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 September 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 000-25001
 
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 –14,230,890 outstanding as of November 3, 2015
 


FEDERATED NATIONAL HOLDING COMPANY

INDEX

PART I: FINANCIAL INFORMATION
PAGE
     
ITEM 1
3
     
ITEM 2
35
     
ITEM 3
58
     
ITEM 4
60
     
PART II: OTHER INFORMATION
 
     
ITEM 1
61
     
ITEM 1A
61
     
ITEM 2
61
     
ITEM 3
61
     
ITEM 4
61
     
ITEM 5
61
     
ITEM 6
62
     
63
 
2

PART I: FINANCIAL INFORMATION
Item 1
Financial Statements
 
FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
September 30, 2015
   
December 31, 2014
 
ASSETS
 
(Dollars in Thousands)
 
Investments
       
Debt maturities, available for sale, at fair value
 
$
341,915
   
$
284,099
 
Debt maturities, held to maturity, at amortized cost
   
6,387
     
7,417
 
Equity securities, available for sale, at fair value
   
38,086
     
39,247
 
                 
Total investments
   
386,388
     
330,763
 
                 
Cash and short term investments
   
76,161
     
40,157
 
Prepaid reinsurance premiums
   
95,470
     
54,502
 
Premiums receivable, net of allowance for credit losses of $312 and $148, respectively
   
34,928
     
27,275
 
Reinsurance recoverable, net
   
8,349
     
12,534
 
Deferred policy acquisition costs
   
13,522
     
13,610
 
Income taxes receivable
   
5,763
     
1,810
 
Property, plant and equipment, net
   
2,753
     
1,749
 
Other assets
   
10,973
     
7,231
 
Contingent quota-share profit sharing
   
-
     
14,000
 
                 
Total assets
 
$
634,307
   
$
503,631
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Unpaid losses and LAE
 
$
91,673
   
$
78,330
 
Unearned premiums
   
250,397
     
192,424
 
Debt
   
5,000
     
-
 
Premiums deposits and customer credit balances
   
11,265
     
7,381
 
Deferred income taxes, net
   
4,815
     
1,341
 
Claims payments outstanding
   
13,272
     
10,152
 
Accounts payable and accrued expenses
   
16,403
     
10,924
 
Deferred quota-share profit sharing
   
-
     
10,500
 
                 
Total liabilities
   
392,825
     
311,052
 
                 
Shareholders' equity:
               
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding 13,773,130 and 13,632,414, respectively
   
138
     
136
 
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding
   
-
     
-
 
Additional paid-in capital
   
131,203
     
127,302
 
Accumulated other comprehensive income
               
Unrealized net gains on investments, available for sale
   
4,838
     
7,718
 
Total accumulated other comprehensive income
   
4,838
     
7,718
 
Retained earnings
   
87,188
     
57,423
 
Total Federated National Holding Company equity
   
223,367
     
192,579
 
Non-controlling interest
   
18,115
     
-
 
Total shareholders' equity
   
241,482
     
192,579
 
Total liabilities and shareholders' equity
 
$
634,307
   
$
503,631
 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3

FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(Dollars in Thousands)
   
(Dollars in Thousands)
 
Revenue:
               
Gross premiums written
 
$
129,840
   
$
92,032
   
$
368,561
   
$
280,487
 
Gross premiums ceded
   
(119,985
)
   
(129,298
)
   
(231,046
)
   
(179,137
)
                                 
Net premiums written
   
9,855
     
(37,266
)
   
137,515
     
101,350
 
                                 
Increase in prepaid reinsurance premiums
   
70,018
     
80,013
     
76,756
     
86,900
 
Increase in unearned premiums
   
(17,587
)
   
(8,229
)
   
(57,973
)
   
(58,295
)
                                 
Net change in prepaid reinsurance premiums and unearned premiums
   
52,431
     
71,784
     
18,783
     
28,605
 
                                 
Net premiums earned
   
62,286
     
34,518
     
156,298
     
129,955
 
Commission income
   
1,863
     
1,173
     
4,296
     
3,350
 
Finance revenue
   
425
     
392
     
1,322
     
1,051
 
Direct written policy fees
   
2,782
     
2,238
     
7,887
     
6,417
 
Net investment income
   
1,907
     
1,450
     
5,154
     
3,758
 
Net realized investment gains
   
1,126
     
659
     
3,743
     
4,047
 
Other income
   
2,210
     
970
     
4,548
     
1,540
 
Quota-share profit sharing, net
   
-
     
1,750
     
3,077
     
1,750
 
                                 
Total revenue
   
72,599
     
43,150
     
186,325
     
151,868
 
                                 
Expenses:
                               
