UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2015
OR

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

FOR THE TRANSITION PERIOD FROM ___________________TO _______________________
 
Commission File number 0-2500111
 
Federated National Holding Company
(Exact name of registrant as specified in its charter)
 
Florida
 
65-0248866
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification Number)

14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323
(Address of principal executive offices) (Zip Code)

800-293-2532
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has electronically submitted and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒  No☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐ No ☒
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value –14,228,923 outstanding as of August 3, 2015
 


FEDERATED NATIONAL HOLDING COMPANY

INDEX
 
PART I: FINANCIAL INFORMATION
PAGE
     
ITEM 1
3
     
ITEM 2
36
     
ITEM 3
59
     
ITEM 4
61
     
PART II: OTHER INFORMATION
 
     
ITEM 1
62
     
ITEM 1A
62
     
ITEM 2
62
     
ITEM 3
62
     
ITEM 4
62
     
ITEM 5
62
     
ITEM 6
63
     
64
 
2

PART I: FINANCIAL INFORMATION
Item 1
Financial Statements
 
FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
June 30, 2015
   
December 31, 2014
 
ASSETS
 
(Dollars in Thousands)
 
Investments
       
Debt maturities, available for sale, at fair value
 
$
316,577
   
$
284,099
 
Debt maturities, held to maturity, at amortized cost
   
6,436
     
7,417
 
Equity securities, available for sale, at fair value
   
43,004
     
39,247
 
                 
Total investments
   
366,017
     
330,763
 
                 
Cash and short term investments
   
96,322
     
40,157
 
Prepaid reinsurance premiums
   
40,330
     
54,502
 
Premiums receivable, net of allowance for credit losses of $148 and $148, respectively
   
33,051
     
27,275
 
Reinsurance recoverable, net
   
15,294
     
12,534
 
Deferred policy acquisition costs
   
19,267
     
13,610
 
Income taxes receivable
   
5,519
     
1,810
 
Property, plant and equipment, net
   
1,988
     
1,749
 
Other assets
   
9,274
     
7,231
 
Contingent quota-share profit sharing
   
14,000
     
14,000
 
                 
Total assets
 
$
601,062
   
$
503,631
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Unpaid losses and LAE
 
$
88,082
   
$
78,330
 
Unearned premiums
   
232,811
     
192,424
 
Debt
   
5,000
     
-
 
Premiums deposits and customer credit balances
   
11,319
     
7,381
 
Deferred income taxes, net
   
4,962
     
1,341
 
Claims payments outstanding
   
9,963
     
10,152
 
Accounts payable and accrued expenses
   
10,489
     
10,924
 
Deferred quota-share profit sharing
   
7,000
     
10,500
 
                 
Total liabilities
   
369,626
     
311,052
 
                 
Shareholders' equity:
               
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding 13,724,189 and 13,632,414, respectively
137 136
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding
   
-
     
-
 
Additional paid-in capital
   
129,495
     
127,302
 
Accumulated other comprehensive income
               
Unrealized net gains on investments, available for sale
   
6,359
     
7,718
 
Total accumulated other comprehensive income
   
6,359
     
7,718
 
Retained earnings
   
77,308
     
57,423
 
Total Federated National Holding Company equity
   
213,299
     
192,579
 
Non-controlling interest
   
18,137
     
-
 
Total shareholders' equity
   
231,436
     
192,579
 
Total liabilities and shareholders' equity
 
$
601,062
   
$
503,631
 
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3

FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
 
2015
   
2014
   
2015
   
2014
 
 
 
(Dollars in Thousands)
   
(Dollars in Thousands)
 
Revenue:
               
Gross premiums written
 
$
132,019
   
$
107,353
   
$
238,721
   
$
188,455
 
Gross premiums ceded
   
(85,103
)
   
(46,533
)
   
(111,061
)
   
(49,840
)
 
                               
Net premiums written
   
46,916
     
60,820
     
127,660
     
138,615
 
 
                               
Increase in prepaid reinsurance premiums
   
31,689
     
23,682
     
6,739
     
6,887
 
Increase in unearned premiums
   
(29,378
)
   
(33,069
)
   
(40,387
)
   
(50,065
)
 
                               
Net change in prepaid reinsurance premiums and unearned premiums
   
2,311
     
(9,387
)
   
(33,648
)
   
(43,178
)
 
                               
Net premiums earned
   
49,227
     
51,433
     
94,012
     
95,437
 
Commission income
   
1,308
     
1,223
     
2,433
     
2,177
 
Finance revenue
   
469
     
348
     
897
     
659
 
Direct written policy fees
   
2,612
     
2,352
     
5,104
     
4,179
 
Net investment income
   
1,701
     
1,302
     
3,248
     
2,308
 
Net realized investment gains
   
913
     
2,056
     
2,617
     
3,388
 
Other income
   
960
     
289
     
2,338
     
570
 
Quota-share profit sharing, net
   
1,600
     
-
     
3,077
     
-
 
 
                               
Total revenue
   
58,790
     
59,003
     
113,726
     
108,718
 
 
                               
Expenses:
                               
Losses and LAE
   
23,149
     
24,522
     
47,098
     
45,350
 
Operating and underwriting expenses
   
6,796
     
4,201
     
13,118
     
7,868
 
Salaries and wages
   
5,013
     
3,448
     
10,151
     
6,498
 
Amortization of deferred policy acquisition costs
   
5,107
     
8,838
     
10,152
     
17,280
 
Interest expense
   
86
     
-
     
85
     
-
 
 
                               
Total expenses
   
40,151
     
41,009
     
80,604
     
76,996
 
 
                               
Income before provision for income tax expense
   
18,639
     
17,994
     
33,122
     
31,722
 
Provision for income tax expense
   
6,755
     
6,440
     
12,465
     
11,745
 
Income before non-controlling interest
   
11,884
     
11,554
     
20,657
     
19,977
 
 
                               
Non-controlling interest
   
150
     
-
     
(361
)
   
-
 
 
                               
Net income attributable to Federated National Holding Company common stockholders
 
$
11,734
   
$
11,554
   
$
21,018
   
$
19,977
 
 
                               
Net income per share - basic
 
$
0.86
   
$
1.04
   
$
1.54
   
$
1.81
 
 
                               
Net income per share - diluted
 
$
0.84
   
$
1.01
   
$
1.50
   
$
1.75
 
 
                               
Weighted average number of common shares outstanding - basic
   
13,722,205
     
11,096,317
     
13,689,380
     
11,022,889
 
 
                               
Weighted average number of common shares outstanding - diluted
   
13,984,596
     
11,481,319
     
13,978,010
     
11,407,576
 
 
                               
Dividends paid per share
 
$
0.04
   
$
0.03
   
$
0.08
   
$
0.06
 
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4

FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(Dollars in Thousands)
   
(Dollars in Thousands)
 
         
Net income attributable to Federated National Holding Company common stockholders
 
$
11,734
   
$
11,554
   
$
21,018
   
$
19,977
 
                                 
Change in net unrealized (losses) gains on investments available for sale
   
(3,975
)
   
1,362
     
(2,010
)
   
2,242
 
                                 
Comprehensive income before tax
   
7,759
     
12,916
     
19,008
     
22,219
 
                                 
Income tax benefit (expense) related to items of other comprehensive income    
1,409
      (414     651       (844
                                 
Comprehensive income
 
$
9,168
   
$
12,502
   
$
19,659
   
$
21,375
 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5

FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
Cash flow from operating activities:
       
Net income
 
$
21,018
   
$
19,977
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization of investment premium or discount, net
   
2,487
     
1,775
 
Depreciation and amortization of property plant and equipment, net
   
302
     
189
 
Net realized investment gains
   
(2,617
)
   
(3,388
)
Non-cash compensation
   
1,556
     
(157
)
Changes in operating assets and liabilities:
               
Premiums receivable
   
(5,776
)
   
(5,707
)
Prepaid reinsurance premiums
   
14,173
     
7,592
 
Reinsurance recoverable, net
   
(2,760
)
   
(179
)
Income taxes recoverable
   
(3,709
)
   
-
 
Deferred income tax expense, net of other comprehensive income
   
4,273
     
728
 
Policy acquisition costs, net of amortization
   
(5,657
)
   
(6,289
)
Other assets
   
(2,043
)
   
(1,486
)
Contingent quota-share profit sharing
   
(3,500
)
   
