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, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________TO _______________________
Commission File number 000-25001
Federated National Holding Company
(Exact name of registrant as specified in its charter)
Florida
(State or Other Jurisdiction of Incorporation or Organization)
65-0248866
(IRS Employer Identification Number)
14050 N.W. 14th Street, Suite 180, Sunrise, FL
(Address of principal executive offices)
33323
(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
Common Stock, par value $0.01 per share
Name of Each Exchange on Which Registered
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 website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark 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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the Registrant’s common stock held by non-affiliates was $246,945,830 on June 30, 2016, computed on the basis
of the closing sale price of the Registrant’s common stock on that date.
As of March 13, 2017, the total number of common shares outstanding of Registrant’s common stock was 13,853,574.
Table of Contents
PART I
ITEM 1
BUSINESS
ITEM 1A
RISK FACTORS
FEDERATED NATIONAL HOLDING COMPANY
TABLE OF CONTENTS
ITEM 1B UNRESOLVED STAFF COMMENTS
ITEM 2
PROPERTIES
ITEM 3
LEGAL PROCEEDINGS
ITEM 4
MINE SAFETY DISCLOSURES
PART II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6
SELECTED FINANCIAL DATA
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A
CONTROLS AND PROCEDURES
ITEM 9B OTHER INFORMATION
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11
EXECUTIVE COMPENSATION
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
1
1
10
20
20
20
20
21
21
24
25
39
40
76
76
76
84
97
99
100
100
101
Table of Contents
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
PART I
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, Georgia, Texas 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.
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Gross premiums written
Homeowners:
Florida
Louisiana
South Carolina
Alabama
Total homeowners
Personal automobile:
Texas
Georgia
Florida
Alabama
Total personal automobile
Commercial general liability
Federal flood
Gross premiums written total
2016
Year Ended December 31,
2015
(in thousands)
2014
$
477,489 $
25,385
6,531
3,332
512,737
427,428 $
18,540
1,518
2,280
449,766
335,338
9,288
—
312
344,938
34,239
31,831
1,745
1,664
69,479
17,916
2,762
1,200
34
21,912
10,805
197
1,374
—
12,376
13,256
10,013
605,485 $
13,928
8,164
493,770 $
12,432
7,410
377,156
$
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.
In connection with the organization of MNIC, the parties entered into the following agreements dated 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 agreements 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 MNIC in any individual reinsurance contract.
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The Company’s CEO and Interim CFO hold their respective positions with Monarch Entities while they remain
employed by the Company.
MNIC expands our ability to provide insurance policies in Florida. Additionally, it strengthens our relationships with our
partner agents. 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 office is 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”). 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 2017 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;
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).
Overview of Insurance Lines of Business
Homeowners Property and Casualty Insurance
FNIC and MNIC underwrite homeowners insurance in Florida and FNIC also underwrites homeowners insurance in
Alabama, Louisiana, Texas 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 279,109 and 254,105 at December 31, 2016
and 2015, 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
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currently in-force is $1,837, as compared with $1,758 for 2015. 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 2016,
FNIC applied for and was approved by the Florida OIR for a rate increase of 5.6% for Florida homeowners multiple-peril insurance
policies, which became effective for new and renewals on August 1, 2016. MNIC applied for and was approved by the Florida OIR
for a rate decrease of 11.9% for Florida homeowners multiple-peril insurance policies, which became effective for new and renewals
on April 15, 2016. 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 2017 rate increase of 6.5% for FNIC for
Florida homeowners’ insurance policies only. These rate changes are currently awaiting approval from the Florida OIR. We continue
to monitor and seek appropriate adjustment to our rates in order to remain competitive and profitable.
Other Lines of Business
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. Currently, FNIC offers this line of business as an admitted
carrier in Texas, Florida, Georgia, and Alabama.
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.
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. Currently, FNIC offers this line of business in
Florida, Alabama, Louisiana, South Carolina, and Texas.
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
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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.
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 and MNIC operate 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.
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 or MNIC from their direct obligations to insured. While it is not always
possible to reinsure every known 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 or MNIC. Demotech provides financial stability ratings for property and casualty
insurance companies.
FNIC and MNIC operate 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. All of our reinsurance contracts do not relieve FNIC or MNIC from their direct
obligations to the insured.
FNIC’s 2015-2016 catastrophe reinsurance program, which ran either from June 1 to May 31 or from July 1 to June 30,
consists of the Florida Hurricane Catastrophe Fund (“FHCF”), excess of loss treaties placed with the private market and a
40% property quota-share program. The property quota-share reinsurance is a form of proportional reinsurance that provides coverage
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for the homeowners’ property lines for wind related catastrophes in Florida. The FHCF treaty affords coverage for losses sustained in
Florida and represents only a portion of the reinsurance coverage in Florida.
The excess of loss and FHCF treaties, which became effective on July 1, 2015 and June 1, 2015, respectively, insure for
approximately $1.82 billion of aggregate catastrophic losses and loss adjustment expenses (“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. Ceded premiums in connection with this program totaled
approximately $149.7 million.
FNIC’s 2016-2017 reinsurance programs, costing approximately $179.5 million, include approximately $125.7 million for
the private reinsurance for Federated National’s Florida exposure, including prepaid automatic premium reinstatement protection on
all layers, along with approximately $53.8 million payable to the FHCF. The combination of private and FHCF reinsurance treaties
will afford Federated National with approximately $2.22 billion of aggregate coverage with a maximum single event coverage totaling
approximately $1.58 billion, exclusive of retentions. FNIC maintained its FHCF participation at 75% for the 2016 hurricane
season. FNIC’s single event pre-tax retention for a catastrophic event in Florida is $18.45 million. In addition, FNIC purchases
separate underlying reinsurance layers in Louisiana, Alabama, and South Carolina to cover losses and LAE outside of Florida for each
catastrophic event from $8.0 million to $18.45 million. Depending on the characteristics of the catastrophic event, and the states
involved, FNIC’s single event pre-tax retention could be as low as $8.0 million. The maximum pre-tax retention of $18.45 million for
Florida represents 7.76% of the Company’s shareholders’ equity as of December 31, 2016.
Additionally, the Company’s private market excess of loss treaties became effective July 1, 2016 and all private layers have
prepaid automatic reinstatement protection, which affords us additional coverage against multiple catastrophic events in the same
hurricane season. The Company obtained multiple year protection for a portion of its program; as a result, some of the coverage will
expire on June 30, 2017, and a portion of the coverage will remain in-force one additional treaty year until June 30, 2018. These
private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all private layers
attach after $18.45 million in losses for FNIC’s Florida exposure. If the aggregate limit of the preceding layer is exhausted, the next
layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted.
MNIC’s 2016-2017 catastrophe reinsurance program, which runs from either June 1 to May 31 or June 1 to June 30 (13
month period), consists of the FHCF and private market excess of loss treaties. All private layers have prepaid automatic reinstatement
protection, which affords MNIC additional coverage, and have a cascading feature such that substantially all layers attach at $3.4
million for MNIC's Florida exposure.
The Company’s property quota share treaties, which are included in the reinsurance program, run for a two-year period from
July 1 to July 1 of the following year. The property 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 provided up to a 40% quota-
share reinsurance on the first $100 million of covered losses for the homeowners’ property insurance program in Florida. The treaties
are accounted for as retrospectively rated contracts whereby the estimated ultimate premium or commission is recognized over the
period of the contracts.
On July 1, 2016, the 30% property quota-share treaty expired on a cut-off basis, which means as of that date the Company
will retain 30% of its unearned premiums and losses. The reinsurers will remain liable for 30% of the paid losses occurring during the
term of the treaty, until the treaty is commuted.
The Company’s private passenger automobile quota share treaties are typically one-year programs which become effective at
different points in the year and cover auto policies across several states. These automobile quota share treaties cede 75% to 90% of all
written premiums entered into by the Company.
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, 2016, 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, 2016, we had 381 employees, including two executive officers. The 381 employees are made up of 187
from our claims department (of which 58 handle automobile claims), 81 from our underwriting department, 16 from our insurance
agency, and 97 perform our back office functions. The back office functions include but are not limited to accounting, information
technology, risk management and human resources. 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.
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COMPETITION
We operate in highly competitive markets and face competition from national, regional and residual market insurance
companies in the homeowners’, commercial general liability, automobile and flood 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 First
Insurance Company. In Florida, more than a 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 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 Florida OIR is currently performing a
regularly scheduled statutory examination of FNIC for the five years ended December 31, 2015. Prior to this, 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
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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, 2016, FNIC and MNIC held investment securities with a fair value of approximately $7.9
million, as deposits with the state of Florida, North Carolina, Alabama, and Georgia.
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.
Insurance Holding Company Regulation
We, the parent company, are subject to laws governing insurance holding companies in Florida where FNIC and MNIC are
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 10% 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 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 2016, 2015 and 2014, and none are anticipated in 2017. Also, no dividends were paid by
MNIC since inception in 2015 and none are anticipated in 2017. 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 or
MNIC 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).
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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 or MNIC to cease operations in the event they fail to maintain the required statutory capital.
Based upon the 2016 and 2015 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 307.5%, 439.3% and 534.0% at
December 31, 2016, 2015 and 2014, respectively. MNIC’s ratio of statutory surplus to its ACL was 2,419.8% and 7,260.0% at
December 31, 2016 and 2015, respectively.
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, 2016, 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 16, 2016, Demotech reaffirmed FNIC’s FSR of “A” (“Exceptional”) and on
November 30, 2016 Demotech reaffirmed MNIC’s FSR of “A” (“Exceptional”).
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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 the Southeast, the majority of which 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.
Florida experienced two significant hurricanes in 2016, which some weather analysts believe is consistent with 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 and MNIC.
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 or our other reinsurers may not have
available capital resources to pay their claims or that their ability to pay their claims in a timely manner may be impaired. This could
result in significant financial, legal and operational challenges to our company. Therefore, in the event of a catastrophic loss, we may
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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 and South Carolina in 2016, 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 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 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 indicates 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.
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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. 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.
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
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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.
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 existing trend, particularly in Florida homeowners insurance, 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 has substantially increased, and is
likely to continue to increase, the Company’s exposure to inflated claims, attorney fees and costs. Although legislative actions in the
State of Florida to limit the effect of assignment of benefits on insurance companies are being contemplated, 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.
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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 (“RBC”) standards, based upon
the Risk Based Capital Model Act adopted by the NAIC, require our insurance company to report their results of RBC calculations to
state departments of insurance and the NAIC. These RBC 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 RBC 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 RBC 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 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 Company rating of our financial strength. Although our insurance subsidiaries have 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.
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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.
We are a party to an Insurance Agency Master Agreement with Ivantage Select Agency, Inc. (“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 2016, 24.1% 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.
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.
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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.
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
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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 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.
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 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, our Chief Executive Officer and President. 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;
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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 annual Form 10-K, the accompanying notes 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.
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,
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 wholly and partially owned 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
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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.
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, 2016, there were 79,484 shares issuable upon the exercise of outstanding and exercisable stock options
and 243,759 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.
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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. 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.
The Company is a party to a Co-Existence Agreement effective as of August 30, 2013 (the “Co-Existence Agreement”) with
Federated Mutual Insurance Company (“Mutual”) pursuant to which the Company has agreed to certain restrictions on its use of the
word “FEDERATED” without the word “NATIONAL” when referring to FNHC and Federated National Insurance Company. In
response to Mutual’s allegations that the Company’s use of the word “FED” as part of the Company’s federally registered “FEDNAT”
trademark infringes on Mutual’s federal and common law trademark rights, which the Company disputes, on July 21, 2016, the
Company filed a declaratory judgment action for non-infringement of trademark in the U.S. District Court for the Southern District of
Florida. Specifically, the Company seeks a declaration that its federally registered trademark "FEDNAT" does not infringe any
alleged trademark rights of Mutual and that Mutual does not own any trademark rights to the name or mark "FED" in connection with
insurance services outside of Owatonna, Minnesota. On July 26, 2016, Mutual filed a demand for arbitration against the Company
before the American Arbitration Association (“AAA”) alleging a breach of the Co-Existence Agreement. On November 29, 2016, the
U.S. District Court for the Southern District of Florida granted Mutual’s motion to compel arbitration of the Company’s declaratory
judgment action for non-infringement of a trademark. On February 3, 2017, the AAA granted the Company’s motion to terminate the
arbitration for lack of jurisdiction based upon Mutual’s failure to comply with the Co-Existence Agreement’s regarding the selection
of an arbitrator. The parties are currently in the process of conferring upon the selection of a mutually agreeable arbitrator. The
Company nevertheless intends to vigorously defend against Mutual’s allegations, although there can be no assurances as to the
outcome of this matter.
On March 2, 2017, the Company filed a complaint in Broward County, Florida court to enforce the terms of the restrictive
covenants set forth in the Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement dated August 5,
2013, as amended, entered into between Peter J. Prygelski, III and the Company during Mr. Prygelski’s employment with the
Company and set forth in the separation agreement he entered into in connection with his separation from the Company. The
Company believes that he accepted employment with a competitor in contravention of these restrictive covenants and therefore the
Company is seeking injunctive relief, declaratory relief and damages, although there can be no assurances as to the outcome of this
matter. The Company has not recognized a gain contingency in the financial statements as of December 31, 2016.
Refer to Note 9 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.
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PART II
ITEM 5. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
$
$
High
Low
29.08 $
22.93
22.45
19.33
31.87 $
31.76
25.90
32.61
18.68
18.00
17.08
14.03
23.15
23.26
20.23
23.54
The closing price of our common stock on March 15, 2017 was $18.12.
HOLDERS
As of March 15, 2017, there were 94 holders of record of our common stock. We believe that the number of beneficial
owners of our common stock is in excess of 5,800.
DIVIDENDS
The Board of Directors of FNHC declared regular quarterly dividends as follows:
In September 2016, our Board of Directors declared a $0.08 per common share dividend payable December 1, 2016 to
shareholders of record on November 1, 2016, totaling $1.1 million.
In May and June 2016, our Board of Directors declared quarterly dividend payments of $0.06 per common share,
respectively, paid in June and August 2016, respectively, totaling $1.7 million.
In February 2016, our Board of Directors declared a quarterly dividend payment of $0.05 per common share, paid in
March 2016, amounting to $0.7 million.
$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, and September 2, 2014 to
shareholders of record as of August 5 and November 4, 2013 and February 3, May 5, August 4, 2014. $0.04 per common
share payable on and December 1, 2014 to shareholders of record as of November 3, 2014.
Payment of dividends in the future will depend on our earnings and financial position and such other factors, as our Board of
Directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits on the amount of
dividends that FNIC and MNIC are permitted to pay to the parent company.
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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes our equity compensation plans as of December 31, 2016. 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 Weighted-average
Number of securities
remaining available for
future issuance under
Plan category
Equity compensation plans approved by stockholders
be issued upon exercise of exercise price of equity compensation plans
outstanding options,
(excluding securities
outstanding options,
warrants and rights warrants and rights reflected in column (a))
(b)
(a)
(c)
79,484
3.70
243,759
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.
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.
Federated National Holding Company
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Index
Federated National Holding Company
NASDAQ Composite
SNL Insurance P&C
Period Ending
12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16
658.07
219.89
219.27
1,027.79
201.98
185.79
835.03
188.84
179.61
181.39
117.45
118.04
503.83
164.57
156.39
100.00
100.00
100.00
Returns are based on the change in year-end to year-end price. The graph assumes $100 was invested on December 31, 2011
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.
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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
Direct written policy fees
Other income
Total revenue
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income before income taxes
Income taxes
Net income
Net income (loss) attributable to noncontrolling interest
Net (loss) income attributable to Federated National
Holding Company shareholders
Per share data:
Net (loss) income per share attributable to Federated National
Holding Company shareholders:
Basic
Diluted
Dividends
Balance Sheet Data:
Cash and invested assets
Total assets
Loss and loss adjustment expense reserves
Total liabilities
Total shareholders’ equity
Book value per share
$
2016
259,872 $
9,063
3,045
17,730
26,674
316,384
187,341
108,776
17,186
348
313,651
2,733
2,683
50
246
2015
Year Ended December 31,
2014
(in thousands, except per share data)
2013
210,020 $
7,226
3,616
11,248
17,783
249,893
104,353
64,868
15,223
256
184,700
65,193
24,753
40,440
(445)
170,905 $
5,385
4,426
8,689
11,287
200,692
81,036
52,077
10,272
—
143,385
57,307
20,108
37,199
—
104,381 $
3,332
2,881
6,196
4,947
121,737
56,410
38,580
7,529
—
102,519
19,218
6,491
12,727
—
2012
59,359
3,819
1,072
2,093
2,304
68,647
30,209
26,515
5,175
—
61,899
6,748
2,435
4,313
—
$
(196) $
40,885 $
37,199 $
12,727 $
4,313
$
$
$
$
$
$
$
$
$
(0.01) $
(0.01) $
0.27 $
2.98 $
2.92 $
0.18 $
3.08 $
2.99 $
0.13 $
1.50 $
1.45 $
0.11 $
0.53
0.53
0.02
2016
2015
December 31,
2014
(in thousands, except per share data)
2013
2012
484,275 $
813,127 $
158,110 $
575,271 $
237,856 $
17.65 $
437,369 $
699,254 $
97,340 $
448,495 $
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
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Operating Results Overview - Year Ended December 31, 2016 Compared with Year Ended December 31, 2015
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.
The following table summarizes our audited results of operations for the years ended December 31, 2016 and 2015:
$
Revenue:
Gross premiums written
Increase in unearned premiums
Gross premiums earned
Ceded premiums earned
Net premiums earned
Net investment income
Net realized investment gains
Direct written policy fees
Other income
Total revenue
Expenses:
Losses and LAE
Commissions and other underwriting expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income before income taxes
Income taxes
Net income
Net income (loss) attributable to noncontrolling interest
Net (loss) income attributable to FNHC
$
Ratios to net premiums earned:
Net loss ratio (1)
Net expense ratio (2)
Net combined ratio (3)
Year Ended
December 31,
% Change
(Dollars in thousands)
2016
22.6% $
(34.9)%
30.8%
37.5%
23.7%
25.4%
(15.8)%
57.6%
50.0%
26.6%
79.5%
67.7%
12.9%
35.9%
69.8%
(95.8)%
(89.2)%
(99.9)%
(155.3)%
(100.5)% $
605,485
(40,062)
565,423
(305,551)
259,872
9,063
3,045
17,730
26,674
316,384
187,341
108,776
17,186
348
313,651
2,733
2,683
50
246
(196)
72.1%
48.5%
120.7%
2015
493,770
(61,536)
432,234
(222,214)
210,020
7,226
3,616
11,248
17,783
249,893
104,353
64,868
15,223
256
184,700
65,193
24,753
40,440
(445)
40,885
49.7%
38.1%
87.9%
(1) The net loss ratio is calculated as losses and LAE divided by net premiums earned.
(2) The net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.
(3) The net combined ratio is calculated as the sum of losses and LAE and all operating expenses less interest expense
divided by net premiums earned.
Revenue
Total revenue for the year ended December 31, 2016 of $316.4 million increased $66.5 million, or 26.6%, compared to
revenue of $249.9 million in 2015.
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Gross Premiums Written
The following table represents the gross premiums written breakout for the years ended December 31, 2016 and 2015:
Gross premiums written:
Homeowners Florida
Homeowners non-Florida
Personal automobile
Commercial general liability
Federal flood
Total gross premiums written
Year Ended December 31,
2016
2015
(in thousands)
$
$
477,489 $
35,248
69,479
13,256
10,013
605,485 $
427,428
22,338
21,912
13,928
8,164
493,770
Gross written premiums increased $111.7 million, or 22.6%, to $605.5 million for the year ended December 31, 2016,
compared with $493.8 million for the same period last year. The increase predominantly reflects market share growth in our
homeowners’ and personal automobile lines of business. Homeowners’ gross written premiums increased $63.0 million, or 14.0%, to
$512.7 million for the year ended December 31, 2016, compared with $449.8 million for the same twelve-month period last year.
Gross written premiums for our personal automobile line of business increased by $47.6 million to $69.5 million in 2016, compared to
$21.9 million in the prior year period. This increase is also reflected in in the increase in our homeowners’ in-force policy count to
279,109 as of December 31, 2016, compared with 254,105 as of December 31, 2015. These increases reflect management’s strategy
to continue to grow market share in Florida as well as expand operations outside of Florida with the growth in our personal automobile
line of business. With the expansion into areas outside of Florida, we are able to continue to leverage our personnel and, at the same
time, diversify our insurance risk.
Gross Premiums Earned
The following table represents the gross premiums earned breakout for the years ended December 31, 2016 and 2015:
Gross premiums earned:
Homeowners Florida
Homeowners non-Florida
Personal automobile
Commercial general liability
Federal flood
Total gross premiums earned
Year Ended December 31,
2016
2015
(in thousands)
$
$
455,252 $
29,101
58,312
13,675
9,083
565,423 $
381,027
15,799
14,108
13,542
7,758
432,234
Gross premiums earned increased $133.2 million, or 30.8%, to $565.4 million for the year ended December 31, 2016,
compared with $432.2 million for the same period last year.
Ceded Premiums Earned
Ceded premiums earned increased by $83.3 million, or 37.5%, to $305.6 million for the year ended December 31, 2016,
compared with $222.2 million in the same period last year. This increase is driven by the additional excess-of-loss reinsurance costs
recorded in 2016 as compared to 2015 related to the homeowners’ premium growth. Additionally, we recorded increased ceded
premiums related to the premium growth in personal automobile in 2016, which is generally ceded at 75% to 80% through a quota
share agreement. These increases were offset by lower ceded premiums in 2016 as compared to 2015 due to the expiration of the 30%
Florida only property quota share treaty, which ended on July 1, 2016.
Net Investment Income
Net investment income increased $1.8 million, or 25.4%, to $9.1 million during the year ended December 31, 2016,
compared with $7.2 million during the year ended December 31, 2015. This increase is mainly due to a year-over-year overall growth
of our investment portfolio, specifically growth in the debt securities investments. Our debt securities investment yields, net, remained
steady year over year at 2.3% for the years ended December 31, 2016 and 2015, respectively.
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Net Realized Investment Gains
Net realized investment gains totaled $3.0 million for the year ended December 31, 2016, compared with $3.6 million for the
year ended December 31, 2015. From time to time, our portfolio managers, under our control, move out of positions due to both
macro and micro conditions; these movements generate both realized gains and losses. The slight decrease is due to less favorable
market conditions for the year ended December 2016, as compared to the year ended December 31, 2015.
