News Column

1347 PROPERTY INSURANCE HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

Forward-Looking Statements Management's Discussion and Analysis includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as "expects", "believes", "anticipates", "intends", "estimates", "seeks" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect Company management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see the "Risk Factors" section of our Form 10-Q for the quarter ended March 31, 2014. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.



OVERVIEW

PIH is a holding company and is engaged, through its subsidiaries, in the property and casualty insurance business. PIH conducts its business under one business segment. On March 31, 2014, the Company completed its initial public offering of 2,170,625 shares of its common stock at a price to the public of $8.00 per share, which included full exercise by the underwriters of their over-allotment option, for total gross proceeds of $17,365. Net proceeds to the Company were $15,088 after deducting underwriting discounts and commissions and other offering expenses payable by the Company. On June 13, 2014, the Company completed an underwritten public offering of 2,875,000 shares of its common stock at a price to the public of $8.00 per share, which included full exercise by the underwriters of their over-allotment option, for total gross proceeds of $23,000. Net proceeds to the Company were $21,281 after deducting underwriting discounts and commissions and other offering expenses payable by the Company. The subsidiaries of the Company are Maison Insurance Company ("Maison"), a Louisiana-domiciled property and casualty insurance company incorporated on October 3, 2012, and Maison Managers, Inc. ("MMI"), incorporated in the State of Delaware on October 2, 2012. Maison provides personal property and casualty insurance solely to individuals in Louisiana. As an insurance company, Maison is subject to examination and comprehensive regulation by the Louisiana Department of Insurance ("LDOI"). Maison provides dwelling policies for wind and hail only, and dwelling, homeowner and mobile home/manufactured home policies for multi-peril property risks located in the State of Louisiana. MMI serves as the Company's management services subsidiary as a general agency providing underwriting, policy administration, claims administration, marketing, accounting and financial and other management services to Maison. MMI contracts with independent agents for policy sales and services. MMI has entered into a contract with an independent third-party policy administration company for services. As a managing general agency, MMI is licensed by and subject to the regulatory oversight of the LDOI. The Company distributes insurance policies through a network of more than 132 independent agents. These agents typically represent several insurance companies in order to provide various insurance product lines to their clients. The Company refers to these policies as voluntary policies.



20

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands Louisiana Citizens Property Insurance Company ("Citizens") is a state-created insurer. As the State of Louisiana has not historically been in the business of serving as an insurer, an insurance "take-out" program was implemented to reduce the number of properties insured by Citizens. Under this take-out program, state-approved insurance companies, such as Maison, have the opportunity to assume insurance policies written by Citizens. It has been Maison's practice to date to participate in such take-out programs, and Maison plans to continue doing so from time to time in the future. While Citizens writes full peril protection policies in addition to wind and hail only policies, the policies that the Company has obtained through the Citizens take-out program cover losses arising only from wind and hail. These policyholders were not able to obtain such coverage from the marketplace prior to our take-out other than through Citizens. As of June 30, 2014, the Company has approximately 5,800 take-out policies in-force from Citizens, of which approximately 3,400 were from the latest take-out which occurred on December 1, 2013, and approximately 2,400 were from the December 1, 2012 take-out. Additionally, the Company has approximately 11,000 in-force policies that it obtained from its independent agent force. From all sources of distribution, the in-force policy count at June 30, 2014, and December 31, 2013 was approximately 16,800 and 11,500, respectively. Maison actively conducts business in the State of Louisiana. The Company insures personal property located in all 64 parishes in the State of Louisiana. As of June 30, 2014, these 16,800 policies are concentrated in certain parishes within Louisiana as follows: Jefferson Parish 20.0%, Saint Tammany Parish 12.2%, Orleans Parish 7.3%, East Baton Rouge Parish 5.8%, and Terrebonne Parish 5.3%. No other parish has over 5.0% of the policies, and these remaining 59 parishes aggregate 49.4%. NON-U.S. GAAP FINANCIAL MEASURES The Company assesses its results of operations using certain non-U.S. GAAP financial measures, in addition to U.S. GAAP financial measures. These non-U.S. GAAP financial measures are defined below. The Company believes these non-U.S. GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating performance in the same manner as management does. The non-U.S. GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, any financial measures prepared in accordance with U.S. GAAP. The Company's non-U.S. GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how we define our non-U.S. GAAP financial measures. Underwriting Ratios The Company, like many insurance companies, analyzes performance based on underwriting ratios such as loss ratio, expense ratio and combined ratio. The loss ratio is derived by dividing the amount of net losses and loss adjustment expenses by net premiums earned. The expense ratio is derived by dividing the sum of amortization of deferred policy acquisition costs and general and administrative expenses by net premiums earned. All items included in the loss and expense ratios are presented in the Company's U.S. GAAP financial statements. The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio below 100% demonstrates underwriting profit whereas a combined ratio over 100% demonstrates an underwriting loss. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates and assumptions in the accompanying unaudited consolidated financial statements include the provision for loss and loss adjustment expense reserves, valuation of fixed income securities, valuation of net deferred income taxes and deferred policy acquisition costs. Provision for Loss and Loss Adjustment Expense Reserves A significant degree of judgment is required to determine amounts recorded in the unaudited consolidated financial statements for the provision for loss and loss adjustment expense reserves. The process for establishing the provision for loss and loss adjustment expense reserves reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events. As such, the process is inherently complex and imprecise and estimates are constantly refined. The process of establishing the provision for loss and loss adjustment expense reserves relies on the judgment and opinions of a large number of individuals, including the opinions of the Company's consulting independent actuaries.