Losses and LAE
   
28,412
     
15,126
     
75,510
     
60,476
 
Operating and underwriting expenses
   
11,769
     
6,732
     
24,887
     
14,600
 
Salaries and wages
   
7,940
     
4,022
     
18,091
     
10,520
 
Policy acquisition costs
   
6,788
     
5,815
     
16,938
     
23,095
 
Interest expense
   
65
     
-
     
152
     
-
 
                                 
Total expenses
   
54,974
     
31,695
     
135,578
     
108,691
 
                                 
Income before provision for income tax expense
   
17,625
     
11,455
     
50,747
     
43,177
 
Provision for income tax expense
   
7,054
     
4,228
     
19,519
     
15,973
 
Income before non-controlling interest
   
10,571
     
7,227
     
31,228
     
27,204
 
                                 
Non-controlling interest
   
(22
)
   
-
     
(383
)
   
-
 
                                 
Net income attributable to Federated National Holding Company common stockholders
 
$
10,593
   
$
7,227
   
$
31,611
   
$
27,204
 
                                 
                                 
Net income per share - basic
 
$
0.77
   
$
0.57
   
$
2.31
   
$
2.35
 
                                 
Net income per share - diluted
 
$
0.76
   
$
0.56
   
$
2.26
   
$
2.28
 
                                 
Weighted average number of common shares outstanding - basic
   
13,749,394
     
12,624,746
     
13,709,605
     
11,562,709
 
                                 
Weighted average number of common shares outstanding - diluted
   
13,976,709
     
12,956,407
     
13,978,381
     
11,934,057
 
                                 
Dividends paid per share
 
$
0.05
   
$
0.03
   
$
0.13
   
$
0.09
 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4

FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(Dollars in Thousands)
   
(Dollars in Thousands)
 
         
Income before non-controlling interest
 
$
10,571
   
$
7,227
   
$
31,228
   
$
27,204
 
                                 
Change in net unrealized (losses) gains on investments available for sale
   
(2,671
)
   
(1,883
)
   
(4,681
)
   
359
 
                                 
Comprehensive income before tax
   
7,900
     
5,344
     
26,547
     
27,563
 
                                 
Income tax benefit (expense) related to items of other comprehensive income
   
1,083
     
615
     
1,734
     
(229
)
                                 
Comprehensive income
   
8,983
     
5,959
     
28,281
     
27,334
 
                                 
Less: Comprehensive income attributable to NCI
   
(17
)    
-
     
(494
)    
-
 
                                 
Comprehensive income attributable to FNHC
 
$
8,966
   
$
5,959
   
$
27,787
   
$
27,334
 
 
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5

FEDERATED NATIONAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Nine Months Ended September 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
Cash flow from operating activities:
       
Income before non-controlling interest
 
$
31,228
   
$
27,204
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization of investment premium or discount, net
   
3,795
     
2,909
 
Depreciation and amortization of property plant and equipment, net
   
495
     
334
 
Net realized investment gains
   
(3,743
)
   
(4,047
)
Non-cash compensation
   
2,903
     
72
 
Changes in operating assets and liabilities:
               
Premiums receivable, net
   
(7,653
)
   
(5,698
)
Prepaid reinsurance premiums
   
(40,967
)
   
(31,610
)
Reinsurance recoverable, net
   
4,186
     
(6,494
)
Income taxes recoverable
   
(3,953
)
   
(2,130
)
Deferred income tax expense, net of other comprehensive income
   
5,277
     
2,741
 
Policy acquisition costs, net of amortization
   
88
     
5,728
 
Other assets
   
(3,742
)
   