Direct Written Policy Fees
Direct written policy fees increased by $6.5 million, or 57.6%, to $17.7 million for the year ended December 31, 2016,
compared with $11.2 million in 2016. The increase in direct written policy fees is correlated to the increase in gross written premiums
in our homeowners and personal automobile lines of business compared to the prior year. These fees are generated when the Company
writes a policy and the fee varies from state to state and by line of business. Policy fees generated by the managing general agent are
earned by the Company. All other policy fees are collected by us and passed through to the general agent as acquisition costs and
recognized in commission and other underwriting expenses.
Other Income
Other income increased $8.9 million, or 50.0%, to $26.7 million for the year ended December 31, 2016, compared with $17.8
million for the year ended December 31, 2015. The following table represents the other income detail:
Other income:
Commission income
Brokerage revenue
Quota-share profit sharing
Finance revenue
Total other income
Year Ended
December 31,
% Change
(Dollars in thousands)
2016
2015
$
$
17,229
7,301
-
2,144
26,674
120.6% $
46.6%
(100.0)%
11.9%
50.0% $
7,811
4,979
3,077
1,916
17,783
The increase in commission income is primarily a result of the premium growth in personal automobile, which has increased
the ceded commissions and the fees we receive for managing that business. These fees are received by FNIC and passed through to
FNU for its services as a managing general agent. The commission income from personal automobile is designed to offset the
commission and other acquisition costs incurred when the Company writes the policies, which are recognized in the commissions and
other underwriting expenses account.
The increase in brokerage revenue is driven by the increase in our homeowners reinsurance program, the type of reinsurance
purchased, and the commissions paid on these reinsurance agreements in calendar year 2016 as compared to calendar year 2015.
The decrease in quota-share profit sharing is the result of our re-evaluation, effective September 30, 2015, of the accounting
treatment for the quota-share reinsurance contracts with retrospective rating provisions. At that time, we eliminated recording of future
estimated quota-share profits in one line, ("Quota-share profit sharing"), on the consolidated statement of operations.
Expenses
Losses and Loss Adjustment Expenses
Losses and LAE increased $83.0 million, or 79.5%, to $187.3 million for the year ended December 31, 2016, compared with
$104.4 million for the same twelve-month period last year. The increase in losses and LAE is driven by $40.0 million of losses due to
increased earned premiums in our homeowners and personal automobile lines of business, $33.3 million incurred in catastrophe losses
resulting from a series of tornados and severe weather events that impacted the state of Florida and South Carolina (i.e., Hurricane
Matthew, Hurricane Hermine, Tropical Storm Colin), and $16.0 million of losses related to increasing our Florida homeowners’
attritional loss ratio throughout 2016. Additionally, losses and LAE were impacted by unfavorable development of $11.0 million for
the 2015 accident year in our homeowners’ coverage in the state of Florida as a result of assignment of benefits and other related
adjusting expenses. The factors listed above were offset by ceded losses pertaining to the property quota-share treaty.
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As of December 31, 2016, the Company recorded $158.1 million in losses and LAE expense reserves for all lines of business,
which includes $99.2 million in incurred but not yet reported (“IBNR”) reserves. As of December 31, 2015, the Company recorded
$97.3 million in losses and LAE expense reserves for all lines of business, which includes $51.1 million in IBNR reserves.
Commissions and Other Underwriting Expenses
The following table represents the commissions and other underwriting expenses breakout for the years ended December 31,
2016 and 2015:
Commissions and other underwriting expenses:
Homeowners Florida
All others
Ceded commissions
Total commissions and other fees
Salaries and wages
Other underwriting expenses
Commissions and other underwriting expenses
Year Ended December 31,
2016
2015
(in thousands)
$
$
61,319 $
23,742
(27,705)
57,356
22,387
29,033
108,776 $
41,033
14,739
(32,828)
22,944
17,934
23,990
64,868
Commissions and other underwriting expenses increased $43.9 million, or 67.7%, to $108.8 million for the year ended
December 31, 2016, compared with $64.9 million for the year ended December 31, 2015. The $43.9 million increase is related to the
premium growth in our homeowners’ and personal automobile lines of business; with personal automobile and homeowners’ non-
Florida lines of business carrying higher acquisition costs as a result of our different distribution models we employ to market our
insurance products. Although personal automobile quota-share treaties cede 75% to 90% of all premiums, the full expense for
commissions and other acquisition costs are recognized in this line item, which partially offsets the related commission income
recorded within the other income line in the statements of operations.
General and Administrative Expenses
General and administrative expenses increased $2.0 million, or 12.9%, to $17.2 million for the year ended December 31,
2016, compared with $15.2 million for the year ended December 31, 2015. The increase primarily reflects expenses incurred of
$1.9 million in connection with the resignation of the Company’s former Chief Financial Officer during the second quarter of 2016.
Income Taxes
Income taxes decreased $22.1 million, or 89.2%, to an income tax expense of $2.7 million for the year ended December 31,
2016, compared with an income tax expense of $24.8 million for the year ended December 31, 2015. The change was primarily due to
a decrease in taxable income. Additionally, in 2016, the Company recorded $2.2 million of additional tax expense related to a prior
year adjustment impacting deferred taxes.
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Operating Results Overview - Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
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.
The following table reports our audited results of operations for the years ended December 31, 2015 and 2014:
Revenue:
Gross premiums written
Increase in unearned premiums
Gross premiums earned
Ceded premiums earned
Net premiums earned
Net investment income
Net realized investment gains
Direct written policy fees
Other income
Total revenue
Expenses:
Losses and LAE
Commissions and other underwriting expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income before income taxes
Income taxes
Net income
Net loss attributable to noncontrolling interest
Net income attributable to FNHC
Ratios to net premiums earned:
Net loss ratio (1)
Net expense ratio (2)
Net combined ratio (3)
Year Ended
December 31,
% Change
(Dollars in thousands)
2015
30.9% $
(4.0)%
38.1%
56.3%
22.9%
34.2%
(18.3)%
29.5%
57.6%
24.5%
28.8%
24.6%
48.2%
100.0%
28.8%
13.8%
23.1%
8.7%
(100.0)%
9.9% $
$
$
493,770
(61,536)
432,234
(222,214)
210,020
7,226
3,616
11,248
17,783
249,893
104,353
64,868
15,223
256
184,700
65,193
24,753
40,440
(445)
40,885
49.7%
38.1%
87.9%
2014
377,156
(64,081)
313,075
(142,170)
170,905
5,385
4,426
8,689
11,287
200,692
81,036
52,077
10,272
-
143,385
57,307
20,108
37,199
-
37,199
47.4%
36.5%
83.9%
(1) The net loss ratio is calculated as losses and LAE divided by net premiums earned.
(2) The net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.
(3) The net combined ratio is calculated as the sum of losses and LAE and all operating expenses less interest expense
divided by net premiums earned.
Revenue
Total revenue for the year ended December 31, 2015 of $249.9 million increased $49.2 million, or 24.5%, compared to
revenue of $200.7 million in 2014.
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Gross Premiums Written
The following table represents the gross premiums written breakout for the years ended December 31, 2015 and 2014:
Gross premiums written:
Homeowners Florida
Homeowners non-Florida
Personal automobile
Commercial general liability
Federal flood
Total gross premiums written
Year Ended December 31,
2015
2014
(in thousands)
$
$
427,428 $
22,338
21,912
13,928
8,164
493,770 $
335,338
9,600
12,376
12,432
7,410
377,156
Gross premiums written increased $116.6 million, or 30.9%, to $493.8 million for the year ended December 31, 2015,
compared with $377.2 million for the same period in 2014. The increase predominantly reflects market share growth in our
homeowners’ and personal automobile lines of business. Homeowners’ gross premiums written increased $104.8 million, or 30.4%, to
$449.8 million for the year ended December 31, 2015, compared with $344.9 million in 2014. Gross premiums written for the
personal automobile line of business increased by $9.5 million to $21.9 million in 2016, compared to $12.4 million in 2014.
Additionally, this increase reflects an increase in our homeowners’ in-force policy count to 254,105 as of December 31, 2015,
compared with 182,557 as of December 31, 2014.
Gross Premiums Earned
The following table represents the gross premiums earned breakout for the years ended December 31, 2015 and 2014:
Gross premiums earned:
Homeowners Florida
Homeowners non-Florida
Personal automobile
Commercial general liability
Federal flood
Total gross premiums earned
Year Ended December 31,
2015
2014
(in thousands)
$
$
381,027 $
15,799
14,108
13,542
7,758
432,234 $
279,514
4,052
11,617
11,245
6,648
313,075
Gross premiums earned increased $119.2 million, or 38.1%, to $432.2 million for the year ended December 31, 2015,
compared with $313.1 million for the same period in 2014.
Ceded Premiums Earned
Ceded premiums earned increased by $80.0 million, or 56.3%, to $222.2 million for the year ended December 31, 2015,
compared with $142.2 million in the same twelve-month period last year. This increase is driven by the additional excess-of-loss
reinsurance costs recorded in 2015 as compared to 2014 related to the homeowners’ premium growth. Additionally, we recorded
higher ceded premiums in 2015 as compared to 2014 as the 30% Florida-only property quota share treaty was in place for a full year
in 2015 as compared to only 6 months in 2014 as well as having the 10% Florida-only property quota share treaty in place for 6
months in 2015.
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 and a decrease in our debt securities investment yields. Our investment yield, net was 2.3% and 2.7%, for
the years ended December 31, 2015 and 2014, respectively.
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Table of Contents
Net Realized Investment Gains
Net realized investment gains were $3.6 million for the year ended December 31, 2015, compared with $4.4 million for the
year ended December 31, 2014. From time to time, our portfolio managers, under our control, move out of positions due to both
macro and micro conditions; these movements generate both realized gains and losses.
Direct Written Policy Fees
Direct written policy fees increased by $2.6 million, or 29.5%, to $11.2 million for the year ended December 31, 2015,
compared with $8.7 million in 2014. The increase in direct written policy fees is correlated to the increase in gross written premiums
in our homeowners and personal automobile lines of business compared to the prior year. These fees are generated when the Company
writes a policy and the fee varies from state to state and by line of business. Policy fees generated by the managing general agent are
earned by the Company. All other policy fees are collected by us and passed through to the general agent as acquisition costs and
recognized in commission and other underwriting expenses.
Other Income
Other income increased $6.5 million, or 57.6%, to $17.8 million for the year ended December 31, 2015, compared with $11.3
million for the year ended December 31, 2014. The following table represents the other income detail:
Other income:
Commission income
Brokerage revenue
Quota-share profit sharing
Finance revenue
Total other income
Year Ended
December 31,
% Change
(Dollars in thousands)
2015
2014
$
$
7,811
4,979
3,077
1,916
17,783
72.9% $
98.1%
10.2%
30.8%
57.6% $
4,517
2,513
2,792
1,465
11,287
The increase in commission income is primarily a result of the premium growth in personal automobile, which has increased
the ceded commissions and the fees we receive for managing that business. These fees are received by FNIC and passed through to
FNU for its services as a managing general agent. The commission income from personal automobile is designed to offset the
commission and other acquisition costs incurred when the Company writes the policies, which are recognized in the commissions and
other underwriting expenses account.
The increase in brokerage revenue is driven by the increase in our homeowners reinsurance program, the type of reinsurance
purchased, and the commissions paid on these reinsurance agreements in calendar year 2015 as compared to calendar year 2014.
Expenses
Losses and Loss Adjustment Expenses
Losses and LAE increased $23.3 million, or 28.8%, to $104.4 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 is directly related to an increase in net
premiums earned and an increase in our net loss ratio year over year. Our net 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 increasing our Florida homeowners’ attritional loss ratio due to
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 without prior approval from them. The temporary discontinuation of the
underwriting analytics caused us to underwrite polices outside of our standard process.
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Commissions and Other Underwriting Expenses
The following table represents commissions and other underwriting expenses breakout for the years ended December 31,
2015 and 2014:
Commissions and other underwriting expenses:
Homeowners Florida
All others
Ceded commissions
Total commissions and other fees
Salaries and wages
Other underwriting expenses
Commissions and other underwriting expenses
Year Ended December 31,
2015
2014
(in thousands)
$
$
41,033 $
14,739
(32,828)
22,944
17,934
23,990
64,868 $
27,983
11,802
(12,310)
27,475
11,125
13,477
52,077
Commissions and other underwriting expenses increased $12.8 million, or 24.6%, to $64.9 million for the year ended
December 31, 2015, compared with $52.1 million for the year ended December 31, 2014. Our net expense ratio for 2015 was 38.1%
compared with 36.5% for the same period in 2014. The increase is directly related to the significant increase in net premiums written
and earned during the same period offset by an increase in ceded commissions from the 30% Florida-only property quota share treaty,
which was in place for a full year in 2015 as compared to only 6 months in 2014 as well as the 10% Florida-only property quota share
treaty, which was in place for 6 months in 2015.
General and Administrative Expenses
General and administrative expenses increased $5.0 million, or 48.2%, to $15.2 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 Delaware. 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.
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, 2016, we had $74.6 million in cash and cash equivalents and
$409.7 million in investments. As of December 31, 2015, we had $53.0 million in cash and cash equivalents and $384.3 million in
investments.
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2016 was $69.8 million, compared to net cash
provided by operating activities for the year ended December 31, 2015 of $52.9 million. This increase was primarily as a result of the
decrease in the prepaid reinsurance premium account and increase loss and LAE expense reserves in 2016, partly offset by decreases
in reinsurance recoverables, unearned premiums, and deferred acquisition costs. 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 decrease was primarily as a result a decrease in prepaid reinsurance premium account.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2016 was $33.2 million, compared to net cash used in
investing activities for the year ended December 31, 2015 of $63.6 million. This decrease was the result of less net purchases of
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investment securities as compared to prior year. 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.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2016 was $15.0 million, compared to net cash provided
by financing activities for the year ended December 31, 2015 of $23.6 million. This decrease was primarily due to $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 and $11.3 million of common stock repurchases and dividends paid during the year ended
December 31, 2016. 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. We currently expect to
continue declaring and paying dividends at comparable levels, subject to our future liquidity needs and reserve requirements. The
Company also considers various opportunities, including common stock repurchases, to deploy its excess capital. 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 GAAP, which
requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and LAE.
Insurance premiums are established before we know the amount of losses and LAE and the extent to which inflation may
affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we
attempt to charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation
may also affect the market value of our investment portfolio and the investment rate of return. Any future economic changes that
result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred losses and LAE and
thereby materially adversely affect future liability requirements.
CONTRACTUAL OBLIGATIONS
A summary of long-term contractual obligations as of December 31, 2016 follows (in thousands). The amounts represent
estimates of gross undiscounted amounts payable over time.
Loss and loss adjustment expense reserves (1)
Debt from consolidated variable interest entity
Operating leases
Other liabilities
Total
Total
158,110 $
5,000
4,057
120
167,287 $
$
$
Payments Due By Period
Less
than
1 Year
1 - 3
Years
3 - 5
Years
More
than
5 Years
93,854 $
—
644
120
94,618 $
55,196 $
—
1,996
—
57,192 $
7,654 $
5,000
1,417
—
14,071 $
1,406
—
—
—
1,406
(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.
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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 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 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.
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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.
DEFERRED ACQUISITION COSTS (“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.
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 (“LAE”)
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.
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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.
We believe that the reserves for unpaid loss and LAE established by our insurance companies are adequate as of December
31, 2016; 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;
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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.
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 2016, 2015 and 2014 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 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.
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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, “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, 2016 and 2015, the Company had no off balance sheet transactions.
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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, 2016, approximately 93% of investments were in debt securities and cash and
cash equivalents, which are considered to be either held-to-maturity or available-for-sale, based upon our estimates of required
liquidity. Approximately 99% 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, 2016, 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.
2017
2018
2019
2020
2021
Thereafter
Total
Carrying
Amount
Principal amount by expected
maturity:
United States government
obligations and authorities
Obligations of states and
political subdivisions
Corporate securities
International securities
Collateralized mortgage obligations
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
Total investments
$
9,721 $
6,509 $
1,765 $
4,921 $
3,425 $
14,600 $
40,941 $
40,553
21,600
15,677
1,300
3,071
51,369 $
12,690
17,567
2,335
1,280
40,381 $
22,825
14,573
406
955
40,524 $
21,525
15,249
551
1,311
43,557 $
10,520
20,888
1,469
4,809
41,111 $
48,250
58,015
5,641
19,422
145,928 $
137,410
141,969
11,702
30,848
362,870 $
151,183
144,646
11,934
31,991
380,307
0.83%
0.76%
1.90%
0.46%
1.24%
1.54%
1.11%
4.53%
3.59%
3.00%
4.38%
3.49%
5.00%
3.74%
3.77%
2.48%
3.62%
4.99%
3.47%
7.38%
3.03%
4.29%
4.93%
3.56%
3.31%
3.34%
3.88%
4.87%
3.29%
2.98%
4.09%
3.61%
4.92%
3.69%
4.08%
3.69%
3.90%
4.88%
3.59%
3.84%
3.73%
3.82%
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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, 2016 and 2015
Consolidated Statements of Operations For the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income For the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Shareholders’ Equity For the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows For the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
PAGE
41
43
44
45
46
47
49
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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 sheets of Federated National Holding Company and subsidiaries as of
December 31, 2016 and 2015 and the related consolidated statements of operations, comprehensive income, changes in shareholders'
equity and cash flows for the years ended December 31, 2016 and 2015. Our audits 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 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 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 audits provide 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, 2016 and 2015 and the consolidated results of their operations
and their cash flows for the years ended December 31, 2016 and 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, 2016, 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 16, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 16, 2017
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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
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FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Investments:
ASSETS
Debt securities, available-for-sale, at fair value (amortized cost of $376,644 and
$338,021, respectively)
Debt securities, held-to-maturity, at amortized cost
Equity securities, available-for-sale, at fair value (cost of $24,163 and $33,581, respectively)
Total investments (including $28,704 and $22,670 related to the VIE, respectively)
Cash and cash equivalents (including $15,668 and $14,616 related to the VIE, respectively)
Prepaid reinsurance premiums
Premiums receivable, net of allowance of $55 and $302, respectively
(including $1,584 and $355 related to the VIE, respectively)
Reinsurance recoverable, net
Deferred acquisition costs
Income taxes receivable
Property and equipment, net
Other assets (including $1,910 and $1,037 related to the VIE, respectively)
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Loss and loss adjustment expense reserves
Unearned premiums
Reinsurance payable
Debt from consolidated variable interest entity
Deferred income taxes, net
Other liabilities
Total liabilities
$
$
$
SHAREHOLDERS’ EQUITY:
Preferred stock, $0.01 par value: 1,000,000 shares authorized
Common stock, $0.01 par value: 25,000,000 shares authorized;
13,473,120 and 13,798,773 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
equity
Noncontrolling interest
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
See accompanying notes to consolidated financial statements.
December 31,
2016
2015
374,756 $
5,551
29,375
409,682
74,593
156,932
54,854
48,530
38,962
13,871
4,194
11,509
813,127 $
158,110 $
294,022
79,154
4,909
1,433
37,643
575,271
339,178
6,619
38,534
384,331
53,038
181,840
38,594
12,714
15,547
2,691
2,894
7,605
699,254
97,340
253,960
61,069
4,887
5,627
25,612
448,495
—
—
134
136,779
1,941
80,275
219,129
18,727
237,856
813,127 $
138
131,998
3,985
96,461
232,582
18,177
250,759
699,254
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FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue:
Net premiums earned
Net investment income
Net realized investment gains
Direct written policy fees
Other income
Total revenue
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income before income taxes
Income taxes
Net income
Net income (loss) attributable to noncontrolling interest
Net (loss) income attributable to Federated National
Holding Company shareholders
Net (loss) income per share attributable to Federated National
Holding Company shareholders:
Basic
Diluted
Weighted average number of shares of common stock
outstanding:
Basic
Diluted
Year Ended
December 31,
2015
2016
$
259,872 $
9,063
3,045
17,730
26,674
316,384
210,020 $
7,226
3,616
11,248
17,783
249,893
187,341
108,776
17,186
348
313,651
2,733
2,683
50
246
104,353
64,868
15,223
256
184,700
65,193
24,753
40,440
(445)
2014
170,905
5,385
4,426
8,689
11,287
200,692
81,036
52,077
10,272
-
143,385
57,307
20,108
37,199
-
$
(196) $
40,885 $
37,199
$
$
(0.01) $
(0.01) $
2.98 $
2.92 $
3.08
2.99
13,758
13,758
13,729
13,997
12,082
12,438
Dividends declared per share of common stock
$
0.27 $
0.18 $
0.13
See accompanying notes to consolidated financial statements.
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FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Change in net unrealized (losses) gains on investments,
available-for-sale
Comprehensive (loss) income before income taxes
Income tax benefit (expense) related to items of other
comprehensive income
Comprehensive (loss) income
Less: comprehensive income (loss) attributable to
noncontrolling interest
Comprehensive (loss) income attributable to Federated National
Holding Company shareholders
See accompanying notes to consolidated financial statements.
