UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(x) Annual Report under Section 13 or 15(d) of the Securities Act of 1934
For the fiscal year ended December 31, 2013
or
( ) Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period of _____________to_______________
Commission file number: 0-2500111
Federated National Holding Company
(Exact name of registrant as specified in its Charter)
Florida
(State or other jurisdiction of
incorporation or organization)
65-0248866
(I.R.S. Employer
Identification No)
14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code
(954) 581-9993
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:134) No (cid:58)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes (cid:134) No (cid:58)
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(cid:58) No (cid:134)
Indicate by check mark whether the registrant has electronically submitted and posted on its corporate Web site, 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 (cid:58) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (cid:134)
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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer (cid:134) Accelerated filer (cid:134) Non-accelerated filer (cid:134) Smaller reporting company (cid:58)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes(cid:134) No (cid:58)
The aggregate market value of the Registrant’s common stock held by non-affiliates was $72,651,131 on June 30, 2013,
computed on the basis of the closing sale price of the Registrant’s common stock on that date.
As of March 11, 2014, the total number of common shares outstanding of Registrant's common stock was 11,264,864.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- 1 -
Federated National Holding Company
Table of Contents
PART I
………………………………………………………………………………………………………………..3
ITEM 1
BUSINESS…………………………………………………………………………………………………...3
ITEM 1A
RISK FACTORS…………………………………………………………………………….……………..22
ITEM 1B
UNRESOLVED STAFF COMMENTS…………………………………………………….…………….34
ITEM 2
PROPERTIES………………………………………………………………………………….…………..34
ITEM 3
LEGAL PROCEEDINGS………………………………………………………………………………....34
ITEM 4
MINE SAFETY DISCLOSURES………………………………….………………………………...……34
PART II
………………………………………………………………………………………………………………34
ITEM 5
AND ISSUER PURCHASES OF EQUITY SECURITIES…………………………………………………………………34
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
ITEM 6
SELECTED FINANCIAL DATA…………………………………………………………………...……35
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS…………………………………………………………………………………………………..………..37
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK……..…….…..65
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA………………………………….......66
ITEM 9
FINANCIAL DISCLOSURE…………………………………………………………………………………………….....111
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 9A
CONTROLS AND PROCEDURES……………………………………………………………………..111
ITEM 9B
OTHER INFORMATION……………………………………………………………………………….111
PART III
……………………………………………………………………………………………………………..112
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE…………………..112
ITEM 11
EXECUTIVE COMPENSATION……………………………………………………………………….116
ITEM 12
RELATED STOCKHOLDER MATTERS……………………………………………………………………………...…122
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE…………………………………………………………………………………………………….….….123
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES…………………………………………….….124
PART IV
……………………………………………………………………………………………………………..125
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES………………………………………………125
SIGNATURES ……………………………………………………………………………………………………………..129
- 2 -
Federated National Holding Company
PART I
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange Act. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These
statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “budget,” “contemplate,”
“continue,” “could,” “envision,” “estimate,” “expect,” “forecast,” “guidance,” “indicate,” “intend,” “may,” “might,” “outlook,”
“plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” “will,” “would,” “will
be,” “will continue” or the negative thereof or other variations thereon or comparable terminology. We have based these forward-
looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations,
assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve a number
of risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results,
performance or achievements to differ materially from any future results, performance or achievements expressed or implied by
these forward-looking statements. Management cautions that the forward-looking statements contained in this Annual Report on
Form 10-K are not guarantees of future performance, and we cannot assume that such statements will be realized or the forward-
looking events and circumstances will occur. Factors that might cause such a difference include, without limitation, the risks and
uncertainties discussed under “Risk Factors” in this Annual Form 10-K, and discussed from time to time in our reports filed with
the SEC.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included or incorporated by reference into this Annual Form 10-K are made only as of the date
hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the
results of any revisions to any such statements to reflect future events or developments.
ITEM 1
BUSINESS
GENERAL
Federated National Holding Company (“FNHC”, “Company”, “we”, “us”), formerly known as 21st Century Holding
Company 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
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 22 years.
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 insurance subsidiary is Federated National Insurance Company (“FNIC”). FNIC 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 3,600 independent agents, of which approximately 1,800 actively sell and service our products,
FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines and personal and commercial
automobile insurance in Florida. FNIC is licensed as an admitted carrier in Alabama, Louisiana, Georgia and Texas and
underwrites commercial general liability insurance in those states, homeowners’ insurance in Louisiana and personal automobile
insurance in Georgia and Texas.
FNIC is licensed as a non-admitted carrier in Arkansas, Kentucky, Missouri, Nevada, Oklahoma, South Carolina and
Tennessee and can underwrite commercial general liability insurance in all of these states. A non-admitted carrier, sometimes
referred to as a “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.
- 3 -
Federated National Holding Company
In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance
Company (“American Vehicle”), with FNIC continuing the operations of both entities. In connection with this merger, the
Company, FNIC and American Vehicle entered into a Consent Order with the Florida Office of Insurance Regulation (“Florida
OIR”) pursuant to which we agreed to certain restrictions on our business operations. The Consent Order was amended in
February 2013 to lessen or eliminate certain of the original requirements, due to FNIC’s statutory underwriting profit during
2012. See “Regulation– Consent Order.”
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 Loss and loss adjustment expenses (“LAE”) and improved
customer service for our claimants and policyholders. We also employ an in-house Litigation Manager to cost effectively
manage claims-related litigation and to monitor our claims handling practices for efficiency and regulatory compliance.
Until June 2011, we offered premium financing to our own and third-party insureds through our wholly owned
subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).
Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, a wholly
owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a
managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South
Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general
liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s
existing network of agents.
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 $25 per policy fee, and traditionally a 6%
commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed
above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown
future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during
January 2011.
The homeowner policy provides FNU the right to cancel any policy within a period of 90 days from the policy's
inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our
underwriting criteria.
Although we are authorized to underwrite the various lines described above, our business is primarily underwriting
homeowners’ policies. During 2013, 89.6%, 4.3%, 2.6% and 3.5% of the premiums we underwrote were for homeowners’,
commercial general liability, federal flood, and personal automobile insurance, respectively. During 2013, $29.7 million or
13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with
Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to
offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents
25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents
began writing for FNIC in March 2013. During 2012, 85.3%, 7.8%, 4.4% and 2.5% of the premiums we underwrote were for
homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively.
During the years ended December 31, 2013, 2012 or 2011, we did not experience any weather-related catastrophic
events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or
other insurable events will affect our future results of operations and liquidity. Losses and LAE are affected by a number of
factors, many of which are partially or entirely beyond our control, including the following.
the nature and severity of the loss;
•
• weather-related patterns;
•
•
•
• macroeconomic issues.
the availability, cost and terms of reinsurance;
underlying settlement costs, including medical and legal costs;
legal and political factors such as legislative initiatives and public opinion;
- 4 -
Federated National Holding Company
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 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 have entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with
Federated Mutual Insurance Company (“Federated Mutual”) in response to correspondence received from Federated
Mutual’s counsel alleging that our use of the name “Federated” infringed certain federal trademarks held by Federated
Mutual. Although we believe that we have meritorious defenses to this allegation, we sought to avoid litigation and therefore
negotiated and entered into the Coexistence Agreement. Under the Coexistence Agreement, 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.
During this period, we continue to develop our brand under the “FedNat” name, which is the name by which agents generally
know us.
Our goal in our reinsurance strategy is to equalize the liquidity requirements imposed by most severe insurable
events and by all other insurable events we manage in the normal course of business. Please see “Reinsurance Agreements”
under “Item 1. Business” for a more detailed description of our reinsurance agreements and strategy.
Our executive offices are located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 and our telephone
number is (954) 581-9993.
Our internet web site is FedNat.com for policy holders, agents and investors. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available, free of charge,
through our website as soon as reasonably practicable after we electronically file or furnish such material to the Securities
and Exchange Commission (“SEC”). Further, a copy of this annual report on Form 10-K is located at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room
can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and
information statements and other information regarding our filings at www.sec.gov.
RECENT DEVELOPMENTS
We sold 2,781,395 shares of our common stock in a November 19, 2013 capital raise offering, which represented
approximately 25.0% of our outstanding shares of common stock on that date after giving effect to this offering.
BUSINESS STRATEGY
We expect that in 2014 we will capitalize on our operational efficiencies and business practices through:
•
•
improved property analytical qualities such as a broader geographical dispersion of risks throughout the state of
Florida and avoiding risks that do not yield an underwriting profit;
continued territorial expansion of our homeowners’, commercial general liability and private passenger
automobile insurance products into additional states;
•
employing our business practices developed and used in Florida in our expansion to other selected states;
• maintaining a commitment to provide high quality customer service to our agents and insureds;
•
•
•
•
•
expansion of our marketing efforts by retaining key personnel and implementing direct marketing technologies;
offering attractive incentives to our agents to place a high volume of quality business with our companies;
offering our employees continuing education classes appropriate to the respective discipline employed within
this organization;
assumption of existing risks from other carriers; and
additional strategies that may include possible acquisitions or dispositions of assets, and development of
procedures to improve claims history and mitigate losses from claims.
- 5 -
Federated National Holding Company
We expect that in 2014 these strategies have poised us to accelerate the 2013 results trajectory in 2014 and beyond.
There can be no assurances, however, that any of the foregoing strategies will be developed or successfully implemented or,
if implemented, that they will positively affect our results of operations.
INSURANCE OPERATIONS AND RELATED SERVICES
Overview of Premium Growth
Gross premiums written increased $123.9 million, or 103.7%, to $243.4 million for 2013, compared with $119.5
million for 2012. Florida homeowners’ represents 94% and Texas private passenger automobile represents the remaining 6%
of the increased premium volume. We believe that our growth in 2013 reflects management’s efforts over several years. Our
success today reflects our goal to be an agent-friendly carrier that provides exceptional service. We have invested in our
agent relationships and our staff, have created easy to use systems for the agent, and increased our relevance to the agents’
operations by providing insurance products that meet their market needs.
Our homeowner business contributed $116.5 million or 94.0% of the increased gross written premiums during the
year ended December 31, 2013. This increase was the result of:
•
•
•
policyholders continuing to renew their FNIC homeowners’ policy,
a “flight to quality” in the market by agents who seek quality carriers to place their business,
and supporting a marketing team dedicated to promoting the quality and quantity of products and services that we offer.
During 2013, approximately 85% of our policyholders renewed their policies. This high retention rate reflects the
confidence that the policyholder and his agent have in our financial stability and strength. Additionally, policyholders have
told agents that our professional staff adjusts claims quickly and fairly.
Overview of Insurance Lines of Business
The following tables set forth the amount and percentages of our consolidated gross premiums written, premiums
ceded to reinsurers and net premiums written by line of business for the periods indicated.
Years Ended December 31,
2013
2012
2011
Premium
Percent
Premium
Percent
Premium
Percent
(Dollars in Thousands)
Gross written premiums:
Automobile
Federal Flood
Homeowners'
Commercial General Liability
Total gross written premiums
Ceded premiums:
Automobile
Federal Flood
Homeowners'
Commercial General Liability
Total ceded premiums
Net written premiums
Automobile
Federal Flood
Homeowners'
Commercial General Liability
Total net written premiums
$
8,449
6,213
218,350
10,362
243,374
$
$
6,337
6,213
69,721
438
82,709
$
$
2,112
-
148,629
9,924
160,665
$
3.5%
2.6%
89.6%
4.3%
100.0%
7.7%
7.5%
84.3%
0.5%
100.0%
1.3%
0.0%
92.5%
6.2%
100.0%
- 6 -
$
2,996
5,293
101,832
9,338
119,459
$
$
2,021
5,293
43,331
440
51,085
975
-
58,501
8,898
68,374
$
$
$
2.5%
4.4%
85.3%
7.8%
100.0%
4.0%
10.4%
84.7%
0.9%
100.0%
1.4%
0.0%
85.6%
13.0%
100.0%
$
3,274
4,468
80,403
10,125
98,270
$
$
1,541
4,468
40,273
12
46,294
$
$
1,733
-
40,130
10,113
51,976
$
3.3%
4.5%
81.9%
10.3%
100.0%
3.3%
9.7%
87.0%
0.0%
100.0%
3.3%
0.0%
77.2%
19.5%
100.0%
Homeowners’ Property and Casualty Insurance
Federated National Holding Company
FNIC underwrites homeowners’ insurance in Florida and Louisiana. Homeowners’ insurance generally protects an
owner of real and personal property against covered causes of loss to that property. The number of Louisiana homeowner
policies in-force totaled approximately 400 at December 31, 2013. The table that follows reflects the number of Florida
homeowner policies in-force by county and reflects our concentrations of risk from catastrophic events.
2013
In-Force Policy Count
Years Ended December 31,
2012
2011
County
Amount
Percentage
Amount
Percentage
Amount
Percentage
Palm Beach
Brevard
Collier
Lee
Hillsborough
Pinellas
Broward
Saint Lucie
Indian River
Okaloosa
Martin
Orange
Sarasota
Charlotte
Escambia
Walton
Santa Rosa
Bay
Duval
Volusia
Miami-Dade
Manatee
Seminole
Saint Johns
Flagler
All others
Total
13,874
8,947
7,420
6,870
6,350
6,139
5,498
4,957
4,704
4,668
4,444
4,083
3,936
3,129
3,038
3,021
2,939
2,785
2,249
1,990
1,883
1,859
1,665
1,639
1,267
7,047
116,401
11.9%
7.7%
6.4%
5.9%
5.5%
5.3%
4.7%
4.3%
4.0%
4.0%
3.8%
3.5%
3.4%
2.7%
2.6%
2.6%
2.5%
2.4%
1.9%
1.7%
1.6%
1.6%
1.4%
1.4%
1.1%
6.1%
100.0%
7,270
4,508
3,422
5,175
2,682
4,034
3,700
3,151
2,436
1,966
2,052
1,654
2,759
2,059
1,227
1,210
1,305
792
911
881
1,616
1,560
788
547
543
2,854
61,102
11.7%
7.4%
5.6%
8.5%
4.4%
6.6%
6.1%
5.2%
4.0%
3.2%
3.4%
2.7%
4.5%
3.4%
2.0%
2.0%
2.1%
1.3%
1.5%
1.4%
2.6%
2.6%
1.3%
0.9%
0.9%
4.7%
100.0%
8,203
2,900
1,583
3,133
2,984
3,788
4,386
1,757
903
372
984
1,012
2,689
1,680
158
193
131
118
546
863
1,944
1,548
367
165
66
1,320
43,793
19.0%
6.6%
3.6%
7.2%
6.8%
8.6%
10.0%
4.0%
2.1%
0.8%
2.2%
2.3%
6.1%
3.8%
0.4%
0.4%
0.3%
0.3%
1.2%
2.0%
4.4%
3.5%
0.8%
0.4%
0.2%
3.0%
100.0%
Our homeowner insurance products provide maximum dwelling coverage in the amount of approximately $3.0
million, with the aggregate maximum policy limit being approximately $5.0 million. We currently offer dwelling coverage
“A” up to $3.0 million with an aggregate total insured value of $5.0 million. We continually subject these limits to review;
though there were no material changes during 2013. The approximate average premium on the policies currently in-force is
$1,857, as compared with $1,675 for 2012. The typical deductible is either $2,500 or $1,000 for non-hurricane-related claims
and generally 2% of the coverage amount for the structure for hurricane-related claims.
Premium rates charged to our homeowner insurance policyholders are continually evaluated to assure that they meet
the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive nor inadequate).
Premium rates are regulated and approved by the Florida OIR. In 2013 our voluntary program rate indications did not
indicate the need for adjustment. In 2012 we were approved for a 4.8% and 0.9% rate increase on our voluntary property
book of homeowners’ business. In 2011 our voluntary rate increase of 20% was approved.
Similarly, for the policies we assumed from Citizens Property Insurance Corporation (“Citizens”) in 2009, we
received approval for a 14.8% increase in 2013 and a 14.1% rate increase in 2012. In 2011 we received approval for a 13.9%
increase. Our voluntary program was 97.7%, 90.0%, and 79.2% of the total homeowner program, for the years ending
December 31, 2013, 2012, and 2011, respectively.
- 7 -
Federated National Holding Company
For a further discussion regarding Homeowners’ Property and Casualty Insurance, see “Recent Developments”,
above.
Commercial General Liability
We underwrite commercial general liability insurance for approximately 380 classes of artisan (excluding home-
builders and developers) and mercantile trades (such as owners, landlords and tenants). The limits of liability range from
$100,000 per occurrence with a $200,000 policy aggregate to $1.0 million per occurrence with a $2.0 million policy
aggregate. We continually subject these limits to review, though there were no changes during 2013. We market the
commercial general liability insurance products through independent agents and a limited number of general agencies
unaffiliated with the Company. The average annual premium on policies currently in-force during 2013 is approximately
$773, as compared with $569 in 2012.
The following table sets forth the amounts and percentages of our gross premiums written in connection with our
commercial general liability program by state.
2013
Years Ended December 31,
2012
2011
Amount
Percentage
Amount
Percentage
Amount
Percentage
(Dollars in Thousands)
State
Florida
Louisiana
Texas
Other
Total
$
9,572
150
547
93
10,362
$
92.37%
1.45%
5.28%
0.90%
100.00%
$
$
8,639
217
426
56
9,338
92.52%
2.32%
4.56%
0.60%
100.00%
$
8,606
916
534
69
10,125
$
84.99%
9.05%
5.28%
0.68%
100.00%
Personal Automobile
Personal automobile insurance markets can be divided into two categories, standard automobile and nonstandard
automobile. Standard personal automobile insurance is principally provided to insureds who present an average risk profile in
terms of driving record, vehicle type and other factors. Nonstandard personal automobile insurance is principally provided to
insureds that are unable to obtain standard insurance coverage because of their driving record, age, vehicle type or other
factors, including market conditions. The average nonstandard personal automobile insurance policy currently in-force is
approximately $987 for a twelve month policy in Florida and approximately $158 for a three month policy in Texas.
The maximum exposures for the nonstandard policy in Florida are $10,000 per individual, $20,000 per accident for
bodily injury, $10,000 per accident for property damage, and predominantly $50,000 for comprehensive and collision.
Beginning in late 2010 we underwrote nonstandard personal automobile insurance in Georgia, where the maximum
exposures are $25,000 per individual, $50,000 per accident for bodily injury, $25,000 per accident for property damage, and
predominantly $50,000 for comprehensive and collision. In addition, we write commercial automobile insurance in Florida.
The maximum exposure is predominantly $30,000 on a combined single limit basis.
Flood
FNIC writes flood insurance through the National Flood Insurance Program (“NFIP”) on a direct and ceded basis.
We write the policy for the NFIP, which assumes 100% of the flood risk while we retain a commission for our service. The
average flood policy premium is approximately $504 with limits up to $250,000. Commissions in connection with this
program totaled $0.4 million, $0.3 million and $0.2 million in 2013, 2012 and 2011, respectively.
Managing General Agent Services
FNU, a wholly owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and
is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North
Carolina, Nevada, South Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to
sell commercial general liability, workers compensation, personal umbrella, inland marine and other various lines of
insurance through FNU’s existing network of agents.
- 8 -
Federated National Holding Company
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 $25 per policy fee, and traditionally a 6%
commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed
above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown
future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during
January 2011.
Claims Adjusting
We internally process claims made by our insureds through our wholly owned claims adjusting company, 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 Manager to cost effectively manage claims-related litigation and to monitor our claims handling practices for
efficiency and regulatory compliance.
Premium Finance
Until June 2011, our wholly owned subsidiary, Federated Premium, offered premium financing to our own and
third-party insureds. Premium financing was marketed through our distribution network of general agents and independent
agents.
The Company anticipates continued use of the direct bill feature associated with our homeowners’ and commercial
general liability programs. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise
to pay the premium, as opposed to requiring payment of the full amount of the policy. The advantage of direct billing a
policyholder by the insurance company is that we are not reliant on a credit facility, but remain able to charge and collect
interest from the policyholder. Underwriting criteria are designed with down payment requirements and monthly payments
that create policyholder equity in the insurance policy. The equity in the policy is collateral for the extension of credit to the
insured.
Through our monitoring systems, we track delinquent payments and, in accordance with the terms of the extension
of credit, cancel if payment is not made. If any excess premium remains after cancellation of the policy and deduction of
applicable penalties, this excess is refunded to the policyholder. The direct bill program enables us to closely manage our risk
while providing credit to our insureds.
Independent Insurance Agency
Insure-Link, Inc. (“Insure-Link”) was formed in March 2008 to serve as an 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 and workers’ compensation insurance through their
agency appointments with over thirty different carriers.
MARKETING AND DISTRIBUTION
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.
Our independent agents and general agents have the authority to sell and bind insurance coverage in accordance with
procedures established by FNU. FNU reviews all coverage bound by the agents promptly and generally accepts all coverage
that falls within stated underwriting criteria. For all policies issued, FNU also has the right, within a period that varies by
state between 60 days and 120 days from a policy's inception, to cancel any policy, upon an advanced notice provided in
accordance with statutory specific guidelines, even if the risk falls within our underwriting criteria.
We believe that our integrated computer systems, which allow for rapid automated premium quotation and policy
issuance by our agents, is a key element in providing quality service to both our agents and insureds for various lines of our
business.
- 9 -
Federated National Holding Company
We believe that the management of our distribution system now centers on our ability to capture and maintain
relevant data by producing agents. We believe that information management of agent production, coupled with loss
experience, will enable us to maximize profitability.
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 from Bermuda and Europe as well as to the Florida Hurricane Catastrophe Fund (“FHCF”).
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 2013–2014 hurricane season, the excess of loss and FHCF treaties insured the property lines for
approximately $562.7 million of aggregate catastrophic losses and LAE with a maximum single event coverage totaling
approximately $420.4 million, with the Company retaining the first $7.0 million of losses and LAE for each event. 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. Coverage
afforded by the FHCF totals approximately $278.1 million, or 49.4 % of the $562.7 million 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 2013-2014 hurricane season,
inclusive of approximately $21.7 million payable to the FHCF and the prepaid automatic premium reinstatement protection,
is approximately $67.9 million.
- 10 -
Federated National Holding Company
The 2013-2014 private reinsurance companies and their respective A.M. Best Company (“A.M. Best”) and Standard
and Poor’s (“S&P”) ratings are listed in the table as follows.
Reinsurer
A.M. Best Rating
S&P Rating
UNITED STATES
American Agricultural Insurance Company
Everest Reinsurance Company
Houston Casualty Company, UK Branch
Odyssey Reinsurance Company
BERMUDA
ACE Tempest Reinsurance Limited
Allied World Assurance Company Limited, Bermuda
Arch Reinsurance Limited
Argo Reinsurance Limited
Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)
DaVinci Reinsurance Ltd
Endurance Specialty Insurance Limited
JC Re Ltd. (aka Pillar Capital and fka Juniperus & Actua Re Ltd.)
Partner Reinsurance Company Limited
Platinum Underwriters Bermuda Limited
Renaissance Reinsurance Ltd
S.A.C. Re, Ltd.
XL Re Limited
UNITED KINGDOM
A.F. Beazley Syndicate No. 623 (AFB)
A.F. Beazley Syndicate No. 2623 (AFB)
Amlin Syndicate No. 2001 (AML)
Ariel Syndicate No. 1910 (ARE)
ARK Syndicate No. 3902 (NOA)
Ascot Syndicate No. 1414 (ASC)
Barbican Syndication No. 1955 (BAR)
Canopius Syndicate No. 958 (CNP)
Canopius Syndicate No. 4444 (CNP)
Cathederal Syndicate No. 2010 (MMX)
Kiln Syndicate No. 510 (KLN)
Liberty Syndicates Services Limited, Paris for and on behalf of Lloyd's Syndicate No. 4472 (LIB)
MAP Underwriting Syndicate No. 2791 (MAP)
MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)
Novae Syndicate No. 2007 (NVA)
Pembroke Syndicate No. 4000 (PEM)
Tokio Marine Kiln Syndicate No. 1880 (TMK)
EUROPE
Amlin Bermuda (Branch of Amlin AG)
SCOR Global P&C SE
* Reinstatement Premium Protection Program Participants
A-
A+
A
A
A+
A
A+
A
A-
A
A
NR
A+
A
A+
A-
A
A
A
A
A
A
A
A
A
A
A
A
NR
A
A
A
A
A
A
A
NR
A+
A+
A-
AA-
A
A+
NR
NR
A+
A
** NR
A+
A-
AA-
NR
A
*
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A
A
** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market
value.
- 11 -
Federated National Holding Company
For the 2012–2013 hurricane season, the excess of loss and FHCF treaties insured the property lines for
approximately $328.3 million of aggregate catastrophic losses and LAE with a maximum single event coverage totaling
approximately $246.5 million, with the Company retaining the first $8.0 million of losses and LAE for each event. 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. Coverage
afforded by the FHCF totals approximately $144.7 million, or 44.1% of the $328.3 million 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 2012-2013 hurricane season,
inclusive of approximately $11.2 million payable to the FHCF and the prepaid automatic premium reinstatement protection,
is approximately $43.1 million.
The 2012-2013 private reinsurance companies and their respective A.M. Best and S&P ratings are listed in the table
as follows.
Reinsurer
UNITED STATES
American Agricultural Insurance Company
Everest Reinsurance Company
Houston Casualty Company, (UK Branch)
Munich Reinsurance America, Inc.
Odyssey Reinsurance Company
BERMUDA
ACE Tempest Reinsurance Limited
Arch Reinsurance Limited
Ariel Reinsurance Bermuda Limited for and on Behalf of Ariel Syndicate 1910 (ARE)
DaVinci Reinsurance Limited
JC Re Limited (Juniperus & fka Actua Re Limited)
Montpelier Reinsurance Limited
Nephila (via Allianz Risk Transfer AG, Bermuda Branch)
Platinum Underwriters Bermuda Limited
Renaissance Reinsurance Limited
UNITED KINGDOM
Amlin Syndicate No. 2001 (AML)
Ariel Syndicate No. 1910 (ARE)
ARK Syndicate No. 3902 (NOA)
Barbican Syndication No. 1955 (BAR)
Kiln Syndicate No. 510 (KLN)
Liberty Syndicates Services Limited Paris, for and on Behalf of Lloyd's Syndicate No. 4472 (LIB)
MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)
Novae Syndicate No. 2007 (NVA)
Tokio Marine Kiln Syndicate No. 1880 (TMK)
Torus Syndicate No. 1301 (TUL)
EUROPE
Amlin Bermuda (Branch of Amlin AG)
SCOR Global P&C Zurich Branch
* Reinstatement Premium Protection Program Participants
A.M. Best Rating
S&P Rating
A-
A+
A+
A+
A
A+
A+
A-
A
NR
A-
NR
A
A+
A
A
A
A
A
NR
A
A
A
A
A
A
*
*
*
*
*
*
*
*
*
NR
A+
AA
AA-
A-
AA-
A+
NR
A+
** NR
A-
AA-
A-
AA-
A+
A+
A+
A+
A+
A+
A+
A+
A+
A+
A
A
** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market
value.
- 12 -
Federated National Holding Company
Annually, the cost and amounts of reinsurance are based on management's analysis of FNIC's exposure to
catastrophic risk as of June 30 and estimated to September 30. Our data is then subjected to actual exposure level analysis as
of September 30. This analysis of our exposure level in relation to the total exposures to the FHCF and excess of loss
treaties may produce changes in limits and reinsurance premiums as a result of the reconciliation of estimated to
actual exposure level. The September 30, 2013 change to total limits was an increase of $8.7 billion of total insured value or
25.3% and the change to reinsurance premiums was an increase of $8.3 million or 13.8%. The September 30, 2012 change to
total limits was an increase of $2.1 billion of total insured value or 12.5% and the change to reinsurance premiums was an
increase of $2.4 million or 6.0%. These adjustments are amortized over the remaining underlying policy term.
To date, we have made no claims asserted against our reinsurers in connection with the 2013–2014 and 2012–2013
excess of loss and FHCF treaties.
The quota share retrocessionaire reinsurance agreements require FNIC to securitize credit, regulatory and business
risk. Fully funded trust agreements totaled $4.9 million and $4.8 million as of December 31, 2013 and 2012, respectively.
We are selective in choosing reinsurers and consider numerous factors, the most important of which are the financial
stability of the reinsurer, their history of responding to claims and their overall reputation. In an effort to minimize our
exposure to the insolvency of a reinsurer, we evaluate the acceptability and review the financial condition of the reinsurer at
least annually.
LIABILITY FOR UNPAID LOSSES AND LAE
We are directly liable for loss and LAE payments under the terms of the insurance policies that we write. In many
cases, there may be a time lag between the occurrence and reporting of an insured loss and our payment of that loss. As
required by insurance regulations and accounting rules, we reflect the liability for the ultimate payment of all incurred losses
and LAE by establishing a liability for those unpaid losses and LAE for both reported and unreported claims, which represent
estimates of future amounts needed to pay claims and related expenses.
When a claim, other than personal automobile, involving a probable loss is reported, we establish a liability for the
estimated amount of our ultimate losses and LAE payments. The estimate of the amount of the ultimate loss is based upon
such factors as the type of loss, jurisdiction of the occurrence, knowledge of the circumstances surrounding the claim,
severity of injury or damage, potential for ultimate exposure, estimate of liability on the part of the insured, past experience
with similar claims and the applicable policy provisions.
All newly reported claims received with respect to personal automobile policies are set up with an initial average
liability. The average liability for these claims is determined by dividing the number of reported claims into the total amount
paid during the same period. If a claim is open more than 45 days, that open case liability is evaluated and the liability is
adjusted upward or downward according to the facts and circumstances of that particular claim.
In addition, management provides for a liability on an aggregate basis to provide for incurred but not yet reported
(“IBNR”). We utilize independent actuaries to help establish liability for unpaid losses and LAE. We do not discount the
liability for unpaid losses and LAE for financial statement purposes.
The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and
frequency and are continually reviewed. As part of this process, we review historical data and consider various factors,
including known and anticipated legal developments, inflation and economic conditions. As experience develops and other
data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for
unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the
liabilities may deviate substantially from prior estimates.
Among our classes of insurance, the automobile and homeowners’ liability claims historically tend to have longer
time lapses between the occurrence of the event, the reporting of the claim and the final settlement, than do automobile
physical damage and homeowners’ property claims. These liability claims often involve parties filing suit and therefore may
result in litigation. By comparison, property damage claims tend to be reported in a relatively shorter period of time and
settled in a shorter time frame with less occurrence of litigation.
There can be no assurance that our liability for unpaid losses and LAE will be adequate to cover actual losses. If our
liability for unpaid losses and LAE proves to be inadequate, we will be required to increase the liability with a corresponding
reduction in our net income in the period in which the deficiency is identified. Future loss experience substantially in excess
of established liability for unpaid losses and LAE could have a material adverse effect on our business, results of operations
- 13 -
and financial condition.
Federated National Holding Company
The following table sets forth a reconciliation of beginning and ending liability for unpaid losses and LAE as shown
in our consolidated financial statements for the periods indicated.
Balance at January 1
Less reinsurance recoverables
Net balance at January 1
Incurred related to
Current year
Prior years
Total incurred
Paid related to
Current year
Prior years
Total paid
Net balance at period end
Plus reinsurance recoverables
Balance at period end
2013
$
$
49,908
(3,503)
46,405
Years Ended December 31,
2012
(Dollars in Thousands)
$
59,983
(2,088)
57,895
$
2011
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
31,636
(1,427)
30,209
15,892
25,807
41,699
46,405
3,503
49,908
56,209
201
56,410
22,695
21,846
44,541
58,274
2,742
61,016
66,529
(6,809)
59,720
31,893
(997)
30,896
13,672
19,048
32,720
57,896
2,087
59,983
As shown above, and as a result of review of liability for losses and LAE, which includes a re-evaluation of the
adequacy of reserve levels for prior year’s claims, we increased the liability for losses and LAE for claims occurring in prior
years by $0.2 million for the year ended December 31, 2013 and decreased the liability for losses and LAE for claims
occurring in prior years by $1.4 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively.
The liability for losses and LAE increased by $18.6 million and $0.9 million for our homeowners’ and automobile
lines, and decreased by $8.4 million for our commercial general liability lines, respectively, during 2013. These changes are
due to management's continued efforts to manage the claims life cycle more efficiently. Additionally, our underwriting
processes are designed to quickly gather the true primary and secondary risk characteristics and provide a profitable quote to
the policyholder. This approach helps to reduce the overall frequency and severity of the loss portfolio.
Based upon discussions with our independent actuarial consultants and their statements of opinion on losses and
LAE, we believe that the liability for unpaid losses and LAE is currently adequate to cover all claims and related expenses
which may arise from incidents reported and IBNR as of December 31, 2013. There can be no assurance concerning future
adjustments of reserves, positive or negative, for claims incurred through December 31, 2013.
- 14 -
Federated National Holding Company
The following table presents total unpaid losses and LAE, net, and total reinsurance recoverable due from our
catastrophic reinsurers as shown in our consolidated financial statements.
As of December 31,
2013
2012
(Dollars in Thousands)
$
$
$
$
29
25
54
47
94
141
$
25
29
-
$
54
$
94
47
-
$
141
Catastrophe Excess of Loss (various participants) and FHCF
Reinsurance recoverable on paid losses and LAE
Unpaid losses and LAE
Amounts due from (to) reinsurers consisted of amounts related to:
Unpaid losses and LAE
Reinsurance recoverable on paid LAE
Reinsurance payable
- 15 -
Federated National Holding Company
The following table presents the liability for unpaid losses and LAE for the years ended December 31, 2004 through
2013 and does not distinguish between catastrophic and non-catastrophic events. The top line of the table shows the
estimated liability for unpaid losses and LAE at the balance sheet date for each of the periods indicated. These figures
represent the estimated amount of unpaid losses and LAE for claims arising in all prior years that were unpaid at the balance
sheet date, including losses that had been IBNR. The portion of the table labeled "Cumulative paid as of" shows the
cumulative payments for losses and LAE made in succeeding years for losses incurred prior to the balance sheet date. The
lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the
end of each succeeding year.
Years Ended December 31,
(Dollars in Thousands)
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Unpaid losses and LAE, net
$
61,016
$
49,908
$
59,983
$
66,529
$
70,611
64,775
$
59,685
$
39,615
$
154,039
$
46,571
Cumulative paid as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Re-estimated net liability as of:
End of year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
24,329
16,527
31,676
20,774
26,667
38,703
29,202
40,493
42,577
50,096
26,431
45,264
52,761
53,689
60,075
61,016
49,908
46,245
59,983
58,389
58,711
66,529
62,756
51,266
51,936
70,611
73,122
70,709
59,276
58,223
64,775
75,646
80,606
78,132
68,119
69,226
30,570
48,409
64,014
68,865
68,880
73,235
59,685
69,383
82,890
88,159
85,532
77,294
78,541
36,058
58,002
72,752
86,110
89,006
87,555
90,910
170,825
196,080
215,297
228,805
240,171
242,383
244,405
246,286
39,615
71,907
80,383
97,174
102,571
99,710
93,878
96,514
154,039
193,068
223,005
231,761
248,116
252,365
249,744
248,211
251,217
68,027
88,294
96,654
103,463
107,302
110,029
107,534
229,435
230,800
46,571
80,037
94,799
102,318
108,276
112,336
111,540
114,172
110,997
113,918
Cumulative redundancy (deficiency)
3,662
1,272
14,593
12,388
(4,451)
(18,856)
(56,899)
(97,178)
(67,347)
Cumulative redundancy (-) deficiency
as a % of reserves originally established
7.3%
2.1%
21.9%
17.5%
-6.9%
-31.6%
-143.6%
-63.1%
-144.6%
The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. A
deficiency indicates that the latest estimate of the liability for losses and LAE is higher than the liability that was originally
estimated and a redundancy indicates that such estimate is lower. It should be emphasized that the table presents a run-off of
balance sheet liability for the periods indicated rather than accident or policy loss development for those periods. Therefore,
each amount in the table includes the cumulative effects of changes in liability for all prior periods. Conditions and trends
that have affected liabilities in the past may not necessarily occur in the future.
- 16 -
Federated National Holding Company
As noted above, we have since experienced $3.7 million and $1.3 million cumulative redundancies in connection
with the re-estimation of all losses that occurred in 2012 and 2011, respectively.
The table below sets forth the differences between loss and LAE reserves as disclosed for Generally Accepted
Accounting Principles (“GAAP”) basis compared with Statutory Accounting Principles (“SAP”) basis of presentation for the
years ended 2013, 2012 and 2011.
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
GAAP basis Loss and LAE reserves
Less unpaid Losses and LAE ceded
Balance Sheet Liability
Add Insurance Apportionment Plan
Intercompany Indemnification
FNIC SAP basis Loss and LAE reserves
$
$
$
61,016
2,312
58,704
2
(4,705)
54,001
49,908
3,189
46,719
6
(2,039)
44,686
59,983
2,319
57,664
17
(2,114)
55,567
$
$
$
The table below sets forth the differences between loss and LAE incurred as disclosed for GAAP basis compared
with SSAP basis presentation for the years ended 2013, 2012 and 2011.
