10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

x  Annual Report under Section 13 or 15(d) of the Securities Act of 1934

For the fiscal year ended December 31, 2013

or

o Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period of _____________to_______________

Commission file number:  0-2500111

Federated National Holding Company

(Exact name of registrant as specified in its Charter)

Florida	65-0248866
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employern Identification No)

14050 N.W. 14^th Street, Suite 180, Sunrise, Florida 33323

(Address of principal executive offices)Zip Code)

Registrant’s telephone number, including area code(954) 581-9993

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

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 o No x

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 x No o

Indicate by check mark whether the registrant has electronically submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes x No o

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer  o Smaller reporting company  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso No x

The aggregate market value of the Registrant’s common stock held by non-affiliates was $72,651,131 on June 30, 2013, computed on the basis of the closing sale price of the Registrant’s common stock on that date.

As of March 11, 2014, the total number of common shares outstanding of Registrant's common stock was 11,264,864.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Federated National Holding Company

Table of Contents

PART I		3
ITEM 1	BUSINESS	3
ITEM 1A	RISK FACTORS	22
ITEM 1B	UNRESOLVED STAFF COMMENTS	34
ITEM  2	PROPERTIES	34
ITEM 3	LEGAL PROCEEDINGS	34
ITEM 4	MINE SAFETY DISCLOSURES	34
PART II		34
ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	34
ITEM 6	SELECTED FINANCIAL DATA	35
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37
ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	65
ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	66
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	111
ITEM 9A	CONTROLS AND PROCEDURES	111
ITEM 9B	OTHER INFORMATION	111
PART III		112
ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	112
ITEM 11	EXECUTIVE COMPENSATION	112
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	122
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	123
ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES	124
PART IV		125
ITEM 15	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	125
SIGNATURES		129

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Federated National Holding Company

PART I

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “forecast,” “guidance,” “indicate,” “intend,” “may,” “might,” “outlook,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” “will,” “would,” “will be,” “will continue” or the negative thereof  or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve a number of risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Management cautions that the forward-looking statements contained in this Annual Report on Form 10-K are not guarantees of future performance, and we cannot assume that such statements will be realized or the forward-looking events and circumstances will occur. Factors that might cause  such a difference include, without limitation, the risks and uncertainties discussed under “Risk Factors” in this Annual Form 10-K, and discussed from time to time in our reports filed with the SEC.

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this Annual Form 10-K are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.

ITEM 1 BUSINESS

GENERAL

Federated National Holding Company (“FNHC”, “Company”, “we”, “us”), formerly known as 21st Century Holding Company is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents. We changed our name on September 11, 2012, pursuant to approval received at our annual shareholders’ meeting, from 21st Century Holding Company so that our parent company and other subsidiary companies’ names are consistent with our primary insurance subsidiary and the name under which we have been writing insurance for more than 22 years.

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

Our insurance subsidiary is Federated National Insurance Company (“FNIC”). FNIC is licensed as an admitted carrier in Florida. An admitted carrier is an insurance company that has received a license from the state department of insurance giving the company the authority to write specific lines of insurance in that state. These companies are also bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices,including fraud. Admitted carriers are also required to financially contribute to the state guarantee fund, which is used to pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders. Through contractual relationships with a network of approximately 3,600 independent agents, of which approximately 1,800 actively sell and service our products, FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines and personal and commercial automobile insurance in Florida.  FNIC is licensed as an admitted carrier in Alabama, Louisiana, Georgia and Texas and underwrites commercial general liability insurance in those states, homeowners’ insurance in Louisiana and personal automobile insurance in Georgia and Texas.

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

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Federated National Holding Company

In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. In connection with this merger, the Company, FNIC and American Vehicle entered into a Consent Order with the Florida Office of Insurance Regulation (“Florida OIR”) pursuant to which we agreed to certain restrictions on our business operations. The Consent Order was amended in February 2013 to lessen or eliminate certain of the original requirements, due to FNIC’s statutory underwriting profit during 2012. See “Regulation– Consent Order.”

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

 Until June 2011, we offered premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).

Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, a wholly owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s existing network of agents.

FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.

The homeowner policy provides FNU the right to cancel any policy within a period of 90 days from the policy's inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our underwriting criteria.

Although we are authorized to underwrite the various lines described above, our business is primarily underwriting homeowners’ policies. During 2013, 89.6%, 4.3%, 2.6% and 3.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively. During 2013, $29.7 million or 13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents 25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents began writing for FNIC in March 2013. During 2012, 85.3%, 7.8%, 4.4% and 2.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively.

During the years ended December 31, 2013, 2012 or 2011, we did not experience any weather-related catastrophic events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or other insurable events will affect our future results of operations and liquidity. Losses and LAE are affected by a number of factors, many of which are partially or entirely beyond our control, including the following.

· the nature and severity of the loss;

· weather-related patterns;

· the availability, cost and terms of reinsurance;

· underlying settlement costs, including medical and legal costs;

· legal and political factors such as legislative initiatives and public opinion;

· macroeconomic issues.

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Federated National Holding Company

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

We have entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with Federated Mutual Insurance Company (“Federated Mutual”) in response to correspondence received from Federated Mutual’s counsel alleging that our use of the name “Federated” infringed certain federal trademarks held by Federated Mutual.  Although we believe that we have meritorious defenses to this allegation, we sought to avoid litigation and therefore negotiated and entered into the Coexistence Agreement.  Under the Coexistence Agreement, among other things, we may continue to use “Federated” until at least August 30, 2020, after which time we have agreed to either cease using “Federated” in commerce or otherwise adopt and use trade names that are not confusingly similar to Federated Mutual’s trademarks.  During this period, we continue to develop our brand under the “FedNat” name, which is the name by which agents generally know us.

Our goal in our reinsurance strategy is to equalize the liquidity requirements imposed by most severe insurable events and by all other insurable events we manage in the normal course of business.  Please see “Reinsurance Agreements” under “Item 1.  Business” for a more detailed description of our reinsurance agreements and strategy.

Our executive offices are located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 and our telephone number is (954) 581-9993.

Our internet web site is FedNat.com for policy holders, agents and investors. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available, free of charge, through our website as soon as reasonably practicable after we electronically file or furnish such material to the Securities and Exchange Commission (“SEC”). Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

RECENT DEVELOPMENTS

We sold 2,781,395 shares of our common stock in a November 19, 2013 capital raise offering, which represented approximately 25.0% of our outstanding shares of common stock on that date after giving effect to this offering.

BUSINESS STRATEGY

We expect that in 2014 we will capitalize on our operational efficiencies and business practices through:

· improved property analytical qualities such as a broader geographical dispersion of risks throughout the state of Florida and avoiding risks that do not yield an underwriting profit;

· continued territorial expansion of our homeowners’, commercial general liability and private passenger automobile insurance products into additional states;

· employing our business practices developed and used in Florida in our expansion to other selected states;

· maintaining a commitment to provide high quality customer service to our agents and insureds;

· expansion of our marketing efforts by retaining key personnel and implementing direct marketing technologies;

· offering attractive incentives to our agents to place a high volume of quality business with our companies;

· offering our employees continuing education classes appropriate to the respective discipline employed within this organization;

· assumption of existing risks from other carriers; and

· additional strategies that may include possible acquisitions or dispositions of assets, and development of procedures to improve claims history and mitigate losses from claims.

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Federated National Holding Company

We expect that in 2014 these strategies have poised us to accelerate the 2013 results trajectory in 2014 and beyond. There can be no assurances, however, that any of the foregoing strategies will be developed or successfully implemented or, if implemented, that they will positively affect our results of operations.

INSURANCE OPERATIONS AND RELATED SERVICES

Overview of Premium Growth

Gross premiums written increased $123.9 million, or 103.7%, to $243.4 million for 2013, compared with $119.5 million for 2012.  Florida homeowners’ represents 94% and Texas private passenger automobile represents the remaining 6% of the increased premium volume. We believe that our growth in 2013 reflects management’s efforts over several years.  Our success today reflects our goal to be an agent-friendly carrier that provides exceptional service. We have invested in our agent relationships and our staff, have created easy to use systems for the agent, and increased our relevance to the agents’ operations by providing insurance products that meet their market needs.

Our homeowner business contributed $116.5 million or 94.0% of the increased gross written premiums during the year ended December 31, 2013. This increase was the result of:

· policyholders continuing to renew their FNIC homeowners’ policy,

· a “flight to quality” in the market by agents who seek quality carriers to place their business,

· and supporting a marketing team dedicated to promoting the quality and quantity of products and services that we offer.

During 2013, approximately 85% of our policyholders renewed their policies. This high retention rate reflects the confidence that the policyholder and his agent have in our financial stability and strength. Additionally, policyholders have told agents that our professional staff adjusts claims quickly and fairly.

Overview of Insurance Lines of Business

The following tables set forth the amount and percentages of our consolidated gross premiums written, premiums ceded to reinsurers and net premiums written by line of business for the periods indicated.

	Years Ended December 31,
	2013					2012					2011
	Premium		Percent			Premium		Percent			Premium		Percent
	(Dollars in Thousands)
Gross written premiums:
Automobile	$	8,449		3.5	%	$	2,996		2.5	%	$	3,274		3.3	%
Federal Flood		6,213		2.6	%		5,293		4.4	%		4,468		4.5	%
Homeowners'		218,350		89.6	%		101,832		85.3	%		80,403		81.9	%
Commercial General Liability		10,362		4.3	%		9,338		7.8	%		10,125		10.3	%
Total gross written premiums	$	243,374		100.0	%	$	119,459		100.0	%	$	98,270		100.0	%
Ceded premiums:
Automobile	$	6,337		7.7	%	$	2,021		4.0	%	$	1,541		3.3	%
Federal Flood		6,213		7.5	%		5,293		10.4	%		4,468		9.7	%
Homeowners'		69,721		84.3	%		43,331		84.7	%		40,273		87.0	%
Commercial General Liability		438		0.5	%		440		0.9	%		12		0.0	%
Total ceded premiums	$	82,709		100.0	%	$	51,085		100.0	%	$	46,294		100.0	%
Net written premiums
Automobile	$	2,112		1.3	%	$	975		1.4	%	$	1,733		3.3	%
Federal Flood		-		0.0	%		-		0.0	%		-		0.0	%
Homeowners'		148,629		92.5	%		58,501		85.6	%		40,130		77.2	%
Commercial General Liability		9,924		6.2	%		8,898		13.0	%		10,113		19.5	%
Total net written premiums	$	160,665		100.0	%	$	68,374		100.0	%	$	51,976		100.0	%

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Federated National Holding Company

Homeowners’ Property and Casualty Insurance

FNIC underwrites homeowners’ insurance in Florida and Louisiana. Homeowners’ insurance generally protects an owner of real and personal property against covered causes of loss to that property. The number of Louisiana homeowner policies in-force totaled approximately 400 at December 31, 2013. The table that follows reflects the number of Florida homeowner policies in-force by county and reflects our concentrations of risk from catastrophic events.

			In-Force Policy Count
			Years Ended December 31,
	2013					2012					2011
County	Amount		Percentage			Amount		Percentage			Amount		Percentage
Palm Beach		13,874		11.9	%		7,270		11.7	%		8,203		19.0	%
Brevard		8,947		7.7	%		4,508		7.4	%		2,900		6.6	%
Collier		7,420		6.4	%		3,422		5.6	%		1,583		3.6	%
Lee		6,870		5.9	%		5,175		8.5	%		3,133		7.2	%
Hillsborough		6,350		5.5	%		2,682		4.4	%		2,984		6.8	%
Pinellas		6,139		5.3	%		4,034		6.6	%		3,788		8.6	%
Broward		5,498		4.7	%		3,700		6.1	%		4,386		10.0	%
Saint Lucie		4,957		4.3	%		3,151		5.2	%		1,757		4.0	%
Indian River		4,704		4.0	%		2,436		4.0	%		903		2.1	%
Okaloosa		4,668		4.0	%		1,966		3.2	%		372		0.8	%
Martin		4,444		3.8	%		2,052		3.4	%		984		2.2	%
Orange		4,083		3.5	%		1,654		2.7	%		1,012		2.3	%
Sarasota		3,936		3.4	%		2,759		4.5	%		2,689		6.1	%
Charlotte		3,129		2.7	%		2,059		3.4	%		1,680		3.8	%
Escambia		3,038		2.6	%		1,227		2.0	%		158		0.4	%
Walton		3,021		2.6	%		1,210		2.0	%		193		0.4	%
Santa Rosa		2,939		2.5	%		1,305		2.1	%		131		0.3	%
Bay		2,785		2.4	%		792		1.3	%		118		0.3	%
Duval		2,249		1.9	%		911		1.5	%		546		1.2	%
Volusia		1,990		1.7	%		881		1.4	%		863		2.0	%
Miami-Dade		1,883		1.6	%		1,616		2.6	%		1,944		4.4	%
Manatee		1,859		1.6	%		1,560		2.6	%		1,548		3.5	%
Seminole		1,665		1.4	%		788		1.3	%		367		0.8	%
Saint Johns		1,639		1.4	%		547		0.9	%		165		0.4	%
Flagler		1,267		1.1	%		543		0.9	%		66		0.2	%
All others		7,047		6.1	%		2,854		4.7	%		1,320		3.0	%
Total		116,401		100.0	%		61,102		100.0	%		43,793		100.0	%

Our homeowner insurance products provide maximum dwelling coverage in the amount of approximately $3.0 million, with the aggregate maximum policy limit being approximately $5.0 million. We currently offer dwelling coverage “A” up to $3.0 million with an aggregate total insured value of $5.0 million. We continually subject these limits to review; though there were no material changes during 2013. The approximate average premium on the policies currently in-force is $1,857, as compared with $1,675 for 2012. The typical deductible is either $2,500 or $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims.

Premium rates charged to our homeowner insurance policyholders are continually evaluated to assure that they meet the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive nor inadequate). Premium rates are regulated and approved by the Florida OIR. In 2013 our voluntary program rate indications did not indicate the need for adjustment. In 2012 we were approved for a 4.8% and 0.9% rate increase on our voluntary property book of homeowners’ business. In 2011 our voluntary rate increase of 20% was approved.

Similarly, for the policies we assumed from Citizens Property Insurance Corporation (“Citizens”) in 2009, we received approval for a 14.8% increase in 2013 and a 14.1% rate increase in 2012. In 2011 we received approval for a 13.9% increase. Our voluntary program was 97.7%, 90.0%, and 79.2% of the total homeowner program, for the years ending December 31, 2013, 2012, and 2011, respectively.

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Federated National Holding Company

For a further discussion regarding Homeowners’ Property and Casualty Insurance, see “Recent Developments”, above.

Commercial General Liability

We underwrite commercial general liability insurance for approximately 380 classes of artisan (excluding home-builders and developers) and mercantile trades (such as owners, landlords and tenants). The limits of liability range from $100,000 per occurrence with a $200,000 policy aggregate to $1.0 million per occurrence with a $2.0 million policy aggregate. We continually subject these limits to review, though there were no changes during 2013. We market the commercial general liability insurance products through independent agents and a limited number of general agencies unaffiliated with the Company. The average annual premium on policies currently in-force during 2013 is approximately $773, as compared with $569 in 2012.

The following table sets forth the amounts and percentages of our gross premiums written in connection with our commercial general liability program by state.

	Years Ended December 31,
	2013					2012					2011
	Amount		Percentage			Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
State
Florida	$	9,572		92.37	%	$	8,639		92.52	%	$	8,606		84.99	%
Louisiana		150		1.45	%		217		2.32	%		916		9.05	%
Texas		547		5.28	%		426		4.56	%		534		5.28	%
Other		93		0.90	%		56		0.60	%		69		0.68	%
Total	$	10,362		100.00	%	$	9,338		100.00	%	$	10,125		100.00	%

Personal Automobile

Personal automobile insurance markets can be divided into two categories, standard automobile and nonstandard automobile. Standard personal automobile insurance is principally provided to insureds who present an average risk profile in terms of driving record, vehicle type and other factors. Nonstandard personal automobile insurance is principally provided to insureds that are unable to obtain standard insurance coverage because of their driving record, age, vehicle type or other factors, including market conditions. The average nonstandard personal automobile insurance policy currently in-force is approximately $987 for a twelve month policy in Florida and approximately $158 for a three month policy in Texas.

The maximum exposures for the nonstandard policy in Florida are $10,000 per individual, $20,000 per accident for bodily injury, $10,000 per accident for property damage, and predominantly $50,000 for comprehensive and collision. Beginning in late 2010 we underwrote nonstandard personal automobile insurance in Georgia, where the maximum exposures are $25,000 per individual, $50,000 per accident for bodily injury, $25,000 per accident for property damage, and predominantly $50,000 for comprehensive and collision. In addition, we write commercial automobile insurance in Florida. The maximum exposure is predominantly $30,000 on a combined single limit basis.

Flood

FNIC writes flood insurance through the National Flood Insurance Program (“NFIP”) on a direct and ceded basis. We write the policy for the NFIP, which assumes 100% of the flood risk while we retain a commission for our service. The average flood policy premium is approximately $504 with limits up to $250,000. Commissions in connection with this program totaled $0.4 million, $0.3 million and $0.2 million in 2013, 2012 and 2011, respectively.

Managing General Agent Services

FNU, a wholly owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s existing network of agents.

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Federated National Holding Company

FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.

Claims Adjusting

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

Premium Finance

Until June 2011, our wholly owned subsidiary, Federated Premium, offered premium financing to our own and third-party insureds. Premium financing was marketed through our distribution network of general agents and independent agents.

The Company anticipates continued use of the direct bill feature associated with our homeowners’ and commercial general liability programs. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring payment of the full amount of the policy. The advantage of direct billing a policyholder by the insurance company is that we are not reliant on a credit facility, but remain able to charge and collect interest from the policyholder. Underwriting criteria are designed with down payment requirements and monthly payments that create policyholder equity in the insurance policy. The equity in the policy is collateral for the extension of credit to the insured.

Through our monitoring systems, we track delinquent payments and, in accordance with the terms of the extension of credit, cancel if payment is not made. If any excess premium remains after cancellation of the policy and deduction of applicable penalties, this excess is refunded to the policyholder. The direct bill program enables us to closely manage our risk while providing credit to our insureds.

Independent Insurance Agency

Insure-Link, Inc. (“Insure-Link”) was formed in March 2008 to serve as an independent insurance agency.The insurance agency markets direct to the public to provide a variety of insurance products and services to individual clients, as well as business clients, by offering a full line of insurance products including, but not limited to,  homeowners’, flood, personal and commercial automobile, commercial general liability and workers’ compensation insurance through their agency appointments with over thirty different carriers.

MARKETING AND DISTRIBUTION

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

Our independent agents and general agents have the authority to sell and bind insurance coverage in accordance with procedures established by FNU. FNU reviews all coverage bound by the agents promptly and generally accepts all coverage that falls within stated underwriting criteria. For all policies issued, FNU also has the right, within a period that varies by state between 60 days and 120 days from a policy's inception, to cancel any policy, upon an advanced notice provided in accordance with statutory specific guidelines, even if the risk falls within our underwriting criteria.

We believe that our integrated computer systems, which allow for rapid automated premium quotation and policy issuance by our agents, is a key element in providing quality service to both our agents and insureds for various lines of our business.

- 9 -

Federated National Holding Company

We believe that the management of our distribution system now centers on our ability to capture and maintain relevant data by producing agents. We believe that information management of agent production, coupled with loss experience, will enable us to maximize profitability.

REINSURANCE AGREEMENTS

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

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

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

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

For the 2013–2014 hurricane season, the excess of loss and FHCF treaties insured the property lines for approximately $562.7 million of aggregate catastrophic losses and LAE with a maximum single event coverage totaling approximately $420.4 million, with the Company retaining the first $7.0 million of losses and LAE for each event. The reinsurance program includes coverage purchased from the private market, which affords optional reinstatement premium protection that provides coverage beyond the first event, along with any remaining coverage from the FHCF. Coverage afforded by the FHCF totals approximately $278.1 million, or 49.4 % of the $562.7 million of aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire season, subject to maximum payouts, without regard to any particular insurable event.

The estimated cost to the Company for the excess of loss reinsurance products for the 2013-2014 hurricane season, inclusive of approximately $21.7 million payable to the FHCF and the prepaid automatic premium reinstatement protection, is approximately $67.9 million.

- 10 -

Federated National Holding Company

The 2013-2014 private reinsurance companies and their respective A.M. Best Company (“A.M. Best”) and Standard and Poor’s (“S&P”) ratings are listed in the table as follows.

Reinsurer	A.M. Best Rating			S&P Rating
UNITED STATES
American Agricultural Insurance Company	A-			NR
Everest Reinsurance Company	A+			A+
Houston Casualty Company, UK Branch	A			A+
Odyssey Reinsurance Company	A			A-
BERMUDA
ACE Tempest Reinsurance Limited	A+			AA-
Allied World Assurance Company Limited, Bermuda	A			A
Arch Reinsurance Limited	A+			A+
Argo Reinsurance Limited	A			NR
Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)	A-			NR
DaVinci Reinsurance Ltd	A			A+
Endurance Specialty Insurance Limited	A			A
JC Re Ltd. (aka Pillar Capital and fka Juniperus & Actua Re Ltd.)	NR	*	**	NR
Partner Reinsurance Company Limited	A+			A+
Platinum Underwriters Bermuda Limited	A			A-
Renaissance Reinsurance Ltd	A+			AA-
S.A.C. Re, Ltd.	A-			NR
XL Re Limited	A			A
UNITED KINGDOM
A.F. Beazley Syndicate No. 623 (AFB)	A			A+
A.F. Beazley Syndicate No. 2623 (AFB)	A			A+
Amlin Syndicate No. 2001 (AML)	A			A+
Ariel Syndicate No. 1910 (ARE)	A			A+
ARK Syndicate No. 3902 (NOA)	A			A+
Ascot Syndicate No. 1414 (ASC)	A			A+
Barbican Syndication No. 1955 (BAR)	A			A+
Canopius Syndicate No. 958 (CNP)	A			A+
Canopius Syndicate No. 4444 (CNP)	A			A+
Cathederal Syndicate No. 2010 (MMX)	A			A+
Kiln Syndicate No. 510 (KLN)	A			A+
Liberty Syndicates Services Limited, Paris for and on behalf of Lloyd's Syndicate  No. 4472 (LIB)	NR			A+
MAP Underwriting Syndicate No. 2791 (MAP)	A			A+
MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)	A			A+
Novae Syndicate No. 2007 (NVA)	A			A+
Pembroke Syndicate No. 4000 (PEM)	A			A+
Tokio Marine Kiln Syndicate No. 1880 (TMK)	A			A+
EUROPE
Amlin Bermuda (Branch of Amlin AG)	A			A
SCOR Global P&C SE	A			A
* Reinstatement Premium Protection Program Participants
** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market value.

- 11 -

Federated National Holding Company

For the 2012–2013 hurricane season, the excess of loss and FHCF treaties insured the property lines for approximately $328.3 million of aggregate catastrophic losses and LAE with a maximum single event coverage totaling approximately $246.5 million, with the Company retaining the first $8.0 million of losses and LAE for each event. The reinsurance program includes coverage purchased from the private market, which affords optional reinstatement premium protection that provides coverage beyond the first event, along with any remaining coverage from the FHCF. Coverage afforded by the FHCF totals approximately $144.7 million, or 44.1% of the $328.3 million of aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire season, subject to maximum payouts, without regard to any particular insurable event.

The estimated cost to the Company for the excess of loss reinsurance products for the 2012-2013 hurricane season, inclusive of approximately $11.2 million payable to the FHCF and the prepaid automatic premium reinstatement protection, is approximately $43.1 million.

The 2012-2013 private reinsurance companies and their respective A.M. Best and S&P ratings are listed in the table as follows.

Reinsurer	A.M. Best Rating			S&P Rating
UNITED STATES
American Agricultural Insurance Company	A-			NR
Everest Reinsurance Company	A+			A+
Houston Casualty Company, (UK Branch)	A+	*		AA
Munich Reinsurance America, Inc.	A+			AA-
Odyssey Reinsurance Company	A			A-
BERMUDA
ACE Tempest Reinsurance Limited	A+	*		AA-
Arch Reinsurance Limited	A+	*		A+
Ariel Reinsurance Bermuda Limited for and on Behalf of Ariel Syndicate 1910 (ARE)	A-	*		NR
DaVinci Reinsurance Limited	A	*		A+
JC Re Limited (Juniperus & fka Actua Re Limited)	NR	*	**	NR
Montpelier Reinsurance Limited	A-			A-
Nephila (via Allianz Risk Transfer AG, Bermuda Branch)	NR			AA-
Platinum Underwriters Bermuda Limited	A	*		A-
Renaissance Reinsurance Limited	A+	*		AA-
UNITED KINGDOM
Amlin Syndicate No. 2001 (AML)	A			A+
Ariel Syndicate No. 1910 (ARE)	A	*		A+
ARK Syndicate No. 3902 (NOA)	A			A+
Barbican Syndication No. 1955 (BAR)	A			A+
Kiln Syndicate No. 510 (KLN)	A			A+
Liberty Syndicates Services Limited Paris, for and on Behalf of Lloyd's Syndicate  No. 4472 (LIB)	NR			A+
MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)	A			A+
Novae Syndicate No. 2007 (NVA)	A			A+
Tokio Marine Kiln Syndicate No. 1880 (TMK)	A			A+
Torus Syndicate No. 1301 (TUL)	A			A+
EUROPE
Amlin Bermuda (Branch of Amlin AG)	A			A
SCOR Global P&C Zurich Branch	A			A
* Reinstatement Premium Protection Program Participants
** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market value.

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Federated National Holding Company

Annually, the cost and amounts of reinsurance are based on management's analysis of FNIC's exposure to catastrophic risk as of June 30 and estimated to September 30. Our data is then subjected to actual exposure level analysis as of September 30. This analysis of our exposure level in relation to the total exposures to the FHCF and excess of loss treaties may produce changes in limits and reinsurance premiums as a result of the reconciliation of estimated to actual exposure level. The September 30, 2013 change to total limits was an increase of $8.7 billion of total insured value or 25.3% and the change to reinsurance premiums was an increase of $8.3 million or 13.8%. The September 30, 2012 change to total limits was an increase of $2.1 billion of total insured value or 12.5% and the change to reinsurance premiums was an increase of $2.4 million or 6.0%. These adjustments are amortized over the remaining underlying policy term.

To date, we have made no claims asserted against our reinsurers in connection with the 2013–2014 and 2012–2013 excess of loss and FHCF treaties.

The quota share retrocessionaire reinsurance agreements require FNIC to securitize credit, regulatory and business risk. Fully funded trust agreements totaled $4.9 million and $4.8 million as of December 31, 2013 and 2012, respectively.

We are selective in choosing reinsurers and consider numerous factors, the most important of which are the financial stability of the reinsurer, their history of responding to claims and their overall reputation. In an effort to minimize our exposure to the insolvency of a reinsurer, we evaluate the acceptability and review the financial condition of the reinsurer at least annually.

LIABILITY FOR UNPAID LOSSES AND LAE

We are directly liable for loss and LAE payments under the terms of the insurance policies that we write. In many cases, there may be a time lag between the occurrence and reporting of an insured loss and our payment of that loss. As required by insurance regulations and accounting rules, we reflect the liability for the ultimate payment of all incurred losses and LAE by establishing a liability for those unpaid losses and LAE for both reported and unreported claims, which represent estimates of future amounts needed to pay claims and related expenses.

When a claim, other than personal automobile, involving a probable loss is reported, we establish a liability for the estimated amount of our ultimate losses and LAE payments. The estimate of the amount of the ultimate loss is based upon such factors as the type of loss, jurisdiction of the occurrence, knowledge of the circumstances surrounding the claim, severity of injury or damage, potential for ultimate exposure, estimate of liability on the part of the insured, past experience with similar claims and the applicable policy provisions.

All newly reported claims received with respect to personal automobile policies are set up with an initial average liability. The average liability for these claims is determined by dividing the number of reported claims into the total amount paid during the same period. If a claim is open more than 45 days, that open case liability is evaluated and the liability is adjusted upward or downward according to the facts and circumstances of that particular claim.

In addition, management provides for a liability on an aggregate basis to provide for incurred but not yet reported (“IBNR”). We utilize independent actuaries to help establish liability for unpaid losses and LAE. We do not discount the liability for unpaid losses and LAE for financial statement purposes.

The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

Among our classes of insurance, the automobile and homeowners’ liability claims historically tend to have longer time lapses between the occurrence of the event, the reporting of the claim and the final settlement, than do automobile physical damage and homeowners’ property claims. These liability claims often involve parties filing suit and therefore may result in litigation. By comparison, property damage claims tend to be reported in a relatively shorter period of time and settled in a shorter time frame with less occurrence of litigation.

There can be no assurance that our liability for unpaid losses and LAE will be adequate to cover actual losses. If our liability for unpaid losses and LAE proves to be inadequate, we will be required to increase the liability with a corresponding reduction in our net income in the period in which the deficiency is identified. Future loss experience substantially in excess of established liability for unpaid losses and LAE could have a material adverse effect on our business, results of operations and financial condition.

- 13 -

Federated National Holding Company

The following table sets forth a reconciliation of beginning and ending liability for unpaid losses and LAE as shown in our consolidated financial statements for the periods indicated.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Balance at January 1	$	49,908		$	59,983		$	66,529
Less reinsurance recoverables		(3,503	)		(2,088	)		(6,809	)
Net balance at January 1	$	46,405		$	57,895		$	59,720
Incurred related to
Current year	$	56,209		$	31,636		$	31,893
Prior years		201			(1,427	)		(997	)
Total incurred	$	56,410		$	30,209		$	30,896
Paid related to
Current year	$	22,695		$	15,892		$	13,672
Prior years		21,846			25,807			19,048
Total paid	$	44,541		$	41,699		$	32,720
Net balance at period end	$	58,274		$	46,405		$	57,896
Plus reinsurance recoverables		2,742			3,503			2,087
Balance at period end	$	61,016		$	49,908		$	59,983

As shown above, and as a result of review of liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year’s claims, we increased the liability for losses and LAE for claims occurring in prior years by $0.2 million for the year ended December 31, 2013 and decreased the liability for losses and LAE for claims occurring in prior years by $1.4 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively.

The liability for losses and LAE increased by $18.6 million and $0.9 million for our homeowners’ and automobile lines, and decreased by $8.4 million for our commercial general liability lines, respectively, during 2013. These changes are due to management's continued efforts to manage the claims life cycle more efficiently. Additionally, our underwriting processes are designed to quickly gather the true primary and secondary risk characteristics and provide a profitable quote to the policyholder. This approach helps to reduce the overall frequency and severity of the loss portfolio.

Based upon discussions with our independent actuarial consultants and their statements of opinion on losses and LAE, we believe that the liability for unpaid losses and LAE is currently adequate to cover all claims and related expenses which may arise from incidents reported and IBNR as of December 31, 2013. There can be no assurance concerning future adjustments of reserves, positive or negative, for claims incurred through December 31, 2013.

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Federated National Holding Company

The following table presents total unpaid losses and LAE, net, and total reinsurance recoverable due from our catastrophic reinsurers as shown in our consolidated financial statements.

	As of December 31,
	2013		2012
	(Dollars in Thousands)
Catastrophe Excess of Loss (various participants) and FHCF
Reinsurance recoverable on paid losses and LAE	$	29	$	47
Unpaid losses and LAE		25		94
	$	54	$	141
Amounts due from (to) reinsurers consisted of amounts related to:
Unpaid losses and LAE	$	25	$	94
Reinsurance recoverable on paid LAE		29		47
Reinsurance payable		-		-
	$	54	$	141

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Federated National Holding Company

The following table presents the liability for unpaid losses and LAE for the years ended December 31, 2004 through 2013 and does not distinguish between catastrophic and non-catastrophic events. The top line of the table shows the estimated liability for unpaid losses and LAE at the balance sheet date for each of the periods indicated. These figures represent the estimated amount of unpaid losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been IBNR. The portion of the table labeled "Cumulative paid as of" shows the cumulative payments for losses and LAE made in succeeding years for losses incurred prior to the balance sheet date. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year.

	Years Ended December 31,
	(Dollars in Thousands)
	2013		2012			2011			2010			2009			2008			2007			2006			2005			2004
Unpaid losses and LAE, net	$	61,016	$	49,908		$	59,983		$	66,529		$	70,611			64,775		$	59,685		$	39,615		$	154,039		$	46,571
Cumulative paid as of:
One year later				24,329			16,527			20,774			29,202			26,431			30,570			36,058			170,825			68,027
Two years later							31,676			26,667			40,493			45,264			48,409			58,002			196,080			88,294
Three years later										38,703			42,577			52,761			64,014			72,752			215,297			96,654
Four years later													50,096			53,689			68,865			86,110			228,805			103,463
Five years later																60,075			68,880			89,006			240,171			107,302
Six years later																			73,235			87,555			242,383			110,029
Seven years later																						90,910			244,405			107,534
Eight years later																									246,286			229,435
Nine years later																												230,800
Re-estimated net liability as of:
End of year		61,016		49,908			59,983			66,529			70,611			64,775			59,685			39,615			154,039			46,571
One year later				46,245			58,389			62,756			73,122			75,646			69,383			71,907			193,068			80,037
Two years later							58,711			51,266			70,709			80,606			82,890			80,383			223,005			94,799
Three years later										51,936			59,276			78,132			88,159			97,174			231,761			102,318
Four years later													58,223			68,119			85,532			102,571			248,116			108,276
Five years later																69,226			77,294			99,710			252,365			112,336
Six years later																			78,541			93,878			249,744			111,540
Seven years later																						96,514			248,211			114,172
Eight years later																									251,217			110,997
Nine years later																												113,918
Cumulative redundancy (deficiency)				3,662			1,272			14,593			12,388			(4,451	)		(18,856	)		(56,899	)		(97,178	)		(67,347	)
Cumulative redundancy (-) deficiency as a % of reserves originally established				7.3	%		2.1	%		21.9	%		17.5	%		-6.9	%		-31.6	%		-143.6	%		-63.1	%		-144.6	%

The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. A deficiency indicates that the latest estimate of the liability for losses and LAE is higher than the liability that was originally estimated and a redundancy indicates that such estimate is lower. It should be emphasized that the table presents a run-off of balance sheet liability for the periods indicated rather than accident or policy loss development for those periods. Therefore, each amount in the table includes the cumulative effects of changes in liability for all prior periods. Conditions and trends that have affected liabilities in the past may not necessarily occur in the future.