21

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands Factors affecting the provision for loss and loss adjustment expense reserves include the continually evolving and changing regulatory and legal environment, actuarial studies, professional experience and expertise of the Company's claims departments' personnel and independent adjusters retained to handle individual claims, the quality of the data used for projection purposes, existing claims management practices including claims handling and settlement practices, the effect of inflationary trends on future loss settlement costs, court decisions, economic conditions and public attitudes. In the actuarial review process, an analysis of the provision for loss and loss adjustment expense reserves is completed for the Company's insurance subsidiary. Unpaid losses, allocated loss adjustment expenses and unallocated loss adjustment expenses are separately analyzed by line of business or coverage by accident year. A wide range of actuarial methods are utilized in order to appropriately measure ultimate loss and loss adjustment expense costs. These methods include paid loss development, incurred loss development and frequency-severity method. Reasonability tests such as ultimate loss ratio trends and ultimate allocated loss adjustment expense to ultimate loss are also performed prior to selection of the final provision. The provision is indicated by line of business or coverage and is separated into case reserves, reserves for losses incurred but not reported ("IBNR") and a provision for unallocated loss adjustment expenses. Because the establishment of the provision for loss and loss adjustment expense reserves is an inherently uncertain process involving estimates, current provisions may need to be updated. Adjustments to the provision, both favorable and unfavorable, are reflected in the unaudited consolidated statements of operations and comprehensive income (loss) for the periods in which such estimates are updated. The Company's actuaries develop a range of reasonable estimates and a point estimate of loss and loss adjustment expense reserves. The actuarial point estimate is intended to represent the actuaries' best estimate and will not necessarily be at the mid-point of the high and low estimates of the range. Valuation of Fixed Income Securities The Company's fixed income securities are recorded at fair value using 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. The Company does not have any investments in our portfolio which require the Company to use unobservable inputs. Any change in the estimated fair value of its investments could impact the amount of unrealized gain or loss the Company has recorded, which could change the amount the Company has recorded for its investments and other comprehensive income on its unaudited consolidated balance sheets. Gains and losses realized on the disposition of investments are determined on the first-in first-out basis and credited or charged to the unaudited consolidated statements of operations and comprehensive income (loss). Premium and discount on investments are amortized and accredited using the interest method and charged or credited to net investment income. The Company performs a quarterly analysis of its investment portfolio to determine if declines in market value are other-than-temporary. Further information regarding its detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within Note 5, "Investments," to the unaudited consolidated financial statements. Valuation of Net Deferred Income Taxes The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in its unaudited consolidated financial statements. In determining its provision for income taxes, the Company interprets tax legislation in a variety of jurisdictions and make assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of net deferred income taxes. The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the periods in which the Company's temporary differences reverse and become deductible. A valuation allowance is established when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific deferred income tax asset balances, including the Company's past and anticipated future performance, the reversal of deferred income tax liabilities, and the availability of tax planning strategies. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the unaudited consolidated statements of operations and comprehensive income (loss). The Company carries a net deferred income tax asset of $411 and $571 at June 30, 2014 and December 31, 2013, respectively, all of which the Company believes is more likely than not to be fully realized based upon management's assessment of future taxable income. Deferred Policy Acquisition Costs