Year Ended
December 31,
2015
2014
2016
$
50
$
40,440
$
37,199
(2,786)
(2,736)
(6,308)
34,132
2,856
40,055
1,046
(1,690)
2,454
36,586
(1,102)
38,953
550
(566)
—
$
(2,240)
$
37,152
$
38,953
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Table of Contents
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except per share data)
Common Stock
Preferred
Stock
Issued
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive Retained
Earnings
Income
Total Shareholders'
Equity Attributable to
Federated National
Holding Company
Noncontrolling Shareholders'
Shareholders
Interest
Equity
Total
Balance as of December 31, 2013
$
Net income
Other comprehensive income
Dividends
Stock issued in public offering
Shares issued under share-
based compensation plans
Tax benefits from share-based
awards
Share-based compensation
Balance as of December 31, 2014
Net income (loss)
Other comprehensive income,
Noncontrolling interest capital
contributions
Dividends
Shares issued under share-
based compensation plans
Tax benefits from share-based
awards
Share-based compensation
Balance as of December 31, 2015
Net (loss) income
Other comprehensive (loss) income
Dividends
Shares issued under share-
based compensation plans
Tax benefits from share-based
awards
Repurchases of common stock
Share-based compensation
Balance as of December 31, 2016
$
—
—
—
—
—
10,901,716 $
—
—
—
2,358,975
109 $
—
—
—
23
80,525 $
—
—
—
43,086
5,964 $
—
1,754
—
—
21,896 $
37,199
—
(1,672)
—
108,494 $
37,199
1,754
(1,672)
43,109
— $
—
—
—
—
108,494
37,199
1,754
(1,672)
43,109
—
371,723
4
1,551
—
—
1,555
—
1,555
—
—
—
—
—
—
—
13,632,414
—
—
—
—
136
—
—
480
1,660
127,302
—
—
—
—
7,718
—
(3,733)
—
—
57,423
40,885
—
480
1,660
192,579
40,885
(3,733)
—
(1,847)
(1,847)
—
—
171
—
171
—
—
—
166,359
—
—
—
—
—
—
—
—
13,798,773 $
—
—
—
—
2
—
—
138 $
—
—
—
—
169
1,564
2,963
131,998 $
—
—
—
—
—
3,985 $
—
(2,044)
—
—
—
96,461 $
(196)
—
(4,677)
1,564
2,963
232,582 $
(196)
(2,044)
(4,677)
—
299,165
—
361
—
—
361
—
—
—
—
—
(624,818)
—
13,473,120 $
—
(4)
—
134 $
590
—
3,831
136,779 $
—
—
—
1,941 $
—
(11,313)
—
80,275 $
590
(11,317)
3,831
219,129 $
—
—
—
(445)
(121)
480
1,660
192,579
40,440
(3,854)
18,743
—
18,743
(1,847)
—
—
18,177 $
246
304
—
—
—
—
—
18,727 $
1,564
2,963
250,759
50
(1,740)
(4,677)
361
590
(11,317)
3,831
237,856
See accompanying notes to consolidated financial statements.
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Table of Contents
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
December 31,
2015
2014
2016
$
50 $
40,440 $
37,199
(3,045)
5,346
869
4,420
24,908
(16,260)
(35,816)
(23,415)
(11,769)
60,770
40,062
18,085
(2,575)
8,120
69,750
(3,616)
5,645
624
4,527
(84,875)
(11,319)
(180)
(1,937)
(2,445)
19,010
61,535
18,606
6,741
135
52,891
(4,426)
4,165
149
2,140
(59,829)
(4,860)
(9,793)
3,098
(4,189)
17,315
64,081
12,918
765
4,411
63,144
311,109
(342,113)
(2,147)
(33,151)
169,979
(231,884)
(1,736)
(63,641)
87,151
(194,087)
(969)
(107,905)
—
—
589
—
(11,317)
361
(4,677)
(15,044)
21,555
53,038
74,593 $
18,743
—
1,564
5,000
—
171
(1,847)
23,631
12,881
40,157
53,038 $
—
43,109
480
—
—
1,555
(1,672)
43,472
(1,289)
41,446
40,157
$
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
Reinsurance payable
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 common stock in public offering
Tax benefit related to share-based compensation
Issuance of debt in consolidated variable interest entity
Purchases of FNHC common stock
Issuance of common stock for share-based awards
Dividends paid
Net cash (used in) provided by financing activities
Net increase 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.
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FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
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.
Year Ended
December 31,
2015
2014
2016
$
14,360 $
15,662 $
19,185
$
1,115 $
712 $
564
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016
1. ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION
Organization
Federated National Holding Company, (“FNHC,” the “Company,” “we,” or “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’”), personal automobile, commercial general liability, federal
flood, 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, Texas, Georgia, 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 to their policyholders.
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.
Significant Customer
We entered into an Insurance Agency Master Agreement with Ivantage Select Agency, Inc., (“ISA”), an affiliate of Allstate
Insurance Company (“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. As a percentage of the total homeowners’ premiums we
underwrote in the years ended December 31, 2016, 2015, and 2014, 24.1%, 25.4%, and 20.5%, respectively, were from Allstate’s
network of Florida agents.
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 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. Refer to Note 14 for additional information on the VIE.
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Table of Contents
Basis of Presentation
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
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.
2. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
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 losses 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.
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.
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 operations. 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.
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Table of Contents
Cash and Cash Equivalents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
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.
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.
Direct Written Policy Fees
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.
Other Income
Other income represents primarily brokerage and commission related income from our personal automobile line of business
and agency operations. The commission income from our personal automobile line of business is made up of ceded commission
income and fee income for administration and claims handling services. The income associated with ceded commission and fee
income is recognized over the respective terms of the contracts. The fees associated with the administrative services is recognized
upfront upon policy inception. Commission income from our agency operations are recognized upfront upon policy inception.
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Table of Contents
Deferred Acquisition Costs
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
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, referral
fees, 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
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 6 or
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.
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.
Losses and Loss Adjustment Expenses (“LAE”)
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.
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.
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,
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
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.
Basic and Diluted Net Income per Share
Basic net income per share is computed by dividing net (loss) 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.
Reclassifications
Certain amounts in prior year’s consolidated financial statements have been reclassified to conform to the 2016
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 present reinsurance assets and reinsurance payables separately on the
consolidated balance sheets and statements of cash flows. The Company believes this reclassification provide greater clarity and
insight into the consolidated financial statements for the periods presented.
Adopted Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-
02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amended the
consolidation guidance by modifying the evaluation criteria for whether limited partnerships and similar legal entities are variable
interest entities or voting interest entities, eliminating the presumption that a general partner should consolidate a limited partnership,
and affecting the consolidation analysis of reporting entities that are involved with variable interest entities. We adopted the provisions
of ASU 2015-02 effective January 1, 2016 and re-evaluated all legal entity investments under the revised consolidation model. The
adoption of ASU 2015-02 did not have any impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest. ASU 2015-03 reduces the complexity of
disclosing debt issuance costs and debt discount and premium on the balance sheet by requiring that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability,
consistent with debt discounts. The Company adopted this ASU retrospectively as of January 1, 2016. Other assets and debt from
consolidated variable interest entity have been reclassified to be consistent with the adoption of this standard, which resulted in a
reduction of $0.1 million each. There were no changes to shareholders’ equity as a result of this adoption. There were no other
impacts on the Company’s consolidated financial statements.
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 effective for annual periods
beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The disclosure
requirements of this guidance were adopted; see Note 6 Loss and Loss Adjustment Expense Reserves for further details.
Recent Accounting Pronouncements
In May 2014, the FASB issued 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. This authoritative guidance replaces all general and most industry specific revenue recognition guidance (excluding
insurance) currently prescribed by U.S. GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a
promised good or service to customers in an amount that reflects that consideration to which the entity expects to be entitled in
exchange for that good or service. This guidance also provides clarification on when an entity is a principal or an agent in a
transaction. The guidance may be applied using one of the two following methods: (1) retrospectively to each prior reporting periods
presented, or (2) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial
application. In addition, during 2016 the FASB issued ASU 2016-08, ASU 2016-10, and ASU 2016-12, all of which clarify certain
implementation guidance within ASU 2014-09. We will adopt this accounting standard update effective January 1, 2018. While we
are currently evaluating the method of adoption and the impact of the provisions of this accounting standard update, only a portion of
our revenues are impacted by this guidance because the guidance does not apply to revenue on contracts accounted for under the
financial instruments or insurance contracts standards. Our evaluation process includes, but is not limited to, identifying contracts
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
within the scope of the guidance, reviewing and documenting our accounting for these contracts, and identifying and determining the
accounting for any related contract costs.
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 the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). Upon the effective date, ASU
2016-02 will supersede the current lease guidance in Topic 840, Leases. Under the new guidance, lessees will be required to recognize
for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising
from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset
that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim
and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be
applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative periods presented in the financial statements. This guidance will require us to add our operating leases to the balance
sheet. We are currently evaluating other impacts this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and
interim periods therein. Early application is permitted. The guidance will be adopted on a prospective basis as indicated by the
guidance for each area of change and will not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“ASU 2016-13”) which significantly changes the measurement of credit losses for most financial
assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will require entities to
record allowances for available-for-sale debt securities rather than reduce the carrying amount, as currently performed under the other-
than-temporary impairment model. Additionally, the standard will require enhanced disclosures for financial assets measured at
amortized cost and available-for-sale debt securities to help the financial statement users better understand significant judgments used
in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU 2016-13 is effective
for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We are currently
evaluating the effects the adoption of ASU 2016-13 will have on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash
Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on the following eight specific cash flow
classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt
instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent
consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from
the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from
equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and
application of the predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification
issues. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption
permitted. The Company is evaluating the effect that ASU 2015-16 will have on its consolidated financial statements and related
disclosures.
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:
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
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.
Currently, the Company has no level 3 investments.
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
Level 1
Level 2
Level 3
Total
December 31, 2016
(in thousands)
$
$
36,560
—
—
—
36,560
$
25,645
151,183
149,505
11,863
338,196
— $
—
—
—
—
62,205
151,183
149,505
11,863
374,756
Equity securities
Total investments
28,960
415
—
29,375
$
65,520 $
338,611 $
— $
404,131
Debt securities:
United States government obligations and authorities
Obligations of states and political subdivisions
Corporate
International
Level 1
Level 2
Level 3
Total
December 31, 2015
(in thousands)
$
34,733 $
—
—
—
34,733
26,820 $
110,702
154,620
12,303
304,445
— $
—
—
—
—
61,553
110,702
154,620
12,303
339,178
Equity securities
Total investments
38,012
522
—
38,534
$
72,745 $
304,967 $
— $
377,712
A third party nationally recognized pricing service provides the fair value of securities in Level 2. A summary of the
significant valuation techniques and market inputs for each class of security is as follows:
United States government obligations and authorities: In determining the fair value for U.S. Government securities we use the market
approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are
not active, benchmark yields, credit spreads, reference data and industry and economic events.
Obligations of states and political subdivisions: In determining the fair value for state and municipal securities we use the market
approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are
not active, benchmark yields, credit spreads, reference data and industry and economic events.
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
Corporate and International: In determining the fair value for corporate securities we use the market approach. The primary inputs to
the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields,
credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates),
reference data and industry and economic events.
We review the third party pricing methodologies quarterly and test for significant differences between the market price used
to value the security and recent sales activity.
4. INVESTMENTS
Unrealized Gains and Losses
The amortized cost and the fair value of debt and equity securities as of December 31, 2016 and 2015 are summarized as
follows:
Amortized
Cost
or Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
December 31, 2016
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
Total investments
$
$
62,881
152,823
149,053
11,887
376,644
4,163
1,317
71
5,551
24,163
406,358 $
$
177
427
1,347
95
2,046
22
20
—
42
5,500
7,588 $
$
853
2,067
895
119
3,934
118
2
—
120
288
4,342 $
62,205
151,183
149,505
11,863
374,756
4,067
1,335
71
5,473
29,375
409,604
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
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
Equity securities
Total investments
Net Realized Gains and Losses
$
Amortized
Cost
or Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
$
61,384
109,152
154,957
12,528
338,021
4,275
2,253
91
6,619
33,581
378,221 $
$
489
1,590
1,153
18
3,250
30
14
—
44
6,809
10,103 $
$
320
40
1,490
243
2,093
204
20
—
224
1,856
4,173 $
61,553
110,702
154,620
12,303
339,178
4,101
2,247
91
6,439
38,534
384,151
The Company calculates the gain or loss realized on the sale of investments by comparing the sales price (fair value) to the
cost or amortized cost of the security sold. Net realized gains and losses on investments are determined in accordance with the specific
identification method. The following tables detail the Company’s net realized gains (losses) by major investment category for the
years ended December 31, 2016, 2015 and 2014:
Gross realized gains:
Debt securities
Equity securities
Total gross realized gains
Gross realized losses:
Debt securities
Equity securities
Total gross realized losses
Net realized gains on investments
2016
Year Ended
December 31,
2015
(in thousands)
2014
$
3,208 $
4,264
7,472
1,272 $
4,959
6,231
725
4,489
5,214
(1,614)
(2,813)
(4,427)
3,045 $
(805)
(1,810)
(2,615)
3,616 $
(147)
(641)
(788)
4,426
$
During the years ended December 31, 2016, 2015 and 2014, the proceeds from sales of investment securities were $229.3
million, $157.2 million and $87.1 million, respectively.
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Table of Contents
Contractual Maturity
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
The amortized cost and estimated fair value of debt securities as of December 31, 2016 and 2015 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
December 31, 2016
December 31, 2015
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(in thousands)
$
46,189 $
46,231 $
24,470 $
177,982
150,557
1,916
376,644
177,899
148,783
1,843
374,756
170,797
142,728
26
338,021
170
1,719
3,662
5,551
382,195 $
170
1,750
3,553
5,473
380,229 $
486
1,899
4,234
6,619
344,640 $
24,488
171,113
143,545
32
339,178
487
1,915
4,037
6,439
345,617
Total
$
Net Investment Income
The following table summarizes the Company’s net investment income for years ended December 31, 2016, 2015 and 2014:
Interest income
Dividends income
Net investment income
2016
Year Ended
December 31,
2015
(in thousands)
2014
$
$
7,920 $
1,143
9,063 $
6,638 $
588
7,226 $
4,832
553
5,385
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Table of Contents
Aging of Gross Unrealized Losses
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
As of December 31, 2016 and 2015, 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:
December 31, 2016
Debt securities - available-for-sale:
United States government obligations
and authorities
Obligations of states and political subdivisions
Corporate
International
Less than 12 months
Fair
Value
Gross
Unrealized
Losses
12 months or longer
Gross
Unrealized
Losses
Fair
Value
(in thousands)
Total
Gross
Unrealized
Losses
Fair
Value
$
45,255 $
850 $
111 $
103,724
59,970
5,925
214,874
2,066
864
119
3,899
1,007
2,427
5
3,550
3 $ 45,366 $
1
31
-
104,731
62,397
5,930
218,424
35
853
2,067
895
119
3,934
Equity securities
Total investments
4,701
253
434
35
5,135
288
$ 219,575 $
4,152 $
3,984 $
70 $ 223,559 $
4,222
December 31, 2015
Debt securities - available-for-sale:
United States government obligations
and authorities
Obligations of states and political subdivisions
Corporate
International
Equity securities
Total investments
Less than 12 months
Fair
Value
Gross
Unrealized
Losses
12 months or longer
Gross
Unrealized
Losses
Fair
Value
(in thousands)
Total
Gross
Unrealized
Losses
Fair
Value
$
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
11,790
1,850
84
6
11,874
1,856
$ 154,742 $
3,804 $
4,614 $
145 $ 159,356 $
3,949
As of December 31, 2016, the Company held a total of 1,132 debt and equity securities that were in an unrealized loss
position, of which 36 securities were in an unrealized loss position continuously for 12 months or more. As of December 31, 2015, the
Company held a total of 676 debt and equity securities that were in an unrealized loss position, of which 22 securities were in an
unrealized loss position continuously for 12 months or more. The unrealized losses associated with these securities consisted primarily
of losses related to corporate securities.
The Company holds its equity securities and some of its debt securities as available-for-sale and as such, these securities are
recorded at fair value. The Company continually monitors the difference between cost and the estimated fair value of its investments,
which involves uncertainty as to whether declines in value are temporary in nature. If the decline of a particular investment is deemed
temporary, the Company records the decline as an unrealized loss in shareholders’ equity. If the decline is deemed to be other than
temporary, the Company will write the security’s cost-basis or amortized cost-basis down to the fair value of the investment and
recognizes an other than temporary impairment (“OTTI”) loss in our consolidated statement of operations. Additionally, any portion
of such decline related to debt securities that is believed to arise from factors other than credit will be recorded as a component of
other comprehensive income rather than charged against income.
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
The Company’s assessment of equity securities initially involves an evaluation of all securities that are in an unrealized loss
position, regardless of the duration or severity of the loss, as of the applicable balance sheet date. Such initial review consists primarily
of assessing whether: (i) there has been a negative credit or news event with respect to the issuer that could indicate the existence of an
OTTI; and (ii) the Company has the ability and intent to hold an equity security for a period of time sufficient to allow for an
anticipated recovery (generally considered to be one year from the balance sheet date).
To the extent that an equity security in an unrealized loss position is not impaired based on the initial review described above,
the Company then evaluates such equity security by considering qualitative and quantitative factors. These factors include but are not
limited to facts and circumstances specific to individual securities, asset classes, the financial condition of the issuer, changes in
dividend payment, the length of time fair value had been less than cost, the severity of the decline in fair value below cost, industry
outlook and our ability and intent to hold each position until its forecasted recovery.
Debt securities classified as available-for-sale in a gross unrealized loss position for twelve months or longer are primarily
comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is not more than likely
than not that the Company will not be required to sell the security before recovery. The Company has analyzed these securities and
has determined that they are not other than temporarily impaired.
During the years ended December 31, 2016, 2015 and 2014, OTTI losses were $0.3 million, $0.4 million 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 securities relative to their cost as of the balance sheet date.
Statutory Deposits
As of December 31, 2016, investments with fair values of approximately $7.9 million, the majority of which were debt
securities, were deposited with governmental authorities and into custodial bank accounts as required by law or contractual
obligations.
5. REINSURANCE
Overview
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. The Company
reinsures (cedes) a portion of written premiums on an excess of loss or a quota share basis 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.
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 with the assistance of our reinsurance broker.
Significant Reinsurance Contracts
FNIC and MNIC operate 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. All of our reinsurance contracts do not relieve FNIC or MNIC from their direct
obligations to the insured.
FNIC’s 2015-2016 catastrophe reinsurance program, which ran either from June 1 to May 31 or from July 1 to June 30,
consists of the Florida Hurricane Catastrophe Fund (“FHCF”), excess of loss treaties placed with the private market and a
40% property quota-share program. The property quota-share reinsurance is a form of proportional reinsurance that provides coverage
for the homeowners’ property lines for wind related catastrophes in Florida. The FHCF treaty affords coverage for losses sustained in
Florida and represents only a portion of the reinsurance coverage in Florida.
The excess of loss and FHCF treaties, which became effective on July 1, 2015 and June 1, 2015, respectively, insure for
approximately $1.82 billion of aggregate catastrophic losses and loss adjustment expenses (“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
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
Louisiana, Alabama and South Carolina for losses and LAE from each event. Ceded premiums in connection with this program totaled
approximately $149.7 million.
FNIC’s 2016-2017 reinsurance programs, costing approximately $179.5 million, include approximately $125.7 million for
the private reinsurance for Federated National’s Florida exposure, including prepaid automatic premium reinstatement protection on
all layers, along with approximately $53.8 million payable to the FHCF. The combination of private and FHCF reinsurance treaties
will afford Federated National with approximately $2.22 billion of aggregate coverage with a maximum single event coverage totaling
approximately $1.58 billion, exclusive of retentions. FNIC maintained its FHCF participation at 75% for the 2016 hurricane
season. FNIC’s single event pre-tax retention for a catastrophic event in Florida is $18.45 million. In addition, FNIC purchases
separate underlying reinsurance layers in Louisiana, Alabama, and South Carolina to cover losses and LAE outside of Florida for each
catastrophic event from $8.0 million to $18.45 million. Depending on the characteristics of the catastrophic event, and the states
involved, FNIC’s single event pre-tax retention could be as low as $8.0 million. The maximum pre-tax retention of $18.45 million for
Florida represents 7.76% of the Company’s shareholders’ equity as of December 31, 2016.
Additionally, the Company’s private market excess of loss treaties became effective July 1, 2016 and all private layers have
prepaid automatic reinstatement protection, which affords us additional coverage against multiple catastrophic events in the same
hurricane season. The Company obtained multiple year protection for a portion of its program; as a result, some of the coverage will
expire on June 30, 2017, and a portion of the coverage will remain in-force one additional treaty year until June 30, 2018. These
private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all private layers
attach after $18.45 million in losses for FNIC’s Florida exposure. If the aggregate limit of the preceding layer is exhausted, the next
layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted.
MNIC’s 2016-2017 catastrophe reinsurance program, which runs from either June 1 to May 31 or June 1 to June 30 (13
month period), consists of the FHCF and private market excess of loss treaties. All private layers have prepaid automatic reinstatement
protection, which affords MNIC additional coverage, and have a cascading feature such that substantially all layers attach at $3.4
million for MNIC's Florida exposure.
The Company’s property quota share treaties, which are included in the reinsurance program, run for a two-year period from
July 1 to July 1 of the following year. The property 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 provided up to a 40% quota-
share reinsurance on the first $100 million of covered losses for the homeowners’ property insurance program in Florida. The treaties
are accounted for as retrospectively rated contracts whereby the estimated ultimate premium or commission is recognized over the
period of the contracts.
On July 1, 2016, the 30% property quota-share treaty expired on a cut-off basis, which means as of that date the Company
will retain 30% of its unearned premiums and losses. The reinsurers will remain liable for 30% of the paid losses occurring during the
term of the treaty, until the treaty is commuted.
The Company’s private passenger automobile quota share treaties are typically one-year programs which become effective at
different points in the year and cover auto policies across several states. These automobile quota share treaties cede 75% to 90% of all
written premiums entered into by the Company.
Certain reinsurance agreements require FNIC to secure the credit, regulatory and business risk. Fully funded trust agreements
securing these risks totaled $2.6 million as of December 31, 2016 and $3.5 million as of December 31, 2015.
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Table of Contents
Reinsurance Recoverables
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated with the
reinsurance placement and presented on the consolidated balance sheet as reinsurance recoverables. The following reinsurance
recoverable is reflected in the consolidated balance sheets as of the dates presented as follows:
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
Reinsurance recoverable, net
Premiums Written and Earned
December 31,
2016
2015
(in thousands)
7,451 $
41,079
48,530 $
5,218
7,496
12,714
$
$
The following table presents premiums written and earned for the years ended December 31, 2016, 2015, and 2014:
Net premiums written:
Direct
Ceded
Net premiums earned:
Direct
Ceded
2016
Year Ended
December 31,
2015
(in thousands)
2014
$
$
$
$
605,485 $
(285,986)
319,499 $
493,770 $
(268,516)
225,254 $
377,156
(201,998)
175,158
565,423 $
(305,551)
259,872 $
432,234 $
(222,214)
210,020 $
313,075
(142,170)
170,905
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
6. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The liability for loss and LAE reserves is determined on an individual-case basis for all claims reported. The liability also
includes amounts for unallocated expenses, anticipated future claim development and incurred but not yet reported (“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)
Gross reserves, end of period
2016
Year Ended December 31,
2015
(in thousands)
2014
$
97,340 $
(7,496)
89,844
78,330 $
(10,394)
67,936
61,016
(2,313)
58,703
174,795
12,546
187,341
113,819
(9,466)
104,353
113,196
56,958
160,154
49,531
32,914
82,445
117,031
41,079
158,110 $
89,844
7,496
97,340 $
$
79,932
1,104
81,036
40,680
31,123
71,803
67,936
10,394
78,330
(1) Reinsurance recoverable in this table includes only ceded loss and LAE reserves.