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
GAAP basis Loss and LAE incurred
Intercompany adjusting and other expenses
Insurance apportionment plan
SAP basis Loss and LAE incurred
$
$
$
56,410
3,489
13
59,912
30,209
3,744
(4)
33,949
30,896
(726)
-
30,170
$
$
$
Underwriting results of insurance companies are frequently measured by their Combined Ratios. However,
investment income, federal income taxes and other non-underwriting income or expense are not reflected in the Combined
Ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and
service operations. Underwriting results are considered profitable when the Combined Ratio is under 100% and unprofitable
when the Combined Ratio is over 100%.
The following table sets forth Loss Ratios, Expense Ratios and Combined Ratios for the periods indicated for the
insurance business of FNIC and American Vehicle for 2013, 2012 and 2011, and are inclusive of Unallocated Loss
Adjustment Expenses (“ULAE”).
Years Ended December 31,
2013
54.0%
44.2%
98.2%
2012
50.9%
53.4%
104.3%
2011
63.7%
62.4%
126.1%
Loss Ratio
Expense Ratio
Combined Ratio
COMPETITION
We operate in highly competitive markets and face competition from national, regional and residual market
insurance companies in the homeowners’, commercial general liability, and automobile markets. Our competitors include
companies that market their products through agents, as well as companies that sell insurance directly to their customers.
Large national writers may have certain competitive advantages over agency writers, including increased name recognition,
increased loyalty of their customer base and reduced policy acquisition costs. We compete based on underwriting criteria, our
distribution network and superior service to our agents and insureds. Although our pricing is inevitably influenced to some
degree by that of our competitors, we believe that it is generally not in our best interest to compete solely on price.
- 17 -
Federated National Holding Company
In Florida, more than 100 companies are authorized to underwrite homeowners’ insurance. Several of our
competitors include Citizens, Universal Property and Casualty Insurance Company and St. Johns Insurance Company. In
Florida, more than one dozen companies compete with us in the commercial general liability insurance market.
Significant competition also emerged because of fundamental changes made to the property and casualty insurance
business in Florida in recent years which resulted in a multi-pronged approach to address the cost of residential property
insurance in Florida. First, the law increased the capacity of reinsurance that stabilized the reinsurance market to the benefit
of the insurance companies writing properties lines in Florida. Secondly, the law provided for rate relief to all policyholders.
The law also authorized the state-owned insurance company, Citizens, which is free of many of the restraints on private
carriers such as surplus, ratios, income taxes and reinsurance expense, to reduce its premium rates and begin competing
against private insurers in the residential property insurance market and expands the authority of Citizens to write
commercial insurance.
In May 2013, SB 1770 was signed by the Governor of Florida and passed during the 2013 legislative session. This
bill is intended to reform Citizens by reducing its insurance policy count and establishing the Property Insurance
Clearinghouse (“Clearinghouse”). The Clearinghouse launched during February 2014 and makes new business ineligible for
Citizens if a participating insurance company is willing to afford similar coverage at a price that is no more than 15% above
the price of a policy with Citizens. Similarly, existing Citizens policies will not be eligible for renewal with Citizens if a
participating insurance company is willing to afford similar coverage at no additional cost over the price for a Citizens policy.
This will allow potentially new and renewal policies of Citizens to be comparatively shopped by participating private market
insurers before becoming, or remaining, policies of Citizens. FNIC intends to be a participating insurance company in the
Clearinghouse.
REGULATION
General
We are subject to the laws and regulations in Alabama, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland,
Mississippi, Missouri, New York, Nevada, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia
and regulations of any other states in which we seek to conduct business in the future. The regulations cover all aspects of our
business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of
shareholders. Such regulations relate to authorized lines of business, capital and surplus requirements, allowable rates and
forms, investment parameters, underwriting limitations, transactions with affiliates, dividend limitations, changes in control,
market conduct, maximum amount allowable for premium financing service charges and a variety of other financial and non-
financial components of our business. Our failure to comply with certain provisions of applicable insurance laws and
regulations could have a material adverse effect on our business, results of operations or financial condition. In addition, any
changes in such laws and regulations, including the adoption of consumer initiatives regarding rates charged for coverage,
could materially and adversely affect our operations or our ability to expand.
Most states’ laws restrict an insurer’s underwriting discretion, such as the ability to terminate policies, terminate
agents or reject insurance coverage applications, and many state regulators have the power to reduce, or to disallow, increases
in premium rates. In addition, state laws generally require that rate schedules and other information be filed with the state's
insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The
regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory.
Rates, which are not necessarily uniform for all insurers, vary by class of business, hazard covered, and size of risk. Certain
states, including Florida, as discussed above, have adopted laws or are considering proposed legislation which, among other
things, limit the ability of insurance companies to effect rate increases or to cancel, reduce or non-renew insurance coverage
with respect to existing policies, particularly personal automobile insurance.
Most states require licensure or regulatory approval prior to the marketing of new insurance products. Typically,
licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, character of its
officers and directors, rates, forms and other financial and non-financial aspects of a company. The regulatory authorities
may prohibit entry into a new market by not granting a license or by withholding approval.
All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject
to regular and special examinations by those agencies. We may be the subject of additional special examinations or analysis.
These examinations or analysis may result in one or more corrective orders being issued by the Florida OIR. The most recent
balance sheet audit of FNIC by the Florida OIR occurred as of December 31, 2009. There were no material findings by the
independent auditors in connection with this examination. FNIC also experienced a regularly scheduled statutory
examination by the Florida OIR which occurred during 2010 for the five years ended December 31, 2009. There were no
- 18 -
material findings in connection with this examination.
Federated National Holding Company
In some instances, various states routinely require deposits of assets for the protection of policyholders either in
those states or for all policyholders. As an example, the Florida OIR requires FNIC to have securities with a fair market value
of $2.0 million held in escrow. As of December 31, 2013, FNIC held investment securities with a fair value of approximately
$2.0 million, as a deposit with the State of Florida. Additionally, as of December 31, 2013 FNIC had cash deposits totaling
$370,000 with the State of Alabama, $118,900 with the State of Louisiana and $25,000 with the State of Georgia.
As of December 31, 2012, FNIC held investment securities with a fair value of approximately $2.3 million, as a
deposit with the State of Florida. Additionally, as of December 31, 2012 FNIC had cash deposits totaling $415,100 with the
State of Alabama, $150,000 with the State of Arkansas, $118,700 with the State of Louisiana and $25,000 with the State of
Georgia.
Consent Order
In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance
Company (“American Vehicle”), with FNIC continuing the operations of both entities. As part of its approval of the merger
between FNIC and American Vehicle, the Florida Office of Insurance Regulation (“Florida OIR”), the Company, FNIC and
American Vehicle entered into a consent order with the Florida OIR dated January 25, 2011 (the “Consent Order”), which
was amended in February 2013, due to FNIC’s statutory underwriting profit during 2012. Pursuant to the amended Consent
Order, the Company and the resulting company in the merger (the “Merged Company”) have agreed to the following:
• The Merged Company retained the following licenses: (010) Fire, (020) Allied Lines, (040) Homeowners Multi
Peril, (050) Commercial Multi Peril, (090) Inland Marine, (170) Other Liability, (192) Private Passenger Auto
Liability, (194) Commercial Auto Liability, (211) Private Passenger Auto Physical Damage and (212) Commercial
Auto Physical Damage.
• The Merged Company will not write commercial multi peril policy premium without prior approval from the Florida
OIR. The Merged Company has no commercial multi peril policy premium in force.
• The Merged Company surrendered its surety license. The Merged Company has no surety policy premium in force.
• The Merged Company will not write new commercial habitation condominium associations without prior approval
from the Florida OIR. The current commercial habitation book of business is fully earned.
• The Merged Company agreed to maintain the total number of its homeowners’ policies in Miami-Dade, Broward
and Palm Beach counties (the “Tri-County Area”) at 35% of its entire homeowners’ book. As of December 31,
2013, the Company had approximately 18.3% of its homeowners’ policies located within Tri-County Area.
• The managing general agency fees payable by the Merged Company to Federated National Underwriters, Inc.
(“FNU”), formerly known as Assurance Managing General Agents, Inc., a wholly owned subsidiary of the
Company, which were traditionally 6% of gross written premium, were reduced and will not exceed 4% without
prior approval from the Florida OIR. The Merged Company has lowered the fee to amounts varying between 2%
and 4% of gross written to further support the FNIC results of operations. This will have no impact on the
Company’s consolidated financial results.
• The claims service fees payable by the Merged Company to Federated National Adjusting, Inc. (“FNA”), formerly
known as Superior Adjusting, Inc., were reduced from the traditional 4.5% of gross earned premium to 3.6% of
gross earned premium. This will have no impact on the Company’s consolidated financial results.
The merger of FNIC and American Vehicle will be an ongoing transition, many aspects of which will take effect
over time. References to the companies contained herein are intended to be references to the operations of FNIC following
the January 2011 merger. References to the historical activities of American Vehicle are appropriately identified throughout
this document.
- 19 -
Restrictions in Payments of Dividends by Domestic Insurance Companies
Federated National Holding Company
Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its
shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments
or distributions to shareholders without prior approval of the Florida OIR if the dividend or distribution would exceed the
larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two-
year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25.0% of
unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three-year
carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the
Florida OIR (i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards
policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s
entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the
insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital
surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the Florida OIR at
least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer
of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115.0% of required
statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend
or make a distribution (i) subject to prior approval by the Florida OIR or (ii) 30 days after the Florida OIR has received notice
of such dividend or distribution and has not disapproved it within such time.
No dividends were paid by FNIC or American Vehicle in 2013, 2012 and 2011, and none are anticipated in 2014.
Although we believe that amounts required to meet our financial and operating obligations will be available from sources
other than dividends from our insurance subsidiaries, there can be no assurance in this regard. Further, there can be no
assurance that, if requested, the Florida OIR will allow any dividends to be paid by FNIC to us, the parent company, in the
future. The maximum dividends permitted by state law are not necessarily indicative of an insurer’s actual ability to pay
dividends or other distributions to a parent company, which also may be constrained by business and regulatory
considerations, such as the impact of dividends on capital surplus, which could affect an insurer’s competitive position, the
amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations
require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable
in relation to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries (FNU, FNA and any other affiliate) are not subject directly to the
dividend and other distribution limitations, insurance holding company regulations govern the amount that any affiliate
within the holding company system may charge any of the insurance companies for service (e.g., management fees and
commissions).
NAIC Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners
(“NAIC”) established risk-based capital requirements for insurance companies that are designed to assess capital adequacy
and to raise the level of protection that statutory surplus provides for policy holders. These requirements measure three major
areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss
developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from
investments. Insurers having less statutory surplus than required will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy. The Florida OIR, which follows these requirements, could require FNIC to
cease operations in the event they fail to maintain the required statutory capital.
Based upon the 2013 and 2012 statutory financial statements for FNIC, statutory surplus exceeded the regulatory
action levels established by the NAIC’s risk-based capital requirements.
Based on risk-based capital requirements, the extent of regulatory intervention and action increases as the ratio of an
insurer’s statutory surplus to its Authorized Control Level (“ACL”), as calculated under the NAIC’s requirements, decreases.
The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance
regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level,
requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an
examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The
third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions
- 20 -
Federated National Holding Company
if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the
regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC’s ratio of
statutory surplus to its ACL was 312.1%, 474.4% and 409.7% at December 31, 2013, 2012 and 2011, respectively.
Insurance Regulatory Information Systems (“IRIS”) Ratios
The NAIC has also developed IRIS ratios to assist state insurance departments in identifying companies which may
be developing performance or solvency problems, as signaled by significant changes in the companies’ operations. Such
changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in
certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling
outside “usual ranges”, state regulators may investigate to determine the reasons for the variance and whether corrective
action is warranted.
As of December 31, 2013, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions
related to change in net writings, investment yield and estimated current reserve deficiency to policyholders’ surplus.
As of December 31, 2012, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions
related to investment yield, net change in adjusted policyholders’ surplus and estimated current reserve deficiency to
policyholders’ surplus.
As of December 31, 2011, FNIC was outside NAIC’s usual range for two of thirteen IRIS ratios. These exceptions
related to two-years overall operating ratio and investment yield.
There was no action taken by the Florida OIR in connection with the December 31, 2012 or 2011 IRIS ratio results.
We do not currently believe that the Florida OIR will take any significant action with respect to FNIC regarding the 2013
IRIS ratios, although there can be no assurance that will be the case.
Insurance Holding Company Regulation
We, the parent company, are subject to laws governing insurance holding companies in Florida where FNHC is
domiciled. These laws, among other things, (i) require us to file periodic information with the Florida OIR, including
information concerning our capital structure, ownership, financial condition and general business operations, (ii) regulate
certain transactions between us and our affiliates, including the amount of dividends and other distributions, the terms of
surplus notes and amounts that our affiliates can charge the holding company for services such as management fees or
commissions, (iii) restrict the ability of any one person to acquire certain levels of our voting securities without prior
regulatory approval. Any purchaser of 5% or more of the outstanding shares of our Common Stock will be presumed to have
acquired control of FNHC unless the Florida OIR, upon application, determines otherwise.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or
regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing.
These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain
coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term, (iii) advance
notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates
permitted to be charged.
Industry Ratings Services
Third-party rating agencies assess and rate the ability of insurers to pay their claims. These financial strength ratings
are used by the insurance industry to assess the financial strength and quality of insurers. These ratings are based on criteria
established by the rating agencies and reflect evaluations of each insurer's profitability, debt and cash levels, customer base,
adequacy and soundness of reinsurance, quality and estimated market value of assets, adequacy of reserves and management.
Ratings are based upon factors of concern to agents, reinsurers and policyholders and are not directed toward the protection
of investors, such as purchasers of our common stock.
As of December 31, 2013, FNIC is rated by Demotech as "A" ("Exceptional"), which is the third of seven ratings,
and defined as “Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers
earning a Financial Stability Rating (“FSR”) of “A” possess “Exceptional” financial stability related to maintaining surplus as
regards to policyholders”. Demotech’s ratings are based upon factors of concern to agents, reinsurers and policyholders and
- 21 -
Federated National Holding Company
are not primarily directed toward the protection of investors. Our Demotech rating could be jeopardized by factors including
adverse development and various surplus related ratio exceptions. On November 22, 2013, Demotech reaffirmed FNIC’s FSR
of “A” (“Exceptional”).
The withdrawal of our ratings could limit or prevent us from writing or renewing desirable insurance policies, from
competing with insurers who have higher ratings, from obtaining adequate reinsurance, or from borrowing on a line of credit.
The withdrawal of our ratings could have a material adverse effect on the Company’s results of operations and financial
position because the Company’s insurance products might no longer be acceptable to the secondary marketplace and
mortgage lenders. Furthermore, a withdrawal of our ratings could prevent independent agents from selling and servicing our
insurance products.
EMPLOYEES
As of December 31, 2013, we had 153 employees, including two executive officers. We are not a party to any
collective bargaining agreement and we have not experienced work stoppages or strikes as a result of labor disputes. We
consider relations with our employees to be satisfactory.
ITEM 1A
RISK FACTORS
We are subject to certain risks in our business operations which are described below. Careful consideration of these
risks should be made before making an investment decision. The risks and uncertainties described below are not the only
ones facing FNHC. Additional risks and uncertainties not presently known or currently deemed immaterial may also impair
our business operations.
Risks Related to Our Business
Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.
We write insurance policies that cover homeowners, business owners and automobile owners for losses that result
from, among other things, catastrophes and sinkholes. Catastrophic losses can be caused by natural events such as hurricanes,
tropical storms, tornadoes, wind, hail, fires, explosions and other events, and their incidence and severity are inherently
unpredictable. They can also be caused by terrorist attacks, war, riots, political instability and other man-made events. The
extent of losses from a catastrophe is a function of two factors: the total amount of the insurance company's exposure in the
area affected by the event and the severity of the event. Although our homeowners' policyholders are disbursed throughout
Florida, substantially all of them are located in Florida, which is especially subject to adverse weather conditions such as
hurricanes and tropical storms, and a substantial portion are located in southeastern Florida.
The occurrence of claims from catastrophic events could result in substantial volatility in our results of operations or
financial condition for any fiscal quarter or year. Increases in the values and concentrations of insured property may also
increase the severity of these occurrences in the future. Although we attempt to manage our exposure to such events through
the use of underwriting controls and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable
and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and
risk management expectations. As a result, the occurrence of one or more catastrophic events could have a material adverse
effect on our results of operations or financial condition.
Although Florida has not experienced a hurricane during the last eight hurricane seasons, some weather analysts
believe that we have entered a period of greater hurricane activity. We are exploring alternatives to reduce our exposure to
these types of storms, which may increase operating expenses and may not be successful in protecting long-term profitability.
If our loss experience is more adverse than is contemplated by our loss reserves, the related increase in our loss reserves may
have a material adverse effect on our results of operations in the period in which the increase occurs.
Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance
fluctuates and we may not be able to successfully alleviate risk through reinsurance arrangements.
We have a reinsurance structure that is a combination of private reinsurance and the FHCF. Our reinsurance
structure is composed of several reinsurance companies with varying levels of participation providing coverage for loss and
LAE at pre-established minimum and maximum amounts. Losses incurred in connection with a catastrophic event below the
minimum and above the maximum are the responsibility of FNIC.
- 22 -
Federated National Holding Company
The availability and costs associated with the acquisition of reinsurance will vary year to year. We are not able to
control these fluctuations which may be significant and may limit our ability to purchase adequate coverage. The recovery of
increased reinsurance costs through rate action is not immediate and cannot be presumed, as it is subject to approval of the
Florida OIR.
We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of
operations and financial condition.
As is common practice within the insurance industry, we transfer a portion of the risks insured under our policies to
other companies through the purchase of reinsurance. This reinsurance is maintained to protect our insurance subsidiary
against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an
aggregate extraordinary loss and other catastrophic events. Although reinsurance does not discharge our insurance subsidiary
from its primary obligation to pay for losses insured under the policies it issues, reinsurance does make the assuming
reinsurer liable to the insurance subsidiary for the reinsured portion of the risk. A credit 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 business, 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 their claims or impair their ability to pay their claims in a timely manner. This could result in significant
financial, legal and operational challenges to our company. Therefore, in the event of a catastrophic loss, we may become
dependent upon the FHCF's ability to pay, which may, in turn, be dependent upon the MCP's ability to issue bonds in
amounts that would be required to meet its reinsurance obligations in the event of such a catastrophic loss.
Our January 2011 Consent Order with the Florida OIR, as amended in February 2013, limits our business in certain
respects and may prevent us from growing our business.
In January 2011, we entered into a Consent Order with the Florida OIR, in connection with our request for approval
of the merger of FNIC, into American Vehicle Insurance Company, one of our other subsidiaries at the time. The Consent
Order was amended in February 2013 to lessen or eliminate certain of the original requirements, due to FNIC's statutory
underwriting profit during 2012. Among other things, the Consent Order as amended requires us to limit the concentration of
our homeowners' policies in Miami-Dade, Broward and Palm Beach counties. This reduction in concentration could
materially adversely affect us by limiting our ability to write policies in the most populous region of the State of Florida,
which could materially adversely affect our results of operations if we are not able to replace those policies with policies
elsewhere in Florida or the other states in which we do business.
If we are unable to continue our growth because our capital must be used to pay greater than anticipated claims, our
financial results may suffer.
Our future growth will depend on our ability to expand the types of insurance products we offer and the geographic
markets in which we do business, both balanced by the business risks we choose to assume and cede. We believe that our
Company is sufficiently capitalized to operate our business as it now exists and as we currently plan to expand it. Our
existing sources of funds include possible sales of our investment securities and our earnings from operations and
investments. Unexpected catastrophic events in our market areas, such as the hurricanes experienced in Florida, have resulted
and may result in greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy
our capital to pay these unanticipated claims.
We may require additional capital in the future which may not be available or only available on unfavorable terms.
Our future capital requirements depend on many factors, including our ability to write new business successfully and
to establish premium rates and reserves at levels sufficient to cover losses. Based on our current operating plan, we believe
current capital, together with our anticipated retained earnings, will support our operations without the need to raise
additional capital. To the extent that our capital may be insufficient to meet future operating requirements and/or cover
losses, we may need to raise additional funds through financings or curtail our growth. Many factors will affect the amount
and timing of our capital needs, including our growth and profitability, our claims experience, and the availability of
reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments.
- 23 -
Federated National Holding Company
If we were required to raise additional capital, equity or debt financing may not be available at all or may be
available only on terms that are not favorable to us. In the case of equity financings, dilution to our stockholders’ ownership
could result, and in any case such securities may have rights, preferences and privileges that are senior to those of existing
shareholders. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash
payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business or
pay dividends. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of
operations could be materially adversely affected.
Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.
We are subject to extensive regulation in the states in which we conduct business. This regulation is generally
designed to protect the interests of policyholders, as opposed to shareholders and other investors, and relates to authorization
for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with
affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial
components of an insurance company's business. These regulatory requirements may adversely affect or inhibit our ability to
achieve some or all of our business objectives. State regulatory authorities also conduct periodic examinations into insurers'
business practices. These reviews may reveal deficiencies in our insurance operations or differences between our
interpretations of regulatory requirements and those of the regulators.
The National Association of Insurance Commissioners, or NAIC, and state insurance regulators are constantly
reexamining existing laws and regulations, generally focusing on modifications to holding company regulations,
interpretations of existing laws and the development of new laws.
From time to time, some states in which we conduct business have considered or enacted laws that may alter or
increase state authority to regulate insurance companies and insurance holding companies. In other situations, states in which
we conduct business have considered or enacted laws that impact the competitive environment and marketplace for property
and casualty insurance. In addition, in recent years the state insurance regulatory framework has come under increased
federal scrutiny. Changes in federal legislation and administrative policies in several areas, including changes in financial
services regulation and federal taxation, can significantly impact the insurance industry and us.
We cannot predict with certainty the effect any enacted, proposed or future state or federal legislation or NAIC
initiatives may have on the conduct of our business. Furthermore, there can be no assurance that the regulatory requirements
applicable to our business will not become more stringent in the future or result in materially higher costs than current
requirements. Changes in the regulation of our business may reduce our profitability, limit our growth or otherwise adversely
affect our operations.
We may experience financial exposure from climate change.
A body of scientific evidence seems to indicate that climate change may be occurring. Climate change, to the extent
that it may affect weather patterns, may cause an increase in the frequency and/or the severity of catastrophic events or severe
weather conditions. Our financial exposure from climate change is most notably associated with losses in connection with the
occurrence of hurricanes striking Florida. We mitigate the risk of financial exposure from climate change by restrictive
underwriting criteria, sensitivity to geographic concentrations, and reinsurance.
Restrictive underwriting criteria can include, but are not limited to, higher premiums and deductibles and more
specifically excluded policy risks such as fences and screened-in enclosures. New technological advances in computer
generated geographical mapping afford us an enhanced perspective as to geographic concentrations of policyholders and
proximity to flood prone areas. Our amount of maximum reinsurance coverage is determined by subjecting our homeowner
exposures to statistical forecasting models that are designed to quantify a catastrophic event in terms of the frequency of a
storm occurring once in every "n" years. Our reinsurance coverage contemplates the effects of a catastrophic event that
occurs only once every 100 years. Our amount of losses retained (our deductible) in connection with a catastrophic event is
determined by market capacity, pricing conditions and surplus preservation. There can be no assurance that our reinsurance
coverage and other measures taken will be sufficient to mitigate losses resulting from one or more catastrophic events.
- 24 -
Federated National Holding Company
Our loss reserves are estimates and may be inadequate to cover our actual liability for losses, causing our results of
operations to be adversely affected.
We maintain reserves to cover our estimated ultimate liabilities for loss and LAE. These reserves are estimates
based on historical data and statistical projections of what we believe the settlement and administration of claims will cost
based on facts and circumstances then known to us. Actual loss and LAE reserves, however, may vary significantly from our
estimates.
Factors that affect unpaid losses and LAE include the estimates made on a claim-by-claim basis known as "case
reserves" coupled with bulk estimates known as "incurred but not yet reported." Periodic estimates by management of the
ultimate costs required to settle all claim files are based on our analysis of historical data and estimations of the impact of
numerous factors such as (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative
enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes; 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 past 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.
Because of the uncertainties that surround estimated loss reserves, we cannot be certain that our reserves will be
adequate to cover our actual losses. If our reserves for unpaid losses and LAE are less than actual losses and LAE, we will be
required to increase our reserves with a corresponding reduction in our net income in the period in which the deficiency is
identified. Future loss experience, substantially in excess of our reserves for unpaid losses and LAE, could substantially harm
our results of operations and financial condition.
Our revenues and operating performance will fluctuate due to statutorily approved assessments that support property
and casualty insurance pools and associations.
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, the Florida Joint
Underwriters Association, the Florida Insurance Guaranty Association, Citizens and the FHCF.
The insurance companies currently pass the assessments on to holders or insurance policies, in the form of a policy
surcharge, and reflect the collection of these assessments as fully earned credits to operations in the period collected. The
collection of these fees may adversely affect our overall marketing strategy due to the competitive landscape in Florida.
During December 2012, the Company was assessed $0.8 million by Florida Insurance Guaranty Association
(“FIGA”) relating to the recent failures of Florida domestic property and casualty insurance companies. Future assessments
are likely, although the impact of these assessments on our balance sheet, results of operations or cash flow are
undeterminable at this time.
Our investment portfolio may suffer reduced returns or losses, which would significantly reduce our earnings.
Like other insurance companies, we depend on income from our investment portfolio for a substantial portion of our
earnings. During the time that normally elapses between the receipt of insurance premiums and any payment of insurance
claims, we invest the premiums received, together with our other available capital, primarily in debt securities and to a lesser
extent in equity securities, in order to generate investment income.
Our investment portfolio contains interest rate sensitive instruments, such as bonds, which may be adversely
affected by changes in interest rates. A significant increase in interest rates or decrease in credit worthiness could have a
material adverse effect on our financial condition or results of operations. Generally, bond prices decrease as interest rates
rise. Changes in interest rates could also have an adverse effect on our investment income and results of operations. For
example, if interest rates decline, investment of new premiums received and funds reinvested will earn less than expected.
Our determination of the amount of other-than-temporary impairment to record varies by investment type and is
based upon our periodic evaluation and assessment of known and inherent risks associated with the respective investment
type. We revise our evaluations and assessments as conditions change and new information becomes available, and we reflect
changes in other-than- temporary impairments in our consolidated statements of income. We base our assessment of whether
other-than-temporary impairments have occurred on our case-by-case evaluation of the underlying reasons for the decline in
fair value. We can neither provide assurance that we have accurately assessed whether the impairment of one or more of our
- 25 -
Federated National Holding Company
investments is temporary or other-than-temporary, nor that we have accurately recorded amounts for other-than-temporary
impairments in our financial statements. Furthermore, historical trends may not be indicative of future impairments and
additional impairments may need to be recorded in the future.
In addition, volatile and illiquid markets increase the likelihood that investment securities may not behave in
historically predictable manners, resulting in fair value estimates that may be overstated compared with actual amounts that
could be realized upon disposition or maturity of the security. The effects of market volatility and declining economic
conditions may have unforeseen consequences on the credit quality, liquidity and financial stability of the issuers of securities
we hold, or reinsurers with which we do business. Such deteriorations in financial condition can occur rapidly, leaving us
unable to react to such a scenario in a prudent manner consistent with our historical practices in dealing with more orderly
markets. This in turn could adversely and negatively affect our results of operations, liquidity or financial condition.
We may experience a loss due to the concentration of credit risk.
Financial instruments that potentially subject the Company to significant concentration of credit risk consist of cash
and cash equivalents held in a mutual fund money market account. The Company had approximately $12.2 million and $10.7
million invested in the Wilmington Prime Money Market Fund – Class Select (Ticker: VSMXX, CUSIP: 97181C308), for
which the NAIC classification is Class 1, as of December 31, 2013 and 2012, respectively. Although this fund is on the Class
1 list, the highest rating available, there can be no assurance that it will remain financially sound. If the MTB Fund were to
experience financial difficulty such that it could not repay the money we have invested in the fund, our financial condition
and results of operations could be materially and adversely affected.
The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial
condition or our results of operations.
Various provisions of our policies, such as limitations or exclusions from coverage which have been negotiated to
limit our risks, may not be enforceable in the manner we intend. At the present time we employ a variety of exclusions to our
policies that limit exposure to known risks, including, but not limited to, exclusions relating to certain named liabilities, types
of vehicles and specific artisan activities.
In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to
decline coverage in the event of a violation of that condition. While we believe our insurance product exclusions and
limitations reduce the loss exposure to us and help eliminate known exposures to certain risks, it is possible that a court or
regulatory authority could nullify or void an exclusion or that legislation could he enacted modifying or barring the use of
such endorsements and limitations in a way that would adversely affect our loss experience, which could have a material
adverse effect on our financial condition or results of operations.
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues
related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not
become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full
extent of liability under our insurance contracts may not be known for many years after a contract is issued.
An example of such emerging change was the influence public adjusters have had on property claim patterns. Public
adjusters represented the vast majority of new and reopened claims filed during 2011 and 2010 where the cause of loss was
asserted as hurricane related. Although the legitimacy of the claim may not prevail we are still required to research, review
and sometimes mediate these claims. Several legislative actions in of the State of Florida, such as limiting the time a claim
can be filed subsequent to the cause of loss, have either passed or remain in legislative sub-committees. Each of these actions
is designed to enhance the legitimacy of the public adjusters’ influence on the claim process.
Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.
We must accurately evaluate and pay claims that are made under our policies. Many factors affect our ability to pay
claims accurately, including the training and experience of our claims representatives, the culture of our claims organization
and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems
to support our claims functions and other factors. Our failure to pay claims accurately could lead to material litigation,
undermine our reputation in the marketplace, impair our image and negatively affect our financial results.
- 26 -
Federated National Holding Company
In addition, if we do not train new claims adjusting employees effectively or if we lose a significant number of
experienced claims adjusting employees, our claims department's ability to handle an increasing workload as we grow could
be adversely affected. In addition to potentially requiring that growth be slowed in the affected markets, we could suffer
decreased quality of claims work, which in turn could lower our operating margins.
Our insurance company is subject to minimum capital and surplus requirements, and our failure to meet these
requirements could subject us to regulatory action.
Our insurance company is subject to risk-based capital standards and other minimum capital and surplus
requirements imposed under applicable state laws, including the laws of the State of Florida. The risk-based capital standards,
based upon the Risk Based Capital Model Act adopted by the NAIC, require our insurance company to report their results of
risk-based capital calculations to state departments of insurance and the NAM. These risk-based capital standards provide for
different levels of regulatory attention depending upon the ratio of an insurance company's total adjusted capital, as
calculated in accordance with NAIC guidelines, to its authorized control level risk-based capital.
If we fail to meet the applicable risk-based capital or minimum statutory capital requirements imposed by the laws
of Florida or other states where we do business, we could be subject to further examination or corrective action imposed by
state regulators, including limitations on out writing of additional business, state supervision or liquidation, and may be
required to raise additional capital. Similarly, an increase in existing risk-based capital requirements or minimum statutory
capital requirements may require us to increase our statutory capital levels. As of December 31, 2013, FNIC was in
compliance with the NAIC risk-based capital requirements (see “Business-Regulation” for further discussion).
Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance
industry.
Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in
cyclical patterns characterized by periods of significant competition in pricing and underwriting terms and conditions, which
is known as a "soft" insurance market, followed by periods of lessened competition and increasing premium rates, which is
known as a "hard" insurance market. Although an individual insurance company's financial performance is dependent on its
own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this
cyclical market pattern, with profitability generally increasing in hard markets and decreasing in soft markets. At present, we
are experiencing a hardening market in the property and casualty market in Florida because of regulatory changes. We cannot
predict, however, how long these market conditions will persist. Although we do not compete entirely on price or targeted
market share, negative market conditions may impair our ability to write insurance at rates that we consider appropriate
relative to the risk assumed. If we cannot write insurance at appropriate rates, our revenues and operating performance may
be adversely affected.
We may not obtain the necessary regulatory approvals to expand the types of insurance products we offer or the
states in which we operate.
The insurance industry is highly regulated. Prior to selling a new insurance product in a state, we must obtain
approval from the applicable state insurance regulators. The insurance regulators in states to which we might apply may
request additional information, add conditions to the license that we find unacceptable, or deny our application. This would
delay or prevent us from operating in that state. If we want to operate in any additional states, we must file similar
applications for licenses, which we may not be successful in obtaining.
Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable
policies or obtain adequate insurance, which could limit or halt our growth and harm our business.
Third-party rating agencies assess and rate the ability of insurers to pay their claims. These financial strength ratings
are used by the insurance industry to assess the financial strength and quality of insurers. These ratings are based on criteria
established by the rating agencies and reflect evaluations of each insurer's profitability, debt and cash levels, customer base,
adequacy and soundness of reinsurance, quality and estimated market value of assets, adequacy of reserves, and management.
Ratings are based upon factors of concern to agents, reinsurers and policyholders and are not directed toward the protection
of investors, such as purchasers of our common stock.
The withdrawal of our ratings could limit or prevent us from writing or renewing desirable insurance policies, from
competing with insurers who have higher ratings, from obtaining adequate reinsurance, or from borrowing on a line of credit.
The withdrawal or downgrade of our ratings could have a material adverse effect on our results of operations and financial
position because our insurance products might no longer be acceptable to the secondary marketplace and mortgage lenders.
- 27 -
Federated National Holding Company
Furthermore, a withdrawal or downgrade of our ratings could prevent independent agents from selling and servicing our
insurance products or could increase the commissions we must pay to these agents.
We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain
independent and general agents, our revenues would be negatively affected.
We currently market and distribute our products and services through contractual relationships with a network of
approximately 3,600 independent agents, of which approximately 1,800 actively sell and service our products, and a selected
number of general agents. Our independent agents are our primary source for our property and liability insurance policies.
Many of our competitors also rely on independent agents. As a result, we must compete with other insurers for independent
agents' business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage,
or higher commissions to their agents. If our products, pricing and commissions do not remain competitive, we may find it
more difficult to attract business from independent agents to sell our products. A material reduction in the amount of our
products that independent agents sell or a material reduction in the number of independent agents with whom we maintain a
relationship could negatively affect our results of operations and financial condition.
In February 2013, we entered into an Insurance Agency Master Agreement with Ivantage Select Agency, Inc., or
ISA, an affiliate of Allstate Insurance Company, or Allstate, pursuant to which we are authorized by ISA to appoint Allstate
agents to offer our homeowners' and commercial general liability insurance products to consumers in Florida. Since that time,
our homeowners' premiums and the percentage of homeowners' premiums attributable to Allstate agents has increased
rapidly. During 2013, 25.5% of the homeowners' premiums we underwrote were from Allstate's network of Florida agents,
and this concentration may continue to increase. An interruption or change in our relationship with ISA could have a material
adverse effect on the amount of premiums we are able to write, as well as our results of operations.
We rely on our information technology and telecommunications systems, and the failure of these systems could
disrupt our operations.
Our business is highly dependent upon the successful and uninterrupted functioning of our current information
technology and telecommunications systems. We rely on these systems to process new and renewal business, provide
customer service, make claims payments and facilitate collections and cancellations, as well as to perform actuarial and other
analytical functions necessary for pricing and product development. As a result, the failure of these systems could interrupt
our operations and adversely affect our financial results. We utilize a third-party to provide certain information security
related services designed to prevent an information security event or detect one timely. Although we have implemented
security measures to protect our systems from computer viruses and intrusions by third parties, there can be no assurances
that these measures will be effective.
Nonstandard automobile insurance historically has a higher frequency of claims than standard automobile insurance,
thereby increasing our potential for loss exposure beyond what we would be likely to experience if we offered only
standard automobile insurance.
Nonstandard automobile insurance is provided to insureds that are unable to obtain preferred or standard insurance
coverage because of their payment histories, driving records, age, vehicle types, or prior claims histories. This type of
automobile insurance historically has a higher frequency of claims than does preferred or standard automobile insurance
policies, although the average dollar amount of the claim is usually smaller under nonstandard insurance policies. As a result,
we are exposed to the possibility of increased loss exposure and higher claims experience than would be the case if we
offered only standard automobile insurance.
Florida's personal injury protection insurance statute contains provisions that favor claimants, causing us to
experience a higher frequency of claims than might otherwise be the case if we operated only outside of Florida.
Florida's personal injury protection insurance statute limits an insurer's ability to deny benefits for medical treatment
that is unrelated to the accident, that is unnecessary, or that is fraudulent. In addition, the statute allows claimants to obtain
awards for attorney's fees. Although this statute has been amended several times in recent years, primarily to address
concerns over fraud, the Florida legislature has been only marginally successful in implementing effective mechanisms that
allow insurers to combat fraud and other abuses. We believe that this statute contributes to a higher frequency of claims
under nonstandard automobile insurance policies in Florida, as compared with claims under standard automobile insurance
policies in Florida and nonstandard and standard automobile insurance policies in other states. Although we believe that we
have successfully offset these higher costs with premium increases, because of competition, we may not be able to do so with
as much success in the future, which could have a material adverse effect on our results of operations and financial condition.