22

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands Deferred policy acquisition costs represent the deferral of expenses that the Company incurs related to successful efforts to acquire new business or renew existing business. Acquisition costs, primarily commissions, premium taxes and underwriting and agency expenses related to issuing insurance policies are deferred and charged against income ratably over the terms of the related insurance policies. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. Costs associated with unsuccessful efforts or costs that cannot be tied directly to a successful policy acquisition are expensed as incurred, as opposed to being deferred and amortized as the premium is earned.



23

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands RESULTS OF OPERATIONS The Company's net income (loss) for the three and six months ended June 30, 2014 and 2013 is presented in Table 1 below: Table 1 Net Income (Loss) For the three and six months ended June 30 (in thousands of dollars) For the three months ended For the six months ended June June 30, 30, 2014 2013 Change 2014 2013 Change Revenues: Net premiums earned 4,740 694 4,046 8,854 1,609 7,245 Net investment income 24 21 3 28 42 (14 ) Other-than-temporary impairment loss - (188 ) 188 - (188 ) 188 Other income 65 6 59 120 6 114 Total revenues 4,829 533 4,296 9,002 1,469 7,533 Expenses: Net losses and loss adjustment expenses 1,175 642 533 1,559 2,489 (930 ) Amortization of deferred policy acquisition costs 1,100 220 880 1,981 423 1,558 General and administrative expenses 1,500 457 1,043 2,101 813 1,288 Total expenses 3,775 1,319 2,456 5,641 3,725 1,916 Income (loss) before income tax expense (benefit) 1,054 (786 ) 1,840 3,361 (2,256 ) 5,617 Income tax expense (benefit) 438 (263 ) 701 1,042 (767 ) 1,809 Net income (loss) 616 (523 ) 1,139 2,319 (1,489 ) 3,808 Net Income (Loss) and Earnings (Loss) Per Common Share In the second quarter of 2014, the Company earned net income of $616 compared to a net loss of $523 in the second quarter of 2013 (net income of $2,319 for the six months ended June 30, 2014 compared to net loss of $1,489 for the six months ended June 30, 2013). Including the impact of the beneficial conversion feature on convertible preferred shares, basic and diluted earnings per common share in the second quarter of 2014 was $0.15 compared to basic and diluted loss per common share of $0.52 in the second quarter of 2013 (basic and diluted earnings per common share of $0.71 and $0.70, respectively, for the six months ended June 30, 2014 compared to basic and diluted loss per common share of $1.49 for the six months ended June 30, 2013). The net income for the quarter ended June 30, 2014 is attributable to pre-tax underwriting profits of approximately $965. This underwriting profit was generated from the Company's policy growth from both the Citizen's take-out business as well as the independent agency production. The net loss for the quarter ended June 30, 2013 is primarily due to continued loss reporting of damage from the significant hail event occurring in the month of February 2013, which was approximately $523. The net income for the six months ended June 30, 2014 is attributable to pre-tax underwriting profits of approximately $3,213. This underwriting profit was generated from the Company's policy growth from both the Citizen's take-out business as well as the independent agency production. There were no significant weather events that occurred in the first six months of 2014. The Company benefited in the first five months of 2014 from the ceded catastrophe reinsurance purchased for the contract year of June 1, 2013 through May 31, 2014 since the cost of the catastrophe reinsurance was based upon the in-force policy exposures as of September 30, 2013. The net loss for the six months ended June 30, 2013 is primarily due to a significant hail event occurring in the month of February 2013, which, net of ceded reinsurance recovery, was a $2,342 event. Insurance Operations For the quarter ended June 30, 2014, direct premiums written were $8,877 compared to $2,380 for the quarter ended June 30, 2013, representing a 273.0% increase ($14,558 year to date compared to $2,823 prior year to date, representing a 415.7% increase). Net premiums written increased 366.3% to $6,398 for the quarter ended June 30, 2014 compared with $1,372 for the quarter ended June 30, 2013 ($11,756 year to date compared to $1,763 prior year to date, representing a 566.8% increase). Net premiums earned increased 583.0% to $4,740 for the quarter ended June 30, 2014 compared with $694 for the quarter ended June 30, 2013 ($8,854 year to date compared to $1,609 prior year to date, representing a 450.3% increase).