The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as
such estimates are subject to the outcome of future events. The factors influencing changes in claim costs are often difficult to isolate
or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple interpretations.
Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period
during which such adjustments are made.
During the year ended December 31, 2016, the Company experienced unfavorable loss and LAE reserve development on
prior year accident years primarily in its all other peril homeowners’ coverage in Florida. The deficiency primarily relates to reserve
development on prior year accident years and was related to the all other peril homeowners’ coverage in the state of Florida. The
deficiency primarily relates to higher severity above the expected development factor anticipated at December 31, 2015 which was
driven by the impact from assignment of benefits and other related adjusting expenses.
During the year ended December 31, 2015, the Company experienced a redundancy on prior year accident years 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. Specifically, we have experienced better severity
than expected on the 2014 and 2013 accident years.
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
The following tables provide incurred losses and allocated loss adjustment expenses (“ALAE”) as well as cumulative paid
claims and ALAE, net of reinsurance, for the prior ten accident years for our largest lines of business, homeowners’’. In addition, as of
the most recent reporting period, the total of IBNR reserves plus expected development on reported claims and the cumulative number
of reported claims are presented (in thousands, except severity). The information about incurred and paid claims development for the
years ended December 31, 2007 to December 31, 2015 is presented as supplementary information.
Incurred losses and ALAE, net of reinsurance
For the years ended December 31,
IBNR &
expected
development
on
reported
claims
Cumulative
number of
reported
claims (1)
Severity
(2)
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007
2012
2009
2008
2013
2014
2010
(unaudited)
2015
2011
19,410 18,293 17,319 17,544 17,494 17,761 17,912 17,715 17,553
18,305 15,784 15,811 15,977 15,659 16,021 15,661 15,604
26,228 25,618 25,955 26,482 27,015 27,041 27,119
24,825 25,056 26,151 27,895 28,968 29,407
20,492 21,344 23,007 23,932 24,582
23,032 23,301 24,186 24,468
43,807 42,021 35,834
64,312 63,300
99,286
2016
17,559
15,609
27,163
29,945
25,957
25,889
35,859
61,770
92,159
168,875
Total $500,785
2016
6
4
101
34
40
326
216
2,222
8,097
48,663
2016
2016
9,325
1,883
1,705
9,155
2,323 11,693
2,348 12,753
2,344 11,074
2,579 10,038
3,209 11,175
5,679 10,877
8,231
8,071
11,196
20,923
Cumulative paid losses and ALAE, net of reinsurance
For the years ended December 31,
2007
11,358
2008
15,352
9,477
2009
16,160
13,832
15,047
2010
16,783
14,689
23,095
14,052
(unaudited)
2011
17,027
15,190
24,657
21,350
11,119
2012
17,291
15,308
26,007
24,730
19,250
13,693
2013
17,429
15,445
26,462
26,886
21,323
20,728
19,986
2014
17,443
15,595
26,831
27,984
22,723
23,120
31,606
37,033
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2015
17,509
15,583
26,927
29,092
24,047
23,923
33,867
53,831
52,190
2016
17,519
15,587
26,982
29,739
25,580
25,186
35,123
57,891
76,169
101,532
Total $ 414,308
All outstanding liabilities for unpaid claims and LAE prior to 2007, net of reinsurance 1,478
Total outstanding liabilities for unpaid claims and LAE, net of reinsurance $ 87,955
(1) The cumulative number of reported claims is measured by individual claimant at a coverage level.
(2) Calculated severity amounts by accident year are based on inception-to-date incurred less IBNR and expected development dollars on reported claims. Note
the older accident years are more developed than recent accident years.
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in the
consolidated balance sheets is as follows:
Liabilities for unpaid losses and LAE:
Homeowners
Other lines
Total liabilities for unpaid losses and LAE, net of reinsurance
Reinsurance recoverables:
Homeowners
Other lines
Total reinsurance recoverables
Unallocated loss adjustment expenses
Gross liability for unpaid losses and LAE
As of December 31, 2016
(in thousands)
$ 87,955
28,915
116,870
19,964
21,115
41,079
161
$ 158,110
Other lines include our CGL and personal automobile lines of business. Management performed a quantitative and
qualitative assessment and determined that neither line of business met the guidelines for disaggregation, above.
Management establishes a liability on an aggregate basis to provide for the estimated 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.
Various actuarial methods are utilized to determine the reserves that are booked to our financial statements. Weightings of
tests and methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures and time
elements. On an overall basis, changes to methods and/or assumptions underlying reserve estimations and selections as of December
31, 2016, were not considered material.
IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff.
Various standard actuarial tests are applied to subsets of the business at a line of business and coverage basis. Included in the analyses
are the following:
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.
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
Supplementary Information on Historical Loss and LAE Duration (Unaudited)
The following table provides supplementary information about the average annual percentage payout of incurred losses and
ALAE, net of reinsurance, as of December 31, 2016:
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Homeowners
53.4%
28.3%
7.4%
4.2%
2.2%
2.6%
1.0%
0.1%
Year 9 Year 10
0.0%
0.4%
Average annual payout of losses and LAE, net of reinsurance
(unaudited)
7. LONG-TERM 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.
8. INCOME TAXES
The provision for income tax expense for the years ended December 31, 2016, 2015 and 2014 is as follows:
Federal:
Current
Deferred
Federal income tax expense
State:
Current
Deferred
State income tax expense
Total income tax expense
2016
Year Ended
December 31,
2015
(in thousands)
$
5,076 $
(2,771)
2,305
674
(296)
378
2,683 $
$
15,523 $
6,118
21,641
2,489
623
3,112
24,753 $
2014
16,659
1,059
17,718
2,204
186
2,390
20,108
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:
Computed expected tax expense provision, at federal rate
State tax, net of federal tax benefit
Tax-exempt interest
Income subject to dividends-received deduction
Meals and entertainment
Return to provision and rate changes
Prior year deferred tax true-up
Other
Total income tax expense
- 66 -
2016
Year Ended
December 31,
2015
(in thousands)
957 $
85
(571)
(219)
130
145
2,163
(7)
2,683 $
22,829 $
2,291
(445)
(109)
-
119
-
68
24,753 $
$
$
2014
19,887
1,696
(312)
(136)
-
(1,027)
-
-
20,108
Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
Income tax expense for the year ended December 31, 2016 was $2.7 million, which includes $2.2 million of additional tax
expense related to a prior year adjustment impacting deferred taxes.
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
Unpaid losses and loss adjustment expenses
Accrued expenses
Net operating loss carryforwards
Share-based compensation
Other
Total
Deferred tax liabilities:
Deferred acquisition costs
Unrealized gains on investment securities
Deferred revenue related to reinsurance
Depreciation and amortization
Other
Total
$
Year Ended December 31,
2016
2015
(in thousands)
13,975 $
1,612
692
7
582
155
17,023
(16,364)
(1,277)
-
(718)
(97)
(18,456)
9,375
1,175
694
140
606
212
12,202
(11,906)
(2,336)
(3,395)
-
(192)
(17,829)
Net deferred tax liability
$
(1,433) $
(5,627)
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 2013 - 2015 are open for review by the Internal Revenue Service (“IRS”) and other state taxing
authorities.
As of December 31, 2016, 2015, and 2014, 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.
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
On July 26, 2016, Mutual filed a demand for arbitration against the Company before the American Arbitration Association
(“AAA”) alleging a breach of the Co-Existence Agreement. On November 29, 2016, the U.S. District Court for the Southern District
of Florida granted Mutual’s motion to compel arbitration of the Company’s declaratory judgment action for non-infringement of a
trademark. On February 3, 2017, the AAA granted the Company’s motion to terminate the arbitration for lack of jurisdiction based
upon Mutual’s failure to comply with the Co-Existence Agreement’s regarding the selection of an arbitrator. The parties are currently
in the process of conferring upon the selection of a mutually agreeable arbitrator. The Company nevertheless intends to vigorously
defend against Mutual’s allegations, although there can be no assurances as to the outcome of this matter.
On March 2, 2017, the Company filed a complaint in Broward County, Florida court to enforce the terms of the restrictive
covenants set forth in the Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement dated August 5,
2013, as amended, entered into between Peter J. Prygelski, III and the Company during Mr. Prygelski’s employment with the
Company and set forth in the separation agreement he entered into in connection with his separation from the Company. The
Company believes that he accepted employment with a competitor in contravention of these restrictive covenants and therefore the
Company is seeking injunctive relief, declaratory relief and damages. The Company has not recognized a gain contingency in the
financial statements as of December 31, 2016.
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: Florida Insurance Guaranty Association (“FIGA”), Citizens
Property Insurance Corporation (“Citizens”), FHCF, Florida Joint Underwriters Insurance Association (“JUA”), Georgia Insurers
Insolvency Pool (“GIIP”), Special Insurance Fraud Fund (“SIIF”), Fair Access to Insurance Requirements Plan (“FAIRP”), Georgia
Automobile Insurance Plan (“GAIP”), Property Insurance Association of Louisiana (“PIAL”), Louisiana Automobile Insurance Plan
(“LAIP”), South Carolina Property & Casualty Insurance Guaranty Association (“SCPCIGA”), Texas Property and Casualty
Insurance Guaranty Association (“TPCIGA”), Texas Windstorm Insurance Association (“TWIA”), Texas Automobile Insurance Plan
Association (“TAIPA”), Alabama Insurance Guaranty Association (“AIGA”), and Alabama Insurance Underwriters Association
(“AIUA”). As a direct premium writer in Florida, we are required to participate in certain insurer solvency associations under Florida
law, administered by FIGA.
FNIC is also required to participate in an insurance apportionment plan under Florida law, 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.
Leases
The Company is committed under various operating lease agreements for office space. Rental expense for the years ended
December 31, 2016, 2015 and 2014 was $0.6 million, $0.7 million and $0.5 million, respectively. As of December 31, 2016, the
future minimum lease payments under these agreements are as follows:
Year Ended December 31,
2017
2018
2019
2020
2021
Thereafter
Total
- 68 -
Aggregate Minimum
Lease Payments
(in thousands)
$
$
644
662
656
678
698
719
4,057
Table of Contents
10. SHAREHOLDERS’ EQUITY
Common Stock Repurchases
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
In March 2016, our Board of Directors authorized a program to repurchase shares of common stock of FNHC, at such times
and at prices as management determines advisable, up to an aggregate of $10.0 million through March 31, 2017. In November 2016,
our Board of Directors authorized a program to repurchase shares of common stock of FNHC, at such times and at prices as
management determines advisable, up to an aggregate of $10.0 million through March 1, 2017. Common stock repurchases are
conducted in the open market or under Rule 10b5-1 trading plans from time to time in its discretion, based on ongoing assessments of
the Company’s capital needs, the market price of its common stock and general market conditions. The amount and timing of all
repurchase transactions are contingent upon market conditions, applicable legal requirements and other factors. This program may be
modified, suspended or terminated by us at any time without notice.
Pursuant to our Board of Directors’ authorizations, the Company repurchased 624,818 shares of its common stock at a total
cost of $11.3 million, which is an average price per share of $19.23, during the year ended December 31, 2016.
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.
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
Intrinsic value of options exercised
Fair value of restricted stock vested
2016
Year Ended
December 31,
2015
(in thousands)
$
$
$
$
3,831 $
—
3,831 $
2,930 $
33
2,963 $
13,732 $
41,495 $
1,124 $
2,303 $
2014
1,525
135
1,660
5,172
549
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 Market.
The unamortized share-based compensation expense is $5.6 million for the year ended December 31, 2016, which will be
recognized over the remaining weighted average vesting period of approximately 1.76 years.
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Table of Contents
Stock Option Awards
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
A summary of the Company’s stock option activity for the period from January 1, 2014 to December 31, 2016 is as follows:
Outstanding at January 1, 2014
Granted
Exercised
Cancelled
Outstanding at December 31, 2014
Granted
Exercised
Cancelled
Outstanding at December 31, 2015
Granted
Exercised
Cancelled
Outstanding at December 31, 2016
Number of Shares
Weighted Average
Option
Exercise Price
526,521 $
— $
(302,735) $
(4,501) $
219,285 $
— $
(44,652) $
— $
174,633 $
— $
(94,249) $
(900) $
79,484 $
4.56
—
5.13
3.49
3.79
—
3.81
—
3.79
—
3.85
4.40
3.70
A following table summarizes information about stock options outstanding and exercisable in a select price range as of
December 31, 2016:
Weighted Average
Remaining
Shares Outstanding Contractual Life
Range of Exercise Price
$2.45 - $4.40
and Exercisable
79,484
(years)
4.87
Weighted Average
Exercise Price
3.70
Aggregate
Intrinsic Value
1,191,218
Options Outstanding and Exercisable
- 70 -
Table of Contents
Restricted Stock
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
During the years ended December 31, 2016, 2015 and 2014, 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, 2014 to December 31, 2016 is as follows:
Outstanding at January 1, 2014
Granted
Vested
Cancelled
Outstanding at December 31, 2014
Granted
Vested
Cancelled
Outstanding at December 31, 2015
Granted
Vested
Cancelled
Outstanding at December 31, 2016
Number of Shares
Weighted Average
Grant Date
Fair Value
249,500 $
268,648 $
(68,988) $
(1,359) $
447,801 $
116,140 $
(145,134) $
— $
418,807 $
128,472 $
(204,916) $
(5,160) $
337,203 $
8.24
22.50
7.96
8.29
16.84
27.53
15.87
—
20.14
19.16
20.25
20.58
19.69
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 Market.
Accumulated Other Comprehensive Income
The following table presents a reconciliation of the changes in accumulated other comprehensive income during the years
ended December 31, 2016 and 2015:
Year Ended December 31,
Before
Tax
2016
Income
Tax
Net
Before
Tax
(in thousands)
2015
Income
Tax
Net
$
6,111 $
1,774
(2,247) $
(470)
3,864 $ 12,419 $
1,305
(324)
(4,701) $
86
7,718
(238)
(4,560)
(2,786)
1,515
1,046
(1,199) $
(3,045)
(1,740)
2,124 $
(5,984)
(6,308)
6,111 $
2,368
2,454
(2,247) $
(3,616)
(3,854)
3,864
Accumulated other comprehensive income,
beginning of period
Other comprehensive income before reclassifications
Reclassification adjustment for realized gains included
in net (loss) income
Accumulated other comprehensive income, end of period $
3,323 $
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, 2016, there was no additional profit-sharing contribution. For the year ended December 31, 2015, the Company
made an additional contribution of 1% of an employee’s salary.
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
The Company’s total contributions to the 401(K) Plan were $0.9 million, $0.6 million and $0.4 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
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,
2016, 2015 and 2014.
The Company entered into catastrophe excess of loss and quota share reinsurance agreements with TransRe. For the years
ended December 31, 2016, 2015 and 2014, the Company ceded premiums related to these agreements totaling $5.0 million, $4.3
million and $1.2 million, respectively. In connection with Hurricane Matthew and the quota share agreements, we have ceded losses
of $0.8 million and $0.1 million for the years ended December 31, 2016 and 2015 relating to these agreements. For the years ended
December 31, 2014, there were no ceded losses relating to these agreements.
Bruce F. Simberg, the Company’s Chairman of the Board, is a partner of the Hollywood, Florida law firm of Conroy
Simberg, which specializes in insurance defense and coverage matters. The Company paid legal fees to Conroy Simberg for services
rendered in the amount of $72,198, $26,286, and $6,538 for the years ended December 31, 2016, 2015, and 2014, respectively. We
believe that the fees charged for services provided by Conroy Simberg are on terms at least as favorable as those that we could secure
from a non-affiliated law firm. The firm has handled only a limited number of matters for the Company. Mr. Simberg has not been
personally involved in any of the legal matters handled by the firm for the Company and he received de minimis direct personal
benefit from the fees paid to the firm by the Company. The matters handled by the firm for the Company as of December 31, 2016
have been completed or are in the process of being completed, and the Company does not at this time anticipate retaining the firm for
future matters.
For the years ended December 31, 2016 and 2015, the Company paid investment fees to Crosswinds AUM, LLC, a wholly
owned subsidiary of Crosswinds, totaling $0.2 million and $0.2 million, 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.
Year Ended
December 31,
2015
(in thousands, except per share data)
2016
2014
$
(196) $
40,885 $
37,199
13,758
(0.01) $
13,729
2.98 $
12,082
3.08
$
13,758
-
13,729
268
13,758
(0.01) $
13,997
2.92 $
12,082
356
12,438
2.99
0.27 $
0.18 $
0.13
$
$
Net (loss) income attributable to Federated National Holding
Company shareholders
Weighted average number of common shares outstanding -
basic
Net (loss) income per share - basic
Weighted average number of common shares outstanding -
basic
Dilutive effect of stock compensation plans
Weighted average number of common shares outstanding -
diluted
Net (loss) income per share - diluted
Dividends per share
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Table of Contents
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
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
Debt securities, available-for-sale, at amortized cost
Equity securities, available-for-sale, at fair value
Total investments
Cash and cash equivalents
Prepaid reinsurance premiums
Premiums receivable, net
Other assets
Total assets
LIABILITIES
Loss and loss adjustment expense reserves
Unearned premiums
Reinsurance payable
Debt
Income taxes payable
Other liabilities
Total liabilities
December 31,
2016
2015
(in thousands)
$
27,100 $
1,604
28,704
15,668
1,070
1,584
1,910
48,936 $
1,659 $
8,406
864
4,909
—
1,026
16,864 $
$
$
$
21,312
1,358
22,670
14,616
34
355
1,037
38,712
237
1,448
—
4,887
8
374
6,954
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, 2016.
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, 2016, 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 surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory
approval before such dividend can be paid.
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Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2016
As of December 31, 2016 and 2015, on a consolidated statutory basis, the capital and surplus of the Company’s insurance
companies was $172.1 million and $175.9 million, respectively. For the year ended December 31, 2016 consolidated statutory net
loss of the Company’s insurance companies was $37.0 million. For the years ended December 31, 2015, and 2014, consolidated
statutory net income of the Company’s insurance companies was $23.9 million and $29.3 million, respectively. Statutory capital and
surplus significantly exceeds amounts necessary to satisfy regulatory requirements.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
2016
Net premiums earned
Total revenue
Losses and loss adjustment expenses
Total costs and expenses
Net (loss) income attributable to Federated National Holding
Company shareholders
Net (loss) income per share - basic
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
17. SUBSEQUENT EVENTS
$
$
$
$
$
$
$
$
$
$
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share data)
54,997 $
68,960 $
29,545 $
53,562 $
60,045 $
75,064 $
47,025 $
73,249 $
69,405 $
83,790 $
43,613 $
82,250 $
75,425
88,570
67,158
104,590
9,535 $
0.69 $
991 $
0.07 $
1,394 $
0.10 $
(12,116)
(0.89)
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
On March 1, 2017, the Company entered into a Reimbursement Contract with the State Board of Administration of Florida
(“SBA”) for the 2017 – 2018 hurricane season. The SBA is the agency that administers the FHCF. The Contracts will reimburse FNIC
and MNIC for covered property losses under their respective homeowners’ insurance policies resulting from hurricanes that cause
damage in the State of Florida, from June 1, 2017 through May 31, 2018.
On March 1, 2017, in connection with the Company’s review of its subsidiaries’ financial condition and capital resources as
of the end of the 2016 fiscal year, the Company’s Board of Directors approved $25.0 million of capital to be transferred into FNIC
from FNHC to support FNIC’s book of business and regulatory requirements.
On March 10, 2017, our Board of Directors authorized an additional $10 million share buyback program to repurchase shares
of common stock through March 8, 2018. The Company may repurchase shares in open market transactions or under Rule 10b5-1
trading plans from time to time in its discretion, based on ongoing assessments of the Company’s capital needs, the market price of its
common stock and general market conditions. The Company will fund the share repurchase program with cash from operations.
On March 13, 2017, we announced that the Company’s Board of Directors approved a dividend of $0.08 per share, which
will be paid on June 1, 2017 to shareholders on record as of May 1, 2017.
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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,
2016, 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, 2016, 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 sheets as of December 31, 2016 and 2015 and the related consolidated statements of operations, comprehensive
income, changes in shareholders' equity and cash flows for the years ended December 31, 2016 and 2015, of Federated National
Holding Company and subsidiaries and our report dated March 16, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 16, 2017
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including
our Chief Executive Officer and Interim 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 Interim Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of December 31, 2016.
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 Interim 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, 2016 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 64 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,
2016 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.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth certain information with respect to our executive officers and directors as of March 14, 2017:
Name
Michael H. Braun (5)
Erick A. Fernandez
Bruce F Simberg (2)(3)(4)(5)
Jenifer G. Kimbrough (1)(3)(4)
Richard W. Wilcox Jr. (1)(3)(4)
William G. Stewart (2)(4)
Carl Dorf (1)(2)(4)
Thomas A. Rogers (3)(4)(5)
Age
49
38
68
45
75
68
75
65
Position with the Company
Chief Executive Officer, President,
Class I Director
Interim Chief Financial Officer, Treasurer
Chairman of the Board, Class II Director
Class I Director
Lead Director, Class II Director
Class II Director
Class III Director
Class III Director
---------------------------------------
(1)
(2)
(3)
(4)
(5)
Audit Committee Member
Investment Committee Member
Compensation Committee Member
Nominating Committee Member
Business Development Committee Member
Our Articles of Incorporation provide that our Board of Directors shall consist of three classes of directors, as nearly equal in
number as possible, designated Class I, Class II and Class III, and provides that the exact number of directors comprising our Board of
Directors will be determined from time to time by resolution adopted by the Board. At each annual meeting of shareholders,
successors to the class of directors whose term expires at that annual meeting are elected for a three-year term. The current term of the
Class I directors terminates on the date of our 2019 annual meeting. The current term of the Class II directors terminates on the date
of our 2018 annual meeting and the current term of the Class III directors terminate as of the date of our 2017 annual meeting.
The following is a brief description of the business experience of each director and executive officer of the Company.
Michael H. Braun was appointed Chief Executive Officer of the Company in July 2008, President in June 2009, elected to
the Board of Directors in December 2005 and served as Chairman of the Board from March 2015 to January 2016. Previously, Mr.