- 28 -
Our success depends on our ability to accurately price the risks we underwrite.
Federated National Holding Company
The results of operations and the financial condition of our insurance company depend on our ability to underwrite
and set premium rates accurately for a wide variety of risks. Rate adequacy is necessary to generate sufficient premiums to
pay losses, LAE and underwriting expenses and to earn a profit. In order to price our products accurately, we must collect
and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and
timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to
undertake these efforts successfully and price our products accurately is subject to a number of risks and uncertainties, some
of which are outside our control, including:
•
•
•
•
•
•
the availability of sufficient reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
our selection and application of appropriate rating and pricing techniques;
changes in legal standards, claim settlement practices, medical care expenses and restoration costs;
regulatory restrictions; and
legislatively imposed consumer initiatives.
Consequently, we could under-price risks, which would negatively affect our profit margins, or we could overprice
risks, which could reduce our sales volume and competitiveness. In either event, the profitability of our insurance company
could be materially and adversely affected.
Current operating resources are necessary to develop future new insurance products.
We currently intend to expand our product offerings by underwriting additional insurance products and programs,
and marketing them through our distribution network. Expansion of our product offerings will result in increases in expenses
due to additional costs incurred in actuarial rate justifications, software and personnel. Offering additional insurance products
may also require regulatory approval, further increasing our costs. There can be no assurance that we will be successful
bringing new insurance products to our marketplace in a manner that is profitable.
Increased competition, competitive pressures, industry developments and market conditions could affect the growth
of our business and adversely impact our financial results.
We operate in highly competitive markets and face competition from national, regional and residual market
insurance companies in the homeowners', commercial general liability, and automobile markets, many of whom are larger,
have greater financial and other resources, have higher financial strength ratings and offer more diversified insurance
coverage. Our competitors include companies that market their products through agents, as well as companies that sell
insurance directly to their customers. Large national writers may have certain competitive advantages over agency writers,
including increased name recognition, increased loyalty of their customer base and reduced policy acquisition costs. We may
be forced to reduce our premiums significantly to compete, which could make us less profitable and have a material adverse
effect on our business, results of operations and financial condition. If we do not meet the prices offered by our competitors,
we may lose business in the short term, which could also result in a material adverse effect on our business, results of
operations and financial condition.
Our ability to compete successfully in states outside of Florida and to expand our business footprint may also be
negatively affected by our lack of an A. M. Best rating of our financial strength. Although our insurance subsidiary has a
Demotech rating of "A" (Exceptional), which is generally accepted in Florida and certain other states, a rating by A. M. Best
is more widely accepted outside of Florida and may cause customers and agents to prefer a policy written by an A. M. Best-
rated company over a policy written by us. In addition, some mortgage companies outside of Florida may require
homeowners to obtain property insurance from an insurance company with a minimum A. M. Best rating.
- 29 -
Federated National Holding Company
Our participation in the new Florida Property Insurance Clearinghouse may not result in an increase in our premium
revenue.
Pursuant to legislation passed by the Florida legislature in 2013 intended to reduce the insurance policy count of
Citizens Property Insurance Corporation, a Florida not-for-profit, tax-exempt government corporation (“Citizens”), the
Property Insurance Clearinghouse (the “Clearinghouse”) launched during February 2014. This will allow all potentially new
and renewal policies of Citizens to be comparatively shopped by participating private market insurers before becoming, or
remaining, policies of Citizens. We intend to be a participating insurance company in the Clearinghouse.
Applications to Citizens for new homeowners' policies and existing policies with Citizens up for renewal will be
submitted to insurance companies participating in the Clearinghouse. If that process identifies a carrier willing to write a new
policy at a premium that is no more than 15% higher than Citizens' premium of comparable coverage or, in the case of a
renewal, with a premium equal to or less than the policy's renewal premium with Citizens, then that homeowner will be
ineligible for coverage with Citizens. The homeowner may then choose to have an agent bind coverage with the homeowner's
choice of the private market insurers that have made the homeowner a qualifying offer of coverage.
There can be no assurance that our policy count or gross premiums will increase as a result of our participation in
the Clearinghouse, because our premiums may not be below the threshold required by Citizens, other carriers participating in
the Clearinghouse may be willing to oiler similar policies for lower premiums, or we may decide to not provide a quote on
these policies if they do not meet our underwriting guidelines.
Our senior management team is critical to the strategic direction of our company. If there were an unplanned loss of
service by any of our officers our business could be harmed.
We depend, and will continue to depend, on the services of our executive management team which includes Michael
H. Braun, Chief Executive Officer and President and Peter J. Prygelski III, our Chief Financial Officer and Treasurer. Our
success also will depend in part upon our ability to attract and retain qualified executive officers, experienced underwriting
talent and other skilled employees who are knowledgeable about our business. If we were to lose the services of one or more
members of our executive management team, our business could be adversely affected. Although we have employment
agreements with our executive officers, any unplanned loss of service could substantially harm our business.
We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs
and limit our growth.
As an insurance company, we are subject to extensive laws and regulations. These laws and regulations are complex
and subject to change. Moreover, they are administered and enforced by a number of different governmental authorities,
including state insurance regulators, state securities administrators, the SEC, the U.S. Department of Justice, and state
attorneys general, each of which exercises a degree of interpretive latitude. Consequently, we are subject to the risk that
compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in
compliance with another’s interpretation of the same issue, particularly when compliance is judged in hindsight. In addition,
there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may change over time to
our detriment, or that changes in the overall legal environment may, even absent any particular regulator’s or enforcement
authority’s interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a
legal risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to
grow and improve the profitability of our business. Furthermore, in some cases, these laws and regulations are designed to
protect or benefit the interests of a specific constituency rather than a range of constituencies. For example, state insurance
laws and regulations are generally intended to protect or benefit purchasers or users of insurance products, not holders of
securities issued by us. In many respects, these laws and regulations limit our ability to grow and improve the profitability of
our business.
In recent years, the state insurance regulatory framework has come under public scrutiny and members of Congress
have discussed proposals to provide for federal chartering of insurance companies. We can make no assurances regarding the
potential impact of state or federal measures that may change the nature or scope of insurance regulation
New homeowners’ insurance operations outside of the State of Florida may not be profitable.
We plan to continue the expansion of admitted homeowners’ property and casualty programs into other states as
opportunities avail themselves. Risks associated with execution of our planned operations include the inability to market an
adequately priced policy, inadequate commission structures, and overpriced or unavailable catastrophic reinsurance for wind
events. Additionally, each state has its own authoritative body designed to regulate the insurance products and operations of
- 30 -
Federated National Holding Company
new and existing insurance companies under their respective authority. For example, during 2013 Federated National
obtained regulatory approval to initiate a new homeowners’ property and casualty program in the State of Louisiana.
There can be no guarantees that our operations will be profitable in a given state nor can there be any guarantees that
the state authorities will allow us to do business in that state.
We face risks in connection with potential material weakness resulting from our Sarbanes-Oxley Section 404
management report and any related remedial measures that we undertake.
In conjunction with our ongoing reporting obligations as a public company and the requirements of Section 404 of
the Sarbanes-Oxley Act, management reported on the effectiveness of our internal control over financial reporting as of
December 31, 2013. In order to identify any material weaknesses in our internal control over financial reporting, we engaged
in a process to document, evaluate and test our internal controls and procedures, including corrections to existing controls and
implement additional controls and procedures that we may deem necessary. As a result of this evaluation and testing process,
no material financial reporting deficiencies were noted.
Although we did not have any material weaknesses in our internal controls for our fiscal year ended December 31,
2013, we cannot be certain that there will be none in the future. In future periods, if the process required by Section 404 of
the Sarbanes-Oxley Act reveals significant deficiencies or material weaknesses, the correction of any such significant
deficiencies or material weaknesses could require additional remedial measures that could be costly and time-consuming. In
addition, the discovery of material weaknesses could also require the restatement of prior period operating results. If a
material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which
there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures),
our management will be unable to report favorably as of such future period year-end as to the effectiveness of our control
over financial reporting and we could lose investor confidence in the accuracy and completeness of our financial reports,
which could have an adverse effect on our stock price and potentially subject us to litigation.
Risks Related to an Investment in Our Shares
Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price of
our common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.
The market price of our common stock has experienced, and may continue to experience, significant volatility from
time to time. Such volatility may be affected by various factors and events, such as:
•
•
•
•
•
•
•
our quarterly operating results, including a shortfall in operating revenue or net income from that expected by securities
analysts and investors;
recognition of large unanticipated accounting charges, such as related to a loss reserve enhancement;
changes in securities analysts’ estimates of our financial performance or the financial performance of our competitors or
companies in our industry generally;
the limited trading volume and public float of the common stock;
the announcement of a material event or anticipated event involving us or our industry or the markets in which we
operate;
the issuance of a significant number of shares; and
the other risk factors described in this prospectus supplement, the accompanying prospectus and the documents
incorporated by reference herein.
In recent years, the U.S. stock market has experienced extreme price and volume fluctuations, which have
sometimes affected the market price of the securities issued by a particular company in a manner unrelated to the operational
performance of the company. This type of market effect could impact our common stock price as well. The volatility of our
common stock means that the price of our common stock may have declined substantially at such time as you may look to
sell your shares of our common stock. If our share price decreases, the value of your investment could decline.
- 31 -
Federated National Holding Company
If we report a material weakness in our internal controls and procedures, we may lose investor confidence and
remedial measures may be costly.
In accordance with applicable law, we are required to document, evaluate and test our internal controls and
procedures, including corrections to existing controls and implement additional controls and procedures that we may deem
necessary, and to identify and report any material weakness in our internal control over financial reporting. As a result of this
evaluation and testing process, no material weakness was identified or reported as of December 31, 2013. In fixture periods,
if the process required by law reveals significant deficiencies or material weaknesses, the correction of any such significant
deficiencies or material weaknesses could require additional remedial measures that could be costly and time consuming.
In addition, the discovery of material weaknesses could also require the restatement of prior period operating results. If a
material weakness exists and is reported as of a future period year-end (including a material weakness identified prior to year-
end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related
new procedures), we could lose investor confidence in the accuracy and completeness of our financial reports, which could
have an adverse effect on our stock price and potentially subject us to litigation.
No system of internal control over financial reporting will prevent all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems
objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become
inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not
be detected. As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over
financial reporting will be identified in the future.
Our controls and procedures may fail or be circumvented which could have a material adverse effect on our business,
results of operations and financial condition.
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions
and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or
circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could
have a material adverse effect on our business, results of operations and financial condition.
We have authorized but unissued preferred stock, which could affect rights of holders of common stock.
Our articles of incorporation authorize the issuance of preferred stock with designations, rights and preferences
determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without
shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of common stock. In addition, the preferred stock could be
issued as a method of discouraging a takeover attempt. Although we do not intend to issue any preferred stock at this time,
we may do so in the future.
Provisions in our articles of incorporation and our bylaws, as amended, and the Florida Business Corporation Act
could make it more difficult to acquire us and may reduce the market price of our common stock.
Our articles of incorporation and our bylaws presently contain certain provisions which may make it more difficult
and time-consuming for shareholders or third parties to influence our management, policies or affairs, and may discourage,
delay or prevent a transaction involving a change-in-control of the Company and offering a premium over the current market
price of our common stock. These provisions include those which:
•
•
•
•
prohibit cumulative voting in the election of our directors,
establish a classified board of directors with staggered three-year terms,
provide that the written request of shareholders holding not less than one-third of all votes entitled to be cast on an issue
is required for shareholders to call special meetings of our shareholders,
establish advance notice and disclosure procedures for shareholders to bring matters, including nominations for election
to our board, before a meeting of our shareholders, and
- 32 -
Federated National Holding Company
•
eliminate the ability of shareholders to take action by written consent in lieu of a shareholder meeting.
As a result, we may be less likely to receive unsolicited offers to acquire us that some of our shareholders might
consider beneficial.
The Florida Business Corporation Act, as amended, contains provisions, which our directors have elected not to opt
out of, that are designed to enhance the ability of our board to respond to and potentially defer attempts to acquire control of
the Company. These provisions may discourage altogether takeover attempts that have not been approved by our board.
These provisions may also adversely affect the price that a potential purchaser would be willing to pay for our common stock
and, therefore, deprive you of the opportunity to obtain a takeover premium for your shares. These provisions could make the
removal of our incumbent directors and management more difficult. These provisions may enable a minority of our directors
and the holders of a minority of our outstanding voting stock or the holders of an existing control block to prevent, delay,
discourage or make more difficult a merger, tender offer or proxy contest, even though the transaction may be favorable to
the interests of a majority of our non-affiliate shareholders. These provisions could also potentially adversely affect the
market price of our common stock.
As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and
dividends to the holding company as the primary source of our income.
We are an insurance holding company whose primary assets are the stock of our subsidiaries. Our operations, and
our ability to pay dividends or service future potential debt, are limited by the earnings of our subsidiaries and their payment
of their earnings to us in the form of management fees, commissions, dividends, loans, advances or the reimbursement of
expenses. These payments can be made only when our subsidiaries have adequate earnings. In addition, dividend payments
made to us by our insurance subsidiary are restricted by Florida law governing the insurance industry. Generally, Florida law
limits the dividends payable by insurance companies under complicated formulas based on the subsidiary's available capital
and earnings.
Payment of dividends in the future will depend on our earnings and financial position and such other factors, as our
board of directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits
on the amount of dividends that our insurance subsidiaries are permitted to pay to the holding company.
The Board of Directors of FNHC declared regular quarterly dividends of $0.02 per common share payable on
December 28, 2012 and March 4, 2013 to shareholders of record as of December 3, 2012 and February 4, 2013. The Board of
Directors of FNHC declared regular quarterly dividends of $0.03 per common share payable on September 3 and December
2, 2013 and March 3, 2014 to shareholders of record as of August 5 and November 4, 2013 and February 3, 2014.
Payment of dividends in the future will depend on our earnings and financial position and such other factors, as our
Board of Directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits
on the amount of dividends that FNIC is permitted to pay to the parent company.
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in the public market or otherwise, by us or by a major
shareholder, could depress the market price of our common stock and impair our ability to raise capital through the sale of
additional equity securities.
In addition, we may issue additional shares of our common stock from time to time in the future in amounts that
may be significant. The sale of substantial amounts of our common stock, or the perception that these sales may occur, could
adversely impact our stock price.
As of December 31, 2013, there were 313,475 shares issuable upon the exercise of outstanding and exercisable stock
options, 251,896 shares issuable upon the exercise of outstanding stock options that are not yet exercisable and 750,500
additional shares available for grant under our equity-based compensation plans. The market price of the common shares may
be depressed by the potential exercise of these options or grant of these shares. The holders of these options are likely to
exercise them when we would otherwise be able to obtain additional capital on more favorable terms than those provided by
the options.
- 33 -
Federated National Holding Company
ITEM 1B UNRESOLVED STAFF COMMENTS
None
ITEM 2 PROPERTIES
Our executive offices are now located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 in an 18,500
square feet office facility and our telephone number is (800) 293-2532. All of our operations are consolidated within this
facility. 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. Our lease for this office space will expire in May 2017.
ITEM 3 LEGAL PROCEEDINGS
See Item 8 of Part II, “Financial Statements and Supplementary Data – Footnote 9 – Commitments and
Contingencies”.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed for trading on The NASDAQ Global Market under the symbol “FNHC”. The following
table sets out the high and low closing sale prices as reported on The NASDAQ Global Market. These reported prices reflect
inter-dealer prices without adjustments for retail markups, markdowns or commissions.
Quarter Ended
March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
March 31, 2012
June 30, 2012
September 30, 2012
December 31, 2012
High
$7.90
$10.41
$10.89
$14.90
$4.50
$4.99
$6.20
$6.37
Low
$5.35
$7.05
$8.43
$9.80
$3.02
$3.81
$4.25
$3.02
As of March 6, 2014, there were 56 holders of record of our common stock. We believe that the number of
beneficial owners of our common stock is in excess of 2,900.
DIVIDENDS
The Board of Directors of FNHC declared regular quarterly dividends of $0.02 per common share payable on
December 28, 2012 and March 4, 2013 to shareholders of record as of December 3, 2012 and February 4, 2013. The Board of
Directors of FNHC declared regular quarterly dividends of $0.03 per common share payable on September 3 and December
2, 2013 and March 3, 2014 to shareholders of record as of August 5 and November 4, 2013 and February 3, 2014.
Payment of dividends in the future will depend on our earnings and financial position and such other factors, as our
Board of Directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits
on the amount of dividends that FNIC is permitted to pay to the parent company.
- 34 -
Federated National Holding Company
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes our equity compensation plans as of December 31, 2013. All equity compensation
plans were approved by our shareholders. We have not granted any options, warrants or rights to our shareholders outside of
these equity compensation plans.
Equity Compensation Plan Information
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
776,021
4.88
750,500
Plan category
Equity compensation plans
approved by stock
holders*
* Includes the 1998 and 2002 Stock Option Plans and the 2012 Stock Incentive Plan.
For additional information concerning our capitalization please see Footnote 14 to our Consolidated Financial
Statements included under Item 8 of this Annual Report on Form 10-K.
ISSUER REPURCHASES
During 2013 and 2012, the Company did not repurchase any common stock under previously announced stock
repurchase plans.
SALES OF UNREGISTERED SECURITIES
None.
ITEM 6
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the consolidated financial
statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
appearing elsewhere in this Annual Report on Form 10-K.
As of the Years Ended December 31,
(Amounts in Thousands except Book Value Per Share)
2013
2012
2011
2010
2009
$
262,156
316,741
$
151,238
185,888
$
144,672
179,980
$
138,691
184,049
$
142,416
202,889
Balance Sheet Data
Assets:
Cash and investments
Total assets
Liabilities:
Unpaid losses and LAE
Unearned premiums
Total liabilities
61,016
128,343
208,247
49,908
59,006
119,983
59,983
47,933
121,836
66,529
47,136
126,118
70,611
50,857
135,447
Total shareholders' equity
108,494
65,905
58,144
57,931
67,442
Book value per share
$
9.95
$
8.26
$
7.32
$
7.29
$
8.48
Statutory surplus
76,889
52,012
39,307
40,603
46,810
- 35 -
Federated National Holding Company
Years Ended December 31,
(Amounts in Thousands except EPS and Dividends)
2013
2012
2011
2010
2009
$
243,373
(82,708)
$
119,459
(51,085)
$
98,269
(46,293)
$
96,410
(52,963)
$
104,379
(56,217)
Operations Data:
Revenue:
Gross premiums written
Gross premiums ceded
Net premiums written
Increase (decrease) in prepaid reinsurance premiums
(Increase) decrease in unearned premiums
160,665
13,052
(69,336)
68,374
2,059
(11,074)
51,976
(2,656)
(797)
43,447
(2,108)
3,721
48,162
10,163
(10,349)
Net change in prepaid reinsurance premiums and unearned premiums
(56,284)
(9,015)
(3,453)
Net premiums earned
Commission income
Finance revenue
Direct written policy fees
Net investment income
Net realized investment gains
Regulatory assessments recovered
Other income
Total revenue
Expenses:
Losses and LAE
Operating and underwriting expenses
Salaries and wages
Amortization of deferred policy acquisition costs
Total expenses
Income (loss) before provision for income tax expense (benefit)
Provision for income tax expense (benefit)
Net income (loss)
Earnings per share data
Net income (loss) per share - basic
Net income (loss) per share - diluted
1,613
45,060
1,388
395
1,609
3,726
6,777
857
792
60,604
40,088
10,835
8,611
13,025
72,559
(186)
47,976
1,362
294
1,620
3,397
1,117
2,333
755
58,854
43,706
9,681
7,930
13,747
75,064
48,523
994
518
1,583
4,079
2,725
-
1,741
60,163
30,896
9,916
8,004
12,347
61,163
104,381
2,646
866
6,196
3,332
2,881
-
1,435
121,737
56,410
14,474
10,188
21,447
102,519
19,218
6,491
59,359
1,377
496
2,007
3,819
1,072
-
517
68,647
30,209
9,996
8,439
13,255
61,899
6,748
2,435
(1,000)
(570)
(11,955)
(3,959)
(16,210)
(5,921)
$
12,727
$
4,313
$
(430)
$
(7,996)
$
(10,289)
$
$
1.50
1.45
$
$
0.53
0.53
$
$
(0.05)
(0.05)
$
$
(1.01)
(1.01)
$
$
(1.29)
(1.29)
Dividends paid per share
$
0.11
$
0.02
$
-
$
0.06
$
0.36
- 36 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Federated National Holding Company (“FNHC”, “Company”, “we”, “us”), formerly known as 21st Century Holding
Company 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
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 20 years.
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 insurance subsidiary is Federated National Insurance Company (“FNIC”). FNIC 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 3,600 independent agents, of which approximately 1,800 actively sell and service our products,
FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines and personal and commercial
automobile insurance in Florida. FNIC is licensed as an admitted carrier in Alabama, Louisiana, Georgia and Texas and
underwrites commercial general liability insurance in those states, homeowners’ insurance in Louisiana and personal automobile
insurance in Georgia and Texas.
FNIC is licensed as a non-admitted carrier in Arkansas, Kentucky, Missouri, Nevada, Oklahoma, South Carolina and
Tennessee and can underwrite commercial general liability insurance in all of these states. A non-admitted carrier, sometimes
referred to as a “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.
In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance
Company (“American Vehicle”), with FNIC continuing the operations of both entities. In connection with this merger, the
Company, FNIC and American Vehicle entered into a Consent Order with the Florida OIR pursuant to which we agreed to
certain restrictions on our business operations. The Consent Order was amended in February 2013 to lessen or eliminate
certain of the original requirements, due to FNIC’s statutory underwriting profit during 2012. See “Regulation– Consent
Order.”
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 Manager to cost effectively manage claims-related litigation and to
monitor our claims handling practices for efficiency and regulatory compliance.
Until June 2011, we offered premium financing to our own and third-party insureds through our wholly owned
subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).
Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, a wholly
owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a
managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South
Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general
- 37 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s
existing network of agents.
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 $25 per policy fee, and traditionally a 6%
commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed
above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown
future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during
January 2011.
The homeowner policy provides FNU the right to cancel any policy within a period of 90 days from the policy's
inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our
underwriting criteria.
Although we are authorized to underwrite the various lines described above, our business is primarily underwriting
homeowners’ policies. During 2013, 89.6%, 4.3%, 2.6% and 3.5% of the premiums we underwrote were for homeowners’,
commercial general liability, federal flood, and personal automobile insurance, respectively. During 2013, $29.7 million or
13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with
Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to
offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents
25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents
began writing for FNIC in March 2013. During 2012, 85.3%, 7.8%, 4.4% and 2.5% of the premiums we underwrote were for
homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively.
During the years ended December 31, 2013, 2012 or 2011, we did not experience any weather-related catastrophic
events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or
other insurable events will affect our future results of operations and liquidity. Loss and loss adjustment expenses (“LAE”)
are affected by a number of factors, many of which are partially or entirely beyond our control, including the following.
the nature and severity of the loss;
•
• weather-related patterns;
•
•
•
• macroeconomic issues.
the availability, cost and terms of reinsurance;
underlying settlement costs, including medical and legal costs;
legal and political factors such as legislative initiatives and public opinion;
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 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 have entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with
Federated Mutual Insurance Company (“Federated Mutual”) in response to correspondence received from Federated
Mutual’s counsel alleging that our use of the name “Federated” infringed certain federal trademarks held by Federated
Mutual. Although we believe that we have meritorious defenses to this allegation, we sought to avoid litigation and therefore
negotiated and entered into the Coexistence Agreement. Under the Coexistence Agreement, 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.
During this period, we continue to develop our brand under the “FedNat” name, which is the name by which agents generally
know us.
Our goal in our reinsurance strategy is to equalize the liquidity requirements imposed by most severe insurable
events and by all other insurable events we manage in the normal course of business. Please see “Reinsurance Agreements”
under “Item 1. Business” for a more detailed description of our reinsurance agreements and strategy.
- 38 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview of Premium Growth
Gross premiums written increased $123.9 million, or 103.7%, to $243.4 million for 2013, compared with $119.5
million for 2012. Florida homeowners’ represents 94% and Texas private passenger automobile represents the remaining 6%
of the increased premium volume. We believe that our growth in 2013 reflects management’s efforts over several years. Our
success today reflects our goal to be an agent-friendly carrier that provides exceptional service. We have invested in our
agent relationships and our staff, have created easy to use systems for the agent, and increased our relevance to the agents’
operations by providing insurance products that meet their market needs.
Our homeowner business contributed $116.5 million or 94.0% of the increased gross written premiums during the
year ended December 31, 2013. This increase was the result of:
•
•
•
policyholders continuing to renew their FNIC homeowners’ policy,
a “flight to quality” in the market by agents who seek quality carriers to place their business,
and supporting a marketing team dedicated to promoting the quality and quantity of products and services that we offer.
During 2013, approximately 85% of our policyholders renewed their policies. This high retention rate reflects the
confidence that the policyholder and his agent have in our financial stability and strength. Additionally, policyholders have
told agents that our professional staff adjusts claims quickly and fairly.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“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 Deferred Policy Acquisition Costs (“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 in this Form 10-K.
Except as described below, we believe that in 2013 there were no significant changes in those critical accounting
policies and estimates. Senior management has reviewed the development and selection of our critical accounting policies
and estimates and their disclosure in this Form 10-K 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
- 39 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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. The guidance requires that these securities be classified
into one of three categories: Held-to-maturity, Trading, or Available-for-sale securities.
Investments classified as held-to-maturity include debt securities wherein the Company’s intent and ability are to
hold the investment until maturity. The accounting treatment for held-to-maturity investments is to carry them 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 the sale in the near term. The accounting treatment for trading securities is to carry
them 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. The accounting treatment for available-for-sale securities is to carry them 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”.
Overview of Management’s Loss Reserving Process
The Company’s loss reserves can generally be categorized into two distinct groups. One group is short-tail classes of
business consisting principally of property risks in connection with homes and automobiles. The other group is long-tail
casualty classes of business which include primarily commercial general liability and to a much lesser extent, homeowner
and automobile liability. For operations writing short-tail coverages our loss reserves were generally geared toward
determining an expected loss ratio for current business rather than maintaining a reserve for the outstanding exposure.
Estimations of ultimate net loss reserves for long-tail casualty classes of business is a more complex process and depends on
a number of factors including class and volume of business involved. Experience in the more recent accident years of long-
tail casualty classes of business shows limited statistical credibility in reported net losses because a relatively low proportion
of net losses would be reported claims and expenses and even smaller percentage would be net losses paid. Therefore,
incurred but not yet reported (“IBNR”) would constitute a relatively high proportion of net losses.
Additionally, the different methodologies are utilized the same, regardless of the line of business. However, the final
selection of ultimate loss and LAE is certain to vary by both line of business and by accident period maturity. There is no
prescribed combination of line of business, accident year maturity, and methodologies; consistency in results of the different
methodologies and reasonableness of the result are the primary factors that drive the final selection of ultimate loss and LAE.
Methods Used to Estimate Loss and LAE Reserves
The methods we use for our short-tail business do not differ from the methods we use for our long-tail business. The
Incurred and Paid Development Methods intrinsically recognize the unique development characteristics contained within the
historical experience of each material short-tail and long-tail line of business. The Incurred and Paid Cape Cod Methods
reflect similar historical development unique to each material short-tail and long-tail line of business.
We apply the following general methods in projecting loss and LAE reserves:
• Paid and Incurred Loss Development Method
• Paid and Incurred Bornhuetter-Ferguson Incurred Method
• Frequency / Severity Method
- 40 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Description of Ultimate Loss Estimation Methods
The estimated Ultimate Loss and Defense and Cost Containment Expense (“DCCE”) is based on an analysis by line
of business, coverage and by accident quarter performed using data as of December 31, 2013. The analysis relies primarily on
four actuarial methods: Incurred Loss and DCCE Development Method, Paid Loss and DCCE Development Method,
Bornhuetter-Ferguson Incurred Method, and Bornhuetter-Ferguson Paid Method. Each method relies on company
experience, and, where relevant, the analysis includes comparisons to industry experience. The following is a description of
each of these methods:
Incurred Loss and DCCE Development Method – This reserving method is based on the assumption that the
historical incurred loss and DCCE development pattern as reflected by the Company is appropriate for estimating the future
loss & DCCE development. Incurred paid plus case amounts separated by accident quarter of occurrence and at quarterly
evaluations are used in this analysis. Case reserves do not have to be adequately stated for this method to be effective; they
only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development
factors were calculated to measure the relative development of an accident quarter from one maturity point to the next. Loss
and DCCE development factors (“LDF”) are selected based on a review of the historical relationships between incurred loss
& DCCE at successive valuations and based on industry patterns. The LDFs are multiplied together to derive cumulative
LDF’s that, when multiplied by actual incurred loss and DCCE, produce estimates of ultimate loss and DCCE.
Paid Loss & DCCE Development Method – This method is similar to the Incurred Loss & DCCE Development
Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.
Bornhuetter-Ferguson Incurred Method – This reserving method combines estimated initial expected unreported
loss & DCCE with the actual loss & DCCE to yield the ultimate loss & DCCE estimate. Expected unreported loss & DCCE
are equal to expected total loss & DCCE times the expected unreported percentage of loss & DCCE for each policy year.
The incurred loss & DCCE emergence pattern used to determine the unreported percentages in our projections is based on the
selected LDF’s from the Incurred Loss & DCCE Development Method described above. The estimate of initial expected total
loss & DCCE is based on the historical loss ratio for more mature accident years. While this approach reduces the
independence of the Bornhuetter-Ferguson Method from the loss & DCCE development methods for older policy years, it is
used primarily for estimating ultimate loss & DCCE for more recent, less mature, policy years.
Bornhuetter-Ferguson Paid Method – This method is similar to the Bornhuetter-Ferguson Incurred Method only
paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.
We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each
projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and
December 31, 2013). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate
estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the
overall estimate of unpaid losses & DCCE liability for the company.
We also produce an estimate of unpaid Adjusting and Other Expense (“A&O”), as a reserve is required under
Statutory Accounting Principles (“SAP”) even if this expense has been pre-paid or with an unconsolidated affiliate. Although
we do not prepay for A&O, the majority of the A&O incurred is with an affiliated company and eliminated under the
accounting principles for consolidation. The unpaid A&O is added to unpaid losses & DCCE, resulting in total unpaid losses
and LAE.
The validity of the results from using a loss development approach can be affected by many conditions, such as
internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or
variations in a company’s mix of business from year to year. Also, since the percentage of losses paid for immature years is
often low, development factors can be volatile. A small variation in the number of claims paid can have a leveraging effect
that could lead to significant changes in estimated ultimate values. Accordingly, our reserves are estimates because there are
uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions
can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends.
We compute our estimated ultimate liability using the most appropriate principles and procedures applicable to the lines of
business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain
that ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of
operations and financial condition.
- 41 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Frequency / Severity Method – This method separately estimates the two components of ultimate losses (the
frequency, or number of claims and the severity, or cost per claim) and then combines the resulting estimates in a
multiplicative fashion to estimate ultimate losses. The approach is valuable because sometimes there is more inherent
stability in the frequency and severity data when viewed separately than in the total losses.
We developed reported claim counts to ultimate levels using the development approach. The mechanics of this
approach are the same as we described previously for paid and incurred losses. The validity of the results of this method
depends on the stability of claim reporting and settlement rates. Then we developed accident year incurred severities
(incurred losses divided by reported claim counts) to ultimate levels using the development approach.
We trended these severities to accident year 2013 levels. Trend rates were selected based on a review of historical
severities. Selected severity was chosen based on judgment considering the developed severities and the trended severities,
considering industry benchmarks for each segment. The loss & ALAE, claim count and severity triangles are evaluated as of
12 months, 24 months, 36 months etc. We selected loss development factors based on the loss development history, to the
extent credible, and supplemented with industry data where appropriate.
A key assumption underlying the estimation of the reserve for loss and LAE is that past experience serves as the
most reliable estimator of future events. This assumption may materially affect the estimates when the insurance market, the
regulatory environment, the legal environment, the economic environment, the book of business, the claims handling
department, or other factors (known or unknown) have varied over time during the experience period and / or will vary
(expectedly or unexpectedly) in the future. Changes in estimates, or differences between estimates and amounts ultimately
paid, are reflected in the operating results of the period during which such adjustments are made. Therefore, the ultimate
liability for unpaid losses and LAE will likely differ from the amount recorded at December 31, 2013.
The following describes the extent of our procedures for determining the reserve for loss and LAE on both an annual
and interim reporting basis:
Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for
unpaid losses and LAE. Our independent actuarial firm, examining the exact same data set, will independently select a point
estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations.
If our point estimate falls within the range determined from the point estimate of our actuary, then the Company’s policy has
been that no adjustments by management would be required. In consideration thereof, the company does not have a policy for
adjusting the liability for unpaid losses and LAE to an amount that is different than an amount set forth within the range
determined by our independent actuary, although the reserve level ultimately determined by us may not be the mid-point of
our independent actuary’s range. Further, there can be no assurances that our actual losses will be within our actuary’s range.
Our independent actuary’s report expressly states that the report is based on assumptions developed from its own analysis and
based on information provided by management and that notwithstanding its analysis, there is a significant risk of material
adverse deviation from its range.
Interim – During 2013 our interim approach was very similar to the annual process noted above.
A number of other actuarial assumptions are generally made in the review of reserves for each class of business.
For each class of business, expected ultimate loss ratios for each accident year are estimated based on loss reserve
development patterns. The expected loss ratio generally reflects the projected loss ratio from prior accident years,
adjusted for the loss trend and the effect of rate changes and other quantifiable factors on the loss ratio.
In practice there are factors that change over time; however, many (such as inflation) are intrinsically reflected in the
historical development patterns, and others typically do not materially affect the estimate of the reserve for unpaid losses and
LAE. Therefore, no specific adjustments have been incorporated for such contingencies projecting future development of
losses and LAE. There are no key assumptions as of December 31, 2013 premised on future emergence inconsistent with
historical loss reserve development patterns.
- 42 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The table below distinguishes total loss reserves between IBNR, as discussed above, and case estimates for specific
claims as established by routine claims management.
Reserves for unpaid loss and
LAE net of reinsurance
recoverable as of December
31, 2013
Case Loss
Reserves
Case LAE
Reserves
IBNR
Reserves
(Including
LAE)
Total Case
Reserves
(Dollars in Thousands)
Reinsurance
Recoverable
on Unpaid
Loss and Loss
Expenses
Net
Reserves
Homeowners'
Commercial General Liability
Automobile
$
10,106
2,404
5,037
$
1,292
1,099
3,211
$
11,398
3,503
8,248
$
23,749
13,366
752
25
$
-
2,717
$
35,122
16,869
6,283
Total
$
17,547
$
5,602
$
23,149
$
37,867
$
2,742
$
58,274
Reserves for unpaid loss and
LAE net of reinsurance
recoverable as of December
31, 2012
Case Loss
Reserves
Case LAE
Reserves
IBNR
Reserves
(Including
LAE)
Total Case
Reserves
(Dollars in Thousands)
Reinsurance
Recoverable
on Unpaid
Loss and Loss
Expenses
Net
Reserves
Homeowners'
Commercial General Liability
Automobile
Fire
Inland Marine
$
6,295
1,197
3,456
5
$
1,430
1,509
133
7
-
-
$
7,725
2,706
3,589
12
-
$
8,855
22,677
4,259
83
2
$
141
77
3,285
-
-
$
16,439
25,306
4,563
95
2
Total
$
10,953
$
3,079
$
14,032
$
35,876
$
3,503
$
46,405
Our reported results, financial position and liquidity would be affected by likely changes in key assumptions that
determine our net loss reserves. The table below illustrates the change to equity that would occur as a result of a change in
loss and LAE reserves, net of reinsurance.
Years Ended December 31,
2013
2012
Change in loss and
LAE reserves, net of
reinsurance
Adjusted loss and
LAE reserves, net of
reinsurance
Percentage
change in
equity (1)
Adjusted loss and
LAE reserves, net of
reinsurance
Percentage
change in
equity (1)
-10.0%
-7.5%
-5.0%
-2.5%
Base
2.5%
5.0%
7.5%
10.0%
52,447
53,903
55,360
56,817
58,274
59,731
61,188
62,644
64,101
(Dollars in Thousands)
3.6%
2.7%
1.8%
0.9%
-
-0.9%
-1.8%
-2.7%
-3.6%
41,764
42,925
44,085
45,245
46,405
47,565
48,725
49,885
51,045
4.5%
3.4%
2.3%
1.1%
-
-1.1%
-2.3%
-3.4%
-4.5%
(1) Net of tax
- 43 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
For the year ended December 31, 2013, our actuarial firm determined range of statutory loss and LAE reserves on a
net basis range from a low of $51.5 million to a high of $60.9 million, with a best estimate of $55.5 million. The Company’s
net loss and LAE reserves are carried on a statutory basis at $54.0 million, and on a GAAP consolidated basis at $61.0
million which when netted with our $2.7 million reinsurance recoverable totals $58.3 million. The Company’s statutory point
estimate for its reserves as of December 31, 2013 is 2.6% below our actuary’s best estimate, which reflects management’s
current analysis of the status and expected timing of our anticipated claims, our analysis of expected weather patterns in the
regions in which we sell policies, our re-focus of our business growth efforts to areas outside of South Florida, and other
factors.