24

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands The significant increase in direct written premiums is the result of the independent agency voluntary production which began in April 2013. These agents wrote approximately $5,915 of volume during the quarter ended June 30, 2014 ($9,915 year to date) as compared to approximately $841 during the quarter ended June 30, 2013 ($841 prior year to date). These increases were primarily from net new full peril policies written from the independent agency channel of approximately 3,000 policies during the quarter ended June 30, 2014, (5,600 policies year to date) as compared to approximately 500 policies during the quarter ended June 30, 2013 (500 policies prior year to date). Premium volume written from the Citizen's take-out wind/hail only business was $2,962 during the quarter ended June 30, 2014 ($4,643 year to date) as compared to $1,539 for the quarter ended June 30, 2013 ($1,982 prior year to date). The loss ratio for the second quarter of 2014 was 24.8% compared to 92.5% for the second quarter of 2013 (17.6% for the six months ended June 30, 2014 compared with 154.7% for the same period in 2013). The decrease in the loss ratio for the second quarter of 2014 was due primarily to favorable development of losses occurring prior to the start of the second quarter of 2014, compared to adverse loss development experienced during the second quarter of 2013. The decrease in the loss ratio for the six months ended June 30, 2014 was due primarily to no significant weather events occurring in 2014 compared to the unusual significant hail event that occurred in the first quarter of 2013 and had development carry over into the second quarter. The 2014 year to date loss ratio had the benefit of the release of a portion of prior accident year loss reserves, which decreased the loss ratio by 1.4 percentage points. No loss reserve release or strengthening was recorded for the six months ended June 30, 2013. The impact of catastrophes on the loss ratios were zero percentage points for the six months ended June 30, 2014 and 145.6 percentage points for the six months ended June 30, 2013. The expense ratio was 54.9% for the second quarter of 2014 compared to 97.6% for the second quarter of 2013 (46.1% for the six months ended June 30, 2014 compared with 76.8% for the same period in 2013). The decrease in the expense ratio for the quarter and six months ended June 30, 2014, is primarily due to a higher increase in net premiums earned as compared to the increase in general and administrative expenses. Amortization of deferred policy acquisition cost expenses were 23.2% and 31.7% of net premiums earned, respectively, for the quarters ended June 30, 2014 and 2013 (22.4% year to date compared to 26.3% prior year to date), decreasing primarily due to actions taken by the Company to lower its premium taxes owed. General and administrative expenses were 31.6% and 65.9% of net premiums earned, respectively, for the quarters ended June 30, 2014 and 2013 (23.7% year to date compared to 50.5% prior year to date), decreasing primarily due to a higher increase in net premiums earned as compared to the increase in general and administrative expenses. . For the quarter ended June 30, 2014, general and administrative expenses incurred, primarily related to becoming a public entity, included management and board of director compensation, stock options and fees aggregating $493. Additionally, the Company incurred State of Louisiana assessment expenses of $193. As a result of the above items, the Company's combined ratio was 79.7% in the second quarter of 2014 compared with 190.1% in the second quarter of 2013 (63.7% for the six months ended June 30, 2014 compared with 231.5% for the same period in 2013). Catastrophe Excess of Loss Reinsurance Maison obtains excess of loss ceded reinsurance protection for storms occurring, to reduce the insurance company's risk. These reinsurance contracts are on a contract year of June 1 through May 31, based upon exposures insured as of September 30 each year. For each event occurring within a ninety-six hour period, Maison receives reinsurance recoveries up to $69,000 in excess of $3,000 per event. This $3,000 retention is the amount Maison retains in loss from each storm before the reinsurance protection is available. Maison also has another layer of reinsurance protection that can be used for the first event for losses above $72,000 per event, in an amount up to $20,000. If any of this $20,000 coverage is not used from the first event, the remaining portion is available for additional events. This $20,000 second layer coverage applies in total for all events occurring during the reinsurance period. This $20,000 second layer provides $1,000 in excess of $2,000 and $19,000 in excess of $72,000 for the second event. For the second event of the season, the earlier described $69,000 in excess of $2,000 is available since Maison has purchased a prepaid reinstatement premium protection for this coverage. The maximum Maison can pay from June 1, 2014 to May 31, 2015 is $5,000 in retention for any number of events as long as the total losses from all events do not exceed the reinsurance limits of all protection layers including the reinstatement of first protection layer, and no single event generates losses greater than $92,000. The estimated total cost of this coverage is approximately $10,869, which is a significant increase from the costs from the excess of loss reinsurance contracts ended May 31, 2014 of $3,385. This increase was due to the much greater reinsurance protection of $89,000 compared to the previous contract of $22,500 in excess of $1,500 retention. Income Tax Expense (Benefit) Income tax expense for the second quarter of 2014 was $438 ($1,042 year to date) compared to income tax benefit of $263 in the second quarter of 2013 ($767 prior year to date). The increase in income tax expense for the quarter ended June 30, 2014 is primarily attributable to the increased operating income in 2014 and state income tax recorded in 2014. The increase in income tax expense for the six months ended June 30, 2014 is primarily attributable to the increased operating income in 2014, and state