Braun was Chief Operating Officer, where he was responsible for the Company’s day-to-day operations and strategic product
portfolio. Mr. Braun has also served as President of Federated National Insurance Company (“FNIC”), a subsidiary of the Company,
since September 2003, a position that he continues to hold. Previously, he held key management positions within FNIC, responsible
for operations, marketing and underwriting. Prior to joining the Company, Mr. Braun was Managing Partner for an independent chain
of insurance agencies, which was acquired by the Company in 1998. Mr. Braun received a Bachelor’s of Science degree in Business
Administration from the State University of New York. Mr. Braun does not serve on the board of directors of any other SEC
reporting company.
Mr. Braun’s nearly 20-year tenure with the Company, together with his substantial experience in all aspects of insurance
company operations, including product development, strategy, reinsurance and underwriting, have been critical to the Company’s
growth in the Florida homeowners’ insurance market.
Erick A. Fernandez was appointed to serve as the Company’s Interim Chief Financial Officer on June 20, 2016. Mr.
Fernandez joined the Company in January 2016 and was the Company’s Vice President, Corporate Accounting and Reporting, until
his appointment as Interim Chief Financial Officer. Mr. Fernandez brings more than 15 years of experience in accounting, finance,
financial reporting and auditing. Prior to joining the Company, Mr. Fernandez worked for Verizon Communications, Inc. in that
company’s Cloud and Datacenter segment as a Senior Director of Financial Planning and Analysis, responsible for strategic planning
and finance operations. From June 2008 to June 2011, Mr. Fernandez held various finance and accounting positions at Terremark
Worldwide, Inc., including Senior Director of Accounting and External Reporting, Director of Budgeting and Reporting, and Director
of SEC Reporting. From September 2001 to June 2008, Mr. Fernandez worked for “Big 5” accounting firms, including as an Audit
Manager at Ernst & Young LLP from May 2002 to June 2008. Mr. Fernandez is a Certified Public Accountant and received his
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Bachelor’s degree in accounting and a Master’s of Business Administration from Florida International University.
Mr. Fernandez was appointed to his position following the resignation on June 20, 2016 by Peter J. Prygelski III from his
positions as a director and Chief Financial Officer and Treasurer of the Company to pursue other opportunities.
Bruce F. Simberg rejoined the Board on January 29, 2016, after serving as a director of the Company from January 1998 to
March 2015. Mr. Simberg has been a practicing attorney since October 1975, most recently as managing partner of Conroy Simberg,
P.A. (“Conroy Simberg”), a law firm in Hollywood, Florida, since October 1979. Mr. Simberg received his Bachelors of Science
degree from Emory University and his Juris Doctor from the University of Miami. Mr. Simberg does not serve on the board of
directors of any other SEC reporting company.
Mr. Simberg has significant historical knowledge and understanding of the Company’s development, as well as significant
experience in insurance-related and other litigation and risk assessment matters.
Jenifer G. Kimbrough has served as a director of the Company since April 2009. Ms. Kimbrough serves as Managing
Director, Chief Financial Officer at Oakworth Capital Bank since October 2015, prior to which Ms. Kimbrough was the Vice
President of Compliance and Audit for Surgical Care Affiliates from March 2010 to October 2015. Prior to 2010, Ms. Kimbrough
served as the Vice President of Assurance and Process Improvement. Prior to 2007, Ms. Kimbrough was the Senior Vice President of
Investor Relations at Regions Financial Corporation. From 1993 to 2003, Ms. Kimbrough served as an Audit Senior Manager at Ernst
& Young LLP. Ms. Kimbrough received her certification as a Certified Public Accountant (“CPA”) from the Alabama State Board of
Public Accountancy in 1994 and obtained a Bachelor’s of Science degree in Commerce & Business Administration (Accounting) fro m
The University of Alabama in 1993. Ms. Kimbrough is a member of several professional societies, including: American Woman’s
Society of Certified Public Accountants (“AWSCPA”), Alabama State Society of Certified Public Accountants and American Institute
of Certified Public Accountants (“AICPA”). Additionally, she served on the AICPA Women’s Initiative Executive Committee and as
National President of the AWSCPA and serves in various volunteer leadership capacities. Ms. Kimbrough does not serve on the board
of directors of any other SEC reporting company.
Ms. Kimbrough brings her significant knowledge in compliance and audit, from both the issuer’s perspective and the
auditor’s perspective, to the Company and the Board.
Richard W. Wilcox Jr. has served as a director of the Company since January 2003. Mr. Wilcox has been in the insurance
industry for more than 40 years. In 1963, Mr. Wilcox purchased an insurance agency that he grew into a business generating $10
million in annual revenue. In 1991, Mr. Wilcox sold his agency to Hilb, Rogal and Hamilton Company (“HRH”) of Fort Lauderdale,
for which he retained the position of President through 1998. In 1998, HRH of Fort Lauderdale merged with Poe and Brown of Fort
Lauderdale, and Mr. Wilcox served as the Vice President of Poe and Brown until 1999, when he retired. Mr. Wilcox holds CIC
designation as a member of the Society of Certified Insurance Counselors. Mr. Wilcox also holds an Advanced Professional Director
Certification from the American College of Corporate Directors, a national public company director education and credentialing
organization. Mr. Wilcox does not serve on the board of directors of any other SEC reporting company.
Mr. Wilcox’s substantial experience with insurance agency operations, his overall knowledge of the insurance industry, as
well as his historical knowledge of the Company, are considered to be valuable expertise for the Board.
William G. Stewart has served as a director of the Company since October 1, 2015. Mr. Stewart has significant experience
in administration and investment management. He has served as the Deputy Secretary of Administration for the State of Maryland,
Department of Public Safety and Correctional Services, since February 2015. From 2003 to 2007, Mr. Stewart was an Assistant
Secretary for Administration/Business Services and an Acting Deputy Secretary for the State of Maryland, Department of Juvenile
Services. He has more than 35 years’ experience in the securities industry, including as a Senior Consultant at Asset Strategy
Consultants, an investment management consulting firm, from 2007 to 2015, and as a senior executive officer and registered
representative at Mercantile Capital Advisors, Inc. from 2000 to 2002, and at BT Alex. Brown Incorporated and Alex. Brown & Sons
Incorporated from 1973 to 1999. Mr. Stewart received a Bachelor of Arts degree from Princeton University and a Masters of Business
Administration from the University of Virginia Graduate School of Business Administration. Mr. Stewart does not serve on the board
of directors of any other SEC reporting company.
Mr. Stewart’s significant experience in administration and investment management provides the Board with greater depth of
knowledge regarding management of the Company’s investment portfolio.
Carl Dorf has served as a director of the Company since August 2001. Mr. Dorf has over 40 years of diversified investment
experience as a security analyst, portfolio manager, mutual fund manager and hedge fund manager. He earned the Chartered Financial
Analyst (CFA) designation and in the past served as director of the Los Angeles Society of Security Analysts. Since April 2001, Mr.
Dorf has been the principal of Dorf Asset Management, LLC, and is responsible for all investment decisions made by that
company. From January 1991 to February 2001, Mr. Dorf served as the Fund Manager of ING Pilgrim Bank and Thrift Fund. Prior
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to his experience at Pilgrim, Mr. Dorf was a principal in Dorf & Associates, an investment management company. Mr. Dorf has a
Bachelor’s degree in Business Administration, with a minor in accounting, and a Master’s of Business Administration in finance from
the Bernard Baruch School of Business and Public Administration, The City College of New York. Mr. Dorf does not serve on the
board of directors of any other SEC reporting company.
The Board believes that Mr. Dorf’s significant knowledge and experience in investments and financial instruments, in
addition to his long tenure on the Board, are important additions to the Board.
Thomas A. Rogers has served as a director of the Company since October 1, 2015. Mr. Rogers has more than 40 years’
experience in the reinsurance industry, including 22 years serving in senior executive officer positions with Aon Benfield Inc. until his
retirement in 2014 as its Vice Chairman. Prior to Aon Benfield, Mr. Rogers spent 18 years with both reinsurance underwriting and
intermediary companies and specialized in the development and management of specialized property and casualty lines. Mr. Rogers
received his Bachelors of Science degree from Drexel University. Mr. Rogers does not serve on the board of directors of any other
SEC reporting company.
Mr. Rogers’ significant knowledge of reinsurance underwriting, including day-to-day insurance operations, and in specialized
property and casualty lines provides the Board with expertise that is highly relevant to the Company’s current operations and that will
be beneficial in connection with possible future expansion of the Company’s business lines.
Corporate Governance Update
The Company has experienced significant growth, both in revenues and market capitalization, in recent years. The Board of
Directors has received feedback from shareholders and others regarding certain provisions of the Company’s articles of incorporation
and bylaws, which reflect anti-takeover provisions that were typical when the Company first became publicly traded in 1998 and
which have fallen out of favor with investors. With that feedback in mind, and being cognizant of the Company’s recent growth, the
Board of Directors has undertaken a comprehensive review of our Company’s corporate governance, including the Company’s articles
of incorporation and bylaws, in order to assure strong Board accountability and effective shareholder rights policies. This review was
done in conjunction with a review by our Compensation Committee of our executive compensation practices, which resulted in
significant updates to our executive compensation practices as described more fully below under the caption “Compensation
Discussion and Analysis.” The Board believes that certain of the Company’s current corporate governance practices and provisions of
its articles and bylaws are consistent with those of a public company that is a comparable size to the Company and that is in the
Company’s industry, and are in the best interests of its shareholders. Still, the Board agrees that updating of the Company’s corporate
governance practices are advisable now and has approved the following actions:
The Board added two new independent directors in 2015, with the result that six of the seven Board members are
independent.
The Board separated the roles of Chairman of the Board and Chief Executive Officer with Bruce F. Simberg’s return to
the Board.
The Board has amended the Company’s bylaws to implement a majority voting standard for uncontested elections of
directors.
The Board approved increasing the frequency of the shareholder vote on executive compensation (“say-on-pay”) to
occur annually, with which the shareholders concurred in the 2016 say-on-pay frequency vote;
The Board proposed and received shareholder approval to amend the Company’s articles and bylaws to reduce the
supermajority requirement (66-2/3% of the shares outstanding) to amend certain provisions to a majority of shares
outstanding.
The Board proposed and received shareholder approval to amend the Company’s articles and bylaws to reduce the
percentage of shares required to call a special meeting from 33% to 25%.
The Board approved stock ownership and retention guidelines applicable to our directors, in addition to our Chief
Executive Officer and Chief Financial Officer. Under these guidelines, our outside, non-employee directors are each
required to hold shares of the Company’s common stock with a value of at least four times the annual retainer. The
guidelines further provide that the outside directors should achieve the guideline amounts within five years of the
policy’s adoption and, until the guideline amounts are achieved, our directors must retain 66-2/3% of any shares received
as equity grants from the Company, net of shares withheld or sold to pay taxes.
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The Board prohibited directors and executive officers from hedging or pledging the Company’s common stock, without
exception.
The Board adopted corporate governance guidelines, which update, consolidate and memorialize the corporate
governance practices followed by the Board and the Company.
The Board believes that these steps are all significant steps forward as the Company continues its growth.
Leadership Structure and Risk Oversight
The Chairman of the Board is elected by the members of the Board and typically presides at all meetings of the Board. Bruce
F. Simberg currently serves as our Chairman, a position he has held since 1998 other than a brief hiatus from March 2015 to January
2016. Richard W. Wilcox Jr., an independent member of the Board since 2003, served as the Board’s Lead Independent Director
during that hiatus and continues to hold that position in recognition of his significant knowledge of the Company’s history, growth and
operations. The responsibilities of the Company’s Chairman of the Board are: (i) presiding at all meetings of the Board (with the Lead
Independent Director presiding at meetings where the Chairman is not present), including presiding at executive sessions of the Board
(without management present) at every regularly scheduled Board meeting, (ii) serving as a liaison between management and the
independent directors, (iii) providing input regarding meeting agendas, time schedules and other information provided to the Board,
and (iv) being available for direct communication and consultation with major shareholders, as appropriate, upon request. Our
Chairman also has the authority to call meetings of the independent directors. The Chief Executive Officer is currently the only
member of management on the Board.
The Company believes that its Board as a whole should encompass a diverse range of talents, skills, perspectives, and experiences,
enabling it to provide sound guidance with respect to the Company's operations and interests. The Company's policy is to have at least
a majority of directors qualify as independent as defined by the listing and maintenance rules of The Nasdaq Stock Market (the
“Nasdaq Rules”). The Nominating Committee identifies candidates for election to the Board of Directors; reviews their skills,
characteristics and experience; and recommends nominees for director to the Board for approval. The Nominating Committee's
Charter provides that the Board of Directors as a whole should be balanced and diverse, and consist of individuals with various and
relevant career experience, relevant technical skills, industry knowledge and experience, financial expertise and local or community
ties. Minimum individual requirements include strength of character, mature judgment, familiarity with the Company's business and
industry, independence of thought and an ability to work collegially. The Board believes that the qualifications of the directors, as set
forth in their biographies above provide them with the qualifications and skills to serve as a director of our Company
Board Self-Assessment Process
The Board believes that ongoing self-assessment is important to strengthening its performance and fulfilling its role on behalf
of the Company’s shareholders. To that end, the Board conducts an annual evaluation process that begins by asking each Board
member to complete a comprehensive evaluation form that addresses the Board’s overall performance and a self-evaluation of the
individual director’s performance. Overall Board performance is evaluated based on, among other things, the conduct of Board
meetings, the composition of the Board, the quality of information provided to the Board, Board effectiveness, and access to
management. Individual performance is evaluated to determine, among other things, whether the director continues to be able to
devote the necessary time to Board and committee matters, whether the director’s skills are best utilized, and whether the director
contributes to Board decision making. In addition, the Audit Committee conducts an annual evaluation of its performance, including a
review of the effectiveness of its processes, the composition of the Committee, the Committee’s interactions with management and the
Company’s auditors, and the Committee members’ understanding of the Company’s risks, controls and compliance. These evaluation
forms are reviewed by the Chairman of the Board or the Audit Committee, and by the entire Board or Committee, and are discussed in
detail at a Board or Audit Committee meeting, as applicable.
Board Continuing Education
The Company encourages its directors to remain current in corporate governance, compliance and industry topics facing
publicly traded insurance companies such as the Company. In that regard, the Company provides directors with the opportunity to
attend seminars and conferences on director education, board leadership, current issues facing the insurance industry generally and the
Florida insurance market in particular, governance, risk management and other subjects of interest to Board members and relevant to
the Company. Certain of our directors also obtain significant continuing education relevant to the Company in connection with their
professional licenses and certifications in accounting, finance and law.
Corporate Governance Guidelines
The Board has adopted Corporate Governance Guidelines, which have updated, consolidated and memorialized the corporate
governance practices followed by the Board and the Company. Among other things, the guidelines address the following matters
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relating to the Board and its committees:
Director qualifications generally and guidelines on the composition of the Board and its committees;
Director responsibilities and the standards for carrying out such responsibilities;
Board membership criteria;
Board committee requirements;
Director compensation;
Director access to management and independent advisors;
Director orientation and continuing education requirements; and
CEO evaluation, management succession and CEO compensation.
The Corporate Governance Guidelines are reviewed at least annually by the Board.
Risk Oversight
The Board’s role in connection with risk oversight is to oversee and monitor the management of risk practiced by the
Company’s management in the performance of their duties. The Board does this in a number of ways, principally through the
oversight responsibility of committees of the Board, but also as part of the strategic planning process. For example, our Audit
Committee oversees management of risks related to accounting, auditing and financial reporting, maintaining effective internal
controls over financial reporting, and information security and technology risks. Our Nominating Committee oversees risk associated
with corporate governance and the Company’s code of conduct, including compliance with listing standards for independent directors
and conflicts of interest. Our Compensation Committee oversees the risk related to our executive compensation plans and
arrangements. Our Investment Committee oversees the risks related to managing our investment portfolio. Our Directors
Compensation Committee has been responsible for reviewing and recommending our non-employee director compensation plans and
arrangements. The full Board receives reports on a regular basis regarding each committee’s oversight from the chairperson of each
committee when reporting on their committee’s actions at regular Board meetings, as well as overseeing the development and
implementation of strategic initiatives.
Meetings and Committees of the Board of Directors
During 2016, the Board of Directors held 11 regular meetings, seven special meetings and took actions by written consent on
four occasions. During 2016, no director attended fewer than 75% of the Board and committee meetings held during this period. The
Board of Directors encourages, but does not require, its directors to attend the Company’s annual meeting. Last year, the seven
directors that constituted the entire Board at the time attended our annual meeting.
The Board has determined that the following directors continue to be independent pursuant to the Nasdaq Rules applicable to
the Company: Bruce F. Simberg, Carl Dorf, Richard W. Wilcox Jr., Jenifer G. Kimbrough, William G. Stewart and Thomas A.
Rogers.
The independent directors of the Board also meet in executive sessions without management present. These sessions, which
generally occur at every regularly scheduled Board meeting, are led by the Chairman. Executive sessions allow the independent
directors to discuss, among other issues, management performance and compensation.
To facilitate the Board’s oversight functions and to take advantage of the knowledge and experience of its members, the
Board has created several standing committees. These committees, the Audit, Investment, Nominating, Compensation and Business
Development committees, allow regular risk oversight and monitoring, and deeper analysis of issues before the Board. The Audit,
Compensation, Investment and Nominating committees are composed exclusively of independent directors. The membership of the
standing committees is reviewed from time to time, and specific committee assignments are proposed and appointed by the Board.
Each committee holds regularly scheduled meetings and confers between regularly scheduled meetings as needed.
Charters for the Audit, Compensation and Nominating committees, and the Corporate Governance Guidelines, are available
upon the Company’s website at www.fednat.com and are also available in print to any shareholder upon request from our Corporate
Secretary.
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Audit Committee. As of December 31, 2016, the Audit Committee was composed of Jenifer G. Kimbrough, who served as
the Chair, Richard W. Wilcox Jr. and Carl Dorf. Each member was determined to be “independent” as defined under the Nasdaq
Rules applicable to the Company and SEC rules for Audit Committee membership. Ms. Kimbrough, who is a Certified Public
Accountant, was designated as a “financial expert” as that term is defined in the applicable rules and regulations of the Exchange Act
based on her understanding of U.S. generally accepted accounting principles (“GAAP”) and financial statements; her ability to assess
the general application of GAAP in connection with the accounting for estimates, accruals and reserves; her experience preparing,
auditing, analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial
statements, or experience actively supervising one or more persons engaged in such activities; her understanding of internal controls
and procedures for financial reporting; and her understanding of audit committee functions. The Audit Committee held four regular
meetings in fiscal 2016 and one special meeting.
Pursuant to its written charter, the duties and responsibilities of the Audit Committee include, but are not limited to, (a) the
appointment of the independent certified public accountants and any termination of such engagement, (b) reviewing the plan and
scope of independent audits, (c) reviewing significant accounting and reporting policies and operating controls, (d) having general
responsibility for all related auditing and financial statement matters, and (e) reporting its recommendations and findings to the full
Board of Directors. The Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and
terms thereof) to be performed by the independent accountants, subject to the de minimis exceptions for non-audit services described
in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Audit Committee prior to the completion of the audit.
To ensure prompt handling of unexpected matters, the Audit Committee delegates to the Chair the authority to amend or
modify the list of approved permissible non-audit services and fees. The Chair will report action taken to the Audit Committee at the
next committee meeting. The Chief Financial Officer is responsible for tracking all independent auditor fees against the budget for
such services and reports at least annually to the Audit Committee.
Compensation Committee. As of December 31, 2016, the Company’s Compensation Committee was composed of Jenifer G.
Kimbrough, Bruce F. Simberg, Thomas A. Rogers and Richard W. Wilcox Jr. Each member is independent as defined by the
NASDAQ Rules. The Compensation Committee performs the duties and responsibilities pursuant to its charter, which includes
reviewing and approving the compensation of the Company's executive officers. Mr. Wilcox serves as the Chairman. During fiscal
2016, the Compensation Committee held one regular meeting and eight special meetings. For 2017, the members of the Compensation
Committee will be Jenifer G. Kimbrough, Thomas A. Rogers and Richard W. Wilcox Jr.
For the 2016 fiscal year, the Compensation Committee engaged the independent executive compensation consulting firm of
Meridian Compensation Partners, LLC (“Meridian”) to review the structure and competitiveness of the Company’s executive and
director compensation for 2016. Meridian provides no other services to the Company other than those directly to the Compensation
Committee relating to executive and director compensation. Meridian attends meetings of the Compensation Committee at the request
of the committee, meets with the Compensation Committee in executive sessions without the presence of management, and
communicates with the Chairman of the Compensation Committee with respect to emerging issues.
The Compensation Committee Chairman and certain Company officials furnished Meridian with information concerning the
compensation of its executives and copies of their employment contracts. After review, Meridian provided the Compensation
Committee with a detailed report concerning its current and future executive compensation program along with observations of
comparable companies. The Compensation Committee met with a representative of Meridian to review and discuss their findings and
recommendations. The Compensation Committee may use the services of Meridian or other comparable companies in the future to
assist it in providing a fair and competitive compensation plan for its executives.
Nominating Committee. As of December 31, 2016, the Company’s Nominating Committee was composed of Jenifer G.
Kimbrough, Carl Dorf, Richard W. Wilcox Jr., Bruce F. Simberg, Thomas A. Rogers and William G. Stewart. Each member is
independent as defined by the NASDAQ Rules. During fiscal 2016, the Nominating Committee held two regular meetings. For 2017,
the members of the Nominating Committee will be Jenifer G. Kimbrough, Carl Dorf, Richard W. Wilcox Jr., Thomas A. Rogers and
William G. Stewart.
In recommending proposed nominees to the full Board, the Nominating Committee is charged with building and maintaining
a Board that has an ideal mix of talent and experience to achieve the Company’s business objectives. In particular, the Nominating
Committee considers all aspects of a candidate’s qualifications in the context of the needs of the Company at that point in time with a
view to creating a Board with a diversity of experience and perspectives. Among the qualifications, qualities and skills of a candidate
considered important by the Nominating Committee is a person with strength of character, mature judgment, familiarity with the
Company’s business and industry, independence of thought and an ability to work collegially. The Nominating Committee considers
diversity, together with these other factors, when evaluating candidates, but does not have a specific policy in place with respect to
diversity.
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The Nominating Committee will consider candidates for director who are recommended by its members, by other Board
members and by management of the Company and who have the experience and skill set best suited to benefit the Company and its
shareholders. The Nominating Committee will consider nominees recommended by our shareholders if the shareholder submits the
nomination in compliance with the advance notice, information and other requirements described in our bylaws and applicable
securities laws. The Nominating Committee evaluates director candidates recommended by shareholders in the same way that it
evaluates candidates recommended by its members, other members of the Board, or other persons.
Shareholders who wish to recommend nominees to the Nominating Committee should submit their recommendation in
writing to the Secretary of the Company at its executive offices pursuant to the requirements contained in Article III, Section 13 of the
Company’s Bylaws. This section provides that the notice shall include: (a) as to each person who the shareholder proposed to
nominate for election, (i) name, age, business address and residence address of the person, (ii) the principal occupation or employment
of the person, (iii) the class and number of shares of capital stock of the Company which are beneficially owned by the person, (iv) the
consent of each nominee to serve as a director of the Company if so elected and (v) any other information relating to the person that is
required to be disclosed in solicitation for proxies for the election of directors pursuant to Rule 14A under the Exchange Act; and (b)
as to the shareholder giving the notice, the name and record address of the shareholder, and (ii) the class and number of shares of
capital stock of the Company which are beneficially owned by the shareholder. The Company may require any proposed nominee to
furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee
to serve as a director of the Company. To be timely, a shareholder’s notice shall be delivered to or mailed and received at the
Company’s principal executive offices not less than 60 days nor more than 90 days prior to the meeting. If we give less than 70 days’
notice or prior public disclosure of the date of the meeting date, however, notice by the shareholder to be timely must be so received
not later than the close of business on the tenth day following either the date we publicly announce the date of our annual meeting or
the date of mailing of the notice of the meeting, whichever first occurs.
Investment Committee. As of December 31, 2016, the Company’s Investment Committee was composed of Carl Dorf,
Bruce F. Simberg and William G. Stewart. The Investment Committee manages our investment portfolio pursuant to its adopted
Investment Policy Statement. Mr. Dorf serves as the Chairman. During fiscal 2016, the Investment Committee held five regular
meetings.
Business Development Committee. As of December 31, 2016, the Company’s Business Development Committee was
composed of Thomas A. Rogers, Michael H. Braun and Bruce F. Simberg. The Business Development Committee provides advice,
oversight and guidance both to management of the Company and to the Board on matters involving the Company’s development of
programs and projects, and acquisitions of new technologies or products and other business opportunities of strategic importance to
the Company. Mr. Rogers serves as the Chairman. During fiscal 2016, the Business Development Committee held four regular
meetings.
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 is available on our web site at www.fednat.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our executive officers, directors, and persons who own more than 10% of a
registered class of our equity securities to file reports of beneficial ownership and certain changes in beneficial ownership with the
SEC and to furnish us with copies of those reports. To our knowledge, based solely on a review of the copies of such reports furnished
to us or written representations that no other reports were required, we believe that during the year ended December 31, 2016, our
officers, directors and greater than 10% shareholders timely filed all reports required by Section 16(a).
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
The following Compensation Discussion and Analysis describes the components and objectives of the Company’s executive
compensation program for fiscal 2016 for our “Named Executive Officers,” describes the process through which the decisions
regarding executive compensation have been made, and describes the results of this decision-making process. Our Named Executive
Officers for fiscal 2016 were our Chief Executive Officer and President, our Interim Chief Financial Officer and our former Chief
Financial Officer. The following Compensation Discussion and Analysis reflects the compensation paid to our Named Executive
Officers for fiscal 2016 and the Compensation Committee’s decisions with respect to the compensation for fiscal 2017 for the Named
Executive Officers.
Philosophy of the Company’s Executive Compensation Programs
The Compensation Committee of the Board is responsible for establishing, implementing and monitoring adherence to the
Company’s compensation philosophy and oversees our compensation programs for our Named Executive Officers. With respect to
executive compensation, the Compensation Committee’s primary goals are to attract and retain the most qualified, knowledgeable,
dedicated and seasoned executives possible; provide challenging but attainable goals by which to measure performance; reward them
for their contributions to the development of the Company’s business; and align the executives’ compensation and incentives with the
Company’s performance and the interests of our shareholders. The Compensation Committee also endeavors, while compensating our
Named Executive Officers for their performance, to structure the Company’s compensation programs so as to not encourage
unnecessary or excessive risk-taking. The Compensation Committee believes that crafting incentives so as to not encourage
unnecessary or excessive risk taking is especially important in the homeowners’ insurance industry in the Company’s home state of
Florida.
The Compensation Committee is committed to ensuring our compensation programs are strongly aligned with the
Company’s long-term business strategy. The Committee seeks to continuously and rigorously evaluate its compensation plans to
reflect strong governance practices and shareholder feedback.
What We Do Not Do
x No change-in-control excise tax gross-ups.
x No tax gross-ups on perquisites.
x No excessive perquisites.
x No hedging or pledging of the Company’s common stock.
x No option repricing without shareholder approval.
What We Do
Established long-term performance-based criteria for the
equity awards to our Chief Executive Officer, which for
2017 will constitute 50% of his total incentive award.
Implemented a clawback policy that allows for the
recovery of previously paid incentive compensation in
the event of a restatement of our financial statements.
Established stock ownership and retention guidelines for
our executive officers and directors.
Conducted robust shareholder outreach program
in
response to our 2016 say-on-pay vote to solicit investor
feedback on compensation plan design and disclosure.
Amended our Chief Executive Officer’s employment
agreement to require a “double trigger” for the payment
of change-in-control payments to him, meaning that
payments will not be triggered without a qualifying
termination following a change in control, and to provide
that his change in control payment would be based on the
average of the preceding three years’ actual bonuses
earned.
The Company’s 2016 Performance
The Company’s financial results for 2016 reflect the impact of several severe weather events and other challenges in the
Company’s operating environment, such as the continuing frequency of the assignment of benefits by insureds to third parties.
Nevertheless, the Company achieved significant accomplishments during 2016 that the Company believes will result in increased
shareholder value, such as:
22.6% increase in gross written premiums to $605.5 million, reflecting market share growth in our homeowners’ and
personal automobile lines of business;
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9.8% increase in Florida homeowners’ policies to approximately 279,000;
26.6% increase in total revenue to $316.4 million;
$47.6 million increase in gross written premium of our personal automobile line of business to $69.5 million;
Continued development of our partnerships to expand the policies we write, including our agreement with Allstate, and
our new agreement with GEICO;
Increases in the Company’s dividend from $0.05 per share beginning December 1, 2015, to $0.06 per share beginning
June 1, 2016 and to $0.08 per share beginning December 1, 2016; and
Approval of an average statewide rate increase of 5.6% in effect since August 1, 2016, with another rate increase of 6.5%
to be effective August 1, 2017 pending.
Coupled with those accomplishments, however, were the significant increase in losses from multiple weather events, most
particularly Hurricane Matthew, which impacted Florida and South Carolina in October 2016, and the inflated costs of handling
homeowners’ claims in Florida, primarily as a result of the growth of assignment of benefits by insureds. The Company anticipates
that its approved and pending rate increases should gradually offset the increased costs associated with assignment of benefits claims.
In the fourth quarter of 2016, the Company recorded for Hurricane Matthew $47.0 million of gross claims, which represented a
decrease from the initial estimate of $77.5 million, and $21.4 million of claims, net of reinsurance. The Company also increased its
total loss reserves by $30.6 million during the quarter, which increased the Company’s total loss reserves at December 31, 2016 to
$158.1 million. The foregoing resulted in a net loss of $0.2 million or $(0.01) per undiluted share for the year ended December 31.
2016.
Results of Our Evaluations
The following table summarizes the Compensation Committee’s 2016 compensation decisions for our Named Executive
Officers, consistent with how the Compensation Committee views total compensation. The Compensation Committee reached these
compensation decisions based on its evaluation of performance relative to the incentive criteria established at the beginning of 2016 as
described below. For comparative purposes, the table also presents 2015 and 2014 compensation decisions for our Named Executive
Officers. While the table below summarizes how the Compensation Committee views compensation, it is not a substitute for the
tables and disclosures required by the SEC’s rules, which begin on page 90. Further detail on how individual pay decisions were
made and descriptions of the elements of compensation can be found following this table.
Named Executive Officer
Michael H. Braun, CEO and
President
Peter J. Prygelski III, CFO &
Treasurer (1)
Erick A. Fernandez, Interim CFO
and Treasurer (2)
Base Salary
Rate
Annual
Incentive
Awards
Long-term
Incentive
Awards
Total
Compensation
$
$
$
$
$
$
$
$
$
1,000,000 $
0 $
0 $
600,000 $
1,200,000 $
1,200,000 $
475,000 $
950,000 $
1,293,000 $
325,000 $
0 $
0 $
1,000,000
3,000,000
2,693,300
325,000
325,000 $
487,500 $
243,750 $
1,056,250
300,000 $
450,000 $
0 $
212,000 $
30,000 $
63,228 $
0 $
0 $
0 $
0 $
0 $
0 $
750,000
305,228
0
0
Year
2016
2015
2014
2016
2015
2014
2016
2015
2014
(1) Mr. Prygelski separated from the Company in June 2016.
(2) Mr. Fernandez became the Company’s Interim Chief Financial Officer and Treasurer in June 2016. The annual incentive award
for Mr. Fernandez was paid pursuant to a bonus agreement entered into prior to his appointment as the Interim Chief Financial
Officer. The long-term incentive award consists of restricted stock vesting over three years that was granted to him also prior to his
appointment as Interim Chief Financial Officer.
Shareholder Outreach and “Say-on-Pay”
At our advisory shareholder vote on executive compensation in 2016, our say-on-pay proposal received the affirmative vote
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of 49.07% of the shares voted on the proposal. Our directors nominated for re-election at the 2016 annual meeting, Michael H. Braun,
Jenifer G. Kimbrough, Bruce F. Simberg, Thomas A. Rogers and William G. Stewart, received votes for re-election from the shares
voted at the meeting as shown in the table below.
Director
Michael H. Braun
Jenifer G. Kimbrough
Bruce F. Simberg
Thomas A. Rogers
William G. Stewart
% of Shares Voted
93.76%
92.65%
86.22%
92.76%
93.48%
In response to the 2016 say-on-pay vote, the Compensation Committee has sought and received feedback and guidance from
shareholders and others regarding the Company’s executive compensation practices, with a view to better understand and address
investor concerns, while continuing to evolve our compensation practices in a way that both meets the Board’s compensation goals
and benefits our shareholders.
During the course of our outreach, we contacted all of the Company’s top 30 shareholders, representing approximately 62%
of our outstanding common stock. We received responses from and engaged in dialogue with seven of these shareholders, and will
continue this outreach process during the months preceding our 2017 annual meeting. We also held discussions with the major proxy
advisory firms to learn more about their perspectives and policies.
The Compensation Committee has carefully considered the shareholder feedback and guidance it received and has
undertaken a comprehensive review of, and made several positive changes to, our executive compensation program.
What We Heard:
The metrics used to determine awards under the short and long-term incentive plans should be different from one another
and closely tied to Company performance, and Compensation Committee should minimize discretionary payouts.
Our historical reliance on time-based vesting of equity awards should be reduced, with the emphasis instead on
performance-based vesting of equity.
Awards made under the long-term incentive plan should be granted predominantly in the form of equity, rather than
cash.
The Company should clearly disclose the performance metrics, goals and weighting that were considered when
determining our Named Executive Officers’ incentive compensation payouts.
How We Responded:
The Compensation Committee has approved a new formula-based short and long-term incentive plan structure for
evaluating our Chief Executive Officer’s performance beginning in 2017, with 50% of his incentive award based on
annual goals that reflect the Company’s financial and operating performance on a year-to-year basis, and 50% based on
long-term goals that reflect the growth realized by the Company’s shareholders over a more extended horizon.
Beginning in 2017, a portion of our Chief Executive Officer’s awards granted under the long-term incentive plan will be
granted in the form of performance-based equity.
We have substantially revamped and restructured our Compensation Discussion and Analysis to provide a more detailed
and transparent presentation of the alignment between pay and performance.
We entered into amendments to the employment agreement with our Chief Executive Officer to provide for a “double-
trigger” for payment of his change of control bonus and to modify the calculation of that bonus to be based on the
average of the Chief Executive Officer’s actual bonuses received for the three years prior to the change of control.
Evaluation Process
The Compensation Committee conducts an annual review of the total compensation of our executive officers, executive
compensation, as well as the mix of elements used to compensate our Named Executive Officers. This review is based in part on an
analysis of feedback from shareholders and current best practices in executive compensation and in part on a survey of executive
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compensation paid by various comparable publicly traded property and casualty insurance companies as reported in each company’s
proxy statement. For 2016, our direct peer group encompassed publicly traded companies that compete with us in the Florida
homeowners’ insurance market: Heritage Insurance Holdings, Inc. (NYSE: HRTG), HCI Group, Inc. (NYSE: HCI), United
Insurance Holdings Corp. (NASDAQ: UIHC) and Universal Insurance Holdings, Inc. (NYSE: UVE).
In addition to the four insurance companies listed above, the Company included the following companies in its peer group for
comparison purposes for 2016:
– Safety Insurance Group Inc. (NASDAQ: SAFT)
– Donegal Group Inc. (NASDAQ: DGICA)
– Greenlight Capital Re Ltd. (NASDAQ: GLRE)
– Third Point Reinsurance Ltd. (NYSE: TPRE)
– Hallmark Financial Services (NASDAQ: HALL)
– First Acceptance Corp. (NYSE: FAC)
– Atlas Financial Holdings Inc. (NASDAQ: AFH)
– RLI Corp. (NYSE: RLI)
– EMC Insurance Group Inc. (NASDAQ: EMCI)
– Baldwin & Lyons (NASDAQ: BWINB)
– Atlantic American Corp. (NASDAQ: AAME)
These additional peers provide the Compensation Committee with a broader perspective of compensation practices among
relevant insurance companies. The Committee assessed the competitiveness of the Company’s compensation program in comparison
to the entire peer group, as well as the subset of the Company’s direct peers who are competitors in the Florida homeowners’
insurance market.
For the 2016 fiscal year, the Compensation Committee engaged Meridian Compensation Partners, an independent executive
compensation consulting firm, to review the structure and competitiveness of the Company’s executive and director compensation for
2016. Meridian provided no other services to the Company other than those directly to the Compensation Committee relating to
executive and director compensation. Meridian attended meetings of the Compensation Committee at the request of the committee,
met with the Compensation Committee in executive sessions without the presence of management, and communicated with the
Chairman of the Compensation Committee with respect to emerging issues.
We also consider the industry knowledge and experience of our Committee members to be an important component of our
compensation review process. Our Committee members each have substantial management experience in running businesses in the
insurance, financial services and legal services industries, many of which have substantial management teams. As a result, their
personal experience extends to developing and implementing management compensation and incentive programs, enabling our
Committee members to use that experience when reviewing the Company’s executive compensation programs and working with
Meridian to make appropriate updates.
Meridian was provided with information about our Named Executive Officers’ historical compensation and the Company’s
financial results, and was provided copies of their employment agreements. Meridian then delivered to the Compensation Committee a
detailed report comparing the Company’s current executive compensation program to those comparable companies, together with
recommendations for future updates. The Compensation Committee, on multiple occasions, met with or spoke with a representative
of Meridian to review and discuss Meridian’s findings and recommendations. The Compensation Committee may use the services of
Meridian or other consultants in the future to assist it in providing a fair and competitive compensation plan for its executives.
Elements of Compensation
The Compensation Committee has been committed to updating the Company’s executive compensation programs to reflect
the Company’s growth and the evolution of best practices, and to reflect the feedback received as a result of our outreach to our largest
shareholders. In that regard, the Compensation Committee approved in 2016 and 2017 a significant revamp of the Company’s
compensation practices, in particular the incentive compensation of the Company’s Chief Executive Officer and President. The
Company’s executive compensation programs for its Named Executive Officers consist of elements described below.
Base Salary. The Compensation Committee annually reviews the base salaries of the Named Executive Officers, and
considers a number of factors, such as each Named Executive Officer’s level of responsibility, performance during the prior fiscal
year (with respect to specific areas of responsibility and on an overall basis), past and present contributions to and achievement of
Company goals, historical compensation levels of the Named Executive Officer, and the Company’s financial condition and results of
operations. The Compensation Committee also considers the median base salary levels for executives in similar positions with similar
responsibilities at companies of comparable size in the insurance and financial services industries when reviewing our Named
Executive Officers’ base salaries. That review for 2016 indicated that Mr. Braun’s base salary was below the median for the
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Company’s peer group and lowest among our direct peer group, while Mr. Prygelski’s salary was approximately at the median of our
peer group. The Compensation Committee reviewed the compensation analysis report prepared by Meridian and, based on the factors
described above, the Compensation Committee approved an increase for fiscal 2016 to Mr. Braun’s base salary to $1,000,000 to bring
his base salary above the median, while Mr. Prygelski’s base salary of $325,000 remained unchanged. Following the resignation of
Mr. Prygelski and appointment of Mr. Fernandez as the Interim Chief Financial Officer in June 2016, Mr. Fernandez’s base salary was
increased to $212,000. For 2017, both Mr. Braun’s and Mr. Fernandez’s base salaries were unchanged.
Incentive Compensation. Consistent with the Company’s pay-for-performance philosophy of compensating our Named
Executive Officers for the Company’s achievements for the prior year and their roles in those achievements, and reflecting the
feedback received from our outreach to our largest shareholders, in 2017 the Compensation Committee completely revamped the
incentive compensation of our Chief Executive Officer and President.
For 2017, Mr. Braun will be entitled to receive performance-based incentive compensation, 50% of which will be an annual
bonus payable in cash and 50% of which will be a long-term incentive bonus payable in equity, based on the performance metrics and
weighting described below. The total payout for both the annual and long-term bonuses will be based on Mr. Braun’s base salary of
$1,000,000 for 2017, at the threshold, target and maximum percentages indicated below:
Annual Incentive Plan(A):
Performance Metrics
Increase in Gross Revenues
Expense Control
EBITDA
Long-Term Incentive Plan:
Performance Metrics
Return on Equity
Increase in Book Value
Relative TSR (3-Year)
Incentive Plan Payout
(% Based on 50% of Base Salary)
Threshold
100%
100%
100%
Target
175%
175%
175%
Maximum
250%
250%
250%
Incentive Plan Payout
(% Based on 50% of Base Salary)
Threshold
100%
100%
100%
Target
175%
175%
175%
Maximum
250%
250%
250%
Weight
33%
33%
33%
Weight
33%
33%
33%
(A)
No payouts will be made under the annual incentive plan unless the Company’s 2017 net income is above a minimum
threshold determined by the Compensation Committee.
The Compensation Committee believes that the annual financial and operating metrics selected for the annual incentive
plan—increase in gross revenues, expense control and EBITDA--appropriately reflect the important measurements of the Company’s
results of operations on a year-to-year basis, and provide incentives to grow the Company’s business in a cost-effective way.
The metrics selected by the Compensation Committee for the long-term incentive plan—return on equity (“ROE”), increase
in book value, and relative shareholder return (“Relative TSR”)—are appropriate measures of the Company’s success over a longer
time horizon, with particular emphasis on the measurements that are meaningful to the Company’s shareholders and relevant to the
Company’s long-term business strategy. The ROE and increase in book value metrics will be measured over successive one-year
performance periods, and the equity granted will vest 1/3 annually beginning one year after the grant date. The Relative TSR metric
will be measured over a three-year performance period, and the equity granted will cliff vest at the end of the three-year performance
period based on the Company’s performance relative to the primary peer group of Florida homeowners’ insurers. For the Relative
TSR metric, the Compensation Committee determined that the most appropriate comparison of the Company’s performance would be
to the Company’s direct peer group of Florida homeowners’ insurers because of the unique competitive aspects of the Florida
homeowners’ insurance market and because external factors such as hurricanes would likely impact all of the members of the direct
peer group in a more consistent way.
The Compensation Committee established the minimum, target and maximum percentages of base salary taking into account
that Mr. Braun will receive no increase in base salary for 2017.
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The incentive compensation plan structure approved for 2017 is a significant departure from the incentive compensation plan
structure approved by the Compensation Committee for 2016. For 2016, Mr. Braun was entitled to receive annual and long-term
awards as follows:
Performance Metrics
Pre-tax income
ROE
Weight
45%
45%
Executive-specific goals
10%
2016 Results
$2.7 million
(5.38)%
As determined by the
Compensation Committee
The annual and long-term awards would be based on a percentage of base salary and paid 50% in cash and 50% in the
Company’s common stock. Of the equity portion, 75% would time vest over five years and 25% would be granted with performance
vesting criteria that will be evaluated over three years. The executive-specific goals for Mr. Braun included increasing the Company’s
market share in Florida, expanding the Company’s marketing relationships, and expanding the Company’s product lines The
Compensation Committee determined that, although the Company had achieved significant accomplishments during 2016, as
described above under “The Company’s 2016 Performance,” the Company’s results did not meet the goals established and therefore
Mr. Braun would not be awarded any bonus for 2016.
Erick A. Fernandez, our Interim Chief Financial Officer, received for 2016 a bonus of $30,000 pursuant to a bonus agreement
entered into with him when he joined the Company.
Our 2012 Stock Incentive Plan, which was adopted by the Board of Directors and approved by our shareholders in 2012,
authorizes us to grant a variety of equity incentive awards, such as incentive stock options, non-qualified stock options, stock
appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, and performance shares to officers, directors and
executive, managerial, administrative and professional employees of the Company and its subsidiaries. Awards may be granted
singly, in combination, or in tandem. Our Compensation Committee is the administrator of the equity plans. The Compensation
Committee reviews and approves equity awards to executive officers based upon a review of competitive compensation data, its
assessment of individual performance, and retention considerations, as well as a review of the individual’s existing share and option
holdings. Equity grants have been made at the discretion of the Compensation Committee and/or executive management members,
who have been granted limited authority by the Compensation Committee. To date, only restricted stock has been granted under the
2012 Stock Incentive Plan. The Board has adopted a policy prohibiting repricing of stock options and prohibiting cash buyouts of
underwater options, and intends to propose amendments to the 2012 Plan implementing these policies for approval by the Company’s
shareholders.
Other Employee Benefit Plans. Our employees, including our Named Executive Officers, are entitled to various employee
benefits. These benefits include medical and dental care plans; flexible benefit accounts; life, accidental death and dismemberment
and disability insurance; a 401(k) plan; and paid vacation.
Under our 401(k) plan, the Company matches 100% of the first 6% of participant elective contributions and, from time to
time, the Board of Directors approves an additional discretionary profit sharing contribution. No additional contribution was approved
for 2016. The Board of Directors currently intends to review the Company’s financial results annually to determine whether to
approve a discretionary profit sharing contribution in any future years.