-
 
Unpaid losses and LAE
   
9,752
     
10,020
 
Unearned premiums
   
40,387
     
50,065
 
Reinsurance premiums payable
   
-
     
7,134
 
Debt
   
5,000
     
-
 
Premium deposits and customer credit balances
   
3,938
     
3,697
 
Income taxes payable
   
-
     
(1,796
)
Claims payments outstanding
   
(189
)
   
(149
)
Accounts payable and accrued expenses
   
(434
)
   
1,587
 
Net cash provided by operating activities
   
76,201
     
83,613
 
Cash flow used by investing activities:
               
Proceeds from sale of investment securities
   
92,411
     
44,081
 
Purchases of investment securities available for sale
   
(129,545
)
   
(111,591
)
Purchases of property and equipment
   
(542
)
   
(718
)
Net cash used by investing activities
   
(37,676
)
   
(68,228
)
Cash flow provided by financing activities:
               
Exercised stock options
 
$
123
   
$
1,190
 
Dividends paid
   
(1,133
)
   
(695
)
Non-controlling interest
   
18,136
     
-
 
Tax benefit related to non-cash compensation
   
514
     
175
 
Net cash provided by financing activities
   
17,640
     
670
 
Net increase in cash and short term investments
   
56,165
     
16,055
 
Cash and short term investments at beginning of period
   
40,157
     
41,446
 
Cash and short term investments at end of period
 
$
96,322
   
$
57,501
 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
6

FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Six Months Ended June 30,
 
(continued)
 
2015
   
2014
 
   
(Dollars in Thousands)
 
Supplemental disclosure of cash flow information:
       
Cash paid during the period for:
       
Income taxes
 
$
10,662
   
$
13,260
 
Non-cash investing and finance activities:
               
Accrued dividends payable
 
$
567
   
$
350
 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7

(1)
Organization and Business

In this Quarterly Report on Form 10-Q, “FNHC” and the terms “Company”, “we”, “us” and “our” refer to Federated National Holding Company and its subsidiaries, unless the context indicates otherwise. We changed our name on September 11, 2012, pursuant to approval received at our annual shareholders’ meeting, from 21st Century Holding Company so that our parent company and other subsidiary companies’ names are consistent with our primary insurance subsidiary and the name under which we have been writing insurance for more than 23 years.

FNHC is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents.

We are authorized to underwrite, and/or place through our wholly owned subsidiaries, homeowners’ multi-peril (“homeowners”), commercial general liability, federal flood, personal auto and various other lines of insurance in Florida and various other states. We market and distribute our own and third-party insurers’ products and our other services through a network of independent agents.

Our wholly owned insurance subsidiary is Federated National Insurance Company (“FNIC”) and is licensed as an admitted carrier in Florida. An admitted carrier is an insurance company that has received a license from the state department of insurance giving the company the authority to write specific lines of insurance in that state. These companies are also bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices, including fraud. Admitted carriers are also required to financially contribute to the state guarantee fund, which is used to pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders. Through contractual relationships with a network of approximately 3,800 independent agents, of which approximately 2,300 actively sell and service our products, FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines, and personal automobile insurance in Florida. FNIC is licensed as an admitted carrier in Alabama, Louisiana, Georgia, and Texas. Non-Florida commercial general liability operations have not been material to the Company’s overall operations. Although FNIC has underwritten commercial general liability insurance in those states, the Company has decided to eliminate its commercial general liability operations in Alabama, Louisiana, Georgia and Texas ultimately resulting in no new premium for this particular line of business. FNIC continues to underwrite commercial general liability operations in Florida. FNIC also underwrites homeowners’ insurance in Alabama and Louisiana and was admitted in South Carolina to underwrite homeowners’ insurance. Homeowner operations in South Carolina are expected to commence in 2015. Additionally, we underwrite personal automobile insurance in Georgia and Texas.

FNIC is licensed as a non-admitted carrier in Missouri and Nevada and can underwrite commercial general liability insurance in these states. Currently, we do not have any operations in these states. A non-admitted carrier, sometimes referred to as an “excess and surplus lines” carrier, is permitted to do business in a state and, although it is strictly regulated to protect policyholders from a variety of illegal and unethical practices, including fraud, non-admitted carriers are subject to considerably less regulation with respect to policy rates and forms. Non-admitted carriers are not required to financially contribute to and benefit from the state guarantee fund, which is used to pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders.

The Company has entered into a joint venture to organize Monarch National Insurance Company (“MNIC”), which received its certificate of authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the “Florida OIR”) on March 19, 2015.  The Company’s joint venture partners are a majority-owned limited partnership of Crosswinds Holdings Inc., f/k/a C.A. Bancorp Inc., a publicly traded Canadian private equity firm and asset manager (“Crosswinds”); and Transatlantic Reinsurance Company (“TransRe”).
 
The Company and Crosswinds have each invested $14.0 million in Monarch Delaware Holdings LLC, the indirect parent company of Monarch Insurance (“Monarch Delaware”), for a 42.4% interest in Monarch Delaware (each holding 50% of the voting interests in Monarch Delaware).  TransRe has invested $5.0 million for a 15.2% non-voting interest in Monarch Delaware and has advanced an additional $5.0 million in debt evidenced by a six-year promissory note bearing 6% annual interest payable by Monarch National Holding Company (“MNHC”), a wholly owned subsidiary of Monarch Delaware and the direct parent company of MNIC.

In connection with the organization of MNIC, the parties entered into a Managing General Agent and Claims Administration Agreement (the “Monarch MGA Agreement”) dated March 17, 2015, with FedNat Underwriters, Inc. (“FNU”), a wholly owned subsidiary of the Company, pursuant to which FNU provides underwriting, accounting, reinsurance placement and claims administration services to Monarch.  For its services under the Monarch MGA Agreement, FNU will receive 4% of Monarch’s total written annual premium, excluding acquisition expenses payable to agents, for FNU’s managing general agent services; 3.6% of Monarch’s total earned annual premium for FNU’s claims administration services; and a per-policy administrative fee of $25 for each policy underwritten for Monarch.  The Company will also receive an annual expense reimbursement for accounting and related services.
 
The Company has, in recent years, used analytic modeling to assist it in underwriting its insurance products.  The Florida Office of Insurance Regulation (the “Florida OIR”) issued a cease and desist order dated May 19, 2015, ordering FNIC to cease use of an unfiled analytic model. FNIC confirmed to the Florida OIR in a meeting on June 5, 2015 that it would immediately cease use of such analytic model, which FNIC has done.  FNIC has submitted the necessary filing to enable the Florida OIR to review and approve the Company’s analytic models, which review remains ongoing as of the date of this Report.  The Florida OIR has not asserted that FNIC’s use of an unfiled analytic model in its underwriting process constitutes “price optimization.”   “Price optimization” has recently been defined in an industry white paper as a practice that uses predictive modeling and data analytics in pricing insurance products.  This has been a topic of recent discussion by various state insurance regulators, including the Florida OIR.

In lieu of its underwriting analytics, FNIC has used its current filed and approved rule-based underwriting to manage all new and existing business since early June 2015. For the first nine weeks of the quarter ended June 30, 2015, the Company wrote an average of $3.3 million dollars of new Florida homeowners’ business weekly. Since discontinuing the use of the underwriting analytics, the average weekly new premium written increased by approximately 47% to $4.9 million in the last three weeks of June and during the month of July, but has since returned to levels consistent with our production prior to discontinuing our analytics. The Company does not believe that the additional written premium will have a material impact on the Company’s results of operations.  The Company cannot predict at this time the outcome of the review of the Company’s filing or whether any restrictions, fees or fine will be imposed by the Florida OIR as it relates to the prior use of analytics.

We previously entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with Federated Mutual Insurance Company (“Federated Mutual”) pursuant to which, among other things, we may continue to use “Federated” until at least August 30, 2020, after which time we have agreed to either cease using “Federated” in commerce or otherwise adopt and use trade names that are not confusingly similar to Federated Mutual’s trademarks.  We continue to develop our brand under the “FedNat” name, which is the name by which agents generally know us.
 
- 8 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
As of September 30, 2014, we had satisfied all applicable conditions of the Consent Order we entered into in January 2011 (the “Consent Order”) with the Florida OIR.  We entered into the Consent Order in connection with the merger of one of our wholly owned insurance subsidiaries, FNIC, into American Vehicle Insurance Company (“American Vehicle”), with American Vehicle continuing the operations of both entities under the name FNIC. As of the date of this Report, the only operational restriction that remains in effect is a requirement to obtain OIR approval prior to writing commercial multi-peril business or any new commercial property business, including condo associations, under any other line of business for which FNIC is authorized.  FNIC currently has no commercial multi-peril policy premium in-force and the current commercial habitation book of business is fully earned. The Consent Order required us to, among other things, limit the number of policies that we write in the Tri-County area and imposed certain other operational requirements on us, all of which we have complied with.