25

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands income tax recorded in 2014, partly offset by a tax benefit for a net operating loss carry forward recorded in 2014. See Note 8, "Income Taxes," to the unaudited consolidated interim financial statements for additional detail of the differences in income tax expense (benefit) recorded for the three and six months ended June 30, 2014 and June 30, 2013, respectively.



INVESTMENTS

Portfolio Composition All of the Company's investments in fixed income securities are classified as available-for-sale and are reported at fair value. At June 30, 2014, the Company held cash and cash equivalents and investments with a carrying value of $62,907. As of June 30, 2014, the Company held an investments portfolio comprised primarily of fixed income securities issued by the U.S. Government, government agencies and high quality corporate issuers. Investments held by the Company's insurance subsidiaries must comply with applicable domiciliary state regulations that prescribe the type, quality and concentration of investments. Table 2 below summarizes the carrying value of investments, including cash and cash equivalents, at the dates indicated. TABLE 2 Carrying value of investments, including cash and cash equivalents (in thousands of dollars, except for percentages) Type of investment June 30, 2014 % of Total December 31, 2013 % of Total Fixed income securities: U.S. government, government agencies and authorities 1,442 2.3 % - - % States municipalities and political subdivisions 45 0.1 % - - % Mortgage-backed 185 0.3 % - - % Asset-backed securities and collateralized mortgage obligations 852 1.3 % 100 0.6 % Corporate 3,384 5.4 % 201 1.3 % Total fixed income securities 5,908 9.4 % 301 1.9 % Short-term investments 100 0.2 % 100 0.6 % Total investments 6,008 9.6 % 401 2.5 % Cash and cash equivalents 56,899 90.4 % 15,007 97.5 % Total 62,907 100.0 % 15,408 100.0 % Liquidity and Cash Flow Risk Table 3 below summarizes the fair value by contractual maturities of the fixed income securities portfolio, excluding cash and cash equivalents, at June 30, 2014 and December 31, 2013. TABLE 3 Fair value of fixed income securities by contractual maturity date (in thousands of dollars) June 30, 2014 % of Total December 31, 2013 % of Total Due in less than one year 101 1.7 % - - % Due in one through five years 4,462 75.5 % 300 100.0 % Due after five through ten years 616 10.4 % - - % Due after ten years 729 12.4 % - - % Total 5,908 100.0 % 300 100.0 % At June 30, 2014, 77.2% of fixed income securities, including treasury bills, government bonds and corporate bonds, had contractual maturities of five years or less. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. The Company holds cash and high-grade short-term assets which, along with fixed income securities, management believes are sufficient in amount for the payment of loss and loss adjustment