Other Compensation. At the present time, we do not offer pension benefits or, except as described above, other forms of
deferred compensation plans. The Compensation Committee periodically reviews the overall employment packages and benefits
offered to the Company’s Name Executive Officers. As part of that review, Mr. Braun’s employment agreement with the Company
was amended in February 2017 to eliminate the 100% coverage of his health insurance premiums, with his reimbursement to be the
same as the Company’s other senior management. The Compensation Committee believes that the benefits and perquisites offered to
the Named Executive Officers are currently set at competitive levels for comparable companies, requiring no further changes at this
time. The Compensation Committee may, however, at its discretion, modify or increase the Named Executive Officers’ executive
benefits and perquisites, if it deems it appropriate or advisable.
Clawback Policy. In 2016, the Board adopted a clawback policy applicable to our Named Executive Officers and other
current or former executive officers of the Company. Pursuant to this policy, the Company will have the right, in appropriate
circumstances as determined by the Board in its sole discretion, to seek to recover all or any part of the cash or equity incentive-based
compensation granted to our Named Executive Officers or such other executive officers during the three fiscal years preceding the
date on which the Company is required to prepare an accounting restatement to correct a material error, if the restatement is required
because of a knowing violation of SEC rules and regulations, GAAP, other applicable legal or regulatory requirements, or Company
policy by a Named Executive Officer or such other executive officer. Incentive-based compensation subject to the policy includes any
cash or equity compensation granted, earned or vested based wholly or in part on the attainment of a financial reporting
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measure. Financial reporting measures include measures that are based on accounting principles used in preparing the Company’s
financial statements, measures that are derived from information in the Company’s financial statements, and stock price and total
shareholder return. The Board will have the discretion to forgo such recovery if it determines that seeking such recovery would be
unreasonable or not in the Company’s best interests.
Stock Ownership and Retention Guidelines. The Board also approved in 2016 stock ownership guidelines applicable to our
Named Executive Officers. Under these guidelines, our Chief Executive Officer is required to hold shares of the Company’s common
stock with a value of at least six times his annual salary rate, and our Chief Financial Officer is required to hold shares with a value of
at least three times his annual salary rate. The guidelines further provide that the Named Executive Officers should achieve the
guideline amounts within five years of becoming subject to the policy and, until the guideline amounts are achieved, the Named
Executive Officers must retain 66-2/3% of any shares received as equity grants from the Company, net of shares withheld or sold to
pay taxes. The Board also prohibited hedging or pledging the Company’s common stock, without exception.
Tax Considerations. Under Section 162(m) of the Internal Revenue Code of 1986, as amended, the federal income tax
deductibility of compensation paid to our Named Executive Officers may be limited to the extent that compensation to a Named
Executive Officer exceeds $1.0 million in any year. The Company can deduct compensation in excess of that amount if it qualifies as
“performance-based compensation” under Section 162(m). Among other things, compensation qualifies as performance-based for
purposes of Section 162(m) if the compensation is approved by shareholders or awarded under a plan approved by
shareholders. Although the Compensation Committee considers the desirability of limiting our non-deductible expenses when it
makes compensation decisions, the committee believes in maintaining the flexibility and competitive effectiveness of the executive
compensation program. Tax deductibility, while an important consideration, is analyzed as one component of the overall program.
Compensation Committee Report
The Compensation Committee of the Company has reviewed and discussed the foregoing Compensation Discussion and
Analysis with management. Based on our review and discussion with management, we have recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in the Company’s SEC filings, including its proxy statement for the 2017
Annual Meeting of Shareholders.
Respectfully Submitted
March 15, 2017
/s/ Richard W. Wilcox Jr., Chairman
/s/ Jenifer G. Kimbrough
/s/ Thomas A. Rogers
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation earned by, awarded to or paid to our Chief Executive
Officer and President, our Interim Chief Financial Officer, and our former Chief Financial Officer, for the fiscal years ended
December 31, 2016, 2015 and 2014. We refer to these officers as our Named Executive Officers in other parts of this Form 10-K. We
currently do not have any other employees of the Company designated as executive officers.
Name and Principal
Year
Position
2016 $
Michael H. Braun
2015 $
Chief Executive Officer,
2014 $
President
Peter J. Prygelski III
2016 $
Former Chief Financial Officer, 2015 $
2014 $
Treasurer (7)
Erick A. Fernandez
2016 $
Interim Chief Financial Officer, 2015 $
2014 $
Treasurer (9)
Salary
993,846 $
617,308 $
469,231 $
325,000 $
336,346 $
297,638 $
180,846 $
— $
— $
Bonus (1)
—
1,200,000
Option
Stock Awards (1) Awards
$
—
$
— (5) $
$
—
$
487,500
$
175,000
$
40,000
$
—
$
—
600,000 (4)
4,703,100 (6)
1,164,529 (10)
243,750 (4)
658,700 (8)
— $
— $
— $
— $
— $
— $
— $
— $
— $
—
—
Nonqualified
Non-Equity
Incentive Plan
Deferred
Compensation Compensation Compensation
Earnings
All Other
(2)
(3)
—
600,000
—
—
—
—
—
—
—
— $
— $
— $
— $
— $
— $
— $
— $
— $
36,492 $
48,466 $
34,883 $
36,418 $
51,358 $
39,572 $
8,131 $
— $
— $
Total
1,030,338
3,065,774
5,207,214
1,525,947
1,118,954
1,170,910
218,977
—
—
(1) Reflects cash bonuses earned by the Named Executive Officer for the applicable fiscal year but that were paid in the following fiscal year. The
amounts shown for the bonuses and stock awards in 2014 were updated to reflect the amounts awarded for that year but that were paid in the
following fiscal year, and to remove amounts paid in that year that were awarded for the prior year.
(2) Reflects cash awarded to the Named Executive Officer as long-term incentive compensation for the applicable fiscal year but that was paid in
the following fiscal year.
(3) See table "All Other Compensation" below for an itemized disclosure of this element of compensation.
(4) The nominal amounts remaining after calculation of awards as restricted stock which was based on the fair market value on the grant date of
March 10, 2016, which was $19.16 per share, was paid in cash.
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(5) Mr. Braun elected to receive 100% of his 2014 performance award, which was paid in 2015, as restricted stock. The nominal amounts
remaining after calculation of his award as restricted stock, based on the fair market value on the grant dates of March 10, 2015 and May 5,
2015, which were $28.79 and $25.86 per share, respectively, were paid in cash.
(6) Includes the 2014 performance awards referenced in Note (5) above and grants made on September 9, 2014 and December 9, 2014, which were
awarded to bring his total compensation more in line with the Company’s direct peer group, vest over a five-year period and were based on the
fair market values of $25.58 and $26.18, respectively, per share on the grant dates.
(7) Mr. Prygelski terminated his employment with the Company on June 20, 2016. The amounts shown include $168,750 paid to Mr. Prygelski in
2016 pursuant to his severance agreement.
(8) Reflects a portion of his 2014 performance award, which was paid in 2015, paid in cash and the remaining portion paid in shares of restricted
stock. The nominal amount remaining after calculation of his award as restricted stock which was based on the fair market value on the grant
date of March 10, 2015, which was $28.79 per share, was paid in cash. Also includes a grant in 2014 to bring his total compensation more in
line with the Company’s direct peer group. All unvested shares held by him were vested upon his separation from the Company in June 2016.
(9) Mr. Fernandez was appointed Interim Chief Financial Officer effective June 20, 2016.
(10) Includes grant date fair value and/or incremental fair value of restricted stock for which vesting was accelerated upon his separation from the
Company.
Name
Michael H. Braun
Peter J. Prygelski III
Erick A. Fernandez
ALL OTHER COMPENSATION
Club Member Insurance Contribution to Compensation
Auto
Fees
Benefits (1)
401(k) Plan (2)
Total
All Other
3,817 (3) $
7,614 $
7,998 $
2,885 $
6,231 $
6,000 $
-- $
-- $
-- $
-- $
-- $
-- $
617 $
9,239 $
9,228 $
-- $
-- $
-- $
11,261 $
10,407 $
9,385 $
12,901 $
7,883 $
6,844 $
-- $
-- $
-- $
20,015 $
19,930 $
17,500 $
20,015 $
19,930 $
17,500 $
8,131 $
-- $
-- $
35,093
48,466
34,883
36,418
51,358
39,572
8,131
--
--
Year
2016
2015
2014
2016
2015
2014
2016
2015
2014
$
$
$
$
$
$
$
$
$
(1) Represents premiums for medical insurance.
(2) Represents matching contributions and a discretionary profit contribution made by the Company on behalf of the Named Executive Officers to
the Company’s 401(k) plan.
(3) Mr. Braun’s automobile allowance was eliminated in July 2016 and payment of 100% of his health insurance premiums was eliminated
effective January 1, 2017.
Employment Agreements
Michael H. Braun, Chief Executive Officer and President. We entered into a second amended and restated employment
agreement with Michael H. Braun effective as of January 18, 2012, which amended and restated Mr. Braun’s prior employment
agreement. In connection with the organization of Monarch National Insurance Company (“Monarch Insurance”) in 2015, the
Company's Board of Directors approved an amendment to his employment agreement to extend the term of his employment
agreement to four years from the date of the amendment with automatic extensions so that at all times the balance of the term is not
less than two years unless sooner terminated as provided in the employment agreement. Under his agreement, Mr. Braun’s annual
salary, which may be increased at any time during the term of the agreement, was increased to $1,000,000 effective January 1,
2016. Mr. Braun is also entitled to receive such bonuses and increases as may be awarded by the Board of Directors. It also contains
customary confidentiality and non-solicitation provisions. Mr. Braun’s agreement was further amended in 2016 to eliminate a car
allowance as a perquisite and to modify the definition of “Good Reason” so that the payments due to him following a “Change in
Control” under the agreement will be payable only upon a “double-trigger” and in February 2017 to eliminate his full reimbursement
for health insurance and to modify the calculation of his Change of Control bonus, as described below.
Mr. Braun is entitled to receive certain payments upon the termination of employment under certain circumstances as set
forth in his agreement, as amended. If his employment is terminated by us without Cause (as defined in his agreement), we must
make a lump sum payment to the executive equal to two years' base salary (the “Termination Severance”). In addition, all unvested
stock options and any other equity awards held by him will become vested. If Mr. Braun’s employment with us is terminated for
Cause or as a result of his death or disability, he will be entitled to his base salary prorated through the date of the termination and any
benefits due him as may be provided under the applicable plan, program or arrangement.
The agreement also provides for payments to him if he is employed by us on the date on which a Change of Control
occurs. Under the agreements, a “Change of Control” will be deemed to have occurred if: (i) any person, including a “group” as
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defined in Section 13(d)(3) of the Exchange Act, becomes the owner or beneficial owner of our securities having 50% or more of the
combined voting power of our then-outstanding securities that may be voted for the election of our directors (other than as a result of
an issuance of securities initiated by us, or open market purchases approved by our Board, as long as the majority of the Board
approving the purchases is the majority at the time the purchases are made), or (ii) the persons who were our directors before such
transactions shall cease to constitute a majority of our Board, or any successor to us, as the direct or indirect result of or in connection
with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination
of the foregoing transactions. If, following a Change in Control, Mr. Braun’s employment is terminated by us (or any successor or
subsidiary) without Cause or by the executive for Good Reason (as defined in his agreement), we will make a lump sum payment to
the executive in an amount equal to two times the sum of his base salary immediately preceding the Change of Control plus the
average of his actual bonus for the three fiscal years immediately preceding the Change of Control (the "Change of Control
Severance"). Additionally, all unvested stock options and any other equity awards held by him will become vested and the Company
will continue to provide Mr. Braun (and his family) with medical insurance for a period of two years after the date of such termination
of employment at no cost and on the same terms and conditions as in effect on the date on which such termination of employment
occurs.
If Mr. Braun is terminated by us without Cause prior to a Change of Control, and a Change of Control occurs within six
months following such termination, then in addition to the Termination Severance described above, he will be entitled to an additional
lump sum payment in an amount equal to (i) the Change of Control Severance, less (ii) the Termination Severance.
As a condition to Mr. Braun’s entitlement to receive the base salary amounts and equity award acceleration referenced above,
he is bound by the terms of an agreement that sets forth certain restrictive covenants. Pursuant to the non-competition provisions of
this agreement, as amended, he is prohibited from working in the insurance industry in any territories where the Company has been
doing business for a period of two years from the date on which he terminates employment with the Company for any reason (other
than without cause). For a period of two years after his employment is terminated, he is also prohibited from soliciting, for himself or
for any third person, any employees or former employees of the Company, unless the employees have not been employed by the
Company for a period in excess of six months, and from disclosing any confidential information that he learned about the Company
during his employment. In connection with the organization of Monarch Insurance in 2015, the Company's Board of Directors
approved an amendment to his Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement dated as of
August 5, 2013 (the "Restrictive Covenant Agreement") to permit him to hold his positions with Monarch Insurance and its parent
companies (the “Monarch Entities”) while remaining employed by the Company. Mr. Braun's Restrictive Covenant Agreement was
further amended to permit him to continue to hold his positions with the Monarch Entities if he is terminated without cause by the
Company.
Erick A. Fernandez, Interim Chief Financial Officer. Mr. Fernandez is not currently a party to an employment agreement
with the Company. In connection with his joining the Company in January 2016, Mr. Fernandez and the Company entered into a
Bonus Agreement dated as of January 11, 2016 (the “Bonus Agreement”) and a Change of Control Agreement dated as of May 2,
2016 (the “Change of Control Agreement”). The Bonus Agreement provides for a bonus payable to Mr. Fernandez on a quarterly
basis equal to 0.060% of net income as reported in the Company’s Form 10-Q, with a minimum bonus for 2016 of $40,000. The
Change of Control Agreement provides for payments to Mr. Fernandez if he is employed by us on the date on which a Change of
Control (as defined above) occurs. If, during the one-year period following a Change in Control, Mr. Fernandez’s employment is
terminated by us without Cause or by Mr. Fernandez for Good Reason (each as defined in the Change of Control Agreement), he will
be entitled to receive a lump sum payment equal to one year of his base salary in effect immediately prior to the Change of Control.
Peter J. Prygelski III, Former Chief Financial Officer. Mr. Prygelski resigned his positions as Chief Financial Officer and
Treasurer of the Company on June 20, 2016 and therefore the employment-related provisions of his Second Amended and Restated
Employment Agreement dated effective as of January 18, 2012 were deemed terminated as of that date. The confidentiality, non-
competition and non-solicitation provisions remain in effect. In connection with his resignation, the Company agreed to pay him cash
severance equal to two years’ base salary, or $650,000, payable bi-weekly over two years, and accelerated the vesting of
approximately 66,500 unvested restricted shares.
Equity-Based Compensation
Grants of Plan Based Awards. The following table provides information regarding restricted stock granted to our Named
Executive Officers during 2016 under the Company’s Amended and Restated 2012 Stock Incentive Plan (the “2012 Plan”).
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Name
Michael H. Braun
Peter J. Prygelski III
Erick A. Fernandez
All Other Equity Awards
/ Number of Securities
Underlying Options
Exercise or Base
Price of Equity
Awards
Grant Date Fair
Value of
31,315 (2) $
12,721 (2) $
3,300 (3) $
Equity Awards (1)
599,995
243,734
63,228
19.16 $
19.16 $
19.16 $
Grant Date
3/10/2016
3/10/2016
3/10/2016
(1) This amount reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in the
calculation of this amount are included in Footnote 14 to the Company’s audited financial statements for fiscal year ended December 31, 2016.
(2) Shares granted in 2016 for incentive awards based on 2015 performance.
(3) Shares granted to Mr. Fernandez upon his employment with the Company and prior to his appointment as Interim Chief Financial Officer.
Stock Incentive Plan. Our 2012 Plan is administered by the Compensation Committee. The objectives of the 2012 Plan include
attracting, motivating and retaining key personnel and promoting our success by linking the interests of our employees, directors and
consultants with our success.
Awards may be made under the 2012 Plan in the form of (a) incentive stock options, (b) non-qualified stock options,
(c) stock appreciation rights, (d) dividend equivalent rights, (e) restricted stock, (f) unrestricted stock, (g) restricted stock units, and
(h) performance shares. No incentive stock option may be granted to a person who is not an employee of the Company or one of its
subsidiaries on the date of grant. In addition, both incentive stock options and non-statutory stock options were granted under our 2002
stock option plan. This plan has expired, although as of December 31, 2016, 79,484 options remain outstanding under the 2002 plan.
Shares Available for Issuance. As of December 31, 2016, 367,071 shares were remaining available to be awarded
under the 2012 Plan. As of December 31, 2016, all shares of common stock authorized for issuance upon exercise of options granted
under the 2002 plan have been issued or are issuable upon exercise of outstanding options. The shares to be delivered pursuant to
awards will be made available, at the discretion of the Compensation Committee, from authorized but unissued shares or outstanding
options or awards that expire or are cancelled. If shares covered by an option or award cease to be issuable for any reason, such
number of shares will no longer count against the shares authorized under the plan and may again be granted under the 2012 Plan.
Vesting Schedule. Awards granted under the 2012 Plan typically vest in equal portions over three or five years.
Awards granted under the 2012 Plans require that the recipient of a grant be continuously employed or otherwise provide services to
us or our subsidiaries. Failure to be continuously employed or in another service relationship generally results in the forfeiture of
awards not vested at the time the employment or other service relationship ends. Termination of a recipient’s employment or other
service relationship for cause generally results in the forfeiture of all of the recipient’s unexercised awards.
Policy on Repricing and Cash Buyouts of Underwater Options. The Board has adopted a policy prohibiting
repricing of stock options and prohibiting cash buyouts of underwater options, and intends to propose amendments to the 2012 Plan
implementing these policies for approval by the Company’s shareholders
Adjustments in Our Capital Structure. The number and kind of shares available for grants under our 2012 Plans
and any outstanding awards under the plans, as well as the exercise price of outstanding options or awards, will be subject to
adjustment by the Compensation Committee in the event of any merger, consolidation, reorganization, stock split, stock dividend or
other event causing a capital adjustment affecting the number of outstanding shares of common stock. In the event of a business
combination or in the event of a sale of all or substantially all of our assets, the committee may cash out some or all of the
unexercised, vested options or awards under the plan, or allow some or all of the options or awards to remain outstanding, subject to
certain conditions. Unless otherwise provided in individual option agreements, the vesting of outstanding options or awards will not
accelerate in connection with a business combination or in the event of a sale of all or substantially all of our assets.
Administration. The Compensation Committee has full discretionary authority to determine all matters relating to
awards granted under the 2012 Plan, including the persons eligible to receive awards, the number of shares subject to each award, the
exercise price of each option or award, if applicable, any vesting schedule, any acceleration of the vesting schedule and any extension
of the exercise period. The committee has granted limited authority to executive management members to grant awards to eligible
individuals.
Amendment and Termination. Our Board of Directors has authority to suspend, amend or terminate the 2012 Plan,
except as would adversely affect participants’ rights to outstanding awards without their consent. The 2012 Plan was amended and
restated in March 2013 to clarify the plan administrator’s authority to permit the vesting of unvested restricted shares in the event of
the death of the grantee. As the plan administrator, our Committee has the authority to interpret the plans and options or awards
granted under the stock plans and to make all other determinations necessary or advisable for plan administration.
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Outstanding Equity Awards at Fiscal Year-End. The following table summarizes the equity awards held by our Chief
Executive Officer and President and our Interim Chief Financial Officer, as of December 31, 2016.
Stock Option Awards
Restricted Stock Awards
Number of
Securities
Underlying
Exercisable
Options (#)
Number of
Securities
Underlying
Option
Unexercisable Exercise
Price ($)
Options (#)
Market Value
Shares
That
Have Not
Vested (#)
of Shares
That Have
Not Vested
($)(1)
Option
Expiration
Date
40,000 $
14,666 $
27,000 $
30,000 $
21,998 $
40,000 $
31,315 $
3,300 $
747,600
274,108
504,630
560,700
411,143
747,600
585,227
61,677
Name
Michael H. Braun
Erick A. Fernandez
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
—
—
—
—
—
—
—
—
Market or
Payout Value of
Unearned
Shares, Units or
Other Rights
That Have
Not Vested
— (2)
— (3)
— (4)
— (5)
— (6)
— (7)
— (8)
— (8)
(1) Based on the market value per share of $29.56 on December 31, 2016.
(2) Restricted stock vested as to 25% on December 31, 2016, the remaining 50% vest as follows:
25% on 8/5/2017 and 25% on 8/5 2018.
(3) Restricted stock vested as to 66 2/3% on December 31, 2016, the remaining 33 1/3% vests on 3/4/2017.
(4) Restricted stock vested as to 40% on December 31, 2016, the remaining 60% vest as follows:
20% on 9/9/2017, 20% on 9/9/2018 and 20% on 9/9/2019.
(5) Restricted stock vested as to 40% on December 31, 2016, the remaining 60% vest as follows:
20% on 12/9/2017, 20% on 12/9/2018 and 20% on 12/9/2019.
(6) Restricted stock vested as to 33 1/3% on December 31, 2016, the remaining 66 2/3% vest as follows:
33 1/3% on 3/10/2017 and 33 1/3% on 3/10/2018.
(7) Restricted stock vested as to 20% on December 31, 2016, the remaining 80% vest as follows:
20% on 5/5/2017, 20% on 5/5/2018, 20% on 5/5/2019 and 20% on 5/5/20
(8) Restricted stock vests as follows: 33 1/3% on 3/10/2017, 33 1/3% on 3/10/2018 and 33 1/3% on 3/10/2019..
Option Exercises and Stock Vested. The following table sets forth certain information with respect to stock options exercised
and restricted stock awards vested during calendar year 2016 by our Chief Executive Officer, our former Chief Financial Officer, and
our Interim Chief Financial Officer.
Name
Michael H. Braun
Peter J. Prygelski III
Erick A. Fernandez
Stock Option Awards
Shares acquired
on Exercise (#)
Value Realized on
Exercise ($)
Restricted Stock Awards
Shares Acquired on Value Realized on
Vesting (#)
Vesting ($)
15,000 $
10,000 $
15,000 $
—
—
—
—
—
—
—
15,000 $
10,000 $
—
204,461
156,133
209,500
—
—
—
—
—
—
—
204,461
156,133
—
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—
—
—
8,333 $
20,000 $
14,665 $
9,000 $
10,000 $
10,999 $
10,000 $
—
—
—
—
—
—
201,075
370,200
353,866
159,840
187,300
210,741
216,300
—
—
—
Table of Contents
Compensation of Directors
Cash Compensation. The Company’s policy is that only our non-employee directors receive annual cash compensation and
reimbursement of actual out-of-pocket expenses in connection with their service on the Board. Members of our Board of Directors
who are also executive officers do not receive additional compensation for service on the Board. During 2016, the non-employee
directors received an annual retainer of $75,000, payable in quarterly installments in January, April, and July and October. We had
five non-employee directors until January 20, 2016, when Mr. Simberg re-joined the Board, bringing the total number of non-
employee directors to six.