During the three months ended June 30, 2015, 93.6%, 2.9%, 1.7% and 1.8% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively. During the three months ended June 30, 2015, $27.5 million or 22.2% of the $123.5 million of the homeowners’ premiums we underwrote were produced under Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to offer certain FNIC products. The $8.7 million increased homeowners’ premiums we underwrote under ISA represents 34.9% of the $24.9 million increased total homeowners’ premiums we underwrote during the three months ended June 30, 2015. During the three months ended June 30, 2014, $18.8 million or 19.1% of the $98.6 million of the homeowners’ premiums we underwrote were produced under ISA. This network of agents began writing for FNIC in March 2013. During the three months ended June 30, 2014, 91.8%, 3.0%, 2.2% and 3.0% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively.

During the six months ended June 30, 2015, 92.7%, 3.2%, 1.6% and 2.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively. During the six months ended June 30, 2015, $47.0 million or 21.3% of the $221.3 million of the homeowners’ premiums we underwrote were produced under ISA. The $16.7 million increased homeowners’ premiums we underwrote under ISA represents 34.3% of the $48.7 million increased total homeowners’ premiums we underwrote during the six months ended June 30, 2015. During the six months ended June 30, 2014, $30.3 million or 17.6% of the $172.6 million of the homeowners’ premiums we underwrote were produced under ISA. This network of agents began writing for FNIC in March 2013. During the six months ended June 30, 2014, 91.5%, 3.4%, 2.1% and 3.0% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively.

Our business, results of operations and financial condition are subject to fluctuations due to a variety of factors. Abnormally high severity or frequency of claims in any period could have a material adverse effect on us. When our estimated liabilities for unpaid losses and loss adjustment expenses (“LAE”) are less than the actuarially determined amounts, we increase the expense in the current period. Conversely, when our estimated liabilities for unpaid losses and LAE are greater than the actuarially determined amounts, we decrease the expense in the current period.

We are focusing our marketing efforts on continuing to expand our distribution network while maintaining our commitment to long-term relationships. We market our products and services throughout Florida and in other states by establishing relationships with additional independent agents and general agents. There can be no assurance, however, that we will be able to obtain the required regulatory approvals to offer additional insurance products or expand into other states.

FNU, formerly known as Assurance Managing General Agents, Inc., a wholly owned subsidiary of the Company, acts as FNIC’s and MNIC’s exclusive managing general agent and is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Nevada, South Carolina and Texas. FNU is an appointed Lloyds of London coverholder to write homeowners’ multi peril insurance in Florida on an excess and surplus lines basis and has contracted with other unaffiliated insurance companies to sell personal umbrella through FNU’s existing network of agents. Operations for Lloyds of London are expected to commence in the third quarter of this year.
 
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Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
 FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a per policy fee which ranges from $25 to $55 and a commission fee from its affiliate, FNIC and MNIC, which totaled 4% during the three months ended June 30, 2015. The Florida OIR periodically reviews our managing general agent’s fee structure to ensure that it is neither excessive nor inadequate to operate.

We internally process claims made by our insureds through our wholly owned claims adjusting company, Federated National Adjusting, Inc. (“FNA”), formerly known as Superior Adjusting, Inc. Our agents have no authority to settle claims or otherwise exercise control over the claims process. Furthermore, we believe that the retention of independent adjusters, in addition to the employment of salaried claims personnel, results in reduced ultimate loss payments, lower LAE and improved customer service for our claimants and policyholders. We also employ an in-house litigation management team to cost effectively manage claims-related litigation and to monitor our claims handling practices for efficiency and regulatory compliance.

During 2014, the Florida OIR approved an application to allow the claims administration operations of FNA to be assumed by FNU. Under the amended managing general agency agreement between FNU and FNIC, FNU will provide the same claims administration services. The combination of these services in FNU had no effect on consolidated net income.

Insure-Link, Inc. (“Insure-Link”) is our independent insurance agency. The insurance agency markets direct to the public to provide a variety of insurance products and services to individual clients, as well as business clients, by offering a full line of insurance products including, but not limited to,  homeowners’, flood, personal and commercial automobile, commercial general liability, workers’ compensation, boat and recreational vehicle and personal articles and jewelry insurance through their agency appointments with over forty-seven different carriers.

(2) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America referred to as Generally Accepted Accounting Principles (“GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2015 and the results of operations and cash flows for the periods presented.

The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2015. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2014 included in the Company’s Form 10-K, which was filed with the SEC on March 16, 2015.

In preparing the interim unaudited condensed consolidated financial statements, management was required to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates.

Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of loss and LAE, ceded reinsurance balances payable, the recoverability of Deferred Policy Acquisition Costs (“DPAC”), the determination of federal income taxes, quota share profit sharing, prepaid reinsurance, unrealized investment gains and losses, deferred tax assets and liabilities, and the net realizable value of reinsurance recoverables. Although considerable variability is inherent in these estimates, management believes that the amounts provided are reasonable. These estimates are continually reviewed and adjusted as necessary. Such adjustments are reflected in current operations.
 
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Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
All significant intercompany balances and transactions have been eliminated. No material reclassifications have been made to the prior-period balances to conform to the current-period presentation.

(3) Summary of Significant Accounting Policies and Practices

(A)  Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management’s evaluation of the determination of (i) liability for unpaid losses and LAE, (ii) the amount and recoverability of amortization of DPAC, and (iii) estimates for our reserves with respect to finance contracts, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates, which are described in greater detail in Footnote 2 of the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2014, which we included in the Company’s Annual Report on Form 10-K which was filed with the SEC on March 16, 2015.

We believe that there were no significant changes in those critical accounting policies and estimates during the six months ended June 30, 2015. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Form 10-Q with the Audit Committee of our Board of Directors.

The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, and in the case of unpaid losses and LAE, an actuarial valuation. Management regularly reevaluates these significant factors and makes adjustments where facts and circumstances dictate. In selecting the best estimate, we utilize various actuarial methodologies. Each of these methodologies is designed to forecast the number of claims we will be called upon to pay and the amounts we will pay on average to settle those claims. In arriving at our best estimate, our actuaries consider the likely predictive value of the various loss development methodologies employed in light of underwriting practices, premium rate changes and claim settlement practices that may have occurred, and weight the credibility of each methodology. Our actuarial methodologies take into account various factors, including, but not limited to, paid losses, liability estimates for reported losses, paid allocated LAE, salvage and other recoveries received, reported claim counts, open claim counts and counts for claims closed with and without payment for loss.

Accounting for loss contingencies pursuant to Financial Accounting Standards Board (“FASB”) issued guidance involves the existence of a condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future event(s) occur or fail to occur. Additionally, accounting for a loss contingency requires management to assess each event as probable, reasonably possible or remote. Probable is defined as the future event or events are likely to occur. Reasonably possible is defined as the chance of the future event or events occurring is more than remote but less than probable, while remote is defined as the chance of the future event or events occurring is slight. An estimated loss in connection with a loss contingency shall be recorded by a charge to current operations if both of the following conditions are met: First, the amount can be reasonably estimated, and second, the information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements. It is implicit in this condition that it is probable that one or more future events will occur confirming the fact of the loss or incurrence of a liability.

We are required to review the contractual terms of all our reinsurance purchases to ensure compliance with FASB issued guidance. The guidance establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. Contracts that do not result in the reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed generally do not meet the conditions for reinsurance accounting and must be accounted for as deposits. The guidance also requires us to disclose the nature, purpose and effect of reinsurance transactions, including the premium amounts associated with reinsurance assumed and ceded. It also requires disclosure of concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums.
 
- 11 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
FASB issued guidance addresses accounting and reporting for (a) investments in equity securities that have readily determinable fair values and (b) all investments in debt securities. We account for our investment securities consistent with FASB issued guidance that requires our securities to be classified into one of three categories: (i) held-to-maturity, (ii) trading securities or (iii) available-for-sale.

Investments classified as held-to-maturity include debt securities wherein the Company’s intent and ability are to hold the investment until maturity and are carried at amortized cost without consideration to unrealized gains or losses. Investments classified as trading securities include debt and equity securities bought and held primarily for sale in the near term and are carried at fair value with unrealized holding gains and losses included in current period operations. Investments classified as available-for-sale include debt and equity securities that are not classified as held-to-maturity or as trading security investments and are carried at fair value with unrealized holding gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, namely “Other Comprehensive Income.”