26

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands expense reserves and other operating subsidiary obligations on a timely basis. In the event that additional cash is required to meet obligations to its policyholders, the Company believes that the high-quality, liquid investments in the portfolios provide it with sufficient liquidity. Market Risk Market risk is the risk that we will incur losses due to adverse changes in interest or currency exchange rates and equity prices. Given its operations typically invest in U.S. dollar denominated instruments and maintain a relatively insignificant investment in equity instruments, its primary market risk exposures in the investments portfolio are to changes in interest rates. Because the investments portfolio is comprised of primarily fixed maturity instruments that are usually held to maturity, periodic changes in interest rate levels generally impact the Company's financial results to the extent that the investments are recorded at market value and reinvestment yields are different than the original yields on maturing instruments. During periods of rising interest rates, the market values of the existing fixed income securities will generally decrease. The reverse is true during periods of declining interest rates. Credit Risk Credit risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to discharge an obligation. Credit risk arises from the Company's positions in short-term investments, corporate debt instruments and government bonds. Maison's Board of Directors is responsible for the oversight of key investment policies and limits. These policies and limits are subject to annual review and approval by Maison's Board of Directors. Maison's Board of Directors is also responsible for ensuring that these policies are implemented and that procedures are in place to manage and control credit risk. Table 4 below summarizes the composition of the fair values of fixed income securities, excluding cash and cash equivalents, at June 30, 2014 and December 31, 2013, by rating as assigned by Standard and Poor's ("S&P") or Moody's Investors Service ("Moody's"). Fixed income securities consist of predominantly high-quality instruments in corporate and government bonds with approximately 98.3% of those investments rated 'A' or better at June 30, 2014. TABLE 4 Credit ratings of fixed income securities Rating (S&P/Moody's) June 30, 2014 December 31, 2013 AAA/Aaa 44.4 % 33.3 % AA/Aa 11.9 33.3 A/A 42.0 33.4 Percentage rated A/A2 or better 98.3 % 100.0 % BBB/Baa 1.7 - Total 100.0 % 100.0 % Other-Than-Temporary Impairment The Company performs a quarterly analysis of its investment portfolio to determine if declines in market value are other-than-temporary. Further information regarding the Company's detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within Note 5, "Investments," to the unaudited consolidated financial statements. As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the Company recorded a write-down of zero and $188 for the quarters ended June 30, 2014 and June 30, 2013, respectively, for other-than-temporary impairments related to investments (zero and $188 for the six months ended June 30, 2014 and June 30, 2013, respectively). The length of time an individual investment may be held in an unrealized loss position may vary based on the opinion of the investment manager and their respective analyses related to valuation and to the various credit risks that may prevent the Company from recapturing the principal investment. In the case of an individual investment with a maturity date where the investment manager determines that there is little or no risk of default prior to the maturity of a holding, the Company would elect to hold the investment in an unrealized loss position until the price recovers or the investment matures. In situations where facts emerge that might increase the risk associated with recapture of principal, the Company may elect to sell investments at a loss.



27

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands At June 30, 2014, the gross unrealized losses for fixed income securities amounted to $3, and there were no unrealized losses attributable to non-investment grade fixed income securities. At each of June 30, 2014 and December 31, 2013, all unrealized losses on individual investments were considered temporary. Fixed income securities in unrealized loss positions continued to pay interest and were not subject to material changes in their respective debt ratings. The Company concluded that default risk did not exist at the time and, therefore, the declines in value were considered temporary. As the Company has the capacity to hold these investments to maturity, no impairment provision was considered necessary.