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.
Please see Footnote 2 of the Notes to Consolidated Financial Statements for additional discussions regarding critical
accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2(n), “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the Notes
to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if
any, on the Company.
ANALYSIS OF FINANCIAL CONDITION
As of December 31, 2013 Compared with December 31, 2012
Total Investments
Total investments increased $90.6 million, or 69.7%, to $220.7 million as of December 31, 2013, compared with
$130.1 million as of December 31, 2012. This increase reflected the $123.9 million increase in gross premiums written
compared with 2012 and the $28.1 million in net proceeds from the Company’s November 2013 offering. The excess cash
was invested primarily in the bond portfolio.
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.”
The debt and equity securities that are available for sale and carried at fair value represent 97% of total investments
as of December 31, 2013, compared with 94% as of December 31, 2012.
We did not hold any trading investment securities during 2013.
As of December 31, 2013 and 2012, our investments consisted primarily of corporate bonds held in various
industries, municipal bonds and United States government bonds. As of December 31, 2013, 83% of our debt portfolio was in
diverse industries and 17% is in United States government bonds. As of December 31, 2013, approximately 91% of our
equity holdings were in equities related to diverse industries and 9% were in mutual funds. As of December 31, 2012, 69% of
- 44 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
our debt portfolio was in diverse industries and 31% is in United States government bonds. As of December 31, 2012,
approximately 87% of our equity holdings were in equities related to diverse industries and 13% were in mutual funds.
Below is a summary of net unrealized gains at December 31, 2013 and December 31, 2012 by category.
Debt securities:
United States government obligations and authorities
Obligations of states and political subdivisions
Corporate
International
Equity securities:
Common stocks
Unrealized (Losses) and Gains
December 31, 2013
December 31, 2012
(Dollars in Thousands)
$
(213)
180
467
(33)
401
$
567
201
3,760
106
4,634
9,161
1,887
Total debt and equity securities
$
9,562
$
6,521
The net unrealized gain of $9.6 million is inclusive of $1.6 million of unrealized losses. The $1.6 million of
unrealized losses is inclusive of $0.1 million unrealized losses from equity securities and $1.5 million unrealized losses from
debt securities.
The $0.1 million of unrealized losses from equity securities is from common stocks and mutual funds held in diverse
industries as of December 31, 2013. The Company evaluated the near-term prospects in relation to the severity and duration
of the impairment. Based on this evaluation and the Company’s ability and intent to hold these investments for a reasonable
period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-
than-temporarily impaired at December 31, 2013.
The $1.5 million of unrealized losses from debt securities is primarily related to US government obligations and
obligations of states and political subdivisions. The Company does not expect to settle at prices less than the amortized cost
basis. The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2013
because we neither currently intend to sell these investments nor consider it likely that we will be required to sell these
investments before recovery of the amortized cost basis.
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
- 45 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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 2013, in connection with the process,
we have not charged any investment losses to operations. During 2012, in connection with the process, we have charged to
operations $44,000 of investment losses.
As of December 31, 2013 and December 31, 2012, respectively, all of our securities are in good standing and not
impaired, except as noted above, as defined by FASB issued guidance.
The following table summarizes, by type, our investments as of December 31, 2013 and 2012.
December 31, 2013
December 31, 2012
Debt securities, at market:
United States government obligations and authorities
Obligations of states and political subdivisions
Corporate
International
Debt securities, at amortized cost:
United States government obligations and authorities
Corporate
International
Total debt securities
Equity securities, at market:
Total investments
Carrying
Amount
$
27,209
52,064
91,941
3,698
174,912
4,630
2,475
109
7,214
182,126
Percent
of Total
Carrying
Amount
(Dollars in Thousands)
Percent
of Total
12.33%
23.59%
41.66%
1.68%
79.26%
2.10%
1.12%
0.05%
3.27%
82.53%
$
27,392
3,939
67,313
3,111
101,755
6,016
1,203
140
7,359
109,114
21.06%
3.03%
51.74%
2.39%
78.22%
4.62%
0.92%
0.11%
5.65%
83.87%
16.13%
100.00%
38,584
220,710
$
17.47%
100.00%
20,982
130,096
$
Debt securities are carried on the balance sheet at market. At December 31, 2013 and 2012, debt securities had the
following quality ratings by S&P and for securities not assigned a rating by S&P, Moody’s or Fitch ratings were used.
December 31, 2013
Carrying
Amount
Percent
of Total
December 31, 2012
Carrying
Amount
Percent
of Total
(Dollars in Thousands)
AAA
AA
A
BBB
Not rated
$
24,904
67,374
46,338
42,979
531
182,126
$
13.67%
36.99%
25.44%
23.60%
0.30%
100.00%
$
10,967
38,733
31,774
27,640
-
109,114
$
10.05%
35.50%
29.12%
25.33%
0.00%
100.00%
- 46 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table summarizes, by maturity, the debt securities as of December 31, 2013 and 2012.
December 31, 2013
Carrying
Amount
December 31, 2012
Percent
of Total
Carrying
Amount
Percent
of Total
(Dollars in Thousands)
Matures In:
One year or less
One year to five years
Five years to 10 years
More than 10 years
Total debt securities
$
5,180
113,561
62,511
874
182,126
$
2.84%
62.35%
34.32%
0.49%
100.00%
$
2,938
51,439
37,111
17,626
109,114
$
2.70%
47.14%
34.01%
16.15%
100.00%
As December 31, 2013, the duration of the bond portfolio was approximately 3.9 years.
As of December 31, 2013 and December 31, 2012, we have classified $7.2 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 2013 we reclassified $150,000 of our bond portfolio to available-for-sale from held-to-maturity. During
2012, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.
Two reinsurers require FNIC to maintain securities with a fair market value of $4.6 million. As of December 31,
2013, FNIC maintained fully funded trust agreements that totaled $4.9 million in favor of the reinsurers. As of December 31,
2012, FNIC maintained fully funded trust agreements that totaled $4.8 million in favor of the reinsurers.
During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the
100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was
terminated in April 2007. During 2010, the letter of credit in favor of Republic was replaced by a fully funded trust
agreement. As of December 31, 2013 and 2012 respectively, the amount held in trust was $1.0 million.
Cash and Short-Term Investments
Cash and short-term investments, which include cash, certificates of deposits, and money market accounts, increased
$20.3 million, or 96.0%, to $41.4 million as of December 31, 2013, compared with $21.1 million as of December 31, 2012.
The increase in cash and short-term investments is for a planned reinsurance payment. We evaluate our asset class allocation
on an ongoing basis continually adjust based on economic and business risk.
Prepaid Reinsurance Premiums
Prepaid reinsurance premiums increased $0.6 million, or 7.8%, to $7.6 million as of December 31, 2013, compared
with $7.0 million as of December 31, 2012 due to the amortization of our payment patterns. We believe concentrations of
credit risk associated with our prepaid reinsurance premiums are not significant.
Premiums Receivable, Net of Allowance for Credit Losses
Premiums receivable, net of allowance for credit losses, increased $14.4 million, or 179.4%, to $22.4 million as of
December 31, 2013, compared with $8.0 million as of December 31, 2012.
Our homeowners’ insurance premiums receivable increased $13.4 million, or 226.4%, to $19.4 million as of
December 31, 2013, compared with $6.0 million as of December 31, 2012, resulting from the increase to gross premiums
written during 2013 compared with 2012.
Our commercial general liability insurance premiums receivable decreased $0.2 million, or 33.5%, to $0.3 million as
of December 31, 2013, compared with $0.5 million as of December 31, 2012.
Premiums receivable in connection with our automobile line of business increased $1.1 million, or 69.5%, to $2.8
million as of December 31, 2013, compared with $1.7 million as of December 31, 2012.
- 47 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our allowance for credit losses remained unchanged at $0.1 million as of December 31, 2013, compared with $0.1
million as of December 31, 2012.
Years Ended December 31,
2013
2012
(Dollars in Thousands)
Allowance for credit losses at beginning of year
Additions charged to bad debt expense
Write-downs charged against the allowance
Allowance for credit losses at end of year
Reinsurance Recoverable, Net
$
$
69
250
(176)
143
73
161
(165)
69
$
$
Reinsurance recoverable, net, decreased $0.8 million, or 21.7%, to $2.7 million as of December 31, 2013, compared
with $3.5 million as of December 31, 2012. The change is due to the payment patterns by our reinsurers, as influenced by the
diminishing catastrophe related claims. All amounts are current and deemed collectable. We believe concentrations of credit
risk associated with our reinsurance recoverables, net, are not significant.
DPAC
DPAC increased $8.2 million, or 97.0%, to $16.7 million as of December 31, 2013, compared with $8.5 million as
of December 31, 2012. The change is due to the deferral of the actual policy acquisition costs, including commissions,
payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned, in conjunction with the
increase to gross premiums written during 2013 compared with 2012. An analysis of deferred acquisition costs follows.
Years Ended December 31,
2012
2013
(Dollars in Thousands)
Balance, beginning of year
Acquisition costs deferred
Amortization expense during year
Balance, end of year
8,479
29,676
(21,447)
16,708
$
$
$
$
7,718
14,016
(13,255)
8,479
- 48 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Deferred Income Taxes, Net
Deferred income taxes, net, decreased $3.3 million, or 76.8%, to $1.0 million as of December 31, 2013, compared
with $4.3 million as of December 31, 2012. Deferred income taxes, net, is comprised of approximately $11.0 million and
$10.0 million of deferred tax assets, net of approximately $10.0 million and $5.7 million of deferred tax liabilities as of
December 31, 2013 and December 31, 2012. The change in the net deferred tax asset is primarily due to the increase in the
deferred tax liability related to deferred acquisition costs, net.
Years Ended December 31,
2013
2012
Deferred tax assets:
Unpaid losses and loss adjustment expenses
Unearned premiums
Discount on advance premiums
Allowance for credit losses
Allowance for impairments
FIGA Guaranty Assessment
Depreciation & amortization
Reserve for claims settlements
NOL Carryforward
AMT credit
Flow-through income or loss
Stock option expense per ASC 718
Total deferred tax assets
Deferred tax liabilities:
Deferred acquisition costs, net
Dividends Collected vs. Earned
Regulatory assessments
Unrealized Gain on investment securities
Total deferred tax liabilities
Net deferred tax asset
Property, Plant and Equipment, net
$
1,157
6,864
243
59
21
-
149
1,844
73
-
4
550
10,964
(6,287)
(6)
(67)
(3,598)
(9,958)
1,006
$
$
1,725
2,629
167
31
91
306
366
809
3,259
253
-
432
10,068
(3,191)
(18)
(67)
(2,454)
(5,730)
4,338
$
Property, plant and equipment, net increased $0.3 million, or 64.8%, to $0.9 million as of December 31, 2013,
compared with $0.6 million as of December 31, 2012. The change is due primarily to investments in information technology.
Other Assets
Other assets increased $0.5 million, or 20.1%, to $3.2 million as of December 31, 2013, compared with $2.7 million
as of December 31, 2012. Major components of other assets are shown in the following table; the accrued interest income
receivable is primarily investment related.
December 31, 2013
December 31, 2012
(Dollars in Thousands)
Accrued interest income receivable
Deposits
Prepaid expenses
Receivable for investments sold
Other
Total
$
$
1,684
327
812
-
371
3,194
966
249
478
598
367
2,658
$
$
- 49 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unpaid Losses and LAE
Unpaid losses and LAE increased $11.1 million, or 22.3%, to $61.0 million as of December 31, 2013, compared
with $49.9 million as of December 31, 2012, in conjunction with the increase to net premiums earned during 2013 compared
with 2012. The composition of unpaid losses and LAE by product line is as follows.
Case
December 31, 2013
Bulk
(Dollars in Thousands)
Total
Case
December 31, 2012
Bulk
(Dollars in Thousands)
Total
Homeowners'
Commercial General Liability
Automobile
Total
11,399
3,503
8,259
23,161
$
$
$
$
$
$
19,623
13,231
5,001
37,855
31,022
16,734
13,260
61,016
8,276
2,956
3,643
14,875
6,637
22,310
6,086
35,033
14,913
25,266
9,729
49,908
$
$
$
$
$
$
Please see “Liability for Unpaid Losses and LAE” under “Item 1. Business” for a discussion of the factors that affect
unpaid losses and LAE.
Unearned Premium
Unearned premiums increased $69.3 million, or 117.5%, to $128.3 million as of December 31, 2013, compared with
$59.0 million as of December 31, 2012. The change was due to a $68.0 million increase in unearned homeowners’ insurance
premiums, a $0.4 million increase in unearned flood insurance premiums, a $0.5 million increase in unearned commercial
general liability premiums and a $0.4 million increase in unearned automobile insurance premiums. Generally, as is in this
case, an increase in unearned premium directly relates to an increase in written premium on a rolling twelve-month basis.
Premium Deposits and Customer Credit Balances
Premium deposits and customer credit balances increased $1.3 million, or 56.0%, to $3.8 million as of December 31,
2013, compared with $2.5 million as of December 31, 2012. Premium deposits are monies received on policies not yet in-
force as of December 31, 2013.
Income Taxes Payable
Income taxes payable increased to $2.4 million as of December 31, 2013, compare with nothing as of December 31,
2012, in conjunction with the increase to income before provision for income tax expense, net of estimated tax payments
made during 2013.
Bank Overdraft
Bank overdraft increased $0.2 million, or 3.6%, to $6.2 million as of December 31, 2013, compared with $6.0
million as of December 31, 2012. The bank overdraft relates primarily to losses and LAE disbursements paid but not
presented for payment by the policyholder or vendor. The change relates to the timing of presentation of claims checks to the
issuing bank.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses increased $3.9 million, or 146.7%, to $6.5 million as of December 31,
2013, compared with $2.6 million as of December 31, 2012. The $3.9 million change includes increases of $1.6 million for
commissions, $0.8 million for the remittance of recouped assessments, $0.6 million for payroll, $0.6 million for premium
taxes and $0.3 million for dividends.
- 50 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name
to “Federated National Insurance Company”.
Gross Premiums Written
Gross premiums written increased $123.9 million, or 103.7%, to $243.4 million for 2013, compared with $119.5
million for 2012. The following table denotes gross premiums written by major product line. The increase in gross premiums
written during 2013 is primarily due to the increase in the sale of homeowners’ policies. During 2013, our improved
underwriting, risk management and product distribution enabled us to write more policies than in prior years.
Years Ended December 31,
2013
2012
(Dollars in Thousands)
Amount
Percentage
Amount
Percentage
Homeowners'
Commercial General Liability
Federal Flood
Automobile
$
218,349
10,362
6,213
8,449
89.72%
4.26%
2.55%
3.47%
$
101,832
9,338
5,293
2,996
85.24%
7.82%
4.43%
2.51%
Gross written premiums
$
243,373
100.00%
$
119,459
100.00%
The increase in the sale of homeowners’ policies by $116.5 million, or 114.4%, to $218.3 million in 2013, compared
with $101.8 million in 2012, is gross of reinsurance costs and net of Florida’s mandated homeowners’ wind mitigation
discounts. We offer premium discounts for wind mitigation efforts by policyholders, as required by Florida law. As of
December 31, 2013, 80.3% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling
approximately $216.8 million (a 50.1% reduction of in-force premium), while 72.7% of our in-force homeowners’
policyholders were receiving wind mitigation credits totaling approximately $61.1 million, (a 37.4 % reduction of in-force
premium), as of December 31, 2012.
During 2013, $29.7 million or 13.6% of the $218.3 million of homeowners’ premiums we underwrote were
produced under an agency agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company,
that grants Allstate agents the authority to offer certain FNU products. The $29.7 million of homeowners’ premiums
produced under this agreement with ISA represents 25.5% of the total increase in the sale of homeowners’ policies during
2013, compared with 2012. This network of agents began writing for FNIC in March 2013.
During 2013 and 2012, the change to the cumulative wind mitigation credits afforded our policyholders totaled
$155.7 million and $29.6 million, respectively.
These premium discounts have had a significant effect on both written and earned premium. Wind mitigation credits
are 50.1% of the pre-credit premium, or $216.8 million, as of December 31, 2013, as compared with 37.4% of the pre-credit
premium, or $61.1 million, as of December 31, 2012.
Our in-force homeowners’ policies increased by approximately 55,300, or approximately 91%, to approximately
116,400 as of December 31, 2013, as compared with approximately 61,100 as of December 31, 2012.
Premium rates charged to our homeowner insurance policyholders are continually evaluated to assure that they meet
the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive nor inadequate).
Premium rates are regulated and approved by the Florida OIR. In 2013 our voluntary program rate indications did not
indicate the need for adjustment. In 2012 we were approved for a 4.8% and 0.9% rate increase on our voluntary property
book of homeowners’ business. In 2011 our voluntary rate increase of 20% was approved.
Similarly, for the policies we assumed from Citizens Property Insurance Corporation (“Citizens”) in 2009, we
received approval for a 14.8% increase in 2013 and a 14.1% rate increase in 2012. In 2011 we received approval for a 13.9%
increase. Our voluntary program was 97.7%, 90.0%, and 79.2% of the total homeowner program, for the years ending
December 31, 2013, 2012, and 2011, respectively.
- 51 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our earnings can also be impacted by our ratings, such as the rating of FNIC by Demotech, Inc. (“Demotech”).
FNIC’s rating as of December 31, 2013 was "A" ("Exceptional"). For more information regarding our rating and the impact
of a change or withdrawal of our rating, please see “Business-Regulation-Industry Rating Services.”
The Company’s sale of commercial general liability policies increased by $1.1 million to $10.4 million for 2013,
compared with $9.3 million for 2012. The primary factor for this increase has been renewal retention combined with new
business growth.
The following table sets forth the amounts and percentages of our gross premiums written in connection with our
commercial general liability program by state.
2013
Amount
Years Ended December 31,
Percentage
Amount
(Dollars in Thousands)
2012
Percentage
State
Florida
Louisiana
Texas
Other
Total
$
9,572
150
547
93
10,362
$
92.37%
1.45%
5.28%
0.90%
100.00%
$
$
8,639
217
426
56
9,338
92.52%
2.32%
4.56%
0.60%
100.00%
We are required to report write-your-own flood premiums on a direct and 100% ceded basis.
The Company’s sale of auto insurance policies increased by $5.4 million to $8.4 million for 2013, compared with
$3.0 million for 2012. The primary factor for this increase has been renewal retention combined with new Texas business
growth for which 2013 was the first full year of operations.
Gross Premiums Ceded
Gross premiums ceded increased to $82.7 million for 2013, compared with $51.1 million for 2012. Gross premiums
ceded relating to our homeowners’, commercial general liability, write-your-own flood and automobile programs totaled
$69.7 million, $0.5 million, $6.2 million and $6.3 million for 2013. Gross premiums ceded relating to our homeowners’,
commercial general liability, write-your-own flood and automobile programs totaled $43.3 million, $0.5 million, $5.3 million
and $2.0 million for 2012.
The increased homeowners’ gross premiums ceded is due to an additional 75.7% of reinsurance coverage purchased
for the 2013-2014 season as compared with the 2012 - 2013 season.
Increase in Prepaid Reinsurance Premiums
The increase in prepaid reinsurance premiums was $13.1 million in 2013, compared with $2.1 million in 2012. The
benefit to written premium is associated with the timing of our reinsurance payments measured against the term of the
underlying reinsurance policies.
Increase in Unearned Premiums
The increase in unearned premiums was $69.3 million for 2013, compared with $11.1 million in 2012. The 2013
charge to written premium was due to a $68.0 million increase in unearned homeowners’ insurance premiums, a $0.4 million
increase in unearned flood premiums, a $0.5 million increase in unearned commercial general liability premiums and a $0.4
million increase in unearned automobile insurance premiums during 2013. These changes are a result of differences in
written premium volume during this period as compared with the same period last year. See “Gross Premiums Written”
above.
- 52 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Premiums Earned
Net premiums earned increased $45.0 million, or 75.8%, to $104.4 million for 2013, compared with $59.4 million
for 2012. The following table denotes net premiums earned by product line.
Years Ended December 31,
2013
2012
Amount
Percentage
Amount
Percentage
(Dollars in Thousands)
Homeowners'
Commercial General Liability
Automobile
Net premiums earned
$
92,793
9,432
2,156
104,381
88.89%
9.04%
2.07%
100.00%
$
$
$
49,209
9,196
954
59,359
82.90%
15.49%
1.61%
100.00%
The $43.6 million increase in homeowners’ net premiums earned is due to a $116.5 million increase in gross written
premium as discussed, a $26.4 million increase in gross premiums ceded and a $46.5 million increase in the net change to
prepaid reinsurance premiums and unearned premium.
The $0.2 million increase in commercial general liability net premiums earned is a result of a $1.0 million increase
in gross written premium, a less than $0.1 million decrease in gross premiums ceded and a $0.8 million increase in the net
change to unearned premium.
The $1.2 million increase in automobile net premiums earned is a result of a $5.5 million increase in gross written
premium as discussed, a $4.3 million increase in gross premiums ceded and a less than $0.1 million decrease in the net
change to prepaid reinsurance premiums and unearned premium.
Commission Income
Commission income increased $1.2 million, or 92.2%, to $2.6 million for 2013, compared with $1.4 million for
2012. The primary sources of our commission income are our managing general agent services, write-your-own flood
premiums and our independent insurance agency, Insure-Link, Inc. (“Insure-Link”).
Direct Written Policy Fees
Direct written policy fees increased $4.2 million, or 208.8%, to $6.2 million for 2013, compared with $2.0 million
for 2012. The change is attributed to the increase in gross premiums written during this same period.
Net Investment Income
Net investment income decreased $0.5 million, or 12.7%, to $3.3 million for 2013, compared with $3.8 million for
2012.
Our investment yield, net and gross of investment expenses, excluding equities and including cash, was 1.8% and
2.0%, respectively, for 2013. Our investment yield, net and gross of investment expenses, excluding equities and including
cash, was 2.5% and 2.8%, respectively, for 2012.
Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and
cash, was 2.1% and 2.4%, respectively, for 2013. The primary reason for our lower investment yield in 2013 pertained to
selling higher yielding and longer duration bonds, purchasing shorter duration and lower yielding bonds to protect our bond
portfolio against principal erosion. Our investment yield, net and gross of investment expenses measured against debt
securities, excluding equities and cash, was 2.6% and 2.9%, respectively, for 2012.
See also “Analysis of Financial Condition As of December 31, 2013 Compared with December 31, 2012 –
Investments” for a further discussion on our investment portfolio.
- 53 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Realized Investment Gains
Net realized investment gains were $2.9 million for 2013, compared with $1.1 million for 2012. Specifically, net
realized gains for equity securities were $2.2 million for 2013, compared with net realized losses of $0.3 million for 2012.
For debt securities, net realized gains were $0.7 million for 2013, compared with $1.4 million for 2012. Our managers are
authorized to sell securities at their discretion. During 2013, our equity managers took advantage of prevailing market
opportunities and sold equities to lock in gains.
FASB has issued guidance regarding when an investment is considered impaired, whether that impairment is other-
than temporary, and the measurement of an impairment loss. 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. During 2013, pursuant to guidelines prescribed in FASB issued guidance, we have not
charged to operations any investment losses. During 2012, pursuant to guidelines prescribed in FASB issued guidance, we
charged to operations, realized investment losses of $44,000. 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 S&P and Moody’s,
as well as information released via the general media channels.
The table below depicts the net realized investment gains by investment category during 2013 and 2012.
Realized gains:
Debt securities
Equity securities
Total realized gains
Realized losses:
Debt securities
Equity securities
Total realized losses
Net realized gains on investments
Other Income
Years Ended December 31,
2013
2012
(Dollars in Thousands)
$
1,690
2,858
4,548
$
1,783
1,403
3,186
(1,001)
(666)
(1,667)
2,881
$
(391)
(1,723)
(2,114)
1,072
$
Other income increased $0.9 million, or 177.3%, to $1.4 million for 2013, compared with $0.5 million for 2012. The
increase is primarily due to the recoupment of assessments previously expensed in connection with the Florida Insurance
Guaranty Association (“FIGA”).
Losses and LAE
Losses and LAE, our most significant expense, represent actual payments made and changes in estimated future
payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. We revise
our estimates based on the results of analysis of estimated future payments to be made. This process assumes that experience,
adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.
Losses and LAE increased by $26.2 million, or 86.7%, to $56.4 million for 2013, compared with $30.2 million for
2012. The overall change includes a $26.7 million increase in our homeowners’ program, a $2.5 million decrease in our
commercial general liability program and a $2.0 million increase in connection with our automobile program.
The increase to losses and LAE for 2013, compared with 2012, reflects the additional reserves we added in response
to the substantial increase in the number of policies we wrote during 2013. The increase to losses and LAE was more than
offset by the increase to net premiums earned during this same period.
- 54 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The composition of unpaid losses and LAE by product line is as follows.
Case
December 31, 2013
Bulk
(Dollars in Thousands)
Total
Case
December 31, 2012
Bulk
(Dollars in Thousands)
Total
Homeowners'
Commercial General Liability
Automobile
Total
11,399
3,503
8,259
23,161
$
$
$
$
$
$
19,623
13,231
5,001
37,855
31,022
16,734
13,260
61,016
8,276
2,956
3,643
14,875
6,637
22,310
6,086
35,033
14,913
25,266
9,729
49,908
$
$
$
$
$
$
Please see “Liability for Unpaid Losses and LAE” under “Item 1 Business” for a further discussion of the factors
that affect unpaid losses and LAE.
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. Because of our process, reserves were
increased by approximately $11.1 million during 2013. This overall change includes a $16.1 million increase in reserves for
our homeowners’ program, a $3.5 million increase in reserves for our automobile program and an $8.5 million decrease in
reserves for our commercial general liability program.
Our loss ratio is computed as losses and LAE divided by net premiums earned. A lower loss ratio generally results in
higher operating income. Our loss ratio for 2013 was 54.0% compared with 50.9% for the same period in 2012. The increase
to our loss ratio is due to the $26.2 million increase in losses and LAE measured against the $45.0 million increase in net
premium earned during 2013 as compared with the same period in 2012.
The table below reflects the loss ratios by product line.
Homeowners'
Commercial General Liability
Automobile
All lines
Years Ended December 31,
2013
56.27%
5.49%
170.79%
54.04%
2012
51.86%
32.86%
175.08%
50.89%
Operating and Underwriting Expenses
Operating and underwriting expenses increased $4.5 million, or 44.8%, to $14.5 million for 2013, compared with
$10.0 million for 2012. The change is primarily due to a $2.5 million increase in premium tax expense, a $0.5 million
increase in postage, a $0.9 million increase in surveys and underwriting reports, a $0.2 million increase in rent, a $0.2 million
increase in computer service fees and a $0.2 million increase in other general expenses.
Salaries and Wages
Salaries and wages increased $1.8 million, or 20.7%, to $10.2 million for 2013, compared with $8.4 million for 2012
and is primarily due to an increased number of employees. The charge to operations for stock-based compensation, in
accordance with FASB guidance, was approximately $0.4 million during 2013, compared with approximately $0.3 million
for 2012.
Amortization of Deferred Policy Acquisition Costs
Amortization of deferred policy acquisition costs increased $8.1 million, or 61.8%, to $21.4 million for 2013,
compared with $13.3 million for 2012, which corresponds to the increase in net premiums earned during this same period.
Amortization of deferred policy acquisition costs, consists of the actual policy acquisition costs, including
commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned.
- 55 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Provision for Income Tax Expense
The provision for income tax expense was $6.5 million for 2013, compared with $2.4 million for 2012. The
effective rate for income taxes was 33.8% for 2013, compared with 36.1% for 2012.
Net Income
Net income increased $8.4 million, or 195.1%, to $12.7 million for 2013, compared with $4.3 million for 2012.
Results of Operations
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name
to “Federated National Insurance Company”.
Gross Premiums Written
Gross premiums written increased $21.2 million, or 21.6%, to $119.5 million for 2012, compared with $98.3 million
for 2011. The following table denotes gross premiums written by major product line. This increase reflected primarily an
increase in the sale of homeowners’ policies.
Years Ended December 31,
2012
2011
(Dollars in Thousands)
Amount
Percentage
Amount
Percentage
Homeowners'
Commercial General Liability
Federal Flood
Automobile
$
101,832
9,338
5,293
2,996
85.24%
7.82%
4.43%
2.51%
$
80,402
10,125
4,468
3,274
81.82%
10.30%
4.55%
3.33%
Gross written premiums
$
119,459
100.00%
$
98,269
100.00%
The increase in the sale of homeowners’ policies by $21.4 million, or 26.7%, to $101.8 million in 2012, compared
with $80.4 million in 2011, is gross of reinsurance costs and net of Florida’s mandated homeowners’ wind mitigation
discounts. We offer premium discounts for wind mitigation efforts by policyholders, as required by Florida law. As of
December 31, 2012, 72.7% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling
approximately $61.1 million (a 37.4% reduction of in-force premium), while 63.5% of our in-force homeowners’
policyholders were receiving wind mitigation credits totaling approximately $31.5 million, (a 28.6 % reduction of in-force
premium), as of December 31, 2011.
During 2012 and 2011, the change to the cumulative wind mitigation credits afforded our policyholders totaled
$29.6 million and $4.2 million, respectively.
These premium discounts have had a significant effect on both written and earned premium. Wind mitigation credits
are 37.4% of the pre-credit premium, or $61.1 million, as of December 31, 2012, as compared with 28.6% of the pre-credit
premium, or $31.5 million, as of December 31, 2011.
Our in-force homeowners’ policies increased by approximately 17,300, or approximately 40%, to approximately
61,100 as of December 31, 2012, as compared with approximately 43,800 as of December 31, 2011.
We received approval from the Florida OIR in 2010 for a premium rate increase for our voluntary homeowners’
program within the State of Florida. That premium rate increase averaged approximately 20.2% and was implemented for
policies with effective dates as soon as permitted following approval. In addition, in 2010 we received approval from the
Florida OIR for a premium rate increase of approximately 15% for homeowners policies assumed from Citizens in Florida
beginning July 2010. In February 2012, we received approval from the Florida OIR of a 14.1% rate increase. That rate
increase, together with our 2011 rate increase for our voluntary property book of homeowners’ business averaged 20.2%
statewide, and our assumed property book of homeowners’ business, averaged 13.9% statewide.
- 56 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our earnings can also be impacted by our ratings, such as the rating of FNIC by Demotech. FNIC’s rating as of
December 31, 2012 was "A" ("Exceptional"). For more information regarding our rating and the impact of a change or
withdrawal of our rating, please see “Business-Regulation-Industry Rating Services.”
The Company’s sale of commercial general liability policies decreased by $0.8 million to $9.3 million for 2012,
compared with $10.1 million for 2011. The primary factor for this decrease has been improvements to our underwriting
standards and our decision to restrict underwriting authority within specific commercial general liability classes and
geographic areas.
The following table sets forth the amounts and percentages of our gross premiums written in connection with our
commercial general liability program by state.
2012
Amount
Years Ended December 31,
Percentage
Amount
(Dollars in Thousands)
2011
Percentage
State
Florida
Louisiana
Texas
Other
Total
$
$
8,639
217
426
56
9,338
92.52%
2.32%
4.56%
0.60%
100.00%
$
8,606
916
534
69
10,125
$
84.99%
9.05%
5.28%
0.68%
100.00%
We are required to report write-your-own flood premiums on a direct and 100% ceded basis.
The Company’s sale of auto insurance policies decreased to $3.0 million for 2012, compared with $3.3 million for
2011. The Company’s sale of auto insurance included new and renewal policies in 2012 and only renewal policies in 2011.
Gross Premiums Ceded
Gross premiums ceded increased to $51.1 million for 2012, compared with $46.3 million for 2011. Gross premiums
ceded relating to our homeowners’, commercial general liability, write-your-own flood and automobile programs totaled
$43.3 million, $0.5 million, $5.3 million and $2.0 million for 2012. Gross premiums ceded relating to our homeowners’,
write-your-own flood and automobile programs totaled $40.3 million, $4.5 million and $1.5 million for 2011. The increase to
gross premiums ceded relating to our homeowners’ program is due to higher gross premium written, net of a reduced
marginal cost of reinsurance purchased from the Florida Hurricane Catastrophe Fund (“FHCF”). We are required to report
write-your-own flood premiums on a direct and 100% ceded basis.
Increase (Decrease) in Prepaid Reinsurance Premiums
The increase in prepaid reinsurance premiums was $2.1 million in 2012, compared with a $2.7 million decrease in
2011. The benefit to written premium is associated with the timing of our reinsurance payments measured against the term of
the underlying reinsurance policies.
Increase in Unearned Premiums
The increase in unearned premiums was $11.1 million for 2012, compared with $0.8 million for 2011. The 2012
charge to written premium was due to a $10.9 million increase in unearned homeowners’ insurance premiums, a $0.5 million
increase in unearned flood premiums, a $0.1 million decrease in unearned automobile premiums and a $0.2 million decrease
in unearned commercial general liability premiums during 2012. These changes are a result of differences in written premium
volume during this period as compared with the same period last year. See “Gross Premiums Written” above.
- 57 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Premiums Earned
Net premiums earned increased $10.9 million, or 22.3%, to $59.4 million for 2012, compared with $48.5 million for
2011. The following table denotes net premiums earned by product line.
Years Ended December 31,
2012
2011
Amount
Percentage
Amount
Percentage
(Dollars in Thousands)
Homeowners'
Commercial General Liability
Automobile
Net premiums earned
$
$
49,209
9,196
954
59,359
82.90%
15.49%
1.61%
100.00%
$
$
35,785
10,632
2,106
48,523
73.75%
21.91%
4.34%
100.00%
The $13.4 million increase in homeowners’ net premiums earned is due to a $21.4 million increase in gross written
premium as discussed, a $3.1 million increase in gross premiums ceded and a $4.9 million increase in the net change to
prepaid reinsurance premiums and unearned premium.
The $1.4 million decrease in commercial general liability net premiums earned is a result of a $0.8 million decrease
in gross written premium, reflecting the impact our decision to restrict underwriting authority within specific commercial
general liability classes and geographic areas. The change is also a result of a $0.4 million increase in gross premiums ceded
and a $0.2 million decrease in the net change to unearned premium.
The $1.1 million decrease in automobile net premiums earned is a result of a $0.3 million decrease in gross written
premium as discussed, a $0.4 million increase in gross premiums ceded and a $0.4 million decrease in the net change to
prepaid reinsurance premiums and unearned premium.
Commission Income
Commission income increased $0.4 million, or 38.5%, to $1.4 million for 2012, compared with $1.0 million for
2011. The primary sources of our commission income are our managing general agent services, write-your-own flood
premiums and our independent insurance agency, Insure-Link.
Direct Written Policy Fees
Direct written policy fees increased $0.4 million, or 26.8%, to $2.0 million for 2012, compared with $1.6 million for
2011. The change is attributed to the increase in gross premiums written during this same period.
Net Investment Income
Net investment income decreased $0.3 million, or 6.4%, to $3.8 million for 2012, compared with $4.1 million for
2011. Our investment yield, net and gross of investment expenses, excluding equities and including cash, was 2.5% and
2.8%, respectively, for 2012. Our investment yield, net and gross of investment expenses, excluding equities and including
cash, was 2.9% and 3.1%, respectively, for 2011.
Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and
cash, was 2.6% and 2.9%, respectively, for 2012. The primary reason for our lower investment yield in 2012 was the result
of the Federal Reserve's activity in the bond market, which pushed up bond prices and lowered yields. Our investment yield,
net and gross of investment expenses measured against debt securities, excluding equities and cash, was 3.1% and 3.4%,
respectively, for 2011.
See also “Analysis of Financial Condition As of December 31, 2012 Compared with December 31, 2011 –
Investments” for a further discussion on our investment portfolio.
- 58 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Realized Investment Gains
Net realized investment gains were $1.1 million for 2012, compared with $2.7 million for 2011. Specifically, net
realized losses for equity securities were $0.3 million for 2012 and 2011. For debt securities, net realized gains were $1.4
million for 2012, compared with $3.0 million for 2011. During 2011, the Company, because of the actions taken by the
Federal Reserve to maintain a low interest rate environment, realized significant gains in the fixed income portfolio.
FASB has issued guidance regarding when an investment is considered impaired, whether that impairment is other-
than temporary, and the measurement of an impairment loss. 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. During 2012, pursuant to guidelines prescribed in FASB issued guidance, we have
charged to operations, realized investment losses of $44,000. The charges relate to common stock held in diverse industries;
during 2011, pursuant to guidelines prescribed in FASB issued guidance, we charged to operations, realized investment
losses of $0.8 million. 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 S&P and Moody’s, as well as information released via the
general media channels.
The table below depicts the net realized investment gains by investment category during 2012 and 2011.