A decline in the fair value of an available-for-sale security below cost that is deemed other-than-temporary results in a charge to income, resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted, respectively, over the life of the related debt security as an adjustment to yield using a method that approximates the effective interest method. Dividends and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific-identification method for determining the cost of securities sold.

Financial instruments, which potentially expose us to concentrations of credit risk, consist primarily of investments, premiums receivable, amounts due from reinsurers on paid and unpaid losses and finance contracts. We have not experienced significant losses related to premiums receivable from individual policyholders or groups of policyholders in a particular industry or geographic area. We believe no credit risk beyond the amounts provided for collection losses is inherent in our premiums receivable or finance contracts. In order to reduce credit risk for amounts due from reinsurers, we seek to do business with financially sound reinsurance companies and regularly review the financial strength of all reinsurers used. Additionally, our credit risk in connection with our reinsurers is frequently mitigated by the establishment of irrevocable clean letters of credit in favor of FNIC.

The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on June 30, 2015 and December 31, 2014. Changes in interest rates subsequent to June 30, 2015 and December 31, 2014 may affect the fair value of our investments.

The carrying amounts for the following financial instrument categories approximate their fair values at June 30, 2015 and December 31, 2014 because of their short-term nature: cash and short-term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, claims payments outstanding, accounts payable and accrued expenses.

(B) Impact of New Accounting Pronouncements

In May 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-09, Financial Services – Insurance (Topic 944): Disclosures about Short-Duration-Contracts. The amendments in this ASU apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services—Insurance. The amendments require insurance entities to disclose for annual reporting periods the following information about the liability for unpaid claims and claim adjustment expenses: (1) Incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding (that need not exceed 10 years, including the most recent reporting period presented in the statement of financial position). Each period presented in the disclosure about claims development that precedes the current reporting period is considered to be supplementary information. (2) A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position. (3) For each accident year presented of incurred claims development information, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses, accompanied by a description of reserving methodologies (as well as any changes to those methodologies). (4) For each accident year presented of incurred claims development information, quantitative information about claim frequency (unless it is impracticable to do so) accompanied by a qualitative description of methodologies used for determining claim frequency information (as well as any changes to these methodologies). (5) For all claims except health insurance claims, the average annual percentage payout of incurred claims by age (that is, history of claims duration) for the same number of accident years as presented in (3) and (4) above. The amendments in this ASU are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016.
 
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Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
In April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

In February 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements and significantly changes the consolidation analysis required. The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (i) modify the evaluation of whether limited partnership and similar legal entities are VIEs ,(ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Act of 1940 for registered money market funds. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted. The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

In June 2014, the FASB issued Accounting Standard Update (“ASU”) No. 2014-12: Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, a consensus of the FASB Emerging Issues Task Force. The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a non-vesting condition that affects the grant-date fair value of an award. The amendments in this ASU provide explicit guidance for those awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted. The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.
 
- 13 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
In July 2013, the FASB issued Accounting Standard Update (“ASU”) No. 2013-11: Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Topic 740, Income Taxes, does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists, and there is diversity in practice in the presentation of unrecognized tax benefit in those instances. The objective of the amendments in this ASU is to eliminate that diversity in practice. The ASU applies to all entities that have unrecognized tax benefits when a net operating loss carry forward, a similar tax loss, or a tax credit carryforward exists at the operating date. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and early adoption is permitted. The amendments in this ASU should be applied prospectively to all unrecognized tax benefits that exist at the effective date and   retrospective application is permitted. The adoption of the amendments in this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In February 2013, the FASB issued ASU No. 2013-02: Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this ASU is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety in net income. For other amounts that are not required to be reclassified to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. The ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of these amendments did not have a material impact on our financial condition, results of operations or cash flows.

In January 2013, the FASB issued ASU No. 2013-01: Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The objective of this ASU is to clarify the scope of offsetting disclosures and to address implementation issues with ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments clarify that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions.  An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods. The adoption of these amendments did not have a material impact on our financial condition, results of operations or cash flows.
 
- 14 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements

Other recent accounting pronouncements issued by FASB, the American Institute of Certified Public Accountants (“AICPA”), and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

(C) Stock Options

Pursuant to FASB issued guidance, compensation cost recognized during the six months ended June 30, 2015 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the guidance.

(D) Earnings per Share

Basic earnings per share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share (“Diluted EPS”) is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period presented.
 
- 15 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements

(E) Reclassifications

No material reclassification of the 2014 financial statements was necessary to conform to the 2015 presentation.

(4) Commitments and Contingencies

Management has a responsibility to continually measure and monitor its commitments and its contingencies. The nature of the Company’s commitments and contingencies can be grouped into three major categories: insured claim activity, assessment related activities and operational matters.

(A) Insured Claim Activity

We are involved in claims and legal actions arising in the ordinary course of business. The amount of liability for these claims and lawsuits is uncertain. 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) legislative enactments, judicial decisions, legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of its analysis. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. In the opinion of management, the ultimate disposition of these matters may have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

The Company’s subsidiaries are, from time to time, named as defendants in various lawsuits incidental to their insurance operations. Legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy are considered by the Company in establishing loss and LAE reserves.

The Company also faces, in the ordinary course of business, lawsuits that seek damages beyond policy limits. The Company continually evaluates potential liabilities and reserves for litigation of these types using the criteria established by FASB issued guidance. Under this guidance, reserves for a loss are recorded if the likelihood of occurrence is probable and the amount can be reasonably estimated. If a loss, while not probable, is judged to be reasonably possible, management will make an estimate of a possible range of loss or state that an estimate cannot be made. Management considers each legal action using this guidance and records reserves for losses as warranted.

(B) Assessment Related Activity

We operate in a regulatory environment where certain entities and organizations have the authority to require us to participate in assessments. Currently these entities and organizations include, but are not limited to, Florida Insurance Guaranty Association (“FIGA”), Citizens Property Insurance Corporation (“Citizens”), Florida Hurricane Catastrophe Fund (“FHCF”) and Florida Joint Underwriters Insurance Association (“JUA”). As a direct premium writer in the state of Florida, we are required to participate in certain insurer solvency associations under Florida Statutes Section 631.57(3) (a), administered by FIGA.

FNIC is also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. FNIC was not assessed by the JUA Plan during 2015 or 2014. Future assessments by this association are undeterminable at this time.
 
- 16 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
(C) Operational Matters

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for 2012 - 2014 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities. The Company’s 2011 federal tax return was reviewed by the IRS and a “no change” report was issued indicating that the IRS is in agreement with the tax positions presented on the 2011 return. The 2013 federal and state income tax returns were timely filed by the extended filing deadline of September 15, 2014. The Company does not have any known uncertain tax positions and all tax positions are evaluated in accordance with FIN 48. Any change to or resolution of tax reserves could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

The Company has recorded a net deferred tax liability of $5.0 million as of June 30, 2015 compared with $1.3 million as of December 31, 2014.

The calculation of current and deferred income taxes presents management’s assessment of the amount of current and future taxes to be paid. The calculation of deferred tax assets and liabilities is in accordance with ASC 740. These assets and liabilities may be impacted if new information not previously available is considered in future analysis and calculations. Because of the unpredictability and complexity of these future uncertainties the ultimate resolution of the tax payment may be an amount that is materially different from the current estimate of the tax liabilities. As of June 30, 2015 the Company has recorded a net deferred tax liability of $5.0 million. The primary reason for the change in deferred tax liabilities include the tax impact of the appreciation in the market value of the available-for-sale securities.  Any change in circumstances leading to a change in the tax liability would be recorded in the period that the change in circumstances occurs.

Our executive offices are located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 in an 18,500 square foot office facility. Our original lease for this office space was scheduled to expire in May 2017. During March 2014, we extended our lease term to expire in August 2019 and expanded the leased premises to include an additional 13,642 square feet. All of our operations are consolidated within these facilities. We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the lease term.

The expected future payments in connection with this lease are as follows.

Fiscal Year
 
Payments
 
   
(Dollars in Thousands)
 
2015
   
363
 
2016
   
714
 
2017
   
726
 
2018
   
740
 
Thereafter
   
502
 
Total
 
$
3,045
 
 
The Company is not currently involved in any material legal actions arising from the ordinary course of business that are not related to the insured claims activity.
 
- 17 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
(5)
Investments

FASB issued guidance addresses accounting and reporting for (a) investments in equity securities that have readily determinable fair values and (b) all investments in debt securities. We account for our investment securities consistent with FASB issued guidance that requires our securities to be classified into one of three categories: (i) held-to-maturity, (ii) trading securities or (iii) available-for-sale.

Investments classified as held-to-maturity include debt securities wherein the Company’s intent and ability are to hold the investment until maturity and are carried at amortized cost without consideration to unrealized gains or losses. Investments classified as trading securities include debt and equity securities bought and held primarily for sale in the near term and are carried at fair value with unrealized holding gains and losses included in current period operations. Investments classified as available-for-sale include debt and equity securities that are not classified as held-to-maturity or as trading security investments and are carried at fair value with unrealized holding gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, namely “Other Comprehensive Income.”

Total investments increased $35.2 million, or 10.7%, to $366.0 million as of June 30, 2015, compared with $330.8 million as of December 31, 2014.

The debt and equity securities that are available-for-sale and carried at fair value represent 98% of total investments as of June 30, 2015 and December 31, 2014.

We did not hold any trading investment securities during the six months ended June 30, 2015.

The FASB issued guidance also addresses the determination as to when an investment is considered impaired, whether that impairment is other-than temporary, and the measurement of an impairment loss. The Company’s policy for the valuation of temporarily impaired securities is to determine impairment based on the analysis of the following factors.

· rating downgrade or other credit event (eg., failure to pay interest when due);

· length of time and the extent to which the fair value has been less than amortized cost;

· financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology or discontinuance of a business segment;

· prospects for the issuer’s industry segment;

· intent and ability of the Company to retain the investment for a period of time sufficient to allow for anticipated recovery in market value;

· historical volatility of the fair value of the security.

Pursuant to FASB issued guidance, the Company records the unrealized losses, net of estimated income taxes that are associated with that part of our portfolio classified as available-for-sale through the shareholders' equity account titled “Other Comprehensive Income”. Management periodically reviews the individual investments that comprise our portfolio in order to determine whether a decline in fair value below our cost either is other-than temporarily or permanently impaired. Factors used in such consideration include, but are not limited to, the extent and length of time over which the market value has been less than cost, the financial condition and near-term prospects of the issuer and our ability and intent to keep the investment for a period sufficient to allow for an anticipated recovery in market value.
 
- 18 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
In reaching a conclusion that a security is either other-than-temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via the general media channels. During the six months ended June 30, 2015 and 2014, respectively, in connection with the process, we have not charged operations with investment losses.

As of June 30, 2015 and December 31, 2014, respectively, all of our securities are in good standing and not impaired as defined by FASB issued guidance.

As of June 30, 2015 and December 31, 2014, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of June 30, 2015, 78% of our debt portfolio was in diverse industries and 22% was in United States government bonds. As of June 30, 2015, approximately 86% of our equity holdings were in equities related to diverse industries and 14% were in mutual funds. As of December 31, 2014, 77% of our debt portfolio was in diverse industries and 23% is in United States government bonds. As of December 31, 2014, approximately 88% of our equity holdings were in equities related to diverse industries and 12% were in mutual funds.

As of June 30, 2015 and December 31, 2014, we have classified $6.4 million and $7.4 million, respectively, of our bond portfolio as held-to-maturity. We classify bonds as held-to-maturity to support securitization of credit requirements.

During the six months ended June 30, 2015, we did re-classify approximate fair value of $1.0 million of our bond portfolio to available-for-sale from held-to-maturity. During the six months ended June 30, 2014, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.
 
(A) Debt and Equity Securities

The following table summarizes, by type, our investments as of June 30, 2015 and December 31, 2014.

   
June 30, 2015
   
December 31, 2014
 
   
Carrying
Amount
   
Percent
of Total
   
Carrying
Amount
   
Percent
of Total
 
   
(Dollars in Thousands)
 
Debt securities, at market:
               
United States government obligations and authorities
 
$
67,829
     
18.53
%
 
$
62,323
     
18.84
%
Obligations of states and political subdivisions
   
100,284
     
27.40
%
   
91,614
     
27.70
%
Corporate
   
136,553
     
37.32
%
   
119,024
     
35.99
%
International
   
11,911
     
3.25
%
   
11,138
     
3.37
%
     
316,577
     
86.50
%
   
284,099
     
85.90
%
Debt securities, at amortized cost:
                               
United States government obligations and authorities
   
4,093
     
1.12
%
   
4,490
     
1.36
%
Corporate
   
2,219
     
0.61
%
   
2,681
     
0.81
%
International
   
125
     
0.03
%
   
246
     
0.07
%
     
6,437
     
1.76
%
   
7,417
     
2.24
%
Total debt securities
   
323,014
     
88.26
%
   
291,516
     
88.14
%
                                 
Equity securities, at market:
   
43,003
     
11.74
%
   
39,247
     
11.86
%
Total investments
 
$
366,017
     
100.00
%
 
$
330,763
     
100.00
%
 
- 19 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
The following table shows the realized gains (losses) for debt and equity securities for the three months ended June 30, 2015 and 2014.

   
Three Months Ended June 30,
 
   
2015
   
2014
 
   
Gains
(Losses)
   
Fair Value
at Sale
   
Gains
(Losses)
   
Fair Value
at Sale
 
   
(Dollars in Thousands)
 
                 
Debt securities
 
$
265
   
$
14,626
   
$
157
   
$
12,576
 
Equity securities
   
915
     
2,675
     
1,949
     
6,138
 
Total realized gains
   
1,180
     
17,301
     
2,106
     
18,714
 
                                 
Debt securities
   
(224
)
   
15,649
     
(28
)
   
3,007
 
Equity securities
   
(43
)
   
193
     
(22
)
   
183
 
Total realized losses
   
(267
)
   
15,842
     
(50
)
   
3,190
 
                                 
Net realized gains on investments
 
$
913
   
$
33,143
   
$
2,056
   
$
21,904
 

Net realized investment gains totaled $0.9 million for the three months ended June 30, 2015, compared with $2.1 million during the three months ended June 30, 2014. From time to time, our asset managers, at their discretion, make periodic sales from the portfolio and during the three months ended June 30, 2015, the majority of the realized gains were from equity sales.

The following table shows the realized gains (losses) for debt and equity securities for the six months ended June 30, 2015 and 2014.

   
Six Months Ended June 30,
 
   
2015
   
2014
 
   
Gains
(Losses)
   
Fair Value
at Sale
   
Gains
(Losses)
   
Fair Value
at Sale
 
   
(Dollars in Thousands)
 
                 
Debt securities
 
$
746
   
$
49,932
   
$
292
   
$
22,244
 
Equity securities
   
2,342
     
5,759
     
3,560
     
10,953
 
Total realized gains
   
3,088
     
55,691
     
3,852
     
33,197
 
                                 
Debt securities
   
(326
)
   
30,275
     
(98
)
   
6,706
 
Equity securities
   
(145
)
   
653
     
(366
)
   
1,521
 
Total realized losses
   
(471
)
   
30,928
     
(464
)
   
8,227
 
                                 
Net realized gains on investments
 
$
2,617
   
$
86,619
   
$
3,388
   
$
41,424
 

Net realized investment gains totaled $2.6 million for the six months ended June 30, 2015, compared with $3.4 million during the six months ended June 30, 2014. During the six months ended June 30, 2015, the investment committee decided to increase the fixed income asset allocation by directing new invested dollars and reducing our exposure to equities.
- 20 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at June 30, 2015 and December 31, 2014 is as follows.

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
   
(Dollars in Thousands)
 
June 30, 2015
               
Debt Securities  - Available-For-Sale:
               
United States government obligations and authorities
 
$
67,495
   
$
752
   
$
418
   
$
67,829
 
Obligations of states and political subdivisions
   
99,800
     
739
     
255
     
100,284
 
Corporate
   
136,049
     
1,266
     
762
     
136,553
 
International
   
11,948
     
58
     
95
     
11,911
 
   
$
315,292
   
$
2,815
   
$
1,530
   
$
316,577
 
                                 
Debt Securities  - Held-To-Maturity:
                               
United States government obligations and authorities
 
$
4,093
   
$
36
   
$
174
   
$
3,955
 
Corporate
   
2,219
     
25
     
4
     
2,240
 
International
   
125
     
1
     
1
     
125
 
   
$
6,437
   
$
62
   
$
179
   
$
6,320
 
                                 
Equity securities - common stocks
 
$
33,882
   
$
10,111
   
$
989
   
$
43,004
 
                                 
December 31, 2014
                               
Debt Securities  - Available-For-Sale:
                               
United States government obligations and authorities
 
$
61,376
   
$
1,022
   
$
75
   
$
62,323
 
Obligations of states and political subdivisions
   
90,728
     
956
     
70
     
91,614
 
Corporate
   
117,778
     
1,578
     
332
     
119,024
 
International
   
11,139
     
53
     
54
     
11,138
 
   
$
281,021
   
$
3,609
   
$
531
   
$
284,099
 
     
 
                         
Debt Securities  - Held-To-Maturity:
   
 
                         
United States government obligations and authorities
 
$
4,490
   
$
41
   
$
225
   
$
4,306
 
Corporate
   
2,681
     
31
     
5
     
2,707
 
International
   
246
     
1
     
1
     
246
 
   
$
7,417
   
$
73
   
$
231
   
$
7,259
 
                                 
Equity securities - common stocks
 
$
29,908
   
$
9,836
   
$
497
   
$
39,247
 
 
- 21 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of June 30, 2015.

   
Unrealized Losses
   
Less than 12 months
   
12 months or longer
 
   
(Dollars in Thousands)
 
Debt securities:
           
United States government obligations and authorities
 
$
418
   
$
401
   
$
17
 
Obligations of states and political subdivisions
   
255
     
255
     
-
 
Corporate
   
762
     
738
     
24
 
International
   
95
     
95
     
-
 
     
1,530
     
1,489
     
41
 
Equity securities:
                       
Common stocks
   
989
     
866
     
123
 
                         
Total debt and equity securities
 
$
2,519
   
$
2,355
   
$
164
 

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of December 31, 2014.

   
Unrealized Losses
   
Less than 12 months
   
12 months or longer
 
   
(Dollars in Thousands)
 
Debt securities:
           
United States government obligations and authorities
 
$
75
   
$
22
   
$
53
 
Obligations of states and political subdivisions
   
70
     
66
     
4
 
Corporate
   
332
     
260
     
72
 
International
   
54
     
54
     
-
 
     
531
     
402
     
129
 
Equity securities:
                       
Common stocks
   
497
     
461
     
36
 
                         
Total debt and equity securities
 
$
1,028
   
$
863
   
$
165
 
 
Below is a summary of debt securities at June 30, 2015 and December 31, 2014, by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
June 30, 2015
   
December 31, 2014
 
   
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
   
(Dollars in Thousands)
 
                 
Due in one year or less
 
$
22,398
   
$
22,435
   
$
16,777
   
$
16,797
 
Due after one through five years
   
173,755
     
174,992
     
173,236
     
174,273
 
Due after five through ten years
   
123,587
     
123,471
     
98,404
     
100,259
 
Due after ten years
   
1,992
     
1,999
     
26
     
33
 
                                 
Total
 
$
321,732
   
$
322,897
   
$
288,443
   
$
291,362
 
 
- 22 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements

United States Treasury notes with a book value of $60,940 and $2,191,594, maturing in 2016 and 2022, and a statutory deposit held in trust with a book value of $0.3 million, were on deposit with the Florida OIR as of June 30, 2015, as required by law for FNIC and MNIC, respectively, and are included with other investments held until maturity.

United States Treasury notes with a book value of $61,465 and $2,208,588, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2014, as required by law for FNIC, and are included with other investments held until maturity.

The table below sets forth investment results for the three months ended June 30, 2015 and 2014.

   
Three Months Ended June 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
         
Interest on debt securities
 
$
1,616
   
$
1,209
 
Dividends on equity securities
   
128
     
92
 
Interest on cash and cash equivalents
   
(43
)
   
1
 
                 
Total investment income
 
$
1,701
   
$
1,302
 
                 
Net realized gains
 
$
913
   
$
2,056
 
 
Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the three months ended June 30, 2015 and 2014, were approximately $36.1 million and $23.1 million, respectively.

The table below sets forth investment results for the six months ended June 30, 2015 and 2014.

   
Six Months Ended June 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
         
Interest on debt securities
 
$
2,959
   
$
2,104
 
Dividends on equity securities
   
234
     
203
 
Interest on cash and cash equivalents
   
55
     
1
 
                 
Total investment income
 
$
3,248
   
$
2,308
 
                 
Net realized gains
 
$
2,617
   
$
3,388
 

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the six months ended June 30, 2015 and 2014, were approximately $92.4 million and $44.1 million, respectively.
 
- 23 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
The table below sets forth a summary of net realized investment gains during the three months ended June 30, 2015 and 2014.

   
Three Months Ended June 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
Net realized gains
       
Debt securities
 
$
41
   
$
129
 
Equity securities
   
872
     
1,927
 
                 
Total
 
$
913
   
$
2,056
 

The table below sets forth a summary of net realized investment gains during the six months ended June 30, 2015 and 2014.

   
Six Months Ended June 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
Net realized gains
       
Debt securities
 
$
420
   
$
194
 
Equity securities
   
2,197
     
3,194
 
                 
Total
 
$
2,617
   
$
3,388
 

The table below sets forth a summary of net unrealized investment gains as of June 30, 2015 and December 31, 2014.

   
Unrealized Gains
 
   
June 30, 2015
   
December 31, 2014
 
   
(Dollars in Thousands)
 
Net unrealized gains
       
Debt securities
 
$
1,285
   
$
3,078
 
Equity securities
   
9,122
     
9,339
 
                 
Total
 
$
10,407
   
$
12,417
 

(6)
Fair Value Disclosure

In April 2009, the FASB issued accounting guidance that if an entity determines that either the volume and/or level of activity for an investment security has significantly decreased (from normal conditions for that investment security) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. This guidance was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted. This guidance was applied prospectively. The adoption of this guidance did not have an impact on our financial condition, results of operations or cash flows.

In October 2008, the FASB issued accounting guidance to clarify the application of GAAP in determining fair value of financial instruments in a market that is not active. The guidance was effective upon issuance, including prior periods for which financial statements had not been issued. Our adoption of this guidance did not have a material effect on our financial position, results of operations or cash flows.
 
- 24 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
In September 2006, FASB issued accounting guidance that defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also categorizes assets and liabilities at fair value into one of three different levels depending on the observation of the inputs employed in the measurement, as follows.

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price for an identical asset or liability in an active market provides the most reliable fair value measurement because it is directly observable to the market.

Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs are observable for an asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Securities available-for-sale:  The fair value of securities available-for-sale is determined by obtaining quoted prices on nationally recognized security exchanges.

Assets measured at fair value on a recurring basis as of June 30, 2015, presented in accordance with this guidance, are as follows.

   
As of June 30, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(Dollars in Thousands)
 
Debt securities:
               
United States government obligations and authorities
 
$
43,480
   
$
24,354
   
$
-
   
$
67,834
 
Obligations of states and political subdivisions
   
-
     
100,284
     
-
     
100,284
 
Corporate
   
-
     
147,956
     
-
     
147,956
 
International
   
-
     
503
     
-
     
503
 
     
43,480
     
273,097
     
-
     
316,577
 
                                 
Equity securities:
                               
Common stocks
   
43,004
     
-
     
-
     
43,004
 
     
43,004
     
-
     
-
     
43,004
 
                                 
Total debt and equity securities
 
$
86,484
   
$
273,097
   
$
-
   
$
359,581
 
 
- 25 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
Assets measured at fair value on a recurring basis as of December 31, 2014, presented in accordance with this guidance, are as follows.

   
As of December 31, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(Dollars in Thousands)
 
Debt securities:
               
United States government obligations and authorities
 
$
46,002
   
$
16,321
   
$
-
   
$
62,323
 
Obligations of states and political subdivisions
   
-
     
91,614
     
-
     
91,614
 
Corporate
   
-
     
119,024
     
-
     
119,024
 
International
   
-
     
11,138
     
-
     
11,138
 
     
46,002
     
238,097
     
-
     
284,099
 
                                 
Equity securities:
                               
Common stocks
   
39,247
     
-
     
-
     
39,247
 
     
39,247
     
-
     
-
     
39,247
 
                                 
Total debt and equity securities
 
$
85,249
   
$
238,097
   
$
-
   
$
323,346
 

(7)
Reinsurance Agreements

Financing risk generally involves a combination of risk retention and risk transfer techniques. “Retention”, similar to a deductible, involves financing losses by funds internally generated. “Transfer” involves the existence of a contractual arrangement designed to shift financial responsibility to another party in exchange for premium. Secondary to the primary risk-transfer agreements, we use reinsurance agreements to transfer a portion of the risks insured under our policies to other companies through the purchase of reinsurance. We utilize reinsurance to reduce exposure to catastrophic and non-catastrophic risks and to help manage the cost of capital. Reinsurance techniques are designed to lessen earnings volatility, improve shareholder return, and to support the required statutory surplus requirements. We also use reinsurance to realize an arbitrage of premium rates, benefit from the availability of our reinsurers’ expertise, and benefit from the management of a profitable portfolio of insureds by way of enhanced analytical capacities. Our primary property line that is subject to catastrophic reinsurance is Homeowners’ Multiple Peril. FNIC cedes these risks to domestic and foreign reinsurance participants around the world as well as to the FHCF.