- 16 -

Federated National Holding Company

As noted above, we have since experienced $3.7 million and $1.3 million cumulative redundancies in connection with the re-estimation of all losses that occurred in 2012 and 2011, respectively.

The table below sets forth the differences between loss and LAE reserves as disclosed for Generally Accepted Accounting Principles (“GAAP”) basis compared with Statutory Accounting Principles (“SAP”) basis of presentation for the years ended 2013, 2012 and 2011.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
GAAP basis Loss and LAE reserves	$	61,016		$	49,908		$	59,983
Less unpaid Losses and LAE ceded		2,312			3,189			2,319
Balance Sheet Liability		58,704			46,719			57,664
Add Insurance Apportionment Plan		2			6			17
Intercompany Indemnification		(4,705	)		(2,039	)		(2,114	)
FNIC SAP basis Loss and LAE reserves	$	54,001		$	44,686		$	55,567

The table below sets forth the differences between loss and LAE incurred as disclosed for GAAP basis compared with SSAP basis presentation for the years ended 2013, 2012 and 2011.

	Years Ended December 31,
	2013		2012			2011
	(Dollars in Thousands)
GAAP basis Loss and LAE incurred	$	56,410	$	30,209		$	30,896
Intercompany adjusting and other expenses		3,489		3,744			(726	)
Insurance apportionment plan		13		(4	)		-
SAP basis Loss and LAE incurred	$	59,912	$	33,949		$	30,170

Underwriting results of insurance companies are frequently measured by their Combined Ratios. However, investment income, federal income taxes and other non-underwriting income or expense are not reflected in the Combined Ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are considered profitable when the Combined Ratio is under 100% and unprofitable when the Combined Ratio is over 100%.

The following table sets forth Loss Ratios, Expense Ratios and Combined Ratios for the periods indicated for the insurance business of FNIC and American Vehiclefor 2013, 2012 and 2011, and are inclusive of Unallocated Loss Adjustment Expenses (“ULAE”).

	Years Ended December 31,
	2013			2012			2011
Loss Ratio		54.0	%		50.9	%		63.7	%
Expense Ratio		44.2	%		53.4	%		62.4	%
Combined Ratio		98.2	%		104.3	%		126.1	%

COMPETITION

We operate in highly competitive markets and face competition from national, regional and residual market insurance companies in the homeowners’, commercial general liability, and automobile markets. Our competitors include companies that market their products through agents, as well as companies that sell insurance directly to their customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and reduced policy acquisition costs. We compete based on underwriting criteria, our distribution network and superior service to our agents and insureds. Although our pricing is inevitably influenced to some degree by that of our competitors, we believe that it is generally not in our best interest to compete solely on price.

- 17 -

Federated National Holding Company

In Florida, more than 100 companies are authorized to underwrite homeowners’ insurance. Several of our competitors include Citizens, Universal Property and Casualty Insurance Company and St. Johns Insurance Company. In Florida, more than one dozen companies compete with us in the commercial general liability insurance market.

Significant competition also emerged because of fundamental changes made to the property and casualty insurance business in Florida in recent years which resulted in a multi-pronged approach to address the cost of residential property insurance in Florida. First, the law increased the capacity of reinsurance that stabilized the reinsurance market to the benefit of the insurance companies writing properties lines in Florida. Secondly, the law provided for rate relief to all policyholders. The law also authorized the state-owned insurance company, Citizens, which is free of many of the restraints on private carriers such as surplus, ratios, income taxes and reinsurance expense, to reduce its premium rates and begin competing against private insurers in the residential property insurance market and expands the authority of Citizens to write commercial insurance.

In May 2013, SB 1770 was signed by the Governor of Florida and passed during the 2013 legislative session. This bill is intended to reform Citizens by reducing its insurance policy count and establishing the Property Insurance Clearinghouse (“Clearinghouse”). The Clearinghouse launched during February 2014 and makes new business ineligible for Citizens if a participating insurance company is willing to afford similar coverage at a price that is no more than 15% above the price of a policy with Citizens. Similarly, existing Citizens policies will not be eligible for renewal with Citizens if a participating insurance company is willing to afford similar coverage at no additional cost over the price for a Citizens policy. This will allow potentially new and renewal policies of Citizens to be comparatively shopped by participating private market insurers before becoming, or remaining, policies of Citizens. FNIC intends to be a participating insurance company in the Clearinghouse.

REGULATION

General

We are subject to the laws and regulations in Alabama, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New York, Nevada, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia and regulations of any other states in which we seek to conduct business in the future. The regulations cover all aspects of our business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of shareholders. Such regulations relate to authorized lines of business, capital and surplus requirements, allowable rates and forms, investment parameters, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, market conduct, maximum amount allowable for premium financing service charges and a variety of other financial and non-financial components of our business. Our failure to comply with certain provisions of applicable insurance laws and regulations could have a material adverse effect on our business, results of operations or financial condition. In addition, any changes in such laws and regulations, including the adoption of consumer initiatives regarding rates charged for coverage, could materially and adversely affect our operations or our ability to expand.

Most states’ laws restrict an insurer’s underwriting discretion, such as the ability to terminate policies, terminate agents or reject insurance coverage applications, and many state regulators have the power to reduce, or to disallow, increases in premium rates. In addition, state laws generally require that rate schedules and other information be filed with the state's insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers, vary by class of business, hazard covered, and size of risk. Certain states, including Florida, as discussed above, have adopted laws or are considering proposed legislation which, among other things, limit the ability of insurance companies to effect rate increases or to cancel, reduce or non-renew insurance coverage with respect to existing policies, particularly personal automobile insurance.

Most states require licensure or regulatory approval prior to the marketing of new insurance products. Typically, licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, character of its officers and directors, rates, forms and other financial and non-financial aspects of a company. The regulatory authorities may prohibit entry into a new market by not granting a license or by withholding approval.

All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. We may be the subject of additional special examinations or analysis. These examinations or analysis may result in one or more corrective orders being issued by the Florida OIR. The most recent balance sheet audit of FNIC by the Florida OIR occurred as of December 31, 2009. There were no material findings by the independent auditors in connection with this examination. FNIC also experienced a regularly scheduled statutory examination by the Florida OIR which occurred during 2010 for the five years ended December 31, 2009. There were no material findings in connection with this examination.

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Federated National Holding Company

In some instances, various states routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As an example, the Florida OIR requires FNIC to have securities with a fair market value of $2.0 million held in escrow. As of December 31, 2013, FNIC held investment securities with a fair value of approximately $2.0 million, as a deposit with the State of Florida. Additionally, as of December 31, 2013 FNIC had cash deposits totaling $370,000 with the State of Alabama, $118,900 with the State of Louisiana and $25,000 with the State of Georgia.

As of December 31, 2012, FNIC held investment securities with a fair value of approximately $2.3 million, as a deposit with the State of Florida. Additionally, as of December 31, 2012 FNIC had cash deposits totaling $415,100 with the State of Alabama, $150,000 with the State of Arkansas, $118,700 with the State of Louisiana and $25,000 with the State of Georgia.

Consent Order

In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. As part of its approval of the merger between FNIC and American Vehicle, the Florida Office of Insurance Regulation (“Florida OIR”), the Company, FNIC and American Vehicle entered into a consent order with the Florida OIR dated January 25, 2011 (the “Consent Order”), which was amended in February 2013, due to FNIC’s statutory underwriting profit during 2012. Pursuant to the amended Consent Order, the Company and the resulting company in the merger (the “Merged Company”) have agreed to the following:

· The Merged Company retained the following licenses: (010) Fire, (020) Allied Lines, (040) Homeowners Multi Peril, (050) Commercial Multi Peril, (090) Inland Marine, (170) Other Liability, (192) Private Passenger Auto Liability, (194) Commercial Auto Liability, (211) Private Passenger Auto Physical Damage and (212) Commercial Auto Physical Damage.

· The Merged Company will not write commercial multi peril policy premium without prior approval from the Florida OIR. The Merged Company has no commercial multi peril policy premium in force.

· The Merged Company surrendered its surety license. The Merged Company has nosurety policy premium in force.

· The Merged Company will not write new commercial habitation condominium associations without prior approval from the Florida OIR. The current commercial habitation book of business is fully earned.

· The Merged Company agreed to maintain the total number of its homeowners’ policies in Miami-Dade, Broward and Palm Beach counties (the “Tri-County Area”) at 35% of its entire homeowners’ book. As of December 31, 2013, the Company had approximately 18.3% of its homeowners’ policies located within Tri-County Area.

· The managing general agency fees payable by the Merged Company to Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, Inc., a wholly owned subsidiary of the Company, which were traditionally 6% of gross written premium, were reduced and will not exceed 4% without prior approval from the Florida OIR. The Merged Company has lowered the fee to amounts varying between 2% and 4% of gross written to further support the FNIC results of operations. This will have no impact on the Company’s consolidated financial results.

· The claims service fees payable by the Merged Company to Federated National Adjusting, Inc. (“FNA”), formerly known as Superior Adjusting, Inc., were reduced from the traditional 4.5% of gross earned premium to 3.6% of gross earned premium. This will have no impact on the Company’s consolidated financial results.

The merger of FNIC and American Vehicle will be an ongoing transition, many aspects of which will take effect over time. References to the companies contained herein are intended to be references to the operations of FNIC following the January 2011 merger. References to the historical activities of American Vehicle are appropriately identified throughout this document.

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Federated National Holding Company

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 or American Vehicle in 2013, 2012 and 2011, and none are anticipated in 2014. Although we believe that amounts required to meet our financial and operating obligations will be available from sources other than dividends from our insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida OIR will allow any dividends to be paid by FNIC to us, the parent company, in the future.The maximum dividends permitted by state law are not necessarily indicative of an insurer’s actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer’s competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs.

While the non-insurance company subsidiaries (FNU, FNA and any other affiliate) are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount that any affiliate within the holding company system may charge any of the insurance companies for service (e.g., management fees and commissions).

NAIC Risk-Based Capital Requirements

In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners (“NAIC”) established risk-based capital requirements for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. These requirements measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from investments. Insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The Florida OIR, which follows these requirements, could require FNIC to cease operations in the event they fail to maintain the required statutory capital.

Based upon the 2013 and 2012 statutory financial statements for FNIC, statutory surplus exceeded the regulatory action levels established by the NAIC’s risk-based capital requirements.

Based on risk-based capital requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its Authorized Control Level (“ACL”), as calculated under the NAIC’s requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC’s ratio of statutory surplus to its ACL was 312.1%, 474.4% and 409.7% at December 31, 2013, 2012 and 2011, respectively.

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Federated National Holding Company

Insurance Regulatory Information Systems (“IRIS”) Ratios

The NAIC has also developed IRIS ratios to assist state insurance departments in identifying companies which may be developing performance or solvency problems, as signaled by significant changes in the companies’ operations. Such changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling outside “usual ranges”, state regulators may investigate to determine the reasons for the variance and whether corrective action is warranted.

As of December 31, 2013, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions related to change in net writings, investment yield and estimated current reserve deficiency to policyholders’ surplus.

As of December 31, 2012, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions related to investment yield, net change in adjusted policyholders’ surplus and estimated current reserve deficiency to policyholders’ surplus.

As of December 31, 2011, FNIC was outside NAIC’s usual range for two of thirteen IRIS ratios. These exceptions related to two-years overall operating ratio and investment yield.

There was no action taken by the Florida OIR in connection with the December 31, 2012 or 2011 IRIS ratio results. We do not currently believe that the Florida OIR will take any significant action with respect to FNIC regarding the 2013 IRIS ratios, although there can be no assurance that will be the case.

Insurance Holding Company Regulation

We, the parent company, are subject to laws governing insurance holding companies in Florida where FNHC is domiciled. These laws, among other things, (i) require us to file periodic information with the Florida OIR, including information concerning our capital structure, ownership, financial condition and general business operations, (ii) regulate certain transactions between us and our affiliates, including the amount of dividends and other distributions, the terms of surplus notes and amounts that our affiliates can charge the holding company for services such as management fees or commissions, (iii) restrict the ability of any one person to acquire certain levels of our voting securities without prior regulatory approval. Any purchaser of 5% or more of the outstanding shares of our Common Stock will be presumed to have acquired control of FNHC unless the Florida OIR, upon application, determines otherwise.

Underwriting and Marketing Restrictions

During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates permitted to be charged.

Industry Ratings Services

Third-party rating agencies assess and rate the ability of insurers to pay their claims. These financial strength ratings are used by the insurance industry to assess the financial strength and quality of insurers. These ratings are based on criteria established by the rating agencies and reflect evaluations of each insurer's profitability, debt and cash levels, customer base, adequacy and soundness of reinsurance, quality and estimated market value of assets, adequacy of reserves and management. Ratings are based upon factors of concern to agents, reinsurers and policyholders and are not directed toward the protection of investors, such as purchasers of our common stock.

As of December 31, 2013, FNIC is rated by Demotech as "A" ("Exceptional"), which is the third of seven ratings, and defined as “Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating (“FSR”) of “A” possess “Exceptional” financial stability related to maintaining surplus as regards to policyholders”. Demotech’s ratings are based upon factors of concern to agents, reinsurers and policyholders and are not primarily directed toward the protection of investors. Our Demotech rating could be jeopardized by factors including adverse development and various surplus related ratio exceptions. On November 22, 2013, Demotech reaffirmed FNIC’s FSR of “A” (“Exceptional”).

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Federated National Holding Company

The withdrawal of our ratings could limit or prevent us from writing or renewing desirable insurance policies, from competing with insurers who have higher ratings, from obtaining adequate reinsurance, or from borrowing on a line of credit. The withdrawal of our ratings could have a material adverse effect on the Company’s results of operations and financial position because the Company’s insurance products might no longer be acceptable to the secondary marketplace and mortgage lenders. Furthermore, a withdrawal of our ratings could prevent independent agents from selling and servicing our insurance products.

EMPLOYEES

As of December 31, 2013, we had 153 employees, including two executive officers. We are not a party to any collective bargaining agreement and we have not experienced work stoppages or strikes as a result of labor disputes. We consider relations with our employees to be satisfactory.

ITEM 1A RISK FACTORS

We are subject to certain risks in our business operations which are described below. Careful consideration of these risks should be made before making an investment decision. The risks and uncertainties described below are not the only ones facing FNHC. Additional risks and uncertainties not presently known or currently deemed immaterial may also impair our business operations.

Risks Related to Our Business

Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.

We write insurance policies that cover homeowners, business owners and automobile owners for losses that result from, among other things, catastrophes and sinkholes. Catastrophic losses can be caused by natural events such as hurricanes, tropical storms, tornadoes, wind, hail, fires, explosions and other events, and their incidence and severity are inherently unpredictable. They can also be caused by terrorist attacks, war, riots, political instability and other man-made events. The extent of losses from a catastrophe is a function of two factors: the total amount of the insurance company's exposure in the area affected by the event and the severity of the event. Although our homeowners' policyholders are disbursed throughout Florida, substantially all of them are located in Florida, which is especially subject to adverse weather conditions such as hurricanes and tropical storms, and a substantial portion are located in southeastern Florida.

The occurrence of claims from catastrophic events could result in substantial volatility in our results of operations or financial condition for any fiscal quarter or year. Increases in the values and concentrations of insured property may also increase the severity of these occurrences in the future. Although we attempt to manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophic events could have a material adverse effect on our results of operations or financial condition.

Although Florida has not experienced a hurricane during the last eight hurricane seasons, some weather analysts believe that we have entered a period of greater hurricane activity. We are exploring alternatives to reduce our exposure to these types of storms, which may increase operating expenses and may not be successful in protecting long-term profitability. If our loss experience is more adverse than is contemplated by our loss reserves, the related increase in our loss reserves may have a material adverse effect on our results of operations in the period in which the increase occurs.

Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance fluctuates and we may not be able to successfully alleviate risk through reinsurance arrangements.

We have a reinsurance structure that is a combination of private reinsurance and the FHCF. Our reinsurance structure is composed of several reinsurance companies with varying levels of participation providing coverage for loss and LAE at pre-established minimum and maximum amounts. Losses incurred in connection with a catastrophic event below the minimum and above the maximum are the responsibility of FNIC.

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Federated National Holding Company

The availability and costs associated with the acquisition of reinsurance will vary year to year. We are not able to control these fluctuations which may be significant and may limit our ability to purchase adequate coverage. The recovery of increased reinsurance costs through rate action is not immediate and cannot be presumed, as it is subject to approval of the Florida OIR.

We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of operations and financial condition.

As is common practice within the insurance industry, we transfer a portion of the risks insured under our policies to other companies through the purchase of reinsurance. This reinsurance is maintained to protect our insurance subsidiary against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and other catastrophic events. Although reinsurance does not discharge our insurance subsidiary from its primary obligation to pay for losses insured under the policies it issues, reinsurance does make the assuming reinsurer liable to the insurance subsidiary for the reinsured portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectability of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. A reinsurer's insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on our business, results of operations and financial condition.

Our reinsurance structure has significant risks, including the fact that the FHCF may not be able to raise sufficient money to pay their claims or impair their ability to pay their claims in a timely manner. This could result in significant financial, legal and operational challenges to our company. Therefore, in the event of a catastrophic loss, we may become dependent upon the FHCF's ability to pay, which may, in turn, be dependent upon the MCP's ability to issue bonds in amounts that would be required to meet its reinsurance obligations in the event of such a catastrophic loss.

Our January 2011 Consent Order with the Florida OIR, as amended in February 2013, limits our business in certain respects and may prevent us from growing our business.

In January 2011, we entered into a Consent Order with the Florida OIR, in connection with our request for approval of the merger of FNIC, into American Vehicle Insurance Company, one of our other subsidiaries at the time. The Consent Order was amended in February 2013 to lessen or eliminate certain of the original requirements, due to FNIC's statutory underwriting profit during 2012. Among other things, the Consent Order as amended requires us to limit the concentration of our homeowners' policies in Miami-Dade, Broward and Palm Beach counties. This reduction in concentration could materially adversely affect us by limiting our ability to write policies in the most populous region of the State of Florida, which could materially adversely affect our results of operations if we are not able to replace those policies with policies elsewhere in Florida or the other states in which we do business.

 If we are unable to continue our growth because our capital must be used to pay greater than anticipated claims, our financial results may suffer.

Our future growth will depend on our ability to expand the types of insurance products we offer and the geographic markets in which we do business, both balanced by the business risks we choose to assume and cede. We believe that our Company is sufficiently capitalized to operate our business as it now exists and as we currently plan to expand it. Our existing sources of funds include possible sales of our investment securities and our earnings from operations and investments. Unexpected catastrophic events in our market areas, such as the hurricanes experienced in Florida, have resulted and may result in greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy our capital to pay these unanticipated claims.

We may require additional capital in the future which may not be available or only available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Based on our current operating plan, we believe current capital, together with our anticipated retained earnings, will support our operations without the need to raise additional capital. To the extent that our capital may be insufficient to meet future operating requirements and/or cover losses, we may need to raise additional funds through financings or curtail our growth. Many factors will affect the amount and timing of our capital needs, including our growth and profitability, our claims experience, and the availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments.

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Federated National Holding Company

If we were required to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our stockholders’ ownership could result, and in any case such securities may have rights, preferences and privileges that are senior to those of existing shareholders. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business or pay dividends. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of operations could be materially adversely affected.

Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

We are subject to extensive regulation in the states in which we conduct business. This regulation is generally designed to protect the interests of policyholders, as opposed to shareholders and other investors, and relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurance company's business. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. State regulatory authorities also conduct periodic examinations into insurers' business practices. These reviews may reveal deficiencies in our insurance operations or differences between our interpretations of regulatory requirements and those of the regulators.

The National Association of Insurance Commissioners, or NAIC, and state insurance regulators are constantly reexamining existing laws and regulations, generally focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws.

From time to time, some states in which we conduct business have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. In other situations, states in which we conduct business have considered or enacted laws that impact the competitive environment and marketplace for property and casualty insurance. In addition, in recent years the state insurance regulatory framework has come under increased federal scrutiny. Changes in federal legislation and administrative policies in several areas, including changes in financial services regulation and federal taxation, can significantly impact the insurance industry and us.

We cannot predict with certainty the effect any enacted, proposed or future state or federal legislation or NAIC initiatives may have on the conduct of our business. Furthermore, there can be no assurance that the regulatory requirements applicable to our business will not become more stringent in the future or result in materially higher costs than current requirements. Changes in the regulation of our business may reduce our profitability, limit our growth or otherwise adversely affect our operations.

We may experience financial exposure from climate change.

A body of scientific evidence seems to indicate that climate change may be occurring. Climate change, to the extent that it may affect weather patterns, may cause an increase in the frequency and/or the severity of catastrophic events or severe weather conditions. Our financial exposure from climate change is most notably associated with losses in connection with the occurrence of hurricanes striking Florida. We mitigate the risk of financial exposure from climate change by restrictive underwriting criteria, sensitivity to geographic concentrations, and reinsurance.

Restrictive underwriting criteria can include, but are not limited to, higher premiums and deductibles and more specifically excluded policy risks such as fences and screened-in enclosures. New technological advances in computer generated geographical mapping afford us an enhanced perspective as to geographic concentrations of policyholders and proximity to flood prone areas. Our amount of maximum reinsurance coverage is determined by subjecting our homeowner exposures to statistical forecasting models that are designed to quantify a catastrophic event in terms of the frequency of a storm occurring once in every "n" years. Our reinsurance coverage contemplates the effects of a catastrophic event that occurs only once every 100 years. Our amount of losses retained (our deductible) in connection with a catastrophic event is determined by market capacity, pricing conditions and surplus preservation. There can be no assurance that our reinsurance coverage and other measures taken will be sufficient to mitigate losses resulting from one or more catastrophic events.

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Federated National Holding Company

Our loss reserves are estimates and may be inadequate to cover our actual liability for losses, causing our results of operations to be adversely affected.

We maintain reserves to cover our estimated ultimate liabilities for loss and LAE. These reserves are estimates based on historical data and statistical projections of what we believe the settlement and administration of claims will cost based on facts and circumstances then known to us. Actual loss and LAE reserves, however, may vary significantly from our estimates.

Factors that affect unpaid losses and LAE include the estimates made on a claim-by-claim basis known as "case reserves" coupled with bulk estimates known as "incurred but not yet reported." Periodic estimates by management of the ultimate costs required to settle all claim files are based on our analysis of historical data and estimations of the impact of numerous factors such as (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of its analysis. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors.

Because of the uncertainties that surround estimated loss reserves, we cannot be certain that our reserves will be adequate to cover our actual losses. If our reserves for unpaid losses and LAE are less than actual losses and LAE, we will be required to increase our reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. Future loss experience, substantially in excess of our reserves for unpaid losses and LAE, could substantially harm our results of operations and financial condition.

Our revenues and operating performance will fluctuate due to statutorily approved assessments that support property and casualty insurance pools and associations.

We operate in a regulatory environment where certain entities and organizations have the authority to require us to participate in assessments. Currently these entities and organizations include, but are not limited to, the Florida Joint Underwriters Association, the Florida Insurance Guaranty Association, Citizens and the FHCF.

The insurance companies currently pass the assessments on to holders or insurance policies, in the form of a policy surcharge, and reflect the collection of these assessments as fully earned credits to operations in the period collected. The collection of these fees may adversely affect our overall marketing strategy due to the competitive landscape in Florida.

During December 2012, the Company was assessed $0.8 million by Florida Insurance Guaranty Association (“FIGA”) relating to the recent failures of Florida domestic property and casualty insurance companies. Future assessments are likely, although the impact of these assessments on our balance sheet, results of operations or cash flow are undeterminable at this time.

Our investment portfolio may suffer reduced returns or losses, which would significantly reduce our earnings.

Like other insurance companies, we depend on income from our investment portfolio for a substantial portion of our earnings. During the time that normally elapses between the receipt of insurance premiums and any payment of insurance claims, we invest the premiums received, together with our other available capital, primarily in debt securities and to a lesser extent in equity securities, in order to generate investment income.

Our investment portfolio contains interest rate sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates. A significant increase in interest rates or decrease in credit worthiness could have a material adverse effect on our financial condition or results of operations. Generally, bond prices decrease as interest rates rise. Changes in interest rates could also have an adverse effect on our investment income and results of operations. For example, if interest rates decline, investment of new premiums received and funds reinvested will earn less than expected.

Our determination of the amount of other-than-temporary impairment to record varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective investment type. We revise our evaluations and assessments as conditions change and new information becomes available, and we reflect changes in other-than- temporary impairments in our consolidated statements of income. We base our assessment of whether other-than-temporary impairments have occurred on our case-by-case evaluation of the underlying reasons for the decline in fair value. We can neither provide assurance that we have accurately assessed whether the impairment of one or more of our 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.

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Federated National Holding Company

In addition, volatile and illiquid markets increase the likelihood that investment securities may not behave in historically predictable manners, resulting in fair value estimates that may be overstated compared with actual amounts that could be realized upon disposition or maturity of the security. The effects of market volatility and declining economic conditions may have unforeseen consequences on the credit quality, liquidity and financial stability of the issuers of securities we hold, or reinsurers with which we do business. Such deteriorations in financial condition can occur rapidly, leaving us unable to react to such a scenario in a prudent manner consistent with our historical practices in dealing with more orderly markets. This in turn could adversely and negatively affect our results of operations, liquidity or financial condition.

We may experience a loss due to the concentration of credit risk.

Financial instruments that potentially subject the Company to significant concentration of credit risk consist of cash and cash equivalents held in a mutual fund money market account. The Company had approximately $12.2 million and $10.7 million invested in the Wilmington Prime Money Market Fund – Class Select (Ticker: VSMXX, CUSIP: 97181C308), for which the NAIC classification is Class 1, as of December 31, 2013 and 2012, respectively. Although this fund is on the Class 1 list, the highest rating available, there can be no assurance that it will remain financially sound. If the MTB Fund were to experience financial difficulty such that it could not repay the money we have invested in the fund, our financial condition and results of operations could be materially and adversely affected.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or our results of operations.

Various provisions of our policies, such as limitations or exclusions from coverage which have been negotiated to limit our risks, may not be enforceable in the manner we intend. At the present time we employ a variety of exclusions to our policies that limit exposure to known risks, including, but not limited to, exclusions relating to certain named liabilities, types of vehicles and specific artisan activities.

In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to decline coverage in the event of a violation of that condition. While we believe our insurance product exclusions and limitations reduce the loss exposure to us and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or that legislation could he enacted modifying or barring the use of such endorsements and limitations in a way that would adversely affect our loss experience, which could have a material adverse effect on our financial condition or results of operations.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued.

An example of such emerging change was the influence public adjusters have had on property claim patterns. Public adjusters represented the vast majority of new and reopened claims filed during 2011 and 2010 where the cause of loss was asserted as hurricane related. Although the legitimacy of the claim may not prevail we are still required to research, review and sometimes mediate these claims. Several legislative actions in of the State of Florida, such as limiting the time a claim can be filed subsequent to the cause of loss, have either passed or remain in legislative sub-committees. Each of these actions is designed to enhance the legitimacy of the public adjusters’ influence on the claim process.

Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.

We must accurately evaluate and pay claims that are made under our policies. Many factors affect our ability to pay claims accurately, including the training and experience of our claims representatives, the culture of our claims organization and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to pay claims accurately could lead to material litigation, undermine our reputation in the marketplace, impair our image and negatively affect our financial results.

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Federated National Holding Company

In addition, if we do not train new claims adjusting employees effectively or if we lose a significant number of experienced claims adjusting employees, our claims department's ability to handle an increasing workload as we grow could be adversely affected. In addition to potentially requiring that growth be slowed in the affected markets, we could suffer decreased quality of claims work, which in turn could lower our operating margins.

Our insurance company is subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.

Our insurance company is subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of the State of Florida. The risk-based capital standards, based upon the Risk Based Capital Model Act adopted by the NAIC, require our insurance company to report their results of risk-based capital calculations to state departments of insurance and the NAM. These risk-based capital standards provide for different levels of regulatory attention depending upon the ratio of an insurance company's total adjusted capital, as calculated in accordance with NAIC guidelines, to its authorized control level risk-based capital.

If we fail to meet the applicable risk-based capital or minimum statutory capital requirements imposed by the laws of Florida or other states where we do business, we could be subject to further examination or corrective action imposed by state regulators, including limitations on out writing of additional business, state supervision or liquidation, and may be required to raise additional capital. Similarly, an increase in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels. As of December 31, 2013, FNIC was in compliance with the NAIC risk-based capital requirements (see “Business-Regulation” for further discussion).

Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance industry.

Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns characterized by periods of significant competition in pricing and underwriting terms and conditions, which is known as a "soft" insurance market, followed by periods of lessened competition and increasing premium rates, which is known as a "hard" insurance market. Although an individual insurance company's financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern, with profitability generally increasing in hard markets and decreasing in soft markets. At present, we are experiencing a hardening market in the property and casualty market in Florida because of regulatory changes. We cannot predict, however, how long these market conditions will persist. Although we do not compete entirely on price or targeted market share, negative market conditions may impair our ability to write insurance at rates that we consider appropriate relative to the risk assumed. If we cannot write insurance at appropriate rates, our revenues and operating performance may be adversely affected.

We may not obtain the necessary regulatory approvals to expand the types of insurance products we offer or the states in which we operate.

The insurance industry is highly regulated. Prior to selling a new insurance product in a state, we must obtain approval from the applicable state insurance regulators. The insurance regulators in states to which we might apply may request additional information, add conditions to the license that we find unacceptable, or deny our application. This would delay or prevent us from operating in that state. If we want to operate in any additional states, we must file similar applications for licenses, which we may not be successful in obtaining.

Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable policies or obtain adequate insurance, which could limit or halt our growth and harm our business.

Third-party rating agencies assess and rate the ability of insurers to pay their claims. These financial strength ratings are used by the insurance industry to assess the financial strength and quality of insurers. These ratings are based on criteria established by the rating agencies and reflect evaluations of each insurer's profitability, debt and cash levels, customer base, adequacy and soundness of reinsurance, quality and estimated market value of assets, adequacy of reserves, and management. Ratings are based upon factors of concern to agents, reinsurers and policyholders and are not directed toward the protection of investors, such as purchasers of our common stock.

The withdrawal of our ratings could limit or prevent us from writing or renewing desirable insurance policies, from competing with insurers who have higher ratings, from obtaining adequate reinsurance, or from borrowing on a line of credit. The withdrawal or downgrade of our ratings could have a material adverse effect on our results of operations and financial position because our insurance products might no longer be acceptable to the secondary marketplace and mortgage lenders. 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.

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Federated National Holding Company

We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain independent and general agents, our revenues would be negatively affected.

We currently market and distribute our products and services through contractual relationships with a network of   approximately 3,600 independent agents, of which approximately 1,800 actively sell and service our products, and a selected number of general agents. Our independent agents are our primary source for our property and liability insurance policies. Many of our competitors also rely on independent agents. As a result, we must compete with other insurers for independent agents' business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher commissions to their agents. If our products, pricing and commissions do not remain competitive, we may find it more difficult to attract business from independent agents to sell our products. A material reduction in the amount of our products that independent agents sell or a material reduction in the number of independent agents with whom we maintain a relationship could negatively affect our results of operations and financial condition.

In February 2013, we entered into an Insurance Agency Master Agreement with Ivantage Select Agency, Inc., or ISA, an affiliate of Allstate Insurance Company, or Allstate, pursuant to which we are authorized by ISA to appoint Allstate agents to offer our homeowners' and commercial general liability insurance products to consumers in Florida. Since that time, our homeowners' premiums and the percentage of homeowners' premiums attributable to Allstate agents has increased rapidly. During 2013, 25.5% of the homeowners' premiums we underwrote were from Allstate's network of Florida agents, and this concentration may continue to increase. An interruption or change in our relationship with ISA could have a material adverse effect on the amount of premiums we are able to write, as well as our results of operations.

We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our operations.

Our business is highly dependent upon the successful and uninterrupted functioning of our current information technology and telecommunications systems. We rely on these systems to process new and renewal business, provide  customer service, make claims payments and facilitate collections and cancellations, as well as to perform actuarial and other analytical functions necessary for pricing and product development. As a result, the failure of these systems could interrupt our operations and adversely affect our financial results. We utilize a third-party to provide certain information security related services designed to prevent an information security event or detect one timely. Although we have implemented security measures to protect our systems from computer viruses and intrusions by third parties, there can be no assurances that these measures will be effective.

Nonstandard automobile insurance historically has a higher frequency of claims than standard automobile insurance, thereby increasing our potential for loss exposure beyond what we would be likely to experience if we offered only standard automobile insurance.

Nonstandard automobile insurance is provided to insureds that are unable to obtain preferred or standard insurance coverage because of their payment histories, driving records, age, vehicle types, or prior claims histories. This type of automobile insurance historically has a higher frequency of claims than does preferred or standard automobile insurance policies, although the average dollar amount of the claim is usually smaller under nonstandard insurance policies. As a result, we are exposed to the possibility of increased loss exposure and higher claims experience than would be the case if we offered only standard automobile insurance.

Florida's personal injury protection insurance statute contains provisions that favor claimants, causing us to experience a higher frequency of claims than might otherwise be the case if we operated only outside of Florida.

Florida's personal injury protection insurance statute limits an insurer's ability to deny benefits for medical treatment that is unrelated to the accident, that is unnecessary, or that is fraudulent. In addition, the statute allows claimants to obtain awards for attorney's fees. Although this statute has been amended several times in recent years, primarily to address concerns over fraud, the Florida legislature has been only marginally successful in implementing effective mechanisms that allow insurers to combat fraud and other abuses. We believe that this statute contributes to a higher frequency of claims under nonstandard automobile insurance policies in Florida, as compared with claims under standard automobile insurance policies in Florida and nonstandard and standard automobile insurance policies in other states. Although we believe that we have successfully offset these higher costs with premium increases, because of competition, we may not be able to do so with as much success in the future, which could have a material adverse effect on our results of operations and financial condition.

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Federated National Holding Company

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 and underwriting expenses and to earn a profit. In order to price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully and price our products accurately is subject to a number of risks and uncertainties, some of which are outside our control, including:

· the availability of sufficient reliable data and our ability to properly analyze available data;

· the uncertainties that inherently characterize estimates and assumptions;

· our selection and application of appropriate rating and pricing techniques;

· changes in legal standards, claim settlement practices, medical care expenses and restoration costs;

· regulatory restrictions; and

· legislatively imposed consumer initiatives.

Consequently, we could under-price risks, which would negatively affect our profit margins, or we could overprice risks, which could reduce our sales volume and competitiveness. In either event, the profitability of our insurance company could be materially and adversely affected.

Current operating resources are necessary to develop future new insurance products.

We currently intend to expand our product offerings by underwriting additional insurance products and programs, and marketing them through our distribution network. Expansion of our product offerings will result in increases in expenses due to additional costs incurred in actuarial rate justifications, software and personnel. Offering additional insurance products may also require regulatory approval, further increasing our costs. There can be no assurance that we will be successful bringing new insurance products to our marketplace in a manner that is profitable.

Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our business and adversely impact our financial results.

We operate in highly competitive markets and face competition from national, regional and residual market insurance companies in the homeowners', commercial general liability, and automobile markets, many of whom are larger, have greater financial and other resources, have higher financial strength ratings and offer more diversified insurance coverage. Our competitors include companies that market their products through agents, as well as companies that sell insurance directly to their customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and reduced policy acquisition costs. We may be forced to reduce our premiums significantly to compete, which could make us less profitable and have a material adverse effect on our business, results of operations and financial condition. If we do not meet the prices offered by our competitors, we may lose business in the short term, which could also result in a material adverse effect on our business, results of operations and financial condition.

Our ability to compete successfully in states outside of Florida and to expand our business footprint may also be negatively affected by our lack of an A. M. Best rating of our financial strength. Although our insurance subsidiary has a Demotech rating of "A" (Exceptional), which is generally accepted in Florida and certain other states, a rating by A. M. Best is more widely accepted outside of Florida and may cause customers and agents to prefer a policy written by an A. M. Best-rated company over a policy written by us. In addition, some mortgage companies outside of Florida may require homeowners to obtain property insurance from an insurance company with a minimum A. M. Best rating.

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Federated National Holding Company

Our participation in the new Florida Property Insurance Clearinghouse may not result in an increase in our premium revenue.

Pursuant to legislation passed by the Florida legislature in 2013 intended to reduce the insurance policy count of Citizens Property Insurance Corporation, a Florida not-for-profit, tax-exempt government corporation (“Citizens”), the Property Insurance Clearinghouse (the “Clearinghouse”) launched during February 2014. This will allow all potentially new and renewal policies of Citizens to be comparatively shopped by participating private market insurers before becoming, or remaining, policies of Citizens. We intend to be a participating insurance company in the Clearinghouse.

Applications to Citizens for new homeowners' policies and existing policies with Citizens up for renewal will be submitted to insurance companies participating in the Clearinghouse. If that process identifies a carrier willing to write a new policy at a premium that is no more than 15% higher than Citizens' premium of comparable coverage or, in the case of a renewal, with a premium equal to or less than the policy's renewal premium with Citizens, then that homeowner will be ineligible for coverage with Citizens. The homeowner may then choose to have an agent bind coverage with the homeowner's choice of the private market insurers that have made the homeowner a qualifying offer of coverage.

There can be no assurance that our policy count or gross premiums will increase as a result of our participation in the Clearinghouse, because our premiums may not be below the threshold required by Citizens, other carriers participating in the Clearinghouse may be willing to oiler similar policies for lower premiums, or we may decide to not provide a quote on these policies if they do not meet our underwriting guidelines.

Our senior management team is critical to the strategic direction of our company. If there were an unplanned loss of service by any of our officers our business could be harmed.

We depend, and will continue to depend, on the services of our executive management team which includes Michael H. Braun, Chief Executive Officer and President and Peter J. Prygelski III, our Chief Financial Officer and Treasurer. Our success also will depend in part upon our ability to attract and retain qualified executive officers, experienced underwriting talent and other skilled employees who are knowledgeable about our business. If we were to lose the services of one or more members of our executive management team, our business could be adversely affected. Although we have employment agreements with our executive officers, any unplanned loss of service could substantially harm our business.

We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth.

As an insurance company, we are subject to extensive laws and regulations. These laws and regulations are complex and subject to change. Moreover, they are administered and enforced by a number of different governmental authorities, including state insurance regulators, state securities administrators, the SEC, the U.S. Department of Justice, and state attorneys general, each of which exercises a degree of interpretive latitude. Consequently, we are subject to the risk that compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal environment may, even absent any particular regulator’s or enforcement authority’s interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a legal risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow and improve the profitability of our business. Furthermore, in some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of constituencies. For example, state insurance laws and regulations are generally intended to protect or benefit purchasers or users of insurance products, not holders of securities issued by us. In many respects, these laws and regulations limit our ability to grow and improve the profitability of our business.

In recent years, the state insurance regulatory framework has come under public scrutiny and members of Congress have discussed proposals to provide for federal chartering of insurance companies. We can make no assurances regarding the potential impact of state or federal measures that may change the nature or scope of insurance regulation

New homeowners’ insurance operations outside of the State of Florida may not be profitable.

We plan to continue the expansion of admitted homeowners’ property and casualty programs into other states as opportunities avail themselves. Risks associated with execution of our planned operations include the inability to market an adequately priced policy, inadequate commission structures, and overpriced or unavailable catastrophic reinsurance for wind events. Additionally, each state has its own authoritative body designed to regulate the insurance products and operations of new and existing insurance companies under their respective authority. For example, during 2013 Federated National obtained regulatory approval to initiate a new homeowners’ property and casualty program in the State of Louisiana.

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Federated National Holding Company

There can be no guarantees that our operations will be profitable in a given state nor can there be any guarantees that the state authorities will allow us to do business in that state.

We face risks in connection with potential material weakness resulting from our Sarbanes-Oxley Section 404 management report and any related remedial measures that we undertake.

In conjunction with our ongoing reporting obligations as a public company and the requirements of Section 404 of the Sarbanes-Oxley Act, management reported on the effectiveness of our internal control over financial reporting as of December 31, 2013. In order to identify any material weaknesses in our internal control over financial reporting, we engaged in a process to document, evaluate and test our internal controls and procedures, including corrections to existing controls and implement additional controls and procedures that we may deem necessary. As a result of this evaluation and testing process, no material financial reporting deficiencies were noted.

Although we did not have any material weaknesses in our internal controls for our fiscal year ended December 31, 2013, we cannot be certain that there will be none in the future. In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals significant deficiencies or material weaknesses, the correction of any such significant deficiencies or material weaknesses could require additional remedial measures that could be costly and time-consuming. In addition, the discovery of material weaknesses could also require the restatement of prior period operating results. If a material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures), our management will be unable to report favorably as of such future period year-end as to the effectiveness of our control over financial reporting and we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and potentially subject us to litigation.

Risks Related to an Investment in Our Shares

Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price of our common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.

The market price of our common stock has experienced, and may continue to experience, significant volatility from time to time. Such volatility may be affected by various factors and events, such as:

• our quarterly operating results, including a shortfall in operating revenue or net income from that expected by securities analysts and investors;

• recognition of large unanticipated accounting charges, such as related to a loss reserve enhancement;

• changes in securities analysts’ estimates of our financial performance or the financial performance of our competitors or companies in our industry generally;

• the limited trading volume and public float of the common stock;

• the announcement of a material event or anticipated event involving us or our industry or the markets in which we operate;

• the issuance of a significant number of shares; and

• the other risk factors described in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference herein.

In recent years, the U.S. stock market has experienced extreme price and volume fluctuations, which have sometimes affected the market price of the securities issued by a particular company in a manner unrelated to the operational performance of the company. This type of market effect could impact our common stock price as well. The volatility of our common stock means that the price of our common stock may have declined substantially at such time as you may look to sell your shares of our common stock. If our share price decreases, the value of your investment could decline.

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Federated National Holding Company

If we report a material weakness in our internal controls and procedures, we may lose investor confidence and remedial measures may be costly.

In accordance with applicable law, we are required to document, evaluate and test our internal controls and procedures, including corrections to existing controls and implement additional controls and procedures that we may deem necessary, and to identify and report any material weakness in our internal control over financial reporting. As a result of this evaluation and testing process, no material weakness was identified or reported as of December 31, 2013.  In fixture periods, if the process required by law reveals significant deficiencies or material weaknesses, the correction of any such significant deficiencies or material weaknesses could require additional remedial measures that could be costly and time consuming. In addition, the discovery of material weaknesses could also require the restatement of prior period operating results. If a material weakness exists and is reported as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures), we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and potentially subject us to litigation.

No system of internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will be identified in the future.

Our controls and procedures may fail or be circumvented which could have a material adverse effect on our business, results of operations and financial condition.

We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

We have authorized but unissued preferred stock, which could affect rights of holders of common stock.

Our articles of incorporation authorize the issuance of preferred stock with designations, rights and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. In addition, the preferred stock could be issued as a method of discouraging a takeover attempt. Although we do not intend to issue any preferred stock at this time, we may do so in the future.

Provisions in our articles of incorporation and our bylaws, as amended, and the Florida Business Corporation Act could make it more difficult to acquire us and may reduce the market price of our common stock.

Our articles of incorporation and our bylaws presently contain certain provisions which may make it more difficult and time-consuming for shareholders or third parties to influence our management, policies or affairs, and may discourage, delay or prevent a transaction involving a change-in-control of the Company and offering a premium over the current market price of our common stock. These provisions include those which:

• prohibit cumulative voting in the election of our directors,

• establish a classified board of directors with staggered three-year terms,

• provide that the written request of shareholders holding not less than one-third of all votes entitled to be cast on an issue is required for shareholders to call special meetings of our shareholders,

• establish advance notice and disclosure procedures for shareholders to bring matters, including nominations for election to our board, before a meeting of our shareholders, and

• eliminate the ability of shareholders to take action by written consent in lieu of a shareholder meeting.

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Federated National Holding Company

As a result, we may be less likely to receive unsolicited offers to acquire us that some of our shareholders might consider beneficial.

The Florida Business Corporation Act, as amended, contains provisions, which our directors have elected not to opt out of, that are designed to enhance the ability of our board to respond to and potentially defer attempts to acquire control of the Company. These provisions may discourage altogether takeover attempts that have not been approved by our board. These provisions may also adversely affect the price that a potential purchaser would be willing to pay for our common stock and, therefore, deprive you of the opportunity to obtain a takeover premium for your shares. These provisions could make the removal of our incumbent directors and management more difficult. These provisions may enable a minority of our directors and the holders of a minority of our outstanding voting stock or the holders of an existing control block to prevent, delay, discourage or make more difficult a merger, tender offer or proxy contest, even though the transaction may be favorable to the interests of a majority of our non-affiliate shareholders. These provisions could also potentially adversely affect the market price of our common stock.

As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and dividends to the holding company as the primary source of our income.

We are an insurance holding company whose primary assets are the stock of our subsidiaries. Our operations, and our ability to pay dividends or service future potential debt, are limited by the earnings of our subsidiaries and their payment of their earnings to us in the form of management fees, commissions, dividends, loans, advances or the reimbursement of expenses. These payments can be made only when our subsidiaries have adequate earnings. In addition, dividend payments made to us by our insurance subsidiary are restricted by Florida law governing the insurance industry. Generally, Florida law limits the dividends payable by insurance companies under complicated formulas based on the subsidiary's available capital and earnings.

Payment of dividends in the future will depend on our earnings and financial position and such other factors, as our board of directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits on the amount of dividends that our insurance subsidiaries are permitted to pay to the holding company.

The Board of Directors of FNHC declared regular quarterly dividends of $0.02 per common share payable on December 28, 2012 and March 4, 2013 to shareholders of record as of December 3, 2012 and February 4, 2013. The Board of Directors of FNHC declared regular quarterly dividends of $0.03 per common share payable on September 3 and December 2, 2013 and March 3, 2014 to shareholders of record as of August 5 and November 4, 2013 and February 3, 2014.

Payment of dividends in the future will depend on our earnings and financial position and such other factors, as our Board of Directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits on the amount of dividends that FNIC is permitted to pay to the parent company.

Future sales of our common stock may depress our stock price.

Sales of a substantial number of shares of our common stock in the public market or otherwise, by us or by a major shareholder, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.

In addition, we may issue additional shares of our common stock from time to time in the future in amounts that may be significant. The sale of substantial amounts of our common stock, or the perception that these sales may occur, could adversely impact our stock price.

As of December 31, 2013, there were 313,475 shares issuable upon the exercise of outstanding and exercisable stock options, 251,896 shares issuable upon the exercise of outstanding stock options that are not yet exercisable and 750,500 additional shares available for grant under our equity-based compensation plans. The market price of the common shares may be depressed by the potential exercise of these options or grant of these shares. The holders of these options are likely to exercise them when we would otherwise be able to obtain additional capital on more favorable terms than those provided by the options.

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Federated National Holding Company

ITEM 1B UNRESOLVED STAFF COMMENTS

None

ITEM 2 PROPERTIES

Our executive offices are now located at 14050 N.W. 14^th Street, Suite 180, Sunrise, Florida 33323 in an 18,500 square feet office facility and our telephone number is (800) 293-2532. All of our operations are consolidated within this facility. We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the lease term. Our lease for this office space will expire in May 2017.

ITEM 3 LEGAL PROCEEDINGS

See Item 8 of Part II, “Financial Statements and Supplementary Data – Footnote 9 – Commitments and Contingencies”.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed for trading on The NASDAQ Global Market under the symbol “FNHC”. The following table sets out the high and low closing sale prices as reported on The NASDAQ Global Market. These reported prices reflect inter-dealer prices without adjustments for retail markups, markdowns or commissions.

Quarter Ended	High		Low
March 31, 2013	$	7.90	$	5.35
June 30, 2013	$	10.41	$	7.05
September 30, 2013	$	10.89	$	8.43
December 31, 2013	$	14.90	$	9.80
March 31, 2012	$	4.50	$	3.02
June 30, 2012	$	4.99	$	3.81
September 30, 2012	$	6.20	$	4.25
December 31, 2012	$	6.37	$	3.02

As of March 6, 2014, there were 56 holders of record of our common stock. We believe that the number of beneficial owners of our common stock is in excess of 2,900.

DIVIDENDS

The Board of Directors of FNHC declared regular quarterly dividends of $0.02 per common share payable on December 28, 2012 and March 4, 2013 to shareholders of record as of December 3, 2012 and February 4, 2013. The Board of Directors of FNHC declared regular quarterly dividends of $0.03 per common share payable on September 3 and December 2, 2013 and March 3, 2014 to shareholders of record as of August 5 and November 4, 2013 and February 3, 2014.

Payment of dividends in the future will depend on our earnings and financial position and such other factors, as our Board of Directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits on the amount of dividends that FNIC is permitted to pay to the parent company.

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Federated National Holding Company

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table summarizes our equity compensation plans as of December 31, 2013. All equity compensation plans were approved by our shareholders. We have not granted any options, warrants or rights to our shareholders outside of these equity compensation plans.

Equity Compensation Plan Information
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by stock holders*		776,021		4.88		750,500

*   Includes the 1998 and 2002 Stock Option Plans and the 2012 Stock Incentive Plan.

For additional information concerning our capitalization please see Footnote 14 to our Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.

ISSUER REPURCHASES

During 2013 and 2012, the Company did not repurchase any common stock under previously announced stock repurchase plans.

SALES OF UNREGISTERED SECURITIES

None.

ITEM 6 SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K.

	As of the Years Ended December 31,
	(Amounts in Thousands except Book Value Per Share)
	2013		2012		2011		2010		2009
Balance Sheet Data
Assets:
Cash and investments	$	262,156	$	151,238	$	144,672	$	138,691	$	142,416
Total assets		316,741		185,888		179,980		184,049		202,889
Liabilities:
Unpaid losses and LAE		61,016		49,908		59,983		66,529		70,611
Unearned premiums		128,343		59,006		47,933		47,136		50,857
Total liabilities		208,247		119,983		121,836		126,118		135,447
Total shareholders' equity		108,494		65,905		58,144		57,931		67,442
Book value per share	$	9.95	$	8.26	$	7.32	$	7.29	$	8.48
Statutory surplus		76,889		52,012		39,307		40,603		46,810

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Federated National Holding Company

	Years Ended December 31,
	(Amounts in Thousands except EPS and Dividends)
	2013			2012			2011			2010			2009
Operations Data:
Revenue:
Gross premiums written	$	243,373		$	119,459		$	98,269		$	96,410		$	104,379
Gross premiums ceded		(82,708	)		(51,085	)		(46,293	)		(52,963	)		(56,217	)
Net premiums written		160,665			68,374			51,976			43,447			48,162
Increase (decrease) in prepaid reinsurance premiums		13,052			2,059			(2,656	)		(2,108	)		10,163
(Increase) decrease in unearned premiums		(69,336	)		(11,074	)		(797	)		3,721			(10,349	)
Net change in prepaid reinsurance premiums and unearned premiums		(56,284	)		(9,015	)		(3,453	)		1,613			(186	)
Net premiums earned		104,381			59,359			48,523			45,060			47,976
Commission income		2,646			1,377			994			1,388			1,362
Finance revenue		866			496			518			395			294
Direct written policy fees		6,196			2,007			1,583			1,609			1,620
Net investment income		3,332			3,819			4,079			3,726			3,397
Net realized investment gains		2,881			1,072			2,725			6,777			1,117
Regulatory assessments recovered		-			-			-			857			2,333
Other income		1,435			517			1,741			792			755
Total revenue		121,737			68,647			60,163			60,604			58,854
Expenses:
Losses and LAE		56,410			30,209			30,896			40,088			43,706
Operating and underwriting expenses		14,474			9,996			9,916			10,835			9,681
Salaries and wages		10,188			8,439			8,004			8,611			7,930
Amortization of deferred policy acquisition costs		21,447			13,255			12,347			13,025			13,747
Total expenses		102,519			61,899			61,163			72,559			75,064
Income (loss) before provision for income tax expense (benefit)		19,218			6,748			(1,000	)		(11,955	)		(16,210	)
Provision for income tax expense (benefit)		6,491			2,435			(570	)		(3,959	)		(5,921	)
Net income (loss)	$	12,727		$	4,313		$	(430	)	$	(7,996	)	$	(10,289	)
Earnings per share data
Net income (loss)  per share - basic	$	1.50		$	0.53		$	(0.05	)	$	(1.01	)	$	(1.29	)
Net income (loss)  per share - diluted	$	1.45		$	0.53		$	(0.05	)	$	(1.01	)	$	(1.29	)
Dividends paid per share	$	0.11		$	0.02		$	-		$	0.06		$	0.36

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Federated National Holding Company (“FNHC”, “Company”, “we”, “us”), formerly known as 21st Century Holding Company is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents. We changed our name on September 11, 2012, pursuant to approval received at our annual shareholders’ meeting, from 21st Century Holding Company so that our parent company and other subsidiary companies’ names are consistent with our primary insurance subsidiary and the name under which we have been writing insurance for more than 20 years.

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

Our insurance subsidiary is Federated National Insurance Company (“FNIC”). FNIC is licensed as an admitted carrier in Florida. An admitted carrier is an insurance company that has received a license from the state department of insurance giving the company the authority to write specific lines of insurance in that state. These companies are also bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices,including fraud. Admitted carriers are also required to financially contribute to the state guarantee fund, which is used to pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders. Through contractual relationships with a network of approximately 3,600 independent agents, of which approximately 1,800 actively sell and service our products, FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines and personal and commercial automobile insurance in Florida.  FNIC is licensed as an admitted carrier in Alabama, Louisiana, Georgia and Texas and underwrites commercial general liability insurance in those states, homeowners’ insurance in Louisiana and personal automobile insurance in Georgia and Texas.

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

In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. In connection with this merger, the Company, FNIC and American Vehicle entered into a Consent Order with the Florida OIR pursuant to which we agreed to certain restrictions on our business operations. The Consent Order was amended in February 2013 to lessen or eliminate certain of the original requirements, due to FNIC’s statutory underwriting profit during 2012. See “Regulation– Consent Order.”

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

 Until June 2011, we offered premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).

Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, a wholly owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s existing network of agents.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.

The homeowner policy provides FNU the right to cancel any policy within a period of 90 days from the policy's inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our underwriting criteria.

Although we are authorized to underwrite the various lines described above, our business is primarily underwriting homeowners’ policies. During 2013, 89.6%, 4.3%, 2.6% and 3.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively. During 2013, $29.7 million or 13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents 25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents began writing for FNIC in March 2013. During 2012, 85.3%, 7.8%, 4.4% and 2.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively.

During the years ended December 31, 2013, 2012 or 2011, we did not experience any weather-related catastrophic events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or other insurable events will affect our future results of operations and liquidity. Loss and loss adjustment expenses (“LAE”) are affected by a number of factors, many of which are partially or entirely beyond our control, including the following.

· the nature and severity of the loss;

· weather-related patterns;

· the availability, cost and terms of reinsurance;

· underlying settlement costs, including medical and legal costs;

· legal and political factors such as legislative initiatives and public opinion;

· macroeconomic issues.

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

We have entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with Federated Mutual Insurance Company (“Federated Mutual”) in response to correspondence received from Federated Mutual’s counsel alleging that our use of the name “Federated” infringed certain federal trademarks held by Federated Mutual.  Although we believe that we have meritorious defenses to this allegation, we sought to avoid litigation and therefore negotiated and entered into the Coexistence Agreement.  Under the Coexistence Agreement, among other things, we may continue to use “Federated” until at least August 30, 2020, after which time we have agreed to either cease using “Federated” in commerce or otherwise adopt and use trade names that are not confusingly similar to Federated Mutual’s trademarks.  During this period, we continue to develop our brand under the “FedNat” name, which is the name by which agents generally know us.

Our goal in our reinsurance strategy is to equalize the liquidity requirements imposed by most severe insurable events and by all other insurable events we manage in the normal course of business.  Please see “Reinsurance Agreements” under “Item 1.  Business” for a more detailed description of our reinsurance agreements and strategy.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview of Premium Growth

Gross premiums written increased $123.9 million, or 103.7%, to $243.4 million for 2013, compared with $119.5 million for 2012.  Florida homeowners’ represents 94% and Texas private passenger automobile represents the remaining 6% of the increased premium volume. We believe that our growth in 2013 reflects management’s efforts over several years.  Our success today reflects our goal to be an agent-friendly carrier that provides exceptional service. We have invested in our agent relationships and our staff, have created easy to use systems for the agent, and increased our relevance to the agents’ operations by providing insurance products that meet their market needs.

Our homeowner business contributed $116.5 million or 94.0% of the increased gross written premiums during the year ended December 31, 2013. This increase was the result of:

· policyholders continuing to renew their FNIC homeowners’ policy,

· a “flight to quality” in the market by agents who seek quality carriers to place their business,

· and supporting a marketing team dedicated to promoting the quality and quantity of products and services that we offer.

During 2013, approximately 85% of our policyholders renewed their policies. This high retention rate reflects the confidence that the policyholder and his agent have in our financial stability and strength. Additionally, policyholders have told agents that our professional staff adjusts claims quickly and fairly.

CRITICAL ACCOUNTING POLICIES

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

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management’s evaluation of the determination of (i) liability for unpaid losses and LAE, (ii) the amount and recoverability of amortization of Deferred Policy Acquisition Costs (“DPAC”), and (iii) estimates for our reserves with respect to finance contracts, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates, which are described in greater detail in Footnote 2 in this Form 10-K.

Except as described below, we believe that in 2013 there were no significant changes in those critical accounting policies and estimates. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Form 10-K with the Audit Committee of our Board of Directors.

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

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

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FASB issued guidance addresses accounting and reporting for (a) investments in equity securities that have readily determinable fair values and (b) all investments in debt securities. The guidance requires that these securities be classified into one of three categories: Held-to-maturity, Trading, or Available-for-sale securities.

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

Overview of Management’s Loss Reserving Process

The Company’s loss reserves can generally be categorized into two distinctgroups. One group is short-tail classes of business consisting principally of property risks in connection with homes and automobiles. The other group is long-tail casualty classes of business which include primarily commercial general liability and to a much lesser extent, homeowner and automobile liability. For operations writing short-tail coverages our loss reserves were generally geared toward determining an expected loss ratio for current business rather than maintaining a reserve for the outstanding exposure. Estimations of ultimate net loss reserves for long-tail casualty classes of business is a more complex process and depends on a number of factors including class and volume of business involved. Experience in the more recent accident years of long-tail casualty classes of business shows limited statistical credibility in reported net losses because a relatively low proportion of net losses would be reported claims and expenses and even smaller percentage would be net losses paid. Therefore, incurred but not yet reported (“IBNR”) would constitute a relatively high proportion of net losses.

Additionally, the different methodologies are utilized the same, regardless of the line of business. However, the final selection of ultimate loss and LAE is certain to vary by both line of business and by accident period maturity. There is no prescribed combination of line of business, accident year maturity, and methodologies; consistency in results of the different methodologies and reasonableness of the result are the primary factors that drive the final selection of ultimate loss and LAE.

Methods Used to Estimate Loss and LAE Reserves

The methods we use for our short-tail business do not differ from the methods we use for our long-tail business. The Incurred and Paid Development Methods intrinsically recognize the unique development characteristics contained within the historical experience of each material short-tail and long-tail line of business. The Incurred and Paid Cape Cod Methods reflect similar historical development unique to each material short-tail and long-tail line of business.

We apply the following general methods in projecting loss and LAE reserves:

· Paid and Incurred Loss Development Method

· Paid and Incurred Bornhuetter-Ferguson Incurred Method

· Frequency / Severity Method

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of Ultimate Loss Estimation Methods

The estimated Ultimate Loss and Defense and Cost Containment Expense (“DCCE”) is based on an analysis by line of business, coverage and by accident quarter performed using data as of December 31, 2013. The analysis relies primarily on four actuarial methods: Incurred Lossand DCCE Development Method, Paid Loss and DCCE Development Method, Bornhuetter-Ferguson Incurred Method, and Bornhuetter-Ferguson Paid Method. Each method relies on company experience, and, where relevant, the analysis includes comparisons to industry experience. The following is a description of each of these methods:

Incurred Loss and DCCE Development Method – This reserving method is based on the assumption that the historical incurred loss and DCCE development pattern as reflected by the Company is appropriate for estimating the future loss & DCCE development. Incurred paid plus case amounts separated by accident quarter of occurrence and at quarterly evaluations are used in this analysis. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development factors were calculated to measure the relative development of an accident quarter from one maturity point to the next. Loss and DCCE development factors (“LDF”) are selected based on a review of the historical relationships between incurred loss & DCCE at successive valuations and based on industry patterns.  The LDFs are multiplied together to derive cumulative LDF’s that, when multiplied by actual incurred loss and DCCE, produce estimates of ultimate loss and DCCE.

Paid Loss & DCCE Development Method – This method is similar to the Incurred Loss & DCCE Development Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.

Bornhuetter-Ferguson Incurred Method – This reserving method combines estimated initial expected unreported loss & DCCE with the actual loss & DCCE to yield the ultimate loss & DCCE estimate. Expected unreported loss & DCCE are equal to expected total loss & DCCE times the expected unreported percentage of loss & DCCE for each policy year.  The incurred loss & DCCE emergence pattern used to determine the unreported percentages in our projections is based on the selected LDF’s from the Incurred Loss & DCCE Development Method described above. The estimate of initial expected total loss & DCCE is based on the historical loss ratio for more mature accident years. While this approach reduces the independence of the Bornhuetter-Ferguson Method from the loss & DCCE development methods for older policy years, it is used primarily for estimating ultimate loss & DCCE for more recent, less mature, policy years.

Bornhuetter-Ferguson Paid Method – This method is similar to the Bornhuetter-Ferguson Incurred Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.

We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and December 31, 2013). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the overall estimate of unpaid losses & DCCE liability for the company.

We also produce an estimate of unpaid Adjusting and Other Expense (“A&O”), as a reserve is required under Statutory Accounting Principles (“SAP”) even if this expense has been pre-paid or with an unconsolidated affiliate. Although we do not prepay for A&O, the majority of the A&O incurred is with an affiliated company and eliminated under the accounting principles for consolidation. The unpaid A&O is added to unpaid losses & DCCE, resulting in total unpaid losses and LAE.

The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or variations in a company’s mix of business from year to year. Also, since the percentage of losses paid for immature years is often low, development factors can be volatile. A small variation in the number of claims paid can have a leveraging effect that could lead to significant changes in estimated ultimate values. Accordingly, our reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. We compute our estimated ultimate liability using the most appropriate principles and procedures applicable to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of operations and financial condition.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Frequency / Severity Method – This method separately estimates the two components of ultimate losses (the frequency, or number of claims and the severity, or cost per claim) and then combines the resulting estimates in a multiplicative fashion to estimate ultimate losses. The approach is valuable because sometimes there is more inherent stability in the frequency and severity data when viewed separately than in the total losses.

We developed reported claim counts to ultimate levels using the development approach. The mechanics of this approach are the same as we described previously for paid and incurred losses. The validity of the results of this method depends on the stability of claim reporting and settlement rates. Then we developed accident year incurred severities (incurred losses divided by reported claim counts) to ultimate levels using the development approach.

We trended these severities to accident year 2013 levels. Trend rates were selected based on a review of historical severities. Selected severity was chosen based on judgment considering the developed severities and the trended severities, considering industry benchmarks for each segment. The loss & ALAE, claim count and severity triangles are evaluated as of 12 months, 24 months, 36 months etc. We selected loss development factors based on the loss development history, to the extent credible, and supplemented with industry data where appropriate.

A key assumption underlying the estimation of the reserve for loss and LAE is that past experience serves as the most reliable estimator of future events. This assumption may materially affect the estimates when the insurance market, the regulatory environment, the legal environment, the economic environment, the book of business, the claims handling department, or other factors (known or unknown) have varied over time during the experience period and / or will vary (expectedly or unexpectedly) in the future. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made. Therefore, the ultimate liability for unpaid losses and LAE will likely differ from the amount recorded at December 31, 2013.

The following describes the extent of our procedures for determining the reserve for loss and LAE on both an annual and interim reporting basis:

Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for unpaid losses and LAE. Our independent actuarial firm, examining the exact same data set, will independently select a point estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations. If our point estimate falls within the range determined from the point estimate of our actuary, then the Company’s policy has been that no adjustments by management would be required. In consideration thereof, the company does not have a policy for adjusting the liability for unpaid losses and LAE to an amount that is different than an amount set forth within the range determined by our independent actuary, although the reserve level ultimately determined by us may not be the mid-point of our independent actuary’s range. Further, there can be no assurances that our actual losses will be within our actuary’s range.  Our independent actuary’s report expressly states that the report is based on assumptions developed from its own analysis and based on information provided by management and that notwithstanding its analysis, there is a significant risk of material adverse deviation from its range.

Interim – During 2013 our interim approach was very similar to the annual process noted above.

A number of other actuarial assumptions are generally made in the review of reserves for each class of business.

For each class of business, expected ultimate loss ratios for each accident year are estimated based on loss reserve development patterns. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend and the effect of rate changes and other quantifiable factors on the loss ratio.

In practice there are factors that change over time; however, many (such as inflation) are intrinsically reflected in the historical development patterns, and others typically do not materially affect the estimate of the reserve for unpaid losses and LAE. Therefore, no specific adjustments have been incorporated for such contingencies projecting future development of losses and LAE. There are no key assumptions as of December 31, 2013 premised on future emergence inconsistent with historical loss reserve development patterns.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The table below distinguishes total loss reserves between IBNR, as discussed above, and case estimates for specific claims as established by routine claims management.

Reserves for unpaid loss and LAE net of reinsurance recoverable as of  December 31, 2013	Case Loss Reserves		Case LAE Reserves		Total Case Reserves		IBNR Reserves (Including LAE)		Reinsurance Recoverable on Unpaid Loss and Loss Expenses		Net Reserves
	(Dollars in Thousands)
Homeowners'	$	10,106	$	1,292	$	11,398	$	23,749	$	25	$	35,122
Commercial General Liability		2,404		1,099		3,503		13,366		-		16,869
Automobile		5,037		3,211		8,248		752		2,717		6,283
Total	$	17,547	$	5,602	$	23,149	$	37,867	$	2,742	$	58,274
Reserves for unpaid loss and LAE net of reinsurance recoverable as of  December 31, 2012	Case Loss Reserves		Case LAE Reserves		Total Case Reserves		IBNR Reserves (Including LAE)		Reinsurance Recoverable on Unpaid Loss and Loss Expenses		Net Reserves
	(Dollars in Thousands)
Homeowners'	$	6,295	$	1,430	$	7,725	$	8,855	$	141	$	16,439
Commercial General Liability		1,197		1,509		2,706		22,677		77		25,306
Automobile		3,456		133		3,589		4,259		3,285		4,563
Fire		5		7		12		83		-		95
Inland Marine		-		-		-		2		-		2
Total	$	10,953	$	3,079	$	14,032	$	35,876	$	3,503	$	46,405

Our reported results, financial position and liquidity would be affected by likely changes in key assumptions that determine our net loss reserves. The table below illustrates the change to equity that would occur as a result of a change in loss and LAE reserves, net of reinsurance.

			Years Ended December 31,
			2013					2012
Change in loss and LAE reserves, net of reinsurance			Adjusted loss and LAE reserves, net of reinsurance		Percentage change in equity (1)			Adjusted loss and LAE reserves, net of reinsurance		Percentage change in equity (1)
			(Dollars in Thousands)
	-10.0	%		52,447		3.6	%		41,764		4.5	%
	-7.5	%		53,903		2.7	%		42,925		3.4	%
	-5.0	%		55,360		1.8	%		44,085		2.3	%
	-2.5	%		56,817		0.9	%		45,245		1.1	%
Base				58,274		-			46,405		-
	2.5	%		59,731		-0.9	%		47,565		-1.1	%
	5.0	%		61,188		-1.8	%		48,725		-2.3	%
	7.5	%		62,644		-2.7	%		49,885		-3.4	%
	10.0	%		64,101		-3.6	%		51,045		-4.5	%

(1) Net of tax

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

For the year ended December 31, 2013, our actuarial firm determined range of statutory loss and LAE reserves on a net basis range from a low of $51.5 million to a high of $60.9 million, with a best estimate of $55.5 million. The Company’s net loss and LAE reserves are carried on a statutory basis at $54.0 million, and on a GAAP consolidated basis at $61.0 million which when netted with our $2.7 million reinsurance recoverable totals $58.3 million. The Company’s statutory point estimate for its reserves as of December 31, 2013 is 2.6% below our actuary’s best estimate, which reflects management’s current analysis of the status and expected timing of our anticipated claims, our analysis of expected weather patterns in the regions in which we sell policies, our re-focus of our business growth efforts to areas outside of South Florida, and other factors.

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

Please see Footnote 2 of the Notes to Consolidated Financial Statements for additional discussions regarding critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2(n), “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the Notes to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.

ANALYSIS OF FINANCIAL CONDITION

As of December 31, 2013 Compared with December 31, 2012

Total Investments

Total investments increased $90.6 million, or 69.7%, to $220.7 million as of December 31, 2013, compared with $130.1 million as of December 31, 2012. This increase reflected the $123.9 million increase in gross premiums written compared with 2012 and the $28.1 million in net proceeds from the Company’s November 2013 offering. The excess cash was invested primarily in the bond portfolio.

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

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

The debt and equity securities that are available for sale and carried at fair value represent 97% of total investments as of December 31, 2013, compared with 94% as of December 31, 2012.

We did not hold any trading investment securities during 2013.

As of December 31, 2013 and 2012, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of December 31, 2013, 83% of our debt portfolio was in diverse industries and 17% is in United States government bonds. As of December 31, 2013, approximately 91% of our equity holdings were in equities related to diverse industries and 9% were in mutual funds. As of December 31, 2012, 69% of our debt portfolio was in diverse industries and 31% is in United States government bonds. As of December 31, 2012, approximately 87% of our equity holdings were in equities related to diverse industries and 13% were in mutual funds.

- 44 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Below is a summary of net unrealized gains at December 31, 2013 and December 31, 2012 by category.

	Unrealized (Losses) and Gains
	December 31, 2013			December 31, 2012
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	(213	)	$	567
Obligations of states and political subdivisions		180			201
Corporate		467			3,760
International		(33	)		106
		401			4,634
Equity securities:
Common stocks		9,161			1,887
Total debt and equity securities	$	9,562		$	6,521

The net unrealized gain of $9.6 million is inclusive of $1.6 million of unrealized losses. The $1.6 million of unrealized losses is inclusive of $0.1 million unrealized losses from equity securities and $1.5 million unrealized losses from debt securities.

The $0.1 million of unrealized losses from equity securities is from common stocks and mutual funds held in diverse industries as of December 31, 2013.  The Company evaluated the near-term prospects in relation to the severity and duration of the impairment.  Based on this evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2013.

The $1.5 million of unrealized losses from debt securities is primarily related to US government obligations and obligations of states and political subdivisions.  The Company does not expect to settle at prices less than the amortized cost basis. The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2013 because we neither currently intend to sell these investments nor consider it likely that we will be required to sell these investments before recovery of the amortized cost basis.

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

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

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

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

· prospects for the issuer’s industry segment;

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

· historical volatility of the fair value of the security.

- 45 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

In reaching a conclusion that a security is either other-than-temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via the general media channels. During 2013, in connection with the process, we have not charged any investment losses to operations. During 2012, in connection with the process, we have charged to operations $44,000 of investment losses.

As of December 31, 2013 and December 31, 2012, respectively, all of our securities are in good standing and not impaired, except as noted above, as defined by FASB issued guidance.

The following table summarizes, by type, our investments as of December 31, 2013 and 2012.

	December 31, 2013					December 31, 2012
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	27,209		12.33	%	$	27,392		21.06	%
Obligations of states and political subdivisions		52,064		23.59	%		3,939		3.03	%
Corporate		91,941		41.66	%		67,313		51.74	%
International		3,698		1.68	%		3,111		2.39	%
		174,912		79.26	%		101,755		78.22	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,630		2.10	%		6,016		4.62	%
Corporate		2,475		1.12	%		1,203		0.92	%
International		109		0.05	%		140		0.11	%
		7,214		3.27	%		7,359		5.65	%
Total debt securities		182,126		82.53	%		109,114		83.87	%
Equity securities, at market:		38,584		17.47	%		20,982		16.13	%
Total investments	$	220,710		100.00	%	$	130,096		100.00	%

Debt securities are carried on the balance sheet at market. At December 31, 2013 and 2012, debt securities had the following quality ratings by S&P and for securities not assigned a rating by S&P, Moody’s or Fitch ratings were used.

	December 31, 2013					December 31, 2012
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
AAA	$	24,904		13.67	%	$	10,967		10.05	%
AA		67,374		36.99	%		38,733		35.50	%
A		46,338		25.44	%		31,774		29.12	%
BBB		42,979		23.60	%		27,640		25.33	%
Not rated		531		0.30	%		-		0.00	%
	$	182,126		100.00	%	$	109,114		100.00	%

- 46 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table summarizes, by maturity, the debt securities as of December 31, 2013 and 2012.

	December 31, 2013					December 31, 2012
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Matures In:
One year or less	$	5,180		2.84	%	$	2,938		2.70	%
One year to five years		113,561		62.35	%		51,439		47.14	%
Five years to 10 years		62,511		34.32	%		37,111		34.01	%
More than 10 years		874		0.49	%		17,626		16.15	%
Total debt securities	$	182,126		100.00	%	$	109,114		100.00	%

As December 31, 2013, the duration of the bond portfolio was approximately 3.9 years.

As of December 31, 2013 and December 31, 2012, we have classified $7.2 million and $7.4 million, respectively, of our bond portfolio as held-to-maturity. We classify bonds as held-to-maturity to support securitization of credit requirements.

During 2013 we reclassified $150,000 of our bond portfolio to available-for-sale from held-to-maturity.  During 2012, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

Two reinsurers require FNIC to maintain securities with a fair market value of $4.6 million. As of December 31, 2013, FNIC maintained fully funded trust agreements that totaled $4.9 million in favor of the reinsurers. As of December 31, 2012, FNIC maintained fully funded trust agreements that totaled $4.8 million in favor of the reinsurers.

During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the 100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was terminated in April 2007. During 2010, the letter of credit in favor of Republic was replaced by a fully funded trust agreement. As of December 31, 2013 and 2012 respectively, the amount held in trust was $1.0 million.

Cash and Short-Term Investments

Cash and short-term investments, which include cash, certificates of deposits, and money market accounts, increased $20.3 million, or 96.0%, to $41.4 million as of December 31, 2013, compared with $21.1 million as of December 31, 2012. The increase in cash and short-term investments is for a planned reinsurance payment.  We evaluate our asset class allocation on an ongoing basis continually adjust based on economic and business risk.

 Prepaid Reinsurance Premiums

Prepaid reinsurance premiums increased $0.6 million, or 7.8%, to $7.6 million as of December 31, 2013, compared with $7.0 million as of December 31, 2012 due to the amortization of our payment patterns. We believe concentrations of credit risk associated with our prepaid reinsurance premiums are not significant.

Premiums Receivable, Net of Allowance for Credit Losses

Premiums receivable, net of allowance for credit losses, increased $14.4 million, or 179.4%, to $22.4 million as of December 31, 2013, compared with $8.0 million as of December 31, 2012.

Our homeowners’ insurance premiums receivable increased $13.4 million, or 226.4%, to $19.4 million as of December 31, 2013, compared with $6.0 million as of December 31, 2012, resulting from the increase to gross premiums written during 2013 compared with 2012.

Our commercial general liability insurance premiums receivable decreased $0.2 million, or 33.5%, to $0.3 million as of December 31, 2013, compared with $0.5 million as of December 31, 2012.

Premiums receivable in connection with our automobile line of business increased $1.1 million, or 69.5%, to $2.8 million as of December 31, 2013, compared with $1.7 million as of December 31, 2012.

- 47 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our allowance for credit losses remained unchanged at $0.1 million as of December 31, 2013, compared with $0.1 million as of December 31, 2012.

	Years Ended December 31,
	2013			2012
	(Dollars in Thousands)
Allowance for credit losses at beginning of year	$	69		$	73
Additions charged to bad debt expense		250			161
Write-downs charged against the allowance		(176	)		(165	)
Allowance for credit losses at end of year	$	143		$	69

Reinsurance Recoverable, Net

Reinsurance recoverable, net, decreased $0.8 million, or 21.7%, to $2.7 million as of December 31, 2013, compared with $3.5 million as of December 31, 2012. The change is due to the payment patterns by our reinsurers, as influenced by the diminishing catastrophe related claims. All amounts are current and deemed collectable. We believe concentrations of credit risk associated with our reinsurance recoverables, net, are not significant.

DPAC

DPAC increased $8.2 million, or 97.0%, to $16.7 million as of December 31, 2013, compared with $8.5 million as of December 31, 2012. The change is due to the deferral of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned, in conjunction with the increase to gross premiums written during 2013 compared with 2012. An analysis of deferred acquisition costs follows.

	Years Ended December 31,
	2013			2012
	(Dollars in Thousands)
Balance, beginning of year	$	8,479		$	7,718
Acquisition costs deferred		29,676			14,016
Amortization expense during year		(21,447	)		(13,255	)
Balance, end of year	$	16,708		$	8,479

- 48 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Deferred Income Taxes, Net

Deferred income taxes, net, decreased $3.3 million, or 76.8%, to $1.0 million as of December 31, 2013, compared with $4.3 million as of December 31, 2012. Deferred income taxes, net, is comprised of approximately $11.0 million and $10.0 million of deferred tax assets, net of approximately $10.0 million and $5.7 million of deferred tax liabilities as of December 31, 2013 and December 31, 2012. The change in the net deferred tax asset is primarily due to the increase in the deferred tax liability related to deferred acquisition costs, net.

	Years Ended December 31,
	2013			2012
Deferred tax assets:
Unpaid losses and loss adjustment expenses	$	1,157		$	1,725
Unearned premiums		6,864			2,629
Discount on advance premiums		243			167
Allowance for credit losses		59			31
Allowance for impairments		21			91
FIGA Guaranty Assessment		-			306
Depreciation & amortization		149			366
Reserve for claims settlements		1,844			809
NOL Carryforward		73			3,259
AMT credit		-			253
Flow-through income or loss		4			-
Stock option expense per ASC 718		550			432
Total deferred tax assets		10,964			10,068
Deferred tax liabilities:
Deferred acquisition costs, net		(6,287	)		(3,191	)
Dividends Collected vs. Earned		(6	)		(18	)
Regulatory assessments		(67	)		(67	)
Unrealized Gain on investment securities		(3,598	)		(2,454	)
Total deferred tax liabilities		(9,958	)		(5,730	)
Net deferred tax asset	$	1,006		$	4,338

Property, Plant and Equipment, net

Property, plant and equipment, net increased $0.3 million, or 64.8%, to $0.9 million as of December 31, 2013, compared with $0.6 million as of December 31, 2012. The change is due primarily to investments in information technology.

Other Assets

Other assets increased $0.5 million, or 20.1%, to $3.2 million as of December 31, 2013, compared with $2.7 million as of December 31, 2012. Major components of other assets are shown in the following table; the accrued interest income receivable is primarily investment related.

	December 31, 2013		December 31, 2012
	(Dollars in Thousands)
Accrued interest income receivable	$	1,684	$	966
Deposits		327		249
Prepaid expenses		812		478
Receivable for investments sold		-		598
Other		371		367
Total	$	3,194	$	2,658

- 49 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unpaid Losses and LAE

Unpaid losses and LAE increased $11.1 million, or 22.3%, to $61.0 million as of December 31, 2013, compared with $49.9 million as of December 31, 2012, in conjunction with the increase to net premiums earned during 2013 compared with 2012. The composition of unpaid losses and LAE by product line is as follows.

	December 31, 2013						December 31, 2012
	Case		Bulk		Total		Case		Bulk		Total
	(Dollars in Thousands)						(Dollars in Thousands)
Homeowners'	$	11,399	$	19,623	$	31,022	$	8,276	$	6,637	$	14,913
Commercial General Liability		3,503		13,231		16,734		2,956		22,310		25,266
Automobile		8,259		5,001		13,260		3,643		6,086		9,729
Total	$	23,161	$	37,855	$	61,016	$	14,875	$	35,033	$	49,908

Please see “Liability for Unpaid Losses and LAE” under “Item 1. Business” for a discussion of the factors that affect unpaid losses and LAE.

Unearned Premium

Unearned premiums increased $69.3 million, or 117.5%, to $128.3 million as of December 31, 2013, compared with $59.0 million as of December 31, 2012. The change was due to a $68.0 million increase in unearned homeowners’ insurance premiums, a $0.4 million increase in unearned flood insurance premiums, a $0.5 million increase in unearned commercial general liability premiums and a $0.4 million increase in unearned automobile insurance premiums. Generally, as is in this case, an increase in unearned premium directly relates to an increase in written premium on a rolling twelve-month basis.

Premium Deposits and Customer Credit Balances

Premium deposits and customer credit balances increased $1.3 million, or 56.0%, to $3.8 million as of December 31, 2013, compared with $2.5 million as of December 31, 2012. Premium deposits are monies received on policies not yet in-force as of December 31, 2013.

Income Taxes Payable

Income taxes payable increased to $2.4 million as of December 31, 2013, compare with nothing as of December 31, 2012, in conjunction with the increase to income before provision for income tax expense, net of estimated tax payments made during 2013.

Bank Overdraft

Bank overdraft increased $0.2 million, or 3.6%, to $6.2 million as of December 31, 2013, compared with $6.0 million as of December 31, 2012. The bank overdraft relates primarily to losses and LAE disbursements paid but not presented for payment by the policyholder or vendor. The change relates to the timing of presentation of claims checks to the issuing bank.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses increased $3.9 million, or 146.7%, to $6.5 million as of December 31, 2013, compared with $2.6 million as of December 31, 2012. The $3.9 million change includes increases of $1.6 million for commissions, $0.8 million for the remittance of recouped assessments, $0.6 million for payroll, $0.6 million for premium taxes and $0.3 million for dividends.

- 50 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Year Ended December 31, 2013 Compared with Year Ended December 31, 2012

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”.

Gross Premiums Written

Gross premiums written increased $123.9 million, or 103.7%, to $243.4 million for 2013, compared with $119.5 million for 2012. The following table denotes gross premiums written by major product line. The increase in gross premiums written during 2013 is primarily due to the increase in the sale of homeowners’ policies. During 2013, our improved underwriting, risk management and product distribution enabled us to write more policies than in prior years.

	Years Ended December 31,
	2013					2012
			(Dollars in Thousands)
	Amount		Percentage			Amount		Percentage
Homeowners'	$	218,349		89.72	%	$	101,832		85.24	%
Commercial General Liability		10,362		4.26	%		9,338		7.82	%
Federal Flood		6,213		2.55	%		5,293		4.43	%
Automobile		8,449		3.47	%		2,996		2.51	%
Gross written premiums	$	243,373		100.00	%	$	119,459		100.00	%

The increase in the sale of homeowners’ policies by $116.5 million, or 114.4%, to $218.3 million in 2013, compared with $101.8 million in 2012, is gross of reinsurance costs and net of Florida’s mandated homeowners’ wind mitigation discounts. We offer premium discounts for wind mitigation efforts by policyholders, as required by Florida law. As of December 31, 2013, 80.3% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $216.8 million (a 50.1% reduction of in-force premium), while 72.7% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $61.1 million, (a 37.4 % reduction of in-force premium), as of December 31, 2012.

During 2013, $29.7 million or 13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents 25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents began writing for FNIC in March 2013.

During 2013 and 2012, the change to the cumulative wind mitigation credits afforded our policyholders totaled $155.7 million and $29.6 million, respectively.

These premium discounts have had a significant effect on both written and earned premium. Wind mitigation credits are 50.1% of the pre-credit premium, or $216.8 million, as of December 31, 2013, as compared with 37.4% of the pre-credit premium, or $61.1 million, as of December 31, 2012.

Our in-force homeowners’ policies increased by approximately 55,300, or approximately 91%, to approximately 116,400 as of December 31, 2013, as compared with approximately 61,100 as of December 31, 2012.

Premium rates charged to our homeowner insurance policyholders are continually evaluated to assure that they meet the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive nor inadequate). Premium rates are regulated and approved by the Florida OIR. In 2013 our voluntary program rate indications did not indicate the need for adjustment. In 2012 we were approved for a 4.8% and 0.9% rate increase on our voluntary property book of homeowners’ business. In 2011 our voluntary rate increase of 20% was approved.

Similarly, for the policies we assumed from Citizens Property Insurance Corporation (“Citizens”) in 2009, we received approval for a 14.8% increase in 2013 and a 14.1% rate increase in 2012. In 2011 we received approval for a 13.9% increase. Our voluntary program was 97.7%, 90.0%, and 79.2% of the total homeowner program, for the years ending December 31, 2013, 2012, and 2011, respectively.

- 51 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our earnings can also be impacted by our ratings, such as the rating of FNIC by Demotech, Inc. (“Demotech”). FNIC’s rating as of December 31, 2013 was "A" ("Exceptional"). For more information regarding our rating and the impact of a change or withdrawal of our rating, please see “Business-Regulation-Industry Rating Services.”

The Company’s sale of commercial general liability policies increased by $1.1 million to $10.4 million for 2013, compared with $9.3 million for 2012. The primary factor for this increase has been renewal retention combined with new business growth.

The following table sets forth the amounts and percentages of our gross premiums written in connection with our commercial general liability program by state.

	Years Ended December 31,
	2013					2012
	Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
State
Florida	$	9,572		92.37	%	$	8,639		92.52	%
Louisiana		150		1.45	%		217		2.32	%
Texas		547		5.28	%		426		4.56	%
Other		93		0.90	%		56		0.60	%
Total	$	10,362		100.00	%	$	9,338		100.00	%

We are required to report write-your-own flood premiums on a direct and 100% ceded basis.

The Company’s sale of auto insurance policies increased by $5.4 million to $8.4 million for 2013, compared with $3.0 million for 2012. The primary factor for this increase has been renewal retention combined with new Texas business growth for which 2013 was the first full year of operations.

Gross Premiums Ceded

Gross premiums ceded increased to $82.7 million for 2013, compared with $51.1 million for 2012. Gross premiums ceded relating to our homeowners’, commercial general liability, write-your-own flood and automobile programs totaled $69.7 million, $0.5 million, $6.2 million and $6.3 million for 2013. Gross premiums ceded relating to our homeowners’, commercial general liability, write-your-own flood and automobile programs totaled $43.3 million, $0.5 million, $5.3 million and $2.0million for 2012.

The increased homeowners’ gross premiums ceded is due to an additional 75.7% of reinsurance coverage purchased for the 2013-2014 season as compared with the 2012 - 2013 season.

Increase in Prepaid Reinsurance Premiums

The increase in prepaid reinsurance premiums was $13.1 million in 2013, compared with $2.1 million in 2012. The benefit to written premium is associated with the timing of our reinsurance payments measured against the term of the underlying reinsurance policies.

Increase in Unearned Premiums

The increase in unearned premiums was $69.3 million for 2013, compared with $11.1 million in 2012. The 2013 charge to written premium was due to a $68.0 million increase in unearned homeowners’ insurance premiums, a $0.4 million increase in unearned flood premiums, a $0.5 million increase in unearned commercial general liability premiums and a $0.4 million increase in unearned automobile insurance premiums during 2013. These changes are a result of differences in written premium volume during this period as compared with the same period last year. See “Gross Premiums Written” above.

- 52 -

Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Premiums Earned

Net premiums earned increased $45.0 million, or 75.8%, to $104.4 million for 2013, compared with $59.4 million for 2012. The following table denotes net premiums earned by product line.

	Years Ended December 31,
	2013					2012
	Amount		Percentage			Amount		Percentage
			(Dollars in Thousands)
Homeowners'	$	92,793		88.89	%	$	49,209		82.90	%
Commercial General Liability		9,432		9.04	%		9,196		15.49	%
Automobile		2,156		2.07	%		954		1.61	%
Net premiums earned	$	104,381		100.00	%	$	59,359		100.00	%

The $43.6 million increase in homeowners’ net premiums earned is due to a $116.5 million increase in gross written premium as discussed, a $26.4 million increase in gross premiums ceded and a $46.5 million increase in the net change to prepaid reinsurance premiums and unearned premium.

The $0.2 million increase in commercial general liability net premiums earned is a result of a $1.0 million increase in gross written premium, a less than $0.1 million decrease in gross premiums ceded and a $0.8 million increase in the net change to unearned premium.

The $1.2 million increase in automobile net premiums earned is a result of a $5.5 million increase in gross written premium as discussed, a $4.3 million increase in gross premiums ceded and a less than $0.1 million decrease in the net change to prepaid reinsurance premiums and unearned premium.

Commission Income

Commission income increased $1.2 million, or 92.2%, to $2.6 million for 2013, compared with $1.4 million for 2012. The primary sources of our commission income are our managing general agent services, write-your-own flood premiums and our independent insurance agency, Insure-Link, Inc. (“Insure-Link”).

Direct Written Policy Fees

Direct written policy fees increased $4.2 million, or 208.8%, to $6.2 million for 2013, compared with $2.0 million for 2012. The change is attributed to the increase in gross premiums written during this same period.

Net Investment Income

Net investment income decreased $0.5 million, or 12.7%, to $3.3 million for 2013, compared with $3.8 million for 2012.

Our investment yield, net and gross of investment expenses, excluding equities and including cash, was 1.8% and 2.0%, respectively, for 2013. Our investment yield, net and gross of investment expenses, excluding equities and including cash, was 2.5% and 2.8%, respectively, for 2012.

Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, was 2.1% and 2.4%, respectively, for 2013. The primary reason for our lower investment yield in 2013pertained to selling higher yielding and longer duration bonds, purchasing shorter duration and lower yielding bonds to protect our bond portfolio against principal erosion. Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, was 2.6% and 2.9%, respectively, for 2012.

See also “Analysis of Financial Condition As of December 31, 2013 Compared with December 31, 2012 – Investments” for a further discussion on our investment portfolio.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

\

Net Realized Investment Gains

Net realized investment gains were $2.9 million for 2013, compared with $1.1 million for 2012. Specifically, net realized gains for equity securities were $2.2 million for 2013, compared withnet realized losses of $0.3 million for 2012. For debt securities, net realized gains were $0.7 million for 2013, compared with$1.4 million for 2012.Our managers are authorized to sell securities at their discretion. During 2013, our equity managers took advantage of prevailing market opportunities and sold equities to lock in gains.

FASB has issued guidance regarding when an investment is considered impaired, whether that impairment is other-than temporary, and the measurement of an impairment loss. Management periodically reviews the individual investments that comprise our portfolio in order to determine whether a decline in fair value below our cost either is other-than temporarily or permanently impaired. During 2013, pursuant to guidelines prescribed in FASB issued guidance, we have not charged to operations any investment losses. During 2012, pursuant to guidelines prescribed in FASB issued guidance, we charged to operations, realized investment losses of $44,000. In reaching a conclusion that a security is either other than temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as S&P and Moody’s, as well as information released via the general media channels.

The table below depicts the net realized investment gains by investment category during 2013 and 2012.

	Years Ended December 31,
	2013			2012
	(Dollars in Thousands)
Realized gains:
Debt securities	$	1,690		$	1,783
Equity securities		2,858			1,403
Total realized gains		4,548			3,186
Realized losses:
Debt securities		(1,001	)		(391	)
Equity securities		(666	)		(1,723	)
Total realized losses		(1,667	)		(2,114	)
Net realized gains on investments	$	2,881		$	1,072

Other Income

Other income increased $0.9 million, or 177.3%, to $1.4 million for 2013, compared with $0.5 million for 2012. The increase is primarily due to the recoupment of assessments previously expensed in connection with the Florida Insurance Guaranty Association (“FIGA”).

Losses and LAE

Losses and LAE, our most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. We revise our estimates based on the results of analysis of estimated future payments to be made. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.

Losses and LAE increased by $26.2 million, or 86.7%, to $56.4 million for 2013, compared with $30.2 million for 2012. The overall change includes a $26.7 million increase in our homeowners’ program, a $2.5 million decrease in our commercial general liability program and a $2.0 million increase in connection with our automobile program.

The increase to losses and LAE for 2013, compared with 2012, reflects the additional reserves we added in response to the substantial increase in the number of policies we wrote during 2013. The increase to losses and LAE was more than offset by the increase to net premiums earned during this same period.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The composition of unpaid losses and LAE by product line is as follows.

	December 31, 2013						December 31, 2012
	Case		Bulk		Total		Case		Bulk		Total
	(Dollars in Thousands)						(Dollars in Thousands)
Homeowners'	$	11,399	$	19,623	$	31,022	$	8,276	$	6,637	$	14,913
Commercial General Liability		3,503		13,231		16,734		2,956		22,310		25,266
Automobile		8,259		5,001		13,260		3,643		6,086		9,729
Total	$	23,161	$	37,855	$	61,016	$	14,875	$	35,033	$	49,908

Please see “Liability for Unpaid Losses and LAE” under “Item 1 Business” for a further discussion of the factors that affect unpaid losses and LAE.

Management revises its estimates based on the results of its analysis. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. Because of our process, reserves were increased by approximately $11.1 million during 2013. This overall change includes a $16.1 million increase in reserves for our homeowners’ program, a $3.5 million increase in reserves for our automobile program and an $8.5 million decrease in reserves for our commercial general liability program.

Our loss ratio is computed as losses and LAE divided by net premiums earned. A lower loss ratio generally results in higher operating income. Our loss ratio for 2013 was 54.0% compared with 50.9% for the same period in 2012. The increase to our loss ratio is due to the $26.2 million increase in losses and LAE measured against the $45.0 million increase in net premium earned during 2013 as compared with the same period in 2012.

The table below reflects the loss ratios by product line.

	Years Ended December 31,
	2013			2012
Homeowners'		56.27	%		51.86	%
Commercial General Liability		5.49	%		32.86	%
Automobile		170.79	%		175.08	%
All lines		54.04	%		50.89	%

Operating and Underwriting Expenses

Operating and underwriting expenses increased $4.5 million, or 44.8%, to $14.5 million for 2013, compared with $10.0 million for 2012. The change is primarily due to a $2.5 million increase in premium tax expense, a $0.5 million increase in postage, a $0.9 million increase in surveys and underwriting reports, a $0.2 million increase in rent, a $0.2 million increase in computer service fees and a $0.2 million increase in other general expenses.

Salaries and Wages

Salaries and wages increased $1.8 million, or 20.7%, to $10.2 million for 2013, compared with $8.4 million for 2012 and is primarily due to an increased number of employees. The charge to operations for stock-based compensation, in accordance with FASB guidance, was approximately $0.4 million during 2013, compared with approximately $0.3 million for 2012.

Amortization of Deferred Policy Acquisition Costs

Amortization of deferred policy acquisition costs increased $8.1 million, or 61.8%, to $21.4 million for 2013, compared with $13.3 million for 2012, which corresponds to the increase in net premiums earned during this same period.

 Amortization of deferred policy acquisition costs, consists of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Provision for Income Tax Expense

The provision for income tax expense was $6.5 million for 2013, compared with $2.4 million for 2012. The effective rate for income taxes was 33.8% for 2013, compared with 36.1% for 2012.

Net Income

Net income increased $8.4 million, or 195.1%, to $12.7 million for 2013, compared with $4.3 million for 2012.

Results of Operations

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”.

Gross Premiums Written

Gross premiums written increased $21.2 million, or 21.6%, to $119.5million for 2012, compared with $98.3 million for 2011. The following table denotes gross premiums written by major product line. This increase reflected primarily an increase in the sale of homeowners’ policies.

	Years Ended December 31,
	2012					2011
			(Dollars in Thousands)
	Amount		Percentage			Amount		Percentage
Homeowners'	$	101,832		85.24	%	$	80,402		81.82	%
Commercial General Liability		9,338		7.82	%		10,125		10.30	%
Federal Flood		5,293		4.43	%		4,468		4.55	%
Automobile		2,996		2.51	%		3,274		3.33	%
Gross written premiums	$	119,459		100.00	%	$	98,269		100.00	%

The increase in the sale of homeowners’ policies by $21.4 million, or 26.7%, to $101.8 million in 2012, compared with $80.4 million in 2011, is gross of reinsurance costs and net of Florida’s mandated homeowners’ wind mitigation discounts.  We offer premium discounts for wind mitigation efforts by policyholders, as required by Florida law. As of December 31, 2012, 72.7% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $61.1 million(a 37.4% reduction of in-force premium), while63.5% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $31.5 million, (a 28.6 % reduction of in-force premium), as of December 31, 2011.

During 2012 and 2011, the change to the cumulative wind mitigation credits afforded our policyholders totaled$29.6 million and $4.2 million, respectively.

These premium discounts have had a significant effect on both written and earned premium.Wind mitigation credits are 37.4% of the pre-credit premium, or $61.1 million, as of December 31, 2012, as compared with 28.6% of the pre-credit premium, or $31.5 million, as of December 31, 2011.

Our in-force homeowners’ policies increased by approximately 17,300, or approximately 40%, to approximately 61,100as of December 31, 2012, as compared with approximately43,800 as of December 31, 2011.

We received approval from the Florida OIR in 2010 for a premium rate increase for our voluntary homeowners’ program within the State of Florida. That premium rate increase averaged approximately 20.2% and was implemented for policies with effective dates as soon as permitted following approval. In addition, in 2010 we received approval from the Florida OIR for a premium rate increase of approximately 15% for homeowners policies assumed from Citizens in Florida beginning July 2010.  In February 2012, we received approval from the Florida OIR of a 14.1% rate increase. That rate increase, together with our 2011 rate increase for our voluntary property book of homeowners’ business averaged 20.2% statewide, and our assumed property book of homeowners’ business, averaged 13.9% statewide.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our earnings can also be impacted by our ratings, such as the rating of FNIC by Demotech. FNIC’s rating as of December 31, 2012 was "A" ("Exceptional").For more information regarding our rating and the impact of a change or withdrawal of our rating, please see “Business-Regulation-Industry Rating Services.”

The Company’s sale of commercial general liability policies decreased by $0.8 million to $9.3 million for 2012, compared with $10.1 million for 2011.The primary factor for this decrease has been improvements to our underwriting standards and our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas.

The following table sets forth the amounts and percentages of our gross premiums written in connection with our commercial general liability program by state.

	Years Ended December 31,
	2012					2011
	Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
State
Florida	$	8,639		92.52	%	$	8,606		84.99	%
Louisiana		217		2.32	%		916		9.05	%
Texas		426		4.56	%		534		5.28	%
Other		56		0.60	%		69		0.68	%
Total	$	9,338		100.00	%	$	10,125		100.00	%

We are required to report write-your-own flood premiums on a direct and 100% ceded basis.

The Company’s sale of auto insurance policies decreased to $3.0 million for 2012, compared with $3.3 million for 2011. The Company’s sale of auto insurance included new and renewal policies in 2012 and only renewal policies in 2011.

Gross Premiums Ceded

Gross premiums ceded increased to $51.1 million for 2012,compared with $46.3 million for 2011.Gross premiums ceded relating to our homeowners’, commercial general liability, write-your-own flood and automobile programs totaled $43.3 million, $0.5 million, $5.3 million and $2.0million for 2012.Gross premiums ceded relating to our homeowners’, write-your-own flood and automobile programs totaled $40.3 million, $4.5 million and $1.5 million for 2011. The increase to gross premiums ceded relating to our homeowners’ program is due to higher gross premium written, net of a reduced marginal cost of reinsurance purchased from the Florida Hurricane Catastrophe Fund (“FHCF”). We are required to report write-your-own flood premiums on a direct and 100% ceded basis.

Increase (Decrease) in Prepaid Reinsurance Premiums

The increase in prepaid reinsurance premiums was $2.1 million in 2012,compared with a $2.7 million decrease in 2011.The benefit to written premium is associated with the timing of our reinsurance payments measured against the term of the underlying reinsurance policies.