28

--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Loss and loss adjustment expense reserves represent the estimated liabilities for reported loss events, IBNR loss events and the related estimated loss adjustment expenses. Table 5 presents distributions, by line of business, of the provision for loss and loss adjustment expense reserves. TABLE 5 Provision for loss and loss adjustment expense reserves (in thousands of dollars) Line of Business June 30, 2014 December 31, 2013 Homeowners Multi-Peril 300 151 Fire and Allied Lines (primarily wind/hail only) 133 203 Total 433 354 Information with respect to development of the Company's provision for prior years' loss and loss adjustment expense reserves is presented in Table 6. TABLE 6 Decrease in prior years' provision for loss and loss adjustment expense reserves (in thousands of dollars) Three months ended June 30, Six months ended June 30, 2014 2013 2014 2013 Favorable change in provision for loss and loss adjustment expense reserves for prior accident years: (49 ) - (126 ) - For the quarter ended June 30, 2014, the Company reported $49 of favorable development for loss and loss adjustment expense reserves from prior accident years ($126 year to date). For the quarter ended June 30, 2013, the Company reported zero development for loss and loss adjustment expense reserves from prior accident years (zero year to date). The favorable development reported for the quarter and six months ended June 30, 2014 was primarily related to lower than expected reported claims subsequent to December 31, 2013 for losses incurred during 2013. The Company cannot predict whether loss and loss adjustment expense reserves will develop favorably or unfavorably from the amounts reported in the Company's unaudited consolidated financial statements. The Company believes that any such development will not have a material effect on the Company's consolidated equity but could have a material effect on the Company's consolidated financial results for a given period. See the "Critical Accounting Estimates and Assumptions" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information pertaining to the Company's process of estimating the provision for loss and loss adjustment expense reserves. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 4, "Recently Issued Accounting Standards," to the unaudited consolidated financial statements for discussion of certain accounting standards that may be applicable to the Company's current and future consolidated financial statements. 29



--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands LIQUIDITY AND CAPITAL RESOURCES The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from operations, capital-raising transactions, investment maturities and income and other returns received on investments. Cash provided from these sources is used primarily for loss and loss adjustment expense payments and other operating expenses. The timing and amount of payments for net losses and loss adjustment expenses may differ materially from the Company's provisions for loss and loss adjustment expense reserves, which may create increased liquidity requirements. Cash Flows During the six months ended June 30, 2014, the net cash provided by operating activities as reported on the unaudited consolidated statements of cash flows was $9,131. This source of cash can be primarily explained by the net income of $2,319; the decrease in premiums receivable of $2,152, primarily from the receipt of premium from Citizens related to the policies taken-out at December 2013; the increase in unearned premium reserves of $3,389, primarily due to the policy growth during the six month period; the increase in ceded reinsurance premiums payable of $2,528, from the new catastrophe reinsurance program effective June 1, 2014; the increase in current income taxes payable of $462, due to higher pre-tax operating income; and the increase in premiums collected in advance of $818, due to timing of insureds payment of premiums; offset by the use of cash to pay related parties of $2,431 due to settlement of the December 31, 2013 balance. During the six months ended June 30, 2014, the net cash used in investing activities as reported on the unaudited consolidated statements of cash flows was $5,608. This use of cash was driven primarily by the purchase of fixed income securities. During the six months ended June 30, 2014, the net cash provided by financing activities as reported on the unaudited consolidated statements of cash flows was $38,369. This source of cash is attributed to the net proceeds received from the issuance of common shares and convertible preferred shares during 2014 as further discussed in Note 11, "Shareholders' Equity," to the unaudited consolidated financial statements. In summary, as reported on the unaudited consolidated statements of cash flows, the Company's net increase in cash and cash equivalents during the six months ended June 30, 2014 was $41,892. The Company's subsidiaries fund their obligations primarily through capital contributions received from its parent, premium income, policy fee income and investment income and maturities in the investments portfolios. As a holding company, the Company funds its obligations, which primarily consist of holding company operating expenses, primarily from cash on hand and receipt of dividends from MMI. Maison requires regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. As of June 30, 2014, Maison has negative unassigned funds, so it cannot pay any dividends to the Company without prior notice to LDOI. Effective March 31, 2014, the Company completed its previously announced initial public offering of 1,887,500 shares of its common stock at a price to the public of $8.00 per share, and the exercise in full by representative of the underwriters of a 45-day option to purchase up to 283,125 additional shares of common stock to cover over-allotments. After the exercise of the over-allotment, PIH issued 2,170,625 common shares for total gross proceeds of $17,365. Net proceeds to the Company were $15,088 after deducting underwriting discounts and commissions and other offering expenses payable by the Company. On June 13, 2014, the Company completed an underwritten public offering of 2,875,000 shares of its common stock at a price to the public of $8.00 per share, which included full exercise by the underwriters of their over-allotment option, for total gross proceeds of $23,000. Net proceeds to the Company were $21,281 after deducting underwriting discounts and commissions and other offering expenses payable by the Company. On January 23, 2014, Fund Management Group LLC, an entity of which the Company's Chairman of the Board, Gordon G. Pratt, is a Managing Member and controlling equity holder, invested $2,000 in the Company in exchange for 80,000 Series A Convertible Preferred Shares ("Preferred Shares") of the Company pursuant to the terms and conditions of the Series A Convertible Preferred Shares Purchase Agreement between Fund Management Group LLC and the Company. The Preferred Shares are non-voting and rank senior to all classes of capital stock of the Company. The Preferred Shares do not pay any dividends. At the time of the issuance, the value of the common stock into which the Preferred Shares is convertible had a fair value greater than the $2,000 proceeds for the issuance. Accordingly, the Company recorded a beneficial conversion feature on the Preferred Shares of $500 during the first quarter of 2014 which equals the amount by which the estimated fair value of the common stock issuable upon the conversion of the issued Preferred Shares exceeds the proceeds from the issuance. 30