Realized gains:
Debt securities
Equity securities
Total realized gains
Realized losses:
Debt securities
Equity securities
Total realized losses
Net realized gains on investments
Other Income
Years Ended December 31,
2012
2011
(Dollars in Thousands)
$
1,783
1,403
3,186
$
3,569
1,240
4,809
(391)
(1,723)
(2,114)
1,072
$
(595)
(1,489)
(2,084)
2,725
$
Other income decreased $1.1 million, or 68.3%, to $0.5 million for 2012, compared with $1.6 million for 2011.
Sources of other income for 2012 include the reconciliation of outstanding checks in connection with our accounting for
unclaimed property and the recovery of a receivable written off in a prior year. Sources of other income for 2011 include the
reconciliation of outstanding checks in connection with our accounting for unclaimed property and the final recognition of
our gain on the sale of our Lauderdale Lakes property.
Losses and LAE
Losses and LAE, our most significant expense, represent actual payments made and changes in estimated future
payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. We revise
our estimates based on the results of analysis of estimated future payments to be made. This process assumes that experience,
adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.
Losses and LAE decreased by $0.7 million, or 2.2%, to $30.2 million for 2012, compared with $30.9 million for
2011. The overall change includes a $4.8 million increase in our homeowners’ program, a $3.4 million decrease in our
commercial general liability program and a $2.1 million decrease in connection with our automobile program.
- 59 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The composition of unpaid losses and LAE by product line is as follows.
Case
December 31, 2012
Bulk
(Dollars in Thousands)
Total
Case
December 31, 2011
Bulk
(Dollars in Thousands)
Total
Homeowners'
Commercial General Liability
Automobile
Total
8,276
2,956
3,643
14,875
$
$
$
$
$
$
6,637
22,310
6,086
35,033
14,913
25,266
9,729
49,908
8,795
4,225
3,533
16,553
10,652
27,717
5,061
43,430
19,447
31,942
8,594
59,983
$
$
$
$
$
$
Please see “Liability for Unpaid Losses and LAE” under “Item 1 Business” for a discussion of the factors that affect
unpaid losses and LAE.
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. Because of our process, reserves were
decreased by approximately $10.1 million during 2012. This overall change includes a $4.5 million decrease in reserves for
our homeowners’ program, a $6.7 million decrease in reserves for our commercial general liability program and a $1.1 million
increase in reserves for our automobile program. The decreases are due to favorable experience based in part on enhanced
underwriting and claim processing techniques.
Our loss ratio is computed as losses and LAE divided by net premiums earned. A lower loss ratio generally results in
higher operating income. Our loss ratio for 2012 was 50.9% compared with 63.7% for the same period in 2011. The
favorable decrease to our loss ratio is due to the $0.7 million decrease in losses and LAE measured against the $10.9 million
increase in net premium earned during 2012 as compared with the same period in 2011.
The table below reflects the loss ratios by product line.
Homeowners'
Commercial General Liability
Automobile
All lines
Years Ended December 31,
2012
51.86%
32.86%
175.08%
50.89%
2011
57.79%
60.11%
181.67%
63.67%
Operating and Underwriting Expenses
Operating and underwriting expenses increased $0.1 million, or 0.8%, to $10.0 million for 2012, compared with
$9.9 million for 2011.
Salaries and Wages
Salaries and wages increased $0.4 million, or 5.4%, to $8.4 million for 2012, compared with $8.0 million for 2011.
The charge to operations for stock-based compensation, in accordance with FASB guidance, was approximately $0.3 million
during 2012, compared with approximately $0.2 million for 2011.
Amortization of Deferred Policy Acquisition Costs
Amortization of deferred policy acquisition costs, increased $1.0 million, or 7.4%, to $13.3 million for 2012,
compared with $12.3 million for 2011. Policy acquisition costs - amortization, consists of the actual policy acquisition costs,
including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned.
Provision for Income Tax Expense (Benefit)
The provision for income tax expense was $2.4 million for 2012, compared with a benefit of $0.6 million for 2011.
The effective rate for income taxes was 36.1% for 2012, compared with 57.0% for 2011. The 2011 57.0% effective rate
- 60 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
reflects the true-up of the 2010 tax return permanent differences.
Net Income (Loss)
As a result of the foregoing, the Company’s net income for 2012 was $4.3 million, compared with net loss of $0.4
million for 2011.
CONTRACTUAL OBLIGATIONS
A summary of long-term contractual obligations as of December 31, 2013 follows. The amounts represent estimates
of gross undiscounted amounts payable over time.
Contractual Obligations
Total
2014
Unpaid Losses and LAE
Operating leases
Total
$
$
61,016
1,356
62,372
36,219
392
36,611
14,589
400
14,989
$
$
$
$
$
2017
$
Thereafter
1,153
$
-
1,153
$
2,343
156
2,499
6,712
408
7,120
(Dollars in Thousands)
2016
$
2015
$
LIQUIDITY AND CAPITAL RESOURCES
In 2013, our primary sources of capital included proceeds from the sale of investment securities, increased unearned
premiums, issuance of common stock, increased unpaid losses and LAE, increased accounts payable and accrued expenses,
increased income taxes payable and decreased deferred income tax expense. Additional sources of capital included
amortization of investment premium discount, net, increased premium deposits and customer credit balances, exercised stock
options, decreased reinsurance recoverable, net, non-cash compensation, depreciation and amortization, increased bank
overdraft and a tax benefit related to non-cash compensation. Because we are a holding company, we are largely dependent
upon fees and commissions from our subsidiaries for cash flow.
In 2013, 2012 and 2011, net cash provided by operating activities was $79.7 million, $1.5 million and $4.1 million,
respectively.
In 2013, operations generated $106.3 million of gross cash flow, due to a $69.3 million increase in unearned
premiums, an $11.1 million increase in unpaid losses and LAE, a $3.8 million increase in accounts payable and accrued
expenses, a $2.4 million increase in income taxes payable and a $2.2 million decrease in deferred income tax expense.
Additional sources of cash included $1.8 million of amortization of investment premium discount, net, a $1.4 million
increase in premium deposits and customer credit balances, a $0.8 million decrease in reinsurance recoverable, net, $0.3
million non-cash compensation, $0.3 million depreciation and amortization and a $0.2 million increase in bank overdraft, all
in conjunction with $12.7 million of net income.
In 2013, operations used $26.6 million of gross cash flow primarily due to a $14.3 million increase in premiums
receivable, an $8.2 million increase in policy acquisition costs, net of amortization and $2.9 million of net realized
investment gains. Additional uses of cash included a $0.6 million increase in prepaid reinsurance premiums, a $0.5 million
increase in other assets and a $0.1 million decrease in recovery for uncollectible premiums receivable.
In 2013, net cash used by investing activities was $87.1 million. In 2012 and 2011, net cash provided and used by
investing activities was $4.3 million and $5.2 million, respectively. Our available-for-sale investment portfolio is highly
liquid as it consists entirely of readily marketable securities. In 2013, investing activities generated $106.2 million and used
$193.3 million.
In 2013, net cash provided by financing activities was $27.7 million. In 2012 and 2011, net cash provided by
financing activities was less than $0.1 million. In 2013, the sources of cash in connection with financing activities included
$27.9 million from issuance of common stock, $0.9 million from exercised stock options and a $0.1 million tax benefit
related to non-cash compensation. In 2013, the use of cash in connection with financing activities was $1.2 million of
dividends paid.
We offer direct billing in connection with our homeowners’ and commercial general liability programs. Direct
billing is an agreement in which the insurance company accepts from the insured, as a receivable, a promise to pay the
premium, as opposed to requiring the full amount of the policy at policy inception, either directly from the insured or from a
- 61 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
premium finance company. The advantage of direct billing a policyholder by the insurance company is that we are not reliant
on a credit facility, but remain able to charge and collect interest from the policyholder.
As discussed above, we have experienced significant growth, as evidenced by the 103.7% increase in gross
premiums written during the twelve months of 2013 as compared with the same period in 2012 and the 91.0% increase in the
number of our in-force homeowners’ policies during 2013.
We believe that our current capital resources will be sufficient to meet currently anticipated working capital
requirements. There can be no assurances, however, that such will be the case. We continue to evaluate our liquidity and the
possibility that we may require additional working capital.
GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. FNIC’s
statutory capital and surplus was $76.9 million and $52.1 million as of December 31, 2013 and 2012, respectively. FNIC’s
statutory net income was $3.6 million, $6.6 million and $0.8 million for 2013, 2012 and 2011, respectively. FNIC’s statutory
non-admitted assets were nearly nothing and nearly nothing as of December 31, 2013 and 2012, respectively.
As of December 31, 2013, 2012, and 2011, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as “structured finance” or “special purpose” entities, which were
established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes.
As such, management believes that we currently are not exposed to any financing, liquidity, market or credit risks that could
arise if we had engaged in transactions of that type requiring disclosure herein.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented in this Annual Report have been prepared in
accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets
and liabilities are monetary in nature. As a result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude
as the inflationary effect on the cost of paying losses and LAE.
Insurance premiums are established before we know the amount of losses and LAE and the extent to which inflation
may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels.
While we attempt to charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory
reasons. Inflation may also affect the market value of our investment portfolio and the investment rate of return. Any future
economic changes that result in prolonged and increasing levels of inflation could cause increases in the dollar amount of
incurred losses and LAE and thereby materially adversely affect future liability requirements.
- 62 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Revenue:
Net premiums earned
Other revenue
Total revenue
Expenses:
Losses and LAE
Other expenses
Total expenses
Income before provision for income tax expense
Provision for income tax expense
Year Ended December 31, 2013
(Dollars in Thousands except EPS)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
18,261
3,607
21,868
$
23,742
4,436
28,178
$
27,315
4,605
31,920
$
35,063
4,708
39,771
9,323
8,813
18,136
3,732
1,397
12,821
11,302
24,123
4,055
1,511
14,439
12,695
27,134
4,786
1,504
19,827
13,299
33,126
6,645
2,079
Net income
$
2,335
$
2,544
$
3,282
$
4,566
Basic net income per share
$
0.29
$
0.32
$
0.41
$
0.48
Fully diluted net income per share
$
0.29
$
0.31
$
0.39
$
0.46
Weighted average number of common shares outstanding
7,983
8,020
8,067
9,391
Weighted average number of common shares outstanding (assuming
dilution)
8,127
8,274
8,346
9,731
- 63 -
Federated National Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Revenue:
Net premiums earned
Other revenue
Total revenue
Expenses:
Losses and LAE
Other expenses
Total expenses
Income before provision for income tax expense
Provision for income tax expense
Year Ended December 31, 2012
(Dollars in Thousands except EPS)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
12,818
1,925
14,743
$
14,693
2,130
16,823
$
15,088
2,173
17,261
$
16,760
3,060
19,820
5,728
7,370
13,098
1,645
573
7,136
7,347
14,483
2,340
918
8,049
8,109
16,158
1,103
353
9,296
8,864
18,160
1,660
591
Net income
$
1,072
$
1,422
$
750
$
1,069
Basic net income per share
$
0.13
$
0.18
$
0.09
$
0.13
Fully diluted net income per share
$
0.13
$
0.18
$
0.09
$
0.13
Weighted average number of common shares outstanding
7,946
7,947
7,949
7,965
Weighted average number of common shares outstanding (assuming
dilution)
7,962
7,994
8,042
8,096
OFF BALANCE SHEET TRANSACTIONS
For the years ended December 31, 2013 and 2012, we had no off balance sheet transactions.
- 64 -
Federated National Holding Company
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our investment objective is to maximize total rate of return after federal income taxes while maintaining liquidity
and minimizing risk. Our current investment policy limits investment in non-investment-grade debt securities (including
high-yield bonds), and limits total investments in preferred stock, common stock and mortgage notes receivable. We also
comply with applicable laws and regulations that further restrict the type, quality and concentration of our investments. In
general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal,
state and municipal obligations, corporate bonds, preferred and common equity securities and real estate mortgages.
Our investment policy is established by the Board of Directors Investment Committee and is reviewed on a regular
basis. Pursuant to this investment policy, as of December 31, 2013, approximately 85% of investments were in debt securities
and cash and cash equivalents, which are considered to be either held until maturity or available for sale, based upon our
estimates of required liquidity. Approximately 96% of the debt securities are considered available for sale and are marked to
market. We may in the future consider additional debt securities to be held to maturity and carried at amortized cost. We do
not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.
The following table provides information about the financial instruments as of December 31, 2013 that are sensitive
to changes in interest rates. The table presents principal cash flows and the related weighted average interest rate by expected
maturity date based upon par values.
Principal amount by expected maturity:
United States government obligations
and authorities
Obligations of states and political subdivisions
Corporate securities
International securities
Collateralized mortgage obligations
Equity securities, at market
All investments
Weighted average interest rate by expected maturity:
United States government obligations
and authorities
Obligations of states and political subdivisions
Corporate securities
International securities
Collateralized mortgage obligations
Equity securities, at market
All investments
2014
2015
2016
2017
2018
Thereafter
Total
$
$
$
$
$
495
2,275
2,163
-
127
-
5,060
3,143
5,835
9,513
440
2,349
-
21,280
$
415
8,995
15,410
1,346
4,069
-
$
30,235
3,669
5,540
13,476
280
964
-
23,929
4,005
6,685
14,869
440
4,646
-
30,645
10,867
17,300
26,498
1,172
2,990
-
58,827
$
22,594
46,630
81,929
3,678
15,145
-
$
169,976
$
$
$
$
$
Carrying
Amount
$
22,456
52,064
87,757
3,807
16,042
38,584
$
220,710
1.75%
5.00%
4.89%
0.00%
5.56%
0.00%
4.65%
0.26%
4.40%
4.02%
0.71%
4.73%
0.00%
3.58%
2.18%
4.81%
3.76%
1.97%
5.50%
0.00%
4.21%
0.65%
4.79%
4.32%
1.50%
4.14%
0.00%
3.83%
1.15%
4.91%
4.37%
1.99%
4.01%
0.00%
3.98%
1.97%
4.83%
5.11%
5.11%
4.39%
0.00%
4.41%
1.37%
4.79%
4.46%
2.79%
4.62%
0.00%
4.12%
- 65 -
Federated National Holding Company
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ...................................................................................
Consolidated Balance Sheets
as of December 31, 2013 and 2012 ......................................................................................................................
Consolidated Statements of Operations
For the years ended December 31, 2013, 2012 and 2011 .....................................................................................
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2013, 2012 and 2011 .....................................................................................
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive (Loss) Income
For the years ended December 31, 2013, 2012 and 2011 .....................................................................................
Consolidated Statements of Cash Flows
For the years ended December 31, 2013, 2012 and 2011 .....................................................................................
Notes to Consolidated Financial Statements ...........................................................................................................
PAGE
67
68
69
70
71
72
74
- 66 -
Federated National Holding Company and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Federated National Holding Company
Sunrise, Florida
We have audited the accompanying consolidated balance sheets of Federated National Holding Company as of
December 31, 2013 and 2012 and the related consolidated statements of income and comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Federated National Holding Company at December 31, 2013 and 2012, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting
principles generally accepted in the United States of America.
De Meo Young McGrath
A Goldstein Schechter Koch, P.A. Company
Fort Lauderdale, Florida
March 17, 2014
- 67 -
Federated National Holding Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2013 AND 2012
ASSETS
Investments
Debt maturities, available for sale, at fair value
Debt maturities, held to maturity, at amortized cost
Equity securities, available for sale, at fair value
Period Ending
December 31, 2013
December 31, 2012
(Dollars in Thousands)
$
174,912
7,214
38,584
$
101,755
7,359
20,982
Total investments
220,710
130,096
Cash and short term investments
Prepaid reinsurance premiums
Premiums receivable, net of allowance for credit losses of $143 and $69, respectively
Reinsurance recoverable, net
Deferred policy acquisition costs
Deferred income taxes, net
Income taxes receivable
Property, plant and equipment, net
Other assets
41,446
7,592
22,414
2,742
16,708
1,006
-
929
3,194
21,143
7,045
8,023
3,503
8,479
4,338
39
564
2,658
Total assets
$
316,741
$
185,888
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and LAE
Unearned premiums
Premiums deposits and customer credit balances
Bank overdraft
Income taxes payable
Accounts payable and accrued expenses
Total liabilities
Shareholders' equity:
$
61,016
128,343
3,833
6,203
2,379
6,473
$
49,908
59,006
2,458
5,987
-
2,624
208,247
119,983
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding
10,901,716 and 7,979,488, respectively
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding
Additional paid-in capital
Accumulated other comprehensive income
Unrealized net gains on investments, available for sale
Total accumulated other comprehensive income
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
109
-
80,525
80
-
51,356
5,964
5,964
21,896
108,494
316,741
$
4,067
4,067
10,402
65,905
185,888
$
See accompanying notes to consolidated financial statements.
- 68 -
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2013
Twelve Months Ended December 31,
2012
(Dollars in Thousands except EPS and Share and Dividend Data)
2011
$
Revenue:
Gross premiums written
Gross premiums ceded
Net premiums written
Increase (decrease) in prepaid reinsurance premiums
Increase in unearned premiums
Net change in prepaid reinsurance premiums and unearned premiums
Net premiums earned
Commission income
Finance revenue
Direct written policy fees
Net investment income
Net realized investment gains
Other income
Total revenue
Expenses:
Losses and LAE
Operating and underwriting expenses
Salaries and wages
Amortization of deferred policy acquisition costs
Total expenses
Income (loss) before provision for income tax expense (benefit)
Provision for income tax expense (benefit)
243,373
(82,708)
160,665
13,052
(69,336)
(56,284)
104,381
2,646
866
6,196
3,332
2,881
1,435
121,737
56,410
14,474
10,188
21,447
102,519
19,218
6,491
$
119,459
(51,085)
$
98,269
(46,293)
68,374
2,059
(11,074)
(9,015)
59,359
1,377
496
2,007
3,819
1,072
517
68,647
30,209
9,996
8,439
13,255
61,899
6,748
2,435
51,976
(2,656)
(797)
(3,453)
48,523
994
518
1,583
4,079
2,725
1,741
60,163
30,896
9,916
8,004
12,347
61,163
(1,000)
(570)
Net income (loss)
$
12,727
$
4,313
$
(430)
Net income (loss) per share - basic
$
1.50
$
0.53
$
(0.05)
Net income (loss) per share - diluted
$
1.45
$
0.53
$
(0.05)
Weighted average number of common shares outstanding - basic
Weighted average number of common shares outstanding - diluted
8,505,967
8,772,060
7,951,906
8,016,110
7,946,384
7,946,384
Dividends paid per share
$
0.11
$
0.02
$
-
See accompanying notes to consolidated financial statements.
- 69 -
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
Net income (loss)
$
12,727
$
4,313
$
(430)
Change in net unrealized gains on investments
available for sale
Comprehensive income before tax
Income tax expense related to items of other
comprehensive income (loss)
3,041
15,768
5,114
9,427
572
142
(1,144)
(1,924)
(215)
Comprehensive income (loss)
$
14,624
$
7,503
$
(73)
See accompanying notes to consolidated financial statements.
- 70 -
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
(LOSS) INCOME
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Comprehensive
(Loss)
Income
Common
Additional
Paid-in
Accumulated
Other
Comprehensive
Retained
Total
Shareholders'
Stock
Capital
Income
(Dollars in Thousands)
Earnings
Equity
Balance as of December 31, 2010
$
79
$
50,654
$
520
$
6,678
$
57,931
Net loss
(430)
Cash dividends
Treasury stock acquired
Shares based compensation
Net unrealized change in investments,
net of tax effect of ($215)
Comprehensive loss
357
(73)
$
(430)
-
(430)
-
286
357
286
357
Balance as of December 31, 2011
$
79
$
50,940
$
877
$
6,248
$
58,144
Net income
$4,313
Cash dividends
Treasury stock acquired
Stock options exercised
Shares based compensation
Net unrealized change in investments,
net of tax effect of ($1,924)
Comprehensive income
1
128
288
3,190
7,503
$
3,190
4,313
(159)
4,313
(159)
-
129
288
3,190
Balance as of December 31, 2012
$
80
$
51,356
$
4,067
$
10,402
$
65,905
Net income
$12,727
Cash dividends
Stock issued for capital raised
Treasury stock acquired
Stock options exercised
Shares based compensation
Net unrealized change in investments,
net of tax effect of ($1,144)
Comprehensive income
28
1
27,851
857
461
1,897
14,624
$
1,897
12,727
(1,233)
12,727
(1,233)
27,879
-
858
461
1,897
Balance as of December 31, 2013
$
109
$
80,525
$
5,964
$
21,896
$
108,494
See accompanying notes to consolidated financial statements.
- 71 -
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
2013
For the Years Ended December 31,
2012
(Dollars in Thousands)
2011
$
12,727
$
4,313
$
(430)
1,761
263
(2,881)
-
-
(74)
293
(14,317)
(546)
761
39
2,188
(8,229)
(536)
11,108
69,336
1,376
2,379
216
3,849
79,713
106,173
(192,627)
(629)
(87,083)
1,356
195
(1,072)
(44)
(12)
5
188
(2,412)
1,293
(1,415)
(39)
2,350
(761)
(552)
(10,075)
11,074
(347)
(77)
(1,942)
(486)
1,540
90,449
(86,203)
83
4,329
$
$
858
(1,232)
27,879
168
27,673
20,303
21,143
41,446
128
(159)
-
100
69
5,938
15,205
21,143
$
$
1,249
168
(2,725)
-
18
(5)
196
29
2,076
5,951
2,393
(912)
161
(308)
(6,547)
797
441
77
498
956
4,083
108,318
(113,251)
(243)
(5,176)
-
$
-
-
92
92
(1,001)
16,206
15,205
$
Cash flow from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of investment premium discount, net
Depreciation and amortization of property plant and equipment, net
Net realized investment gains
Non-cash impairment recognition
(Recovery) provision for credit losses, net
(Recovery) provision for uncollectible premiums receivable
Non-cash compensation
Changes in operating assets and liabilities:
Premiums receivable
Prepaid reinsurance premiums
Reinsurance recoverable, net
Income taxes recoverable
Deferred income tax expense, net of other comprehensive income (loss)
Policy acquisition costs, net of amortization
Other assets
Unpaid losses and LAE
Unearned premiums
Premium deposits and customer credit balances
Income taxes payable
Bank overdraft
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flow (used) provided by investing activities:
Proceeds from sale of investment securities
Purchases of investment securities available for sale
Purchases of property and equipment
Net cash (used) provided by investing activities
Cash flow provided by financing activities:
Exercised stock options
Dividends paid
Issuance of common stock
Tax benefit related to non-cash compensation
Net cash provided by financing activities
Net increase (decrease) in cash and short term investments
Cash and short term investments at beginning of period
Cash and short term investments at end of period
See accompanying notes to consolidated financial statements.
- 72 -
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(continued)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes
Non-cash investing and finance activities:
Accrued dividends payable
See accompanying notes to consolidated financial statements.
2013
For the Years Ended December 31,
2012
(Dollars in Thousands)
2011
$
1,870
$
165
$
-
$
330
$
159
$
-
- 73 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(1) ORGANIZATION AND BUSINESS
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation.
Federated National Holding Company (“FNHC”, “Company”, “we”, “us”), formerly known as 21st Century Holding
Company 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
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 20 years.
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 insurance subsidiary is Federated National Insurance Company (“FNIC”). FNIC 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 3,600 independent agents, of which approximately 1,800 actively sell and service our products,
FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines and personal and commercial
automobile insurance in Florida. FNIC is licensed as an admitted carrier in Alabama, Louisiana, Georgia and Texas and
underwrites commercial general liability insurance in those states, homeowners’ insurance in Louisiana and personal automobile
insurance in Georgia and Texas.
FNIC is licensed as a non-admitted carrier in Arkansas, Kentucky, Missouri, Nevada, Oklahoma, South Carolina and
Tennessee and can underwrite commercial general liability insurance in all of these states. A non-admitted carrier, sometimes
referred to as a “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.
In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance
Company (“American Vehicle”), with FNIC continuing the operations of both entities. In connection with this merger, the
Company, FNIC and American Vehicle entered into a Consent Order with the Florida Office of Insurance Regulation (“Florida
OIR”) pursuant to which we agreed to certain restrictions on our business operations. The Consent Order was amended in
February 2013 to lessen or eliminate certain of the original requirements, due to FNIC’s statutory underwriting profit during
2012. See "Footnote 8 – Regulatory Requirements and Restrictions”.
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 Manager to cost effectively manage claims-related litigation and to
monitor our claims handling practices for efficiency and regulatory compliance.
Until June 2011, we offered premium financing to our own and third-party insureds through our wholly owned
subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).
Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, a wholly
owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a
managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South
- 74 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general
liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s
existing network of agents.
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 $25 per policy fee, and traditionally a 6%
commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed
above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown
future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during
January 2011.
The homeowner policy provides FNU the right to cancel any policy within a period of 90 days from the policy's
inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our
underwriting criteria.
Although we are authorized to underwrite the various lines described above, our business is primarily underwriting
homeowners’ policies. During 2013, 89.6%, 4.3%, 2.6% and 3.5% of the premiums we underwrote were for homeowners’,
commercial general liability, federal flood, and personal automobile insurance, respectively. During 2013, $29.7 million or
13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with
Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to
offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents
25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents
began writing for FNIC in March 2013. During 2012, 85.3%, 7.8%, 4.4% and 2.5% of the premiums we underwrote were for
homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively.
During the years ended December 31, 2013, 2012 or 2011, we did not experience any weather-related catastrophic
events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or
other insurable events will affect our future results of operations and liquidity. Loss and loss adjustment expenses (“LAE”)
are affected by a number of factors, many of which are partially or entirely beyond our control, including the following.
the nature and severity of the loss;
•
• weather-related patterns;
•
•
•
• macroeconomic issues.
the availability, cost and terms of reinsurance;
underlying settlement costs, including medical and legal costs;
legal and political factors such as legislative initiatives and public opinion;
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 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 have entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with
Federated Mutual Insurance Company (“Federated Mutual”) in response to correspondence received from Federated
Mutual’s counsel alleging that our use of the name “Federated” infringed certain federal trademarks held by Federated
Mutual. Although we believe that we have meritorious defenses to this allegation, we sought to avoid litigation and therefore
negotiated and entered into the Coexistence Agreement. Under the Coexistence Agreement, 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.
During this period, we continue to develop our brand under the “FedNat” name, which is the name by which agents generally
know us.
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.
- 75 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) CASH AND SHORT TERM INVESTMENTS
We consider all short-term highly liquid investments with original maturities of less than three months to be short
term investments.
(b) INVESTMENTS
Our investment securities have been classified as either available-for-sale or held to maturity in response to our
liquidity needs, changes in market interest rates and asset-liability management strategies, among other reasons. Investments
available-for-sale are stated at fair value on the balance sheet. Investments designated as held to maturity are stated at
amortized cost on the balance sheet. Unrealized gains and losses are excluded from earnings and are reported as a component
of other comprehensive income within shareholders' equity, net of related deferred income taxes.
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.
(c) PREMIUM REVENUE
Premium revenue on all lines is earned on a pro-rata basis over the life of the policies. Unearned premiums represent
the portion of the premium related to the unexpired policy term.
(d) DEFERRED ACQUISITION COSTS
Deferred acquisition costs primarily represent commissions paid to outside agents at the time of policy issuance (to
the extent they are recoverable from future premium income) net of ceded premium commission earned from reinsurers,
salaries and premium taxes net of policy fees, and are amortized over the life of the related policy in relation to the amount of
premiums earned. The method followed in computing deferred acquisition costs limits the amount of such deferred costs to
their estimated realizable value, which gives effect to the premium to be earned, related investment income, unpaid losses and
LAE and certain other costs expected to be incurred as the premium is earned. There is no indication that these costs will not
be fully recoverable in the near term.
(e) PREMIUM DEPOSITS
Premium deposits represent premiums received primarily in connection with homeowner policies that are not yet
effective. We take approximately 30 working days to issue the policy from the date the cash and policy application are
received.
(f) UNPAID LOSSES AND LAE
Unpaid losses and LAE are determined by establishing liabilities in amounts estimated to cover incurred losses and
LAE. Such liabilities are determined based upon our assessment of claims pending and the development of prior years' loss
liability. These amounts include liabilities based upon individual case estimates for reported losses and LAE and estimates of
such amounts that are incurred but not yet reported (“IBNR”). Changes in the estimated liability are charged or credited to
operations as the losses and LAE are settled.
The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and
frequency and are continually reviewed. As part of this process, we review historical data and consider various factors,
including known and anticipated legal developments, inflation and economic conditions. As experience develops and other
data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for
unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the
liabilities may deviate substantially from prior estimates.
- 76 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
There can be no assurance that our liability for unpaid losses and LAE will be adequate to cover actual losses. If our
liability for unpaid losses and LAE proves to be inadequate, we will be required to increase the liability with a corresponding
reduction in our net income in the period in which the deficiency is identified. Future loss experience substantially in excess
of established liability for unpaid losses and LAE could have a material adverse effect on our business, results of operations
and financial condition.
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 do not discount unpaid losses and LAE for financial statement purposes.
(g) FINANCE REVENUE
Interest and service income, resulting from the financing of insurance premiums, is recognized using a method that
approximates the effective interest method. Late charges are recognized as income when chargeable.
(h) PREMIUMS RECEIVABLE, NET OF ALLOWANCE FOR CREDIT LOSSES
Provisions for credit losses are provided in amounts sufficient to maintain the allowance for credit losses at a level
considered adequate to cover anticipated losses. Generally, accounts that are over 90 days old are written off to the allowance
for credit losses. We have been increasing our reliance on direct billing of our policyholders for their insurance premiums.
Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as
opposed to requiring payment of the full amount of the policy, either directly from the insured or from a premium finance
company. We manage the credit risk associated with our direct billing program through our integrated computer system
which allows us to monitor the equity in the unearned premium to the underlying policy. Underwriting criteria are designed
with down payment requirements and monthly payments that create policyholder equity, also called unearned premium, in
the insurance policy. The equity in the policy is collateral for the extension of credit to the insured.
(i) MANAGING GENERAL AGENT (“MGA”) FEES
If all the costs substantially associated with the MGA contracts, which do not involve affiliated insurers, are incurred
during the underwriting process, then the MGA fees and the related acquisition costs are recognized at the time the policy is
underwritten, net of estimated cancellations. If the MGA contract requires significant involvement subsequent to the
completion of the underwriting process, then the MGA fees and related acquisition costs are deferred and recognized over the
life of the policy. Included in MGA Fees are policy fees charged by the insurance companies and passed through to FNU.
Policy fees are discussed below.
(j) POLICY FEES
Policy fees represent a $25 non-refundable application fee for insurance coverage, which are intended to reimburse
us for the costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is underwritten.
These fees are netted against underwriting costs and are included as a component of deferred acquisition costs.
(k) REINSURANCE
We recognize the income and expense on reinsurance contracts principally on a pro-rata basis over the term of the
reinsurance contracts or until the reinsurers maximum liability is exhausted, whichever comes first. We are reinsured under
separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve us from
- 77 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from
reinsurer insolvencies. We only cede risks to reinsurers whom we believe to be financially sound. At December 31, 2013, all
reinsurance recoverables are considered current and deemed collectable.
(l) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date.
(m) CONCENTRATION OF CREDIT RISK
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 $25 per policy fee, and traditionally a 6%
commission fee from its affiliates FNIC and American Vehicle. During the fourth quarter of 2010, FNU, pursuant to the
Consent Order as discussed in “Regulation – Consent Order” reduced its fee, to earn amounts varying between 2% and 4%,
which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement
reflecting this fee modification was executed during January 2011.
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.
(n) RECENT ACCOUNTING PRONOUNCEMENTS
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. Generally Accepted Accounting Principles (“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.
- 78 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
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.
In July 2012, the FASB issued ASU No. 2012-02: Intangibles – Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment. The objective of the amendments in this ASU is to reduce the cost and
complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those
assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The
amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an
indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative
impairment test in accordance with Subtopic 350-30. The more-likely-than-not threshold is defined as having a likelihood of
more than 50 percent. Upon adoption, these amendments are effective for annual and interim impairment tests performed for
fiscal years beginning after September 15, 2012; early adoption is permitted. The adoption of these amendments did not have
a material impact on our financial condition, results of operations or cash flows.
In June 2011, the FASB issued ASU No. 2011-05: Comprehensive Income (Topic 220): Presentation of
Comprehensive Income. The guidance in this ASU is intended to increase the prominence of items reported in other
comprehensive income in the financial statements by presenting the total of comprehensive income, the components of net
income and the components of other comprehensive income either in a single continuous statement of comprehensive income
or in two separate but consecutive statements. This ASU eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders' equity. The guidance in this ASU does not change
the items that must be reported in other comprehensive income or when an item of other comprehensive income must be
reclassified to net income. Upon adoption, this update is to be applied retrospectively and is effective during interim and
annual periods beginning after December 15, 2011. Early adoption is permitted. The adoption of this ASU did not have a
material impact on our financial condition, results of operations or cash flows.
In December 2011, the FASB issued ASU No. 2011-12: Comprehensive Income (Topic 220): Deferral of the
Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive
Income in Accounting Standards Update No. 2011-05. The guidance defers certain provisions contained in ASU No. 2011-
05 requiring the requirement to present components of reclassifications of other comprehensive income on the face of the
income statement or in the notes to the financial statements. However, this deferral does not impact the other requirements
contained in the new standard on comprehensive income as described above. This ASU is effective during interim and annual
periods beginning after December 15, 2011. The adoption of this ASU did not have a material impact on our financial
condition, results of operations or cash flows.
In September 2011, the FASB issued ASU No. 2011-08: Intangibles – Goodwill and Other (Topic 350): Testing
Goodwill for Impairment, which amends ASC Topic 350, Intangibles-Goodwill and Other. The guidance in this ASU
permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test described in ASC Topic 350. Under the amendments in this ASU, an entity is not required to
calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less
than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill
impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent
annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.
In December 2011, the FASB issued ASU No. 2011-11: Balance Sheet (Topic 210): Disclosures about Offsetting
Assets and Liabilities, which requires new disclosure requirements mandating that entities disclose both gross and net
information about instruments and transactions eligible for offset in the statement of financial position as well as instruments
and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure
- 79 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
of collateral received and posted in connection with master netting agreements or similar arrangements. This ASU is effective
for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The
adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.
In October 2010, the FASB issued ASU No. 2010-26: Financial Services – Insurance (Topic 944): Accounting for
Costs Associated with Acquiring or Renewing Insurance Contracts, a consensus of FASB Emerging Issues Task Force. The
amendments in this update modify the definition of the types of costs incurred by insurance entities that can be capitalized in
the acquisition of new and renewal contracts. The amendments in this update specify that the costs must be based on
successful efforts (that is, acquiring a new or renewal contract). The amendments also specify that advertising costs should
be included as deferred acquisition costs under certain circumstances. The amendments in this update are effective for fiscal
years, and interim period within those fiscal years, beginning after December 15, 2011. The amendments in this update
should be applied prospectively upon adoption. Retrospective application to all prior periods presented upon the date of
adoption also is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated
financial statements.
Other recent accounting pronouncements issued by FASB, the American Institute of Certified Public Accountants
(“AICPA”), and the Securities and Exchange Commission (“SEC”) did not or are not believed by management to have a
material impact on the Company’s present or future financial statements.
(o) USE OF ESTIMATES
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.
Similar to other property and casualty insurers, our liability for unpaid losses and LAE, although supported by
actuarial projections and other data, is ultimately based on management's reasoned expectations of future events. Although
considerable variability is inherent in these estimates, we believe that this liability is adequate. Estimates are reviewed
regularly and adjusted as necessary. Such adjustments are reflected in current operations. In addition, the realization of our
deferred income tax assets is dependent on generating sufficient future taxable income. It is reasonably possible that the
expectations associated with these accounts could change in the near term and that the effect of such changes could be
material to the Consolidated Financial Statements.
(p) OPERATIONAL RISKS
We are subject to certain risks in our business operations which are described below. Careful consideration of these
risks should be made before making an investment decision. The risks and uncertainties described below are not the only
ones facing FNHC. Additional risks and uncertainties not presently known or currently deemed immaterial may also impair
our business operations.
Risks Related to Our Business
Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name
to “Federated National Insurance Company”.
• Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.
• Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance
fluctuates and we may not be able to successfully alleviate risk through reinsurance arrangements.
• We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results
of operations and/or financial condition.
• Our January 2011 Consent Order with the Florida OIR, as amended in February 2013, limits our business in certain
- 80 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
respects and may prevent us from growing our business.
•
If we are unable to continue our growth because our capital must be used to pay greater than anticipated claims, our
financial results may suffer.
• We may require additional capital in the future which may not be available or only available on unfavorable terms.
• Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.
• We may experience financial exposure from climate change.
• Our loss reserves may be inadequate to cover our actual liability for losses, causing our results of operations to be
adversely affected.
• Our revenues and operating performance may fluctuate due to statutorily approved assessments that support
property and casualty insurance pools and associations.
• Our investment portfolio may suffer reduced returns or losses, which would significantly reduce our earnings.
• We may experience a loss due to the concentration of credit risk.
• The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial
condition or our results of operations.
• The effects of emerging claim and coverage issues on our business are uncertain.
• Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.