The Company does not currently pay per-meeting fees, but does pay to the non-employee chairperson of certain of the Board
committees an additional annual fee for serving as chair. These annual fees are: Chairman of the Board, $40,000; chairperson of the
Audit Committee, $20,000; chairperson of the Investment Committee, $17,500; chairperson of the Compensation Committee,
$15,000; and chairperson of Business Development Committee, $15,000. Richard W. Wilcox Jr. also received a fee of $20,000 as the
Lead Director during 2016, and did not receive any compensation for serving as the chairperson of the Compensation Committee.
These annual chair fees are also payable in quarterly installments in January, April, and July and October.
For 2017, the Board approved a 5% increase in the annual retainer and chair fees, reflecting the impact of the Company’s
growth, strategic initiatives and operating environment on the Board’s workload.
Equity Compensation. In addition to the cash annual retainers and chair fees, our non-employee directors receive
compensation for their service in the form of grants of restricted stock. The Board believes that providing a substantial portion of the
non-employee directors’ total compensation in the form of equity aligns the directors’ compensation with the interests of the
Company’s shareholders. For 2016, each non-employee director received a grant of $70,000 in shares of restricted stock that vests
over three years.
The Board requested in 2015 that Meridian conduct a review of the Board’s compensation of its non-employee directors.
Meridian evaluated the Company’s outside director compensation relative to the peer group used for its evaluation of the Company’s
executive compensation. This evaluation demonstrated that the Company’s outside director compensation was competitive with its
peer group and, therefore, no changes were made for 2016.
Cash compensation paid to, and the dollar value of equity awards granted to, our non-employee directors in 2016 are shown
in the table below.
NON-EMPLOYEE DIRECTORS' COMPENSATION SUMMARY
Name
Carl Dorf
Jenifer G. Kimbrough
Thomas A. Rogers
Bruce F. Simberg
William G. Stewart
Richard W. Wilcox Jr.
Fees Earned
or Paid in
Cash
92,500
95,000
86,250
110,055 (2)
75,000
95,000
$
$
$
$
$
$
$
$
$
$
$
$
Equity
(Restricted
Stock)
Awards (1)
Stock
Non-Equity
Deferred
Non-Qualified
Option
Incentive Plan
Awards (1) Compensation
Compensation
All Other
Earnings
Compensation
Total
69,991
69,991
169,988
69,991
169,988
69,991
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
396 (3)
$
$
$
$
$
$
162,491
164,991
256,238
180,046
244,988
165,387
(1) The following table provides certain additional information concerning the outstanding stock options and/or equity awards held by our non-
employee directors as of the end of 2016.
(2) Mr. Simberg resigned from the Board of Directors in March 2015 for personal reasons, becoming a consultant to the Company for which
he earned consulting fees, and rejoined the Board in January 2016. This amount includes his director’s fees paid to him during 2016 and
his consulting fees for the first few weeks of 2016.
(3) Includes the fair value of events attended by Mr. Wilcox in 2016,
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Name
Carl Dorf
Jenifer G. Kimbrough
Thomas A. Rogers
Bruce F. Simberg
William G. Stewart
Richard W. Wilcox Jr.
Total Stock
Option/Equity
Awards
Outstanding at 2016
Fiscal Year End
(Shares)
Stock Option / Equity
Awards Granted
During Fiscal Year
2016 (Shares)
37,089 (a)
27,089 (c)
8,872 (d)
3,653 (e)
8,872 (d)
12,089 (f)
Grant Date Fair Value of
Equity Awards Granted
During Fiscal Year 2016 ($)
69,991 (b)
69,991 (b)
169,988 (b)
69,991 (b)
169,988 (b)
69,991 (b)
3,653 $
3,653 $
8,872 $
3,653 $
8,872 $
3,653 $
(a) Includes 10,000 fully vested options granted on 8/22/2011 with an exercise price of $2.45,and an expiration date of 8/22/2021; 15,000 fully
vested options granted on 4/6/2012 with an exercise price of $4.40 and an expiration date of 4/6/2022; 6,000 shares of restricted stock which
began vesting at 20% per year on September 9, 2015; 695 shares of restricted stock which began vesting at 33 1/3% per year on March 10, 2016
and 2,435 shares of restricted stock which began vesting at 33 1/3% per year on March 10, 2017.
(b) Based on the market value of $19.16 on March 10, 2016.
(c) Includes 15,000 fully vested options granted on 4/6/2012 with an exercise price of $4.40 and an expiration date of 4/6/2022; 6,000 shares of
restricted stock which began vesting at 20% per year on September 9, 2015; 695 shares of restricted stock which began vesting at 33 1/3% per
year on March 10, 2016 and 2,435 shares of restricted stock which began vesting at 33 1/3% per year on March 10, 2017.
(d) Includes 2,436 shares of restricted stock which began vesting at 33 1/3% per year on March 10, 2017 and 4,176 shares of restricted stock which
began vesting at 20% per year on March 10, 2017.
(e) Includes 2,435 shares of restricted stock which began vesting at 33 1/3% per year on March 10, 2017.
(f)
Includes 6,000 shares of restricted stock which began vesting at 20% per year on September 9,2015; 695 shares of restricted stock which began
vesting at 33 1/3% per year on March 10, 2016 and 2,435 shares of restricted stock which began vesting at 33 1/3% per year on March 10, 2017.
In March 2016, the Board granted to each of Mr. Rogers and Mr. Stewart $100,000 in shares of restricted stock that vest over
five years in consideration of their joining the Board. All of the non-employee directors also received an annual grant of $70,000 in
shares of restricted stock in March 2016 that vests over three years.
Director Stock Ownership and Retention Guidelines. The Board approved stock ownership and retention guidelines
applicable to our directors. Under these guidelines, our outside, non-employee directors are each required to hold shares of the
Company’s common stock with a value of at least four times the annual retainer. The guidelines further provide that the outside
directors should achieve the guideline amounts within five years of the policy’s adoption and, until the guideline amounts are
achieved, our directors must retain 66-2/3% of any shares received as equity grants from the Company, net of share withheld or sold to
pay taxes. The Board also prohibited hedging the Company’s common stock and prohibited pledging the Company’s common stock
except in limited circumstances as approved by the Board. All of our directors except for two new Board members are in compliance
with these guidelines.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth, as of March 13, 2017, information with respect to the beneficial ownership of our common
stock by (i) each person who is known by us to beneficially own 5% or more of our outstanding common stock, (ii) each of our
Named Executive Officers, (iii) each of our directors, and (iv) all directors and executive officers as a group.
As used herein, the term “beneficial ownership” with respect to a security is defined by Rule 13d-3 under the Exchange Act
as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting and investment rights and the address for each person is c/o Federated
National Holding Company, 14050 NW 14 Street, Suite 180, Sunrise, Florida 33323.
Name and Address of Beneficial Owner
Bruce F. Simberg (2)
Michael H. Braun (3)
Richard W. Wilcox Jr. (4)
Carl Dorf (5)
Jenifer G. Kimbrough (6)
Thomas A. Rogers (7)
William G. Stewart (8)
Erick A. Fernandez (9)
Number of Shares
Beneficially
Owned
499,018
458,490
186,129
175,142
33,914
8,872
8,872
3,300
Percent of
Class
Outstanding (1)
3.60 %
3.31 %
1.34 %
1.26 %
*
*
*
*
All directors and executive officers as a group (eight persons) (10)
1,373,737
9.89 %
5% or greater holders:
Lenox Capital Management, Inc. (11)
322 Alana Drive
New Lenox, Il 60451
BlackRock, Inc. (12)
55 East 52nd Street
New York, NY 10022
Dimensional Fund Advisors LP (13)
Building One
6300 Bee Cave Road
Austin, TX 78746
Renaissance Technologies Holdings Corporation
Renaissance Technologies LLC (14)
800 Third Avenue
* Less than 1%.
(1) Based on 13,853,574 shares outstanding as of March 13, 2017.
1,023,323
7.39 %
955,850
6.90 %
825,137
5.96 %
703,655
5.08 %
(2) Includes 2,435 shares of restricted stock, 33 1/3% of which vest each year beginning on March 10, 2017.
(3) Includes 40,000 shares of restricted stock, which began vesting over five years beginning on August 5, 2014, 27,000 shares of restricted stock,
20% of which began vesting each year beginning on September 9, 2015, 30,000 shares of restricted stock, 20% of which began vesting each
year beginning on December 9, 2015, 10,999 shares of restricted stock, 33 1/3% of which began vesting each year beginning on March 10,
2016, 40,000 shares of restricted stock, of which vest over five years beginning on May 5, 2016, and 25,052 shares of restricted stock, 20% of
which vest each year beginning on March 10, 2017.
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(4) Includes 3,000 shares of common stock held in Mr. Wilcox’s IRA, 40,000 shares of common stock held by Mr. Wilcox’s spouse, 6,000 shares
of restricted stock, 20% of which vest each year beginning on September 9, 2015, 695 shares of restricted stock, 33 1/3% of which vest each
year beginning on March 10, 2016 and 2,435 shares of restricted stock, 33 1/3% of which vest each year beginning on March 10, 2017 .
(5) Includes 63,491 shares of common stock held by Dorf Trust, 59,624 shares of common stock held by Carl Dorf Rollover IRA, 6,000 shares of
restricted stock, 20% of which began vesting each year beginning on September 9, 2015, 695 shares of restricted stock, 33 1/3% of which began
vesting each year beginning on March 10, 2016, 2,435 shares of restricted stock, 33 1/3% of which vest each year beginning on March 10, 2017
and 25,000 shares of common stock issuable upon the exercise of vested stock options held by Mr. Dorf.
(6) Includes 1,110 shares of common stock held in Ms. Kimbrough’s IRA, 6,000 shares of restricted stock, 20% of which vest each year beginning
on September 9, 2015, 695 shares of restricted stock, 33 1/3% of which vest each year beginning on March 10, 2016, 2,435 shares of restricted
stock, 33 1/3% of which vest each year beginning on March 10, 2017 and 15,000 shares of common stock issuable upon the exercise of vested
stock options held by Ms. Kimbrough.
(7) Includes 2,435 shares of restricted stock, 33 1/3% of which vest each year beginning on March 10, 2017 and 4,176 shares of restricted stock,
20% of which vest each year beginning on March 10, 2017.
(8) Includes 2,435 shares of restricted stock, 33 1/3% of which vest each year beginning on March 10, 2017 and 4,176 shares of restricted stock,
20% of which vest each year beginning on March 10, 2017.
(9) Includes 2,200 shares of restricted stock, 33 1/3% of which vest each year beginning on March 10, 2017
(10) Includes 40,000 shares of restricted stock, which began vesting over five years beginning on August 5, 2014, 45,000 shares of restricted stock,
20% of which vest each year beginning on September 9, 2015, 30,000 shares of restricted stock, 20% of which vest each year beginning on
December 9, 2015, 13,084 shares of restricted stock, of which 33 1/3% vest each year beginning on March 10, 2016, 40,000 shares of restricted
stock, which begin vesting over five years beginning on May 5, 2015, 37,227 shares of restricted stock 33 1/3% of which vest each year
beginning on March 10, 2017, 8,352 shares of restricted stock 20% of which will vest beginning March 10, 2017 and 40,000 shares of common
stock issuable upon the exercise of vested stock options.
(11) This information is based on a Schedule 13G filed with the SEC on June 28, 2016
(12) This information is based on an Amendment No. 2 to the Schedule 13G filed with the SEC on January 24, 2017
(13) This information is based on an Amendment No. 7 to the Schedule 13G filed with the SEC on February 9, 2017
(14) This information is based on a Schedule 13G filed with the SEC on February 14, 2017
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENENCE
Family Relationships
There are no family relationships between or among our current executive officers and directors.
Related Transactions
The following is a summary of transactions during 2015 and 2016 between the Company and its executive officers, directors,
nominees for director, principal shareholders and other related parties involving amounts in excess of $120,000 or that the Company
has chosen to voluntarily disclose.
Bruce F. Simberg, our Chairman of the Board, is a partner of the Fort Lauderdale, Florida law firm of Conroy Simberg,
which specializes in insurance defense and coverage matters. The Company paid legal fees to Conroy Simberg for services rendered in
the amount of $26,286 and $72,198 in 2015 and 2016, respectively. We believe that the fees charged for services provided by Conroy
Simberg are on terms at least as favorable as those that we could secure from a non-affiliated law firm. The firm has handled only a
limited number of matters for the Company. Mr. Simberg has not been personally involved in any of the legal matters handled by the
firm for the Company and he received de minimis direct personal benefit from the fees paid to the firm by the Company. The matters
handled by the firm for the Company as of December 31, 2016 have been completed or are in the process of being completed, and the
Company does not at this time anticipate retaining the firm for future matters.
During 2015 and 2016, Michael H. Braun, the Company’s Chief Executive Officer and President, received the compensation
described in "Executive Compensation" above. Mr. Braun’s brother received salary compensation of $148,917 for his services in
2015 as Vice President of Accounting and Finance and in 2016 as Director of Budgeting and Forecasting, respectively. We believe
that the compensation provided to this individual is comparable to that paid by other companies in our industry and market for similar
positions.
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We have adopted a written policy that any transactions between the Company and executive officers, directors, principal
shareholders or their affiliates take place on an arm’s-length basis and require the approval of a majority of our independent directors,
as defined in the Nasdaq Rules.
The Board has determined that the following directors are independent pursuant to the Nasdaq Rules applicable to the
Company: Bruce F. Simberg, Carl Dorf, Richard W. Wilcox Jr., Jenifer G. Kimbrough, Thomas A. Rogers and William G. Stewart.
In making the independence determination with respect to Mr. Simberg, the Board considered that the fees paid by the Company in
connection with the legal services provided by Conroy Simberg during the past three fiscal years did not exceed the amounts set forth
in Nasdaq Rule 5605(a)(2)(D) and, therefore, the Board has determined that Mr. Simberg qualifies as an independent director under
Nasdaq Rule 5605(a)(2).
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee has approved the engagement of Ernst & Young LLP (“E&Y”) as the Company's independent
registered public accounting firm to perform the audit of the Company’s consolidated financial statements and management’s
assessment of the effectiveness of internal control over financial reporting for the fiscal year ended December 31, 2016. The dismissal
of Goldstein Schechter Koch, P.A. ("GSK"), the Company’s prior auditing firm, became effective upon the completion of the 2015
second quarter review by GSK.
Our Audit Committee requires that management obtain the prior approval of the Audit Committee for all audit and
permissible non-audited services to be provided by E&Y. The Audit Committee considers and approves at each meeting, as needed,
anticipated audit and permissible non-audit services to be provided by E&Y during the year and estimated fees. The Audit Committee
Chairman may approve permissible non-audit services with subsequent notification to the full Audit Committee. All services rendered
to us by GSK and E&Y in 2016 were pre-approved in accordance with these procedures.
The Company’s independent auditors for the 2016 fiscal year, E&Y, as successor to GSK, has advised the Company that
neither it, nor any of its members, has any direct financial interest in the Company as a promoter, underwriter, voting trustee, director,
officer or employee. All professional services rendered by E&Y and GSK during the fiscal year ended December 31, 2016 were
furnished at customary rates and were performed by full-time, permanent employees.
The following table shows fees that we paid (or accrued) for professional services rendered by E&Y and GSK for fiscal 2016
and 2015.
Audit Fees (1)
Audit-Related Fees (4)
Tax fees (5)
All other fees (6)
Total
Year Ended December 31,
2015
2016
$
882,522 $
22,055
205,820
—
$
1,110,397 $
1,299,760 (2)
6,425 (3)
—
—
1,306,185
(1) Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the independent auditor
can reasonably be expected to provide, such as statutory audits.
(2) Represent $0.9 million for fees billed by E&Y and $0.4 million for fees billed by GSK.
(3) Represent fees billed by GSK
(4) Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of
our consolidated financial statements and are not reported under “Audit fees.”
(5) Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice, and tax planning. These services include
assistance regarding federal, state, and international tax compliance, acquisitions and international tax planning.
(6) All other fees consist of fees for products and services other than the services reported above.
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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, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014.
Notes to Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014.
(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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused
this Form 10-K report to be signed on its behalf by the undersigned, thereto duly authorized.
FEDERATED NATIONAL HOLDING COMPANY
By:
/s/ Michael H. Braun
Michael H. Braun, Chief Executive Officer
(Principal Executive Officer)
/s/ Erick A. Fernandez
Erick A. Fernandez, Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 16, 2017
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 16, 2017
(Principal Executive Officer)
/s/ Erick A. Fernandez
Erick A. Fernandez
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
March 16, 2017
/s/ Bruce F. Simberg
Bruce F. Simberg
/s/ Carl Dorf
Carl Dorf
Chairman of the Board and Director
March 16, 2017
Director
March 16, 2017
/s/ Jenifer G. Kimbrough
Jenifer G. Kimbrough
Director
March 16, 2017
/s/ Thomas A. Rogers
Thomas A. Rogers
/s/ William G. Stewart
William G. Stewart
Director
March 16, 2017
Director
March 16, 2017
/s/ Richard W. Wilcox, Jr.
Richard W. Wilcox, Jr.
Director
March 16, 2017
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Index to Financial Statement Schedules
Schedule II Condensed Financial Information of Registrant
Schedule V Valuation and Qualifying Accounts
Schedule VI Supplemental Information Concerning Insurance Operations
PAGE
103
107
108
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Schedule II – Condensed Financial Information of Registrant
Condensed Balance Sheets
FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)
December 31, 2016 and 2015
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
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Due to subsidiaries
Deferred income taxes, net
Other liabilities
Total liabilities
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
See accompanying note to condensed financial statements.
December 31,
2016
2015
(in thousands)
$
$
$
$
283,669 $
31,750
7,786
—
9,811
2,030
335,046 $
93,653 $
1,642
1,895
97,190
—
134
136,779
1,941
80,275
219,129
18,727
237,856
335,046 $
282,504
25,649
2,397
485
10,471
1,506
323,012
70,079
—
2,174
72,253
—
138
131,998
3,985
96,461
232,582
18,177
250,759
323,012
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Schedule II – Condensed Financial Information of Registrant (continued)
Condensed Statements of Earnings
FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)
2016
Year Ended December 31,
2015
(in thousands)
2014
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 income (loss) attributable to noncontrolling interest
Net (loss) income attributable to Federated National Holding Company
shareholders
See accompanying note to condensed financial statements.
$
2,492 $
623
9,480
12,595
2,489 $
609
71,905
75,003
2,387
417
61,653
64,457
9,862
9,862
2,733
2,683
50
246
9,810
9,810
65,193
24,753
40,440
(445)
7,150
7,150
57,307
20,108
37,199
—
$
(196) $
40,885 $
37,199
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2016
Year Ended December 31,
2015
(in thousands)
2014
$
50 $
40,440 $
37,199
(9,480)
73
4,420
2,127
2,978
—
23,574
3,786
27,528
—
76,928
(83,724)
(299)
(7,095)
—
589
361
—
(11,317)
(4,677)
(15,044)
5,389
2,397
7,786 $
$
(71,905)
64
4,527
(153)
24,352
(18,501)
6,430
2,057
(12,689)
(32,743)
38,612
(21,354)
(113)
(15,598)
18,743
1,564
171
—
—
(1,847)
18,631
(9,656)
12,053
2,397 $
(61,653)
92
2,140
674
16,521
2,501
(2,069)
4,460
(135)
(18,501)
22,414
(36,949)
(391)
(33,427)
—
480
1,555
43,109
—
(1,672)
43,472
9,910
2,143
12,053
Table of Contents
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
Depreciation and amortization
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
Due to subsidiaries
Other, net
Net cash provided by (used in) 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
Purchases of FNHC common stock
Dividends paid
Net cash (used in) 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.
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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 2016 presentation.
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Schedule V – Valuation and Qualifying Accounts
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
Year
Description
Charged to
Balance at Costs and
Expenses
January 1,
Balance at
Deductions December
(in thousands)
31,
2016
2015
2014
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
$
$
$
$
$
$
— $
302 $
— $
148 $
— $
143 $
— $
(219) $
— $
192 $
— $
45 $
— $
(28) $
— $
(38) $
— $
(40) $
55
—
302
—
148
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Schedule VI – Supplemental Information Concerning Insurance Operations
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
Line of
Business
Year
(in thousands)
Property and
Casualty
Insurance
Property and
Casualty
Insurance
Property and
Casualty
Insurance
2016
2015
2014
At December 31,
Loss and
Loss
Adjustment
Deferred
Acquisition
Costs
Expense
Reserves
Unearned
Premiums
Earned
Premiums
For the Year Ended December 31,
Claim and Claim
Net
Income
Adjustment Expenses
Incurred Related to
Prior
Year
Year
Amortization
of Deferred
Acquisition
Paid Claims
and Claim
Adjustment Premiums
Costs
Expenses
Written
Investment Current
$
38,962 $
158,110 $
294,022 $
259,872 $
9,063 $
174,795 $
12,546 $
75,850 $
160,154 $
319,499
$
15,547 $
97,340 $
253,960 $
210,020 $
7,226 $
113,819 $
(9,466) $
37,276 $
82,445 $
225,254
$
13,610 $
78,330 $
192,424 $
170,905 $
5,385 $
79,932 $
1,104 $
27,474 $
71,803 $
175,158
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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
10.10
10.11
10.12
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).
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).
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).
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).
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Table of Contents
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
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).
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).
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)
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).+
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).+
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).+
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).+
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).+
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).
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).
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).
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).
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).
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Table of Contents
10.26
10.27
10.28
10.29
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).
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).
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).
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).
10.30
Bonus Agreement dated as of January 11, 2016 between Federated National Holding Company and Erick Fernandez.+*
10.31
Change of Control Agreement dated as of May 2, 2016 between Federated National Holding Company and Erick
Fernandez.+*
21.1
23.1
23.2
31.1
31.2
32.1
32.2
Subsidiaries of the Company *
Consent of Goldstein, Schechter, Koch, P.A. Independent Certified Public Accountants *
Consent of Ernst & Young LLP Independent Certified Public Accountants *
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act *
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act *
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act *
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.
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