(1,941
)
Contingent quota-share profit sharing
   
3,500
     
(1,750
)
Unpaid losses and LAE
   
13,343
     
12,093
 
Unearned premiums
   
57,973
     
58,295
 
Cash received from other entitie’s debt instrument
   
5,000
     
-
 
Premium deposits and customer credit balances
   
3,884
     
3,261
 
Income taxes payable
   
-
     
(2,379
)
Claims payments outstanding
   
3,120
     
979
 
Accounts payable and accrued expenses
   
5,480
     
1,158
 
Net cash provided by operating activities
   
80,214
     
58,725
 
Cash flow used by investing activities:
               
Proceeds from sale of investment securities
   
134,918
     
65,869
 
Purchases of investment securities available for sale
   
(195,278
)
   
(162,864
)
Purchases of property and equipment
   
(1,500
)
   
(1,074
)
Net cash used by investing activities
   
(61,860
)
   
(98,069
)
Cash flow provided by financing activities:
               
Exercised stock options
 
$
130
   
$
1,433
 
Dividends paid
   
(1,847
)
   
(1,038
)
Non-controlling interest investment in affiliate
   
18,498
     
-
 
Issuance of common stock
   
-
     
43,116
 
Tax benefit related to non-cash compensation
   
869
     
313
 
Net cash provided by financing activities
   
17,650
     
43,824
 
Net increase in cash and short term investments
   
36,004
     
4,480
 
Cash and short term investments at beginning of period
   
40,157
     
41,446
 
Cash and short term investments at end of period
 
$
76,161
   
$
45,926
 
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
6

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

   
Nine Months Ended September 30,
 
(continued)
 
2015
   
2014
 
   
(Dollars in Thousands)
 
Supplemental disclosure of cash flow information:
       
Cash paid during the period for:
       
Income taxes
 
$
15,662
   
$
18,185
 
Non-cash investing and finance activities:
               
Accrued dividends payable
 
$
712
   
$
350
 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7

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

  (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.

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 3,900 independent agents, of which approximately 2,500 actively sell and service our products. FNIC operates in several states authorized to write various lines of business.

The table below reflects the states and lines of business that FNIC operates in as of September 30, 2015.

 
Fire
 
Allied
Lines
 
Private
Passenger
Automobile
 
Homeowners'
Multiperil
 
Commercial
General
Liability
                   
Florida (Domestic)
a
 
a
 
a
 
a
 
a
Alabama
d
 
d
 
d
 
a
 
c
Georgia
-
 
 -
 
a
 
 -
 
c
Louisiana
-
 
 -
 
 -
 
a
 
c
South Carolina
-
 
 -
 
 -
 
b
 
 -
Texas
-
 
 -
 
a
 
b
 
c
             
  a
Ongoing operations for more than one year  
   b
Ongoing operations for less than one year
 
c
Working with state to discontinue line of authority
  d
Licensed, but no current operations
 
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 wind-down its commercial general liability operations in Alabama, Georgia, Louisiana and Texas, resulting in no new premium for this particular line of business. FNIC continues to underwrite commercial general liability operations in Florida.

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.
 
- 8 -

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

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 (“Monarch Delaware”), the indirect parent company of MNIC, 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 MNIC’s total written annual premium, excluding acquisition expenses payable to agents, for FNU’s managing general agent services; 3.6% of MNIC’s total earned annual premium for FNU’s claims administration services; and a per-policy administrative fee of $25 for each policy underwritten for MNIC.  The Company will also receive an annual expense reimbursement for accounting and related services.

On October 20, 2015, the Florida OIR approved the filing made by FNIC to comply with the cease and desist order dated May 19, 2015 to enable the Florida OIR to review and approve FNIC’s analytic models.  On October 21, 2015, the Florida OIR rescinded the cease and desist order based upon its approval of the Company’s filing.
 
Pending approval of its underwriting analytics, FNIC used its current filed and approved rule-based underwriting to manage all new and existing business since early June 2015.  Prior to this change, the average weekly new premium written was approximately $3.3 million.  Since discontinuing the use of the underwriting analytics, the average weekly new premium written during the next seven weeks increased to $4.9 million, a 48% increase. Since that peak, the average written premium returned to an anticipated $3.3 million level.  The Company does not believe that the additional written premium will have a material impact on the Company’s results of operations.
 
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.

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 in connection with the merger of FNIC into American Vehicle Insurance Company (“American Vehicle”). As of the date of this Report, the only operational restriction that remains in effect is a requirement to obtain Florida 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.
 
During the three months ended September 30, 2015, 91.6%, 2.6%, 3.8% and 2.0% of the premiums we underwrote were for homeowners’, commercial general liability, automobile insurance, and federal flood, respectively. During the three months ended September 30, 2015, $28.6 million or 24.1% of the $118.9 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 $9.6 million increased homeowners’ premiums we underwrote under ISA represents 27.0% of the $35.6 million increased total homeowners’ premiums we underwrote during the three months ended September 30, 2015. During the three months ended September 30, 2014, $19.0 million or 22.8% of the $83.3 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 September 30, 2014, 90.5%, 3.4%, 2.5% and 3.6% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively.
 
- 9 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
During the nine months ended September 30, 2015, 92.3%, 3.0%, 2.9% and 1.8% of the premiums we underwrote were for homeowners’, commercial general liability, automobile insurance, and federal flood, respectively. During the nine months ended September 30, 2015, $75.7 million or 22.2% of the $340.2 million of the homeowners’ premiums we underwrote were produced under ISA. The $26.3 million increased homeowners’ premiums we underwrote under ISA represents 31.2% of the $84.3 million increased total homeowners’ premiums we underwrote during the nine months ended September 30, 2015. During the nine months ended September 30, 2014, $49.4 million or 19.3% of the $255.9 million of the homeowners’ premiums we underwrote were produced under ISA. This network of agents began writing for FNIC in March 2013. During the nine months ended September 30, 2014, 91.2%, 3.4%, 2.2% and 3.2% 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, 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  Florida, 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 coverage through FNU’s existing network of agents. Operations for Lloyds of London commenced in the third quarter of this year.

 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 September 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”). 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.
 
- 10 -

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

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 one hundred different carrier relationships.

(2) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the Company and its majority-owned subsidiaries and its consolidated variable interest entity (“VIE”) have been prepared in accordance with U.S. 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 September 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.
 
All significant intercompany balances and transactions have been eliminated.

(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.
 
- 11 -

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

We believe that there were no significant changes in those critical accounting policies and estimates during the nine months ended September 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.
 
We are required to review the contractual terms of all our reinsurance purchases to ensure compliance with U.S. GAAP, which 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.

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.
 
- 12 -

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

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 September 30, 2015 and December 31, 2014. Changes in interest rates subsequent to September 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 September 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. Because the new guidance does not affect the existing recognition or measurement guidance, the adoption is not expected to have any effect on our financial position, results of operations or cash flows.

In February 2015, the FASB issued 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.
 
- 13 -

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

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 nine months ended September 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.

(E) Adjustments

In conjunction with our third quarter 2015 analysis of actual experience to date under the July 1, 2014 quota share reinsurance contract, we re-evaluated the accounting treatment for quota share reinsurance contracts with retrospective rating provisions.  As a result of this re-evaluation, we have concluded reinsurance contracts which have retrospective rating provisions should be accounted for under Accounting Standards Codification 944, Financial Services — Insurance (“ASC 944”), where amounts due to (from) the assuming companies are accrued based on estimated contract experience to date as though the contracts were terminated.  The adjustment to the accounting treatment related to reinsurance contracts with retrospective rated provisions resulted in the following changes:

(a) We eliminated recording of future estimated quota share profits in one line item, “Quota Share Profit Sharing,” in the financial statements.

(b) Amounts due to (from) the assuming companies have been accrued based on actual contract experience to date as though the contracts were terminated.  These accruals impacted the following income statement line items: gross ceded premiums, loss and loss adjustment expenses, and deferred policy acquisition costs.

The adjustments to our accounting for the July 1, 2014 quota share reinsurance treaty, inclusive of other adjustments, are not material in any prior quarter or annual period based on an analysis of quantitative and qualitative factors in accordance with SEC Guidance.

As a result, we recorded these adjustments during the third quarter of 2015.  These adjustments increased net income by $2.2 million for the three and nine month periods ended on September 30, 2015.

Additionally, the quota share reinsurance accounting adjustments impacted the following income statement line items for the three and nine month periods ended on September 30, 2015:
 
· Gross ceded premiums decreased by $10.9 million,
 
- 14 -

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

· Loss and loss adjustment expenses increased by $4.5 million, and

· Deferred acquisition costs increased by $1.5 million.
 
Finally, the quota share reinsurance accounting adjustments impacted the following balance sheet line items for the three and nine months periods ended on September 30, 2015:
 
· Prepaid reinsurance premiums increased by $10.9 million,

· Reinsurance recoverable, net decreased by $4.5 million, and

· Deferred policy acquisition costs decreased by $1.5 million.
 
· The $14 million balance previously reported under Contingent quota-share profit sharing has been reclassed to the prepaid reinsurance premiums line item

· The $7 million balance previously reported under Deferred quota-share profit sharing has been reclassed to the reinsurance recoverable, net line item
 
(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. 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.
 
- 15 -

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

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.

(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 2014 federal and state income tax returns were timely filed by the extended filing deadline of September 15, 2015. 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 $4.8 million as of September 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 September 30, 2015 the Company has recorded a net deferred tax liability of $4.8 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.
 
- 16 -

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

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.

(5)
Variable Interest Entity

Our consolidated financial statements include Monarch Delaware because we have determined Monarch Delaware is a VIE, we have a variable interest in Monarch Delaware and we are the primary beneficiary. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. The primary beneficiary of a VIE is defined as the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. On an ongoing basis, we assess whether we are the primary beneficiary of VIEs in which we have a relationship.

The carrying amount of our VIE consolidated assets and liabilities are as follows.

   
September 30, 2015
   
December 31, 2014
 
ASSETS
 
(Dollars in Thousands)
 
Investments
       
Debt maturities, held to maturity, at amortized cost
 
$
21,877
   
$
-
 
Equity securities, available for sale, at fair value
   
1,350
     
-
 
                 
Total investments
   
23,227
     
-
 
                 
Cash and short term investments
   
13,492
     
-
 
Premiums receivable, net
   
326
     
-
 
Deferred policy acquisition costs
   
168
     
-
 
Deferred income taxes, net
   
665
     
-
 
Other assets
   
178
     
-
 
                 
Total assets
 
$
38,056
   
$
-
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Unpaid losses and LAE
 
$
112
   
$
-
 
Unearned premiums
   
1,072
     
-
 
Income taxes payable
   
110
     
-
 
Accounts payable and accrued expenses
   
249
     
-
 
Debt
   
5,000
     
-
 
                 
Total liabilities
 
$
6,543
   
$
-
 
                 
Shareholders' equity:
               
Common stock, $0.01 par value. Issued and outstanding 100 shares
   
-
     
-
 
Additional paid-in capital
   
32,413
     
-
 
Accumulated other comprehensive income
               
Unrealized net gains on investments, available for sale
   
(234
)
   
-
 
Total accumulated other comprehensive income
   
(234
)
   
-
 
Retained earnings
   
(666
)
   
-
 
Total shareholders' equity
   
31,513
     
-
 
Total liabilities and shareholders' equity
 
$
38,056
   
$
-
 
 
- 17 -

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

(6) Investments

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”.

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

   
September 30, 2015
   
December 31, 2014
 
   
Carrying
Amount
   
Percent
of Total
   
Carrying
Amount
   
Percent
of Total
 
   
(Dollars in Thousands)
 
Debt securities, at fair value:
               
United States government obligations and authorities
 
$
65,994
     
17.08
%
 
$
62,323
     
18.84
%
Obligations of states and political subdivisions
   
108,597
     
28.11
%
   
91,614
     
27.70
%
Corporate
   
155,324
     
40.20
%
   
119,024
     
35.99
%
International
   
12,000
     
3.11
%
   
11,138
     
3.37
%
     
341,915
     
88.50
%
   
284,099
     
85.90
%
Debt securities, at amortized cost:
                               
United States government obligations and authorities
   
4,221
     
1.09
%
   
4,490
     
1.36
%
Corporate
   
2,101
     
0.54
%
   
2,681
     
0.81
%
International
   
65
     
0.02
%
   
246
     
0.07
%
     
6,387
     
1.65
%
   
7,417
     
2.24
%
Total debt securities
   
348,302
     
90.15
%
   
291,516
     
88.14
%
                                 
Equity securities, at fair value:
   
38,086
     
9.85
%
   
39,247
     
11.86
%
Total investments
 
$
386,388
     
100.00
%
 
$
330,763
     
100.00
%
 
- 18 -

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

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

   
Three Months Ended September 30,
 
   
2015
   
2014
 
   
Gains
(Losses)
   