--------------------------------------------------------------------------------

1347 PROPERTY INSURANCE HOLDINGS, INC.

$ amounts in thousands The Preferred Shares were converted into shares of common stock and warrants on March 31, 2014, the effective date of the initial public offering. The Preferred Shares were converted into (i) 312,500 common shares of the Company, which is equal to the $2,000 liquidation value of the Preferred Shares divided by 80% of the $8.00 offering price per share of the common stock issued in the initial public offering; and (ii) one warrant per each common share issued as a result of the conversion. The warrants issued to Fund Management Group LLC entitle the holder to purchase one share of common stock at a price equal to 120% of the offering price per share of the Company's common stock issued in the initial public offering, subject to certain adjustments under a warrant agreement (the "Warrant Agreement") entered into between Fund Management Group LLC and the Company. The warrants have an expiry date of five years from the date of issuance and are immediately exercisable after issuance in accordance with the exercise procedure under the Warrant Agreement. The warrants may be redeemable by the Company at a price of $0.01 per warrant during any period in which the closing price of the Company's common shares is at or above 175% of the $8.00 price per share of the common stock issued in the initial public offering for 20 consecutive trading days. The warrant holder is entitled to a 30-day notice prior to the date of such redemption. Regulatory Capital In the United States, a risk-based capital ("RBC") formula is used by the National Association of Insurance Commissioners ("NAIC") to identify property and casualty insurance companies that may not be adequately capitalized. Most states, including Louisiana, the domiciliary state of Maison, have adopted the NAIC RBC requirements. In general, insurers reporting surplus as regards policyholders below 200% of the authorized control level, as defined by the NAIC, at December 31 are subject to varying levels of regulatory action, including discontinuation of operations. As of December 31, 2013, surplus as regards policyholders reported by Maison exceeded the 200% threshold. Item 3. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K, we are not required to make disclosures under this Item. Item 4. Controls and Procedures The Company's management performed an evaluation under the supervision and with the participation of the Company's principal executive officer and the principal financial officer, and completed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e), as adopted by the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended ("the Exchange Act") as of June 30, 2014. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Based on that evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. During the Company's quarter ended June 30, 2014, there were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 31



--------------------------------------------------------------------------------

1347 Property Insurance Holdings, Inc.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters