UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2015
or
Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period of _____________to_______________
Commission file number: 000-25001
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
800-293-2532
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 No
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 No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has electronically submitted and posted on its corporate 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 No
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.
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 Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YesNo
The aggregate market value of the Registrant’s common stock held by non-affiliates was $312,306,493 on June 30, 2015,
computed on the basis of the closing sale price of the Registrant’s common stock on that date.
As of March 7, 2016, the total number of common shares outstanding of Registrant's common stock was 14,241,207.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Form 10-K will be incorporated by reference from the Registrant's definitive proxy
statement or included in a Form 10-K/A that will be filed not later than 120 days after the end of the fiscal year ended December 31, 2015.
Table of Contents
PART I
………………………………………………………………………………………………………………..1
ITEM 1
BUSINESS…………………………………………………………………………………………………...1
ITEM 1A
RISK FACTORS…………………………………………………………………………….……………..10
ITEM 1B
UNRESOLVED STAFF COMMENTS…………………………………………………….…………….20
ITEM 2
PROPERTIES………………………………………………………………………………….…………..20
ITEM 3
LEGAL PROCEEDINGS………………………………………………………………………………....20
ITEM 4
MINE SAFETY DISCLOSURES………………………………….………………………………...……20
PART II
………………………………………………………………………………………………………………21
ITEM 5
AND ISSUER PURCHASES OF EQUITY SECURITIES…………………………………………………………………21
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
ITEM 6
SELECTED FINANCIAL DATA…………………………………………………………………...……24
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS…………………………………………………………………………………………………..………..25
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK……..…….…..34
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA………………………………….......35
ITEM 9
FINANCIAL DISCLOSURE…………………………………………………………………………………………….......66
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 9A
CONTROLS AND PROCEDURES……………………………………………………………………...66
ITEM 9B
OTHER INFORMATION………………………………………………………………………………..66
PART III
……………………………………………………………………………………………………………...67
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE…………………...67
ITEM 11
EXECUTIVE COMPENSATION………………………………………………………………………..67
ITEM 12
RELATED STOCKHOLDER MATTERS……………………………………………………………………………...….67
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
ITEM 13
INDEPENDENCE…………………………………………………………………………………………………….….…..67
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES…………………………………………….…..67
PART IV
……………………………………………………………………………………………………………...67
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES……………………………………………….67
SIGNATURES ……………………………………………………………………………………………………………....69
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”), is an insurance holding company that
controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our
contractual relationships with our independent agents and general agents. We are authorized to underwrite, and/or place through
our wholly owned subsidiaries, homeowners’ multi-peril (“homeowners”), commercial general liability, federal flood, personal
auto and other lines of insurance in Florida and other states. We market, distribute and service our own and third-party insurers’
products and our other services through a network of independent agents.
Our wholly owned insurance subsidiary is Federated National Insurance Company (“FNIC”), which is licensed as an
admitted carrier in Florida, Alabama, Louisiana and South Carolina. We also serve as managing general agent for Monarch
National Insurance Company (“MNIC”), which was founded in 2015 through the joint venture, described below, and is licensed
as an admitted carrier in Florida. An admitted carrier is an insurance company that has received a license from the state
department of insurance giving the company the authority to write specific lines of insurance in that state. These companies are
also bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical
practices, including fraud. Admitted carriers are also required to financially contribute to the state guarantee fund, which is used to
pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders.
Monarch National Insurance Company Joint Venture
On March 19, 2015, the Company entered into a joint venture to organize MNIC, which received its certificate of
authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the
“Florida OIR”). The Company’s joint venture partners are a majority-owned limited partnership of Crosswinds Holdings Inc., a
publicly traded Canadian private equity firm and asset manager (“Crosswinds”); and Transatlantic Reinsurance Company
(“TransRe”).
The Company and Crosswinds each invested $14.0 million in Monarch Delaware Holdings, LLC (“Monarch
Delaware”), the indirect parent company of MNIC, for a 42.4% interest in Monarch Delaware (each holding 50% of the voting
interests in Monarch Delaware). TransRe invested $5.0 million in debt evidenced by a six-year promissory note bearing 6%
annual interest payable by Monarch National Holding Company (“MNHC”), a wholly owned subsidiary of Monarch Delaware
and the direct parent company of MNIC.
1
In connection with the organization of MNIC, the parties entered into the following agreements dated as of March
17, 2015:
MNIC entered into a Managing General Agent and Claims Administration Agreement (the “Monarch MGA
Agreement”) with FedNat Underwriters, Inc. (“FNU”), a wholly owned subsidiary of the Company, pursuant to which
FNU provides underwriting, accounting, reinsurance placement and claims administration services to Monarch. For its
services under the Monarch MGA Agreement, FNU will receive 4% of Monarch’s total written annual premium,
excluding acquisition expenses payable to agents, for FNU’s managing general agent services; 3.6% of Monarch’s total
earned annual premium for FNU’s claims administration services; and a per-policy administrative fee of $25 for each
policy underwritten for Monarch. The Company will also receive an annual expense reimbursement for accounting and
related services.
MNIC, MNHC and Monarch Delaware (collectively, the “Monarch Entities”) entered into an Investment Management
Agreement (the “Monarch Investment Agreement”) with Crosswinds AUM LLC, a wholly owned subsidiary of
Crosswinds (“Crosswinds AUM”), pursuant to which Crosswinds AUM will manage the investment portfolios of the
Monarch Entities. The management fee, on an annual basis, is 0.75% of assets under management up to $100 million;
0.50% of assets under management of more than $100 million but less than $200 million; and 0.30% of assets under
management of more than $200 million.
MNIC also entered into a Reinsurance Capacity Right of First Refusal Agreement with TransRe, pursuant to which
TransRe has a right of first refusal for all quota share and excess of loss reinsurance that Monarch Insurance deems
necessary in its sole discretion for so long as TransRe remains a member of Monarch Delaware or the MNHC debt
remains outstanding. Pursuant to this agreement, TransRe has the right to provide, at market rates and terms, a
maximum of 15% of any reinsurance coverage obtained by Monarch Delaware in any individual reinsurance contract.
The Company’s CEO and CFO hold their respective positions with Monarch Entities while they remain employed by the
Company.
Monarch Entities are consolidated as a variable interest entity (“VIE”) in the accompanying consolidated financial
statements included in Part II, Item 8 of this Report. Refer to notes 1 and 14 set forth in Part II, Item 8 “Financial Statements
and Supplemental Data” of this Form 10-K for additional information regarding the accounting and consolidation of the joint
venture.
Executive Offices
Our executive offices are located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 and our telephone
number is (800) 293-2532.
Available Information
Our internet web site is www.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.
INSURANCE OPERATIONS AND RELATED SERVICES
Business Strategy
We expect that in 2016 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
southeast United States and avoiding risks that do not yield an underwriting profit;
continued expansion of our homeowners’ and private passenger automobile insurance products into additional
states;
2
employing our business practices developed and used in Florida in our expansion to other 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;
cede our insurance risk through reinsurance treaties; and
additional strategies that may include possible mergers, acquisitions and joint ventures or dispositions of assets
(such as the MNIC joint venture).
MNIC expands our ability to provide insurance policies in Florida. Additionally, it strengthens our relationships
with our partner agents.
Overview of Insurance Lines of Business
Homeowners’ Property and Casualty Insurance
FNIC and MNIC underwrite homeowners’ insurance in Florida and FNIC also underwrites insurance in Alabama,
Louisiana and South Carolina. Homeowners’ insurance generally protects an owner of real and personal property against
covered causes of loss to that property. The homeowners’ policies in-force totaled approximately 254,105 and 182,557 at
December 31, 2015 and 2014, respectively.
Our homeowners’ insurance products provide maximum dwelling coverage in the amount of approximately $3.8
million, with the aggregate maximum policy limit being approximately $6.5 million. We currently offer dwelling coverage
“A” up to $4.0 million with an aggregate total insured value of $6.5 million. We continually subject these limits to review;
during 2015, coverage “A” was increased by $1.0 million and total insured value increased by $1.5 million. The approximate
average premium on the policies currently in-force is $1,758, as compared with $1,840 for 2014. 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 homeowners’ 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, inadequate or
discriminatory). Premium rates in Florida and other states are regulated and approved by the respective states’ office of
insurance regulation. In 2015, there were no rate increases or decreases in our voluntary property book of homeowners’
business in FNIC or MNIC. As of the date of this Report, the Company has applied with the Florida OIR for a rate increase
of 5.6% for FNIC and a rate decrease of 12% for MNIC for Florida homeowners’ insurance policies only. These rate changes
are currently awaiting approval from the Florida OIR.
Other Lines of Business
Commercial General Liability: We underwrite for approximately 380 classes of skilled craft workers (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 market the commercial general liability insurance products through independent
agents and a limited number of general agencies unaffiliated with the Company.
Personal Automobile: 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. We market this through licensed general agents in their respective territories.
Flood: FNIC writes flood insurance through the National Flood Insurance Program (“NFIP”). We write the policy
for the NFIP, which assumes 100% of the flood risk while we retain a commission for our service.
3
MARKETING AND DISTRIBUTION
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 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.
We believe that our integrated computer systems, which allow for rapid automated premium quotation and policy
issuance by our agents, are key elements in providing quality service to both our agents and insureds for various lines of our
business.
LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
We are directly liable for loss and loss adjustment expense reserves (“LAE”) payments under the terms of the
insurance policies that are underwritten by our insurance companies. 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’s by establishing a liability
for those unpaid losses and LAE’s for both reported and unreported claims, which represent estimates of future amounts
needed to pay claims and related expenses.
When a claim 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.
In addition, management provides for a liability on an aggregate basis to provide for incurred but not yet reported
(“IBNR”). The estimates of the liability for loss and LAE reserves 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
loss and LAE reserves. 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.
4
The following table presents the liability for loss and LAE reserves for the years ended December 31, 2006 through
2015 and do not distinguish between catastrophic and non-catastrophic events. The top line of the table shows the estimated
liability for loss and LAE reserves at the balance sheet date for each of the periods indicated. These figures represent the
estimated amount of loss and LAE reserves 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 amount of net liability paid as of" shows
the cumulative payments for losses and LAE’s 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.
Changes in Historical Net Reserves for Loss and LAE
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Year Ended December 31,
Net liability, as of end of year
Cumulative amount of net liability paid as of:
$
26,998
$
39,513
$
52,040
$
58,707
(in thousands)
$
59,656
$
57,606
$
46,696
$
58,704
$
67,936
$
89,843
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
Net liability re-estimated 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
Cumulative (deficiency) redundancy
Gross liability - end of year
Reinsurance recoverable
Net liability - end of year
Gross re-estimated liability - latest
Re-estimated recoverable - latest
Net re-estimated liability - latest
Gross cumulative (deficiency) redundancy
59,545
35,448
39,139
23,735
27,086
28,651
24,394
27,252
29,041
31,019
74,222
48,953
42,881
29,995
30,706
30,594
30,623
30,710
31,448
32,105
26,112
31,301
35,678
37,665
39,685
35,686
36,743
38,404
39,923
40,416
27,549
31,343
33,616
34,749
35,667
37,299
38,283
38,435
38,691
36,543
37,477
37,827
20,836
24,063
26,711
28,631
30,662
31,538
32,259
33,847
33,643
33,798
32,313
32,160
32,512
32,997
24,056
27,128
29,390
31,346
32,951
33,950
34,367
34,639
38,078
36,591
36,538
36,762
36,671
35,287
35,244
35,430
28,108
30,920
33,949
35,924
37,173
37,934
39,408
39,546
39,741
37,553
38,969
39,398
40,098
40,599
40,649
40,305
40,369
40,252
$
$
$
$
$
(13,254)
39,615
(12,617)
26,998
78,109
(37,857)
40,252
(38,494)
$
$
$
4,083
59,685
(20,172)
39,513
68,367
(32,937)
35,430
(8,682)
$
$
$
$
$
19,043
64,775
(12,735)
52,040
62,026
(29,029)
32,997
2,749
$
$
$
$
$
20,880
70,611
(11,904)
58,707
60,688
(22,861)
37,827
9,923
$
$
$
$
$
19,240
66,529
(6,873)
59,656
56,756
(16,340)
40,416
9,773
$
$
$
$
$
25,501
59,983
(2,377)
57,606
59,963
(27,858)
32,105
20
$
$
$
16,102
49,908
(3,212)
46,696
52,025
(21,431)
30,594
(2,117)
$
$
97,340
(7,497)
89,843
$
$
$
15,823
61,016
(2,312)
58,704
55,859
(12,978)
42,881
5,157
$
$
$
$
$
(6,286)
78,330
(10,394)
67,936
79,434
(5,212)
74,222
(1,104)
$
$
$
$
$
$
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 loss and LAE reserves 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.
5
The net cumulative redundancies (deficiency) since 2007 primarily reflect favorable casualty reserve development,
with the exception of 2014. At December 31, 2015, we had $89.8 million of net loss and loss adjustment expense reserves,
which included $51.0 million in IBNR reserves, $30.4 million in case-reserves, and $8.4 million in adjusting and other
reserves. As reflected in the table, we experienced an unfavorable net reserve development of $6.3 million on reserves at
December 31, 2014, which increased our loss and loss adjustment expense reserves for prior accident periods and increased
our loss and loss adjustment reserve expenses for the year ended December 31, 2015. The unfavorable loss development was
primarily related to commercial general liability and personal private automobile claims occurring in accident years 2014 and
prior.
REINSURANCE AGREEMENTS
Reinsurance is used primarily to manage overall capital adequacy and mitigate the insurance loss exposure related to
certain events such as natural and man-made catastrophes.
FNIC operates primarily by underwriting and accepting risks for their direct account on a gross basis and reinsuring
a portion of the exposure on either an individual risk or an aggregate basis to the extent those exceed the desired retention
level. We continually evaluate the relative attractiveness of different forms of reinsurance contracts and different markets
that may be used to achieve our risk and profitability objectives. MNIC does not have any material reinsurance contracts as
of December 31, 2015.
Reinsurance markets include:
Traditional local and global reinsurance markets including those in the United States, Bermuda, London and
Europe, accessed directly and through reinsurance intermediaries;
Capital markets through insurance-linked securities and collateralized reinsurance transactions, such as
catastrophe bonds, sidecars and similar vehicles; and
Other insurers that engage in both direct and assumed reinsurance
The form of reinsurance that we may choose from time to time will generally depend on whether we are seeking:
Proportional reinsurance, whereby we cede a specified percentage of premium and losses to reinsurers;
Non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of
a specified amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis; or
Facultative contracts that reinsure individual policies
All of our reinsurance contracts do not relieve FNIC from their direct obligations to insured. While it is not always
possible to reinsure every known (cost too much) and unknown risk to the company, an effective reinsurance program
substantially mitigates our exposure to potentially significant losses. There is a credit risk exposure 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. The availability and amount of ceded premiums and losses associated with the acquisition of reinsurance will vary
year to year. Our reinsurance program is subject to approval primarily by the Florida OIR and other regulators in states
where we do business, and is subject to review by Demotech, Inc. (“Demotech”), in connection with Demotech’s rating of
FNIC. Demotech provides financial stability ratings for property and casualty insurance companies.
The Company’s reinsurance program, which generally runs from July 1 to June 30 of the following year, consists of
excess of loss, Florida Hurricane Catastrophe Fund (“FHCF”) and quota share, which is a form of proportional reinsurance,
treaties which insure the homeowners’ property lines from catastrophes in Florida and other states. The excess of loss and
FHCF treaties, which became effective on July 1, 2015, insures for approximately $1.82 billion of aggregate catastrophic
losses and LAE with a maximum single event coverage totaling approximately $1.26 billion, with the Company retaining the
first $12.9 million in Florida and $5.0 million in Louisiana, Alabama and South Carolina for losses and LAE from each
event. The FHCF treaty only affords coverage for losses sustained in Florida and represents only a portion of the reinsurance
coverage in Florida.
The Company’s quota share treaties, which are included in the reinsurance program, runs from July 1 to June 30 of
the following year. The quota share treaties consist of two different treaties, one for 30% which became effective July 1,
2014 and the other for 10% which became effective July 1, 2015. The combined treaties provide a 40% quota share
reinsurance treaty on the first $100 million of covered losses for the homeowners’ insurance program in Florida.
6
We are selective in choosing reinsurers and consider numerous factors, the most important of which are the financial
stability of the reinsurer or capital specifically pledged to uphold the contract, its history of responding to claims and its
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. As of December 31, 2015, we have over 65 reinsurance
companies in our program that are required to have at least an “A-” or better rating by A.M. Best Company (“A.M. Best”) or
the agreement would need to be fully collateralized.
EMPLOYEES
As of December 31, 2015, we had 297 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.
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.
In Florida, more than 50 companies compete with us in the homeowners’ insurance market. Three of our larger
competitors are Citizens Property Insurance Corporation (“Citizens”), Universal Property and Casualty Insurance Company
and Security 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.
REGULATION
Overview
Our insurance operations are subject to the laws and regulations of Alabama, Florida, Georgia, Louisiana, Nevada,
South Carolina and Texas. We are also subject to employment regulations in Florida as well as California, North Carolina
and Nevada, 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
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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, 2010. There were no material findings by the
Florida OIR 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, 2010. There were no material findings in
connection with this examination.
In some instances, various states routinely require deposits of assets for the protection of policyholders either in
those states or for all policyholders. As of December 31, 2015, FNIC and MNIC held investment securities with a fair value
of approximately $2.3 million, as a deposit with the State of Florida.
Consent Order
On October 21, 2015, the Florida OIR approved the filing made by FNIC to comply with their cease and desist order
dated May 19, 2015 which enabled them to review and approve FNIC’s underwriting analytic models. Upon its approval of
the filing, the Florida OIR rescinded the cease and desist order. FNIC was required to pay a nominal administration fee.
As of September 30, 2014, we have satisfied all applicable conditions of the consent order we entered into in
January 2011 with the Florida OIR in connection of American Vehicle Insurance Company into FNIC. As of the date of this
Report, the only operational restriction that remains in effect is a requirement to obtain Florida OIR approval prior to writing
commercial multi-peril business or any new commercial property business, including condo associations, under any other
line of business for which FNIC is authorized.
Insurance Holding Company Regulation
We, the parent company, are subject to laws governing insurance holding companies in Florida where FNIC 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 FNIC unless the Florida OIR, upon application, determines otherwise.
Restrictions in Payments of Dividends by Domestic Insurance Companies
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
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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 in 2015, 2014 and 2013, and none are anticipated in 2016. Also, no dividends
were paid by MNIC since inception in 2015 and none are anticipated in 2016. 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 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 structure may charge any of the insurance companies for service (e.g., management fees and commissions).
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.
National Association of Insurance Commissioners (“NAIC”) Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, 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 2015 and 2014 statutory financial statements for FNIC and MNIC, 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 439.3%, 534.0% and 312.1% at December 31, 2015, 2014 and 2013, respectively.
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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, 2015, FNIC and MNIC are 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 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 24, 2015,
Demotech reaffirmed FNIC’s FSR of “A” (“Exceptional”) and MNIC has maintained its same FSR of “A” (“Exceptional”)
since its 2015 inception.
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 ten 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’s 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.
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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 SBA's ability to issue bonds in
amounts that would be required to meet its reinsurance obligations in the event of such a catastrophic loss.
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. 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.
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 shareholders’ 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
11
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. Additionally, if the statistical forecasting models fail to contemplate an emerging
claim trend, such as the assignment of insurance benefits in Florida then there is the risk the Company may not purchase
adequate catastrophic wind coverage. 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.
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 losses and LAE’s. 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 loss and LAE reserves include the estimates made on a claim-by-claim basis known as “case
reserves” coupled with bulk estimates known as IBNR. Periodic estimates by management of the ultimate costs required to
settle all claim files are based on the Company’s 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, including the impact of trends such as
the assignment of benefits by insureds; (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.
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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 loss and LAE reserves are less than actual losses and LAE’s, 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 loss and LAE reserves, 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 (“JUA”), the Florida Insurance Guaranty Association (“FIGA”), 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.
In addition, the impact of future 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
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.
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.
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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 be 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.
Another example of an emerging trend is the assignment of homeowner benefits for a claim where a service
provider agrees to make a repair that may be covered by an insurance policy in exchange for the policyholder’s right to sue
the insurance carrier directly. The assignment of the insurance benefits increases the Company’s exposure to inflated claims,
attorney fees and costs. Again several legislative actions in the State of Florida to limit the affect of assignment of benefits
are being contemplated, although there can be no assurances that any such legislative actions will become law or, if enacted,
that such actions will have the effect of limiting the impact on us of assignments of benefits by insureds.
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.
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 NAIC. 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.
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
14
are experiencing a softening market in the property and casualty market in Florida and in the other states we operate in
because of increased competition. 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.
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.
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.
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
independent agents 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 2015, 23.7% 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.
15
Our business could be materially and adversely affected by a security breach or other attack involving our computer
systems or the systems of one or more of our business partners or vendors.
Our business requires that we build and maintain computer systems to run our operations and to store the significant
volume of data that we acquire, including the personal confidential information of our customers, agents and employees and
our intellectual property, trade secrets, and other sensitive business and financial information. These systems are subject to
attacks by sophisticated third parties with substantial computing resources and capabilities. Such attacks may include, among
other things, attempts to gain unauthorized access to this confidential or proprietary data or attempts to disrupt or shut down
the system. Additionally, an employee, consultant, vendor representative or other person with legitimate access to our
systems may take actions, or be the subject of a security breach or cyber-attack, which could result in improper or
unauthorized access to our systems, and in the loss or theft of our intellectual property or the personal information of our
customers, agents or employees.
We undertake substantial efforts to protect our systems and sensitive or confidential information. These efforts
include internal processes and technological defenses that are preventative or detective, and other controls designed to
provide multiple layers of security protection. While we expend significant resources on these defensive measures, there can
be no assurance that we will be successful in preventing attacks or detecting and stopping them once they have begun.
We also conduct significant business functions and computer operations using the systems of third-party business
partners and vendors, who provide software, hosting, communication, and other computer services to us. These third-party
systems may experience cyber-attacks and other security breaches, which could result in the loss, theft or unauthorized
publication of our information or the confidential information of our customers, agents or employees.
Our business could be significantly damaged by a security breach, data loss or corruption, or cyber-attack. In
addition to the potentially high costs of investigating and stopping such an event and implementing necessary fixes, we could
incur substantial liability if confidential customer, agent or employee information is stolen. This could cause a significant
disruption of our ability to conduct our insurance operations, adversely affect our competitive position if trade secrets or
other proprietary information is stolen, and have severe ramifications on our reputation and brand, resulting in a materially
adverse effect on our ability to generate new and renewal business. To mitigate these costs, we carry a cyber-liability
insurance policy. Our insurance may not be sufficient to protect against all financial and other loss. Additionally, this policy
will not afford us coverage for security breaches, data loss, or cyber-attacks experienced by our third-party business partners
who have access to our customer, agent, or employee data.
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.
16
Our success depends on our ability to accurately price the risks we underwrite.
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’s 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 underprice 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.
MNIC has initially focused on the Florida homeowners' insurance market, which has increased our exposure to the
factors that impact the Florida insurance market generally, such as the occurrence of hurricanes, trends in claims
experience, and the impact of changes in Florida insurance law and regulations.
MNIC is organized as a Florida property and casualty insurer and has initially focused primarily on the Florida
homeowners' insurance market. As a result, the presence of MNIC in the Florida market increases our exposure to the factors
that impact insurers in the Florida market generally, such as the occurrence of catastrophic events such as hurricanes, the
trends experienced in administering and resolving claims resulting from the increased use of private adjusters, and the impact
of changes in Florida's insurance laws and regulations. To the extent that these factors may adversely affect our operations,
the presence of MNIC in the Florida market will have the effect of magnifying the effect of those factors.
17
MNIC writes insurance policies that have a higher risk profile than those written by FNIC, allowing MNIC to reach
a broader market and charge higher premiums. While MNIC's underwriting standards avoids the highest risk policies, the
occurrence of a catastrophic event could result in greater losses per policy for MNIC and have a material adverse effect on
the Company’s results of operations, financial position and cash flows.
Our executive 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.
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
new and existing insurance companies under their respective authority.
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.
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 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.
18
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
•
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.
19
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
stockholder 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, 2015, there were 174,633 shares issuable upon the exercise of outstanding and exercisable stock
options and 367,071 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.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
Our executive offices are located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 in an 18,554
square foot office facility. Our original lease for this office space was scheduled to expire in May 2017. During March 2014,
we extended our lease term to expire in August 2019 and expanded the leased premises to include an additional 13,642
square feet. During September 2015, we extended our lease term to expire in December 2022 and expanded the leased
premises to include an additional 10,048 square feet. We also lease office space in Bonita Springs, Florida. Refer to note 8
set forth in Part II, Item 8 “Financial Statements and Supplemental Data” of this Form 10-K for further information about our
leases.
ITEM 3 LEGAL PROCEEDINGS
In the ordinary course of conducting our business, we become involved in various legal actions and claims.
Litigation is subject to many uncertainties and we may be unable to accurately predict the outcome of such matters, some of
which could be decided unfavorably to us. Management does not believe the ultimate outcome of any pending matters of the
nature described above would be material. Refer to note 8 set forth in Part II, Item 8 “Financial Statements and Supplemental
Data” of this Form 10-K for additional information on legal proceedings.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
20
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 forth quarterly high and low closing sale prices as reported on the NASDAQ Global Market. These reported prices
reflect prices between dealers, without accounting for retail mark-ups, markdowns or commissions, and may not represent
actual transactions.
Quarter Ended:
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
March 31, 2014
June 30, 2014
September 30, 2014
December 31, 2014
High
Low
$
31.87
31.76
25.90
32.61
$
18.40
26.60
28.22
37.04
$
23.15
23.26
20.23
23.54
$
12.17
18.02
19.70
23.60
The closing price of our common stock on March 7, 2016 was $ 21.10.
HOLDERS
As of March 7, 2016, there were 67 holders of record of our common stock. We believe that the number of
beneficial owners of our common stock is in excess of 6,700.
DIVIDENDS
The Board of Directors of FNHC declared regular quarterly dividends as follows:
$0.05 per common share payable on December 1, 2015 and March 1, 2016 to shareholders of record as of
November 2, 2015 and February 1, 2016;
$0.04 per common share payable on March 2, June 1 and September 1, 2015 to shareholders of record as of
February 2, May 4 and August 3, 2015;
$0.03 per common share payable on September 3 and December 2, 2013 and March 3, June 2, September 2
and December 1, 2014 to shareholders of record as of August 5 and November 4, 2013 and February 3,
May 5, August 4 and November 3, 2014;
$0.02 per common share payable on March 4, 2013 to shareholders of record as of February 4, 2013.
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 and MNIC are permitted to pay to the parent company.
21
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes our equity compensation plans as of December 31, 2015. 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)
174,633
3.79
367,071
Plan category
Equity compensation plans
approved by stock holders
For additional information concerning our equity compensation, refer to note 10 set forth in Part II, Item 8
“Financial Statements and Supplemental Data” of this Form 10-K.
22
STOCK PERFORMANCE GRAPH
The following graph shows the cumulative total shareholder return on our common stock over the last five fiscal
years as compared with the total returns of the NASDAQ Composite Index and the SNL Property & Casualty Insurance
Index. In accordance with SEC rules, this graph includes indices that we believe are comparable and appropriate.
Returns are based on the change in year-end to year-end price. The graph assumes $100 was invested on December
31, 2010 in our common stock, the NASDAQ Composite Index and the SNL Property & Casualty Insurance Index and that
all dividends were reinvested. Past performance is not necessarily an indicator of future results.
Our filings with the SEC may incorporate information by reference, including this Form 10-K. Unless we
specifically state otherwise, the information under this heading "Stock Performance Graph" shall not be deemed to be
"soliciting materials" and shall not be deemed to be "filed" with the SEC or incorporated by reference into any of our filings
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934.
23
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.
Statement of Operations Data:
Revenue:
Net premiums earned
Net investment income
Net realized investment gains
Other income
Total revenue
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting expenses
General and administrative expenses
Total costs and expenses
Income (loss) before income taxes
Income taxes expense (benefit)
Net income (loss)
Net loss attributable to noncontrolling interest
Net income (loss) attributable to Federated National Holding Company shareholders
Per share data:
Net income (loss) per share attributable to Federated National Holding Company
shareholders:
Basic
Diluted
Dividends
2015
2015
2014
Year Ended December 31,
2013
(in thousands, except per share data)
2012
2011
$
210,020
7,226
3,616
29,031
249,893
$
170,905
5,385
4,426
19,976
200,692
$
104,381
3,332
2,881
11,143
121,737
$
59,359
3,819
1,072
4,397
68,647
$
48,523
4,079
2,725
4,836
60,163
104,353
65,315
15,032
184,700
65,193
24,753
40,440
(445)
40,885
$
81,036
52,077
10,272
143,385
57,307
20,108
37,199
-
37,199
$
56,410
38,580
7,529
102,519
19,218
6,491
12,727
-
12,727
$
30,209
26,515
5,175
61,899
6,748
2,435
4,313
-
4,313
$
30,896
25,325
4,942
61,163
(1,000)
(570)
(430)
-
(430)
$
$
$
$
2.98
2.92
0.18
$
$
$
3.08
2.99
0.13
$
$
$
1.50
1.45
0.11
$
$
$
0.53
0.53
0.02
(0.05)
$
$
(0.05)
$
-
2014
December 31,
2013
(in thousands, except per share data)
2012
2011
Balance Sheet Data:
Cash and invested assets
Total assets
Loss and loss adjustment expense reserves
Total liabilities
Total shareholders' equity
Book value per share
$
$
$
$
$
437,369
638,298
97,340
387,539
250,759
18.17
370,920
503,631
78,330
311,052
192,579
14.13
262,156
316,741
61,016
208,247
108,494
9.95
151,238
185,888
49,908
119,983
65,905
8.26
144,672
179,980
59,983
121,836
58,144
7.32
$
$
$
$
$
24
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The following overview does not address all of the matters covered in the other sections of Management’s
Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be
important to our shareholders or the investing public. This overview should be read in conjunction with the other sections of
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Net income attributable to FNHC shareholders totaled $40.9 million in 2015, compared with $37.2 million in
2014 and $12.7 million in 2013.
Total revenues totaled $249.9 million in 2015, compared with $200.7 million in 2014 and $121.7 million in 2013.
Gross premiums written totaled $493.8 million in 2015, compared with $377.2 million in 2014 and $243.4 in
2013.
Total investments increased $53.5 million, to $384.3 million as of December 31, 2015, compared with $330.8
million as of December 31, 2014.
Cash and cash equivalents increased $12.8 million, to $53.0 million as of December 31, 2015, compared with
$40.2 million as of December 31, 2014.
Combined ratio was 87.9% in 2015, compared with 83.9% in 2014 and 98.2% in 2013. The combined ratio is
calculated by dividing losses and LAE plus all other costs and expenses.
RESULTS OF OPERATIONS
Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
Net Premiums Earned
Net premiums earned increased $39.1 million, or 22.9%, to $210.0 million during the year ended December 31,
2015, compared with $170.9 million during the year ended December 31, 2014. This increase was primarily due to an
increase in our homeowners’ in-force policy count to 242,702 as of December 31, 2015, compared with 182,557 as of
December 31, 2014. Additionally, the growth in the policy count is driven by management’s strategy to grow market share
by providing exceptional service to our customers and partner agents.
Net Investment Income
Net investment income increased $1.8 million, or 34.2%, to $7.2 million during the year ended December 31, 2015,
compared with $5.4 million during the year ended December 31, 2014. This increase is mainly due to a year-over-year
overall growth of our investment portfolio, specifically growth in the debt securities investment offset by a decrease in our
debt securities investment yields, net, which were 2.3% and 2.7% for the years ended December 31, 2015 and 2014,
respectively.
Net Realized Investment Gains
Net realized investment gains totaled $3.6 million for the year ended December 31, 2015, compared with $4.4
million for the year ended December 31, 2014. The slight decrease is due to less favorable market conditions for the year
ended December 2015, as compared to the year ended December 31, 2014.
25
Other Income
Other income increased $9.0 million, or 45.0%, to $29.0 million for the year ended December 31, 2015, compared
with $20.0 million for the year ended December 31, 2014. The following table represents the other income detail as follows:
Year Ended December 31,
2015
2014
(in thousands)
Other income:
Direct written policy fees
Commission income
Brokerage revenue
Quota-share profit sharing
Finance revenue
Total
$
$
11,248
7,811
4,979
3,077
1,916
29,031
8,689
4,517
2,513
2,792
1,465
19,976
$
$
The increase in policy fees and brokerage revenue is directly related to the increase in gross written premiums and
ceded premiums over the prior year. Additionally, the change in commission income is related to continued growth in our
book of business.
Losses and LAE
Losses and LAE increased $23.3 million, or 28.8%, to $104.3 million during the year ended December 31, 2015,
compared with $81.0 million during the year ended December 31, 2014. The increase to losses and LAE’s is directly related
to an increase in net premiums earned and an increase in our loss ratio year over year. Our loss ratio for 2015 was 49.7%
compared with 47.4% for the same period in 2014. The increase in the ratio is the result of an unfavorable development from
assignment of benefits and the temporary discontinuation of the underwriting analytics. The underwriting analytics were not
used for several months in the second and third quarter of 2015, due to our compliance with a cease and desist order from the
Florida OIR requiring us to obtain approval of these analytics. The temporary discontinuation of the underwriting analytics
caused us to underwrite polices outside of our standard process.
Commissions and Other Underwriting Expenses
Commissions and other underwriting expenses increased $13.2 million, or 25.4%, to $65.3 million for the year
ended December 31, 2015, compared with $52.1 million for the year ended December 31, 2014. The increase is directly
related to the significant increase in net premiums written and earned during the same period.
General and Administrative Expenses
General and administrative expenses increased $4.7 million, or 46.3%, to $15.0 million for the year ended December
31, 2015, compared with $10.3 million for the year ended December 31, 2014. The change is due to an increase in salaries
and benefits, including share-based compensation, legal and professional fees, including $0.9 million of start-up costs related
to the organization of Monarch. Professional fees include audit, tax and actuarial fees. The increased costs are in support of
the significant growth in our gross and net premiums written in 2015 as compared to 2014.
Income Taxes
Income taxes increased $4.7 million, or 23.1%, to $24.8 million for the year ended December 31, 2015, compared
with $20.1 million for the year ended December 31, 2014. The change was due to an increase in taxable income and an
increase in our effective tax rate. Our effective tax rate was 38.0% for the year ended December 31, 2015, compared with
35.1% for the year ended December 31, 2014. The increase in the effective tax rate is the result of having less permanent
items and true up adjustments in 2015 as compared to 2014.
26
RESULTS OF OPERATIONS
Year Ended December 31, 2014 Compared with Year Ended December 31, 2013
Net Premiums Earned
Net premiums earned increased $66.5 million, or 63.7%, to $170.9 million during the year ended December 31,
2014, compared with $104.4 million during the year ended December 31, 2013. This increase was primarily due to an
increase in our homeowners’ in-force policy count to 182,557 as of December 31, 2014, compared with 116,401 as of
December 31, 2013. Additionally, the growth in the policy count is driven by management’s strategy to grow market share
by providing exceptional service to our customers, partner agents and obtaining the Allstate relationship during 2013.
Net Investment Income
Net investment income increased $2.1 million, or 61.6%, to $5.4 million during the year ended December 31, 2014,
compared with $3.3 million during the year ended December 31, 2013. This increase is mainly due to a year-over-year
overall growth of our investment portfolio and an increase in our debt securities investment yields. Our investment yield, net
was 2.7% and 2.1%, for the years ended December 31, 2014 and 2013, respectively. Our lower investment yield in 2013
primarily resulted from selling higher yielding and longer duration bonds and purchasing shorter duration and lower yielding
bonds to protect our bond portfolio against principal erosion and our average cash holdings were much higher in 2013.
Net Realized Investment Gains
Net realized investment gains were $4.4 million for the year ended December 31, 2014, compared with $2.9 million
for the year ended December 31, 2013. The increase is due to more favorable market conditions for the year ended December
2014 as compared to the year ended December 31, 2013.
Other Income
Other income increased $8.9 million, or 80.2%, to $20.0 million for the year ended December 31, 2014, compared
with $11.1 million for the year ended December 31, 2013. The following table represents the other income detail as follows:
Year Ended December 31,
2014
2013
(in thousands)
Other income:
Direct written policy fees
Commission income
Brokerage revenue
Quota-share profit sharing
Finance revenue
Total
$
$
8,689
4,517
2,513
2,792
1,465
19,976
6,196
2,646
1,435
-
866
11,143
$
$
The increase in policy fees is directly related to the increase in gross written premiums over the prior year.
Additionally, the change in commission increase is related to continued growth in our book of business as well as entering
into a commission sharing agreement with our reinsurance intermediary.
Losses and LAE
Losses and LAE increased by $24.6 million or 43.6%, to $81.0 million for the year ended December 31, 2014,
compared with $56.4 million for the year ended December 31, 2013. The increase reflects a significant increase in net
premiums earned, offset by a decrease in the loss ratio to 47% during the year ended December 2014 from 54% during the
year ended December 31, 2013, which was primarily driven by an increase in the amount of ceded premiums year over year.
Commissions and Other Underwriting Expenses
Commissions and other underwriting expenses increased $13.5 million, or 35.0%, to $52.1 million for the year
ended December 31, 2014, compared with $38.6 million for the year ended December 31, 2013. The increase is directly
related to the significant increase in net premiums written and earned during the same period.
27
General and Administrative Expenses
General and administrative expenses increased $2.8 million, or 36.4%, to $10.3 million for the year ended December
31, 2014, compared with $7.5 million for the year ended December 31, 2013. The change is due to an increase in salaries
and benefits, including share-based compensation, and professional fees. Professional fees include audit, tax and actuarial
fees. The increased costs are in support of the significant growth in our gross and net premiums written in 2014 as compared
to 2013.
Income Taxes
Income taxes increased $13.6 million, to $20.1 million for the year ended December 31, 2014, compared with $6.5
million for the year ended December 31, 2013. The change was due to an increase in taxable income and an increase in our
effective tax rate. Our effective tax rate was 35.1% for the year ended December 31, 2014, compared with 33.8% for the year
ended December 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are net premiums, investment income, commissions and fee income. Our primary
uses of funds are the payment of claims and operating expenses. As of December 31, 2015, we had $53.0 million in cash and
cash equivalents and $384.3 million in investments.
Net cash provided by operating activities for the year ended December 31, 2015 was $52.9 million, compared to net
cash provided by operating activities for the year ended December 31, 2014 of $63.1 million. This increase was primarily as
a result of the growth in the prepaid reinsurance premium account.
Net cash used in investing activities for the year ended December 31, 2015 was $63.6 million, compared to net cash
used in investing activities for the year ended December 31, 2014 of $107.9 million. This decrease was the result of less net
purchases, maturities and redemptions of investment securities as compared to prior year.
Net cash provided by financing activities for the year ended December 31, 2015 was $23.6 million, compared to net
cash provided by financing activities for the year ended December 31, 2014 of $43.5 million. This decrease was primarily
due to $43.1 million related to issuance of common stock in public offering during the year ended December 31, 2014 offset
by $18.7 million related to the noncontrolling interest equity investment and $5.0 million related to the issuance of debt in
our consolidated VIE during the year ended December 31, 2015.
We believe that existing cash and investment balances, when combined with anticipated cash flows as noted above,
will be adequate to meet our expected liquidity needs in both the short-term and the reasonably foreseeable future. Any
future growth strategy may require external financing, and we may from time to time seek to obtain external financing. We
cannot assure that additional sources of financing will be available to us on favorable terms, or at all, or that any such
financing would not negatively impact our results of operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with
Generally Accepted Accounting Principles (“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’s.
Insurance premiums are established before we know the amount of losses and LAE’s 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’s and thereby materially adversely affect future liability requirements.
28
CONTRACTUAL OBLIGATIONS
A summary of long-term contractual obligations as of December 31, 2015 follows (in thousands). The amounts
represent estimates of gross undiscounted amounts payable over time.
Payments Due By Period
Loss and loss adjustment expense reserves (1)
Debt from consolidated variable interest entity
Other liabilities
Operating leases
Total
Less
than
1 Year
57,781
$
-
120
918
58,819
$
$
1-3
Years
33,981
-
120
1,887
35,988
$
$
Total
97,340
5,000
240
6,909
109,489
$
3-5
Years
$
4,712
-
-
2,000
6,712
More
than
5 Years
$
866
5,000
-
2,104
7,970
$
$
(1) Loss and loss adjustment expense reserves do not have contractual maturity dates; however, based on historical payment patterns, the amount
presented is our estimate of the expected timing of these payments. The timing of payments is subject to significant uncertainty. We maintain a
portfolio of marketable investments with varying maturities and a substantial amount of cash and cash equivalents intended to provide adequate
cash flows for such payments.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated 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.
We believe our most critical accounting estimates inherent in the preparation of our financial statements are: (i) fair
value measurements of our investments, (ii) accounting for investments, (iii) premium and unearned premium calculation,
(iv) reinsurance contracts, (v) the amount and recoverability of amortization of Deferred Acquisition Costs (“DAC”), (vi)
reserve for loss and losses adjustment expenses and (vii) income taxes. The accounting estimates that result require the use
of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience
differs from the assumptions used, our financial condition, results of operations, and cash flows would be affected.
FAIR VALUE
The fair value is the price that would be received to sell an asset or paid to transfer a liability between market
participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to
transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value.
Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to
sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent,
knowledgeable, able and willing to transact an exchange and not acting under duress. Our nonperformance or credit risk is
considered in determining the fair value of liabilities. Considerable judgment may be required in interpreting market data
used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily
indicative of the amounts that could be realized in a current or future market exchange.
INVESTMENTS
Investments consist of debt and equity securities. Debt securities consist of securities with an initial fixed maturity
of more than one year, which include corporate bonds, municipal bonds and United States government bonds. Equity
securities generally consist of securities that represent ownership interests in an enterprise. The Company determines the
appropriate classification of investments in debt and equity securities at the acquisition date and re-evaluates the
classification at each balance sheet date.
Held-to-maturity investments are recorded at the amortized cost, reflecting the ability and intent to hold the
securities to maturity. All other securities were classified as available-for-sale and recorded at fair value. Unrealized gains
and losses during the year, net of the related tax effect applicable to available-for-sale, are excluded from income and
reflected in other comprehensive income, and the cumulative effect is reported as a separate component of shareholders’
equity until realized. If a decline in fair value is deemed to be other-than-temporary, the investment is written down to its fair
29
value and the amount of the write-down is recorded as an other-than-temporary impairment (“OTTI”) loss on the statement of
income. In addition, any portion of such decline related to debt securities that is believed to arise from factors other than
credit is recorded as a component of other comprehensive income rather than against income.
Net realized gains and losses on investments are determined in accordance with the specific identification method.
Net investment income consists primarily of interest income from debt securities, cash and cash equivalents,
including any premium amortization or discount accretion and dividend income from equity securities; less expenses related
to investments.
PREMIUMS AND UNEARNED PREMIUMS
Premiums are recognized as revenue on a pro-rata basis over the term of an insurance policy. Assumed reinsurance
premiums written and earned are based on reports received from ceding companies for pro-rata treaty contracts and are
generally recorded as written based on contract terms for excess-of-loss and quota share contracts. Premiums are earned
ratably over the terms of the related coverage.
Unearned premiums and ceded unearned premiums represent the portion of gross premiums written and ceded
premiums written, respectively, relating to the unexpired terms of such coverage.
Premium receivable balances are reported net of an allowance for estimated uncollectible premium amounts. Such
allowance is based upon an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the
insured and other relevant factors. Amounts deemed to be uncollectible are written off against the allowance.
REINSURANCE
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring
loss exposures does not relieve a ceding entity from its obligations to policyholders and cedants. Reinsurance recoverables
(including amounts related to claims incurred but not reported) and ceded unearned premiums are reported as assets. To
minimize exposure to losses from a reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially
upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of the
reinsurer, the collectability of the reinsurance recoverables is evaluated (and where appropriate, whether an allowance for
estimated uncollectible reinsurance recoverables is to be established) based upon a number of other factors. Such factors
include the amounts outstanding, length of collection periods, disputes, any collateral or letters of credit held and other
relevant factors. To the extent that an allowance for uncollectible reinsurance recoverable is established, amounts deemed to
be uncollectible are written off against the allowance for estimated uncollectible reinsurance recoverables. The Company
currently has no allowances for uncollectible reinsurance recoverables.
Ceded premiums written are recorded in accordance with applicable terms of the various reinsurance contracts and
ceded premiums earned are charged against revenue over the period of the various reinsurance contracts. This also generally
applies to reinstatement premiums paid to a reinsurer, which arise when contractually-specified ceded loss triggers have been
breached. Ceded commissions reduce commissions, brokerage and other underwriting expenses and ceded losses incurred
reduce net loss and loss adjustment expense incurred over the applicable periods of the various reinsurance contracts with
third party reinsurers. If premiums or commissions are subject to adjustment (for example, retrospectively-rated or
experience-rated), the estimated ultimate premium or commission is recognized over the period of the contract.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with
the reinsured business and consistent with the terms of the underlying reinsurance contract.
DAC
DAC represent those costs that are incremental and directly related to the successful acquisition of new or renewal
of existing insurance contracts. The Company defers incremental costs that result directly from, and are essential to, the
acquisition or renewal of an insurance contract. Such DAC generally include agent or broker commissions, premium taxes,
medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed.
Each cost is analyzed to assess whether it is fully deferrable.
The Company also defers a portion of the employee total compensation and payroll-related fringe benefits directly
related to time spent performing specific acquisition or renewal activities, including costs associated with the time spent on
underwriting, policy issuance and processing, and sales force contract selling.
30
The acquisition costs are deferred and amortized over the period in which the related premiums written are earned,
generally 12 months. It is grouped consistent with the manner in which the insurance contracts are acquired, serviced and
measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts.
Investment income is anticipated in assessing the recoverability of DAC. The Company assesses the recoverability of DAC
on an annual basis or more frequently if circumstances indicate impairment may have occurred.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Overview
The estimation of the liability for unpaid loss and LAE is inherently difficult and subjective, especially in view of
changing legal and economic environments that impact the development of loss reserves, and therefore, quantitative
techniques frequently have to be supplemented by subjective considerations and managerial judgment. In addition, trends that
have affected development of liabilities in the past may not necessarily occur or affect liability development to the same
degree in the future.
Each of our insurance companies establishes reserves on its balance sheet for unpaid loss and LAE related to its
property and casualty insurance and related reinsurance contracts. As of any balance sheet date, there are claims that have not
yet been reported, and some claims may not be reported for many years after the date a loss occurs. As a result of this
historical pattern, the liability for unpaid loss and LAE includes significant estimates for IBNR claims. Additionally, reported
claims are in various stages of the settlement process. Each claim is settled individually based upon its merits, and certain
claims may take years to settle, especially if legal action is involved. As a result, the liabilities for unpaid loss and LAE
include significant judgments, assumptions and estimates made by management relating to the actual ultimate losses that will
arise from the claims. Due to the inherent uncertainties in the process of establishing these liabilities, the actual ultimate loss
from a claim is likely to differ, perhaps materially, from the liability initially recorded.
As noted above, as of any balance sheet date, not all claims that have occurred have been reported to us, and if
reported may not have been settled. The time period between the occurrence of a loss and the time it is settled is referred to as
the “claim tail.” In general, actuarial judgments for shorter-tailed lines of business generally have much less of an effect on
the determination of the loss reserve amount than when those same judgments are made regarding longer-tailed lines of
business. Reported losses for the shorter-tailed classes, such as property and certain marine, aviation and energy classes,
generally reach the ultimate level of incurred losses in a relatively short period of time. Rather than having to rely on
actuarial assumptions for many accident years, these assumptions are generally only relevant for the more recent accident
years.
The process of recording quarterly and annual liabilities for unpaid loss and LAE for short-tail lines is primarily
focused on maintaining an appropriate reserve level for reported claims and IBNR. Specifically, we assess the reserve
adequacy of IBNR in light of such factors as the current levels of reserves for reported claims and expectations with respect
to reporting lags, catastrophe events, historical data, legal developments, and economic conditions, including the effects of
inflation.
Standard actuarial methodologies employed to estimate ultimate losses incorporate the inherent lag from the time
claims occur to when they are reported to an insurer and, if applicable, to when an insurer reports the claims to a reinsurer.
Certain actuarial methodologies may be more appropriate than others in instances where this lag may not be consistent from
period to period. Consequently, additional actuarial judgment is employed in the selection of methodologies to best
incorporate the potential impact of this situation.
Our insurance companies provide coverage on both a claims-made and occurrence basis. Claims-made policies
generally require that claims occur and be reported during the coverage period of the policy. Occurrence policies allow
claims which occur during a policy’s coverage period to be reported after the coverage period, and as a result, these claims
can have a very long claim tail, occasionally extending for decades. Casualty claims can have a very long claim tail, in
certain situations extending for many years. In addition, casualty claims are more susceptible to litigation and the legal
environment and can be significantly affected by changing contract interpretations, all of which contribute to extending the
claim tail. For long-tail casualty lines of business, estimating the ultimate liabilities for unpaid loss and LAE is a more
complex process and depends on a number of factors, including the line and volume of the business involved. For these
reasons, our insurance companies will generally use actuarial projections in setting reserves for all casualty lines of business.
In conformity with GAAP, our insurance companies are not permitted to establish reserves for catastrophe losses
that have not occurred. Therefore, losses related to a significant catastrophe, or accumulation of catastrophes, in any reporting
period could have a material adverse effect on our results of operations and financial condition during that period.
31
We believe that the reserves for unpaid loss and LAE established by our insurance companies are adequate as of
December 31, 2015; however, additional reserves, which could have a material impact upon our financial condition, results
of operations and cash flows, may be necessary in the future.
Methodologies and Assumptions
Our insurance companies use a variety of techniques that employ significant judgments and assumptions to establish
the liabilities for unpaid loss and LAE recorded at the balance sheet date. These techniques include detailed statistical
analyses of past claims reporting, settlement activity, claims frequency, internal loss experience, changes in pricing or
coverages and severity data when sufficient information exists to lend statistical credibility to the analyses. More subjective
techniques are used when statistical data is insufficient or unavailable. These liabilities also reflect implicit or explicit
assumptions regarding the potential effects of future inflation, judicial decisions, changes in laws and recent trends in such
factors, as well as a number of actuarial assumptions that vary across our reinsurance and insurance subsidiaries and across
lines of business. This data is analyzed by line of business, coverage, accident year or underwriting year and reinsurance
contract type, as appropriate.
Our loss reserve review processes use actuarial methods that vary by operating subsidiary and line of business and
produce point estimates for each class of business. The actuarial methods used include the following methods:
Reported Loss Development Method: a reported loss development pattern is calculated based on historical loss
development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each
accident year or underwriting year, as appropriate, to ultimate levels;
Paid Development Method: a paid loss development pattern is calculated based on historical paid loss development
data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or
underwriting year, as appropriate, to ultimate levels;
Expected Loss Ratio Method: expected loss ratios are applied to premiums earned, based on historical company
experience, or historical insurance industry results when company experience is deemed not to be sufficient; and
Bornhuetter-Ferguson Method: the results from the Expected Loss Ratio Method are essentially blended with either
the Reported Loss Development Method or the Paid Development Method.
The primary actuarial assumptions used by insurance companies include the following:
Expected loss ratios represent management’s expectation of losses, in relation to earned premium, at the time
business is written, before any actual claims experience has emerged. This expectation is a significant determinant
of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to
consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate
changes, loss cost trends and known changes in the type of risks underwritten. For certain longer-tailed reinsurance
business that are typically lower frequency, high severity classes, expected loss ratios are often used for the last
several accident years or underwriting years, as appropriate.
Rate of loss cost inflation (or deflation) represents management’s expectation of the inflation associated with the
costs we may incur in the future to settle claims. Expected loss cost inflation is particularly important for longer-
tailed classes
Reported and paid loss emergence patterns represent management’s expectation of how losses will be reported and
ultimately paid in the future based on the historical emergence patterns of reported and paid losses and are derived
from past experience of our subsidiaries, modified for current trends. These emergence patterns are used to project
current reported or paid loss amounts to their ultimate settlement value.
In the absence of sufficiently credible internally-derived historical information, each of the above actuarial
assumptions may also incorporate data from the insurance industries as a whole, or peer companies writing substantially
similar coverages. Data from external sources may be used to set expectations, as well as assumptions regarding loss
frequency or severity relative to an exposure unit or claim, among other actuarial parameters. Assumptions regarding the
application or composition of peer group or industry reserving parameters require substantial judgment.
32
Loss Frequency and Severity
Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions
described above. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a
measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety
programs and changes in economic conditions or weather patterns. Factors affecting loss severity include changes in policy
limits, retentions, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and
severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported
to our insurance companies. The length of the loss reporting lag affects their ability to accurately predict loss frequency (loss
frequencies are more predictable for lines with short reporting lags), as well as the amount of reserves needed for IBNR. If
the actual level of loss frequency and severity is higher or lower than expected, the ultimate losses will be different than
management’s estimates.
Prior Year Development
Our insurance companies continually evaluate the potential for changes, both favorable and unfavorable, in their
estimates of their loss and LAE liabilities and use the results of these evaluations to adjust both recorded liabilities and
underwriting criteria. With respect to liabilities for unpaid loss and LAE established in prior years, these liabilities are
periodically analyzed and their expected ultimate cost adjusted, where necessary, to reflect favorable or unfavorable
development in loss experience and new information, including, for certain catastrophe events, revised industry estimates of
the magnitude of a catastrophe. Adjustments to previously recorded liabilities for unpaid loss and LAE, both favorable and
unfavorable, are reflected in our financial results in the periods in which these adjustments are made and are referred to as
prior accident year reserve development. We adjusted our prior year loss and LAE reserve estimates during 2015, 2014 and
2013 based on current information that differed from previous assumptions made at the time such loss and LAE reserves
were previously estimated.
Refer to notes 1(l) and 6 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial
Statements and Supplementary Data” of this Form 10-K for additional information on our loss and LAE.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to note 2(r), “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the
Notes to the Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplemental Data” of
this Form 10-K for a discussion of recent accounting pronouncements and their effect, if any, on the Company.
OFF BALANCE SHEET TRANSACTIONS
For the years ended December 31, 2015 and 2014, we had no off balance sheet transactions.
33
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, 2015, approximately 92% 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 98% 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, 2015, that is 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
Total 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
Total investments
2016
2017
2018
2019
2020
Thereafter
Total
$
$
$
$
$
100
8,330
11,706
1,285
3,105
-
24,526
$
$
4,236
18,420
18,855
1,840
3,557
-
46,908
$
2,515
14,235
22,620
3,428
2,011
-
44,809
5,823
12,990
15,066
676
505
-
35,060
2,685
11,850
14,621
1,209
7,639
-
38,004
23,144
32,550
60,799
3,749
17,993
-
138,235
$
38,503
98,375
143,667
12,187
34,810
-
327,542
$
$
$
$
$
Carrying
Amount
$
38,791
110,702
147,677
12,394
36,233
38,534
384,331
$
4.48%
4.73%
3.85%
2.47%
5.49%
0.00%
4.29%
0.70%
4.52%
3.46%
3.53%
3.93%
0.00%
3.67%
1.17%
5.03%
4.02%
2.80%
2.67%
0.00%
4.03%
1.70%
5.00%
4.58%
5.41%
4.13%
0.00%
4.27%
1.65%
4.95%
3.70%
3.55%
4.22%
0.00%
4.04%
1.99%
4.81%
3.93%
4.30%
3.57%
0.00%
3.78%
1.73%
4.82%
3.92%
3.56%
3.88%
0.00%
3.92%
34
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm..................................................................................
Consolidated Balance Sheets
as of December 31, 2015 and 2014 ......................................................................................................................
Consolidated Statements of Operations
For the years ended December 31, 2015, 2014 and 2013 .....................................................................................
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2015, 2014 and 2013 .....................................................................................
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2015, 2014 and 2013 .....................................................................................
Consolidated Statements of Cash Flows
For the years ended December 31, 2015, 2014 and 2013 .....................................................................................
Notes to Consolidated Financial Statements ...........................................................................................................
PAGE
36
39
40
41
42
43
45
35
Federated National Holding Company and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Federated National Holding Company and Subsidiaries
We have audited the accompanying consolidated balance sheet of Federated National Holding Company and subsidiaries as
of December 31, 2015 and the related consolidated statements of operations, comprehensive income, changes in
shareholders' equity and cash flows for the year ended December 31, 2015. Our audit also included the financial statement
schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Federated National Holding Company and subsidiaries at December 31, 2015 and the consolidated results of their
operations and their cash flows for the year ended December 31, 2015, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Federated National Holding Company and subsidiaries' internal control over financial reporting as of December 31, 2015,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) and our report dated March 14, 2016 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 14, 2016
36
Federated National Holding Company and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Federated National Holding Company
We have audited the accompanying consolidated balance sheets of Federated National Holding Company as of December 31,
2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash
flows for each of the years in the three year period ended December 31, 2014. In connection with our audits of the financial
statements, we have also audited the financial statement schedules listed in the accompanying index. We also have audited
Federated National Holdings Company’s internal control over financial reporting as of December 31, 2014, based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Federated National Holdings Company’s management is responsible for these consolidated
financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Item 9A Controls and Procedures.
Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control 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 conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Federated National Holding Company as of December 31, 2014 and 2013, and the consolidated results
of its operations and its cash flows for each of the years in the three year period ended December 31, 2014, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, Federated National
Holdings Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
/s/Goldstein Schechter Koch
Fort Lauderdale, FL
March 16, 2015, except for Schedule II dated March 14, 2016
37
Federated National Holding Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
Investments:
Debt securities, available-for-sale, at fair value
Debt securities, held-to-maturity, at amortized cost
Equity securities, available-for-sale, at fair value
Total investments
Cash and cash equivalents
Prepaid reinsurance premiums
Premiums receivable, net of allowance of $302 and $148, respectively
Reinsurance recoverable, net
Deferred acquisition costs
Income taxes receivable
Property and equipment, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Loss and loss adjustment expense reserves
Unearned premiums
Debt from consolidated variable interest entity
Deferred income taxes, net
Other liabilities
Total liabilities
Preferred stock, $0.01 par value, 1,000,000 shares authorized
Common stock, $0.01 par value, 25,000,000 shares authorized; 13,798,773 and 13,632,414 shares issued and
outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total shareholders' equity attributable to Federated National Holding Company shareholders
Noncontrolling interest
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
December 31,
2015
2014
(in thousands, except per share data)
$
339,178
6,619
38,534
384,331
$
284,099
7,417
39,247
330,763
53,038
120,771
38,594
12,714
15,547
2,691
2,894
40,157
54,502
27,275
12,534
13,610
1,810
1,749
7,718
638,298
$
21,231
503,631
$
$
97,340
253,960
5,000
5,627
$
78,330
192,424
-
1,341
25,612
387,539
-
38,957
311,052
-
138
131,998
3,985
96,461
232,582
18,177
250,759
638,298
$
136
127,302
7,718
57,423
192,579
-
192,579
503,631
$
38
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenue:
Net premiums earned
Net investment income
Net realized investment gains
Other income
Total revenue
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting expenses
General and administrative expenses
Total costs and expenses
Income before income taxes
Income taxes
Net income
Net loss attributable to noncontrolling interest
2015
Year Ended December 31,
2014
(in thousands, except per share data)
2013
$
210,020
7,226
3,616
29,031
249,893
$
170,905
5,385
4,426
19,976
200,692
$
104,381
3,332
2,881
11,143
121,737
104,353
65,315
15,032
184,700
81,036
52,077
10,272
143,385
56,410
38,580
7,529
102,519
65,193
24,753
40,440
(445)
40,885
57,307
20,108
37,199
-
37,199
$
19,218
6,491
12,727
-
12,727
$
Net income attributable to Federated National Holding Company shareholders
$
Net income per share attributable to Federated National Holding Company shareholders:
Basic
Diluted
$
$
2.98
2.92
$
$
3.08
2.99
$
$
1.50
1.45
See accompanying notes to consolidated financial statements.
39
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Change in net unrealized (losses) gains on investments available-for-sale
Comprehensive income before income taxes
2015
$
40,440
(6,308)
34,132
Year Ended December 31,
2014
(in thousands)
37,199
$
2,856
40,055
2013
$
12,727
3,041
15,768
Income tax benefit (expense) related to items of other comprehensive income
Comprehensive income
2,454
36,586
(1,102)
38,953
(1,144)
14,624
Comprehensive loss attributable to noncontrolling interest
Comprehensive income attributable to Federated National Holding Company shareholders
(566)
37,152
$
-
38,953
$
-
14,624
$
See accompanying notes to consolidated financial statements.
40
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three Years Ended December 31, 2015
Common Stock
Preferred
Stock
Issued Shares
Amount
Accumulated
Other
Comprehensive
Income
Additional
Paid-in
Capital
Retained
Earnings
Total Shareholders'
Equity attributable to
Federated National
Holding Company
Shareholders
$
$
Balance as of December 31, 2012
Net income
Other comprehensive income, net of tax of ($1,144)
Dividends paid
Stock issued in public offering
Issuance of common stock for share-based awards
Share-based compensation
Balance as of December 31, 2013
Net income
Other comprehensive income, net of tax of ($1,102)
Dividends paid
Stock issued in public offering
Issuance of common stock for share-based awards
Share-based compensation
Balance as of December 31, 2014
Net income (loss)
Other comprehensive loss, net of tax of $2,318 and $136, respectively
Noncontrolling interest capital contributions
Dividends paid
Issuance of common stock for share-based awards
Share-based compensation
Balance as of December 31, 2015
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
7,979,488
-
-
-
2,781,395
140,833
-
10,901,716
-
-
-
2,358,975
371,723
-
13,632,414
-
-
-
-
166,359
-
13,798,773
$
80
$
-
-
-
28
1
-
109
-
-
-
23
4
-
136
-
-
-
-
2
-
138
$
See accompanying notes to consolidated financial statements.
$
(in thousands, except per share data)
$
10,402
12,727
-
(1,233)
-
-
-
21,896
37,199
-
(1,672)
-
-
-
57,423
40,885
-
-
(1,847)
-
-
96,461
4,067
-
1,897
-
-
-
-
5,964
-
1,754
-
-
-
-
7,718
-
(3,733)
-
-
-
-
3,985
$
$
51,356
-
-
-
27,851
857
461
80,525
-
-
-
43,086
1,551
2,140
127,302
-
-
-
-
169
4,527
131,998
Noncontrolling
Interest
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(445)
(121)
18,743
-
-
-
18,177
$
Total
Shareholders'
Equity
$
65,905
12,727
1,897
(1,233)
27,879
858
461
108,494
37,199
1,754
(1,672)
43,109
1,555
2,140
192,579
40,440
(3,854)
18,743
(1,847)
171
4,527
250,759
65,905
12,727
1,897
(1,233)
27,879
858
461
108,494
37,199
1,754
(1,672)
43,109
1,555
2,140
192,579
40,885
(3,733)
-
(1,847)
171
4,527
232,582
$
$
$
41
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flow from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Net realized investment gains
Amortization of investment premium or discount, net
Depreciation and amortization
Share-based compensation
Changes in operating assets and liabilities:
Prepaid reinsurance premiums
Premiums receivable, net
Reinsurance recoverable, net
Deferred acquisition costs
Income taxes receivable, net
Loss and loss adjustment expense reserves
Unearned premiums
Deferred income taxes, net of other comprehensive income
Other, net
Net cash provided by operating activities
Cash flow from investing activities:
Sales, maturities and redemptions of investment securities
Purchases of investment securities
Purchases of property and equipment
Net cash used in investing activities
Cash flow from financing activities:
Noncontrolling interest equity investment
Issuance of debt in consolidated variable interest entity
Tax benefit related to share-based compensation
Issuance of common stock in public offering
Issuance of common stock for share-based awards
Dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
See accompanying notes to consolidated financial statements.
2015
Year Ended December 31,
2014
(in thousands)
2013
$
40,440
$
37,199
$
12,727
(3,616)
5,645
624
4,527
(66,269)
(11,319)
(180)
(1,937)
(2,445)
19,010
61,535
6,741
135
52,891
169,979
(231,884)
(1,736)
(63,641)
(4,426)
4,165
149
2,140
(46,911)
(4,860)
(9,793)
3,098
(4,189)
17,315
64,081
765
4,411
63,144
87,151
(194,087)
(969)
(107,905)
(2,881)
1,761
263
461
(546)
(14,391)
761
(8,229)
2,418
11,108
69,336
2,020
4,905
79,713
106,173
(192,627)
(629)
(87,083)
18,743
5,000
1,564
-
171
(1,847)
23,631
12,881
40,157
53,038
$
-
-
480
43,109
1,555
(1,672)
43,472
(1,289)
41,446
40,157
$
-
-
169
27,879
858
(1,233)
27,673
20,303
21,143
41,446
$
42
Federated National Holding Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (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.
2015
Year Ended December 31,
2014
(in thousands)
2013
$
16,262
$
19,185
$
1,870
$
-
$
564
$
330
43
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(1) ORGANIZATION AND BUSINESS
Federated National Holding Company (“FNHC”, “Company”, “we”, “us”), is an insurance holding company that
controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our
contractual relationships with our independent agents and general agents. We are authorized to underwrite, and/or place through
our wholly owned subsidiaries, homeowners’ multi-peril (“homeowners”), commercial general liability, federal flood, personal
auto and other lines of insurance in Florida and other states. We market, distribute and service our own and third-party insurers’
products and our other services through a network of independent agents.
Our wholly owned insurance subsidiary is Federated National Insurance Company (“FNIC”), which is licensed as an
admitted carrier in Florida. We also serve as managing general agent for Monarch National Insurance Company (“MNIC”),
which was founded in 2015 through the joint venture, described below. 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.
Monarch National Insurance Company Joint Venture
On March 19, 2015, the Company entered into a joint venture to organize MNIC, which received its certificate of
authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation
(the “Florida OIR”). The Company’s joint venture partners are a majority-owned limited partnership of Crosswinds Holdings
Inc., a publicly traded Canadian private equity firm and asset manager (“Crosswinds”); and Transatlantic Reinsurance
Company (“TransRe”).
The Company and Crosswinds each invested $14.0 million in Monarch Delaware Holdings LLC (“Monarch
Delaware”), the indirect parent company of MNIC, for a 42.4% interest in Monarch Delaware (each holding 50% of the
voting interests in Monarch Delaware). TransRe invested $5.0 million for a 15.2% non-voting interest in Monarch Delaware
and advanced an additional $5.0 million in debt evidenced by a six-year promissory note bearing 6% annual interest payable
by Monarch National Holding Company (“MNHC”), a wholly owned subsidiary of Monarch Delaware and the direct parent
company of MNIC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in accordance with United States of America
Generally Accepted Accounting Principles (“GAAP”). Certain GAAP policies, which significantly affect the determination of
financial condition, results of operations and cash flows, are summarized below.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of FNHC and all other entities in which we
have a controlling financial interest and any variable interest entities (“VIE”) in which we are the primary beneficiary. All
material inter-company accounts and transactions have been eliminated in consolidation.
A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or
where investors lack certain characteristics of a controlling financial interest. We assess our contractual, ownership or other
interests in a VIE to determine if our interest participates in the variability the VIE was designed to absorb and pass onto variable
interest holders. We perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a
controlling financial interest and would therefore be considered the primary beneficiary of the VIE. If we determine we are the
primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in our consolidated financial statements.
In connection with the investment in Monarch Delaware, we have determined that we are the primary beneficiary of this
VIE, as we possess both the power to direct the activities of the VIE that most significantly impact its economic performance.
Accordingly, we consolidate the VIE in our consolidated financial statements.
44
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
Refer to note 14 for additional information on the VIE.
(c) ACCOUNTING ESTIMATES AND ASSUMPTIONS
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.
Similar to other property and casualty insurers, our liability for loss and loss adjustment expense reserves, 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.
(d) FAIR VALUE
The fair value is the price that would be received to sell an asset or paid to transfer a liability between market
participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to
transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value.
Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to
sell an asset or pay to transfer a liability in an orderly transaction. Market participants are assumed to be independent,
knowledgeable, able and willing to transact an exchange and not acting under duress. Our nonperformance or credit risk is
considered in determining the fair value of liabilities. Considerable judgment may be required in interpreting market data
used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily
indicative of the amounts that could be realized in a current or future market exchange.
Refer to note 3 for additional information regarding fair value.
(e) INVESTMENTS
Investments consist of debt and equity securities. Debt securities consist of securities with an initial fixed maturity,
which include corporate bonds, municipal bonds and United States government bonds. Equity securities generally consist of
securities that represent ownership interests in an enterprise. The Company determines the appropriate classification of
investments in debt and equity securities at the acquisition date and re-evaluates the classification at each balance sheet date.
Held-to-maturity investments are recorded at the amortized cost, reflecting the ability and intent to hold the
securities to maturity. All other securities were classified as available-for-sale and recorded at fair value. Unrealized gains
and losses during the year, net of the related tax effect applicable to available-for-sale, are excluded from income and
reflected in other comprehensive income, and the cumulative effect is reported as a separate component of shareholders’
equity until realized. If a decline in fair value is deemed to be other-than-temporary, the investment is written down to its fair
value and the amount of the write-down is recorded as an other-than-temporary impairment (“OTTI”) loss on the statement of
income. In addition, any portion of such decline related to debt securities that is believed to arise from factors other than
credit is recorded as a component of other comprehensive income rather than against income.
Net realized gains and losses on investments are determined in accordance with the specific identification method.
Net investment income consists primarily of interest income from debt securities, cash and cash equivalents,
including any premium amortization or discount accretion and dividend income from equity securities; less expenses related
to investments.
Refer to note 4 for additional information regarding investments.
(f) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all deposit balances with a bank that are available for immediate withdrawal
and highly liquid investments. All investments with maturities of three months or less at the date of the purchase are
considered cash equivalents.
45
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(g) PREMIUMS AND UNEARNED PREMIUMS
Premiums are recognized as revenue on a pro-rata basis over the term of an insurance policy. Assumed reinsurance
premiums written and earned are based on reports received from ceding companies for pro-rata treaty contracts and are
generally recorded as written based on contract terms for excess-of-loss and quota share contracts. Premiums are earned
ratably over the terms of the related coverage.
Unearned premiums and ceded unearned premiums represent the portion of gross premiums written and ceded
premiums written, respectively, relating to the unexpired terms of such coverage.
Premium receivable balances are reported net of an allowance for estimated uncollectible premium amounts. Such
allowance is based upon an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the
insured and other relevant factors. Amounts deemed to be uncollectible are written off against the allowance.
(h) REINSURANCE
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring
loss exposures does not relieve a ceding entity from its obligations to policyholders and cedants. Reinsurance recoverables
(including amounts related to claims incurred but not reported) and ceded unearned premiums are reported as assets. To
minimize exposure to losses from a reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially
upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of the
reinsurer, the collectability of the reinsurance recoverables is evaluated (and where appropriate, whether an allowance for
estimated uncollectible reinsurance recoverables is to be established) based upon a number of other factors. Such factors
include the amounts outstanding, length of collection periods, disputes, any collateral or letters of credit held and other
relevant factors. To the extent that an allowance for uncollectible reinsurance recoverable is established, amounts deemed to
be uncollectible are written off against the allowance for estimated uncollectible reinsurance recoverables. The Company
currently has no allowances for uncollectible reinsurance recoverables.
Ceded premiums written are recorded in accordance with applicable terms of the various reinsurance contracts and
ceded premiums earned are charged against revenue over the period of the various reinsurance contracts. This also generally
applies to reinstatement premiums paid to a reinsurer, which arise when contractually-specified ceded loss triggers have been
breached. Ceded commissions reduce commissions, brokerage and other underwriting expenses and ceded losses incurred
reduce net loss and loss adjustment expense incurred over the applicable periods of the various reinsurance contracts with
third party reinsurers. If premiums or commissions are subject to adjustment (for example, retrospectively-rated or
experience-rated), the estimated ultimate premium or commission is recognized over the period of the contract.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with
the reinsured business and consistent with the terms of the underlying reinsurance contract.
(i) OTHER INCOME
Other income represents primarily policy fees, commission, brokerage and other income. Policy fees represent a
non-refundable application fee for insurance coverage, which are intended to reimburse us for the costs incurred to
underwrite the policy. Policy fees are recognized on the effective date of the insurance policy. Commission and brokerage
income is recognized on a pro-rata basis over the respective terms of the contracts.
(j) DEFERRED ACQUISITION COSTS
Deferred Acquisition Costs (“DAC”) represent those costs that are incremental and directly related to the successful
acquisition of new or renewal of existing insurance contracts. The Company defers incremental costs that result directly
from, and are essential to, the acquisition or renewal of an insurance contract. Such DAC generally include agent or broker
commissions, premium taxes, medical and inspection fees that would not have been incurred if the insurance contract had not
been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable.
The Company also defers a portion of the employee total compensation and payroll-related fringe benefits directly
related to time spent performing specific acquisition or renewal activities, including costs associated with the time spent on
underwriting, policy issuance and processing, and sales force contract selling.
46
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
The acquisition costs are deferred and amortized over the period in which the related premiums written are earned,
generally 12 months. It is grouped consistent with the manner in which the insurance contracts are acquired, serviced and
measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts.
Investment income is anticipated in assessing the recoverability of DAC. The Company assesses the recoverability of DAC
on an annual basis or more frequently if circumstances indicate impairment may have occurred.
(k) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is
calculated using a straight-line method over the estimated useful lives, ranging from 3 to 15 years. Repairs and maintenance
are charged to expense as incurred.
The Company accounts for internal-use software development costs in accordance with accounting guidelines which
state that software costs, including internal payroll costs, incurred in connection with the development or acquisition of
software for internal use is charged to expense as incurred until the project enters the application development phase. Costs
incurred in the application development phase are capitalized and are depreciated using the straight-line method over an
estimated useful life of 5 years, beginning when the software is ready for use.
(l) LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserves for loss and loss adjustment expense (“LAE”) represent management’s best estimate of the ultimate
cost of all reported and unreported losses incurred through the balance sheet date. 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’s 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’s are
settled.
The estimates of the liability for loss and LAE reserves 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
loss and loss adjustment expense reserves. Adjustments are reflected in results of operations in the period in which they are
made and the liabilities may deviate substantially from prior estimates.
(m) 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.
(n) SHARE-BASED COMPENSATION
The Company accounts for share-based compensation based on the estimated grant date fair value. The Company
grants awards with service only conditions and generally amortizes them on a straight-line over the requisite service period of
the award, which is the vesting term. The fair value of the restricted stock grants is determined based on the closing market
price on the date of grant. Non-employee directors are treated as employees for accounting purposes.
47
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(o) BASIC AND DILUTED NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to common shareholders by the weighted
average number of common shares, while diluted net income per share is computed by dividing net income available to
common shareholders by the weighted average number of such common shares and dilutive share equivalents result from the
assumed exercise of employee stock options and vesting of restricted common stock and are calculated using the treasury
stock method.
(p) ADJUSTMENTS
During our third quarter 2015 analysis of actual experience to date under the July 1, 2014 quota share reinsurance
contract, we re-evaluated the accounting treatment for quota share reinsurance contracts with retrospective rating provisions.
As a result of this re-evaluation, we concluded reinsurance contracts which have retrospective rating provisions should be
accounted for under Accounting Standards Codification 944, Financial Services — Insurance (“ASC 944”), where amounts
due to (from) the assuming companies are accrued based on estimated contract experience to date as though the contracts
were terminated. Refer to note 2 in our Form 10-Q for the period ended September 30, 2015 for additional information.
The adjustments to our accounting for the July 1, 2014 quota share reinsurance treaty, inclusive of other adjustments,
are not material in any prior quarter or annual period based on an analysis of quantitative and qualitative factors in
accordance with SEC Guidance.
As a result, we recorded these adjustments during the year ended December 31, 2015. The adjustments increased net
income by $0.6 million for the year ended December 31, 2015.
(q) RECLASSIFICATIONS
Certain amounts in prior year’s consolidated financial statements have been reclassified to conform to the 2015
presentation. These reclassifications had no effect on the reported results of operations, financial condition, and cash flows.
In the current period, the Company concluded it was appropriate to classify accounts on the consolidated balance sheets that
do not have material balances in the periods being presented, such as contingent quota-share profit sharing, deferred quota-
share profit sharing, and accounts payable and accrued expenses. These prior year accounts are included within other assets
and other liabilities on the consolidated balance sheets. We have also reclassified certain revenue accounts that do not have
material balances and included them within other income in the consolidated statements of operations. In addition, during the
current period, we reclassify certain costs and expenses, principally, operating and underwriting expenses, salaries and wages
and amortization of deferred policy acquisition costs. These respective account balances are now included in commissions
and other underwriting expenses and general and administrative expenses in the consolidated statements of operations. The
Company believes this reclassification provide greater clarity and insight into the consolidated financial statements for the
periods presented.
(r) RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-
09 will replace most existing revenue recognition guidance in United States Generally Accepted Accounting Principles when
it becomes effective. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year, making it
effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption
permitted as of the original effective date. ASU 2014-09 permits the use of either the retrospective or cumulative effect
transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements
and related disclosures.
In May 2015, the FASB issued ASU 2015-09, Financial Services – Insurance (Topic 944): Disclosures about Short-
Duration-Contracts. The amendments in this ASU apply to all insurance entities that issue short-duration contracts as defined
in Topic 944, Financial Services—Insurance. The amendments require insurance entities to disclose for annual reporting
periods information on the liability for unpaid claims and claim adjustment expenses. The amendments in this ASU are
48
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after
December 15, 2016. This new guidance affects disclosures only and will have no impact on the Company’s consolidated
financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial
Liabilities which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. Most notably, this new guidance requires equity investments (except those accounted for under the equity
method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair
value recognized in net income. This new guidance is effective for annual reporting periods beginning after December 15,
2017. We are currently evaluating the impact the adoption of this standard would have on our consolidated financial
statements.
(3) FAIR VALUE
Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs are based
on market data from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in
the absence of observable market information. All assets and liabilities that are carried at fair value are classified and
disclosed in one of the following categories:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market is defined
as a market where transactions for the financial statement occur with sufficient frequency and volume to provide
pricing information on an ongoing basis.
Level 2 — Quoted market prices for similar assets or liabilities and valuations, using models or other valuation
techniques that use observable market data. All significant inputs are observable, or derived from observable
information in the marketplace, or are supported by observable levels at which transactions are executed in the
market place.
Level 3 — Instruments that use non-binding broker quotes or model driven valuations that do not have observable
market data or those that are estimated based on an ownership interest to which a proportionate share of net assets is
attributed.
The Company’s financial instruments measured at fair value and the level of the fair value hierarchy of inputs used
were as follows:
Debt securities:
United States government obligations and
authorities
Obligations of states and political
subdivisions
Corporate
International
Equity securities
Total investments
Level 1
December 31, 2015
Level 3
Level 2
(in thousands)
Total
$
34,733
$
26,820
$
-
$
61,553
-
-
-
34,733
38,012
110,702
154,620
12,303
304,445
522
-
-
-
-
-
110,702
154,620
12,303
339,178
38,534
$
72,745
$
304,967
$
-
$
377,712
49
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
Debt securities:
United States government obligations and
authorities
Obligations of states and political
subdivisions
Corporate
International
Equity securities
Total investments
Level 1
December 31, 2014
Level 3
Level 2
(in thousands)
Total
$
46,002
$
16,321
$
-
$
62,323
-
-
-
46,002
39,247
91,614
119,024
11,138
238,097
-
-
-
-
-
-
91,614
119,024
11,138
284,099
39,247
$
85,249
$
238,097
$
-
$
323,346
50
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(4) INVESTMENTS
(a) UNREALIZED GAINS AND LOSSES
The amortized cost and the fair value of debt and equity securities as of December 31, 2015 and 2014 are summarized as
follows:
December 31, 2015
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 or
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
(in thousands)
$
61,384
$
489
$
320
$
61,553
109,152
154,957
12,528
338,021
4,275
2,253
91
6,619
1,590
1,153
18
3,250
30
14
0
44
40
1,490
243
2,093
204
20
0
224
110,702
154,620
12,303
339,178
4,101
2,247
91
6,439
Equity securities
33,581
6,809
1,856
38,534
Total investments
$
378,221
$
10,103
$
4,173
$
384,151
December 31, 2014
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
Equity securities
Amortized Cost or
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
(in thousands)
$
61,376
$
1,022
$
75
$
62,323
90,728
117,778
11,139
281,021
4,490
2,681
246
7,417
29,908
956
1,578
53
3,609
41
31
1
73
9,836
70
332
54
531
225
5
1
231
497
91,614
119,024
11,138
284,099
4,306
2,707
246
7,259
39,247
Total investments
$
318,346
$
13,518
$
1,259
$
330,605
51
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(b) CONTRACTUAL MATURITY
The amortized cost and estimated fair value of debt securities as of December 31, 2015 and 2014 by contractual
maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Securities with maturity dates:
Debt securities, available-for-sale:
One year or less
Over one through five years
Over five through ten years
Over ten years
Debt securities, held-to-maturity:
One year or less
Over one through five years
Over five through ten years
Over ten years
December 31,
2015
Amortized
Cost
Fair Value
2014
Amortized
Cost
Fair Value
(in thousands)
$
24,470
170,797
142,728
26
338,021
$
24,488
171,113
143,545
32
339,178
$
16,346
170,286
94,368
26
281,026
$
16,364
171,320
96,382
33
284,099
486
1,899
4,234
-
6,619
487
1,915
4,037
-
6,439
432
2,947
4,038
-
7,417
433
2,953
3,873
-
7,259
Total
$
344,640
$
345,617
$
288,443
$
291,358
2013
$
$
2,850
478
4
3,332
(c) NET INVESTMENT INCOME
Net investment income was as follows:
2015
Interest income
Dividends income
Cash and cash equivalents
Net investment income
$
$
6,576
588
62
7,226
Year Ended December 31,
2014
(in thousands)
4,775
553
57
5,385
$
$
52
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(d) NET REALIZED GAINS AND LOSSES
The amount of gross realized gains and losses were as follows:
Gross realized gains:
Debt securities
Equity securities
Total gross realized gains
Gross realized losses:
Debt securities
Equity securities
Total gross realized losses
2015
Year Ended December 31,
2014
(in thousands)
2013
$
1,272
4,959
6,231
$
725
4,489
5,214
$
1,690
2,858
4,548
(805)
(1,810)
(2,615)
(147)
(641)
(788)
(1,001)
(666)
(1,667)
Net realized gains on investments
$
3,616
$
4,426
$
2,881
During the years ended December 31, 2015, 2014 and 2013, the proceeds from sales of investment securities were
$157.2 million, $81.5 million and $100.1 million, respectively.
During the years ended December 31, 2015, 2014 and 2013, OTTI losses were $0.4 million, $0 and $0, respectively.
The determination that unrealized losses on such securities were other-than-temporary was primarily based on the duration of
the decline in the fair value of such relative to their cost as of the balance sheet date.
(e) AGING OF GROSS UNREALIZED LOSSES
As of December 31, 2015 and 2014, gross unrealized losses and related fair values for debt and equity securities,
grouped by duration of time in a continuous unrealized loss position, were as follows:
Less than 12 months
12 months or longer
Total
December 31, 2015
Fair Value
Gross
Unrealized
Losses
Gross
Unrealized
Losses
Gross
Unrealized
Losses
Fair Value
Fair Value
(in thousands)
Debt securities:
United States government obligations and authorities
Obligations of states and political subdivisions
Corporate
International
$
30,464
16,652
87,176
8,660
142,952
$
303
40
1,420
191
1,954
659
$
-
3,590
281
4,530
17
$
-
70
52
139
$
31,123
16,652
90,766
8,941
147,482
$
320
40
1,490
243
2,093
Equity securities
Total investments
11,790
1,850
84
6
11,874
1,856
$
154,742
$
3,804
$
4,614
$
145
$
159,356
$
3,949
53
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
December 31, 2014
Debt securities:
United States government obligations and authorities
Obligations of states and political subdivisions
Corporate
International
Less than 12 months
12 months or longer
Total
Gross
Unrealized
Losses
Gross
Unrealized
Losses
Fair Value
(in thousands)
$
22
66
260
54
402
$
3,809
246
4,861
-
8,916
$
53
4
72
-
129
Gross
Unrealized
Losses
$
75
70
332
54
531
Fair Value
$
12,980
27,672
47,749
6,261
94,662
Fair Value
$
9,171
27,426
42,888
6,261
85,746
Equity securities
Total investments
3,683
461
200
36
3,883
497
$
89,429
$
863
$
9,116
$
165
$
98,545
$
1,028
(f) STATUTORY DEPOSITS
As of December 31, 2015, investments with fair values of $6.6 million, the majority of which were debt securities,
were deposited with governmental authorities as required by law.
(5) REINSURANCE
Overview
The Company reinsures (cedes) 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.
Reinsurance Recoverables
Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated
with the reinsurance placement and presented on the balance sheet as reinsurance recoverables. The following reinsurance
recoverable is reflected in the consolidated balance sheets as of the dates presented as follows:
Year Ended December 31,
2014
2015
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
Reinsurance recoverable, net
$
(in thousands)
5,218
7,496
12,714
$
$
2,140
10,394
12,534
$
54
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
Premiums Written and Earned
The following table indicates premiums written and earned as follows:
2015
Year Ended December 31,
2014
(in thousands)
2013
Premiums written:
Direct
Ceded
Premiums earned:
Direct
Ceded
$
$
493,770
(268,517)
225,253
$
$
432,233
(222,213)
210,020
$
$
377,156
(201,998)
175,158
$
$
313,075
(142,170)
170,905
$
$
243,373
(82,709)
160,664
$
$
174,037
(69,656)
104,381
Significant Reinsurance Contracts
FNIC operates primarily by underwriting and accepting risks for their direct account on a gross basis and reinsuring
a portion of the exposure on either an individual risk or an aggregate basis to the extent those exceed the desired retention
level. We continually evaluate the relative attractiveness of different forms of reinsurance contracts and different markets
that may be used to achieve our risk and profitability objectives. MNIC does not have any material reinsurance contracts as
of December 31, 2015. All of our reinsurance contracts do not relieve FNIC from their direct obligations to insured.
The Company’s reinsurance program, which generally runs from July 1 to June 30 of the following year, consists of
excess of loss, Florida Hurricane Catastrophe Fund (“FHCF”) and quota share, which is a form of proportional reinsurance,
treaties which insure the homeowners’ property lines from catastrophes in Florida and other states. The excess of loss and
FHCF treaties, which became effective on July 1, 2015, insures for approximately $1.82 billion of aggregate catastrophic
losses and LAE with a maximum single event coverage totaling approximately $1.26 billion, with the Company retaining the
first $12.9 million in Florida and $5.0 million in Louisiana, Alabama and South Carolina for losses and LAE from each
event. The FHCF treaty only affords coverage for losses sustained in Florida and represents only a portion of the reinsurance
coverage in Florida.
The Company’s quota share treaties, which are included in the reinsurance program, runs from July 1 to June 30 of
the following year. The quota share treaties consist of two different treaties, one for 30% which became effective July 1,
2014 and the other for 10% which became effective July 1, 2015. The combined treaties provide a 40% quota share
reinsurance treaty on the first $100 million of covered losses for the homeowners’ insurance program in Florida.
The quota share reinsurance agreements require FNIC to secure the credit, regulatory and business risk. Fully
funded trust agreements securing these risks totaled $3.5 million and $4.9 million, as of December 31, 2015 and 2014,
respectively.
55
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(6) LOSS AND LAE RESERVES
The liability for loss and LAE reserves 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 loss and LAE reserves is summarized as follows:
Gross reserves, beginning of period
Less: reinsurance recoverable (1)
Net reserves, beginning of period
Incurred loss, net of reinsurance, related to:
Current year
Prior years
Total incurred loss and LAE, net of reinsurance
Paid loss, net of reinsurance, related to:
Current year
Prior years
Total paid loss and LAE, net of reinsurance
Net reserves, end of period
Plus: reinsurance recoverable (1)
2015
$
78,330
(10,394)
67,936
Year Ended December 31,
2014
(in thousands)
$
61,016
(2,313)
58,703
2013
$
49,908
(3,212)
46,696
113,819
(9,466)
104,353
49,531
32,914
82,445
89,844
7,496
97,340
$
79,932
1,104
81,036
40,680
31,123
71,803
67,936
10,394
78,330
56,209
201
56,410
22,557
21,846
44,403
58,703
2,313
61,016
$
Gross reserves, end of period
$
(1) Reinsurance recoverable in this table includes only ceded loss and LAE reserves.
The favorable development in 2015 is primarily a result of continued favorable loss experience (mostly caused by
decreased severity in reported claims) in the Company’s all other peril homeowners coverage caused in part by the absence of
severe weather in Florida in recent years. Specifically, we have experienced better severity than expected on the 2014 and
2013 accident years.
(7) DEBT
On March 17, 2015, MNHC, our consolidated VIE, issued a promissory note with a principal amount of $5.0 million
bearing 6% annual interest, due March 17, 2021 with interest payable on an annual basis due March 17 each year. The debt
was issued to TransRe and is being carried at the unpaid principal balance; any accrued and unpaid interest is recognized in
other liabilities in the consolidated statement of operations. In addition, the Company recorded $0.1 million of debt issuance
costs related to the 6% promissory note.
56
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(8) INCOME TAXES
A summary of the provision for income tax expense is as follows.
Federal:
Current
Deferred
Federal income tax expense
State:
Current
Deferred
State income tax expense
2015
Year Ended December 31,
2014
(in thousands)
2013
$
15,523
6,118
21,641
$
16,659
1,059
17,718
$
4,289
1,393
5,682
2,489
623
3,112
2,204
186
2,390
-
809
809
Total
$
24,753
$
20,108
$
6,491
The actual income tax expense differs from the "expected" income tax expense (computed by applying the combined
applicable effective federal and state tax rates to income before income tax expense as follows):
Year Ended December 31,
2015
2014
2013
Computed expected tax expense provision, at federal rate
State tax, net of federal tax benefit
Tax-exempt interest
Income subject to dividends-received deduction
Return to provision and rate changes
Other
Income tax expense total
$
(in thousands)
$
$
22,829
2,291
(445)
(109)
119
68
24,753
19,887
1,696
(312)
(136)
(1,027)
-
20,108
6,535
698
(31)
(97)
(306)
(308)
6,491
$
$
$
57
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
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 liability are as follows:
Deferred tax assets:
Unearned premiums
Loss and loss adjustment expense reserves
Accrued expenses
Net operating loss carryforwards
Share-based compensation
Other
Total
Deferred tax liabilities:
Deferred acquisition costs
Net unrealized gains on investments
Deferred revenue related to reinsurance
Other
Total
Year Ended December 31,
2015
2014
(in thousands)
$
9,375
1,175
694
140
606
212
12,202
$
7,812
1,239
-
-
545
144
9,740
(11,906)
(2,336)
(3,395)
(192)
(17,829)
(6,199)
(4,792)
-
(90)
(11,081)
Net deferred tax liability
$
(5,627)
$
(1,341)
The Company files a federal income tax return and various state and local tax returns. The Company’s consolidated
federal and state income tax returns for 2012 - 2014 are open for review by the Internal Revenue Service (“IRS”) and other
state taxing authorities. The Company’s 2011 federal tax return was under review by the IRS and in 2014 the audit was
closed with a no change report.
As of December 31, 2015, 2014 and 2013, we have determined that there are no uncertain tax positions.
(9) COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In the ordinary course of conducting business, the Company is involved in various legal proceedings, specifically
claims litigation. The company’s insurance subsidiaries participate in most of these proceedings by either defending third-
party claims brought against insureds or litigating first-party coverage claims. The company accounts for such activity
through the establishment of loss and loss adjustment expense reserves. We believe that the ultimate liability, if any, with
respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of
defense, is immaterial to our consolidated financial statements. The Company is also occasionally involved in other legal and
regulatory proceedings, some of which may assert claims for substantial amounts. These other legal proceedings may
occasionally make us party to individual actions in which extra-contractual damages, punitive damages or penalties are
sought, such as claims alleging bad faith in the handling of insurance claims.
On a quarterly basis, the Company reviews these outstanding matters, if any. Consistent with GAAP, the Company
establishes accruals when it is probable that a loss has been incurred and the Company can reasonably estimate its potential
exposure. We record for such probable and estimable losses, if any, through the establishment of legal expense reserves.
Based on our quarterly review, the Company believes that our accruals for probable and estimable losses are reasonable and
that the amounts accrued do not have a material effect on our consolidated financial statements.
58
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
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”), 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. 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. Future assessments by this association are undeterminable at this time.
Leases
The Company is committed under various operating lease agreements for office space. Rental expense for the years
ended December 31, 2015, 2014 and 2013 was $0.7 million, $0.5 million and $0.4 million, respectively. As of December 31,
2015, the future minimum lease payments under these agreements are as follows:
Year Ended
December 31,
Aggregate Minimum
Lease Payments
(in thousands)
2016
2017
2018
2019
2020
Thereafter
Total
$
918
934
953
981
1,019
2,104
6,909
$
(10) SHAREHOLDERS’ EQUITY
Stock Compensation Plan
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 stock options and restricted stocks. Officers, directors, executive management and all other 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 will expire on April 5, 2022.
59
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
Share-based Compensation Expense
The following table provides certain information in connection with the Company’s share-based compensation
arrangements as follows:
Restricted stock
Stock options
Total share-based compensation expense
2015
$
$
2,930
33
2,963
Year Ended December 31,
2014
(in thousands)
$
1,525
135
1,660
$
2013
$
$
120
172
292
Excess tax benefits from share-based awards
Intrinsic value of options exercised
Fair value of restricted stock vested
$
$
$
1,564
1,124
2,303
$
$
$
480
5,172
549
169
$
$
583
$
-
The intrinsic value of options exercised represents the difference between the stock option exercise price and the
weighted average closing stock price of FNHC common stock on the exercise dates, as reported on The NASDAQ Global
Select Market.
The unamortized share-based compensation expense is $6.9 million for the year ended December 31, 2015, which
will be recognized over the remaining weighted average vesting period of approximately 3.21 years.
Stock Option Awards
A summary of the Company’s stock option activity for the period from January 1, 2013 to December 31, 2015 is as
follows:
Outstanding at January 1, 2013
Granted
Exercised
Cancelled
Outstanding at December 31, 2013
Granted
Exercised
Cancelled
Outstanding at December 31, 2014
Granted
Exercised
Cancelled
Outstanding at December 31, 2015
Number of Shares
781,097
-
(166,077)
(88,499)
526,521
-
(302,735)
(4,501)
219,285
-
(44,652)
-
174,633
Weighted Average
Option Exercise
Price
5.93
$
$
-
$
7.15
$
11.77
$
4.56
$
-
$
5.13
$
3.49
$
3.79
$
-
$
3.81
$
-
$
3.79
60
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
A following table summarizes information about stock options outstanding and exercisable in a select price range as
of December 31, 2015:
Options Outstanding and Exercisable
Shares Outstanding
and Exercisable
174,633
Weighted Average
Remaining
Contractual Life
(years)
5.60
Weighted Average Exercise
Price
$3.79
Aggregate Intrinsic
Value
$4,500,825
Range of Exercise Price
$2.45 - $4.40
Restricted Stock
During the years ended December 31, 2015, 2014 and 2013, the restricted stock awards issued have been granted to
executives, directors and other key employees. The shares granted typically vest in equal portions over three or five years. A
summary of the Company’s restricted stock activity for the period from January 1, 2013 to December 31, 2015 is as follows:
Outstanding at January 1, 2013
Granted
Vested
Cancelled
Outstanding at December 31, 2013
Granted
Vested
Cancelled
Outstanding at December 31, 2014
Granted
Vested
Cancelled
Outstanding at December 31, 2015
Number of Shares
-
250,000
-
(500)
249,500
268,648
(68,988)
(1,359)
447,801
116,140
(145,134)
-
418,807
Weighted Average
Grant Date Fair
Value
$
-
$
8.23
$
-
$
5.54
$
8.24
$
22.50
$
7.96
$
8.29
$
16.84
$
27.53
$
15.87
$
-
$
20.14
The weighted average grant date fair value is measured at the closing price of FNHC common stock on the grant
date, as reported on The NASDAQ Global Select Market.
(11) EMPLOYEE BENEFIT PLAN
The Company sponsors a profit sharing plan under Section 401(K) of the Internal Revenue Code, which is a defined
contribution plan that allows employees to defer compensation through contributions to the 401(K) Plan. This plan covers
substantially all employees who meet specified service requirements and includes a 100% match up to the first 6% of an
employee’s salary, not to exceed statutory limits. Additionally, the Company may make additional profit-sharing
contributions. For the year ended December 31, 2015, the Company made an additional contribution of 1% of an employee’s
salary. During the years ended December 31, 2014 and 2013, there was no additional profit-sharing contribution during the
years ended December 31, 2014 and 2013.
The Company’s total contributions to the 401(K) Plan were $0.6 million, $0.4 million and $0.2 million for the years
ended December 31, 2015, 2014 and 2013, respectively.
61
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(12) RELATED PARTY TRANSACTIONS
The following is a summary of the related party transactions entered into by the Company for the years ended
December 31, 2015, 2014 and 2013.
The Company entered into catastrophe excess of loss reinsurance agreements with TransRe. For the years ended
December 31, 2015, 2014 and 2013, the Company ceded premiums related to these agreements totaling $4.1 million, $1.2
million and $0, respectively. There have not been any ceded losses relating to these agreements.
The Company’s Chairman of the Board of Directors is a partner at a law firm that handles certain litigation claims
for FNHC. Fees paid to the law firm amounted to $26,151, $6,538 and $36,400 for the years ended December 31, 2015,
2014, and 2013, respectively.
For the years ended December 31, 2015, 2014 and 2013, the Company paid investment fees to Crosswinds AUM,
LLC, a wholly owned subsidiary of Crosswinds totaling $0.2 million, $0 and $0, respectively.
Refer to note 7 for information relating to the debt owed to TransRe.
(13) EARNINGS PER SHARE
The following table illustrates our computations of basic and diluted net income per share.
2015
Year Ended December 31,
2014
(in thousands, except per share data)
2013
Net income attributable to Federated National Holding Company
shareholders
Weighted average number of common shares outstanding - basic
Net income per share - basic
$
$
$
$
$
$
37,199
12,082
3.08
12,727
8,506
1.50
40,885
13,729
2.98
Weighted average number of common shares outstanding - basic
Dilutive effect of stock compensation plans
Weighted average number of common shares outstanding - diluted
Net income per share - diluted
13,729
268
13,997
2.92
$
12,082
356
12,438
2.99
$
8,506
266
8,772
1.45
$
Dividends per share
$
0.18
$
0.13
$
0.11
62
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
(14) VARIABLE INTEREST ENTITY
The carrying amounts of Monarch Delaware, our consolidated VIE, assets, which can only be used to settle
obligations of Monarch Delaware, and liabilities of Monarch Delaware for which creditors do not have recourse are as
follows:
ASSETS
Investments
December 31, 2015
(in thousands)
Debt maturities, held-to-maturity, at amortized cost
Equity securities, available-for-sale, at fair value
Total investments
$
Cash and cash equivalents
Prepaid reinsurance premiums
Premiums receivable, net
Deferred income taxes, net
Deferred acquisition costs
Other assets
Total assets
LIABILITIES
Loss and loss adjustment expense reserves
Unearned premiums
Debt
Income taxes payable
Other liabilities
Total liabilities
21,312
1,358
22,670
14,616
34
355
646
234
270
38,825
237
1,448
5,000
8
374
7,067
$
$
$
(15) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The Company’s insurance companies are subject to regulations and standards of the Florida OIR. These standards
require that insurance companies prepare statutory-basis financial statements in accordance with the National Association of
Insurance Commissioners Accounting Practices and Procedures Manual. The Company did not use any prescribed or
permitted statutory accounting practices that differed from the National Association of Insurance Commissioners’ statutory
accounting practices as of December 31, 2015.
The Company’s insurance companies are required to report their risk-based capital (“RBC”) each December 31.
Failure to maintain an adequate RBC could subject the Company to regulatory action and could restrict the payment of
dividends. As of December 31, 2015, the RBC levels of the Company’s insurance companies did not subject them to any
regulatory action.
Additionally, Florida Statutes require the Company’s insurance companies to maintain specified levels of statutory
capital and restrict the timing and amount of dividends and other distributions that may be paid to the parent company. These
standards require dividends to be paid only from statutory unassigned surplus. The maximum dividend that may be paid by
the Company’s insurance companies to their parent company, without prior regulatory approval is limited to the lesser of
statutory net income from operations of the preceding calendar year, not including realized capital gains, plus a 2-year
carryforward or 10.0% of statutory unassigned surplus as of the preceding year end. A dividend may also be taken without
prior regulatory approval if (a) the dividend is equal to or less than the greater of (i) Ten percent of the insurer’s surplus as to
policyholders derived from realized net operating profits on its business and net realized capital gains; or (ii) the insurer’s
entire net operating profits and realized net capital gains derived during the immediately preceding calendar year; (b) the
insurer will have surplus as to policyholders equal to or exceeding 115 percent of the minimum required statutory surplus as
to policyholders after the dividend or distribution is made; and (c) the insurer has filed notice with the office at least 10
business days prior to the dividend payment or distribution, or such shorter period of time as approved by the Florida OIR on
a case-by-case basis. These dividends are referred to as “ordinary dividends.” However, if a dividend, together with other
dividends paid within the preceding twelve months, exceeds this statutory limit or is paid from sources other than earned
63
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2015
surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval
before such dividend can be paid.
As of December 31, 2015 and 2014, on a consolidated statutory basis, the capital and surplus of the Company’s
insurance companies was $175.9 million and $125.3 million, respectively. For the years ended December 2015, 2014 and
2013, consolidated statutory net income of the Company’s insurance companies was $23.9 million, $29.3 million and $3.6
million, respectively. Statutory capital and surplus significantly exceeds amounts necessary to satisfy regulatory
requirements.
(16) QUARTERLY RESULTS OF OPERATIONS
The following is a summary of unaudited quarterly results of operations:
2015
Net premiums earned
Total revenue
Losses and loss adjustment expenses
Total costs and expenses
Net income attributable to Federated National Holding
Company shareholders
Net income per share - basic
2014
Net premiums earned
Total revenue
Losses and loss adjustment expenses
Total costs and expenses
Net income attributable to Federated National Holding
Company shareholders
Net income per share - basic
(17) SUBSEQUENT EVENTS
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share data)
$
$
$
$
44,786
54,936
23,949
40,452
$
$
$
$
49,227
58,790
23,149
40,151
$
$
$
$
62,286
72,599
28,412
54,974
$
$
$
$
53,721
63,568
28,843
49,123
$
$
9,284
0.68
$
$
11,734
0.86
$
$
10,593
0.77
$
$
9,274
0.67
$
$
$
$
44,004
49,715
20,828
35,987
$
$
$
$
51,433
59,003
24,522
41,009
$
$
$
$
34,518
43,150
15,126
31,695
$
$
$
$
40,950
48,824
20,560
34,694
$
$
8,423
0.77
$
$
11,554
1.04
$
$
7,227
0.57
$
$
9,995
0.73
On March 7, 2016, we announced that the Company’s Board of Directors approved a dividend of $0.06 per share,
which will be paid on June 1, 2016 to shareholders on record as of May 2, 2016.
On March 10, 2016, the Company’s Board of Directors granted 128,472 of restricted shares to the Company’s
Directors, Executives and other employees. The restricted shares vest over three or five years.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Internal Control over Financial Reporting
The Board of Directors and Shareholders
Federated National Holding Company and Subsidiaries
We have audited Federated National Holding Company and subsidiaries’ internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Federated National Holding
Company and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control 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 conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Federated National Holding Company and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2015 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet as of December 31, 2015 and the related consolidated statements of operations, comprehensive
income, changes in shareholders' equity and cash flows for the year ended December 31, 2015, of Federated National
Holding Company and subsidiaries and our report dated March 14, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 14, 2016
65
ITEM 9
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
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 disclosures.
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, 2015.
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, 2015 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. Our independent registered public accounting
firm that audited the consolidated financial statements include in this Form 10-K, Ernst & Young LLP, has issued an
attestation report on the effectiveness of our internal control over financial reporting which appears in Part II, Item 8,
“Financial Statements and Supplementary Data” included on page 65 of this Form 10-K.
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, 2015 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.
66
PART III
Except as provided below, the information required by this Part III (Items 10, 11, 12, 13 and 14) is included either in
our definitive proxy statement for our 2016 annual meeting of shareholders (the "2016 Proxy Statement") or in an
amendment to this Form 10-K (the "Form 10-K/A"), as the case may be, to be filed with the SEC within 120 days after the
fiscal year ended December 31, 2015.
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as noted below, the information required by this Item is included in either the 2016 Proxy Statement or the
Form 10-K/A, and is incorporated herein by reference.
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 www.FedNat.com.
ITEM 11
EXECUTIVE COMPENSATION
The information required by this Item is included in either the 2016 Proxy Statement or the Form 10-K/A, and is
incorporated herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is included in either the 2016 Proxy Statement or the Form 10-K/A, and is
incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is included in either the 2016 Proxy Statement or the Form 10-K/A, and is
incorporated herein by reference.
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is included in either the 2016 Proxy Statement or the Form 10-K/A, and is
incorporated herein by reference.
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 Auditor’s Reports
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and
2013.
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013.
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013.
67
Notes to Consolidated Financial Statements for the years ended December 31, 2015, 2014 and 2013.
(2)
Financial Statement Schedules.
The following are included herein under Item 8, Financial Statements and Supplementary Data:
Schedule II, Condensed Financial Information of Registrant
Schedule V, Valuation and Qualifying Accounts
Schedule VI, Supplemental Information Concerning Insurance Operations
(3)
Exhibits.
68
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 and President
(Principal Executive Officer)
/s/ Peter J. Prygelski, III
Peter J. Prygelski, III, Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 14, 2016
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, President and Director March 14, 2016
(Principal Executive Officer)
/s/ Peter J. Prygelski, III
Peter J. Prygelski, III
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
March 14, 2016
/s/ Bruce F. Simberg
Bruce F. Simberg
Chairman of the Board and Director March 14, 2016
/s/ Carl Dorf
Carl Dorf
/s/ Jenifer G. Kimbrough
Jenifer G. Kimbrough
/s/ Thomas A. Rogers
Thomas A. Rogers
/s/ William G. Stewart
William G. Stewart
/s/ Richard W. Wilcox, Jr.
Richard W. Wilcox, Jr.
Director
Director
Director
Director
Director
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
69
Index to Financial Statement Schedules
PAGE
Schedule II Condensed Financial Information of Registrant ..................................................................................
Schedule V Valuation and Qualifying Accounts ....................................................................................................
Schedule VI Supplemental Information Concerning Insurance Operations ...........................................................
71
74
75
70
Schedule II – Condensed Financial Information of Registrant
Condensed Balance Sheets
FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)
December 31, 2015 and 2014
ASSETS
Investments in subsidiaries
Investments securities, available-for-sale, at fair value
Cash and cash equivalents
Deferred income taxes, net
Income taxes receivable
Other assets
December 31,
2015
2014
(in thousands)
$
$
282,504
25,649
2,397
485
10,471
1,506
323,012
208,853
43,962
12,053
332
8,966
1,555
275,721
Total assets
$
$
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to subsidiaries
Capital contribution payable
Other liabilities
Total liabilities
$
70,079
-
2,174
72,253
$
63,649
18,501
992
83,142
Preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total shareholders' equity attributable Federated
National Holding Company shareholders
Noncontrolling interest
Total shareholders' equity
Total liabilities and shareholders' equity
$
-
138
131,998
3,985
96,461
232,582
18,177
250,759
323,012
-
136
127,302
7,718
57,423
192,579
-
192,579
275,721
$
See accompanying note to condensed financial statements.
71
Schedule II – Condensed Financial Information of Registrant (continued)
Condensed Statements of Earnings
FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)
Revenue:
Management fees
Net investment income
Equity in income of consolidated subsidiaries
Total revenue
Costs and expenses:
General and administrative expenses
Total costs and expenses
Income before income taxes
Income taxes
Net income
Net loss attributable to noncontrolling interest
Net income attributable to Federated National Holding Company
shareholders
See accompanying note to condensed financial statements.
2015
Year Ended December 31,
2014
(in thousands)
2013
$
2,489
609
71,905
75,003
$
2,387
417
61,653
64,457
$
1,864
147
21,623
23,634
9,810
9,810
65,193
24,753
40,440
(445)
7,150
7,150
57,307
20,108
37,199
-
4,416
4,416
19,218
6,491
12,727
-
$
40,885
$
37,199
$
12,727
72
Schedule II – Condensed Financial Information of Registrant (continued)
Condensed Statements of Cash Flows
FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)
Cash flow from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Equity in undistributed income of consolidated subsidiaries
Share-based compensation
Changes in operating assets and liabilities:
Deferred income taxes, net of other comprehensive (loss) income
Income taxes receivable, net
Capital contribution payable
Other, net
Net cash (used in) provided by operating activities
Cash flow from investing activities:
Capital contributions to consolidated subsidiaries, net
Sales, maturities and redemptions of investments securities
Purchases of investment securities
Purchases from property and equipment
Net cash used in investing activities
Cash flow from financing activities:
Noncontrolling interest equity investment
Tax benefit related to share-based compensation
Issuance of common stock for share-based awards
Issuance of common stock in public offering
Dividends paid
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
See accompanying note to condensed financial statements.
2015
Year Ended December 31,
2014
(in thousands)
2013
$
40,440
$
37,199
$
12,727
(71,905)
4,527
(153)
24,352
(18,501)
8,551
(12,689)
(32,743)
38,612
(21,354)
(113)
(15,598)
(61,653)
2,140
674
16,521
2,501
2,483
(135)
(18,501)
22,414
(36,949)
(391)
(33,427)
(21,623)
461
3,333
1,732
16,000
5,339
17,969
(16,000)
1,524
(30,366)
(149)
(44,991)
18,743
1,564
171
-
(1,847)
18,631
(9,656)
12,053
2,397
$
-
480
1,555
43,109
(1,672)
43,472
9,910
2,143
12,053
$
-
169
858
27,879
(1,233)
27,673
651
1,492
2,143
$
73
Schedule II – Condensed Financial Information of Registrant (continued)
Note to Condensed Financial Statements
FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)
(1) ORGANIZATION AND BASIS OF PRESENTATION
FNHC, the Parent 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.
The accompanying condensed financial statements include the activity of the Parent Company and, on an equity
basis, its consolidated subsidiaries. Accordingly, these condensed financial statements have been presented for the parent
company only. These condensed financial statements should be read in conjunction with the consolidated financial
statements and related notes of FNHC and subsidiaries set forth in Part II, Item 8 “Financial Statements and Supplemental
Data” of this Form 10-K.
In applying the equity method to our consolidated subsidiaries, we record the investment at cost and subsequently
adjust for additional capital contributions, distributions and proportionate share of earnings or losses.
Certain amounts in prior year’s condensed financial statements have been reclassified to conform to the 2015
presentation.
74
Schedule V – Valuation and Qualifying Accounts
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
Year
2015
2014
2013
Description
Allowance for uncollectible reinsurance recoverable
Allowance for uncollectible premiums receivable
Allowance for uncollectible reinsurance recoverable
Allowance for uncollectible premiums receivable
Allowance for uncollectible reinsurance recoverable
Allowance for uncollectible premiums receivable
Balance at
January 1,
-
$
$
148
$
-
$
143
$
-
$
69
Charged to
Costs and
Expenses
Deductions
Balance at
December 31,
(in thousands)
-
$
$
192
$
-
$
45
$
-
$
250
$
-
$
(38)
$
-
$
(40)
$
-
$
(176)
-
$
$
302
-
$
$
148
-
$
$
143
75
SCHEDULE VI – Supplemental Information Concerning Insurance Operations
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
At December 31,
For the Year Ended December 31,
Claim and Claim
Adjustment Expenses
Incurred Related to
Loss and
Loss
Adjustment
Expense
Reserves
Deferred
Acquisition
Costs
Unearned
Premiums
Line of Business
Property and Casualty Insurance
$
15,547
$
97,340
$
253,960
Net
Investment
Income
Current
Year
Prior Year
Amortization
of Deferred
Acquisition
Costs
Paid Claims
and Claim
Adjustment
Expenses
Premiums
Written
$
7,226
$
113,819
$
(9,466)
$
37,276
$
82,445
$
225,253
Earned
Premiums
(in thousands)
$
210,020
Property and Casualty Insurance
$
13,610
$
78,330
$
192,424
$
170,905
$
5,385
$
79,932
$
1,104
$
27,474
$
71,803
$
175,158
Property and Casualty Insurance
$
16,708
$
61,016
$
128,343
$
104,381
$
3,332
$
56,209
$
201
$
21,447
$
44,403
$
160,664
Year
2015
2014
2013
76
Exhibit Description
EXHIBIT INDEX
3.1
3.2
4.1
10.1
10.2
10.3
10.5
10.6
10.7
10.8
10.9
Amended and Restated Articles of Incorporation, as amended (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).+
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).
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, 2015
(incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on
February 23, 2015).
Excess Catastrophe Reinsurance Contract, effective July 1, 2015, 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, 2015 filed with the SEC on November 9, 2015).
Reinstatement Premium Protection Reinsurance Contract, effective July 1, 2015, 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, 2015 filed with the SEC on November 9, 2015).
Homeowners Quota Share Reinsurance Contract, effective July 1, 2015 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, 2015 filed with the SEC on November 9, 2015).
10.10 Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2015 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, 2015 filed with the SEC on
November 9, 2015).
10.11 Non-Florida Reinstatement Premium Protection Reinsurance Contract, effective July 1, 2015 between Federated
National Insurance Company and subscribing reinsurers (incorporated by reference from Exhibit 10.5 in the
Company’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2015 filed with the SEC on
November 9, 2015).
10.12 FHCF Supplement Layer Reinsurance Contract, effective June 1, 2015 between Federated National Insurance
Company and subscribing reinsurers (incorporated by reference from Exhibit 10.6 in the Company’s Quarterly
Report on Form 10-Q for its quarter ended September 30, 2015 filed with the SEC on November 9, 2015).
77
10.13 Order to Cease and Desist dated May 19, 2015 from the Florida Office of Insurance Regulation to Federated
National Insurance Company (incorporated by reference from Exhibit 99.1 in the Company’s Current Report on
Form 8-K filed with the SEC on June 8, 2015).
10.14 Final Order dated October 21, 2015 from the Florida Office of Insurance Regulation to Federated National Insurance
Company (incorporated by reference to Exhibit 99.1 in the Company’s Current Report on Form 8-K filed with the
SEC on October 26, 2015).
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 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).+
10.17 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).+
10.18 Amendment to Employment Agreement and Restrictive Covenant Agreement effective as of March 17, 2015
between Monarch Delaware Holdings LLC and Michael H. Braun (incorporated by reference from Exhibit 10.3 in
the Company’s Quarterly Report on Form 10-Q for its quarter ended March 31, 2015 filed with the SEC on May 11,
2015).+
10.19 Non-Competition, Non-Disclosure and Non-Solicitation Agreement effective as of March 17, 2015 between
Monarch Delaware Holdings LLC and Michael H. Braun (incorporated by reference from Exhibit 10.4 in the
Company’s Quarterly Report on Form 10-Q for its quarter ended March 31, 2015 filed with the SEC on May 11,
2015).+
10.20 Amendment No. 1 to the Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation
Agreement effective March 17, 2015 between Federated National Holding Company and Peter J. Prygelski, III
(incorporated by reference from Exhibit 10.5 in the Company’s Quarterly Report on Form 10-Q for its quarter ended
March 31, 2015 filed with the SEC on May 11, 2015).+
10.21
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).
10.22 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).
10.23 Second Amendment to Insurance Agency Master Agreement dated January 1, 2015 between Federated National
Underwriters, Inc. and Ivantage Select Agency, Inc. (incorporated by reference from Exhibit 10.6 in the Company’s
Quarterly Report on Form 10-Q for its quarter ended March 31, 2015 filed with the SEC on May 11, 2015).
10.24 Subscription Agreement, effective as of July 18, 2014, among C.A. Bancorp Inc., Federated National Holding
Company, and Transatlantic Reinsurance Company (incorporated by reference from Exhibit 10.6 in the Company’s
Quarterly Report on Form 10-Q for its quarter ended September 30, 2014 filed with the SEC on November 10,
2014).
10.25 Managing General Agent and Claims Administration Agreement dated as of March 17, 2015 between Monarch
National Insurance Company and FedNat Underwriters, Inc. (incorporated by reference from Exhibit 10.1 in the
Company’s Quarterly Report on Form 10-Q for its quarter ended March 31, 2015 filed with the SEC on May 11,
2015).
78
10.26 Limited Liability Company Agreement of Monarch Delaware Holdings LLC dated as of March 17, 2015
(incorporated by reference from Exhibit 10.2 in the Company’s Quarterly Report on Form 10-Q for its quarter ended
March 31, 2015 filed with the SEC on May 11, 2015).
10.27 Consulting Agreement dated as of May 6, 2015 between Bruce F. Simberg and Federated National Holding
Company (incorporated by reference from Exhibit 10.7 in the Company’s Quarterly Report on Form 10-Q for its
quarter ended March 31, 2015 filed with the SEC on May 11, 2015).
10.28 Reimbursement Contract between Federated National Insurance Company and The State Board of Administration of
Florida (SBA) which administers the Florida Hurricane Catastrophe Fund (FHCF) to be effective June 1, 2016
(incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on
March 2, 2016).
10.29 Reimbursement Contract between Monarch National Insurance Company and The State Board of Administration of
Florida (SBA) which administers the Florida Hurricane Catastrophe Fund (FHCF) to be effective June 1, 2016
(incorporated by reference to Exhibit 10.2 in the Company’s Current Report on Form 8-K filed with the SEC on
March 2, 2016).
21.1
Subsidiaries of the Company *
23.1
Consent of Goldstein, Schechter, Koch, P.A. Independent Certified Public Accountants *
23.2
Consent of Ernst & Young LLP 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. **
+ 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.
79
EXHIBIT 21.1
SUBSIDIARIES
FedNat Underwriters, Inc., a Florida corporation
Century Risk Insurance Services, Inc., a Florida corporation
Federated National Insurance Company, a Florida corporation
Insure-Link, Inc., a Florida corporation
Monarch Delaware Holdings LLC, a Delaware limited liability company
Monarch National Holding Company, a Florida corporation
Monarch National Insurance Company, a Florida corporation
Southeast Catastrophe Consulting Company, LLC, an Alabama limited liability company
80
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-188217) pertaining to the
Equity Incentive Plans of Federated National Holding Company of our report dated March 14, 2016, with respect to the
consolidated financial statements and schedules of Federated National Holding Company, and the effectiveness of internal
control over financial reporting of Federated National Holding Company, incorporated by reference in this Annual Report
(Form 10-K) for the year ended December 31, 2015.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 14, 2016
81
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Federated National Holding, Inc. and Subsidiaries
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 16, 2015 (except for Schedule II dated March 14, 2016)
relating to our audits 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 (the “Company”) for the year ended December 31, 2015.
/s/ Goldstein Schechter Koch P.A.
March 14, 2016
Fort Lauderdale, FL
82
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 14, 2016
/s/ Michael H. Braun
Michael H. Braun
Chief Executive Officer (Principal Executive Officer)
83
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 14, 2016
/s/ Peter J. Prygelski, III
Peter J. Prygelski, III
Chief Financial Officer (Principal Financial and Accounting Officer)
84
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, 2015, 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 14, 2016
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.
85
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, 2015, 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 14, 2016
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.
86