Fair Value
at Sale
   
Gains
(Losses)
   
Fair Value
at Sale
 
   
(Dollars in Thousands)
 
                 
Debt securities
 
$
226
   
$
21,843
   
$
241
   
$
16,413
 
Equity securities
   
1,847
     
4,226
     
453
     
1,642
 
Total realized gains
   
2,073
     
26,069
     
694
     
18,055
 
                                 
Debt securities
   
(178
)
   
9,744
     
(20
)
   
1,627
 
Equity securities
   
(769
)
   
3,306
     
(15
)
   
118
 
Total realized losses
   
(947
)
   
13,050
     
(35
)
   
1,745
 
                                 
Net realized gains on investments
 
$
1,126
   
$
39,119
   
$
659
   
$
19,800
 

Net realized investment gains totaled $1.1 million for the three months ended September 30, 2015, compared with $0.7 million during the three months ended September 30, 2014. From time to time, our asset managers, at their discretion, make periodic sales from the portfolio and during the three months ended September 30, 2015, the majority of the realized gains were from equity sales.   

Total investments increased $55.6 million, or 16.8%, to $386.4 million as of September 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 September 30, 2015 and December 31, 2014.

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

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;

· intent to sale the security.

· Whether it is more likely than not that there would be a requirement to sell the security before its anticipated recovery.
 
- 19 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
During the nine months ended September 30, 2015, we have charged to operations, realized investment losses of less than $0.1 million. The charges relate to common stock held in diverse industries. During the nine months ended September 30, 2014, in connection with the process, we have not charged operations with investment losses.

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

As of September 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 September 30, 2015, 80% of our debt portfolio was in diverse industries and 20% was in United States government bonds. As of September 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 September 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.
 
The following table shows the realized gains (losses) for debt and equity securities for the nine months ended September 30, 2015 and 2014.

   
Nine Months Ended September 30,
 
   
2015
   
2014
 
   
Gains
(Losses)
   
Fair Value
at Sale
   
Gains
(Losses)
   
Fair Value
at Sale
 
   
(Dollars in Thousands)
 
                 
Debt securities
 
$
973
   
$
71,869
   
$
533
   
$
38,657
 
Equity securities
   
4,189
     
9,985
     
4,013
     
12,595
 
Total realized gains
   
5,162
     
81,854
     
4,546
     
51,252
 
                                 
Debt securities
   
(504
)
   
39,926
     
(118
)
   
8,333
 
Equity securities
   
(915
)
   
3,959
     
(381
)
   
1,639
 
Total realized losses
   
(1,419
)
   
43,885
     
(499
)
   
9,972
 
                                 
Net realized gains on investments
 
$
3,743
   
$
125,739
   
$
4,047
   
$
61,224
 

Net realized investment gains totaled $3.7 million for the nine months ended September 30, 2015, compared with $4.0 million during the nine months ended September 30, 2014. During the nine months ended September 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
(Unaudited)
 
A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at September 30, 2015 and December 31, 2014 is as follows.
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
   
(Dollars in Thousands)
 
September 30, 2015
               
Debt Securities - Available-For-Sale:
               
United States government obligations and authorities
 
$
64,876
   
$
1,233
   
$
115
   
$
65,994
 
Obligations of states and political subdivisions
   
107,211
     
1,428
     
42
     
108,597
 
Corporate
   
154,469
     
1,625
     
770
     
155,324
 
International
   
12,104
     
55
     
159
     
12,000
 
   
$
338,660
   
$
4,341
   
$
1,086
   
$
341,915
 
                                 
Debt Securities - Held-To-Maturity:
                               
United States government obligations and authorities
 
$
4,221
   
$
51
   
$
184
   
$
4,088
 
Corporate
   
2,101
     
25
     
6
     
2,120
 
International
   
65
     
-
     
-
     
65
 
   
$
6,387
   
$
76
   
$
190
   
$
6,273
 
                                 
Equity securities - common stocks
 
$
33,605
   
$
6,391
   
$
1,910
   
$
38,086
 
                                 
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
(Unaudited)
 
The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of September 30, 2015.