Quota share reinsurance is a pro rata agreement among the primary insurer and one or more reinsurers where each party shares a fixed and predetermined percentage of the program’s premiums and losses. Excess of loss risk transfer agreements involve the transfer of premium in exchange for reimbursement for claims, if they occur, as a result of specific events such as severe catastrophic weather. For quota share and excess of loss reinsurance, coverage is generally afforded based on meeting predetermined risk characteristics. In contrast, facultative reinsurance is negotiated between the primary insurer and the reinsurer(s) on a case-by-case basis with no obligation on either part to cede or assume share of the risk.

Generally, there are three separate kinds of reinsurance structures – quota share, excess of loss, and facultative, each considered either proportional or non-proportional. Our reinsurance structures are maintained to protect our insurance subsidiary against the severity of losses on individual claims or unusually serious occurrences in which the frequency and or the severity of claims produce an aggregate extraordinary loss from catastrophic events. In addition to reinsurance agreements, we also from time to time enter into retro-cessionary reinsurance agreements; each designed to shift financial responsibility based on predefined conditions.
 
- 26 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
Although reinsurance does not discharge us from our primary obligation to pay for losses insured under the policies we issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiary for the reinsured portion of the risk. A credit risk exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectability of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. A reinsurer's insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on our results of operations and financial condition. Our reinsurance structure has significant risks, including the fact that the FHCF may not be able to raise sufficient money to pay its claims or impair its ability to pay its claims in a timely manner. This could result in significant financial, legal and operational challenges to all property and casualty companies associated with FHCF, including our company.

The availability and costs associated with the acquisition of reinsurance will vary year to year. These fluctuations, which can be significant, are not subject to our control and may limit our ability to purchase adequate coverage. For example, FHCF continues to restrict its reinsurance capacity and is expected to continue constricting capacity for future seasons. This gradual restriction is requiring us to replace that capacity with private market reinsurance. Our reinsurance program is subject to approval by the Florida OIR and review by Demotech, Inc. (“Demotech”). The recovery of increased reinsurance costs through rate action is not immediate and cannot be presumed and is subject to Florida OIR approval.

For the 2015–2016 hurricane season, the excess of loss and FHCF treaties insured the property lines for approximately $1.82 billion of aggregate catastrophic losses and LAE with a maximum single event coverage totaling approximately $1.26 billion, with the Company retaining the first $12.9 million in Florida and $5.0 million in Louisiana, Alabama and South Carolina for losses and LAE from each event. The reinstatement treaty will provide for 50% of the covered losses between $15.0 million and $100 million. The Company retains 10% or up to $2.5 million of a covered loss in excess of $21.5 million resulting in the Company’s maximum retention of $15.4 million for losses incurred both in and out of Florida. Florida risks represent 95.5%, or $1.74 billion of the $1.82 billion of total aggregate catastrophic losses and LAE.

The reinsurance program includes coverage purchased from the private market, which is prepaid and affords reinstatement premium protection that provides coverage beyond the first event, along with any remaining coverage from the FHCF. The FHCF only affords coverage for losses sustained in Florida. Coverage afforded by the FHCF totals approximately $581.2 million, or 33.4% of Florida’s $1.74 billion of aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire season, subject to maximum payouts, without regard to any particular insurable event.

The estimated cost to the Company for the excess of loss reinsurance products for the 2015–2016 hurricane season, inclusive of approximately $44.83 million payable to the FHCF and the prepaid automatic premium reinstatement protection, is approximately $149.37 million.

Included in this year’s program are two quota share treaties, similar in terms; one for 30% and one for 10%. The 10% quota share treaty becomes effective July 1, 2015. This is the second year of a two-year term for the 30% quota share treaty and the first year of a two-year term for the new 10% quota share treaty. For the 2015 – 2016 Catastrophic wind season only, both treaties combined provide a 40% quota share reinsurance treaty on the first $100 million of covered losses for the Company’s in-force new and renewal homeowners’ insurance program in the State of Florida.

The original two-year quota share reinsurance treaty provides 30% of $200 million of aggregate catastrophe coverage per year with maximum single event coverage of 30% of $100 million per year. The new two-year quota share reinsurance treaty provides 10% of $200 million of aggregate catastrophe coverage per year with maximum single event coverage of 10% of $100 million per year. The projected cost of the quota share treaties are included in the $149.4 million amount referenced above.  The quota share treaties contain commutation provisions for the Company to share profits based on loss experience during the term of the respective treaties.

The 30% and 10% quota share reinsurance treaty described above contains profit sharing provisions that will adjust over its term depending on the Company’s loss experience from catastrophic and non-catastrophic events during the term. The frequency and severity of catastrophic events, coupled with non-catastrophic loss experience, will determine the ultimate profit share, if any. In accordance with GAAP, the Company will initially recognize an asset and liability and the resultant net income or loss. For example, the deferred quota-share profit sharing asset totaled $7.0 million and $10.5 million as of June 30, 2015 and December 31, 2014, respectively. The deferred quota-share profit sharing asset was originally recorded at $14.0 million at the program’s July 1, 2014 inception and will continue to amortize over the life of the program. Quarterly, the Company will adjust the value of the asset and liability based on information available at the time of valuation. Upward and downward adjustments to the asset’s value will affect the Company’s results of operations by increasing or decreasing net income in the period of the adjustment.
 
- 27 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
The 2015-2016 private reinsurance companies and their respective A.M. Best Company (“A.M. Best”) and S&P ratings are listed in the table as follows.
 
Reinsurer
A.M. Best Rating
S&P Rating
   
 
UNITED STATES
 
 
American Agricultural Insurance Company
 
A-
   
NR
American Standard Insurance Company of Wisconsin
 
A
   
NR
Everest Reinsurance Company
 
A+
   
A+
Odyssey Reinsurance Company
 
A
   
A-
Partner Reinsurance Company of the US
 
A+
   
A+
QBE Reinsurance Corporation
 
A
   
A+
RLI Insurance Company
 
A+
   
A+
Transatlantic Reinsurance Company
 
A
   
A+
         
 
BERMUDA
       
 
ACE Tempest Reinsurance Ltd.
 
A++
   
AA
Allianz Risk Transfer AG, Bermuda Branch (obo Nephila)
 
A+
   
AA-
Allied World Assurance Company, Limited
 
A
   
A
Arch Reinsurance Limited
 
A+
   
A+
Argo Re Ltd
 
A
   
NR
Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)
 
A-
   
A+
Ascot Underwriting (Bermuda) Limited/AIG per AIRCO agreement
 
A
   
NR
Aspen Bermuda Limited
 
A
   
A
AXIS Specialty Limited
 
A+
   
A+
BGS Services (Bermuda) Limited/Lloyds Syndicate 2987
 
A
   
A+
Collateralised Re Ltd - LGT Capital
 
NR
*
**
NR
DaVinci Reinsurance Ltd.
 
A
   
AA-
Endurance Specialty Insurance Ltd.
 
A
   
A
Hamilton Re, Ltd.
 
A-
   
NR
Hiscox Insurance Company (Bermuda) Limited
 
A
   
NR
Horseshoe Re (obo Coriolis)
 
NR
*
**
NR
Markel Bermuda Limited
 
A
   
A
Partner Reinsurance Company Limited
 
A+
   
A+
Renaissance Reinsurance, Ltd.
 
A+
   
AA-
Securis Re II Ltd. Bermuda
 
NR
*
**
NR
Securis Re IV Ltd. Bermuda
 
NR
*
**
NR
Securis Re V Ltd. Bermuda
 
NR
*
**
NR
Tokio Millennium Re AG, Bermuda Branch
 
A++
   
AA-
XL RE Limited
 
A
   
A+
         
 
UNITED KINGDOM
       
 
A.F. Beazley Syndicate No. 623 (AFB)
 
A
   
A+
A.F. Beazley Syndicate No. 2623 (AFB)
 
A
   
A+
Amlin Syndicate No. 2001 (AML)
 
A
   
A+
Antares Syndicate No. 1274 (AUL)
 
A
   
A+
Ariel Syndicate No. 1910 (ARE)
 
A
   
A+
ARK Syndicate No. 4020 (ARK)
 
A
   
A+
Ascot Syndicate No. 1414 (ASC)
 
A
   
A+
Barbican Syndication No. 1955 (BAR)
 
A
   
A+
Canopius Syndicate No. 958 (CNP)
 
A
   
A+
Canopius Syndicate No. 4444 (CNP)
 
A
   
A+
Cathederal Syndicate No. 2010 (MMX)
 
A
   
A+
China Re Syndicate No. 2088 (CNR)
 
A
   
A+
Dale Underwriting Syndicate No. 1729 (DUW)
 
A
   
A+
Faraday Syndicate No. 435 (FDY)
 
A
   
A+
Hiscox Syndicate No. 0033 (HIS)
 
A
   
A+
Liberty Syndicates Services Limited, Paris for and on behalf of Lloyd's Syndicate No. 4472 (LIB)
 
A
   
A+
MAP Underwriting Syndicate No. 2791 (MAP)
 
A
   
A+
MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)
 
A
   
A+
Novae Syndicate No. 2007 (NVA)
 
A
   
A+
Renaissance Re Syndicate No. 1458 (RNR)
 
A
   
A+
S.J.O, Catlin & Others No. 2003 (SJC)
 
A
   
A+
Vibe Syndicate No. 5678 (VSM)
 
A
   
A+
         
 
EUROPE
       
 
Amlin AG, Switzerland, Bermuda Branch
 
A
   
A
Hannover Rueck SE (obo Pillar Capital Management)
 
NR
*
**
NR
Lansforsakringar Sak Forsakringsaktiebolag (publ)
 
NR
   
A
SCOR Global P&C SE, Paris, Zurich Branch
 
A
   
A
         
 
ASIA
       
 
China Reinsurance (Group) Corporation
 
A
   
NR
Fubon Insurance Co., Ltd.
 
A
   
A-
General Insurance Corporation of India, trading as GIC Re
 
A-
   
NR
Peak Re
 
A-
   
NR
Pioneer CAT (obo Peak Re)
 
A-
   
NR
Pioneer CAT (obo Taiping)
 
A-
   
NR
Qatar Reinsurance Company LLC
 
A
   
A
         
 
* Reinstatement Premium Protection Program Participants
       
 
         
 
** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market value.
 
- 28 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
For the 2014–2015 hurricane season, the excess of loss and FHCF treaties insured the property lines for approximately $1.49 billion of aggregate catastrophic losses and LAE with a maximum single event coverage totaling approximately $1.01 billion, with the Company retaining the first $11.20 million in Florida and $3.0 million in Louisiana for losses and LAE from each event. Florida risks represent 98.5%, or $1.46 billion of the $1.49 billion of total aggregate catastrophic losses and LAE. The reinsurance program includes coverage purchased from the private market, which affords optional reinstatement premium protection that provides coverage beyond the first event, along with any remaining coverage from the FHCF. The FHCF only affords coverage for losses sustained in Florida. Coverage afforded by the FHCF totals approximately $546.3 million, or 37.4% of Florida’s $1.46 billion of aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire season, subject to maximum payouts, without regard to any particular insurable event.

The actual cost to the Company for the excess of loss reinsurance products for the 2014–2015 hurricane season, inclusive of approximately $40.20 million payable to the FHCF and the prepaid automatic premium reinstatement protection, is approximately $117.0 million.

Included in the 2014–2015 hurricane season program was a 30% quota share reinsurance treaty for the Company’s in-force new and renewal homeowners’ insurance program in the State of Florida. This two-year quota share reinsurance treaty continues to provide 30% of $200 million of aggregate catastrophe coverage per year with maximum single event coverage of 30% of $100 million per year. The cost of this quota share was $6.7 million, net of ceding commissions, and it was included in the $117.0 million amount referenced above. The quota share treaty contains commutation provisions for the Company to share profits based on loss experience during the term of the treaty.

The 30% quota share reinsurance treaty described above contains profit sharing provisions that will adjust over its two-year term depending on the Company’s loss experience from catastrophic and non-catastrophic events during the term. The frequency and severity of catastrophic events, coupled with non-catastrophic loss experience, will determine the ultimate profit share, if any. In accordance with GAAP, the Company initially recognized an asset and liability and the resultant net income or loss. The deferred quota-share profit sharing was originally recorded at $14.0 million at the program’s July 1, 2014 inception and will continue to amortize over the life of the program. Subsequently, the Company will adjust the value of the asset and liability based on information available at the time of valuation. Upward and downward adjustments to the asset’s value will affect the Company’s results of operations by increasing or decreasing net income in the period of the adjustment.
 
- 29 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
 
The 2014-2015 private reinsurance companies and their respective A.M. Best and S&P ratings are listed in the table as follows.

Reinsurer
A.M. Best Rating
 
 
S&P Rating
 
     
 
UNITED STATES
     
 
American Agricultural Insurance Company
 
A-
     
NR
American Standard Insurance Company of Wisconsin
 
A
     
NR
AIG (National Union Fire Insurance Company of Pittsburgh, PA)
 
A
     
A+
Everest Reinsurance Company
 
A+
     
A+
Odyssey Reinsurance Company
 
A
     
A-
QBE Reinsurance Corporation
 
A
     
A+
RLI Insurance Company
 
A+
     
A+
Transatlantic Reinsurance Company
 
A
     
A+
           
 
BERMUDA
         
 
ACE Tempest Reinsurance Limited
 
A++
     
AA-
Allied World Assurance Company, Limited
 
A
     
A
Arch Reinsurance Limited
 
A+
     
A+
Argo Reinsurance Limited
 
A
     
NR
Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)
 
A-
     
A+
Aspen Bermuda Limited
 
A
     
A
AXIS Specialty Limited
 
A+
     
A+
BGS Services (Bermuda) Limited/Lloyds Syndicate 2987
 
A
     
A+
DaVinci Reinsurance Ltd
 
A
     
AA-
Endurance Specialty Insurance Limited
 
A
     
A
Hamilton Re, Limited
 
A-
     
NR
Hiscox Insurance Company (Bermuda) Limited
 
A
     
NR
Partner Reinsurance Company Limited
 
A+
     
A+
Platinum Underwriters Bermuda Limited
 
A
     
A-
Renaissance Reinsurance, Limited
 
A+
     
AA-
Securis Re III Limited Bermuda
 
NR
*
 
**
NR
Securis Re IV Limited Bermuda
 
NR
*
 
**
NR
Tokio Millennium Re AG, Bermuda Branch
 
A++
     
AA-
XL RE Limited
 
A
     
A+
           
 
UNITED KINGDOM
         
 
A.F. Beazley Syndicate No. 623 (AFB)
 
A
     
A+
A.F. Beazley Syndicate No. 2623 (AFB)
 
A
     
A+
Amlin Syndicate No. 2001 (AML)
 
A
     
A+
Antares Syndicate No. 1274 (AUL)
 
A
     
A+
Ariel Syndicate No. 1910 (ARE)
 
A
     
A+
ARK Syndicate No. 4020 (ARK)
 
A
     
A+
Ascot Syndicate No. 1414 (ASC)
 
A
     
A+
Barbican Syndication No. 1955 (BAR)
 
A
     
A+
Canopius Syndicate No. 958 (CNP)
 
A
     
A+
Canopius Syndicate No. 4444 (CNP)
 
A
     
A+
Cathederal Syndicate No. 2010 (MMX)
 
A
     
A+
Chaucer Syndicate No. 1084 (CSL)
 
A
     
A+
Dale Underwriting Syndicate No. 1729 (DUW)
 
A
     
A+
Faraday Syndicate No. 435 (FDY)
 
A
     
A+
Hiscox Syndicate No. 0033 (HIS)
 
A
     
A+
Kiln Syndicate No. 510 (KLN)
 
A
     
A+
Liberty Syndicates Services Limited, Paris for and on behalf of Lloyd's Syndicate No. 4472 (LIB)
 
A
     
A+
MAP Underwriting Syndicate No. 2791 (MAP)
 
A