 Increase in Unearned Premiums

The increase in unearned premiums was $11.1 million for 2012, compared with $0.8 million for 2011.The 2012 charge to written premium was due to a$10.9 million increase in unearned homeowners’ insurance premiums, a $0.5 million increase in unearned flood premiums, a $0.1 million decrease in unearned automobile premiums and a $0.2 million decrease in unearned commercial general liability premiums during 2012.These changes are a result of differences in written premium volume during this period as compared with the same period last year. See “Gross Premiums Written” above.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Premiums Earned

Net premiums earned increased $10.9 million, or 22.3%, to $59.4 million for 2012, compared with $48.5 million for 2011. The following table denotes net premiums earned by product line.

	Years Ended December 31,
	2012					2011
	Amount		Percentage			Amount		Percentage
			(Dollars in Thousands)
Homeowners'	$	49,209		82.90	%	$	35,785		73.75	%
Commercial General Liability		9,196		15.49	%		10,632		21.91	%
Automobile		954		1.61	%		2,106		4.34	%
Net premiums earned	$	59,359		100.00	%	$	48,523		100.00	%

The $13.4 million increase in homeowners’ net premiums earned is due to a$21.4 million increase in gross written premium as discussed, a $3.1 million increase in gross premiums ceded and a $4.9 million increase in the net change to prepaid reinsurance premiums and unearned premium.

The $1.4 million decrease in commercial general liability net premiums earned is a result of a$0.8 million decrease in gross written premium, reflecting the impact our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas. The change is also a result of a $0.4 million increase in gross premiums ceded and a $0.2 million decrease in the net change to unearned premium.

The $1.1 million decrease in automobile net premiums earned is a result of a $0.3 million decrease in gross written premium as discussed, a $0.4 million increase in gross premiums ceded and a $0.4 million decrease in the net change to prepaid reinsurance premiums and unearned premium.

Commission Income

Commission incomeincreased $0.4 million, or 38.5%, to $1.4million for 2012, compared with $1.0 million for 2011.The primary sources of our commission income are our managing general agent services, write-your-own flood premiums and our independent insurance agency, Insure-Link.

Direct Written Policy Fees

Direct written policy fees increased $0.4 million, or 26.8%, to $2.0million for 2012, compared with $1.6 million for 2011. The change is attributed to the increase in gross premiums written during this same period.

Net Investment Income

Net investment income decreased $0.3 million, or 6.4%, to $3.8 million for 2012, compared with $4.1 million for 2011.  Our investment yield, net and gross of investment expenses, excluding equities and including cash, was 2.5% and 2.8%, respectively, for 2012. Our investment yield, net and gross of investment expenses, excluding equities and including cash, was 2.9% and 3.1%, respectively, for 2011.

Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, was2.6% and 2.9%,respectively, for 2012.The primary reason for our lower investment yield in 2012 wasthe result of the Federal Reserve's activity in the bond market, which pushed up bond prices and lowered yields. Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, was 3.1% and 3.4%, respectively, for 2011.

See also “Analysis of Financial Condition As of December 31, 2012 Compared with December 31, 2011 – Investments” for a further discussion on our investment portfolio.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Realized InvestmentGains

Net realized investment gains were $1.1 million for 2012,compared with $2.7 million for 2011.Specifically, net realizedlosses for equity securities were $0.3million for 2012 and 2011.For debt securities, net realized gains were $1.4 million for 2012, compared with$3.0 million for 2011.During 2011, the Company, because of the actions taken by the Federal Reserve to maintain a low interest rate environment, realized significant gains in the fixed income portfolio.

FASB has issued guidance regarding when an investment is considered impaired, whether that impairment is other-than temporary, and the measurement of an impairment loss. Management periodically reviews the individual investments that comprise our portfolio in order to determine whether a decline in fair value below our cost either is other-than temporarily or permanently impaired.During 2012, pursuant to guidelines prescribed in FASB issued guidance, we have charged to operations, realized investment losses of $44,000. The charges relate to common stock held in diverse industries; during 2011, pursuant to guidelines prescribed in FASB issued guidance, we charged to operations, realized investment losses of $0.8 million.In reaching a conclusion that a security is either other than temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as S&P and Moody’s, as well as information released via the general media channels.

The table below depicts the net realized investment gains by investment category during 2012 and 2011.

	Years Ended December 31,
	2012			2011
	(Dollars in Thousands)
Realized gains:
Debt securities	$	1,783		$	3,569
Equity securities		1,403			1,240
Total realized gains		3,186			4,809
Realized losses:
Debt securities		(391	)		(595	)
Equity securities		(1,723	)		(1,489	)
Total realized losses		(2,114	)		(2,084	)
Net realized gains on investments	$	1,072		$	2,725

Other Income

Other income decreased $1.1 million, or 68.3%, to $0.5 million for 2012, compared with $1.6 million for 2011. Sources of other income for 2012 include the reconciliation of outstanding checks in connection with our accounting for unclaimed property and the recovery of a receivable written off in a prior year. Sources of other income for  2011 include the reconciliation of outstanding checks in connection with our accounting for unclaimed property and the final recognition of our gain on the sale of our Lauderdale Lakes property.

Losses and LAE

Losses and LAE, our most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. We revise our estimates based on the results of analysis of estimated future payments to be made. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.

Losses and LAE decreased by $0.7 million, or 2.2%, to $30.2 million for 2012, compared with $30.9 million for 2011. The overall change includes a $4.8 million increase in our homeowners’ program, a $3.4 million decrease in our commercial general liability program and a $2.1 million decrease in connection with our automobile program.

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The composition of unpaid losses and LAE by product line is as follows.

	December 31, 2012						December 31, 2011
	Case		Bulk		Total		Case		Bulk		Total
	(Dollars in Thousands)						(Dollars in Thousands)
Homeowners'	$	8,276	$	6,637	$	14,913	$	8,795	$	10,652	$	19,447
Commercial General Liability		2,956		22,310		25,266		4,225		27,717		31,942
Automobile		3,643		6,086		9,729		3,533		5,061		8,594
Total	$	14,875	$	35,033	$	49,908	$	16,553	$	43,430	$	59,983

Please see “Liability for Unpaid Losses and LAE” under “Item 1 Business” for a discussion of the factors that affect unpaid losses and LAE.

Management revises its estimates based on the results of its analysis. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. Because of our process, reserves were decreased by approximately $10.1 million during 2012. This overall change includes a $4.5 million decrease in reserves for our homeowners’ program, a $6.7 million decrease in reserves for our commercial general liability program and a $1.1 million increase in reserves for our automobile program. The decreases are due to favorable experience based in part on enhanced underwriting and claim processing techniques.

Our loss ratio is computed as losses and LAE divided by net premiums earned. A lower loss ratio generally results in higher operating income. Our loss ratio for 2012 was 50.9% compared with 63.7% for the same period in 2011. The favorable decrease to our loss ratio is due to the $0.7 million decrease in losses and LAE measured against the $10.9 million increase in net premium earned during 2012 as compared with the same period in 2011.

The table below reflects the loss ratios by product line.

	Years Ended December 31,
	2012			2011
Homeowners'		51.86	%		57.79	%
Commercial General Liability		32.86	%		60.11	%
Automobile		175.08	%		181.67	%
All lines		50.89	%		63.67	%

Operating and Underwriting Expenses

Operating and underwriting expenses increased $0.1 million, or 0.8%, to $10.0million for 2012, compared with $9.9 million for 2011.

Salaries and Wages

Salaries and wages increased $0.4 million, or 5.4%, to $8.4 million for 2012, compared with $8.0 million for 2011. The charge to operations for stock-based compensation, in accordance with FASB guidance, was approximately $0.3 million during 2012, compared with approximately $0.2 million for 2011.

Amortization of Deferred Policy Acquisition Costs

Amortization of deferred policy acquisition costs,increased $1.0 million, or 7.4%, to $13.3 million for 2012, compared with $12.3 million for 2011. Policy acquisition costs - amortization, consists of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned.

Provision for Income Tax Expense (Benefit)

The provision for income tax expense was $2.4 million for 2012, compared with a benefit of $0.6 million for 2011. The effective rate for income taxes was 36.1% for 2012, compared with 57.0% for  2011. The 2011 57.0% effective rate reflects the true-up of the 2010 tax return permanent differences.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Income (Loss)

As a result of the foregoing, the Company’s net income for 2012 was $4.3 million, compared with net loss of  $0.4 million for 2011.

CONTRACTUAL OBLIGATIONS

A summary of long-term contractual obligations as of December 31, 2013 follows. The amounts represent estimates of gross undiscounted amounts payable over time.

	(Dollars in Thousands)
Contractual Obligations	Total		2014		2015		2016		2017		Thereafter
Unpaid Losses and LAE	$	61,016	$	36,219	$	14,589	$	6,712	$	2,343	$	1,153
Operating leases		1,356		392		400		408		156		-
Total	$	62,372	$	36,611	$	14,989	$	7,120	$	2,499	$	1,153

LIQUIDITY AND CAPITAL RESOURCES

In 2013, our primary sources of capital included proceeds from thesale of investment securities, increased unearned premiums, issuance of common stock, increased unpaid losses and LAE, increased accounts payable and accrued expenses, increased income taxes payable and decreased deferred income tax expense. Additional sources of capital includedamortization of investment premium discount, net, increased premium deposits and customer credit balances, exercised stock options, decreased reinsurance recoverable, net, non-cash compensation, depreciation and amortization, increased bank overdraft and a tax benefit related to non-cash compensation.Because we are a holding company, we are largely dependent upon fees and commissions from our subsidiaries for cash flow.

In 2013, 2012 and 2011, net cash provided by operating activities was$79.7 million,$1.5 million and $4.1 million, respectively.

In 2013, operations generated$106.3 million of gross cash flow,due to a $69.3 million increase in unearned premiums,an $11.1 million increase in unpaid losses and LAE, a $3.8 million increase in accounts payable and accrued expenses,a $2.4 million increase in income taxes payable and a $2.2 million decrease in deferred income tax expense.Additional sources of cash included $1.8 million of amortization of investment premium discount, net, a $1.4 million increase in premium deposits and customer credit balances, a $0.8 million decrease in reinsurance recoverable, net,$0.3 million non-cash compensation, $0.3 million depreciation and amortization and a $0.2 million increase in bank overdraft, all in conjunction with $12.7 million of net income.

In 2013, operations used$26.6 million of gross cash flow primarily due toa $14.3 million increase in premiums receivable,an $8.2 million increase in policy acquisition costs, net of amortization and $2.9 million of net realized investment gains. Additional uses of cash included a $0.6 million increase in prepaid reinsurance premiums, a $0.5 million increase in other assets and a $0.1 million decrease in recovery for uncollectible premiums receivable.

In 2013, net cash used by investing activities was $87.1 million.In 2012 and 2011, net cash provided and used by investing activities was $4.3 million and $5.2 million, respectively.Our available-for-sale investment portfolio is highly liquid as it consists entirely of readily marketable securities.In 2013, investing activities generated $106.2 million and used $193.3 million.

In 2013, net cash provided by financing activities was $27.7 million. In 2012 and 2011, net cash provided by financing activities was less than $0.1 million. In 2013, the sources of cash in connection with financing activities included$27.9 million from issuance of common stock, $0.9 million from exercised stock optionsand a $0.1 million tax benefit related to non-cash compensation. In 2013, the use of cash in connection with financing activities was $1.2 million of dividends paid.

We offer direct billing in connection with our homeowners’ and commercial general liability programs. Direct billing is an agreement in which the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring the full amount of the policy at policy inception, either directly from the insured or from a premium finance company. The advantage of direct billing a policyholder by the insurance company is that we are not reliant on a credit facility, but remain able to charge and collect interest from the policyholder.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As discussed above, we have experienced significant growth, as evidenced by the 103.7% increase in gross premiums written during the twelve months of 2013 as compared with the same period in 2012 and the 91.0% increase in the number of our in-force homeowners’ policies during 2013.

We believe that our current capital resources will be sufficient to meet currently anticipated working capital requirements. There can be no assurances, however, that such will be the case. We continue to evaluate our liquidity and the possibility that we may require additional working capital.

GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. FNIC’s statutory capital and surplus was $76.9 million and $52.1 million as of December 31, 2013 and 2012, respectively. FNIC’s statutory net income was $3.6 million, $6.6 million and $0.8 million for 2013, 2012 and 2011, respectively. FNIC’s statutory non-admitted assets were nearly nothing and nearly nothing as of December 31, 2013 and 2012, respectively.

As of December 31, 2013, 2012, and 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose” entities, which were established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. As such, management believes that we currently are not exposed to any financing, liquidity, market or credit risks that could arise if we had engaged in transactions of that type requiring disclosure herein.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and related data presented in this Annual Report have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and LAE.

Insurance premiums are established before we know the amount of losses and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation may also affect the market value of our investment portfolio and the investment rate of return. Any future economic changes that result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred losses and LAE and thereby materially adversely affect future liability requirements.

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

	Year Ended December 31, 2013
	(Dollars in Thousands except EPS)
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Revenue:
Net premiums earned	$	18,261	$	23,742	$	27,315	$	35,063
Other revenue		3,607		4,436		4,605		4,708
Total revenue		21,868		28,178		31,920		39,771
Expenses:
Losses and LAE		9,323		12,821		14,439		19,827
Other expenses		8,813		11,302		12,695		13,299
Total expenses		18,136		24,123		27,134		33,126
Income before provision for income tax expense		3,732		4,055		4,786		6,645
Provision for income tax expense		1,397		1,511		1,504		2,079
Net income	$	2,335	$	2,544	$	3,282	$	4,566
Basic net income per share	$	0.29	$	0.32	$	0.41	$	0.48
Fully diluted net income per share	$	0.29	$	0.31	$	0.39	$	0.46
Weighted average number of common shares outstanding		7,983		8,020		8,067		9,391
Weighted average number of common shares outstanding (assuming dilution)		8,127		8,274		8,346		9,731

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Federated National Holding Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Year Ended December 31, 2012
	(Dollars in Thousands except EPS)
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Revenue:
Net premiums earned	$	12,818	$	14,693	$	15,088	$	16,760
Other revenue		1,925		2,130		2,173		3,060
Total revenue		14,743		16,823		17,261		19,820
Expenses:
Losses and LAE		5,728		7,136		8,049		9,296
Other expenses		7,370		7,347		8,109		8,864
Total expenses		13,098		14,483		16,158		18,160
Income before provision for income tax expense		1,645		2,340		1,103		1,660
Provision for income tax expense		573		918		353		591
Net income	$	1,072	$	1,422	$	750	$	1,069
Basic net income per share	$	0.13	$	0.18	$	0.09	$	0.13
Fully diluted net income per share	$	0.13	$	0.18	$	0.09	$	0.13
Weighted average number of common shares outstanding		7,946		7,947		7,949		7,965
Weighted average number of common shares outstanding (assuming dilution)		7,962		7,994		8,042		8,096

OFF BALANCE SHEET TRANSACTIONS

For the years ended December 31, 2013 and 2012, we had no off balance sheet transactions.

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Federated National Holding Company

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our investment objective is to maximize total rate of return after federal income taxes while maintaining liquidity and minimizing risk. Our current investment policy limits investment in non-investment-grade debt securities (including high-yield bonds), and limits total investments in preferred stock, common stock and mortgage notes receivable. We also comply with applicable laws and regulations that further restrict the type, quality and concentration of our investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities and real estate mortgages.

Our investment policy is established by the Board of Directors Investment Committee and is reviewed on a regular basis. Pursuant to this investment policy, as of December 31, 2013, approximately 85% of investments were in debt securities and cash and cash equivalents, which are considered to be either held until maturity or available for sale, based upon our estimates of required liquidity. Approximately 96% of the debt securities are considered available for sale and are marked to market. We may in the future consider additional debt securities to be held to maturity and carried at amortized cost. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.

The following table provides information about the financial instruments as of December 31, 2013 that are sensitive to changes in interest rates.  The table presents principal cash flows and the related weighted average interest rate by expected maturity date based upon par values.

																						Carrying
	2014			2015			2016			2017			2018			Thereafter			Total			Amount
Principal amount by expected maturity:
United States government obligations and authorities	$	495		$	3,143		$	415		$	3,669		$	4,005		$	10,867		$	22,594		$	22,456
Obligations of states and political subdivisions		2,275			5,835			8,995			5,540			6,685			17,300			46,630			52,064
Corporate securities		2,163			9,513			15,410			13,476			14,869			26,498			81,929			87,757
International securities		-			440			1,346			280			440			1,172			3,678			3,807
Collateralized mortgage obligations		127			2,349			4,069			964			4,646			2,990			15,145			16,042
Equity securities, at market		-			-			-			-			-			-			-			38,584
All investments	$	5,060		$	21,280		$	30,235		$	23,929		$	30,645		$	58,827		$	169,976		$	220,710
Weighted average interest rate by expected maturity:
United States government obligations and authorities		1.75	%		0.26	%		2.18	%		0.65	%		1.15	%		1.97	%		1.37	%
Obligations of states and political subdivisions		5.00	%		4.40	%		4.81	%		4.79	%		4.91	%		4.83	%		4.79	%
Corporate securities		4.89	%		4.02	%		3.76	%		4.32	%		4.37	%		5.11	%		4.46	%
International securities		0.00	%		0.71	%		1.97	%		1.50	%		1.99	%		5.11	%		2.79	%
Collateralized mortgage obligations		5.56	%		4.73	%		5.50	%		4.14	%		4.01	%		4.39	%		4.62	%
Equity securities, at market		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
All investments		4.65	%		3.58	%		4.21	%		3.83	%		3.98	%		4.41	%		4.12	%

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Federated National Holding Company

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
Report of Independent Registered Public Accounting Firm	67
Consolidated Balance Sheets as of December 31, 2013 and 2012	68
Consolidated Statements of Operations For the years ended December 31, 2013, 2012 and 2011	69
Consolidated Statements of Comprehensive Income (Loss) For the years ended December 31, 2013, 2012 and 2011	70
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive (Loss) Income For the years ended December 31, 2013, 2012 and 2011	71
Consolidated Statements of Cash Flows For the years ended December 31, 2013, 2012 and 2011	72
Notes to Consolidated Financial Statements	74

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Federated National Holding Company and Subsidiaries

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Federated National Holding Company

Sunrise, Florida

We have audited the accompanying consolidated balance sheets of Federated National Holding  Company as of December 31, 2013 and 2012 and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Federated National Holding Company at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

De Meo Young McGrath

A Goldstein Schechter Koch, P.A. Company

Fort Lauderdale, Florida

March 17, 2014

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Federated National Holding Company and Subsidiaries

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2013 AND 2012

	Period Ending
	December 31, 2013		December 31, 2012
ASSETS	(Dollars in Thousands)
Investments
Debt maturities, available for sale, at fair value	$	174,912	$	101,755
Debt maturities, held to maturity, at amortized cost		7,214		7,359
Equity securities, available for sale, at fair value		38,584		20,982
Total investments		220,710		130,096
Cash and short term investments		41,446		21,143
Prepaid reinsurance premiums		7,592		7,045
Premiums receivable, net of allowance for credit losses of $143 and $69, respectively		22,414		8,023
Reinsurance recoverable, net		2,742		3,503
Deferred policy acquisition costs		16,708		8,479
Deferred income taxes, net		1,006		4,338
Income taxes receivable		-		39
Property, plant and equipment, net		929		564
Other assets		3,194		2,658
Total assets	$	316,741	$	185,888
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and LAE	$	61,016	$	49,908
Unearned premiums		128,343		59,006
Premiums deposits and customer credit balances		3,833		2,458
Bank overdraft		6,203		5,987
Income taxes payable		2,379		-
Accounts payable and accrued expenses		6,473		2,624
Total liabilities		208,247		119,983
Shareholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding 10,901,716 and 7,979,488, respectively		109		80
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding		-		-
Additional paid-in capital		80,525		51,356
Accumulated other comprehensive income
Unrealized net gains on investments, available for sale		5,964		4,067
Total accumulated other comprehensive income		5,964		4,067
Retained earnings		21,896		10,402
Total shareholders' equity		108,494		65,905
Total liabilities and shareholders' equity	$	316,741	$	185,888

See accompanying notes to consolidated financial statements.

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Federated National Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

	Twelve Months Ended December 31,
	2013			2012			2011
	(Dollars in Thousands except EPS and Share and Dividend Data)
Revenue:
Gross premiums written	$	243,373		$	119,459		$	98,269
Gross premiums ceded		(82,708	)		(51,085	)		(46,293	)
Net premiums written		160,665			68,374			51,976
Increase (decrease) in prepaid reinsurance premiums		13,052			2,059			(2,656	)
Increase in unearned premiums		(69,336	)		(11,074	)		(797	)
Net change in prepaid reinsurance premiums and unearned premiums		(56,284	)		(9,015	)		(3,453	)
Net premiums earned		104,381			59,359			48,523
Commission income		2,646			1,377			994
Finance revenue		866			496			518
Direct written policy fees		6,196			2,007			1,583
Net investment income		3,332			3,819			4,079
Net realized investment gains		2,881			1,072			2,725
Other income		1,435			517			1,741
Total revenue		121,737			68,647			60,163
Expenses:
Losses and LAE		56,410			30,209			30,896
Operating and underwriting expenses		14,474			9,996			9,916
Salaries and wages		10,188			8,439			8,004
Amortization of deferred policy acquisition costs		21,447			13,255			12,347
Total expenses		102,519			61,899			61,163
Income (loss) before provision for income tax expense (benefit)		19,218			6,748			(1,000	)
Provision for income tax expense (benefit)		6,491			2,435			(570	)
Net income (loss)	$	12,727		$	4,313		$	(430	)
Net income (loss) per share - basic	$	1.50		$	0.53		$	(0.05	)
Net income (loss) per share - diluted	$	1.45		$	0.53		$	(0.05	)
Weighted average number of common shares outstanding - basic		8,505,967			7,951,906			7,946,384
Weighted average number of common shares outstanding - diluted		8,772,060			8,016,110			7,946,384
Dividends paid per share	$	0.11		$	0.02		$	-

See accompanying notes to consolidated financial statements.

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Federated National Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Net income (loss)	$	12,727		$	4,313		$	(430	)
Change in net unrealized gains on investments available for sale		3,041			5,114			572
Comprehensive income before tax		15,768			9,427			142
Income tax expense related to items of other comprehensive income (loss)		(1,144	)		(1,924	)		(215	)
Comprehensive income (loss)	$	14,624		$	7,503		$	(73	)

See accompanying notes to consolidated financial statements.

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Federated National Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME

YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

	Comprehensive (Loss) Income			Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings			Total Shareholders' Equity
	(Dollars in Thousands)
Balance as of December 31, 2010				$	79	$	50,654	$	520	$	6,678		$	57,931
Net loss		(430	)								(430	)		(430	)
Cash dividends											-			-
Treasury stock acquired
Shares based compensation							286							286
Net unrealized change in investments, net of tax effect of ($215)		357							357					357
Comprehensive loss	$	(73	)
Balance as of December 31, 2011				$	79	$	50,940	$	877	$	6,248		$	58,144
Net income	$	4,313									4,313			4,313
Cash dividends											(159	)		(159	)
Treasury stock acquired														-
Stock options exercised					1		128							129
Shares based compensation							288							288
Net unrealized change in investments, net of tax effect of ($1,924)		3,190							3,190					3,190
Comprehensive income	$	7,503
Balance as of December 31, 2012				$	80	$	51,356	$	4,067	$	10,402		$	65,905
Net income	$	12,727									12,727			12,727
Cash dividends											(1,233	)		(1,233	)
Stock issued for capital raised					28		27,851							27,879
Treasury stock acquired														-
Stock options exercised					1		857							858
Shares based compensation							461							461
Net unrealized change in investments,net of tax effect of  ($1,144)		1,897							1,897					1,897
Comprehensive income	$	14,624
Balance as of December 31, 2013				$	109	$	80,525	$	5,964	$	21,896		$	108,494

See accompanying notes to consolidated financial statements.

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Federated National Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

	For the Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Cash flow from operating activities:
Net income (loss)	$	12,727		$	4,313		$	(430	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of investment premium discount, net		1,761			1,356			1,249
Depreciation and amortization of property plant and equipment, net		263			195			168
Net realized investment gains		(2,881	)		(1,072	)		(2,725	)
Non-cash impairment recognition		-			(44	)		-
(Recovery) provision for credit losses, net		-			(12	)		18
(Recovery) provision for uncollectible premiums receivable		(74	)		5			(5	)
Non-cash compensation		293			188			196
Changes in operating assets and liabilities:
Premiums receivable		(14,317	)		(2,412	)		29
Prepaid reinsurance premiums		(546	)		1,293			2,076
Reinsurance recoverable, net		761			(1,415	)		5,951
Income taxes recoverable		39			(39	)		2,393
Deferred income tax expense, net of other comprehensive income (loss)		2,188			2,350			(912	)
Policy acquisition costs, net of amortization		(8,229	)		(761	)		161
Other assets		(536	)		(552	)		(308	)
Unpaid losses and LAE		11,108			(10,075	)		(6,547	)
Unearned premiums		69,336			11,074			797
Premium deposits and customer credit balances		1,376			(347	)		441
Income taxes payable		2,379			(77	)		77
Bank overdraft		216			(1,942	)		498
Accounts payable and accrued expenses		3,849			(486	)		956
Net cash provided by operating activities		79,713			1,540			4,083
Cash flow (used) provided by investing activities:
Proceeds from sale of investment securities		106,173			90,449			108,318
Purchases of investment securities available for sale		(192,627	)		(86,203	)		(113,251	)
Purchases of property and equipment		(629	)		83			(243	)
Net cash (used) provided by investing activities		(87,083	)		4,329			(5,176	)
Cash flow provided  by financing activities:
Exercised stock options	$	858		$	128		$	-
Dividends paid		(1,232	)		(159	)		-
Issuance of common stock		27,879			-			-
Tax benefit related to non-cash compensation		168			100			92
Net cash provided by financing activities		27,673			69			92
Net increase (decrease) in cash and short term investments		20,303			5,938			(1,001	)
Cash and short term investments at beginning of period		21,143			15,205			16,206
Cash and short term investments at end of period	$	41,446		$	21,143		$	15,205

See accompanying notes to consolidated financial statements.

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Federated National Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

	For the Years Ended December 31,
(continued)	2013		2012		2011
	(Dollars in Thousands)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	1,870	$	165	$	-
Non-cash investing and finance activities:
Accrued dividends payable	$	330	$	159	$	-

See accompanying notes to consolidated financial statements.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(1) ORGANIZATION AND BUSINESS

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Federated National Holding Company (“FNHC”, “Company”, “we”, “us”), formerly known as 21st Century Holding Company is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents. We changed our name on September 11, 2012, pursuant to approval received at our annual shareholders’ meeting, from 21st Century Holding Company so that our parent company and other subsidiary companies’ names are consistent with our primary insurance subsidiary and the name under which we have been writing insurance for more than 20 years.

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

Our insurance subsidiary is Federated National Insurance Company (“FNIC”). FNIC is licensed as an admitted carrier in Florida. An admitted carrier is an insurance company that has received a license from the state department of insurance giving the company the authority to write specific lines of insurance in that state. These companies are also bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices,including fraud. Admitted carriers are also required to financially contribute to the state guarantee fund, which is used to pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders. Through contractual relationships with a network of approximately 3,600 independent agents, of which approximately 1,800 actively sell and service our products, FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines and personal and commercial automobile insurance in Florida.  FNIC is licensed as an admitted carrier in Alabama, Louisiana, Georgia and Texas and underwrites commercial general liability insurance in those states, homeowners’ insurance in Louisiana and personal automobile insurance in Georgia and Texas.

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

In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. In connection with this merger, the Company, FNIC and American Vehicle entered into a Consent Order with the Florida Office of Insurance Regulation (“Florida OIR”) pursuant to which we agreed to certain restrictions on our business operations. The Consent Order was amended in February 2013 to lessen or eliminate certain of the original requirements, due to FNIC’s statutory underwriting profit during 2012. See "Footnote 8 – Regulatory Requirements and Restrictions”.

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

 Until June 2011, we offered premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, a wholly owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s existing network of agents.

FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.

The homeowner policy provides FNU the right to cancel any policy within a period of 90 days from the policy's inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our underwriting criteria.

Although we are authorized to underwrite the various lines described above, our business is primarily underwriting homeowners’ policies. During 2013, 89.6%, 4.3%, 2.6% and 3.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively. During 2013, $29.7 million or 13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents 25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents began writing for FNIC in March 2013. During 2012, 85.3%, 7.8%, 4.4% and 2.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively.

During the years ended December 31, 2013, 2012 or 2011, we did not experience any weather-related catastrophic events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or other insurable events will affect our future results of operations and liquidity. Loss and loss adjustment expenses (“LAE”) are affected by a number of factors, many of which are partially or entirely beyond our control, including the following.

· the nature and severity of the loss;

· weather-related patterns;

· the availability, cost and terms of reinsurance;

· underlying settlement costs, including medical and legal costs;

· legal and political factors such as legislative initiatives and public opinion;

· macroeconomic issues.

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

We have entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with Federated Mutual Insurance Company (“Federated Mutual”) in response to correspondence received from Federated Mutual’s counsel alleging that our use of the name “Federated” infringed certain federal trademarks held by Federated Mutual.  Although we believe that we have meritorious defenses to this allegation, we sought to avoid litigation and therefore negotiated and entered into the Coexistence Agreement.  Under the Coexistence Agreement, among other things, we may continue to use “Federated” until at least August 30, 2020, after which time we have agreed to either cease using “Federated” in commerce or otherwise adopt and use trade names that are not confusingly similar to Federated Mutual’s trademarks.  During this period, we continue to develop our brand under the “FedNat” name, which is the name by which agents generally know us.

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

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) CASH AND SHORT TERM INVESTMENTS

We consider all short-term highly liquid investments with original maturities of less than three months to be short term investments.

(b) INVESTMENTS

Our investment securities have been classified as either available-for-sale or held to maturity in response to our liquidity needs, changes in market interest rates and asset-liability management strategies, among other reasons. Investments available-for-sale are stated at fair value on the balance sheet. Investments designated as held to maturity are stated at amortized cost on the balance sheet. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income within shareholders' equity, net of related deferred income taxes.

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

(c) PREMIUM REVENUE

Premium revenue on all lines is earned on a pro-rata basis over the life of the policies. Unearned premiums represent the portion of the premium related to the unexpired policy term.

(d) DEFERRED ACQUISITION COSTS

Deferred acquisition costs primarily represent commissions paid to outside agents at the time of policy issuance (to the extent they are recoverable from future premium income) net of ceded premium commission earned from reinsurers, salaries and premium taxes net of policy fees, and are amortized over the life of the related policy in relation to the amount of premiums earned. The method followed in computing deferred acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, unpaid losses and LAE and certain other costs expected to be incurred as the premium is earned. There is no indication that these costs will not be fully recoverable in the near term.

(e) PREMIUM DEPOSITS

Premium deposits represent premiums received primarily in connection with homeowner policies that are not yet effective. We take approximately 30 working days to issue the policy from the date the cash and policy application are received.

(f) UNPAID LOSSES AND LAE

Unpaid losses and LAE are determined by establishing liabilities in amounts estimated to cover incurred losses and LAE. Such liabilities are determined based upon our assessment of claims pending and the development of prior years' loss liability. These amounts include liabilities based upon individual case estimates for reported losses and LAE and estimates of such amounts that are incurred but not yet reported (“IBNR”). Changes in the estimated liability are charged or credited to operations as the losses and LAE are settled.

The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

There can be no assurance that our liability for unpaid losses and LAE will be adequate to cover actual losses. If our liability for unpaid losses and LAE proves to be inadequate, we will be required to increase the liability with a corresponding reduction in our net income in the period in which the deficiency is identified. Future loss experience substantially in excess of established liability for unpaid losses and LAE could have a material adverse effect on our business, results of operations and financial condition.

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

We do not discount unpaid losses and LAE for financial statement purposes.

 (g) FINANCE REVENUE

Interest and service income, resulting from the financing of insurance premiums, is recognized using a method that approximates the effective interest method. Late charges are recognized as income when chargeable.

(h) PREMIUMS RECEIVABLE, NET OF ALLOWANCE FOR CREDIT LOSSES

Provisions for credit losses are provided in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover anticipated losses. Generally, accounts that are over 90 days old are written off to the allowance for credit losses. We have been increasing our reliance on direct billing of our policyholders for their insurance premiums. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring payment of the full amount of the policy, either directly from the insured or from a premium finance company. We manage the credit risk associated with our direct billing program through our integrated computer system which allows us to monitor the equity in the unearned premium to the underlying policy. Underwriting criteria are designed with down payment requirements and monthly payments that create policyholder equity, also called unearned premium, in the insurance policy. The equity in the policy is collateral for the extension of credit to the insured.

(i) MANAGING GENERAL AGENT (“MGA”) FEES

If all the costs substantially associated with the MGA contracts, which do not involve affiliated insurers, are incurred during the underwriting process, then the MGA fees and the related acquisition costs are recognized at the time the policy is underwritten, net of estimated cancellations. If the MGA contract requires significant involvement subsequent to the completion of the underwriting process, then the MGA fees and related acquisition costs are deferred and recognized over the life of the policy. Included in MGA Fees are policy fees charged by the insurance companies and passed through to FNU. Policy fees are discussed below.

(j) POLICY FEES

Policy fees represent a $25 non-refundable application fee for insurance coverage, which are intended to reimburse us for the costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is underwritten.  These fees are netted against underwriting costs and are included as a component of deferred acquisition costs.

(k) REINSURANCE

We recognize the income and expense on reinsurance contracts principally on a pro-rata basis over the term of the reinsurance contracts or until the reinsurers maximum liability is exhausted, whichever comes first. We are reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve us from our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We only cede risks to reinsurers whom we believe to be financially sound. At December 31, 2013, all reinsurance recoverables are considered current and deemed collectable.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(l) INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date.

 (m) CONCENTRATION OF CREDIT RISK

FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliates FNIC and American Vehicle. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed in “Regulation – Consent Order” reduced its fee, to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.

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

(n) RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

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

In July 2012, the FASB issued ASU No. 2012-02: Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendments in this ASU is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories.  The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.   Upon adoption, these amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012; early adoption is permitted.  The adoption of these amendments did not have a material impact on our financial condition, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05: Comprehensive Income (Topic 220):  Presentation of Comprehensive Income. The guidance in this ASU is intended to increase the prominence of items reported in other comprehensive income in the financial statements by presenting the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The guidance in this ASU does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Upon adoption, this update is to be applied retrospectively and is effective during interim and annual periods beginning after December 15, 2011.  Early adoption is permitted. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-12:  Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  The guidance defers certain provisions contained in ASU No. 2011-05 requiring the requirement to present components of reclassifications of other comprehensive income on the face of the income statement or in the notes to the financial statements. However, this deferral does not impact the other requirements contained in the new standard on comprehensive income as described above. This ASU is effective during interim and annual periods beginning after December 15, 2011.  The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In September 2011, the FASB issued ASU No. 2011-08: Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which amends ASC Topic 350, Intangibles-Goodwill and Other. The guidance in this ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-11: Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which requires new disclosure requirements mandating that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. This ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

In October 2010, the FASB issued ASU No. 2010-26: Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, a consensus of FASB Emerging Issues Task Force.  The amendments in this update modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The amendments in this update specify that the costs must be based on successful efforts (that is, acquiring a new or renewal contract).  The amendments also specify that advertising costs should be included as deferred acquisition costs under certain circumstances.  The amendments in this update are effective for fiscal years, and interim period within those fiscal years, beginning after December 15, 2011.  The amendments in this update should be applied prospectively upon adoption.  Retrospective application to all prior periods presented upon the date of adoption also is permitted.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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

 (o) USE OF ESTIMATES

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

Similar to other property and casualty insurers, our liability for unpaid losses and LAE, although supported by actuarial projections and other data, is ultimately based on management's reasoned expectations of future events. Although considerable variability is inherent in these estimates, we believe that this liability is adequate. Estimates are reviewed regularly and adjusted as necessary. Such adjustments are reflected in current operations. In addition, the realization of our deferred income tax assets is dependent on generating sufficient future taxable income. It is reasonably possible that the expectations associated with these accounts could change in the near term and that the effect of such changes could be material to the Consolidated Financial Statements.

 (p) OPERATIONAL RISKS

We are subject to certain risks in our business operations which are described below. Careful consideration of these risks should be made before making an investment decision. The risks and uncertainties described below are not the only ones facing FNHC. Additional risks and uncertainties not presently known or currently deemed immaterial may also impair our business operations.

Risks Related to Our Business

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”.

· Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.

· Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance fluctuates and we may not be able to successfully alleviate risk through reinsurance arrangements.

· We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of operations and/or financial condition.

· Our January 2011 Consent Order with the Florida OIR, as amended in February 2013, limits our business in certain respects and may prevent us from growing our business.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

· If we are unable to continue our growth because our capital must be used to pay greater than anticipated claims, our financial results may suffer.

· We may require additional capital in the future which may not be available or only available on unfavorable terms.

· Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

· We may experience financial exposure from climate change.

· Our loss reserves may be inadequate to cover our actual liability for losses, causing our results of operations to be adversely affected.

· Our revenues and operating performance may fluctuate due to statutorily approved assessments that support property and casualty insurance pools and associations.

· Our investment portfolio may suffer reduced returns or losses, which would significantly reduce our earnings.

· We may experience a loss due to the concentration of credit risk.

· The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or our results of operations.

· The effects of emerging claim and coverage issues on our business are uncertain.

· Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.

· Our insurance company is subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.

· Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance industry.

· We may not obtain the necessary regulatory approvals to expand the types of insurance products we offer or the states in which we operate.

· Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable policies or obtain adequate insurance, which could limit or halt our growth and harm our business.

· We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain independent and general agents, our revenues would be negatively affected.

· We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our operations.

· Nonstandard automobile insurance historically has a higher frequency of claims than standard automobile insurance, thereby increasing our potential for loss exposure beyond what we would be likely to experience if we offered only standard automobile insurance.

· Florida's personal injury protection insurance statute contains provisions that favor claimants, causing us to experience a higher frequency of claims than might otherwise be the case if we operated only outside of Florida.

· Our success depends on our ability to accurately price the risks we underwrite.

· Current operating resources are necessary to develop future new insurance products.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

· Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our business and adversely impact our financial results.

· Our participation in the new Florida Property Insurance Clearinghouse may not result in an increase in our premium revenue.

· Our senior management team is critical to the strategic direction of our company. If there were an unplanned loss of service by any of our officers our business could be harmed.

· We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth.

· New homeowners’ insurance operations outside of the State of Florida may not be profitable.

· We face risks in connection with potential material weakness resulting from our Sarbanes-Oxley Section 404 management report and any related remedial measures that we undertake.

Risks Related to an Investment in Our Shares

· Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price of our common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.

· If we report a material weakness in our internal controls and procedures, we may lose investor confidence and remedial measures may be costly.

· Our controls and procedures may fail or be circumvented which could have a material adverse effect on our business, results of operations and financial condition.

· We have authorized but unissued preferred stock, which could affect rights of holders of common stock.

· Provisions in our articles of incorporation and our bylaws, as amended, and the Florida Business Corporation Act could make it more difficult to acquire us and may reduce the market price of our common stock.

· As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and dividends to the holding company as the primary source of our income.

· Future sales of our common stock may depress our stock price.

 (q) FAIR VALUE

The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on December 31, 2013 and 2012. Changes in interest rates subsequent to December 31, 2013 may affect the fair value of our investments. Refer to Footnote 21 of the Notes to Consolidated Financial Statements for details.

The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2013 and 2012 because of their short-term nature: cash and short term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, bank overdraft, accounts payable and accrued expenses.

(r) STOCK OPTION PLANS

During the year ended December 31, 2013, the Company had three stock-based employee compensation plans, which are described later in Footnote 14, Stock Compensation Plans. Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the Accounting Principles Board (“APB”) and related Interpretation, as permitted by FASB issued guidance.Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2013, 2012 and 2011 include:

· Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and

· Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as they are not required to be by the pronouncement.

 (s) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation on property, plant and equipment is calculated on a straight-line basis over the following estimated useful lives: building and improvements - 30 years and furniture and fixtures - 7 years. We capitalize betterments and any other expenditure in excess of $1,000 if the asset is expected to have a useful life greater than one year.  The carrying value of property, plant and equipment is periodically reviewed based on the expected future undiscounted operating cash flows of the related item. Based upon our most recent analysis, we believe that no impairment of property, plant and equipment exists at December 31, 2013.

(t) RECLASSIFICATIONS

The 2012 and 2011 financial statement amounts have not been reclassified to conform to the 2013 presentations.

(u) GOODWILL AND INTANGIBLE ASSETS

During 2009, the Company purchased one intangible asset totaling $0.1 million. In accordance with FASB issued guidance, the accounting for the recognized intangible asset was based on its useful life to the Company. The useful life of the intangible asset was the period over which it was expected to contribute directly or indirectly to the future cash flows of the Company. The intangible asset had a definite finite life ranging from six to twelve months, and was amortized accordingly.

(3) INVESTMENTS

Total investments increased $90.6 million, or 69.7%, to $220.7 million as of December 31, 2013, compared with $130.1 million as of December 31, 2012. This increase reflected the $123.9 million increase in gross premiums written compared with 2012 and the $28.1 million in net proceeds from the Company’s November 2013 offering. The excess cash was invested primarily in the bond portfolio.

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

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

The debt and equity securities that are available for sale and carried at fair value represent 97% of total investments as of December 31, 2013, compared with 94% as of December 31, 2012.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

We did not hold any trading investment securities during 2013.

As of December 31, 2013 and 2012, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of December 31, 2013, 83% of our debt portfolio was in diverse industries and 17% is in United States government bonds. As of December 31, 2013, approximately 91% of our equity holdings were in equities related to diverse industries and 9% were in mutual funds. As of December 31, 2012, 69% of our debt portfolio was in diverse industries and 31% is in United States government bonds. As of December 31, 2012, approximately 87% of our equity holdings were in equities related to diverse industries and 13% were in mutual funds.

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

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

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

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

· prospects for the issuer’s industry segment;

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

· historical volatility of the fair value of the security.

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

In reaching a conclusion that a security is either other-than-temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via the general media channels. During 2013, in connection with the process, we have not charged any investment losses to operations. During 2012, in connection with the process, we have charged to operations $44,000 of investment losses.

As of December 31, 2013 and December 31, 2012, respectively, all of our securities are in good standing and not impaired, except as noted above, as defined by FASB issued guidance.

As of December 31, 2013 and December 31, 2012, we have classified $7.2 million and $7.4 million, respectively, of our bond portfolio as held-to-maturity. We classify bonds as held-to-maturity to support securitization of credit requirements.

During 2013 we reclassified $150,000 of our bond portfolio to available-for-sale from held-to-maturity.  During 2012, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the 100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was terminated in April 2007. During 2010, the letter of credit in favor of Republic was replaced by a fully funded trust agreement. As of December 31, 2013 and 2012 respectively, the amount held in trust was $1.0 million.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(a) DEBT AND EQUITY SECURITIES

The following table summarizes, by type, our investments as of December 31, 2013 and 2012.

	December 31, 2013					December 31, 2012
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	27,209		12.33	%	$	27,392		21.06	%
Obligations of states and political subdivisions		52,064		23.59	%		3,939		3.03	%
Corporate		91,941		41.66	%		67,313		51.74	%
International		3,698		1.68	%		3,111		2.39	%
		174,912		79.26	%		101,755		78.22	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,630		2.10	%		6,016		4.62	%
Corporate		2,475		1.12	%		1,203		0.92	%
International		109		0.05	%		140		0.11	%
		7,214		3.27	%		7,359		5.65	%
Total debt securities		182,126		82.53	%		109,114		83.87	%
Equity securities, at market:		38,584		17.47	%		20,982		16.13	%
Total investments	$	220,710		100.00	%	$	130,096		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the years ended December 31, 2013 and 2012.

	Years Ended December 31,
	2013					2012
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)
Debt securities	$	1,690		$	41,256	$	1,783		$	50,950
Equity securities		2,858			12,052		1,403			6,709
Total realized gains		4,548			53,308		3,186			57,659
Debt securities		(1,001	)		43,239		(391	)		13,291
Equity securities		(666	)		3,564		(1,723	)		6,560
Total realized losses		(1,667	)		46,803		(2,114	)		19,851
Net realized gains on investments	$	2,881		$	100,111	$	1,072		$	77,510

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

A summary of the amortized cost, estimated fair value, gross unrealized gains and losses of debt and equity securities at December 31, 2013 and 2012 is as follows.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in Thousands)
December 31, 2013
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	27,422	$	186	$	399	$	27,209
Obligations of states and political subdivisions		51,883		303		122		52,064
Corporate		91,475		1,233		767		91,941
International		3,731		5		38		3,698
	$	174,511	$	1,727	$	1,326	$	174,912
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,630	$	32	$	326	$	4,336
Corporate		2,475		22		17		2,480
International		109		-		1		108
	$	7,214	$	54	$	344	$	6,924
Equity securities - common stocks	$	29,423	$	9,436	$	275	$	38,584
December 31, 2012
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	26,825	$	632	$	65	$	27,392
Obligations of states and political subdivisions		3,738		202		1		3,939
Corporate		63,553		3,794		34		67,313
International		3,005		107		1		3,111
	$	97,121	$	4,735	$	101	$	101,755
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	6,016	$	149	$	12	$	6,153
Corporate		1,203		61		2		1,262
International		140		-		1		139
	$	7,359	$	210	$	15	$	7,554
Equity securities - common stocks	$	19,095	$	2,505	$	618	$	20,982

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

The table below reflects our unrealized investment losses by investment class, aged for length of time in an unrealized loss position.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	399	$	391	$	8
Obligations of states and political subdivisions		122		122		-
Corporate		767		761		6
International		38		38		-
		1,326		1,312		14
Equity securities:
Common stocks		275		148		127
Total debt and equity securities	$	1,601	$	1,460	$	141

Below is a summary of debt securities at December 31, 2013 and 2012 by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2013				December 31, 2012
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(Dollars in Thousands)
Due in one year or less	$	5,161	$	5,181	$	2,925	$	2,944
Due after one through five years		113,027		113,561		49,826		51,523
Due after five through ten years		62,656		62,220		35,070		37,182
Due after ten years		881		874		16,659		17,660
Total	$	181,725	$	181,836	$	104,480	$	109,309

United States Treasury notes with a book value of $62,490 and $2,193,814, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2013, as required by law for FNIC, and are included with other investments held until maturity.

United States Treasury notes with a book value of $63,481 and $2,193,300, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2012, as required by law for FNIC, and are included with other investments held until maturity.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

The table below sets forth investment results for the periods indicated.

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Interest on debt securities	$	2,850	$	3,380	$	3,681
Dividends on equity securities		478		436		394
Interest on cash and cash equivalents		4		3		4
Total investment income	$	3,332	$	3,819	$	4,079
Net realized gains	$	2,881	$	1,072	$	2,725

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities in 2013, 2012 and 2011 were approximately $106.1 million, $90.4 million and $108.3 million, respectively.

A summary of net realized investment gains and increases in net unrealized gains follows.

	Years Ended December 31,
	2013		2012			2011
	(Dollars in Thousands)
Net realized gains
Debt securities	$	689	$	1,392		$	2,974
Equity securities		2,192		(320	)		(249	)
Total	$	2,881	$	1,072		$	2,725
Net unrealized gains
Debt securities	$	401	$	4,634		$	2,345
Equity securities		9,161		1,887			(939	)
Total	$	9,562	$	6,521		$	1,406

(4) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following.

	Years Ended December 31,
	2013			2012
	(Dollars in Thousands)
Computer equipment	$	4,621		$	3,993
Property, plant and equipment, gross		4,621			3,993
Accumulated depreciation		(3,692	)		(3,429	)
Property, plant and equipment, net	$	929		$	564

Depreciation of property, plant, and equipment was $263,334, $195,078 and $167,753 during 2013, 2012 and 2011, respectively.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(5) REINSURANCE

We reinsure (cede) a portion of written premiums on an excess of loss or a quota-share basis to nonaffiliated insurance companies in order to limit our loss exposure. To the extent that reinsuring companies are unable to meet their obligations assumed under these reinsurance agreements, we remain primarily liable to our policyholders.

The impact of the reinsurance treaties on the financial statements is as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Premium written
Direct and Assumed	$	243,374		$	119,459		$	98,269
Ceded		(82,709	)		(51,085	)		(46,293	)
	$	160,665		$	68,374		$	51,976
Premiums earned
Direct and Assumed	$	174,037		$	109,312		$	97,473
Ceded		(69,656	)		(49,953	)		(48,950	)
	$	104,381		$	59,359		$	48,523
Losses and LAE incurred
Direct and Assumed	$	59,820		$	33,329		$	33,055
Ceded		(3,410	)		(3,120	)		(2,159	)
	$	56,410		$	30,209		$	30,896

	As of December 31,
	2013			2012
	(Dollars in Thousands)
Unpaid losses and LAE, net
Direct and Assumed	$	61,015		$	49,908
Ceded		(2,742	)		(3,503	)
	$	58,273		$	46,405
Unearned premiums
Direct and Assumed	$	128,343		$	59,006
Ceded		(37,135	)		(24,083	)
	$	91,208		$	34,923

The Company holds collateral under related reinsurance agreements in the form of fully funded trust agreements totaling $4.9 million that can be drawn on for amounts that remain unpaid for more than 120 days.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(6) UNPAID LOSSES AND LAE

The liability for unpaid losses and LAE is determined on an individual-case basis for all incidents reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR.

Activity in the liability for unpaid losses and LAE is summarized as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Balance at January 1	$	49,908		$	59,983		$	66,529
Less reinsurance recoverables		(3,503	)		(2,088	)		(6,809	)
Net balance at January 1	$	46,405		$	57,895		$	59,720
Incurred related to
Current year	$	56,209		$	31,636		$	31,893
Prior years		201			(1,427	)		(997	)
Total incurred	$	56,410		$	30,209		$	30,896
Paid related to
Current year	$	22,695		$	15,892		$	13,672
Prior years		21,846			25,807			19,048
Total paid	$	44,541		$	41,699		$	32,720
Net balance at period end	$	58,274		$	46,405		$	57,896
Plus reinsurance recoverables		2,742			3,503			2,087
Balance at period end	$	61,016		$	49,908		$	59,983

Based upon consultations with our independent actuarial consultants and their statement of opinion on losses and LAE, we believe that the liability for unpaid losses and LAE is adequate to cover all claims and related expenses which may arise from incidents reported.

As shown above, and as a result of review of liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year’s claims, we increased the liability for losses and LAE for claims occurring in prior years by $0.2 million for the year ended December 31, 2013 and decreased the liability for losses and LAE for claims occurring in prior years by $1.4 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively.

We continue to revise our estimates of the ultimate financial impact of claims made resulting from past storms. The revisions to our estimates are based on our analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) Company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and (iv) trends in general economic conditions, including the effects of inflation.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

For the year ended December 31, 2013, our actuarial firm determined range of statutory loss and LAE reserves on a net basis range from a low of $51.5 million to a high of $60.9 million, with a best estimate of $55.5 million. The Company’s net loss and LAE reserves are carried on a statutory basis at $54.0 million, and on a GAAP consolidated basis at $61.0 million which when netted with our $2.7 million reinsurance recoverable totals $58.3 million. The Company’s statutory point estimate for its reserves as of December 31, 2013 is 2.6% below our actuary’s best estimate, which reflects management’s current analysis of the status and expected timing of our anticipated claims, our analysis of expected weather patterns in the regions in which we sell policies, our re-focus of our business growth efforts to areas outside of South Florida, and other factors.

The following is an overview of management’s loss reserving process

The Company’s loss reserves can generally be categorized into two distinctgroups. One group is short-tail classes of business consisting principally of property risks in connection with homes and automobiles. The other group is long-tail casualty classes of business which include primarily commercial general liability and to a much lesser extent, homeowner and automobile liability. For operations writing short-tail coverages our loss reserves were generally geared toward determining an expected loss ratio for current business rather than maintaining a reserve for the outstanding exposure. Estimations of ultimate net loss reserves for long-tail casualty classes of business is a more complex process and depends on a number of factors including class and volume of business involved. Experience in the more recent accident years of long-tail casualty classes of business shows limited statistical credibility in reported net losses because a relatively low proportion of net losses would be reported claims and expenses and even smaller percentage would be net losses paid. Therefore, IBNR would constitute a relatively high proportion of net losses.

Additionally, the different methodologies are utilized the same, regardless of the line of business. However, the final selection of ultimate loss and LAE is certain to vary by both line of business and by accident period maturity. There is no prescribed combination of line of business, accident year maturity, and methodologies; consistency in results of the different methodologies and reasonableness of the result are the primary factors that drive the final selection of ultimate loss and LAE.

Methods Used to Estimate Loss and LAE Reserves

The methods we use for our short-tail business do not differ from the methods we use for our long-tail business. The Incurred and Paid Development Methods intrinsically recognize the unique development characteristics contained within the historical experience of each material short-tail and long-tail line of business. The Incurred and Paid Cape Cod Methods reflect similar historical development unique to each material short-tail and long-tail line of business.

We apply the following general methods in projecting loss and LAE reserves:

· Paid  and Incurred Loss Development Method

· Paid and Incurred Bornhuetter-Ferguson Incurred Method

· Frequency / Severity Method

Description of Ultimate Loss Estimation Methods

The estimated Ultimate Loss and Defense and Cost Containment Expense (“DCCE”) is based on an analysis by line of business, coverage and by accident quarter performed using data as of December 31, 2013. The analysis relies primarily on four actuarial methods: Incurred Lossand DCCE Development Method, Paid Loss and DCCE Development Method, Bornhuetter-Ferguson Incurred Method, and Bornhuetter-Ferguson Paid Method. Each method relies on company experience, and, where relevant, the analysis includes comparisons to industry experience. The following is a description of each of these methods:

Incurred Loss and DCCE Development Method – This reserving method is based on the assumption that the historical incurred loss and DCCE development pattern as reflected by the Company is appropriate for estimating the future loss & DCCE development. Incurred paid plus case amounts separated by accident quarter of occurrence and at quarterly evaluations are used in this analysis. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development factors were calculated to measure the relative development of an accident quarter from one maturity point to the next. Loss and DCCE development factors (“LDF”) are selected based on a review of the historical relationships between incurred loss & DCCE at successive valuations and based on industry patterns.  The LDFs are multiplied together to derive cumulative LDF’s that, when multiplied by actual incurred loss and DCCE, produce estimates of ultimate loss and DCCE.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Paid Loss & DCCE Development Method – This method is similar to the Incurred Loss & DCCE Development Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.

Bornhuetter-Ferguson Incurred Method – This reserving method combines estimated initial expected unreported loss & DCCE with the actual loss & DCCE to yield the ultimate loss & DCCE estimate. Expected unreported loss & DCCE are equal to expected total loss & DCCE times the expected unreported percentage of loss & DCCE for each policy year.  The incurred loss & DCCE emergence pattern used to determine the unreported percentages in our projections is based on the selected LDF’s from the Incurred Loss & DCCE Development Method described above. The estimate of initial expected total loss & DCCE is based on the historical loss ratio for more mature accident years. While this approach reduces the independence of the Bornhuetter-Ferguson Method from the loss & DCCE development methods for older policy years, it is used primarily for estimating ultimate loss & DCCE for more recent, less mature, policy years.

Bornhuetter-Ferguson Paid Method – This method is similar to the Bornhuetter-Ferguson Incurred Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.

We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and December 31, 2013). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the overall estimate of unpaid losses & DCCE liability for the company.

We also produce an estimate of unpaid Adjusting and Other Expense (“A&O”), as a reserve is required under Statutory Accounting Principles (“SAP”) even if this expense has been pre-paid or with an unconsolidated affiliate. Although we do not prepay for A&O, the majority of the A&O incurred is with an affiliated company and eliminated under the accounting principles for consolidation. The unpaid A&O is added to unpaid losses & DCCE, resulting in total unpaid losses and LAE.

The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or variations in a company’s mix of business from year to year. Also, since the percentage of losses paid for immature years is often low, development factors can be volatile. A small variation in the number of claims paid can have a leveraging effect that could lead to significant changes in estimated ultimate values. Accordingly, our reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. We compute our estimated ultimate liability using the most appropriate principles and procedures applicable to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of operations and financial condition.

Frequency / Severity Method – This method separately estimates the two components of ultimate losses (the frequency, or number of claims and the severity, or cost per claim) and then combines the resulting estimates in a multiplicative fashion to estimate ultimate losses. The approach is valuable because sometimes there is more inherent stability in the frequency and severity data when viewed separately than in the total losses.

We developed reported claim counts to ultimate levels using the development approach. The mechanics of this approach are the same as we described previously for paid and incurred losses. The validity of the results of this method depends on the stability of claim reporting and settlement rates. Then we developed accident year incurred severities (incurred losses divided by reported claim counts) to ultimate levels using the development approach.

We trended these severities to accident year 2013 levels. Trend rates were selected based on a review of historical severities. Selected severity was chosen based on judgment considering the developed severities and the trended severities, considering industry benchmarks for each segment. The loss & ALAE, claim count and severity triangles are evaluated as of 12 months, 24 months, 36 months etc. We selected loss development factors based on the loss development history, to the extent credible, and supplemented with industry data where appropriate.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

A key assumption underlying the estimation of the reserve for loss and LAE is that past experience serves as the most reliable estimator of future events. This assumption may materially affect the estimates when the insurance market, the regulatory environment, the legal environment, the economic environment, the book of business, the claims handling department, or other factors (known or unknown) have varied over time during the experience period and / or will vary (expectedly or unexpectedly) in the future. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made. Therefore, the ultimate liability for unpaid losses and LAE will likely differ from the amount recorded at December 31, 2013.

The following describes the extent of our procedures for determining the reserve for loss and LAE on both an annual and interim reporting basis:

Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for unpaid losses and LAE. Our independent actuarial firm, examining the exact same data set, will independently select a point estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations. If our point estimate falls within the range determined from the point estimate of our actuary, then the Company’s policy has been that no adjustments by management would be required. In consideration thereof, the company does not have a policy for adjusting the liability for unpaid losses and LAE to an amount that is different than an amount set forth within the range determined by our independent actuary, although the reserve level ultimately determined by us may not be the mid-point of our independent actuary’s range. Further, there can be no assurances that our actual losses will be within our actuary’s range.  Our independent actuary’s report expressly states that the report is based on assumptions developed from its own analysis and based on information provided by management and that notwithstanding its analysis, there is a significant risk of material adverse deviation from its range.

Interim – During 2013 our interim approach was very similar to the annual process noted above.

A number of other actuarial assumptions are generally made in the review of reserves for each class of business.

For each class of business, expected ultimate loss ratios for each accident year are estimated based on loss reserve development patterns. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend and the effect of rate changes and other quantifiable factors on the loss ratio.

In practice there are factors that change over time; however, many (such as inflation) are intrinsically reflected in the historical development patterns, and others typically do not materially affect the estimate of the reserve for unpaid losses and LAE. Therefore, no specific adjustments have been incorporated for such contingencies projecting future development of losses and LAE. There are no key assumptions as of December 31, 2013 premised on future emergence inconsistent with historical loss reserve development patterns.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(7) INCOME TAXES

A summary of the provision for income tax expense (benefit) is as follows.

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Federal
Current	$	4,289	$	63	$	310
Deferred		1,393		2,052		(490	)
Provision for Federal income tax expense (benefit)		5,682		2,115		(180	)
State
Current		-		-		-
Deferred		809		320		(390	)
Provision for state income tax expense (benefit)		809		320		(390	)
Provision for income tax expense (benefit)	$	6,491	$	2,435	$	(570	)

The actual income tax expense (benefit) differs from the "expected" income tax expense (benefit) (computed by applying the combined applicable effective federal and state tax rates to income before provision for income tax expense (benefit) as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Computed expected tax expense (benefit) provision, at federal rate	$	6,535		$	2,294		$	(341	)
State tax, net of federal deduction expense (benefit)		698			245			(36	)
Tax-exempt interest		(31	)		(26	)		(41	)
Dividend received deduction		(97	)		(88	)		(80	)
Stock option expense and other permanent differences		(34	)		72			87
AMT Tax credit		-			(113	)		-
True-up		(306	)		-			-
Other		(274	)		51			(159	)
Provision for income tax expense (benefit)	$	6,491		$	2,435		$	(570	)

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax asset are as follows.

	Years Ended December 31,
	2013			2012
Deferred tax assets:
Unpaid losses and loss adjustment expenses	$	1,157		$	1,725
Unearned premiums		6,864			2,629
Discount on advance premiums		243			167
Allowance for credit losses		59			31
Allowance for impairments		21			91
FIGA Guaranty Assessment		-			306
Depreciation & amortization		149			366
Reserve for claims settlements		1,844			809
NOL Carryforward		73			3,259
AMT credit		-			253
Flow-through income or loss		4			-
Stock option expense per ASC 718		550			432
Total deferred tax assets		10,964			10,068
Deferred tax liabilities:
Deferred acquisition costs, net		(6,287	)		(3,191	)
Dividends Collected vs. Earned		(6	)		(18	)
Regulatory assessments		(67	)		(67	)
Unrealized Gain on investment securities		(3,598	)		(2,454	)
Total deferred tax liabilities		(9,958	)		(5,730	)
Net deferred tax asset	$	1,006		$	4,338

Based upon the results of our analysis and the application of ASC 740-10, we have determined that all material tax positions meet the recognition threshold and can be considered as highly certain tax positions. This is based on clear and unambiguous tax law, and we are highly confident that the full amount of each tax position will be sustained upon possible examination. Accordingly, the full amount of the tax positions will be recognized in the financial statements.

The Company has recorded a net deferred tax asset of $1.0 million and $4.3 million as of December 31, 2013 and December 31, 2012, respectively.  Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2013, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for 2010 - 2012 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities. The Company’s 2011 federal tax return is currently under review by the IRS. The 2012 federal and state income tax returns were filed by the extended due date in the third quarter of 2013. The 2013 federal and state income tax returns have been extended as of March 2014 and will be timely filed in the third quarter of 2014.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(8) REGULATORY REQUIREMENTS AND RESTRICTIONS

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”.

Consent Order

In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. As part of its approval of the merger between FNIC and American Vehicle, the Florida Office of Insurance Regulation (“Florida OIR”), the Company, FNIC and American Vehicle entered into a consent order with the Florida OIR dated January 25, 2011 (the “Consent Order”), which was amended in February 2013, due to FNIC’s statutory underwriting profit during 2012. Pursuant to the amended Consent Order, the Company and the resulting company in the merger (the “Merged Company”) have agreed to the following:

· The Merged Company retained the following licenses: (010) Fire, (020) Allied Lines, (040) Homeowners Multi Peril, (050) Commercial Multi Peril, (090) Inland Marine, (170) Other Liability, (192) Private Passenger Auto Liability, (194) Commercial Auto Liability, (211) Private Passenger Auto Physical Damage and (212) Commercial Auto Physical Damage.

· The Merged Company will not write commercial multi peril policy premium without prior approval from the Florida OIR. The Merged Company has no commercial multi peril policy premium in force.

· The Merged Company surrendered its surety license. The Merged Company has no surety policy premium in force.

· The Merged Company will not write new commercial habitation condominium associations without prior approval from the Florida OIR. The current commercial habitation book of business is fully earned.

· The Merged Company agreed to maintain the total number of its homeowners’ policies in Miami-Dade, Broward and Palm Beach counties (the “Tri-County Area”) at 35% of its entire homeowners’ book. As of December 31, 2013, the Company had approximately 18.3% of its homeowners’ policies located within Tri-County Area.

· The managing general agency fees payable by the Merged Company to Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, Inc., a wholly owned subsidiary of the Company, which were traditionally 6% of gross written premium, were reduced and will not exceed 4% without prior approval from the Florida OIR. The Merged Company has lowered the fee to amounts varying between 2% and 4% of gross written to further support the FNIC results of operations. This will have no impact on the Company’s consolidated financial results.

· The claims service fees payable by the Merged Company to Federated National Adjusting, Inc. (“FNA”), formerly known as Superior Adjusting, Inc., were reduced from the traditional 4.5% of gross earned premium to 3.6% of gross earned premium. This will have no impact on the Company’s consolidated financial results.

The merger of FNIC and American Vehicle will be an ongoing transition, many aspects of which will take effect over time. References to the companies contained herein are intended to be references to the operations of FNIC following the January 2011 merger. References to the historical activities of American Vehicle are appropriately identified throughout this document.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Other Regulatory Requirements and Restrictions

To retain our certificate of authority, the Florida Insurance Code (the "Code") requires FNIC to maintain capital and surplus equal to the greater of 10% of its’ liabilities or a statutory minimum capital and surplus as defined in the Code. FNIC is required to have a minimum capital surplus of $5.0 million.

At December 31, 2013, 2012 and 2011, FNIC’s statutory capital surplus was $76.9 million, $52.1 million and $39.3 million, respectively.

An insurance company is also required to adhere to prescribed premium-to-capital surplus ratios. As of December 31, 2013, 2012 and 2011, FNIC was in compliance with the prescribed premium-to-surplus ratio.

We had bonds with a carrying value of approximately $2.3 million and $2.2 million pledged to the Florida OIR, as of December 31, 2013 and 2012, respectively, in accordance with regulatory requirements.

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida OIR if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains.

Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida OIR (i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the Florida OIR at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115.0% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida OIR or (ii) 30 days after the Florida OIR has received notice of such dividend or distribution and has not disapproved it within such time.

No dividends were paid by FNIC or American Vehicle in 2013, 2012 and 2011, and none are anticipated in 2014. Although we believe that amounts required to meet our financial and operating obligations will be available from sources other than dividends from our insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida OIR will allow any dividends to be paid by FNIC to us, the parent company, in the future.The maximum dividends permitted by state law are not necessarily indicative of an insurer’s actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer’s competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs.

Insurance holding company regulations govern the amount that non-insurance company subsidiaries (FNU, FNA and any other affiliate)  may charge any of the insurance companies for service (e.g., management fees and commissions).

In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners (“NAIC”) established risk-based capital requirements for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. These requirements measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from investments. Insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The Florida OIR, which follows these requirements, could require FNIC to cease operations in the event they fail to maintain the required statutory capital.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Based upon the 2013 and 2012 statutory financial statements for FNIC, statutory surplus exceeded the regulatory action levels established by the NAIC’s risk-based capital requirements.

Based on risk-based capital requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its Authorized Control Level (“ACL”), as calculated under the NAIC’s requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC’s ratio of statutory surplus to its ACL was 312.1%, 474.4% and 409.7% at December 31, 2013, 2012 and 2011, respectively.

Most recently the Florida OIR subjected FNIC to a balance sheet audit as of December 31, 2009. There were no material findings by the independent auditors in connection with this examination. FNIC also experienced a regularly scheduled statutory examination by the Florida OIR which occurred during 2010 for the five years ended December 31, 2009. There were no material findings in connection with this examination. The previous regulatory examination conducted by the Florida OIR on FNIC covered the three-year period ended on December 31, 2004.

The NAIC has also developed IRIS ratios to assist state insurance departments in identifying companies which may be developing performance or solvency problems, as signaled by significant changes in the companies’ operations. Such changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling outside “usual ranges”, state regulators may investigate to determine the reasons for the variance and whether corrective action is warranted.

As of December 31, 2013, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions related to change in net writings, investment yield and estimated current reserve deficiency to policyholders’ surplus.

As of December 31, 2012, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions related to investment yield, net change in adjusted policyholders’ surplus and estimated current reserve deficiency to policyholders’ surplus.

As of December 31, 2011, FNIC was outside NAIC’s usual range for two of thirteen IRIS ratios. These exceptions related to two-years overall operating ratio and investment yield.

There was no action taken by the Florida OIR in connection with the December 31, 2012 or 2011 IRIS ratio results. We do not currently believe that the Florida OIR will take any significant action with respect to FNIC regarding the 2013 IRIS ratios, although there can be no assurance that will be the case.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

The table below reflects the range and test results for FNIC for the years ended December 31, 2013 and 2012, respectively.

IRIS Ratios	Unusual Values Equal to Or					2013			2012
	Over		Under			FNIC			FNIC
Gross Premiums to Policyholders' Surplus		900		-			325			233
Net Premium to Policyholders' Surplus		300		-			217			135
Change in Net Writings		33		(33	)		137	*		32
Surplus Aid to Policyholders' Surplus		15		-			0			1
Two-year Overall Operating Ratio		100		-			84			92
Investment Yield		6.5		3.0			1.4	*		2.4	*
Gross Change in Policyholders' Surplus		50		(10	)		48			32
Net Change in Adjusted Policyholders' Surplus		25		(10	)		17			32	*
Liabilities to Liquid Assets		105		-			79			69
Gross Agents' Balance to Policyholders' Surplus		40		-			13			3
One-Year Reserve Development to Policyholders' Surplus		20		-			(4	)		(3	)
Two-Year Reserve Development to Policyholders' Surplus		20		-			(7	)		(2	)
Estimated Current Reserve Deficiency to Policyholders' Surplus		25		-			56	*		50	*
* indicates an unusual value

GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. FNIC’s statutory capital and surplus was $76.9 million and $52.1 million as of December 31, 2013 and 2012, respectively. FNIC’s statutory net income was $3.6 million, $6.6 million and $0.8 million for 2013, 2012 and 2011, respectively. FNIC’s statutory non-admitted assets were nearly nothing and nearly nothing as of December 31, 2013 and 2012, respectively.

(9) COMMITMENTS AND CONTINGENCIES

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

(A) Insured Claim Activity

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

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

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

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(B) Assessment Related Activity

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

During December 2012, the Company was assessed $0.8 million by FIGA relating to the failures of Florida domestic property and casualty insurance companies. Future assessments are likely, although the impact of these assessments on our balance sheet, results of operations or cash flow are undeterminable at this time.

FNIC is also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. FNIC was not assessed by the JUA Plan during 2013 or 2012. Future assessments by this association are undeterminable at this time.

(C) Operational Matters

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for 2010 - 2012 are open for review by the IRS and the various state taxing authorities. The Company’s 2011 federal tax return is currently under review by the IRS. The 2012 federal and state income tax returns were filed by the extended due date in the third quarter of 2013. The 2013 federal and state income tax returns have been extended as of March 2014 and will be timely filed in the third quarter of 2014.

The Company has recorded a net deferred tax asset of $1.0 million and $4.3 million as of December 31, 2013 and December 31, 2012, respectively.  Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2013, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

The Company is not currently involved in any material legal actions arising from the ordinary course of business that are not related to insured claims activity.

(10) LEASES

Relative to the Company’s commitments stemming from operational matters, on or about March 1, 2006 we sold our interest in the building that housed our operations in Lauderdale Lakes through December 16, 2011, to an unrelated party. As part of this transaction, we agreed to lease the same facilities for a five-year term.  We amended the lease agreement and the note receivable on September 1, 2010. As part of the amendment, we discounted the note receivable and have discontinued the interest on the note. In consideration, we paid a reduced lease payment for the remainder of the lease. Our lease for this office space expired in December 2011.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Our executive offices are located at 14050 N.W. 14^th Street, Suite 180, Sunrise, Florida 33323 in an 18,500 square foot office facility. All of our operations are consolidated within this facility. We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the lease term. Our lease for this office space will expire in May 2017.

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

Fiscal Year	Payments
	(Dollars in Thousands)
2014		392
2015		400
2016		408
2017		156
Total	$	1,356

Rent expense was $0.4 million, $0.2 million and $0.7 million in 2013, 2012 and 2011, respectively.

(11) RELATED PARTY TRANSACTIONS

One of our directors is a partner at a law firm that handles some of the Company’s claims litigation. Fees paid to this law firm amounted to approximately $30,500, $27,175 and $3,349 in 2013, 2012 and 2011, respectively, and is included in LAE.

(12) NET INCOME PER SHARE

Net income per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented. In accordance with GAAP, net loss per share would be antidilutive; therefore the basic and diluted loss per share is the same.

A summary of the numerator and denominator of the basic and fully diluted 2013, 2012 and 2011 net income (loss) per share is presented below.

	Income (loss)			Shares Outstanding		Per-share
	(Numerator)			(Denominator)		Amount
	(Dollars in Thousands)
For the year ended December 31, 2013
Basic net income per share	$	12,727			8,506	$	1.50
Fully diluted income per share	$	12,727			8,772	$	1.45
For the year ended December 31, 2012
Basic net income per share	$	4,313			7,952	$	0.53
Fully diluted income per share	$	4,313			8,016	$	0.53
For the year ended December 31, 2011
Basic net loss per share	$	(430	)		7,946	$	(0.05	)
Fully diluted loss per share	$	(430	)		7,946	$	(0.05	)

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(13) SEGMENT INFORMATION

FASB issued guidance requires that the amount reported for each segment item be based on what is used by the chief operating decision maker in formulating a determination as to how many resources to assign to a segment and how to appraise the performance of that segment. The term chief operating decision maker may apply to the chief executive officer or chief operating officer or to a group of executives. Note: The term of chief operating decision maker may apply to a function and not necessarily to a specific person. This is a management approach rather than an industry approach in identifying segments. The segments are based on the Company’s organizational structure, revenue sources, nature of activities, existence of responsible managers, and information presented to the Board of Directors.

If any one of the following exists, a segment must be reported on.

· Revenue, including unaffiliated and inter-segment sales or transfers, is 10% or more of total revenue of all operating segments.

· Operating profit or loss is 10% or more of the greater, in absolute amount, of the combined operating profit (or loss) of all industry segments with operating profits (or losses).

· Identifiable assets are 10% or more of total assets of all operating segments.

Operating segments that are not reportable should be combined and disclosed in the ‘‘all other’’ category. Disclosure should be made of the sources of revenue for these segments.

Accordingly, we have no segment information to report.

(14) STOCK COMPENSATION PLANS

We implemented a stock option plan in 1998 (the “1998 Plan”), which expired in September 2008. Under this plan, we were authorized to grant options to purchase up to 900,000 common shares, and as of December 31, 2013 and December 31, 2012, we had outstanding exercisable options to purchase 3,000 and 78,500 shares, respectively.

We implemented a stock option plan in 2002 (the “2002 Plan”), which expired in April 2012. Under this plan, we were authorized to grant options to purchase up to 1,800,000 common shares, and as of December 31, 2013 and December 31, 2012, we had outstanding exercisable options to purchase 523,521 and 702,597 shares, respectively.

In April 2012, our Board of Directors adopted, and in September 2012 our shareholders approved, the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan permits the issuance of up to 1,000,000 shares of our common stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive awards, such as incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, and performance shares. Officers, directors and executive, managerial, administrative and professional employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be granted singly, in combination, or in tandem. The 2012 Plan was amended and restated in March 2013 to clarify the plan administrator’s authority to permit the vesting of unvested restricted shares in the event of the death of the grantee. The 2012 Plan will expire on April 5, 2022.

On August 5, 2013, a total of 150,000 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 100,000 shares were granted to the Company's Chief Executive Officer and President and 50,000 shares were granted to the Company's Chief Financial Officer.

On March 4, 2013, a total of 100,000 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 25,000 shares were granted to the Company's Chief Executive Officer and President and 15,000 shares were granted to the Company's Chief Financial Officer. An aggregate of 20,000 shares were granted to the Company's directors and the remaining 40,000 shares were granted to other employees of the Company.

- 102 -

Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Activity in our stock option and incentive plans for the period from January 1, 2011 to December 31, 2013 is summarized below.

	1998 Plan					2002 Plan					2012 Plan
	Number of Shares			Weighted Average Option Exercise Price		Number of Shares			Weighted Average Option Exercise Price		Number of Shares			Fair Market Value at Grant
Outstanding at January 1, 2011		89,750		$	12.83		574,800		$	9.12		-		$	-
Granted		-		$	-		179,000		$	2.45		-		$	-
Exercised		-		$	-		-		$	-		-		$	-
Cancelled		-		$	-		(129,100	)	$	14.29		-		$	-
Outstanding at January 1, 2012		89,750		$	12.83		624,700		$	6.15		-		$	-
Granted		-		$	-		181,500		$	4.40		-		$	-
Exercised		-		$	-		(33,104	)	$	3.86		-		$	-
Cancelled		(11,250	)	$	13.54		(70,499	)	$	12.45		-		$	-
Outstanding at January 1, 2013		78,500		$	12.73		702,597		$	5.17		-		$	-
Granted		-		$	-		-		$	-		250,000		$	5.54
Exercised		(500	)	$	8.67		(165,577	)	$	7.15		-		$	-
Cancelled		(75,000	)	$	12.92		(13,499	)	$	5.41		(500	)	$	5.54
Outstanding at December 31, 2013		3,000		$	8.67		523,521		$	4.54		249,500		$	5.54

Options outstanding as of December 31, 2013 are exercisable as follows.

	1998 Plan				2002 Plan
Options Exercisable at:	Number of Shares		Weighted Average Option Exercise Price		Number of Shares		Weighted Average Option Exercise Price
December 31, 2013		3,000	$	8.67		310,475	$	4.54
December 31, 2014		-	$	8.67		138,146	$	4.54
December 31, 2015		-	$	8.67		74,900	$	4.54
December 31, 2016		-	$	8.67		-	$	4.54
December 31, 2017		-	$	8.67		-	$	4.54
Thereafter		-	$	8.67		-	$	4.54
Total options exercisable		3,000				523,521

Upon the exercise of options, the Company issues authorized shares.

Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the APB and related Interpretation, as permitted by FASB issued guidance.Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2013 and 2012 include the following.

· Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and

· Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as they are not required to be by the pronouncement.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

As a result of adopting FASB issued guidance on January 1, 2006, the Company’s income from continuing operations before provision for income tax expense and net income for 2013 are lower by approximately $447,000 and $278,600, respectively, than if it had continued to account for share-based compensation under APB guidance.

As a result of adopting FASB issued guidance on January 1, 2006, the Company’s income from continuing operations before provision for income tax expense and net income for 2012 are lower by approximately $265,900 and $165,700, respectively, than if it had continued to account for share-based compensation under APB guidance.

Basic and diluted earnings per share for 2013 would have been $1.53 and $1.48, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $1.50 and $1.45, respectively.

Basic and diluted income per share for 2012 would have been $0.55, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted income per share of $0.53.

Because the change in income taxes receivable includes the effect of excess tax benefits, those excess tax benefits also must be shown as a separate operating cash outflow so that operating cash flows exclude the effect of excess tax benefits. FASB issued guidance requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

FASB issued guidance requires that when valuing an employee stock option under the Black-Scholes option pricing model, the fair value be based on the option’s expected term and expected volatility rather than the contractual term. The estimate of the fair value on the grant date should reflect the assumptions marketplace participants now use on the date of the measurement (i.e. grant date). During 2011, management changed the expected term in the Black –Scholes option pricing model from four years to two years for new options granted.  Management believes that share price volatility over the last two years is more indicative of future share price volatility. The change has had an immaterial impact on the financial statements.

The weighted average fair value of options granted during 2012 and 2011 estimated on the date of grant using the Black-Scholes option-pricing model was $1.45 and $0.72 to $0.78, respectively; no options were granted during 2013.

The fair value of options granted is estimated on the date of grant using the following assumptions.

	December 31, 2013		December 31, 2012		December 31, 2011
Dividend yield		N/A		N/A		N/A
Expected volatility		N/A		39.79%		35.21% -39.08%
Risk-free interest rate		N/A		0.28%		0.20% - 0.25%
Expected life (in years)		N/A		4.45		4.29 - 4.35

Summary information about the Company’s stock options outstanding at December 31, 2013 follows.

	Range of Exercise Price		Outstanding at December 31, 2013		Weighted Average Contractual Periods in Years		Weighted Average Exercise Price		Exercisable at December 31, 2013
1998 Plan	$	8.67		3,000		0.58	$	8.67		3,000
2002 Plan	$	2.45 - $13.24		523,521		5.35	$	4.54		310,475

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(15) EMPLOYEE BENEFIT PLAN

We have established a profit sharing plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to contribute up to 100 percent of their compensation, not to exceed statutory limits. The Company match totaled $0.2 million during 2013 and $0.1 million during each of the years 2012 and 2011.

Through December 31, 2010, the Company matched 50% of the first 6% of a participant’s elective contributions.  Effective January 1, 2011, the Board of Directors approved an amendment to our 401(k) plan to be a qualified automatic contribution arrangement with an employer match of 100% of the first 1% of elective contributions and an employer match of 50% of the next 2% to 6% of elective contributions, which is vested 100% after 2 years of service.  Effective January 1, 2014, the Board of Directors approved the Company will match 100% of the first 6% of a participant’s elective contributions.

(16) ACQUISITIONS

We made no acquisitions during 2013 or 2012.

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”. See " Footnote 8 - Regulation – Consent Order”.

(17) COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, 2013, 2012 and 2011, comprehensive income (loss) consisted of the following.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Net income (loss)	$	12,727		$	4,313		$	(430	)
Change in net unrealized gains on investments available for sale		3,041			5,114			572
Comprehensive income before tax		15,768			9,427			142
Income tax expense related to items of other comprehensive income (loss)		(1,144	)		(1,924	)		(215	)
Comprehensive income (loss)	$	14,624		$	7,503		$	(73	)

(18) AUTHORIZATION OF PREFERRED STOCK

Our Amended and Restated Articles of Incorporation authorize the issuance of one million shares of preferred stock with designations, rights and preferences determined from time to time by our board of directors.  Accordingly, our Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock.  We have not issued preferred shares as of December 31, 2013.

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(19)  FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED)

FNHC (the parent company only) has no long term obligations, guarantees or material contingencies as of December 31, 2013. The following summarizes the major categories of the parent company’s financial statements.

Condensed Balance Sheets (Unaudited)	Period Ending December 31,
ASSETS	2013			2012
	(Dollars in Thousands)
Cash and short term investments	$	2,143		$	1,494
Investments and advances to subsidiaries		105,797			61,005
Deferred income taxes receivable		1,006			4,338
Income taxes receivable		8,157			9,515
Property, plant and equipment, net		184			98
Other assets		4,446			4,069
Total assets	$	121,733		$	80,519
LIABILITIES AND SHAREHOLDERS' EQUITY
Income taxes payable		1,690			-
Dividends payable		330			-
Capital contribution payable		16,000			-
Other liabilities		238			125
Total liabilities		18,258			125
Shareholders' equity:
Common stock		110			80
Additional paid-in capital		74,086			45,378
Accumulated other comprehensive loss		(1,727	)		(1,039	)
Retained earnings		31,006			35,975
Total shareholders' equity		103,475			80,394
Total liabilities and shareholders' equity	$	121,733		$	80,519

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Notes to Consolidated Financial Statements

December 31, 2013

Condensed Statements of Operations (Unaudited)	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Revenue:
Management fees from subsidiaries	$	1,864	$	1,228	$	1,734
Equity in income of subsidiaries		21,623		8,787		(48	)
Net investment income		136		34		31
Other income		11		476		1,345
Total revenue		23,634		10,525		3,062
Expenses:
Salaries and wages		2,022		1,853		1,775
Legal fees		113		198		54
Other expenses		2,281		1,726		2,233
Total expenses		4,416		3,777		4,062
Income (loss) before provision for income tax expense (benefit)		19,218		6,748		(1,000	)
Provision for income tax expense (benefit)		6,491		2,435		(570	)
Net income (loss)	$	12,727	$	4,313	$	(430	)

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

Condensed Statements of Cash Flow (Unaudited)
	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Cash flow from operating activities:
Net income (loss)	$	12,727		$	4,313		$	(430	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Equity in (income) loss  of subsidiaries		(21,623	)		(8,787	)		48
Depreciation and amortization of property plant and equipment, net		33			23			7
Deferred income tax (benefit) expense		(3,332	)		(4,274	)		696
Income tax recoverable  (payable)		1,690			(78	)		78
Change in dividends payable		330			-			-
Non-cash compensation		293			188			263
Changes in operating assets and liabilities:
Property, plant and equipment		119			(138	)		73
Deferred gain on sale of assets		-			(30	)		(506	)
Other assets		377			45			(292	)
Capital contribution payable		16,000			-			-
Other liabilities		112			(18	)		(770	)
Net cash provided (used) by operating activities		6,726			(8,756	)		(833	)
Cash flow used in investing activities:
Purchases of investment securities available for sale		(44,792	)		(451	)		(846	)
Cash flow used in investing activities:		(44,792	)		(451	)		(846	)
Net cash provided in financing activities:
Dividends paid		(1,232	)		(159	)		-
Stock options exercised		858			128			-
Tax benefit related to non-cash compensation		168			100			92
Issuance of common stock		27,879			-			-
Advances from subsidiaries		11,042			8,349			668
Net cash provided in financing activities:		38,715			8,418			760
Net increase (decrease) in cash and short term investments		649			(789	)		(919	)
Cash and short term investments at beginning of year		1,494			2,283			3,202
Cash and short term investments at end of year	$	2,143		$	1,494		$	2,283

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

(20) SCHEDULE VI – SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED)

	Loss and LAE - Current Year		Loss and LAE - Prior year			Amortization of deferred policy acquisition costs		Paid losses and LAE expenses		Net premiums written
	(Dollars in Thousands)
2013	$	56,209	$	201		$	21,447	$	22,695	$	160,665
2012	$	31,636	$	(1,427	)	$	13,255	$	15,892	$	68,374
2011	$	31,893	$	(997	)	$	12,347	$	13,672	$	51,976
Affiliation with registrant	Deferred policy acquisition costs		Reserves for losses and LAE			Discount, if any, deducted from previous column		Unearned premiums		Net premiums earned
	(Dollars in Thousands)
Consolidated Property and Casualty Subsidiaries
2013	$	16,708	$	61,016		$	-	$	128,343	$	104,381
2012	$	8,479	$	49,908		$	-	$	59,006	$	59,359
2011	$	7,718	$	59,983		$	-	$	47,933	$	48,523

(21) FAIR VALUE DISCLOSURE

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

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

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

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Federated National Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013

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

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

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

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

Assets measured at fair value on a recurring basis as of December 31, 2013, presented in accordance with this guidance, are as follows.

	As of December 31, 2013
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	-	$	27,209	$	-	$	27,209
Obligations of states and political subdivisions		-		52,064		-		52,064
Corporate		-		91,941		-		91,941
International		-		3,698		-		3,698
		-		174,912		-		174,912
Equity securities:
Common stocks		38,584		-		-		38,584
		38,584		-		-		38,584
Total debt and equity securities	$	38,584	$	174,912	$	-	$	213,496

 (22) SUBSEQUENT EVENTS

On March 4, 2014, a total of 88,648 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in Restricted Stock Agreements.  Of the total, 43,997 shares were granted to the Company's Chief Executive Officer and President and 16,341 shares were granted to the Company's Chief Financial Officer.  An aggregate of 15,710 shares were granted to the Company's directors and the remaining 12,600 shares were granted to other employees of the Company.

On February 24, 2014, Federated National entered into a Reimbursement Contract with the SBA for the 2014-2015 hurricane season.  This Reimbursement Contract is part of the Company’s reinsurance program and will reimburse Federated National for covered property losses under its homeowners’ insurance policies resulting from hurricanes that cause damage in the State of Florida through May 31, 2015.

Under this Reimbursement Contract, the FHCF will provide approximately $531.0 million of aggregate seasonal coverage for covered losses in excess of approximately $225.0 million, subject to a 10.0% Company participation. Federated National’s premium for the FHCF reinsurance coverage will be approximately $41.4 million payable in three installments between August 2014 and December 2014.  The actual attachment point, total coverage and cost will not be finalized until December 31, 2014.

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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 Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.

Management’s Report on Internal Control over Financial Reporting

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework(2013) issued by the COSO.

Based on the results of this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2013 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. We reviewed the results of management’s assessment with the Company’s Audit Committee.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness

Our management and our audit committee do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control gaps and instances of fraud have been detected. These inherent limitations include the realities that judgments and decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.

ITEM 9B OTHER INFORMATION

None

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Federated National Holding Company and Subsidiaries

PART III

ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth certain information with respect to our executive officers and directors as of March 17, 2014:

Name	Age	Position with the Company
Michael H. Braun (5)(6)	46	Chief Executive Officer, President, Class I Director
Peter J. Prygelski, III (2)	45	Chief Financial Officer, Treasurer, Class I Director
Bruce F. Simberg (2)(3)(4)(5)	65	Chairman, Class II Director
Richard W. Wilcox, Jr. (1)(4)(6)	72	Class II Director
Carl Dorf (1)(2)(4)	3	Class III Director
Charles B. Hart, Jr. (2)(3)(4)(5)(6)	75	Class III Director
Jenifer G. Kimbrough (1)(3)(4)	42	Class I Director

(1) Audit Committee Member

(2) Investment Committee Member

(3) Compensation Committee Member

(4) Nominating Committee Member

(5) Directors Compensation Committee Member

(6) Strategic Initiatives 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 2016 annual meeting.  The current term of the Class II directors terminates on the date of our 2015 annual meeting and the current term of the Class III directors terminates as of the date of our 2014 annual meeting.

The following is a brief description of the business experience of each director and executive officer of the Company.

Michael H. Braun was appointed Chief Executive Officer of the Company in July 2008, President in June 2009, and elected to the Board of Directors in December 2005.   Previously, Mr. Braun was Chief Operating Officer, where he was responsible for the Company’s day-to-day operations and strategic product portfolio.  Mr. Braun has also served as President of Federated National Insurance Company (“FNIC”), a subsidiary of the Company, since September 2003, a position that he continues to hold. Previously, he held key management positions within FNIC, responsible for operations, marketing and underwriting.  Prior to joining the Company, Mr. Braun was Managing Partner for an independent chain of insurance agencies, which was acquired by the Company in 1998.

Peter J. Prygelski, III was named Chief Financial Officer in June 2007 after serving as an independent director from January 2004 through June 2007.  Mr. Prygelski was re-nominated to the Board in June 2008 and has served as an inside director since that time.  Mr. Prygelski has spent his entire career in the financial services industry.  He spent 12 years at American Express in various capacities including; Director of Internal Audit and Assistant General Auditor of American Express Centurion Bank.  In this capacity, Mr. Prygelski was responsible for the monitoring of internal controls for a bank with $45 billion in assets, and assessing and mitigating operational, reputational, regulatory and strategic risk.  After leaving American Express, he spent the next three years at Ernst & Young and Deloitte and Touche.  At both firms, Mr. Prygelski served as a senior manager responsible for growing the financial services practice in the Southeast.  He managed teams that provided Fortune 500 companies with consulting services in the following areas; Finance Transformation, Finance Operations Effectiveness, Financial Reporting, Cost Optimization, Governance, Risk and Compliance Services, and Board of Directors Performance.

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Bruce F. Simberg has served as a director of the Company since January 1998. Mr. Simberg has been a practicing attorney since October 1975, most recently as managing partner of Conroy, Simberg, Ganon, Krevans, Abel, Lurvey, Morrow & Schefer, P.A. (“Conroy Simberg”), a law firm in Fort Lauderdale, Florida, since October 1979.

Richard W. Wilcox, Jr. has served as a director of the Company since January 2003.  Mr. Wilcox has been in the insurance industry for more than 40 years.  In 1963, Mr. Wilcox started an insurance agency that eventually developed into a business generating $10 million in annual revenue.  In 1991, Mr. Wilcox sold his agency to Hilb, Rogal and Hamilton Company (“HRH”) of Fort Lauderdale, for which he retained the position of President through 1998.  In 1998, HRH of Fort Lauderdale merged with Poe and Brown of Fort Lauderdale, and Mr. Wilcox served as the Vice President of Poe and Brown until 1999, when he retired.  Mr. Wilcox holds CIC designation as a member of the Society of Certified Insurance Counselors.  Mr. Wilcox also holds an Advanced Professional Director Certification from the American College of Corporate Directors, a national public company director education and credentialing organization.

Carl Dorf, age 73,has served as a director of the Company since August 2001.  Mr. Dorf has over 40 years of diversified investment experience as a security analyst, portfolio manager, mutual fund manager and hedge fund manager.  He earned the Chartered Financial Analyst (CFA) designation and in the past served as director of the Los Angeles Society of Security Analysts.  Since April 2001, Mr. Dorf has been the principal of Dorf Asset Management, LLC, and is responsible for all investment decisions made by that company.  From January 1991 to February 2001, Mr. Dorf served as the Fund Manager of ING Pilgrim Bank and Thrift Fund.  Prior to his experience at Pilgrim, Mr. Dorf was a principal in Dorf & Associates, an investment management company.

Charles B. Hart, Jr., age 75, was appointed to the Board of Directors in March 2002.  Mr. Hart has more than 40 years of experience in the insurance industry.   From 1973 to 1999, Mr. Hart served as President of Public Assurance Group and as General Manager of Operations for Bristol West Insurance Services.  Since 1999, Mr. Hart has acted as an insurance consultant.

Jenifer G. Kimbrough has served as a director of the Company since April 2009.  Ms. Kimbrough has served as the Vice President of Compliance and Audit for Surgical Care Affiliates since March 2010, prior to which Ms. Kimbrough served as the Vice President of Assurance and Process Improvement. Prior to 2007, Ms. Kimbrough was the Senior Vice President of Investor Relations at Regions Financial Corporation.  From 1993 to 2003, Ms. Kimbrough served as an Audit Senior Manager at Ernst & Young LLP.  Ms. Kimbrough received her certification as a certified public accountant from the Alabama State Board of Public Accountancy in 1994.  Ms. Kimbrough is an active member of several societies, including: American Woman’s Society of CPAs, Institute of Internal Auditors, Alabama State Society of CPAs and American Institute of CPAs.  Additionally, she recently served on the AICPA Women’s Initiative Executive Committee and as National President of the AWSCPA.

Board Committees

The standing committees of the Board of Directors in 2013 were the Audit Committee, the Compensation Committee, the Nominating Committee, the Investment Committee, the Directors Compensation Committee and the Strategic Initiatives Committee.  Charters for the Audit, Compensation and Nominating Committees are available upon the Company’s website at FedNat.com.  The charter of the Audit, Compensation and Nominating Committees is also available in print to any shareholder who requests it from our Corporate Secretary.

Audit Committee.  As of December 31, 2013, the Audit Committee was composed of Jenifer G. Kimbrough, who served as the Chairman of the Audit Committee, Richard W. Wilcox, Jr. and Carl Dorf.  Each member was determined to be “independent” as defined under the Nasdaq Rules applicable to the Company and SEC rules for Audit Committee membership.  Ms. Kimbrough was designated as a “financial expert” as that term is defined in the applicable rules and regulations of the Exchange Act.  The Board determined that Ms. Kimbrough was a "financial expert" as defined in the applicable rules and regulations of the Exchange Act based on her understanding of GAAP and financial statements; her ability to assess the general application of GAAP in connection with the accounting for estimates, accruals and reserves; her experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities; her understanding of internal controls and procedures for financial reporting; and her understanding of audit committee functions.

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Federated National Holding Company and Subsidiaries

Pursuant to its written charter, the duties and responsibilities of the Audit Committee include, but are not limited to, (a) the appointment of the independent certified public accountants and any termination of such engagement, (b) reviewing the plan and scope of independent audits, (c) reviewing significant accounting and reporting policies and operating controls, (d) having general responsibility for all related auditing and financial statement matters, and (e) reporting its recommendations and findings to the full Board of Directors.  The Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed by the independent accountants, subject to the de minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Audit Committee prior to the completion of the audit.

To ensure prompt handling of unexpected matters, the Audit Committee delegates to the Chair the authority to amend or modify the list of approved permissible non-audit services and fees. The Chair will report action taken to the Audit Committee at the next committee meeting. The Chief Financial Officer is responsible for tracking all independent auditor fees against the budget for such services and reports at least annually to the Audit Committee.

Compensation Committee.  As of December 31, 2013, the Company’s Compensation Committee was composed of Bruce F. Simberg, Charles B. Hart, Jr., and Jenifer G. Kimbrough.  Each member is independent as defined by the Nasdaq Rules.  The Compensation Committee performs the duties and responsibilities pursuant to its charter, which includes reviewing and approving the compensation of the Company's executive officers.  Mr. Simberg serves as the Chairman.

Nominating Committee.  As of December 31, 2013, the Company’s Nominating Committee was composed of Bruce F. Simberg, Jenifer G. Kimbrough, Carl Dorf, Charles B. Hart, Jr. and Richard W. Wilcox, Jr.  Each member is independent as defined by the Nasdaq Rules.  Mr. Simberg serves as the Chairman.

The Nominating Committee will consider candidates for director who are recommended by its members, by other Board members and by management of the Company.  The Nominating Committee will consider nominees recommended by our shareholders if the shareholder submits the nomination in compliance with the advance notice, information and other requirements described in our bylaws and applicable securities laws.  The Nominating Committee evaluates director candidates recommended by shareholders in the same way that it evaluates candidates recommended by its members, other members of the Board, or other persons.

It is the Board’s policy to identify qualified potential candidates without regard to any candidate’s race, color, disability, gender, national origin, religion or creed.  In recommending proposed nominees to the full Board, the Nominating Committee is charged with building and maintaining a Board that has an ideal mix of talent and experience to achieve the Company’s business objectives.  In particular, the Nominating Committee considers all aspects of a candidate’s qualifications in the context of the needs of the Company at that point in time with a view to creating a Board with a diversity of experience and perspectives.  Among the qualifications, qualities and skills of a candidate considered important by the Nominating Committee is a person with strength of character, mature judgment, familiarity with the Company’s business and industry, independence of thought and an ability to work collegially.

Shareholders who wish to recommend nominees to the Nominating Committee should submit their recommendation in writing to the Secretary of the Company at its executive offices pursuant to the requirements contained in Article III, Section 13 of the Company’s Bylaws.  This section provides that the notice shall include: (a)  as to each person who the shareholder proposed to nominate for election, (i) name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Company which are beneficially owned by the person, (iv) the consent of each nominee to serve as a director of the Company if so elected and (v) any other information relating to the person that is required to be disclosed in solicitation for proxies for the election of directors pursuant to Rule 14A under the Exchange Act; and (b) as to the shareholder giving the notice, the name and record address of the shareholder, and (ii) the class and number of shares of capital stock of the Company which are beneficially owned by the shareholder.  The Company may require any proposed nominee to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as a director of the Company.

Investment Committee.  As of December 31, 2013, the Company’s Investment Committee was composed of Peter J. Prygelski, III, Bruce F. Simberg, Carl Dorf and Charles B. Hart, Jr.  The Investment Committee manages our investment portfolio pursuant to its adopted Investment Policy Statement.  Mr. Dorf serves as the Chairman.

Directors Compensation Committee.  As of December 31, 2013, the Company’s Directors Compensation Committee was composed of Michael H. Braun, Bruce F. Simberg and Charles B. Hart, Jr.  The Directors Compensation Committee performs the duties and responsibilities pursuant to its charter, which includes reviewing and recommending the compensation of the Company's independent directors for approval by the full Board of Directors.    Mr. Simberg serves as the Chairman.

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Strategic Initiatives Committee.  As of December 31, 2013, the Company’s Strategic Initiatives Committee was composed of Michael H. Braun, Richard W. Wilcox, Jr. and Charles B. Hart, Jr.  The Strategic Initiatives Committee performs the duties and responsibilities pursuant to its charter, which includes developing, adopting and modifying strategic initiatives of the Company.   Mr. Hart serves as the Chairman.

Corporate Governance/Code of Conduct

We have adopted a Code of Conduct for all employees, officers and directors of the Company.  A copy of our Code of Conduct policy is available on our web site at FedNat.com.

Leadership Structure and Risk Oversight

The Chairman of the Board typically presides at all meetings of the Board.  The Chairman is elected to serve by the directors. Currently, the offices of Chairman of the Board and Chief Executive Officer are separated.  The Chief Executive Officer and Chief Financial Officer currently serve as the only members of management on the Board. Based on the current size, organizational structure and nature of operations of the Company, the Board believes that maintaining the separation of the offices of the Chairman of the Board and Chief Executive Officer is in the best interests of the Company.

The Company believes that its Board as a whole should encompass a range of talent, skill, diversity, and expertise enabling it to provide sound guidance with respect to the Company's operations and interests. The Company's policy is to have at least a majority of Directors qualify as independent as defined by the listing and maintenance rules of The Nasdaq Stock Market (the “Nasdaq Rules”).  The Nominating Committee identifies candidates for election to the Board of Directors; reviews their skills, characteristics and experience; and recommends nominees for director to the Board for approval. The Nominating Committee's Charter provides that the Board of Directors as a whole should be diverse and consist of individuals with various and relevant career experience, relevant technical skills, industry knowledge and experience, financial expertise and local or community ties.  Minimum individual requirements include strength of character, mature judgment, familiarity with the Company's business and industry, independence of thought and an ability to work collegially.  The Board believes that the qualifications of the directors, as set forth in their biographies set forth above provide them with the qualifications and skills to serve as a director of our Company.