   
Unrealized Losses
   
Less than 12 months
   
12 months or longer
 
   
(Dollars in Thousands)
 
Debt securities:
           
United States government obligations and authorities
 
$
115
   
$
95
   
$
20
 
Obligations of states and political subdivisions
   
42
     
42
     
-
 
Corporate
   
770
     
740
     
30
 
International
   
159
     
159
     
-
 
     
1,086
     
1,036
     
50
 
Equity securities:
                       
Common stocks
   
1,910
     
1,881
     
29
 
                         
Total debt and equity securities
 
$
2,996
   
$
2,917
   
$
79
 

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 September 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.

   
September 30, 2015
   
December 31, 2014
 
   
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
   
(Dollars in Thousands)
 
                 
Due in one year or less
 
$
19,635
   
$
19,659
   
$
16,777
   
$
16,797
 
Due after one through five years
   
188,397
     
190,047
     
173,236
     
174,273
 
Due after five through ten years
   
136,989
     
138,449
     
98,404
     
100,259
 
Due after ten years
   
26
     
33
     
26
     
33
 
                                 
Total
 
$
345,047
   
$
348,188
   
$
288,443
   
$
291,362
 
 
- 22 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
United States Treasury notes with a book value of$60,674 and $2,204,798, 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 September 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 September 30, 2015 and 2014.

   
Three Months Ended September 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
         
Interest on debt securities
 
$
1,755
   
$
1,328
 
Dividends on equity securities
   
147
     
121
 
Interest on cash and cash equivalents
   
5
     
1
 
                 
Total investment income
 
$
1,907
   
$
1,450
 

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the three months ended September 30, 2015 and 2014, were approximately $42.5 million and $21.8 million, respectively.

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

   
Nine Months Ended September 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
         
Interest on debt securities
 
$
4,713
   
$
3,432
 
Dividends on equity securities
   
381
     
324
 
Interest on cash and cash equivalents
   
60
     
2
 
                 
Total investment income
 
$
5,154
   
$
3,758
 

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the nine months ended September 30, 2015 and 2014, were approximately $134.9 million and $65.9 million, respectively.

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

   
Three Months Ended September 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
Net realized gains
       
Debt securities
 
$
48
   
$
221
 
Equity securities
   
1,078
     
438
 
                 
Total
 
$
1,126
   
$
659
 
 
- 23 -

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

   
Nine Months Ended September 30,
 
   
2015
   
2014
 
   
(Dollars in Thousands)
 
Net realized gains
       
Debt securities
 
$
469
   
$
415
 
Equity securities
   
3,274
     
3,632
 
                 
Total
 
$
3,743
   
$
4,047
 

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

   
Unrealized Gains
 
   
September 30, 2015
   
December 31, 2014
 
   
(Dollars in Thousands)
 
Net unrealized gains
       
Debt securities
 
$
3,255
   
$
3,078
 
Equity securities
   
4,481
     
9,339
 
                 
Total
 
$
7,736
   
$
12,417
 

(7) Fair Value Disclosure

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs are based on market data from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information. All assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories:

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.
 
- 24 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Assets measured at fair value on a recurring basis as of September 30, 2015, presented in accordance with this guidance, are as follows.

   
As of September 30, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(Dollars in Thousands)
 
Debt securities:
               
United States government obligations and authorities
 
$
40,833
   
$
25,161
   
$
-
   
$
65,994
 
Obligations of states and political subdivisions
   
-
     
108,597
     
-
     
108,597
 
Corporate
   
-
     
155,324
     
-
     
155,324
 
International
   
-
     
12,000
     
-
     
12,000
 
     
40,833
     
301,082
     
-
     
341,915
 
                                 
Equity securities:
                               
Common stocks
   
38,086
     
-
     
-
     
38,086
 
     
38,086
     
-
     
-
     
38,086
 
                                 
Total debt and equity securities
 
$
78,919
   
$
301,082
   
$
-
   
$
380,001
 

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
 

(8) 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.
 
- 25 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
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.

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.
 
- 26 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
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 that are similar in terms; one for 30% entered into in 2014, and one for 10% which became 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 $8.5 million for the 30% treaty and $2.8 million for the 10% treaty, both of which are included in the $149.4 million amount referenced above.
- 27 -

Federated National Holding Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
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
(Unaudited)
 
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.
 
- 29 -

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

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