• Our insurance company is subject to minimum capital and surplus requirements, and our failure to meet these
requirements could subject us to regulatory action.
• Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance
industry.
• We may not obtain the necessary regulatory approvals to expand the types of insurance products we offer or the
states in which we operate.
• Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable
policies or obtain adequate insurance, which could limit or halt our growth and harm our business.
• We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain
independent and general agents, our revenues would be negatively affected.
• We rely on our information technology and telecommunications systems, and the failure of these systems could
disrupt our operations.
• Nonstandard automobile insurance historically has a higher frequency of claims than standard automobile insurance,
thereby increasing our potential for loss exposure beyond what we would be likely to experience if we offered only
standard automobile insurance.
• Florida's personal injury protection insurance statute contains provisions that favor claimants, causing us to
experience a higher frequency of claims than might otherwise be the case if we operated only outside of Florida.
• Our success depends on our ability to accurately price the risks we underwrite.
• Current operating resources are necessary to develop future new insurance products.
- 81 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
•
Increased competition, competitive pressures, industry developments and market conditions could affect the growth
of our business and adversely impact our financial results.
• Our participation in the new Florida Property Insurance Clearinghouse may not result in an increase in our premium
revenue.
• Our senior management team is critical to the strategic direction of our company. If there were an unplanned loss of
service by any of our officers our business could be harmed.
• We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs
and limit our growth.
• New homeowners’ insurance operations outside of the State of Florida may not be profitable.
• We face risks in connection with potential material weakness resulting from our Sarbanes-Oxley Section 404
management report and any related remedial measures that we undertake.
Risks Related to an Investment in Our Shares
• Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price
of our common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.
•
If we report a material weakness in our internal controls and procedures, we may lose investor confidence and
remedial measures may be costly.
• Our controls and procedures may fail or be circumvented which could have a material adverse effect on our
business, results of operations and financial condition.
• We have authorized but unissued preferred stock, which could affect rights of holders of common stock.
• Provisions in our articles of incorporation and our bylaws, as amended, and the Florida Business Corporation Act
could make it more difficult to acquire us and may reduce the market price of our common stock.
• As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and
dividends to the holding company as the primary source of our income.
• Future sales of our common stock may depress our stock price.
(q) FAIR VALUE
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 December
31, 2013 and 2012. Changes in interest rates subsequent to December 31, 2013 may affect the fair value of our investments.
Refer to Footnote 21 of the Notes to Consolidated Financial Statements for details.
The carrying amounts for the following financial instrument categories approximate their fair values at December
31, 2013 and 2012 because of their short-term nature: cash and short term investments, premiums receivable, finance
contracts, due from reinsurers, revolving credit outstanding, bank overdraft, accounts payable and accrued expenses.
(r) STOCK OPTION PLANS
During the year ended December 31, 2013, the Company had three stock-based employee compensation plans,
which are described later in Footnote 14, Stock Compensation Plans. Prior to January 1, 2006, we accounted for the plans
under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed
by the Accounting Principles Board (“APB”) and related Interpretation, as permitted by FASB issued guidance. Under these
provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted
- 82 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of
grant.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance
using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2013,
2012 and 2011 include:
• Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and
• 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 provisions of FASB issued guidance. Results for prior periods have not been
restated, as they are not required to be by the pronouncement.
(s) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation on property, plant and
equipment is calculated on a straight-line basis over the following estimated useful lives: building and improvements - 30
years and furniture and fixtures - 7 years. We capitalize betterments and any other expenditure in excess of $1,000 if the asset
is expected to have a useful life greater than one year. The carrying value of property, plant and equipment is periodically
reviewed based on the expected future undiscounted operating cash flows of the related item. Based upon our most recent
analysis, we believe that no impairment of property, plant and equipment exists at December 31, 2013.
(t) RECLASSIFICATIONS
The 2012 and 2011 financial statement amounts have not been reclassified to conform to the 2013 presentations.
(u) GOODWILL AND INTANGIBLE ASSETS
During 2009, the Company purchased one intangible asset totaling $0.1 million. In accordance with FASB issued
guidance, the accounting for the recognized intangible asset was based on its useful life to the Company. The useful life of
the intangible asset was the period over which it was expected to contribute directly or indirectly to the future cash flows of
the Company. The intangible asset had a definite finite life ranging from six to twelve months, and was amortized
accordingly.
(3) INVESTMENTS
Total investments increased $90.6 million, or 69.7%, to $220.7 million as of December 31, 2013, compared with
$130.1 million as of December 31, 2012. This increase reflected the $123.9 million increase in gross premiums written
compared with 2012 and the $28.1 million in net proceeds from the Company’s November 2013 offering. The excess cash
was invested primarily in the bond portfolio.
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.”
The debt and equity securities that are available for sale and carried at fair value represent 97% of total investments
as of December 31, 2013, compared with 94% as of December 31, 2012.
- 83 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
We did not hold any trading investment securities during 2013.
As of December 31, 2013 and 2012, our investments consisted primarily of corporate bonds held in various
industries, municipal bonds and United States government bonds. As of December 31, 2013, 83% of our debt portfolio was in
diverse industries and 17% is in United States government bonds. As of December 31, 2013, approximately 91% of our
equity holdings were in equities related to diverse industries and 9% were in mutual funds. As of December 31, 2012, 69% of
our debt portfolio was in diverse industries and 31% is in United States government bonds. As of December 31, 2012,
approximately 87% of our equity holdings were in equities related to diverse industries and 13% were in mutual funds.
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.
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 2013, in connection with the process,
we have not charged any investment losses to operations. During 2012, in connection with the process, we have charged to
operations $44,000 of investment losses.
As of December 31, 2013 and December 31, 2012, respectively, all of our securities are in good standing and not
impaired, except as noted above, as defined by FASB issued guidance.
As of December 31, 2013 and December 31, 2012, we have classified $7.2 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 2013 we reclassified $150,000 of our bond portfolio to available-for-sale from held-to-maturity. During
2012, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.
During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the
100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was
terminated in April 2007. During 2010, the letter of credit in favor of Republic was replaced by a fully funded trust
agreement. As of December 31, 2013 and 2012 respectively, the amount held in trust was $1.0 million.
- 84 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(a) DEBT AND EQUITY SECURITIES
The following table summarizes, by type, our investments as of December 31, 2013 and 2012.
December 31, 2013
December 31, 2012
Debt securities, at market:
United States government obligations and authorities
Obligations of states and political subdivisions
Corporate
International
Debt securities, at amortized cost:
United States government obligations and authorities
Corporate
International
Total debt securities
Equity securities, at market:
Total investments
Carrying
Amount
$
27,209
52,064
91,941
3,698
174,912
4,630
2,475
109
7,214
182,126
Percent
of Total
Carrying
Amount
(Dollars in Thousands)
Percent
of Total
12.33%
23.59%
41.66%
1.68%
79.26%
2.10%
1.12%
0.05%
3.27%
82.53%
$
27,392
3,939
67,313
3,111
101,755
6,016
1,203
140
7,359
109,114
21.06%
3.03%
51.74%
2.39%
78.22%
4.62%
0.92%
0.11%
5.65%
83.87%
16.13%
100.00%
38,584
220,710
$
17.47%
100.00%
20,982
130,096
$
The following table shows the realized gains (losses) for debt and equity securities for the years ended December 31,
2013 and 2012.
Years Ended December 31,
2013
2012
Gains
(Losses)
Fair Value
at Sale
Gains
(Losses)
Fair Value
at Sale
(Dollars in Thousands)
$
1,690
2,858
4,548
$
41,256
12,052
53,308
$
1,783
1,403
3,186
$
50,950
6,709
57,659
(1,001)
(666)
(1,667)
43,239
3,564
46,803
(391)
(1,723)
(2,114)
13,291
6,560
19,851
Debt securities
Equity securities
Total realized gains
Debt securities
Equity securities
Total realized losses
Net realized gains on investments
$
2,881
$
100,111
$
1,072
$
77,510
- 85 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
A summary of the amortized cost, estimated fair value, gross unrealized gains and losses of debt and equity
securities at December 31, 2013 and 2012 is as follows.
December 31, 2013
Debt Securities - Available-For-Sale:
United States government obligations
and authorities
Obligations of states and political
subdivisions
Corporate
International
Debt Securities - Held-To-Maturity:
United States government obligations
and authorities
Corporate
International
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in Thousands)
Estimated
Fair Value
$
27,422
$
186
$
399
$
27,209
51,883
91,475
3,731
174,511
$
303
1,233
5
1,727
$
122
767
38
1,326
$
52,064
91,941
3,698
174,912
$
$
$
$
$
4,630
2,475
109
7,214
32
22
-
54
326
17
1
344
4,336
2,480
108
6,924
$
$
$
$
Equity securities - common stocks
$
29,423
$
9,436
$
275
$
38,584
December 31, 2012
Debt Securities - Available-For-Sale:
United States government obligations
and authorities
Obligations of states and political
subdivisions
Corporate
International
Debt Securities - Held-To-Maturity:
United States government obligations
and authorities
Corporate
International
$
26,825
$
632
$
65
$
27,392
3,738
63,553
3,005
97,121
$
202
3,794
107
4,735
$
1
34
1
101
$
3,939
67,313
3,111
101,755
$
$
$
$
$
6,016
1,203
140
7,359
149
61
-
210
12
2
1
15
6,153
1,262
139
7,554
$
$
$
$
Equity securities - common stocks
$
19,095
$
2,505
$
618
$
20,982
- 86 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
The table below reflects our unrealized investment losses by investment class, aged for length of time in an
unrealized loss position.
Debt securities:
United States government obligations
and authorities
Obligations of states and political subdivisions
Corporate
International
Equity securities:
Common stocks
Unrealized Losses
Less than 12 months
(Dollars in Thousands)
12 months or longer
$
399
122
767
38
1,326
$
391
122
761
38
1,312
$
8
-
6
-
14
275
148
127
Total debt and equity securities
$
1,601
$
1,460
$
141
Below is a summary of debt securities at December 31, 2013 and 2012 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.
December 31, 2013
Amortized
Cost
Estimated
Fair Value
December 31, 2012
Amortized
Cost
Estimated
Fair Value
(Dollars in Thousands)
Due in one year or less
Due after one through five years
Due after five through ten years
Due after ten years
$
5,161
113,027
62,656
881
$
5,181
113,561
62,220
874
$
2,925
49,826
35,070
16,659
$
2,944
51,523
37,182
17,660
Total
$
181,725
$
181,836
$
104,480
$
109,309
United States Treasury notes with a book value of $62,490 and $2,193,814, maturing in 2016 and 2022,
respectively, were on deposit with the Florida OIR as of December 31, 2013, as required by law for FNIC, and are included
with other investments held until maturity.
United States Treasury notes with a book value of $63,481 and $2,193,300, maturing in 2016 and 2022,
respectively, were on deposit with the Florida OIR as of December 31, 2012, as required by law for FNIC, and are included
with other investments held until maturity.
- 87 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
The table below sets forth investment results for the periods indicated.
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
Interest on debt securities
Dividends on equity securities
Interest on cash and cash equivalents
$
2,850
478
4
$
3,380
436
3
$
3,681
394
4
Total investment income
$
3,332
$
3,819
$
4,079
Net realized gains
$
2,881
$
1,072
$
2,725
Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities in
2013, 2012 and 2011 were approximately $106.1 million, $90.4 million and $108.3 million, respectively.
A summary of net realized investment gains and increases in net unrealized gains follows.
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
Net realized gains
Debt securities
Equity securities
$
689
2,192
$
1,392
(320)
$
2,974
(249)
Total
$
2,881
$
1,072
$
2,725
Net unrealized gains
Debt securities
Equity securities
$
401
9,161
$
4,634
1,887
$
2,345
(939)
Total
$
9,562
$
6,521
$
1,406
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following.
Years Ended December 31,
2013
2012
(Dollars in Thousands)
Computer equipment
Property, plant and equipment, gross
Accumulated depreciation
Property, plant and equipment, net
$
$
4,621
4,621
(3,692)
929
3,993
3,993
(3,429)
564
$
$
Depreciation of property, plant, and equipment was $263,334, $195,078 and $167,753 during 2013, 2012 and 2011,
respectively.
- 88 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(5) REINSURANCE
We reinsure (cede) a portion of written premiums on an excess of loss or a quota-share basis to nonaffiliated
insurance companies in order to limit our loss exposure. To the extent that reinsuring companies are unable to meet their
obligations assumed under these reinsurance agreements, we remain primarily liable to our policyholders.
The impact of the reinsurance treaties on the financial statements is as follows.
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
Premium written
Direct and Assumed
Ceded
Premiums earned
Direct and Assumed
Ceded
Losses and LAE incurred
Direct and Assumed
Ceded
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
119,459
(51,085)
68,374
109,312
(49,953)
59,359
33,329
(3,120)
30,209
243,374
(82,709)
160,665
174,037
(69,656)
104,381
59,820
(3,410)
56,410
98,269
(46,293)
51,976
97,473
(48,950)
48,523
33,055
(2,159)
30,896
As of December 31,
2013
(Dollars in Thousands)
2012
Unpaid losses and LAE, net
Direct and Assumed
Ceded
$
61,015
(2,742)
$
49,908
(3,503)
$
58,273
$
46,405
Unearned premiums
Direct and Assumed
Ceded
$
128,343
(37,135)
$
59,006
(24,083)
$
91,208
$
34,923
The Company holds collateral under related reinsurance agreements in the form of fully funded trust agreements
totaling $4.9 million that can be drawn on for amounts that remain unpaid for more than 120 days.
- 89 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(6) UNPAID LOSSES AND LAE
The liability for unpaid losses and LAE is determined on an individual-case basis for all incidents reported. The
liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR.
Activity in the liability for unpaid losses and LAE is summarized as follows.
Balance at January 1
Less reinsurance recoverables
Net balance at January 1
Incurred related to
Current year
Prior years
Total incurred
Paid related to
Current year
Prior years
Total paid
Net balance at period end
Plus reinsurance recoverables
Balance at period end
2013
$
$
49,908
(3,503)
46,405
Years Ended December 31,
2012
(Dollars in Thousands)
$
59,983
(2,088)
57,895
$
2011
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
31,636
(1,427)
30,209
15,892
25,807
41,699
46,405
3,503
49,908
56,209
201
56,410
22,695
21,846
44,541
58,274
2,742
61,016
66,529
(6,809)
59,720
31,893
(997)
30,896
13,672
19,048
32,720
57,896
2,087
59,983
Based upon consultations with our independent actuarial consultants and their statement of opinion on losses and
LAE, we believe that the liability for unpaid losses and LAE is adequate to cover all claims and related expenses which may
arise from incidents reported.
As shown above, and as a result of review of liability for losses and LAE, which includes a re-evaluation of the
adequacy of reserve levels for prior year’s claims, we increased the liability for losses and LAE for claims occurring in prior
years by $0.2 million for the year ended December 31, 2013 and decreased the liability for losses and LAE for claims
occurring in prior years by $1.4 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively.
We continue to revise our estimates of the ultimate financial impact of claims made resulting from past storms. The
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.
For the year ended December 31, 2013, our actuarial firm determined range of statutory loss and LAE reserves on a
net basis range from a low of $51.5 million to a high of $60.9 million, with a best estimate of $55.5 million. The Company’s
net loss and LAE reserves are carried on a statutory basis at $54.0 million, and on a GAAP consolidated basis at $61.0
million which when netted with our $2.7 million reinsurance recoverable totals $58.3 million. The Company’s statutory point
estimate for its reserves as of December 31, 2013 is 2.6% below our actuary’s best estimate, which reflects management’s
current analysis of the status and expected timing of our anticipated claims, our analysis of expected weather patterns in the
regions in which we sell policies, our re-focus of our business growth efforts to areas outside of South Florida, and other
factors.
- 90 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
The following is an overview of management’s loss reserving process
The Company’s loss reserves can generally be categorized into two distinct groups. One group is short-tail classes of
business consisting principally of property risks in connection with homes and automobiles. The other group is long-tail
casualty classes of business which include primarily commercial general liability and to a much lesser extent, homeowner
and automobile liability. For operations writing short-tail coverages our loss reserves were generally geared toward
determining an expected loss ratio for current business rather than maintaining a reserve for the outstanding exposure.
Estimations of ultimate net loss reserves for long-tail casualty classes of business is a more complex process and depends on
a number of factors including class and volume of business involved. Experience in the more recent accident years of long-
tail casualty classes of business shows limited statistical credibility in reported net losses because a relatively low proportion
of net losses would be reported claims and expenses and even smaller percentage would be net losses paid. Therefore, IBNR
would constitute a relatively high proportion of net losses.
Additionally, the different methodologies are utilized the same, regardless of the line of business. However, the final
selection of ultimate loss and LAE is certain to vary by both line of business and by accident period maturity. There is no
prescribed combination of line of business, accident year maturity, and methodologies; consistency in results of the different
methodologies and reasonableness of the result are the primary factors that drive the final selection of ultimate loss and LAE.
Methods Used to Estimate Loss and LAE Reserves
The methods we use for our short-tail business do not differ from the methods we use for our long-tail business. The
Incurred and Paid Development Methods intrinsically recognize the unique development characteristics contained within the
historical experience of each material short-tail and long-tail line of business. The Incurred and Paid Cape Cod Methods
reflect similar historical development unique to each material short-tail and long-tail line of business.
We apply the following general methods in projecting loss and LAE reserves:
• Paid and Incurred Loss Development Method
• Paid and Incurred Bornhuetter-Ferguson Incurred Method
• Frequency / Severity Method
Description of Ultimate Loss Estimation Methods
The estimated Ultimate Loss and Defense and Cost Containment Expense (“DCCE”) is based on an analysis by line
of business, coverage and by accident quarter performed using data as of December 31, 2013. The analysis relies primarily on
four actuarial methods: Incurred Loss and DCCE Development Method, Paid Loss and DCCE Development Method,
Bornhuetter-Ferguson Incurred Method, and Bornhuetter-Ferguson Paid Method. Each method relies on company
experience, and, where relevant, the analysis includes comparisons to industry experience. The following is a description of
each of these methods:
Incurred Loss and DCCE Development Method – This reserving method is based on the assumption that the
historical incurred loss and DCCE development pattern as reflected by the Company is appropriate for estimating the future
loss & DCCE development. Incurred paid plus case amounts separated by accident quarter of occurrence and at quarterly
evaluations are used in this analysis. Case reserves do not have to be adequately stated for this method to be effective; they
only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development
factors were calculated to measure the relative development of an accident quarter from one maturity point to the next. Loss
and DCCE development factors (“LDF”) are selected based on a review of the historical relationships between incurred loss
& DCCE at successive valuations and based on industry patterns. The LDFs are multiplied together to derive cumulative
LDF’s that, when multiplied by actual incurred loss and DCCE, produce estimates of ultimate loss and DCCE.
Paid Loss & DCCE Development Method – This method is similar to the Incurred Loss & DCCE Development
Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.
- 91 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Bornhuetter-Ferguson Incurred Method – This reserving method combines estimated initial expected unreported
loss & DCCE with the actual loss & DCCE to yield the ultimate loss & DCCE estimate. Expected unreported loss & DCCE
are equal to expected total loss & DCCE times the expected unreported percentage of loss & DCCE for each policy year.
The incurred loss & DCCE emergence pattern used to determine the unreported percentages in our projections is based on the
selected LDF’s from the Incurred Loss & DCCE Development Method described above. The estimate of initial expected total
loss & DCCE is based on the historical loss ratio for more mature accident years. While this approach reduces the
independence of the Bornhuetter-Ferguson Method from the loss & DCCE development methods for older policy years, it is
used primarily for estimating ultimate loss & DCCE for more recent, less mature, policy years.
Bornhuetter-Ferguson Paid Method – This method is similar to the Bornhuetter-Ferguson Incurred Method only
paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.
We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each
projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and
December 31, 2013). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate
estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the
overall estimate of unpaid losses & DCCE liability for the company.
We also produce an estimate of unpaid Adjusting and Other Expense (“A&O”), as a reserve is required under
Statutory Accounting Principles (“SAP”) even if this expense has been pre-paid or with an unconsolidated affiliate. Although
we do not prepay for A&O, the majority of the A&O incurred is with an affiliated company and eliminated under the
accounting principles for consolidation. The unpaid A&O is added to unpaid losses & DCCE, resulting in total unpaid losses
and LAE.
The validity of the results from using a loss development approach can be affected by many conditions, such as
internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or
variations in a company’s mix of business from year to year. Also, since the percentage of losses paid for immature years is
often low, development factors can be volatile. A small variation in the number of claims paid can have a leveraging effect
that could lead to significant changes in estimated ultimate values. Accordingly, our reserves are estimates because there are
uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions
can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends.
We compute our estimated ultimate liability using the most appropriate principles and procedures applicable to the lines of
business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain
that ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of
operations and financial condition.
Frequency / Severity Method – This method separately estimates the two components of ultimate losses (the
frequency, or number of claims and the severity, or cost per claim) and then combines the resulting estimates in a
multiplicative fashion to estimate ultimate losses. The approach is valuable because sometimes there is more inherent
stability in the frequency and severity data when viewed separately than in the total losses.
We developed reported claim counts to ultimate levels using the development approach. The mechanics of this
approach are the same as we described previously for paid and incurred losses. The validity of the results of this method
depends on the stability of claim reporting and settlement rates. Then we developed accident year incurred severities
(incurred losses divided by reported claim counts) to ultimate levels using the development approach.
We trended these severities to accident year 2013 levels. Trend rates were selected based on a review of historical
severities. Selected severity was chosen based on judgment considering the developed severities and the trended severities,
considering industry benchmarks for each segment. The loss & ALAE, claim count and severity triangles are evaluated as of
12 months, 24 months, 36 months etc. We selected loss development factors based on the loss development history, to the
extent credible, and supplemented with industry data where appropriate.
A key assumption underlying the estimation of the reserve for loss and LAE is that past experience serves as the
most reliable estimator of future events. This assumption may materially affect the estimates when the insurance market, the
regulatory environment, the legal environment, the economic environment, the book of business, the claims handling
department, or other factors (known or unknown) have varied over time during the experience period and / or will vary
(expectedly or unexpectedly) in the future. Changes in estimates, or differences between estimates and amounts ultimately
- 92 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
paid, are reflected in the operating results of the period during which such adjustments are made. Therefore, the ultimate
liability for unpaid losses and LAE will likely differ from the amount recorded at December 31, 2013.
The following describes the extent of our procedures for determining the reserve for loss and LAE on both an annual
and interim reporting basis:
Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for
unpaid losses and LAE. Our independent actuarial firm, examining the exact same data set, will independently select a point
estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations.
If our point estimate falls within the range determined from the point estimate of our actuary, then the Company’s policy has
been that no adjustments by management would be required. In consideration thereof, the company does not have a policy for
adjusting the liability for unpaid losses and LAE to an amount that is different than an amount set forth within the range
determined by our independent actuary, although the reserve level ultimately determined by us may not be the mid-point of
our independent actuary’s range. Further, there can be no assurances that our actual losses will be within our actuary’s range.
Our independent actuary’s report expressly states that the report is based on assumptions developed from its own analysis and
based on information provided by management and that notwithstanding its analysis, there is a significant risk of material
adverse deviation from its range.
Interim – During 2013 our interim approach was very similar to the annual process noted above.
A number of other actuarial assumptions are generally made in the review of reserves for each class of business.
For each class of business, expected ultimate loss ratios for each accident year are estimated based on loss reserve
development patterns. The expected loss ratio generally reflects the projected loss ratio from prior accident years,
adjusted for the loss trend and the effect of rate changes and other quantifiable factors on the loss ratio.
In practice there are factors that change over time; however, many (such as inflation) are intrinsically reflected in the
historical development patterns, and others typically do not materially affect the estimate of the reserve for unpaid losses and
LAE. Therefore, no specific adjustments have been incorporated for such contingencies projecting future development of
losses and LAE. There are no key assumptions as of December 31, 2013 premised on future emergence inconsistent with
historical loss reserve development patterns.
(7) INCOME TAXES
A summary of the provision for income tax expense (benefit) is as follows.
Federal
Current
Deferred
Provision for Federal income tax expense (benefit)
State
Current
Deferred
Provision for state income tax expense (benefit)
Provision for income tax expense (benefit)
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
$
4,289
1,393
5,682
-
809
809
6,491
$
$
63
2,052
2,115
$
310
(490)
(180)
-
320
320
2,435
$
-
(390)
(390)
(570)
$
- 93 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
The actual income tax expense (benefit) differs from the "expected" income tax expense (benefit) (computed by
applying the combined applicable effective federal and state tax rates to income before provision for income tax expense
(benefit) as follows.
Years Ended December 31,
2013
2012
2011
(Dollars in Thousands)
Computed expected tax expense (benefit) provision, at federal rate
State tax, net of federal deduction expense (benefit)
Tax-exempt interest
Dividend received deduction
Stock option expense and other permanent differences
AMT Tax credit
True-up
Other
Provision for income tax expense (benefit)
$
$
$
6,535
698
(31)
(97)
(34)
-
(306)
(274)
6,491
2,294
245
(26)
(88)
72
(113)
-
51
2,435
(341)
(36)
(41)
(80)
87
-
-
(159)
(570)
$
$
$
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our
net deferred tax asset are as follows.
Years Ended December 31,
2013
2012
Deferred tax assets:
Unpaid losses and loss adjustment expenses
Unearned premiums
Discount on advance premiums
Allowance for credit losses
Allowance for impairments
FIGA Guaranty Assessment
Depreciation & amortization
Reserve for claims settlements
NOL Carryforward
AMT credit
Flow-through income or loss
Stock option expense per ASC 718
Total deferred tax assets
Deferred tax liabilities:
Deferred acquisition costs, net
Dividends Collected vs. Earned
Regulatory assessments
Unrealized Gain on investment securities
Total deferred tax liabilities
Net deferred tax asset
$
1,157
6,864
243
59
21
-
149
1,844
73
-
4
550
10,964
(6,287)
(6)
(67)
(3,598)
(9,958)
1,006
$
$
1,725
2,629
167
31
91
306
366
809
3,259
253
-
432
10,068
(3,191)
(18)
(67)
(2,454)
(5,730)
4,338
$
Based upon the results of our analysis and the application of ASC 740-10, we have determined that all material tax
positions meet the recognition threshold and can be considered as highly certain tax positions. This is based on clear and
unambiguous tax law, and we are highly confident that the full amount of each tax position will be sustained upon possible
examination. Accordingly, the full amount of the tax positions will be recognized in the financial statements.
- 94 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
The Company has recorded a net deferred tax asset of $1.0 million and $4.3 million as of December 31, 2013 and
December 31, 2012, respectively. Realization of net deferred tax asset is dependent on generating sufficient taxable income
in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such
no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December
31, 2013, based upon the level of historical taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future
taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change
in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as
deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to
net income. The resolution of tax reserves and changes in valuation allowances 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 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 2010 - 2012 are open for review by the Internal Revenue Service
(“IRS”) and the various state taxing authorities. The Company’s 2011 federal tax return is currently under review by the IRS.
The 2012 federal and state income tax returns were filed by the extended due date in the third quarter of 2013. The 2013
federal and state income tax returns have been extended as of March 2014 and will be timely filed in the third quarter of
2014.
(8) REGULATORY REQUIREMENTS AND RESTRICTIONS
Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name
to “Federated National Insurance Company”.
Consent Order
In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance
Company (“American Vehicle”), with FNIC continuing the operations of both entities. As part of its approval of the merger
between FNIC and American Vehicle, the Florida Office of Insurance Regulation (“Florida OIR”), the Company, FNIC and
American Vehicle entered into a consent order with the Florida OIR dated January 25, 2011 (the “Consent Order”), which
was amended in February 2013, due to FNIC’s statutory underwriting profit during 2012. Pursuant to the amended Consent
Order, the Company and the resulting company in the merger (the “Merged Company”) have agreed to the following:
• The Merged Company retained the following licenses: (010) Fire, (020) Allied Lines, (040) Homeowners Multi
Peril, (050) Commercial Multi Peril, (090) Inland Marine, (170) Other Liability, (192) Private Passenger Auto
Liability, (194) Commercial Auto Liability, (211) Private Passenger Auto Physical Damage and (212) Commercial
Auto Physical Damage.
• The Merged Company will not write commercial multi peril policy premium without prior approval from the Florida
OIR. The Merged Company has no commercial multi peril policy premium in force.
• The Merged Company surrendered its surety license. The Merged Company has no surety policy premium in force.
• The Merged Company will not write new commercial habitation condominium associations without prior approval
from the Florida OIR. The current commercial habitation book of business is fully earned.
• The Merged Company agreed to maintain the total number of its homeowners’ policies in Miami-Dade, Broward
and Palm Beach counties (the “Tri-County Area”) at 35% of its entire homeowners’ book. As of December 31,
2013, the Company had approximately 18.3% of its homeowners’ policies located within Tri-County Area.
• The managing general agency fees payable by the Merged Company to Federated National Underwriters, Inc.
(“FNU”), formerly known as Assurance Managing General Agents, Inc., a wholly owned subsidiary of the
Company, which were traditionally 6% of gross written premium, were reduced and will not exceed 4% without
prior approval from the Florida OIR. The Merged Company has lowered the fee to amounts varying between 2%
- 95 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
and 4% of gross written to further support the FNIC results of operations. This will have no impact on the
Company’s consolidated financial results.
• The claims service fees payable by the Merged Company to Federated National Adjusting, Inc. (“FNA”), formerly
known as Superior Adjusting, Inc., were reduced from the traditional 4.5% of gross earned premium to 3.6% of
gross earned premium. This will have no impact on the Company’s consolidated financial results.
The merger of FNIC and American Vehicle will be an ongoing transition, many aspects of which will take effect
over time. References to the companies contained herein are intended to be references to the operations of FNIC following
the January 2011 merger. References to the historical activities of American Vehicle are appropriately identified throughout
this document.
Other Regulatory Requirements and Restrictions
To retain our certificate of authority, the Florida Insurance Code (the "Code") requires FNIC to maintain capital and
surplus equal to the greater of 10% of its’ liabilities or a statutory minimum capital and surplus as defined in the Code. FNIC
is required to have a minimum capital surplus of $5.0 million.
At December 31, 2013, 2012 and 2011, FNIC’s statutory capital surplus was $76.9 million, $52.1 million and $39.3
million, respectively.
An insurance company is also required to adhere to prescribed premium-to-capital surplus ratios. As of December
31, 2013, 2012 and 2011, FNIC was in compliance with the prescribed premium-to-surplus ratio.
We had bonds with a carrying value of approximately $2.3 million and $2.2 million pledged to the Florida OIR, as
of December 31, 2013 and 2012, respectively, in accordance with regulatory requirements.
Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its
shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments
or distributions to shareholders without prior approval of the Florida OIR if the dividend or distribution would exceed the
larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two-
year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25.0% of
unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three-year
carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the
Florida OIR (i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards
policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s
entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the
insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital
surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the Florida OIR at
least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer
of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115.0% of required
statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend
or make a distribution (i) subject to prior approval by the Florida OIR or (ii) 30 days after the Florida OIR has received notice
of such dividend or distribution and has not disapproved it within such time.
No dividends were paid by FNIC or American Vehicle in 2013, 2012 and 2011, and none are anticipated in 2014.
Although we believe that amounts required to meet our financial and operating obligations will be available from sources
other than dividends from our insurance subsidiaries, there can be no assurance in this regard. Further, there can be no
assurance that, if requested, the Florida OIR will allow any dividends to be paid by FNIC to us, the parent company, in the
future. The maximum dividends permitted by state law are not necessarily indicative of an insurer’s actual ability to pay
dividends or other distributions to a parent company, which also may be constrained by business and regulatory
considerations, such as the impact of dividends on capital surplus, which could affect an insurer’s competitive position, the
amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations
require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable
- 96 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
in relation to its outstanding liabilities and adequate for its financial needs.
Insurance holding company regulations govern the amount that non-insurance company subsidiaries (FNU, FNA
and any other affiliate) may charge any of the insurance companies for service (e.g., management fees and commissions).
In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners
(“NAIC”) established risk-based capital requirements for insurance companies that are designed to assess capital adequacy
and to raise the level of protection that statutory surplus provides for policy holders. These requirements measure three major
areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss
developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from
investments. Insurers having less statutory surplus than required will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy. The Florida OIR, which follows these requirements, could require FNIC to
cease operations in the event they fail to maintain the required statutory capital.
Based upon the 2013 and 2012 statutory financial statements for FNIC, statutory surplus exceeded the regulatory
action levels established by the NAIC’s risk-based capital requirements.
Based on risk-based capital requirements, the extent of regulatory intervention and action increases as the ratio of an
insurer’s statutory surplus to its Authorized Control Level (“ACL”), as calculated under the NAIC’s requirements, decreases.
The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance
regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level,
requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an
examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The
third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions
if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the
regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC’s ratio of
statutory surplus to its ACL was 312.1%, 474.4% and 409.7% at December 31, 2013, 2012 and 2011, respectively.
Most recently the Florida OIR subjected FNIC to a balance sheet audit as of December 31, 2009. There were no
material findings by the independent auditors in connection with this examination. FNIC also experienced a regularly
scheduled statutory examination by the Florida OIR which occurred during 2010 for the five years ended December 31, 2009.
There were no material findings in connection with this examination. The previous regulatory examination conducted by the
Florida OIR on FNIC covered the three-year period ended on December 31, 2004.
The NAIC has also developed IRIS ratios to assist state insurance departments in identifying companies which may
be developing performance or solvency problems, as signaled by significant changes in the companies’ operations. Such
changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in
certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling
outside “usual ranges”, state regulators may investigate to determine the reasons for the variance and whether corrective
action is warranted.
As of December 31, 2013, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions
related to change in net writings, investment yield and estimated current reserve deficiency to policyholders’ surplus.
As of December 31, 2012, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions
related to investment yield, net change in adjusted policyholders’ surplus and estimated current reserve deficiency to
policyholders’ surplus.
As of December 31, 2011, FNIC was outside NAIC’s usual range for two of thirteen IRIS ratios. These exceptions
related to two-years overall operating ratio and investment yield.
There was no action taken by the Florida OIR in connection with the December 31, 2012 or 2011 IRIS ratio results.
We do not currently believe that the Florida OIR will take any significant action with respect to FNIC regarding the 2013
IRIS ratios, although there can be no assurance that will be the case.
- 97 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
The table below reflects the range and test results for FNIC for the years ended December 31, 2013 and 2012,
respectively.
IRIS Ratios
Gross Premiums to Policyholders' Surplus
Net Premium to Policyholders' Surplus
Change in Net Writings
Surplus Aid to Policyholders' Surplus
Two-year Overall Operating Ratio
Investment Yield
Gross Change in Policyholders' Surplus
Net Change in Adjusted Policyholders' Surplus
Liabilities to Liquid Assets
Gross Agents' Balance to Policyholders' Surplus
One-Year Reserve Development to Policyholders' Surplus
Two-Year Reserve Development to Policyholders' Surplus
Estimated Current Reserve Deficiency to Policyholders' Surplus
* indicates an unusual value
Unusual Values Equal to Or
Under
Over
2013
FNIC
2012
FNIC
900
300
33
15
100
6.5
50
25
105
40
20
20
25
-
-
(33)
-
-
3.0
(10)
(10)
-
-
-
-
-
325
217
137 *
0
84
1.4 *
48
17
79
13
(4)
(7)
56 *
233
135
32
1
92
2.4 *
32
32 *
69
3
(3)
(2)
50 *
GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. FNIC’s
statutory capital and surplus was $76.9 million and $52.1 million as of December 31, 2013 and 2012, respectively. FNIC’s
statutory net income was $3.6 million, $6.6 million and $0.8 million for 2013, 2012 and 2011, respectively. FNIC’s statutory
non-admitted assets were nearly nothing and nearly nothing as of December 31, 2013 and 2012, respectively.
(9) 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
- 98 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
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.
During December 2012, the Company was assessed $0.8 million by FIGA relating to the failures of Florida
domestic property and casualty insurance companies. Future assessments are likely, although the impact of these assessments
on our balance sheet, results of operations or cash flow are undeterminable at this time.
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 2013 or 2012. 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 2010 - 2012 are open for review by the IRS and the various state taxing
authorities. The Company’s 2011 federal tax return is currently under review by the IRS. The 2012 federal and state income
tax returns were filed by the extended due date in the third quarter of 2013. The 2013 federal and state income tax returns
have been extended as of March 2014 and will be timely filed in the third quarter of 2014.
The Company has recorded a net deferred tax asset of $1.0 million and $4.3 million as of December 31, 2013 and
December 31, 2012, respectively. Realization of net deferred tax asset is dependent on generating sufficient taxable income
in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such
no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December
31, 2013, based upon the level of historical taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future
taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change
in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as
deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to
net income. The resolution of tax reserves and changes in valuation allowances 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 is not currently involved in any material legal actions arising from the ordinary course of business
that are not related to insured claims activity.
