims on a timely basis. The FHCF has the authority to raise additional cash to pay claims through the issuance of bonds, the retirement of which would be funded by imposing additional assessments on future insurance premiums written in the state. Because of our participation in assigned risk plans, we may be exposed to losses that surpass the capitalization of these facilities and/or to additional assessments from these facilities. In addition, while we can recoup these assessments from policyholders through premium rate increases, our payment of the assessments and our recoupments may not offset each other in the same fiscal period in our financial statements.

We are also subject to changing social, economic, and regulatory conditions. Regulatory authorities as well as legislative bodies in the State of Florida seek to influence and restrict premium rates, require premium refunds to policyholders, restrict the ability of insurers to cancel or non-renew policies, require insurers to continue to write new policies

16

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

or limit their ability to write new policies. They can also limit insurers’ ability to change coverage terms or impose underwriting standards or impose additional regulations regarding agent and broker compensation. All of these items result in an expansion of the overall regulation of insurance products and the insurance industry. The ultimate changes and effects on our business, if any, are uncertain. However, based upon information currently known to management, the effect of regulation is not considered to have a material effect on our consolidated financial statements.

We lease office space and office equipment under operating leases. In June 2008, we entered into a new six-year operating lease agreement for office space for our corporate headquarters. The new lease provides us with an option for two renewal periods of five years each.

At September 30, 2008, the minimum future lease payments under our non-cancelable operating leases are as follows:

During the three months ended September 30, 2008 and 2007, we paid board-of-directors fees and commissions for premiums produced to Alpha Insurance, Comegys Insurance Corner and San of Tampa Bay (insurance agencies owned by a person that served as a UIH director until the close of the Merger) totaling $242 and $254, respectively. Those same payments totaled $615 and $637 during the nine months ended September 30, 2008 and 2007, respectively. The commissions paid were determined in accordance with industry rates. As of September 30, 2008, the owner of the aforementioned insurance agencies no longer serves as a director, but remains a common stockholder.

We place private reinsurance through BMS Group, Ltd., a broker that employs a person that served as a UIH director until the close of the Merger. The reinsurers pay commissions to the broker determined in accordance with industry rates. As of September 30, 2008, the aforementioned person no longer serves as a director, but remains a common stockholder.

We have entered into an investment-management agreement with Synovus Trust Company, N.A. (“Synovus Trust”), which provides discretionary investment management services for the investment accounts of our subsidiaries. The agreement was effective October 8, 2003, and remains in effect until terminated by either party. Synovus Trust is owned by Synovus Financial Corporation (“Synovus”). Synovus owned 14.6% of our outstanding common shares at September 30, 2008, and owned 17.2% of UIH at December 31, 2007. Our subsidiaries incurred combined fees under the agreement of $8 and $13 for the three months ended September 30, 2008 and 2007, respectively, and $60 and $89 for the nine months ended September 30, 2008 and 2007, respectively.

17

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

During 2008 and 2007, we had various secured loan agreements with CB&T. CB&T is a subsidiary of Synovus. The amount outstanding on the note payable executed in February 2007 was $4,327 and $23,833 at September 30, 2008 and December 31, 2007, respectively. Total interest incurred related to the CB&T loan agreements was $63 and $880 for the three months ended September 30, 2008 and 2007, respectively, and $691 and $2,506 for the nine months ended September 30, 2008 and 2007, respectively. The interest rates charged and earned were determined in accordance with industry rates.

During the first quarter of 2008, UIH’s Chairman of the Board of Directors exercised an option for $63 to purchase additional membership units of UIH. No further UIH equity purchase options exist.

In a private placement immediately prior to the offering that took place on October 11, 2007 (the “Offering”), certain of our directors purchased, through FMG Investors, LLC, warrants which they can exercise to purchase 1,250,000 shares of our common stock. The warrants were purchased at a price of $1.00 per warrant from the Company and not as part of the Offering. FMG Investors, LLC surrendered warrants to purchase 179,819 shares of our common stock back to the Company as a result of the Merger. The remaining warrants to purchase 1,070,181 shares of our common stock are held in escrow until 90 days after the Merger date.

In addition to surrendering the warrants mentioned above, FMG Investors LLC, also agreed as part of the Merger transaction to reduce the number of UIHC common shares it owned by 179,819. No consideration was paid for these surrendered shares and these shares were cancelled.

On September 29, 2008, we issued notes payable with a total face amount of $7,527 to two of our former stockholders. These notes are part of the note agreement we entered into on August 15, 2008, with various accredited investors. In exchange for these notes, we received 869,565 shares of UIHC common stock, with a total value of $6,878 at the time the notes were issued. We recorded a discount on these notes of $649 which will be amortized to interest expense over the three-year term. The notes bear interest at 11% per year, and require semi-annual interest-only payments each April 1 ^st and October 1 ^st . The entire principal balance is due and payable on September 29, 2011.

During the first quarter of 2008, UIH’s Chairman of the Board of Directors exercised an option for $63 to purchase additional membership units of UIH.

On September 29, 2008, we increased in the number of authorized shares of our common stock from 20,000,000 to 50,000,000 with a $0.0001 par value per share.