- 99 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(10) LEASES
Relative to the Company’s commitments stemming from operational matters, on or about March 1, 2006 we sold our
interest in the building that housed our operations in Lauderdale Lakes through December 16, 2011, to an unrelated party. As
part of this transaction, we agreed to lease the same facilities for a five-year term. We amended the lease agreement and the
note receivable on September 1, 2010. As part of the amendment, we discounted the note receivable and have discontinued
the interest on the note. In consideration, we paid a reduced lease payment for the remainder of the lease. Our lease for this
office space expired in December 2011.
Our executive offices are located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 in an 18,500 square
foot office facility. All of our operations are consolidated within this facility. 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. Our
lease for this office space will expire in May 2017.
The expected future lease payouts in connection with this lease are as follows.
Fiscal Year
2014
2015
2016
2017
Total
Payments
(Dollars in Thousands)
392
400
408
156
1,356
$
Rent expense was $0.4 million, $0.2 million and $0.7 million in 2013, 2012 and 2011, respectively.
(11) RELATED PARTY TRANSACTIONS
One of our directors is a partner at a law firm that handles some of the Company’s claims litigation. Fees paid to this
law firm amounted to approximately $30,500, $27,175 and $3,349 in 2013, 2012 and 2011, respectively, and is included in
LAE.
- 100 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(12) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted average number of shares of common
stock and common stock equivalents outstanding during the periods presented. In accordance with GAAP, net loss per share
would be antidilutive; therefore the basic and diluted loss per share is the same.
A summary of the numerator and denominator of the basic and fully diluted 2013, 2012 and 2011 net income (loss)
per share is presented below.
Income (loss)
(Numerator)
Shares Outstanding
(Denominator)
Per-share
Amount
(Dollars in Thousands)
For the year ended December 31, 2013
Basic net income per share
Fully diluted income per share
$
$
12,727
12,727
8,506
8,772
$
$
1.50
1.45
For the year ended December 31, 2012
Basic net income per share
Fully diluted income per share
$
$
4,313
4,313
7,952
8,016
$
$
0.53
0.53
For the year ended December 31, 2011
Basic net loss per share
Fully diluted loss per share
$
$
(430)
(430)
7,946
7,946
$
$
(0.05)
(0.05)
(13) SEGMENT INFORMATION
FASB issued guidance requires that the amount reported for each segment item be based on what is used by the
chief operating decision maker in formulating a determination as to how many resources to assign to a segment and how to
appraise the performance of that segment. The term chief operating decision maker may apply to the chief executive officer
or chief operating officer or to a group of executives. Note: The term of chief operating decision maker may apply to a
function and not necessarily to a specific person. This is a management approach rather than an industry approach in
identifying segments. The segments are based on the Company’s organizational structure, revenue sources, nature of
activities, existence of responsible managers, and information presented to the Board of Directors.
If any one of the following exists, a segment must be reported on.
• Revenue, including unaffiliated and inter-segment sales or transfers, is 10% or more of total revenue of all operating
segments.
• Operating profit or loss is 10% or more of the greater, in absolute amount, of the combined operating profit (or loss)
of all industry segments with operating profits (or losses).
•
Identifiable assets are 10% or more of total assets of all operating segments.
Operating segments that are not reportable should be combined and disclosed in the ‘‘all other’’ category.
Disclosure should be made of the sources of revenue for these segments.
Accordingly, we have no segment information to report.
- 101 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(14) STOCK COMPENSATION PLANS
We implemented a stock option plan in 1998 (the “1998 Plan”), which expired in September 2008. Under this plan,
we were authorized to grant options to purchase up to 900,000 common shares, and as of December 31, 2013 and December
31, 2012, we had outstanding exercisable options to purchase 3,000 and 78,500 shares, respectively.
We implemented a stock option plan in 2002 (the “2002 Plan”), which expired in April 2012. Under this plan, we
were authorized to grant options to purchase up to 1,800,000 common shares, and as of December 31, 2013 and December
31, 2012, we had outstanding exercisable options to purchase 523,521 and 702,597 shares, respectively.
In April 2012, our Board of Directors adopted, and in September 2012 our shareholders approved, the Company’s
2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan permits the issuance of up to 1,000,000 shares of our common
stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive
awards, such as incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights,
restricted stock, restricted stock units, and performance shares. Officers, directors and executive, managerial, administrative
and professional employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be
granted singly, in combination, or in tandem. The 2012 Plan was amended and restated in March 2013 to clarify the plan
administrator’s authority to permit the vesting of unvested restricted shares in the event of the death of the grantee. The 2012
Plan will expire on April 5, 2022.
On August 5, 2013, a total of 150,000 restricted shares from the 2012 Plan were granted pursuant to the vesting
requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 100,000 shares were
granted to the Company's Chief Executive Officer and President and 50,000 shares were granted to the Company's Chief
Financial Officer.
On March 4, 2013, a total of 100,000 restricted shares from the 2012 Plan were granted pursuant to the vesting
requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 25,000 shares were granted
to the Company's Chief Executive Officer and President and 15,000 shares were granted to the Company's Chief Financial
Officer. An aggregate of 20,000 shares were granted to the Company's directors and the remaining 40,000 shares were
granted to other employees of the Company.
Activity in our stock option and incentive plans for the period from January 1, 2011 to December 31, 2013 is
summarized below.
1998 Plan
2002 Plan
2012 Plan
Weighted
Average
Option
Exercise Price
$
12.83
$
-
$
-
$
-
$
12.83
$
-
$
-
$
13.54
$
12.73
$
-
$
8.67
$
12.92
$
8.67
Number of
Shares
89,750
-
-
-
89,750
-
-
(11,250)
78,500
-
(500)
(75,000)
3,000
Weighted
Average
Option
Exercise Price
$
9.12
$
2.45
$
-
$
14.29
$
6.15
$
4.40
$
3.86
$
12.45
$
5.17
$
-
$
7.15
$
5.41
$
4.54
Number of
Shares
574,800
179,000
-
(129,100)
624,700
181,500
(33,104)
(70,499)
702,597
-
(165,577)
(13,499)
523,521
Outstanding at January 1, 2011
Granted
Exercised
Cancelled
Outstanding at January 1, 2012
Granted
Exercised
Cancelled
Outstanding at January 1, 2013
Granted
Exercised
Cancelled
Outstanding at December 31, 2013
Number of
Shares
-
-
-
-
-
-
-
-
-
250,000
-
(500)
249,500
Fair Market
Value at Grant
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
5.54
$
-
$
5.54
$
5.54
- 102 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Options outstanding as of December 31, 2013 are exercisable as follows.
Options Exercisable at:
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
Thereafter
Total options exercisable
1998 Plan
2002 Plan
Weighted
Average
Option
Exercise Price
$
$
$
$
$
$
8.67
8.67
8.67
8.67
8.67
8.67
Number of
Shares
3,000
-
-
-
-
-
3,000
Weighted
Average
Option
Exercise Price
$
$
$
$
$
$
4.54
4.54
4.54
4.54
4.54
4.54
Number of
Shares
310,475
138,146
74,900
-
-
-
523,521
Upon the exercise of options, the Company issues authorized shares.
Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-
based compensation using the intrinsic value method prescribed by the APB and related Interpretation, as permitted by FASB
issued guidance. Under these provisions, no stock-based employee compensation cost was recognized in the Statement of
Operations as all options granted under those plans had an exercise price equal to or less than the market value of the
underlying common stock on the date of grant.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance
using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2013
and 2012 include the following.
• Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and
• 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 provisions of FASB issued guidance. Results for prior periods have not been
restated, as they are not required to be by the pronouncement.
As a result of adopting FASB issued guidance on January 1, 2006, the Company’s income from continuing
operations before provision for income tax expense and net income for 2013 are lower by approximately $447,000 and
$278,600, respectively, than if it had continued to account for share-based compensation under APB guidance.
As a result of adopting FASB issued guidance on January 1, 2006, the Company’s income from continuing
operations before provision for income tax expense and net income for 2012 are lower by approximately $265,900 and
$165,700, respectively, than if it had continued to account for share-based compensation under APB guidance.
Basic and diluted earnings per share for 2013 would have been $1.53 and $1.48, respectively, if the Company had
not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $1.50 and $1.45,
respectively.
Basic and diluted income per share for 2012 would have been $0.55, if the Company had not adopted FASB issued
guidance, compared with reported basic and diluted income per share of $0.53.
Because the change in income taxes receivable includes the effect of excess tax benefits, those excess tax benefits
also must be shown as a separate operating cash outflow so that operating cash flows exclude the effect of excess tax
benefits. FASB issued guidance requires the cash flows resulting from the tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.
- 103 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
FASB issued guidance requires that when valuing an employee stock option under the Black-Scholes option pricing
model, the fair value be based on the option’s expected term and expected volatility rather than the contractual term. The
estimate of the fair value on the grant date should reflect the assumptions marketplace participants now use on the date of the
measurement (i.e. grant date). During 2011, management changed the expected term in the Black –Scholes option pricing
model from four years to two years for new options granted. Management believes that share price volatility over the last
two years is more indicative of future share price volatility. The change has had an immaterial impact on the financial
statements.
The weighted average fair value of options granted during 2012 and 2011 estimated on the date of grant using the
Black-Scholes option-pricing model was $1.45 and $0.72 to $0.78, respectively; no options were granted during 2013.
The fair value of options granted is estimated on the date of grant using the following assumptions.
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
December 31, 2013
N/A
N/A
N/A
N/A
December 31, 2012
N/A
39.79%
0.28%
4.45
December 31, 2011
N/A
35.21% - 39.08%
0.20% - 0.25%
4.29 - 4.35
Summary information about the Company’s stock options outstanding at December 31, 2013 follows.
1998 Plan
2002 Plan
Range of
Exercise Price
$8.67
$2.45 - $13.24
Outstanding at
December 31, 2013
3,000
523,521
Weighted Average
Contractual
Periods in Years
0.58
5.35
Weighted
Average
Exercise Price
$8.67
$4.54
Exercisable at
December 31, 2013
3,000
310,475
(15) EMPLOYEE BENEFIT PLAN
We have established a profit sharing plan under Section 401(k) of the Internal Revenue Code. This plan allows
eligible employees to contribute up to 100 percent of their compensation, not to exceed statutory limits. The Company match
totaled $0.2 million during 2013 and $0.1 million during each of the years 2012 and 2011.
Through December 31, 2010, the Company matched 50% of the first 6% of a participant’s elective contributions.
Effective January 1, 2011, the Board of Directors approved an amendment to our 401(k) plan to be a qualified automatic
contribution arrangement with an employer match of 100% of the first 1% of elective contributions and an employer match
of 50% of the next 2% to 6% of elective contributions, which is vested 100% after 2 years of service. Effective January 1,
2014, the Board of Directors approved the Company will match 100% of the first 6% of a participant’s elective
contributions.
(16) ACQUISITIONS
We made no acquisitions during 2013 or 2012.
Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name
to “Federated National Insurance Company”. See " Footnote 8 - Regulation – Consent Order”.
- 104 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(17) COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2013, 2012 and 2011, comprehensive income (loss) consisted of the following.
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
Net income (loss)
$
12,727
$
4,313
$
(430)
Change in net unrealized gains on investments
available for sale
Comprehensive income before tax
Income tax expense related to items of other
comprehensive income (loss)
3,041
15,768
5,114
9,427
572
142
(1,144)
(1,924)
(215)
Comprehensive income (loss)
$
14,624
$
7,503
$
(73)
(18) AUTHORIZATION OF PREFERRED STOCK
Our Amended and Restated Articles of Incorporation authorize the issuance of one million shares of preferred stock
with designations, rights and preferences determined from time to time by our board of directors. Accordingly, our Board of
Directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. We have
not issued preferred shares as of December 31, 2013.
- 105 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(19) FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED)
FNHC (the parent company only) has no long term obligations, guarantees or material contingencies as of December
31, 2013. The following summarizes the major categories of the parent company’s financial statements.
Condensed Balance Sheets (Unaudited)
ASSETS
Cash and short term investments
Investments and advances to subsidiaries
Deferred income taxes receivable
Income taxes receivable
Property, plant and equipment, net
Other assets
Total assets
Period Ending December 31,
2013
2012
(Dollars in Thousands)
$
$
2,143
105,797
1,006
8,157
184
4,446
121,733
1,494
61,005
4,338
9,515
98
4,069
80,519
$
$
LIABILITIES AND SHAREHOLDERS' EQUITY
Income taxes payable
Dividends payable
Capital contribution payable
Other liabilities
Total liabilities
Shareholders' equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
1,690
330
16,000
238
18,258
-
-
-
125
125
110
74,086
(1,727)
31,006
103,475
121,733
$
80
45,378
(1,039)
35,975
80,394
80,519
$
- 106 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Condensed Statements of Operations (Unaudited)
Revenue:
Management fees from subsidiaries
Equity in income of subsidiaries
Net investment income
Other income
Total revenue
Expenses:
Salaries and wages
Legal fees
Other expenses
Total expenses
Income (loss) before provision for income tax
expense (benefit)
Provision for income tax expense (benefit)
Net income (loss)
$
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
$
1,864
21,623
136
11
23,634
$
1,228
8,787
34
476
10,525
$
1,734
(48)
31
1,345
3,062
2,022
113
2,281
4,416
19,218
6,491
12,727
1,853
198
1,726
3,777
6,748
2,435
4,313
1,775
54
2,233
4,062
(1,000)
(570)
(430)
$
$
- 107 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Condensed Statements of Cash Flow (Unaudited)
Cash flow from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Equity in (income) loss of subsidiaries
Depreciation and amortization of property plant and equipment, net
Deferred income tax (benefit) expense
Income tax recoverable (payable)
Change in dividends payable
Non-cash compensation
Changes in operating assets and liabilities:
Property, plant and equipment
Deferred gain on sale of assets
Other assets
Capital contribution payable
Other liabilities
Net cash provided (used) by operating activities
Cash flow used in investing activities:
Purchases of investment securities available for sale
Cash flow used in investing activities:
Net cash provided in financing activities:
Dividends paid
Stock options exercised
Tax benefit related to non-cash compensation
Issuance of common stock
Advances from subsidiaries
Net cash provided in financing activities:
Net increase (decrease) in cash and short term investments
Cash and short term investments at beginning of year
2013
Years Ended December 31,
2012
(Dollars in Thousands)
2011
$
12,727
$
4,313
$
(430)
(21,623)
33
(3,332)
1,690
330
293
119
-
377
16,000
112
6,726
(44,792)
(44,792)
(1,232)
858
168
27,879
11,042
38,715
649
1,494
(8,787)
23
(4,274)
(78)
-
188
(138)
(30)
45
-
(18)
(8,756)
(451)
(451)
(159)
128
100
-
8,349
8,418
(789)
2,283
48
7
696
78
-
263
73
(506)
(292)
-
(770)
(833)
(846)
(846)
-
-
92
-
668
760
(919)
3,202
Cash and short term investments at end of year
$
2,143
$
1,494
$
2,283
- 108 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(20) SCHEDULE VI – SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS (UNAUDITED)
Loss and LAE
- Current Year
Loss and LAE
- Prior year
Amortization of
deferred policy
acquisition
costs
(Dollars in Thousands)
Paid losses and
LAE
expenses
Net premiums
written
2013
2012
2011
$
56,209
$
201
$
21,447
$
22,695
$
160,665
$
31,636
$
(1,427)
$
13,255
$
15,892
$
68,374
$
31,893
$
(997)
$
12,347
$
13,672
$
51,976
Affiliation
with
registrant
Deferred policy
acquisition
costs
Reserves for
losses and LAE
Discount, if any,
deducted from
previous column
(Dollars in Thousands)
Unearned
premiums
Net premiums
earned
Consolidated
Property and
Casualty
Subsidiaries
2013
2012
2011
$
16,708
$
61,016
$
-
$
128,343
$
104,381
$
8,479
$
49,908
$
-
$
59,006
$
59,359
$
7,718
$
59,983
$
-
$
47,933
$
48,523
(21) 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.
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.
- 109 -
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
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 December 31, 2013, presented in accordance with this
guidance, are as follows.
Debt securities:
United States government obligations and
authorities
Obligations of states and political
subdivisions
Corporate
International
Equity securities:
Common stocks
Level 1
As of December 31, 2013
Level 2
Level 3
(Dollars in Thousands)
Total
$
-
$
27,209
$
-
$
27,209
-
-
-
-
52,064
91,941
3,698
174,912
38,584
38,584
-
-
-
-
-
-
-
-
52,064
91,941
3,698
174,912
38,584
38,584
Total debt and equity securities
$
38,584
$
174,912
$
-
$
213,496
(22) SUBSEQUENT EVENTS
On March 4, 2014, a total of 88,648 restricted shares from the 2012 Plan were granted pursuant to the vesting
requirements and other terms and conditions set forth in Restricted Stock Agreements. Of the total, 43,997 shares were
granted to the Company's Chief Executive Officer and President and 16,341 shares were granted to the Company's Chief
Financial Officer. An aggregate of 15,710 shares were granted to the Company's directors and the remaining 12,600 shares
were granted to other employees of the Company.
On February 24, 2014, Federated National entered into a Reimbursement Contract with the SBA for the 2014-2015
hurricane season. This Reimbursement Contract is part of the Company’s reinsurance program and will reimburse Federated
National for covered property losses under its homeowners’ insurance policies resulting from hurricanes that cause damage in
the State of Florida through May 31, 2015.
Under this Reimbursement Contract, the FHCF will provide approximately $531.0 million of aggregate seasonal
coverage for covered losses in excess of approximately $225.0 million, subject to a 10.0% Company participation. Federated
National’s premium for the FHCF reinsurance coverage will be approximately $41.4 million payable in three installments
between August 2014 and December 2014. The actual attachment point, total coverage and cost will not be finalized until
December 31, 2014.
- 110 -
Federated National Holding Company and Subsidiaries
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed
in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the
participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of December 31, 2013.
Management’s Report on Internal Control over Financial Reporting
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may
deteriorate.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued
by the COSO.
Based on the results of this evaluation, our management has concluded that our internal control over financial
reporting was effective as of December 31, 2013 to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. We reviewed
the results of management’s assessment with the Company’s Audit Committee.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the year ended December
31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness
Our management and our audit committee do not expect that our disclosure controls and procedures or internal
control over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.
Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control gaps and instances of fraud have been detected. These inherent limitations
include the realities that judgments and decision-making can be faulty, and that breakdowns can occur because of simple
errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all
potential future conditions.
ITEM 9B
OTHER INFORMATION
None
- 111 -
Federated National Holding Company and Subsidiaries
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth certain information with respect to our executive officers and directors as of March
17, 2014:
Name
Michael H. Braun (5)(6)
Peter J. Prygelski, III (2)
Bruce F. Simberg (2)(3)(4)(5)
Richard W. Wilcox, Jr. (1)(4)(6)
Carl Dorf (1)(2)(4)
Charles B. Hart, Jr. (2)(3)(4)(5)(6)
Jenifer G. Kimbrough (1)(3)(4)
Age
46
45
65
72
73
75
42
---------------------------------------
(1)
(2)
(3)
(4)
(5)
(6)
Audit Committee Member
Investment Committee Member
Compensation Committee Member
Nominating Committee Member
Directors Compensation Committee Member
Strategic Initiatives Committee Member
Position with the Company
Chief Executive Officer, President, Class I Director
Chief Financial Officer, Treasurer, Class I Director
Chairman, Class II Director
Class II Director
Class III Director
Class III Director
Class I Director
Our Articles of Incorporation provide that our Board of Directors shall consist of three classes of directors, as nearly
equal in number as possible, designated Class I, Class II and Class III, and provides that the exact number of directors
comprising our Board of Directors will be determined from time to time by resolution adopted by the Board. At each annual
meeting of shareholders, successors to the class of directors whose term expires at that annual meeting are elected for a three-
year term. The current term of the Class I directors terminates on the date of our 2016 annual meeting. The current term of
the Class II directors terminates on the date of our 2015 annual meeting and the current term of the Class III directors
terminates as of the date of our 2014 annual meeting.
The following is a brief description of the business experience of each director and executive officer of the
Company.
Michael H. Braun was appointed Chief Executive Officer of the Company in July 2008, President in June 2009,
and elected to the Board of Directors in December 2005. Previously, Mr. Braun was Chief Operating Officer, where he was
responsible for the Company’s day-to-day operations and strategic product portfolio. Mr. Braun has also served as President
of Federated National Insurance Company (“FNIC”), a subsidiary of the Company, since September 2003, a position that he
continues to hold. Previously, he held key management positions within FNIC, responsible for operations, marketing and
underwriting. Prior to joining the Company, Mr. Braun was Managing Partner for an independent chain of insurance
agencies, which was acquired by the Company in 1998.
Peter J. Prygelski, III was named Chief Financial Officer in June 2007 after serving as an independent director
from January 2004 through June 2007. Mr. Prygelski was re-nominated to the Board in June 2008 and has served as an
inside director since that time. Mr. Prygelski has spent his entire career in the financial services industry. He spent 12 years
at American Express in various capacities including; Director of Internal Audit and Assistant General Auditor of American
Express Centurion Bank. In this capacity, Mr. Prygelski was responsible for the monitoring of internal controls for a bank
with $45 billion in assets, and assessing and mitigating operational, reputational, regulatory and strategic risk. After leaving
American Express, he spent the next three years at Ernst & Young and Deloitte and Touche. At both firms, Mr. Prygelski
served as a senior manager responsible for growing the financial services practice in the Southeast. He managed teams that
provided Fortune 500 companies with consulting services in the following areas; Finance Transformation, Finance
- 112 -
Federated National Holding Company and Subsidiaries
Operations Effectiveness, Financial Reporting, Cost Optimization, Governance, Risk and Compliance Services, and Board of
Directors Performance.
Bruce F. Simberg has served as a director of the Company since January 1998. Mr. Simberg has been a practicing
attorney since October 1975, most recently as managing partner of Conroy, Simberg, Ganon, Krevans, Abel, Lurvey,
Morrow & Schefer, P.A. (“Conroy Simberg”), a law firm in Fort Lauderdale, Florida, since October 1979.
Richard W. Wilcox, Jr. has served as a director of the Company since January 2003. Mr. Wilcox has been in the
insurance industry for more than 40 years. In 1963, Mr. Wilcox started an insurance agency that eventually developed into a
business generating $10 million in annual revenue. In 1991, Mr. Wilcox sold his agency to Hilb, Rogal and Hamilton
Company (“HRH”) of Fort Lauderdale, for which he retained the position of President through 1998. In 1998, HRH of Fort
Lauderdale merged with Poe and Brown of Fort Lauderdale, and Mr. Wilcox served as the Vice President of Poe and Brown
until 1999, when he retired. Mr. Wilcox holds CIC designation as a member of the Society of Certified Insurance
Counselors. Mr. Wilcox also holds an Advanced Professional Director Certification from the American College of Corporate
Directors, a national public company director education and credentialing organization.
Carl Dorf, age 73, has served as a director of the Company since August 2001. Mr. Dorf has over 40 years of
diversified investment experience as a security analyst, portfolio manager, mutual fund manager and hedge fund manager.
He earned the Chartered Financial Analyst (CFA) designation and in the past served as director of the Los Angeles Society of
Security Analysts. Since April 2001, Mr. Dorf has been the principal of Dorf Asset Management, LLC, and is responsible
for all investment decisions made by that company. From January 1991 to February 2001, Mr. Dorf served as the Fund
Manager of ING Pilgrim Bank and Thrift Fund. Prior to his experience at Pilgrim, Mr. Dorf was a principal in Dorf &
Associates, an investment management company.
Charles B. Hart, Jr., age 75, was appointed to the Board of Directors in March 2002. Mr. Hart has more than 40
years of experience in the insurance industry. From 1973 to 1999, Mr. Hart served as President of Public Assurance Group
and as General Manager of Operations for Bristol West Insurance Services. Since 1999, Mr. Hart has acted as an insurance
consultant.
Jenifer G. Kimbrough has served as a director of the Company since April 2009. Ms. Kimbrough has served as
the Vice President of Compliance and Audit for Surgical Care Affiliates since March 2010, prior to which Ms. Kimbrough
served as the Vice President of Assurance and Process Improvement. Prior to 2007, Ms. Kimbrough was the Senior Vice
President of Investor Relations at Regions Financial Corporation. From 1993 to 2003, Ms. Kimbrough served as an Audit
Senior Manager at Ernst & Young LLP. Ms. Kimbrough received her certification as a certified public accountant from the
Alabama State Board of Public Accountancy in 1994. Ms. Kimbrough is an active member of several societies, including:
American Woman’s Society of CPAs, Institute of Internal Auditors, Alabama State Society of CPAs and American Institute
of CPAs. Additionally, she recently served on the AICPA Women’s Initiative Executive Committee and as National
President of the AWSCPA.
Board Committees
The standing committees of the Board of Directors in 2013 were the Audit Committee, the Compensation
Committee, the Nominating Committee, the Investment Committee, the Directors Compensation Committee and the Strategic
Initiatives Committee. Charters for the Audit, Compensation and Nominating Committees are available upon the Company’s
website at FedNat.com. The charter of the Audit, Compensation and Nominating Committees is also available in print to any
shareholder who requests it from our Corporate Secretary.
Audit Committee. As of December 31, 2013, the Audit Committee was composed of Jenifer G. Kimbrough, who
served as the Chairman of the Audit Committee, Richard W. Wilcox, Jr. and Carl Dorf. Each member was determined to be
“independent” as defined under the Nasdaq Rules applicable to the Company and SEC rules for Audit Committee
membership. Ms. Kimbrough was designated as a “financial expert” as that term is defined in the applicable rules and
regulations of the Exchange Act. The Board determined that Ms. Kimbrough was a "financial expert" as defined in the
applicable rules and regulations of the Exchange Act based on her understanding of GAAP and financial statements; her
ability to assess the general application of GAAP in connection with the accounting for estimates, accruals and reserves; her
experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be
raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such
activities; her understanding of internal controls and procedures for financial reporting; and her understanding of audit
committee functions.
- 113 -
Federated National Holding Company and Subsidiaries
Pursuant to its written charter, the duties and responsibilities of the Audit Committee include, but are not limited to,
(a) the appointment of the independent certified public accountants and any termination of such engagement, (b) reviewing
the plan and scope of independent audits, (c) reviewing significant accounting and reporting policies and operating controls,
(d) having general responsibility for all related auditing and financial statement matters, and (e) reporting its
recommendations and findings to the full Board of Directors. The Audit Committee pre-approves all auditing services and
permitted non-audit services (including the fees and terms thereof) to be performed by the independent accountants, subject
to the de minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act that are approved
by the Audit Committee prior to the completion of the audit.
To ensure prompt handling of unexpected matters, the Audit Committee delegates to the Chair the authority to
amend or modify the list of approved permissible non-audit services and fees. The Chair will report action taken to the Audit
Committee at the next committee meeting. The Chief Financial Officer is responsible for tracking all independent auditor
fees against the budget for such services and reports at least annually to the Audit Committee.
Compensation Committee. As of December 31, 2013, the Company’s Compensation Committee was composed of
Bruce F. Simberg, Charles B. Hart, Jr., and Jenifer G. Kimbrough. Each member is independent as defined by the Nasdaq
Rules. The Compensation Committee performs the duties and responsibilities pursuant to its charter, which includes
reviewing and approving the compensation of the Company's executive officers. Mr. Simberg serves as the Chairman.
Nominating Committee. As of December 31, 2013, the Company’s Nominating Committee was composed of
Bruce F. Simberg, Jenifer G. Kimbrough, Carl Dorf, Charles B. Hart, Jr. and Richard W. Wilcox, Jr. Each member is
independent as defined by the Nasdaq Rules. Mr. Simberg serves as the Chairman.
The Nominating Committee will consider candidates for director who are recommended by its members, by other
Board members and by management of the Company. The Nominating Committee will consider nominees recommended by
our shareholders if the shareholder submits the nomination in compliance with the advance notice, information and other
requirements described in our bylaws and applicable securities laws. The Nominating Committee evaluates director
candidates recommended by shareholders in the same way that it evaluates candidates recommended by its members, other
members of the Board, or other persons.
It is the Board’s policy to identify qualified potential candidates without regard to any candidate’s race, color,
disability, gender, national origin, religion or creed. In recommending proposed nominees to the full Board, the Nominating
Committee is charged with building and maintaining a Board that has an ideal mix of talent and experience to achieve the
Company’s business objectives. In particular, the Nominating Committee considers all aspects of a candidate’s qualifications
in the context of the needs of the Company at that point in time with a view to creating a Board with a diversity of experience
and perspectives. Among the qualifications, qualities and skills of a candidate considered important by the Nominating
Committee is a person with strength of character, mature judgment, familiarity with the Company’s business and industry,
independence of thought and an ability to work collegially.
Shareholders who wish to recommend nominees to the Nominating Committee should submit their recommendation
in writing to the Secretary of the Company at its executive offices pursuant to the requirements contained in Article III,
Section 13 of the Company’s Bylaws. This section provides that the notice shall include: (a) as to each person who the
shareholder proposed to nominate for election, (i) name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Company which
are beneficially owned by the person, (iv) the consent of each nominee to serve as a director of the Company if so elected and
(v) any other information relating to the person that is required to be disclosed in solicitation for proxies for the election of
directors pursuant to Rule 14A under the Exchange Act; and (b) as to the shareholder giving the notice, the name and record
address of the shareholder, and (ii) the class and number of shares of capital stock of the Company which are beneficially
owned by the shareholder. The Company may require any proposed nominee to furnish such other information as may
reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as a director of the
Company.
Investment Committee. As of December 31, 2013, the Company’s Investment Committee was composed of Peter J.
Prygelski, III, Bruce F. Simberg, Carl Dorf and Charles B. Hart, Jr. The Investment Committee manages our investment
portfolio pursuant to its adopted Investment Policy Statement. Mr. Dorf serves as the Chairman.
Directors Compensation Committee. As of December 31, 2013, the Company’s Directors Compensation
Committee was composed of Michael H. Braun, Bruce F. Simberg and Charles B. Hart, Jr. The Directors Compensation
Committee performs the duties and responsibilities pursuant to its charter, which includes reviewing and recommending the
- 114 -
Federated National Holding Company and Subsidiaries
compensation of the Company's independent directors for approval by the full Board of Directors. Mr. Simberg serves as
the Chairman.
Strategic Initiatives Committee. As of December 31, 2013, the Company’s Strategic Initiatives Committee was
composed of Michael H. Braun, Richard W. Wilcox, Jr. and Charles B. Hart, Jr. The Strategic Initiatives Committee
performs the duties and responsibilities pursuant to its charter, which includes developing, adopting and modifying strategic
initiatives of the Company. Mr. Hart serves as the Chairman.
Corporate Governance/Code of Conduct
We have adopted a Code of Conduct for all employees, officers and directors of the Company. A copy of our Code
of Conduct policy is available on our web site at FedNat.com.
Leadership Structure and Risk Oversight
The Chairman of the Board typically presides at all meetings of the Board. The Chairman is elected to serve by the
directors. Currently, the offices of Chairman of the Board and Chief Executive Officer are separated. The Chief Executive
Officer and Chief Financial Officer currently serve as the only members of management on the Board. Based on the current
size, organizational structure and nature of operations of the Company, the Board believes that maintaining the separation of
the offices of the Chairman of the Board and Chief Executive Officer is in the best interests of the Company.
The Company believes that its Board as a whole should encompass a range of talent, skill, diversity, and expertise
enabling it to provide sound guidance with respect to the Company's operations and interests. The Company's policy is to
have at least a majority of Directors qualify as independent as defined by the listing and maintenance rules of The Nasdaq
Stock Market (the “Nasdaq Rules”). The Nominating Committee identifies candidates for election to the Board of Directors;
reviews their skills, characteristics and experience; and recommends nominees for director to the Board for approval. The
Nominating Committee's Charter provides that the Board of Directors as a whole should be diverse and consist of individuals
with various and relevant career experience, relevant technical skills, industry knowledge and experience, financial expertise
and local or community ties. Minimum individual requirements include strength of character, mature judgment, familiarity
with the Company's business and industry, independence of thought and an ability to work collegially. The Board believes
that the qualifications of the directors, as set forth in their biographies set forth above provide them with the qualifications
and skills to serve as a director of our Company.
To facilitate the Board’s oversight functions and to take advantage of the knowledge and experience of its members,
the Board has created several standing committees. These committees, the Audit, Investment, Nominating, Compensation,
Directors Compensation and Strategic Initiatives Committees, allow regular risk oversight and monitoring, and deeper
analysis of issues before the Board. The Audit and Compensation committee structures also require committees to be
comprised exclusively of independent directors. The membership of the standing committees is reviewed from time to time,
and specific committee assignments are proposed and appointed by the Board. In addition, among their other respective
duties, the Board and Audit Committee each conduct an annual assessment to evaluate their effectiveness.
The Board’s role in connection with risk oversight is to oversee and monitor the management of risk practiced by
the Company’s management in the performance of their duties. The Board does this in a number of ways, principally
through the oversight responsibility of committees of the Board, but also as part of the strategic planning process. For
example, our Audit Committee oversees management of risks related to accounting, auditing and financial reporting and
maintaining effective internal controls over financial reporting. Our Nominating Committee oversees risk associated with
corporate governance and the Company’s code of conduct, including compliance with listing standards for independent
directors and conflicts of interest. Our Compensation Committee oversees the risk related to our executive compensation
plans and arrangements. Our Investment Committee oversees the risks related to managing our investment portfolio. Our
Directors Compensation Committee oversees the risk related to our non-employee director compensation plans and
arrangements. Our Strategic Initiatives Committee oversees the development and implementation of strategic initiatives of
the Company. The full Board receives reports on a regular basis regarding each committee’s oversight from the chairperson
of each committee when reporting on their committee’s actions at regular Board meetings.
Subsidiary Presidents
James Gordon Jennings, III (age 56) has served as the President of Federated National Underwriters, Inc. since
May 2008 and as the Company’s Vice President of Risk Management since April 2008. He was employed from 1990
through 2000 by American Vehicle, one of our wholly owned subsidiaries, where he was involved in all aspects of property
and casualty insurance. Mr. Jennings served as our Controller from May 2000 through August 2002, as our Chief Financial
- 115 -
Federated National Holding Company and Subsidiaries
Officer from August 2002 through June 2007, and as our Chief Accounting Officer from June 2007 through March 2008.
Mr. Jennings, formerly a certified public accountant, also holds a Certificate in General Insurance and an Associate in
Insurance Services as designated by the Insurance Institute of America. Mr. Jennings maintains a Florida General Lines
Insurance License since 2009 and also carries a 1-20 Florida Surplus Lines License.
C. Brian Turnau (age 47) has served as the President of Federated National Adjusting, Inc. since July 2006. Mr.
Turnau served as the Litigation Manager of FNA from June 2000 until his promotion to President. He has over 10 years’
experience in the insurance industry. Prior to joining the Company, Mr. Turnau worked for private practice insurance
defense litigation law firms for over fifteen years. Mr. Turnau earned his Bachelor of Arts degree in History in 1989 from
Washington and Lee University. He currently serves on the Board of Directors of the Florida High School for Accelerated
Learning, a nonprofit charter school that serves the needs of underprivileged students.
Christopher Clouse (age 46) has served as the President of Insure-Link, Inc. since its incorporation in March 2008.
Mr. Clouse has over 22 years of experience in the insurance industry and has maintained a Florida General Lines Insurance
License since 1991. He also carries a 2-14 Life including Variable Annuity License, 1-20 Florida Surplus Lines License, and
is an Accredited Advisor in Insurance as designated by The Institutes. Prior to joining the Company Mr. Clouse served as an
agent and/or managing agent for several private agencies with a primary focus on personal lines of insurance including
homeowners, auto and flood insurance.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our executive officers, directors, and persons who own more than
10% of a registered class of our equity securities to file reports of beneficial ownership and certain changes in beneficial
ownership with the SEC and to furnish us with copies of those reports. To our knowledge, based solely on a review of the
copies of such reports furnished to us or written representations that no other reports were required, we believe that during
the year ended December 31, 2013, our officers, directors and greater than 10% shareholders timely filed all reports required
by Section 16(a).
ITEM 11
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation earned by, awarded to or paid to our Chief
Executive Officer and President, and Chief Financial Officer, for the years ended December 31, 2013 and 2012. We refer to
these officers as our Named Executive Officers in other parts of this Form 10-K. We currently do not have any other
individual employee of the Company designated as an executive officer.
SUMMARY COMPENSATION
Stock
Awards
Option
Awards
(1)
Non-Equity
Incentive Plan
Compensation
Nonqualified
Deferred
Compensation
Earnings
All Other
Compensation
(2)
Total
Year
Salary
Bonus
2013
$347,322
$72,300
$1,141,500
--
2012
$278,261
$70,800
--
$21,743
2013
$249,182
$75,000
$584,600
--
--
--
--
2012
$222,535
$59,400
--
$21,743
--
--
--
--
--
$26,665
$1,587,787
$27,821
$398,625
$30,737
$939,519
$27,573
$331,251
Name and
Principal
Position
Michael H.
Braun
Chief
Executive
Officer,
President
Peter J.
Prygelski, III
Chief
Financial
Officer,
Treasurer
(1) This amount reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in
the calculation of this amount are included in Footnote 14 to the Company’s audited financial statements for fiscal years ended
December 31, 2013 and December 31, 2012, respectively.
(2) See table "All Other Compensation" for an itemized disclosure of this element of compensation.
- 116 -
Federated National Holding Company and Subsidiaries
Name
Michael H. Braun
Peter J. Prygelski, III
ALL OTHER COMPENSATION
Year
2013
2012
2013
2012
Auto
$8,519
$9,578
$6,000
$6,000
Club Member
Fees
Insurance
Benefits (1)
--
--
$9,225
$8,100
$9,221
$8,313
$6,716
$6,018
Contribution to
401(k) Plan (2)
$8,925
$9,930
$8,796
$7,455
All Other
Compensation
Total
$26,665
$27,821
$30,737
$27,573
(1) Represents premiums for life, medical and dental insurance.
(2) Represents matching contributions made by the Company on behalf of the Named Executive Officers to the Company’s 401(k) plan.
Employment Agreements
Michael H. Braun. We entered into a second amended and restated employment agreement with Michael H. Braun,
the Company’s Chief Executive Officer and President, effective as of January 18, 2012, which amends and restates Mr.
Braun’s prior employment agreement. Under his agreement, Mr. Braun was entitled to receive an annual salary of $280,000
and a $500 monthly automobile allowance. Mr. Braun’s annual salary which may be increased at any time during the term of
the agreement, was increased to $475,000 effective January 1, 2014. The agreement is for a term of two years, which term
shall automatically be extended so that at all times the balance of the term shall not be less than two years unless sooner
terminated as provided in the second amended and restated employment agreement. Mr. Braun is also entitled to receive
such bonuses and increases as may be awarded by the Board of Directors. It also contains customary confidentiality and non-
solicitation provisions. Additionally, we entered into an amended and restated non-competition, non-disclosure and non-
solicitation agreement with Mr. Braun effective August 5, 2013. The amended non-compete agreement prohibits Mr. Braun
from directly or indirectly competing with us for a period of two (2) years after the termination of his employment for any
reason. If Mr. Braun’s employment with the Company is terminated, he is entitled to certain payments described below.
Peter J. Prygelski, III. We entered into a second amended and restated employment agreement with Peter J.
Prygelski, III, the Company’s Chief Financial Officer and Treasurer, effective as of January 18, 2012, which amends and
restates Mr. Prygelski’s prior employment agreement. Under his agreement, Mr. Prygelski was entitled to receive an annual
salary of $223,000 and a $500 monthly automobile allowance. Mr. Prygelski’s annual salary which may be increased at any
time during the term of the agreement, was increased to $300,000 effective January 1, 2014. The agreement is for a term of
two years, which term shall automatically be extended so that at all times the balance of the term shall not be less than two
years unless sooner terminated as provided in the second amended and restated employment agreement. Mr. Prygelski is also
entitled to receive such bonuses and increases as may be awarded by the Board of Directors. It also contains customary
confidentiality and non-solicitation provisions. Additionally, we entered into an amended and restated non-competition, non-
disclosure and non-solicitation agreement with Mr. Prygelski effective August 5, 2013. The amended non-compete
agreement prohibits Mr. Prygelski from directly or indirectly competing with us for a period of two (2) years after the
termination of his employment for any reason. If Mr. Prygelski’s employment with the Company is terminated, he is
entitled to certain payments described below.
Mr. Braun and Mr. Prygelski are each entitled to receive certain payments upon the termination of employment
under certain circumstances as set forth in their respective agreements, both under the agreements as in effect during 2011
and as amended and restated in 2012. If the executive’s employment is terminated by us without Cause (as defined in the
respective agreements), we must make a lump sum payment to the executive equal to two years' base salary (the
“Termination Severance”). In addition, all unvested stock options and any other equity awards held by him will become
vested.
If Mr. Braun’s or Mr. Prygelski’s employment with us is terminated for Cause or as a result of his death or
disability, he will be entitled to his base salary prorated through the date of the termination and any benefits due him as may
be provided under the applicable plan, program or arrangement.
The agreements also provide for payments to the executives if employed by us on the date on which a Change of
Control occurs. Under the agreements, a “Change of Control” will be deemed to have occurred if: (i) any person, including a
“group” as defined in Section 13(d)(3) of the Exchange Act, becomes the owner or beneficial owner of our securities having
50% (which was increased from 30% in the agreements in effect during 2011) or more of the combined voting power of our
then-outstanding securities that may be voted for the election of our directors (other than as a result of an issuance of
securities initiated by us, or open market purchases approved by our Board, as long as the majority of the Board approving
the purchases is the majority at the time the purchases are made), or (ii) the persons who were our directors before such
- 117 -
Federated National Holding Company and Subsidiaries
transactions shall cease to constitute a majority of our Board, or any successor to us, as the direct or indirect result of or in
connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested
election, or any combination of the foregoing transactions. If, following a Change in Control, Mr. Braun’s or Mr. Prygelski’s
employment is terminated by us (or any successor or subsidiary) without Cause or by the executive for Good Reason (as
defined in the respective agreements), we will make a lump sum payment to the executive in an amount equal to two times
the sum of his base salary in effect immediately prior to the Change of Control plus his actual bonus for the fiscal year
immediately preceding the Change of Control (the "Change of Control Severance"). Additionally, all unvested stock options
and any other equity awards held by him will become vested and the Company will continue to provide Messrs. Braun and
Prygelski (and their families) with medical insurance for a period of two years after the date of such termination of
employment at no cost and on the same terms and conditions as in effect on the date on which such termination of
employment occurs.
If either Mr. Braun or Mr. Prygelski is terminated by us without Cause prior to a Change of Control, and a Change
of Control occurs within six months following such termination, then in addition to the Termination Severance described
above, the executive will be entitled to an additional lump sum payment in an amount equal to (i) the Change of Control
Severance, less (ii) the Termination Severance.
As a condition to Messrs. Braun and Prygelski’s entitlement to receive the base salary amounts and equity award
acceleration referenced above, each is bound by the terms of an agreement that sets forth certain restrictive covenants.
Pursuant to the non-competition provisions of these agreements, each are prohibited from working in the insurance industry
in any territories where the Company has been doing business for a period of one year from the date on which he terminates
employment with the Company for any reason (other than without cause). For a period of one year after his employment is
terminated, he is also prohibited from soliciting directly for himself or for any third person any employees or former
employees of the Company, unless the employees have not been employed by the Company for a period in excess of six
months, and from disclosing any confidential information that he learned about the Company during his employment.
Grants of Plan Based Awards
The following table provides information regarding stock options granted to Named Executive Officers during 2013
under the Company’s 2012 Stock Incentive Plan:
GRANTS OF PLAN-BASED AWARDS
Name
Michael H. Braun
Peter J. Prygelski, III
Grant Date
3/4/2013
8/5/2013
3/4/2013
8/5/2013
All Other Equity Awards / Number
of Securities Underlying Options
25,000
100,000
15,000
50,000
Exercise or Base
Price of Equity
Awards
$5.54
$10.03
$5.54
$10.03
Grant Date Fair Value of
Equity Awards (1)
$138,500
$1,003,000
$83,100
$501,500
(1) This amount reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in
the calculation of this amount are included in Footnote 14 to the Company’s audited financial statements for fiscal year ended
December 31, 2013.
Stock Incentive Plans
Our Amended and Restated 2012 Stock Incentive Plan (the “2012 Plan”) is administered by the Compensation
Committee (the “Committee”). The objectives of the 2012 Plan include attracting, motivating and retaining key personnel
and promoting our success by linking the interests of our employees, directors and consultants with our success.
Awards may be made under the 2012 Plan in the form of (a) incentive stock options, (b) non-qualified stock options,
(c) stock appreciation rights, (d) dividend equivalent rights, (e) restricted stock, (f) unrestricted stock, (g) restricted stock
units, and (h) performance shares. No incentive stock option may be granted to a person who is not an employee of the
Company or one of its subsidiaries on the date of grant. In addition, both incentive stock options and non-statutory stock
options were granted under our 1998 and 2002 stock option plans, both of which have expired, although certain options
remain outstanding under these plans.
Options Available for Issuance. As of December 31, 2013, all 900,000 shares of common stock authorized for
issuance upon exercise of options granted under the 1998 plan and 1,800,000 total shares authorized for issuance under the
2002 plan have been issued or are issuable upon exercise of outstanding options, and there were 750,500 shares available to
- 118 -
Federated National Holding Company and Subsidiaries
be awarded under the 2012 Plan. The shares to be delivered upon exercise of options or awards will be made available, at the
discretion of the Committee, from authorized but unissued shares or outstanding options or awards that expire or are
cancelled. If shares covered by an option or award cease to be issuable for any reason, such number of shares will no longer
count against the shares authorized under the plan and may again be granted under the 2012 Plan.
Term of Options. The term of each outstanding option granted to our officers and employees is currently 10 years.
Vesting Schedule. Options or awards granted under our stock plans, unless waived or modified in a particular option
agreement or by action of the Committees, typically vest according to the following schedule:
From the Grant Date
Less than 1 year
1 year
2 years
3 years
Vesting Schedule
Portion of Grant Vested
0%
33 1/3%
33 1/3%
33 1/3%
Options or awards granted under the stock plans require that the recipient of a grant be continuously employed or
otherwise provide services to us or our subsidiaries. Failure to be continuously employed or in another service relationship
generally results in the forfeiture of options or awards not vested at the time the employment or other service relationship
ends. Termination of a recipient’s employment or other service relationship for cause generally results in the forfeiture of all
of the recipient’s unexercised options or awards.
Adjustments in Our Capital Structure. The number and kind of shares available for grants under our stock plans
and any outstanding options or awards under the plans, as well as the exercise price of outstanding options or awards, will be
subject to adjustment by the Committee in the event of any merger, consolidation, reorganization, stock split, stock dividend
or other event causing a capital adjustment affecting the number of outstanding shares of common stock. In the event of a
business combination or in the event of a sale of all or substantially all of our assets, the Committee may cash out some or all
of the unexercised, vested options or awards under the plan, or allow some or all of the options or awards to remain
outstanding, subject to certain conditions. Unless otherwise provided in individual option agreements, the vesting of
outstanding options or awards will not accelerate in connection with a business combination or in the event of a sale of all or
substantially all of our assets.
Administration. The Committee has full discretionary authority to determine all matters relating to options and
awards granted under the stock plans, including the persons eligible to receive options or awards, the number of shares
subject to each option or award, the exercise price of each option or award, any vesting schedule, any acceleration of the
vesting schedule and any extension of the exercise period. The Committee has granted limited authority to executive
management members to grant awards to eligible individuals.
Amendment and Termination. Our Board of Directors has authority to suspend, amend or terminate the 2012 Plan,
except as would adversely affect participants rights to outstanding awards without their consent. The 2012 Plan was amended
and restated in March 2013 to clarify the plan administrator’s authority to permit the vesting of unvested restricted shares in
the event of the death of the grantee. As the plan administrator, our Committee has the authority to interpret the plans and
options or awards granted under the stock plans and to make all other determinations necessary or advisable for plan
administration.
- 119 -
Federated National Holding Company and Subsidiaries
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the holdings held by our Chief Executive Officer and President, and Chief Financial
Officer for the year ended December 31, 2013.
Name
Michael H. Braun
Peter J. Prygelski, III
Stock Option Awards
Equity Awards
Number of
Securities
Underlying
Exercisable
Options (#)
Number of
Securities
Underlying
Unexercisable
Options (#)
Option
Exercise
Price ($)
Option
Expiration
Date
Shares That
Have Not
Vested (#)
Market
Value of
Shares That
Have Not
Vested ($)(1)
Equity
Exercise
Price ($)
Equity
Expiration
Date
40,000
500
32,000
9,000
6,667
5,000
10,000
500
9,000
6,667
5,000
--
--
8,000
6,000
3,333
10,000
--
--
6,000
3,333
10,000
8.32
4.59
4.73
4.36
2.45
4.40
8.32
4.59
4.36
2.45
4.40
07/01/2014 (2)
12/12/2018 (3)
01/02/2015 (4)
03/03/2020 (5)
08/22/2021 (6)
04/06/2022 (7)
07/01/2014 (2)
12/12/2014 (3)
03/03/2020 (5)
08/22/2021 (6)
04/06/2022 (7)
25,000
366,750
100,000
1,467,000
15,000
50,000
220,050
733,500
--
--
--
--
-- (8)
-- (9)
-- (8)
-- (9)
(1) Based on the market value of $14.67 on December 31, 2013.
(2) Options vested as to 100% of the underlying shares on December 31, 2013.
(3) Options vested as to 100% of the underlying shares on December 31, 2013.
(4) Options vested as to 80% of the underlying shares on December 31, 2013, the remaining 20% vest as follows:
20% on 1/2/2014.
(5) Options vested as to 60% of the underlying shares on December 31, 2013, the remaining 40% vest as follows:
20% on 3/3/2014 and 20% on 3/3/2015.
(6) Options vested as to 66 2/3% of the underlying shares on December 31, 2013, the remaining 33 1/3% vest as follows:
33 1/3% on 8/22/2014.
(7) Options vested as to 33 1/3% of the underlying shares on December 31, 2013, the remaining 66 2/3% vest as follows:
33 1/3% on 4/6/2014 and 33 1/3% on 4/6/2015.
(8) Restricted stock vested 0% on December 31, 2013, the remaining 100% vest as follows:
33 1/3% on 3/4/2014, 33 1/3 % on 3/4/2015 and 33 1/3% on 3/4/2016.
(9) Restricted stock vested as to 0% on December 31, 2013, the remaining 100% vest as follows:
33 1/3% on 8/5/2014, 33 1/3% on 8/5/2015 and 33 1/3% on 8/5 2016.
Option Exercises and Stock Vested
The following table sets forth certain information with respect to stock options exercised and equity awards vested
during calendar year 2013 by the Named Executive Officers.
Name
Michael H. Braun
Peter J. Prygelski, III
Stock Option Awards
Equity Awards
Shares acquired on
Exercise (#)
Value Realized on
Exercise ($)
Shares Acquired on
Vesting (#)
Value Realized on
Vesting ($)
500
4,500
500
4,500
$190
$4,365
$190
$4,365
--
--
--
--
--
--
--
--
- 120 -
Federated National Holding Company and Subsidiaries
Pension Benefits and Other Nonqualified Deferred Compensation
None of our Named Executive Officers participate in or have account balances in qualified or non-qualified defined
benefit or contribution plans or other deferred compensation plans maintained by us. The Compensation Committee, which is
composed solely of outside directors as defined for purposes of Section 162(m) of the Internal Revenue Code, may elect to
provide our officers and other employees with qualified or non-qualified defined benefit or contribution or other deferred
compensation benefits if the Compensation Committee determines that doing so is in our best interests.
Director Compensation
During 2013, we had five non-employee directors that qualified for compensation. Non-employee directors receive
an initial stock option or equity grant upon appointment to the board of directors and subsequent option or equity grants as
may be granted at the discretion of the Board. In addition, non-employee directors receive annual cash compensation and
reimbursement of actual out-of-pocket expenses. During 2013, in lieu of per meeting directors’ fees, the non-employee
directors received an annual retainer of $48,000, payable in quarterly installments of $12,000 in January, April, and July and
October.
In September 2013, the Directors Compensation Committee recommended, and the Board approved, an increase of
the annual retainer fee to $60,000 effective October 1, 2013. In addition the Directors Compensation Committee
recommended, and the Board approved, an increase of annual retainer fees to each chairperson of committees and the Board
effective October 1, 2013 and payable in quarterly installments. The Chairman of the Board of Directors annual fee was
increased to $30,000, the chairperson of the Audit Committee’s annual fee was increased to $16,000, the chairperson of the
Investment Committee’s annual fee was increased to $14,000, the chairperson of the Compensation Committee’s annual fee
was increased to $12,000, the chairperson of the Strategic Initiatives Committee’s annual fee was increased to $12,000 and
the chairperson of the Directors Compensation Committee’s annual fee was set at $1,000 for a non-employee chairperson.
Directors who are also employees do not receive this compensation. The Directors Compensation Committee may use the
services of compensation analysis companies in the future to assist it in providing a fair and competitive compensation plan
for its directors.
Historically, the Company granted stock based incentives to our non-employee directors as part of their
compensation. Equity awards granted to non-employee directors in 2013 are shown in the table below.
NON-EMPLOYEE DIRECTORS' COMPENSATION SUMMARY
Name
Carl Dorf
Charles B. Hart, Jr.
Bruce F. Simberg
Richard W. Wilcox, Jr.
Jenifer G. Kimbrough
Fees
Earned or
Paid in
Cash
$59,750
$58,500
$69,750
$58,500
$61,000
Equity
(Restricted
Stock)
Awards (2)
$22,160
$22,160
$22,160
$22,160
$22,160
Stock
Option
Awards
(2)
--
--
--
--
--
Non-Equity
Incentive Plan
Compensation
--
--
--
--
--
Non-Qualified
Deferred
Compensation
Earnings
--
--
--
--
--
All Other
Compensation
--
$5,100 (1)
--
--
Total
$81,910
$85,760
$91,910
$80,660
$83,160
(1) Includes $5,100 for events attended by director in 2013.
(2) The following table provides certain additional information concerning the currently outstanding stock options and/or equity awards
held by our non-employee directors as of the end of 2013:
Name
Carl Dorf
Charles B. Hart, Jr.
Bruce F. Simberg
Richard W. Wilcox, Jr.
Jenifer G. Kimbrough
Total Stock
Option/Equity Awards
Outstanding at 2013
Fiscal Year End
(Shares)
48,500 (c)
44,000 (d)
25,166 (e)
30,166 (f)
39,000 (g)
Stock Option / Equity
Awards Granted
During Fiscal Year
2013 (a)
(Shares)
4,000 (a)
4,000 (a)
4,000 (a)
4,000 (a)
4,000 (a)
Grant Date Fair Value of
Equity Awards Granted
During Fiscal Year 2013
($)(b)
$22,160
$22,160
$22,160
$22,160
$22,160
- 121 -
Federated National Holding Company and Subsidiaries
(a) The restricted stock reported in this column were granted in March 2013 and vest 33 1/3% per year over three years on each
anniversary of the date of grant.
(b) Based on the market value of $5.54 on March 4, 2013.
(c) Includes 4,500 options granted on 1/30/2008 with an exercise price of $12.58, vest 20% per year and expire on 1/30/2014; 15,000
options granted on 1/2/2009 with an exercise price of $4.73, vest 33 1/3% per year and expire on 1/2/2015; 10,000 options granted on
8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 15,000 options granted on 4/6/2012 with
an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which vest 33 1/3 per
year.
(d) Includes 15,000 options granted on 1/2/2009 with an exercise price of $4.73, vest 33 1/3% per year and expire on 1/2/2015; 10,000
options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 15,000 options granted
on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which
vest 33 1/3 per year.
(e) Includes 4,500 options granted on 1/30/2008 with an exercise price of $12.58, vest 20% per year and expire on 1/30/2014; 6,666
options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 10,000 options granted
on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which
vest 33 1/3 per year.
Includes 4,500 options granted on 1/30/2008 with an exercise price of $12.58, vest 20% per year and expire on 1/30/2014; 6,666
options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 15,000 options granted
on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which
vest 33 1/3 per year.
(f)
(g) Includes 10,000 options granted on 4/1/2009 with an exercise price of $3.30, vest 20% per year and expire on 4/1/2015; 10,000
options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 15,000 options granted
on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which
vest 33 1/3 per year.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 17, 2014, information with respect to the beneficial ownership of our
common stock by (i) each person who is known by us to beneficially own 5% or more of our outstanding common stock, (ii)
each of our executive officers named in the Summary Compensation Table in the section “Executive Compensation,” (iii)
each of our directors, and (iv) all directors and executive officers as a group.
As used herein, the term “beneficial ownership” with respect to a security is defined by Rule 13d-3 under the
Exchange Act as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or
shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any
contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60
days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights and the address
for each person is c/o Federated National Holding Company, 14050 NW 14 Street, Suite 180, Sunrise, Florida 33323.
Name and Address of Beneficial Owner
Bruce F. Simberg (2) .................................................................
Michael H. Braun (3) ................................................................
Carl Dorf (4) ..............................................................................
Richard W. Wilcox, Jr. (5) .........................................................
Peter J. Prygelski, III (6) ...........................................................
Charles B. Hart, Jr. (7) ...............................................................
Jenifer G. Kimbrough (8) ...........................................................
Number of Shares
Beneficially
Owned
Percent of
Class
Outstanding (1)
436,992
293,581
167,924
162,059
124,325
39,145
20,253
3.88%
2.58%
1.49%
1.44%
1.10%
*
*
All directors and executive officers as a group (seven persons) (9)
1,244,279
10.81%
5% or greater holders:
Dimensional Fund Advisors LP (10)
Palisades West, Building One
6300 Bee Cave Road
Austin, TX 78746
----------------
*
Less than 1%.
- 122 -
579,646
5.15%
Federated National Holding Company and Subsidiaries
(1) Based on 11,264,864 shares outstanding as of March 7, 2014.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Includes 2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of
restricted stock, one- third of which vest each year beginning on March 4, 2015, and 8,333 shares of common stock issuable upon the
exercise of vested stock options held by Mr. Simberg.
Includes 16,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 100,000 shares of
restricted stock, one-third of which vest each year beginning on August 5, 2014, 43,997 shares of restricted stock, one-third of which
vest each year beginning on March 4, 2015, and 109,167 shares of common stock issuable upon the exercise of vested stock options
held by Mr. Braun.
Includes 64,991 shares of common stock held by Dorf Trust, 59,624 shares of common stock held by Carl Dorf Rollover IRA, 2,666
shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of restricted stock, one-
third of which vest each year beginning on March 4, 2015, and 31,667 shares of common stock issuable upon the exercise of vested
stock options held by Mr. Dorf.
Includes 3,000 shares of common stock held in Mr. Wilcox’s IRA, 40,000 shares of common stock held by Mr. Wilcox’s spouse,
2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of restricted stock,
one-third of which vest each year beginning on March 4, 2015, and 13,333 shares of common stock issuable upon the exercise of
vested stock options held by Mr. Wilcox.
Includes 4,000 shares of common stock held in Mr. Prygelski’s IRA, 10,000 shares of restricted stock, which began vesting over
three years beginning on March 4, 2014, 50,000 shares of restricted stock, one-third of which vest each year beginning on August 5,
2014, 16,341 shares of restricted stock, one-third of which vest each year beginning on March 4, 2015, and 39,167 shares of common
stock issuable upon the exercise of vested stock options held by Mr. Prygelski.
Includes 2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of
restricted stock, one-third of which vest each year beginning on March 4, 2015, and 31,667 shares of common stock issuable upon
the exercise of vested stock options held by Mr. Hart.
Includes 2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of
restricted stock, one-third of which vest each year beginning on March 4, 2015, and 12,001 shares of common stock issuable upon
the exercise of vested stock options held by Ms. Kimbrough.
Includes 39,996 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 150,000 shares of
restricted stock, one-third of which vest each year beginning on August 5, 2014, 76,048 shares of restricted stock, one-third of which
vest each year beginning on March 4, 2015 and 245,335 shares of common stock issuable upon the exercise of vested stock options.
(10) This information is based on an Amendment No. 4 to Schedule 13G filed with the SEC on February 10, 2014.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Family Relationships
There are no family relationships between or among our current executive officers and directors.
Related Transactions
The following is a summary of transactions during 2012 and 2013 between the Company and its executive officers,
directors, nominees for director, principal shareholders and other related parties involving amounts in excess of $120,000 or
that the Company has chosen to voluntarily disclose.
Bruce F. Simberg, a director, is a partner of the Fort Lauderdale, Florida law firm of Conroy, Simberg, which
renders legal services to the Company. The Company paid legal fees to Conroy, Simberg for services rendered in the amount
of approximately $27,175 and $36,400 in 2012 and 2013, respectively. We believe that the fees charged for services
provided by Conroy, Simberg are on terms at least as favorable as those that we could secure from a non-affiliated law firm.
During 2012 and 2013, Michael H. Braun, the Company’s Chief Executive Officer and President, received the
compensation described in "Executive Compensation" on pages 13 through 22 of this proxy statement. Mr. Braun’s brother
received salary compensation of $134,308 and $136,000 for his services as the Vice President of Accounting and Finance in
2012 and 2013, respectively. We believe that the compensation provided to this individual is comparable to that paid by
other companies in our industry and market for similar positions.
- 123 -
Federated National Holding Company and Subsidiaries
We have adopted a written policy that any transactions between the Company and executive officers, directors,
principal shareholders or their affiliates take place on an arm’s-length basis and require the approval of a majority of our
independent directors, as defined in the Nasdaq Rules.
The Board has determined that the following directors are independent pursuant to the Nasdaq Rules applicable to
the Company as a smaller reporting company: Carl Dorf, Charles B. Hart, Jr., Richard W. Wilcox, Jr., Bruce F. Simberg, and
Jenifer G. Kimbrough. In making the independence determination with respect to Mr. Simberg, the Board considered the fact
that Conroy Simberg has provided legal services to the Company during the past 18 years. Nevertheless, the fees paid by the
Company in connection with the legal services provided by Conroy Simberg during the past three fiscal years do not exceed
the amounts set forth in Nasdaq Rule 5605(a)(2)(D) and, therefore, the Board has determined that Mr. Simberg qualifies as
an independent director under Nasdaq Rule 5605(a)(2).
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee selected De Meo Young McGrath (“De Meo”) as the independent registered public
accounting firm to perform the audit of the Company’s consolidated financial statements and management’s assessment of
the effectiveness of internal control over financial reporting for the 2014 fiscal year. Effective January 1, 2014, De Meo
merged with Goldstein Schechter Koch, P.A. (“GSK”). GSK is the surviving firm and continues to practice under that name.
As a result of the merger, De Meo effectively resigned as the Company’s independent registered public accounting firm and
GSK, as the successor to De Meo following the merger, became the Company’s independent registered public accounting
firm. The engagement of GSK was approved by the Audit Committee of the Company’s Board of Directors on January 15,
2014. As a result, the reports previously issued by De Meo with respect to the Company will be reissued by, and any
consents to the use of such reports will be issued by, GSK.
Our Audit Committee requires that management obtain the prior approval of the Audit Committee for all audit and
permissible non-audited services to be provided by GSK. The Audit Committee considers and approves at each meeting, as
needed, anticipated audit and permissible non-audit services to be provided by GSK during the year and estimated fees. The
Audit Committee Chairman may approve permissible non-audit services with subsequent notification to the full Audit
Committee. All services rendered to us by De Meo in 2013 were pre-approved in accordance with these procedures.
The Company’s independent auditors for the 2013 fiscal year, GSK, as successor to De Meo, has advised the
Company that neither it, nor any of its members, has any direct financial interest in the Company as a promoter, underwriter,
voting trustee, director, officer or employee. All professional services rendered by De Meo during the fiscal year ended
December 31, 2013 were furnished at customary rates and were performed by full-time, permanent employees.
The following table shows fees that we paid (or accrued) for professional services rendered by De Meo for fiscal
2013 and 2012.
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
Total
Fiscal 2013
Fiscal 2012
$368,213
$14,823
$0
$372,168
$15,953
$0
$383,036
$388,121
(1) Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the
independent auditor can reasonably be expected to provide, such as statutory audits.
(2) Audit-related fees consisted primarily of audits of employee benefit plans and special procedures related to regulatory filings in 2012
and 2011.
(3) Tax fees consisted primarily of assistance with tax compliance and reporting.
- 124 -
Federated National Holding Company and Subsidiaries
PART IV
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a)
(1)
The following documents are filed as part of this report.
Financial Statements
The following consolidated financial statements of the Company and the reports of independent auditors
thereon are filed with this report:
Independent Auditors’ Report (Goldstein Schechter Koch, P.A.)
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011.
Consolidated Statements of Comprehensive Income (loss) for the years ended December 31, 2013, 2012
and 2011.
Consolidated Statements of Shareholders’ Equity and Comprehensive (Loss) income for the years ended
December 31, 2013, 2012 and 2011.
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011.
Notes to Consolidated Financial Statements for the years ended December 31, 2013, 2012 and 2011.
(2)
Financial Statement Schedules.
Schedule VI, Supplemental information concerning property-casualty insurance operations, is included
herein under Item 8, Financial Statements and Supplementary Data.
(3)
Exhibits.
- 125 -
Federated National Holding Company and Subsidiaries
Exhibit Description
3.1
3.2
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 in the Company’s
Registration Statement on Form SB-2 filed with the SEC on September 17, 1998 [File No. 333-63623]).
Amended and Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 in the
Company’s Current Report on Form 8-K filed with the SEC on September 12, 2012 and Exhibit 3.1 in the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 filed with the SEC on
November 14, 2012).
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 10.1 in the Company’s
Current Report on Form 8-K filed with the SEC on November 28, 2007).
Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.1 in Amendment No. 1 to the
Company’s Registration Statement on Form SB-2 filed with the SEC on October 7, 1998 [File No. 333-63623]).
Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on April 1, 2013).
Form of Restricted Stock Agreement between the Company and individuals awarded restricted stock from the 2012
Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on
Form 8-K filed with the SEC on March 8, 2012).+
Federated National Holding Company 2002 Stock Option Plan, as amended, and Stock Plan Acknowledgment
(incorporated by reference to Annex A in the Company’s Definitive Proxy Statement for its 2009 Annual Meeting of
Stockholders filed with the SEC on April 2, 2009).+
Federated National Holding Company 1998 Stock Option Plan, as amended, and Stock Plan Acknowledgment
(incorporated by reference to Annex A in the Company’s Definitive Proxy Statement filed with the SEC on May 12,
2000).+
Form of Indemnification Agreement between the Company and its directors and executive officers (incorporated by
reference from Exhibit 10.15 in the Company’s Annual Report on Form 10-K for its year ended December 31, 1007
filed with the SEC on March 17, 2008).
Consent Order for Case Number 114165-10-CO between Federated National Insurance Company, American
Vehicle Insurance Company, 21st Century Holding Company and the Florida Office of Insurance Regulation filed
January 25, 2011 to approve of the merger of Federated National Insurance Company with and into American
Vehicle Insurance Company (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form
8-K filed with the SEC on January 27, 2011).
Amended Consent Order dated February 5, 2013 between the Florida Office of Insurance Regulation and Federated
National Insurance Company (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form
8-K filed with the SEC on February 8, 2013).
Reimbursement Contract between Federated National Insurance Company and The State Board of Administration of
Florida (SBA) which administers the Florida Hurricane Catastrophe Fund (FHCF) and Addendum No. 1 effective
June 1, 2013 (incorporated by reference to Exhibit 10.1 – 10.2 in the Company’s Current Report on Form 8-K filed
with the SEC on February 21, 2013).
Fourth Excess Catastrophe Reinsurance Contract, effective July 1, 2013, between Federated National Insurance
Company and subscribing reinsurers (incorporated by reference from Exhibit 10.1 in the Company’s Quarterly
Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.10 Fourth Excess Catastrophe Reinsurance Contract, effective July 1, 2013, between Federated National Insurance
Company and subscribing reinsurers (incorporated by reference from Exhibit 10.2 in the Company’s Quarterly
Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
- 126 -
Federated National Holding Company and Subsidiaries
10.11 Fourth Reinstatement Premium Protection Reinsurance Contract, effective July 1, 2013, between Federated National
Insurance Company and subscribing reinsurers (incorporated by reference from Exhibit 10.3 in the Company’s
Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.12 Underlying Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2013, between Federated National
Insurance Company and subscribing reinsurers (incorporated by reference from Exhibit 10.4 in the Company’s
Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.13 Second Amended and Restated Employment Agreement dated January 18, 2012 between the Company and Michael
H. Braun (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the
SEC on January 20, 2012).+
10.14 Second Amended and Restated Employment Agreement dated January 18, 2012 between the Company and Peter J.
Prygelski, III (incorporated by reference to Exhibit 10.2 in the Company’s Current Report on Form 8-K filed with
the SEC on January 20, 2012).+
10.15 Form of Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement between the
Company and certain employees of the Company (incorporated by reference to Exhibit 10.1 in the Company’s
Current Report on Form 8-K filed with the SEC on August 7, 2013).+
10.16
Insurance Agency Master Agreement dated February 4, 2013 between Ivantage Select Agency, Inc. and Federated
National Underwriters, Inc. (incorporated by reference from Exhibit 10.5 in the Company’s Quarterly Report on
Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.17 First Amendment to Insurance Agency Master Agreement dated February 12, 2013 between Ivantage Select
Agency, Inc. and Federated National Underwriters, Inc. (incorporated by reference from Exhibit 10.6 in the
Company’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on
November 6, 2013).
10.18 Reimbursement Contract between Federated National Insurance Company and The State Board of Administration of
Florida (SBA) which administers the Florida Hurricane Catastrophe Fund (FHCF) effective June 1, 2014
(incorporated by reference to Exhibits 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on
February 28, 2014).
21.1
Subsidiaries of the Company *
23.1
Consent of Goldstein, Schechter, Koch, P.A. Independent Certified Public Accountants *
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act *
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act *
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act *
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act *
101.INS-XBRL Instance Document. **
101.SCH-XBRL Taxonomy Extension Schema Document. **
101.CAL-XBRL Taxonomy Extension Calculation Linkbase Document. **
101.LAB-XBRL Taxonomy Extension Label Linkbase Document. **
101.PRE-XBRL Taxonomy Extension Presentation Linkbase Document. **
- 127 -
Federated National Holding Company and Subsidiaries
+ Management Compensation Plan or Arrangement
* Filed herewith
** In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section
18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement
or other document filed under the Securities Act of Exchange Act, except as shall be expressly set forth by specific reference
in such filing.
- 128 -
Federated National Holding Company and Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Form 10-K report to be signed on its behalf by the undersigned, thereto duly authorized.
FEDERATED NATIONAL HOLDING COMPANY
By:
/s/ Michael H. Braun
Michael H. Braun, Chief Executive Officer
(Principal Executive Officer)
/s/ Peter J. Prygelski, III
Peter J. Prygelski, III, Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 17, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following
persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Michael H. Braun
Michael H. Braun
Chief Executive Officer
(Principal Executive Officer)
March 17, 2014
/s/ Peter J. Prygelski, III
Peter J. Prygelski, III
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 17, 2014
/s/ Carl Dorf
Carl Dorf
Director
March 17, 2014
/s/ Bruce F. Simberg
Bruce F. Simberg Chairman of the Board
Director
/s/ Charles B. Hart, Jr.
Charles B. Hart, Jr.
/s/ Richard W. Wilcox, Jr.
Richard W. Wilcox, Jr.
/s/ Jenifer G. Kimbrough
Jenifer G. Kimbrough
Director
Director
Director
March 17, 2014
March 17, 2014
March 17, 2014
March 17, 2014
- 129 -
Federated National Holding Company and Subsidiaries
EXHIBIT INDEX
21.1
Subsidiaries
23.1 Consent of Goldstein Schechter Koch, P.A., Independent Certified Public Accountants
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
- 130 -
Federated National Holding Company and Subsidiaries
EXHIBIT 21.1
SUBSIDIARIES
Federated National Underwriters, Inc., a Florida corporation
Century Risk Insurance Services, Inc., a Florida corporation
Federated National Insurance Company, a Florida corporation
Federated Premium Finance, Inc., a Florida corporation
Insure-Link, Inc., a Florida corporation
Federated National Adjusting, Inc., a Florida corporation
- 131 -
Federated National Holding Company and Subsidiaries
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in previously filed Registration Statements on Form S-8, File No.
333-188217, which was effective on April 29, 2013, of our report dated March 17, 2014 relating to our audit of the
consolidated financial statements and internal control over financial reporting, which appear in the Annual Report on Form
10-K of Federated National Holding Company (the “Company”) for the year ended December 31, 2013.
/s/ Goldstein Schechter Koch, P.A.
Fort Lauderdale, Florida
March 17, 2014
- 132 -
Federated National Holding Company and Subsidiaries
EXHIBIT 31.1
I, Michael H. Braun, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Federated National Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 17, 2014
/s/ Michael H. Braun
Michael H. Braun
Chief Executive Officer
- 133 -
Federated National Holding Company and Subsidiaries
EXHIBIT 31.2
I, Peter J. Prygelski, III, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Federated National Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 17, 2014
/s/ Peter J. Prygelski, III
Peter J. Prygelski, III
Chief Financial Officer
- 134 -
Federated National Holding Company and Subsidiaries
EXHIBIT 32.1
STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Federated National Holding Company (the "Company") for the year
ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I,
Michael H. Braun, Chief Executive Officer of the Company, certify that the Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company.
/s/ Michael H. Braun
--------------------
Michael H. Braun
March 17, 2014
The foregoing certification is made solely for the purpose of 18 U. S.C. Section 1350, subject to the knowledge standard
contained therein, and not for any other purpose.
- 135 -
Federated National Holding Company and Subsidiaries
EXHIBIT 32.2
STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Federated National Holding Company (the "Company") for the year
ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter
J. Prygelski, III, Chief Financial Officer of the Company, certify that the Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company.
/s/ Peter J. Prygelski, III
-----------------------
Peter J. Prygelski, III
March 17, 2014
The foregoing certification is made solely for the purpose of 18 U. S.C. Section 1350, subject to the knowledge standard
contained therein, and not for any other purpose.
- 136 -