18

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

As further detailed in Note 3, we completed the acquisition of, and merger with, UIH effective September 30, 2008. The following transactions relating to our capital stock occurred in connection with the Merger:

We have a right to redeem the warrants if the last sale price of the common stock equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. If we call the warrants for redemption, our management will have the option to require any holder that wishes to exercise his, her or its warrant to do so on a “cashless basis.” If our management takes advantage of this option, all holders of warrants would pay the exercise price by surrendering his, her or its warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” by (y) the fair market value. If we call our warrants for redemption and our management does not take advantage of this option, Pali Capital would still be entitled to exercise its warrants (350,000) for cash or on a cashless basis.

As discussed in the “Related Party Transactions” section above, FMG Investors, LLC, a related party, holds warrants to purchase 1,070,181 shares of our common stock, which are being held by an escrow agent pursuant to an escrow agreement until 90 days after the Merger date. As long as these warrants are held by FMG Investors, LLC or certain permitted assigns, they are non-redeemable and can be exercised on a “cashless” basis.

See Note 9(c) for a discussion on restrictions on dividends or distributions related to the note purchase agreement with five noteholders.

Prior to the recently completed Merger, and in accordance with the UIH Members Agreement, UIH provided cash distributions to each of its members on an annual basis to allow each member to pay any federal income tax which may have been owed on the taxable income attributable to the person/entity as a member of UIH. UIH paid a tax distribution of $9,262 to its members during the nine months ended September 30, 2008. UIH has accrued $7,325 for a tax distribution related to the taxable income attributable to the members of UIH for the nine months ending on September 30, 2008, the date the Merger was completed. The tax distribution will be paid to members prior to year end. No non-tax-related distributions were declared by UIH during the three months ended September 30, 2008 and 2007, but $2,000 and zero were declared and paid during the nine months ended September 30, 2008 and 2007, respectively. The $2,000 non-tax-related distribution was authorized under the Merger agreement.

19

Table of Contents

UNITED INSURANCE HOLDINGS CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In thousands, except share and per share amounts

UPCIC’s assets, liabilities and results of operations have been reported in accordance with GAAP, which varies from statutory accounting practices (“SAP”) prescribed or permitted by insurance regulatory authorities. Prescribed statutory accounting practices are found in a variety of publications of the National Association of Insurance Commissioners (“NAIC”), state laws and regulations, as well as through general practices. The principal differences between SAP and GAAP are that under SAP: (1) certain assets that are not admitted assets are eliminated from the balance sheet, (2) acquisition costs for policies are expensed as incurred, while they may be deferred and amortized over the estimated life of the policies under GAAP, (3) differences in the computation of deferred income taxes, and (4) valuation allowances are established against investments. UPCIC must file with applicable state insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and stockholders’ equity (called “surplus as regards policyholders” or “surplus” in statutory reporting).

Statutory surplus was $52,598 and $51,699 at September 30, 2008 and December 31, 2007, respectively. Statutory net income was $(2,736) and $1,956 for the three months ended September 30, 2008 and 2007, respectively and $5,947 and $7,912 for the nine months ended September 30, 2008 and 2007, respectively.

GAAP differs in some respects from reporting practices prescribed or permitted by the OIR. To retain our certificate of authority, the Florida insurance laws and regulations require that UPCIC maintain capital and surplus equal to the statutory minimum capital and surplus requirement defined in the Florida Insurance Code as the greater of 10% of the insurer’s total liabilities or $4 million. UPCIC’s statutory capital surplus was $52,598 at September 30, 2008, and exceeded the minimum capital and surplus requirements. UPCIC is also required to adhere to prescribed premium-to-capital surplus ratios, with which we were in compliance as of September 30, 2008.

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated capital and surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to stockholders without prior approval of the Florida OIR if the dividend or distribution would exceed the larger of (1) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two year carry forward, (2) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (3) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three year carry forward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains. At September 30, 2008, we were in compliance with these requirements.

On October 14, 2008, UPCIC assumed approximately four thousand one hundred policies from Citizens. On November 6, 2008, we received $3,736 in premium from this assumption, net of ceding commission of $598; however, Florida law allows policyholders to “opt out” of the assumption at any time until we issue them a UPCIC renewal policy. The policies were removed from Citizens pursuant to an assumption agreement with Citizens dated August 27, 2008. In conjunction with the assumption agreement, UPCIC agreed to a Consent Order from the OIR that allows UPCIC to assume as many as 75,000 policies from Citizens over a period of 18 months from August 27, 2008. In addition, we agreed that any rates charged to policyholders within one year of the actual date of removal of policies removed pursuant to the Consent Order shall remain at or below the approved rates for Citizens.

On November 7, 2008, we amended our note payable to the FSBA. The amendment to the note, which was effective on July 1, 2008, changes some of the terms of the agreement, including the Minimum Writing Ratio that UPCIC is required to meet. Please see Note 9(a) for additional details regarding the amended note.

20

Table of Contents

UNITED INSURANCE HOLDINGS CORPORATION