To facilitate the Board’s oversight functions and to take advantage of the knowledge and experience of its members, the Board has created several standing committees.  These committees, the Audit, Investment, Nominating, Compensation, Directors Compensation and Strategic Initiatives Committees, allow regular risk oversight and monitoring, and deeper analysis of issues before the Board.  The Audit and Compensation committee structures also require committees to be comprised exclusively of independent directors.  The membership of the standing committees is reviewed from time to time, and specific committee assignments are proposed and appointed by the Board. In addition, among their other respective duties, the Board and Audit Committee each conduct an annual assessment to evaluate their effectiveness.

The Board’s role in connection with risk oversight is to oversee and monitor the management of risk practiced by the Company’s management in the performance of their duties.  The Board does this in a number of ways, principally through the oversight responsibility of committees of the Board, but also as part of the strategic planning process. For example, our Audit Committee oversees management of risks related to accounting, auditing and financial reporting and maintaining effective internal controls over financial reporting. Our Nominating Committee oversees risk associated with corporate governance and the Company’s code of conduct, including compliance with listing standards for independent directors and conflicts of interest.  Our Compensation Committee oversees the risk related to our executive compensation plans and arrangements.  Our Investment Committee oversees the risks related to managing our investment portfolio.  Our Directors Compensation Committee oversees the risk related to our non-employee director compensation plans and arrangements.  Our Strategic Initiatives Committee oversees the development and implementation of strategic initiatives of the Company.  The full Board receives reports on a regular basis regarding each committee’s oversight from the chairperson of each committee when reporting on their committee’s actions at regular Board meetings.

Subsidiary Presidents

James Gordon Jennings, III (age 56) has served as the President of Federated National Underwriters, Inc. since May 2008 and as the Company’s Vice President of Risk Management since April 2008.  He was employed from 1990 through 2000 by American Vehicle, one of our wholly owned subsidiaries, where he was involved in all aspects of property and casualty insurance.  Mr. Jennings served as our Controller from May 2000 through August 2002, as our Chief Financial Officer from August 2002 through June 2007, and as our Chief Accounting Officer from June 2007 through March 2008.  Mr. Jennings, formerly a certified public accountant, also holds a Certificate in General Insurance and an Associate in Insurance Services as designated by the Insurance Institute of America. Mr. Jennings maintains a Florida General Lines Insurance License since 2009 and also carries a 1-20 Florida Surplus Lines License.

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C. Brian Turnau (age 47) has served as the President of Federated National Adjusting, Inc. since July 2006.  Mr. Turnau served as the Litigation Manager of FNA from June 2000 until his promotion to President.  He has over 10 years’ experience in the insurance industry.  Prior to joining the Company, Mr. Turnau worked for private practice insurance defense litigation law firms for over fifteen years.  Mr. Turnau earned his Bachelor of Arts degree in History in 1989 from Washington and Lee University.  He currently serves on the Board of Directors of the Florida High School for Accelerated Learning, a nonprofit charter school that serves the needs of underprivileged students.

Christopher Clouse (age 46) has served as the President of Insure-Link, Inc. since its incorporation in March 2008.  Mr. Clouse has over 22 years of experience in the insurance industry and has maintained a Florida General Lines Insurance License since 1991.  He also carries a 2-14 Life including Variable Annuity License, 1-20 Florida Surplus Lines License, and is an Accredited Advisor in Insurance as designated by The Institutes.  Prior to joining the Company Mr. Clouse served as an agent and/or managing agent for several private agencies with a primary focus on personal lines of insurance including homeowners, auto and flood insurance.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires that our executive officers, directors, and persons who own more than 10% of a registered class of our equity securities to file reports of beneficial ownership and certain changes in beneficial ownership with the SEC and to furnish us with copies of those reports. To our knowledge, based solely on a review of the copies of such reports furnished to us or written representations that no other reports were required, we believe that during the year ended December 31, 2013, our officers, directors and greater than 10% shareholders timely filed all reports required by Section 16(a).

ITEM 11 EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information regarding compensation earned by, awarded to or paid to our Chief Executive Officer and President, and Chief Financial Officer, for the years ended December 31, 2013 and 2012.  We refer to these officers as our Named Executive Officers in other parts of this Form 10-K.  We currently do not have any other individual employee of the Company designated as an executive officer.

SUMMARY COMPENSATION
Name and Principal Position	Year	Salary		Bonus		Stock Awards		Option Awards (1)		Non-Equity Incentive Plan Compensation		Nonqualified Deferred Compensation Earnings		All Other Compensation (2)		Total
Michael H. Braun	2013	$	347,322	$	72,300	$	1,141,500		--		--		--	$	26,665	$	1,587,787
Chief Executive Officer, President	2012	$	278,261	$	70,800		--	$	21,743		--		--	$	27,821	$	398,625
Peter J. Prygelski, III	2013	$	249,182	$	75,000	$	584,600		--		--		--	$	30,737	$	939,519
Chief Financial Officer, Treasurer	2012	$	222,535	$	59,400		--	$	21,743		--		--	$	27,573	$	331,251

(1) This amount reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.    Assumptions used in the calculation of this amount are included in Footnote 14 to the Company’s audited financial statements for fiscal years ended December 31, 2013 and December 31, 2012, respectively.

(2) See table "All Other Compensation" for an itemized disclosure of this element of compensation.

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ALL OTHER COMPENSATION
Name	Year	Auto		Club Member Fees		Insurance Benefits (1)		Contribution to 401(k) Plan (2)		All Other Compensation Total
Michael H. Braun	2013	$	8,519		--	$	9,221	$	8,925	$	26,665
	2012	$	9,578		--	$	8,313	$	9,930	$	27,821
Peter J. Prygelski, III	2013	$	6,000	$	9,225	$	6,716	$	8,796	$	30,737
	2012	$	6,000	$	8,100	$	6,018	$	7,455	$	27,573

(1) Represents premiums for life, medical and dental insurance.

(2) Represents matching contributions made by the Company on behalf of the Named Executive Officers to the Company’s 401(k) plan.

Employment Agreements

Michael H. Braun.  We entered into a second amended and restated employment agreement with Michael H. Braun, the Company’s Chief Executive Officer and President, effective as of January 18, 2012, which amends and restates Mr. Braun’s prior employment agreement.  Under his agreement, Mr. Braun was entitled to receive an annual salary of $280,000 and a $500 monthly automobile allowance.  Mr. Braun’s annual salary which may be increased at any time during the term of the agreement, was increased to $475,000 effective January 1, 2014. The agreement is for a term of two years, which term shall automatically be extended so that at all times the balance of the term shall not be less than two years unless sooner terminated as provided in the second amended and restated employment agreement.   Mr. Braun is also entitled to receive such bonuses and increases as may be awarded by the Board of Directors.  It also contains customary confidentiality and non-solicitation provisions.  Additionally, we entered into an amended and restated non-competition, non-disclosure and non-solicitation agreement with Mr. Braun effective August 5, 2013.  The amended non-compete agreement prohibits Mr. Braun from directly or indirectly competing with us for a period of two (2) years after the termination of his employment for any reason.  If Mr. Braun’s employment with the Company is terminated, he is entitled to certain payments described below.

Peter J. Prygelski, III.  We entered into a second amended and restated employment agreement with Peter J. Prygelski, III, the Company’s Chief Financial Officer and Treasurer, effective as of January 18, 2012, which amends and restates Mr. Prygelski’s prior employment agreement.  Under his agreement, Mr. Prygelski was entitled to receive an annual salary of $223,000 and a $500 monthly automobile allowance.  Mr. Prygelski’s annual salary which may be increased at any time during the term of the agreement, was increased to $300,000 effective January 1, 2014. The agreement is for a term of two years, which term shall automatically be extended so that at all times the balance of the term shall not be less than two years unless sooner terminated as provided in the second amended and restated employment agreement. Mr. Prygelski is also entitled to receive such bonuses and increases as may be awarded by the Board of Directors. It also contains customary confidentiality and non-solicitation provisions.  Additionally, we entered into an amended and restated non-competition, non-disclosure and non-solicitation agreement with Mr. Prygelski effective August 5, 2013.  The amended non-compete agreement prohibits Mr. Prygelski from directly or indirectly competing with us for a period of two (2) years after the termination of his employment for any reason.   If Mr. Prygelski’s employment with the Company is terminated, he is entitled to certain payments described below.

Mr. Braun and Mr. Prygelski are each entitled to receive certain payments upon the termination of employment under certain circumstances as set forth in their respective agreements, both under the agreements as in effect during 2011 and as amended and restated in 2012.  If the executive’s employment is terminated by us without Cause (as defined in the respective agreements), we must make a lump sum payment to the executive equal to two years' base salary (the “Termination Severance”). In addition, all unvested stock options and any other equity awards held by him will become vested.

If Mr. Braun’s or Mr. Prygelski’s employment with us is terminated for Cause or as a result of his death or disability, he will be entitled to his base salary prorated through the date of the termination and any benefits due him as may be provided under the applicable plan, program or arrangement.

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The agreements also provide for payments to the executives if employed by us on the date on which a Change of Control occurs.  Under the agreements, a “Change of Control” will be deemed to have occurred if: (i) any person, including a “group” as defined in Section 13(d)(3) of the Exchange Act, becomes the owner or beneficial owner of our securities having 50% (which was increased from 30% in the agreements in effect during 2011) or more of the combined voting power of our then-outstanding securities that may be voted for the election of our directors (other than as a result of an issuance of securities initiated by us, or open market purchases approved by our Board, as long as the majority of the Board approving the purchases is the majority at the time the purchases are made), or (ii) the persons who were our directors before such transactions shall cease to constitute a majority of our Board, or any successor to us, as the direct or indirect result of or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions.  If, following a Change in Control, Mr. Braun’s or Mr. Prygelski’s employment is terminated by us (or any successor or subsidiary) without Cause or by the executive for Good Reason (as defined in the respective agreements), we will make a lump sum payment to the executive in an amount equal to two times the sum of his base salary in effect immediately prior to the Change of Control plus his actual bonus for the fiscal year immediately preceding the Change of Control (the "Change of Control Severance").  Additionally, all unvested stock options and any other equity awards held by him will become vested and the Company will continue to provide Messrs. Braun and Prygelski (and their families) with medical insurance for a period of two years after the date of such termination of employment at no cost and on the same terms and conditions as in effect on the date on which such termination of employment occurs.

If either Mr. Braun or Mr. Prygelski is terminated by us without Cause prior to a Change of Control, and a Change of Control occurs within six months following such termination, then in addition to the Termination Severance described above, the executive will be entitled to an additional lump sum payment in an amount equal to (i) the Change of Control Severance, less (ii) the Termination Severance.

As a condition to Messrs. Braun and Prygelski’s entitlement to receive the base salary amounts and equity award acceleration referenced above, each is bound by the terms of an agreement that sets forth certain restrictive covenants.  Pursuant to the non-competition provisions of these agreements, each are prohibited from working in the insurance industry in any territories where the Company has been doing business for a period of one year from the date on which he terminates employment with the Company for any reason (other than without cause).  For a period of one year after his employment is terminated, he is also prohibited from soliciting directly for himself or for any third person any employees or former employees of the Company, unless the employees have not been employed by the Company for a period in excess of six months, and from disclosing any confidential information that he learned about the Company during his employment.

Grants of Plan Based Awards

The following table provides information regarding stock options granted to Named Executive Officers during 2013 under the Company’s 2012 Stock Incentive Plan:

GRANTS OF PLAN-BASED AWARDS
Name	Grant Date	All Other Equity Awards / Number of Securities Underlying Options		Exercise or Base Price of Equity Awards		Grant Date Fair Value of Equity Awards (1)
	3/4/2013		25,000	$	5.54	$	138,500
Michael H. Braun	8/5/2013		100,000	$	10.03	$	1,003,000
	3/4/2013		15,000	$	5.54	$	83,100
Peter J. Prygelski, III	8/5/2013		50,000	$	10.03	$	501,500

(1) This amount reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.    Assumptions used in the calculation of this amount are included in Footnote 14 to the Company’s audited financial statements for fiscal year ended December 31, 2013.

Stock Incentive Plans

Our Amended and Restated 2012 Stock Incentive Plan (the “2012 Plan”) is administered by the Compensation Committee (the “Committee”).  The objectives of the 2012 Plan include attracting, motivating and retaining key personnel and promoting our success by linking the interests of our employees, directors and consultants with our success.

Awards may be made under the 2012 Plan in the form of (a) incentive stock options, (b) non-qualified stock options, (c) stock appreciation rights, (d) dividend equivalent rights, (e) restricted stock, (f) unrestricted stock, (g) restricted stock units, and (h) performance shares. No incentive stock option may be granted to a person who is not an employee of the Company or one of its subsidiaries on the date of grant. In addition, both incentive stock options and non-statutory stock options were granted under our 1998 and 2002 stock option plans, both of which have expired, although certain options remain outstanding under these plans.

Options Available for Issuance. As of December 31, 2013, all 900,000 shares of common stock authorized for issuance upon exercise of options granted under the 1998 plan and 1,800,000 total shares authorized for issuance under the 2002 plan have been issued or are issuable upon exercise of outstanding options, and there were 750,500 shares available to be awarded under the 2012 Plan.  The shares to be delivered upon exercise of options or awards will be made available, at the discretion of the Committee, from authorized but unissued shares or outstanding options or awards that expire or are cancelled. If shares covered by an option or award cease to be issuable for any reason, such number of shares will no longer count against the shares authorized under the plan and may again be granted under the 2012 Plan.

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Term of Options. The term of each outstanding option granted to our officers and employees is currently 10 years.

Vesting Schedule. Options or awards granted under our stock plans, unless waived or modified in a particular option agreement or by action of the Committees, typically vest according to the following schedule:

Vesting Schedule
From the Grant Date	Portion of Grant Vested
Less than 1 year		0	%
1 year		33 1/3	%
2 years		33 1/3	%
3 years		33 1/3	%

Options or awards granted under the stock plans require that the recipient of a grant be continuously employed or otherwise provide services to us or our subsidiaries. Failure to be continuously employed or in another service relationship generally results in the forfeiture of options or awards not vested at the time the employment or other service relationship ends. Termination of a recipient’s employment or other service relationship for cause generally results in the forfeiture of all of the recipient’s unexercised options or awards.

Adjustments in Our Capital Structure. The number and kind of shares available for grants under our stock plans and any outstanding options or awards under the plans, as well as the exercise price of outstanding options or awards, will be subject to adjustment by the Committee in the event of any merger, consolidation, reorganization, stock split, stock dividend or other event causing a capital adjustment affecting the number of outstanding shares of common stock.  In the event of a business combination or in the event of a sale of all or substantially all of our assets, the Committee may cash out some or all of the unexercised, vested options or awards under the plan, or allow some or all of the options or awards to remain outstanding, subject to certain conditions. Unless otherwise provided in individual option agreements, the vesting of outstanding options or awards will not accelerate in connection with a business combination or in the event of a sale of all or substantially all of our assets.

Administration. The Committee has full discretionary authority to determine all matters relating to options and awards granted under the stock plans, including the persons eligible to receive options or awards, the number of shares subject to each option or award, the exercise price of each option or award, any vesting schedule, any acceleration of the vesting schedule and any extension of the exercise period. The Committee has granted limited authority to executive management members to grant awards to eligible individuals.

Amendment and Termination. Our Board of Directors has authority to suspend, amend or terminate the 2012 Plan, except as would adversely affect participants rights to outstanding awards without their consent. The 2012 Plan was amended and restated in March 2013 to clarify the plan administrator’s authority to permit the vesting of unvested restricted shares in the event of the death of the grantee. As the plan administrator, our Committee has the authority to interpret the plans and options or awards granted under the stock plans and to make all other determinations necessary or advisable for plan administration.

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Outstanding Equity Awards at Fiscal Year-End

The following table summarizes the holdings held by our Chief Executive Officer and President, and Chief Financial Officer for the year ended December 31, 2013.

	Stock Option Awards							Equity Awards
Name	Number of Securities Underlying Exercisable Options (#)		Number of Securities Underlying Unexercisable Options (#)		Option Exercise Price ($)		Option Expiration Date	Shares That Have Not Vested (#)		Market Value of Shares That Have Not Vested ($)(1)		Equity Exercise Price ($)		Equity Expiration Date
Michael H. Braun		40,000		--		8.32	07/01/2014 (2)
		500		--		4.59	12/12/2018 (3)
		32,000		8,000		4.73	01/02/2015 (4)
		9,000		6,000		4.36	03/03/2020 (5)
		6,667		3,333		2.45	08/22/2021 (6)
		5,000		10,000		4.40	04/06/2022 (7)
									25,000		366,750		--		--	(8)
									100,000		1,467,000		--		--	(9)
Peter J. Prygelski, III		10,000		--		8.32	07/01/2014 (2)
		500		--		4.59	12/12/2014 (3)
		9,000		6,000		4.36	03/03/2020 (5)
		6,667		3,333		2.45	08/22/2021 (6)
		5,000		10,000		4.40	04/06/2022 (7)
									15,000		220,050		--		--	(8)
									50,000		733,500		--		--	(9)

(1) Based on the market value of $14.67 on December 31, 2013.

(2) Options vested as to 100% of the underlying shares on December 31, 2013.

(3) Options vested as to 100% of the underlying shares on December 31, 2013.

(4) Options vested as to 80% of the underlying shares on December 31, 2013, the remaining 20% vest as follows:

20% on 1/2/2014.

(5) Options vested as to 60% of the underlying shares on December 31, 2013, the remaining 40% vest as follows:

20% on 3/3/2014 and 20% on 3/3/2015.

(6) Options vested as to 66 2/3% of the underlying shares on December 31, 2013, the remaining 33 1/3% vest as follows:

33 1/3% on 8/22/2014.

(7) Options vested as to 33 1/3% of the underlying shares on December 31, 2013, the remaining 66 2/3% vest as follows:

33 1/3% on 4/6/2014 and 33 1/3% on 4/6/2015.

(8) Restricted stock vested 0% on December 31, 2013, the remaining 100% vest as follows:

33 1/3% on 3/4/2014, 33 1/3 % on 3/4/2015 and 33 1/3% on 3/4/2016.

(9) Restricted stock vested as to 0% on December 31, 2013, the remaining 100% vest as follows:

33 1/3% on 8/5/2014, 33 1/3% on 8/5/2015 and 33 1/3% on 8/5 2016.

Option Exercises and Stock Vested

The following table sets forth certain information with respect to stock options exercised and equity awards vested during calendar year 2013 by the Named Executive Officers.

	Stock Option Awards				Equity Awards
Name	Shares acquired on Exercise (#)		Value Realized on Exercise ($)		Shares Acquired on Vesting (#)		Value Realized on Vesting ($)
Michael H. Braun		500	$	190		--		--
		4,500	$	4,365		--		--
Peter J. Prygelski, III		500	$	190		--		--
		4,500	$	4,365		--		--

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Pension Benefits and Other Nonqualified Deferred Compensation

None of our Named Executive Officers participate in or have account balances in qualified or non-qualified defined benefit or contribution plans or other deferred compensation plans maintained by us. The Compensation Committee, which is composed solely of outside directors as defined for purposes of Section 162(m) of the Internal Revenue Code, may elect to provide our officers and other employees with qualified or non-qualified defined benefit or contribution or other deferred compensation benefits if the Compensation Committee determines that doing so is in our best interests.

Director Compensation

During 2013, we had five non-employee directors that qualified for compensation. Non-employee directors receive an initial stock option or equity grant upon appointment to the board of directors and subsequent option or equity grants as may be granted at the discretion of the Board. In addition, non-employee directors receive annual cash compensation and reimbursement of actual out-of-pocket expenses. During 2013, in lieu of per meeting directors’ fees, the non-employee directors received an annual retainer of $48,000, payable in quarterly installments of $12,000 in January, April, and July and October.

In September 2013, the Directors Compensation Committee recommended, and the Board approved, an increase of the annual retainer fee to $60,000 effective October 1, 2013. In addition the Directors Compensation Committee recommended, and the Board approved, an increase of annual retainer fees to each chairperson of committees and the Board effective October 1, 2013 and payable in quarterly installments. The Chairman of the Board of Directors annual fee was increased to $30,000, the chairperson of the Audit Committee’s annual fee was increased to $16,000, the chairperson of the Investment Committee’s annual fee was increased to $14,000, the chairperson of the Compensation Committee’s annual fee was increased to $12,000, the chairperson of the Strategic Initiatives Committee’s annual fee was increased to $12,000 and the chairperson of the Directors Compensation Committee’s annual fee was set at $1,000 for a non-employee chairperson.  Directors who are also employees do not receive this compensation.  The Directors Compensation Committee may use the services of compensation analysis companies in the future to assist it in providing a fair and competitive compensation plan for its directors.

Historically, the Company granted stock based incentives to our non-employee directors as part of their compensation.  Equity awards granted to non-employee directors in 2013 are shown in the table below.

NON-EMPLOYEE DIRECTORS' COMPENSATION SUMMARY
Name	Fees Earned or Paid in Cash		Equity (Restricted Stock) Awards (2)		Stock Option Awards (2)		Non-Equity Incentive Plan Compensation		Non-Qualified Deferred Compensation Earnings		All Other Compensation			Total
Carl Dorf	$	59,750	$	22,160		--		--		--		--		$	81,910
Charles B. Hart, Jr.	$	58,500	$	22,160		--		--		--	$	5,100	(1)	$	85,760
Bruce F. Simberg	$	69,750	$	22,160		--		--		--		--		$	91,910
Richard W. Wilcox, Jr.	$	58,500	$	22,160		--		--		--				$	80,660
Jenifer G. Kimbrough	$	61,000	$	22,160		--		--		--		--		$	83,160

(1) Includes $5,100 for events attended by director in 2013.

(2) The following table provides certain additional information concerning the currently outstanding stock options and/or equity awards held by our non-employee directors as of the end of 2013:

Name	Total Stock Option/Equity Awards Outstanding at 2013 Fiscal Year End (Shares)			Stock Option / Equity Awards Granted During Fiscal Year 2013 (a) (Shares)			Grant Date Fair Value of Equity Awards Granted During Fiscal Year 2013 ($)(b)
Carl Dorf		48,500	(c)		4,000	(a)	$	22,160
Charles B. Hart, Jr.		44,000	(d)		4,000	(a)	$	22,160
Bruce F. Simberg		25,166	(e)		4,000	(a)	$	22,160
Richard W. Wilcox, Jr.		30,166	(f)		4,000	(a)	$	22,160
Jenifer G. Kimbrough		39,000	(g)		4,000	(a)	$	22,160

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(a) The restricted stock reported in this column were granted in March 2013 and vest 33 1/3% per year over three years on each anniversary of the date of grant.

(b) Based on the market value of $5.54 on March 4, 2013.

(c) Includes 4,500 options granted on 1/30/2008 with an exercise price of $12.58, vest 20% per year and expire on 1/30/2014; 15,000 options granted on 1/2/2009 with an exercise price of $4.73, vest 33 1/3% per year and expire on 1/2/2015; 10,000 options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 15,000 options granted on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which vest 33 1/3 per year.

(d) Includes 15,000 options granted on 1/2/2009 with an exercise price of $4.73, vest 33 1/3% per year and expire on 1/2/2015; 10,000 options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 15,000 options granted on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which vest 33 1/3 per year.

(e) Includes 4,500 options granted on 1/30/2008 with an exercise price of $12.58, vest 20% per year and expire on 1/30/2014; 6,666 options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 10,000 options granted on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which vest 33 1/3 per year.

(f) Includes 4,500 options granted on 1/30/2008 with an exercise price of $12.58, vest 20% per year and expire on 1/30/2014; 6,666 options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 15,000 options granted on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which vest 33 1/3 per year.

(g) Includes 10,000 options granted on 4/1/2009 with an exercise price of $3.30, vest 20% per year and expire on 4/1/2015; 10,000 options granted on 8/22/2011 with an exercise price of $2.45, vest 33 1/3% per year, and expire on 8/22/2021; 15,000 options granted on 4/6/2012 with an exercise price of $4.40, vest 33 1/3% per year, and expire on 4/6/2022; and 4,000 shares of restricted stock which vest 33 1/3 per year.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of March 17, 2014, information with respect to the beneficial ownership of our common stock by (i) each person who is known by us to beneficially own 5% or more of our outstanding common stock, (ii) each of our executive officers named in the Summary Compensation Table in the section “Executive Compensation,” (iii) each of our directors, and (iv) all directors and executive officers as a group.

As used herein, the term “beneficial ownership” with respect to a security is defined by Rule 13d-3 under the Exchange Act as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights and the address for each person is c/o Federated National Holding Company, 14050 NW 14 Street, Suite 180, Sunrise, Florida 33323.

	Number of Shares		Percent of
	Beneficially		Class
Name and Address of Beneficial Owner	Owned		Outstanding (1)
Bruce F. Simberg (2)		436,992		3.88	%
Michael H. Braun (3)		293,581		2.58	%
Carl Dorf (4)		167,924		1.49	%
Richard W. Wilcox, Jr. (5)		162,059		1.44	%
Peter J. Prygelski, III (6)		124,325		1.10	%
Charles B. Hart, Jr. (7)		39,145		*
Jenifer G. Kimbrough (8)		20,253		*
All directors and executive officers as a group (seven persons) (9)		1,244,279		10.81	%
5% or greater holders:
Dimensional Fund Advisors LP (10)		579,646		5.15	%
Palisades West, Building One
6300 Bee Cave Road
Austin, TX 78746

*Less than 1%.

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Federated National Holding Company and Subsidiaries

(1) Based on 11,264,864 shares outstanding as of March 7, 2014.

(2) Includes 2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of restricted stock, one- third of which vest each year beginning on March 4, 2015, and 8,333 shares of common stock issuable upon the exercise of vested stock options held by Mr. Simberg.

(3) Includes 16,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 100,000 shares of restricted stock, one-third of which vest each year beginning on August 5, 2014, 43,997 shares of restricted stock, one-third of which vest each year beginning on March 4, 2015, and 109,167 shares of common stock issuable upon the exercise of vested stock options held by Mr. Braun.

(4) Includes 64,991 shares of common stock held by Dorf Trust, 59,624 shares of common stock held by Carl Dorf Rollover IRA, 2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of restricted stock, one- third of which vest each year beginning on March 4, 2015, and 31,667 shares of common stock issuable upon the exercise of vested stock options held by Mr. Dorf.

(5) Includes 3,000 shares of common stock held in Mr. Wilcox’s IRA, 40,000 shares of common stock held by Mr. Wilcox’s spouse, 2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of restricted stock, one-third of which vest each year beginning on March 4, 2015, and 13,333 shares of common stock issuable upon the exercise of vested stock options held by Mr. Wilcox.

(6) Includes 4,000 shares of common stock held in Mr. Prygelski’s IRA, 10,000 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 50,000 shares of restricted stock, one-third of which vest each year beginning on August 5, 2014, 16,341 shares of restricted stock, one-third of which vest each year beginning on March 4, 2015, and 39,167 shares of common stock issuable upon the exercise of vested stock options held by Mr. Prygelski.

(7) Includes 2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of restricted stock, one-third of which vest each year beginning on March 4, 2015, and 31,667 shares of common stock issuable upon the exercise of vested stock options held by Mr. Hart.

(8) Includes 2,666 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 3,142 shares of restricted stock, one-third of which vest each year beginning on March 4, 2015, and 12,001 shares of common stock issuable upon the exercise of vested stock options held by Ms. Kimbrough.

(9) Includes 39,996 shares of restricted stock, which began vesting over three years beginning on March 4, 2014, 150,000 shares of restricted stock, one-third of which vest each year beginning on August 5, 2014, 76,048 shares of restricted stock, one-third of which vest each year beginning on March 4, 2015 and 245,335 shares of common stock issuable upon the exercise of vested stock options.

(10) This information is based on an Amendment No. 4 to Schedule 13G filed with the SEC on February 10, 2014.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Family Relationships

There are no family relationships between or among our current executive officers and directors.

Related Transactions

The following is a summary of transactions during 2012 and 2013 between the Company and its executive officers, directors, nominees for director, principal shareholders and other related parties involving amounts in excess of $120,000 or that the Company has chosen to voluntarily disclose.

Bruce F. Simberg, a director, is a partner of the Fort Lauderdale, Florida law firm of Conroy, Simberg, which renders legal services to the Company.  The Company paid legal fees to Conroy, Simberg for services rendered in the amount of approximately $27,175 and $36,400 in 2012 and 2013, respectively.  We believe that the fees charged for services provided by Conroy, Simberg are on terms at least as favorable as those that we could secure from a non-affiliated law firm.

During 2012 and 2013, Michael H. Braun, the Company’s Chief Executive Officer and President, received the compensation described in "Executive Compensation" on pages 13 through 22 of this proxy statement.  Mr. Braun’s brother received salary compensation of $134,308 and $136,000 for his services as the Vice President of Accounting and Finance in 2012 and 2013, respectively.  We believe that the compensation provided to this individual is comparable to that paid by other companies in our industry and market for similar positions.

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Federated National Holding Company and Subsidiaries

We have adopted a written policy that any transactions between the Company and executive officers, directors, principal shareholders or their affiliates take place on an arm’s-length basis and require the approval of a majority of our independent directors, as defined in the Nasdaq Rules.

The Board has determined that the following directors are independent pursuant to the Nasdaq Rules applicable to the Company as a smaller reporting company:  Carl Dorf, Charles B. Hart, Jr., Richard W. Wilcox, Jr., Bruce F. Simberg, and Jenifer G. Kimbrough.  In making the independence determination with respect to Mr. Simberg, the Board considered the fact that Conroy Simberg has provided legal services to the Company during the past 18 years. Nevertheless, the fees paid by the Company in connection with the legal services provided by Conroy Simberg during the past three fiscal years do not exceed the amounts set forth in Nasdaq Rule 5605(a)(2)(D) and, therefore, the Board has determined that  Mr. Simberg qualifies as an independent director under Nasdaq Rule 5605(a)(2).

ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES

The Audit Committee selected De Meo Young McGrath (“De Meo”) as the independent registered public accounting firm to perform the audit of the Company’s consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting for the 2014 fiscal year.  Effective January 1, 2014, De Meo merged with Goldstein Schechter Koch, P.A. (“GSK”). GSK is the surviving firm and continues to practice under that name.  As a result of the merger, De Meo effectively resigned as the Company’s independent registered public accounting firm and GSK, as the successor to De Meo following the merger, became the Company’s independent registered public accounting firm.  The engagement of GSK was approved by the Audit Committee of the Company’s Board of Directors on January 15, 2014.  As a result, the reports previously issued by De Meo with respect to the Company will be reissued by, and any consents to the use of such reports will be issued by, GSK.

Our Audit Committee requires that management obtain the prior approval of the Audit Committee for all audit and permissible non-audited services to be provided by GSK.  The Audit Committee considers and approves at each meeting, as needed, anticipated audit and permissible non-audit services to be provided by GSK during the year and estimated fees.  The Audit Committee Chairman may approve permissible non-audit services with subsequent notification to the full Audit Committee.  All services rendered to us by De Meo in 2013 were pre-approved in accordance with these procedures.

The Company’s independent auditors for the 2013 fiscal year, GSK, as successor to De Meo, has advised the Company that neither it, nor any of its members, has any direct financial interest in the Company as a promoter, underwriter, voting trustee, director, officer or employee.  All professional services rendered by De Meo during the fiscal year ended December 31, 2013 were furnished at customary rates and were performed by full-time, permanent employees.

The following table shows fees that we paid (or accrued) for professional services rendered by De Meo for fiscal 2013 and 2012.

	Fiscal 2013		Fiscal 2012
Audit Fees (1)	$	368,213	$	372,168
Audit-Related Fees (2)	$	14,823	$	15,953
Tax Fees (3)	$	0	$	0
Total	$	383,036	$	388,121

(1) Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the independent auditor can reasonably be expected to provide, such as statutory audits.

(2) Audit-related fees consisted primarily of audits of employee benefit plans and special procedures related to regulatory filings in 2012 and 2011.

(3) Tax fees consisted primarily of assistance with tax compliance and reporting.

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Federated National Holding Company and Subsidiaries

PART IV

ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K

(a)The following documents are filed as part of this report.

(1) Financial Statements

The following consolidated financial statements of the Company and the reports of independent auditors thereon are filed with this report:

Independent Auditors’ Report (Goldstein Schechter Koch, P.A.)

Consolidated Balance Sheets as of December 31, 2013 and 2012

Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011.

Consolidated Statements of Comprehensive Income (loss) for the years ended December 31, 2013, 2012 and 2011.

Consolidated Statements of Shareholders’ Equity and Comprehensive (Loss) income for the years ended December 31, 2013, 2012 and 2011.

Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011.

Notes to Consolidated Financial Statements for the years ended December 31, 2013, 2012 and 2011.

(2) Financial Statement Schedules.

Schedule VI, Supplemental information concerning property-casualty insurance operations, is included herein under Item 8, Financial Statements and Supplementary Data.

(3) Exhibits.

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Federated National Holding Company and Subsidiaries

Exhibit	Description
3.1	Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 in the Company’s Registration Statement on Form SB-2 filed with the SEC on September 17, 1998  [File No. 333-63623]).
3.2	Amended and Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 in the Company’s Current Report on Form 8-K filed with the SEC on September 12, 2012 and Exhibit 3.1 in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 filed with the SEC on November 14, 2012).
3.3	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).
4.1	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]).
10.1	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).
10.2	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).+
10.3	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).+
10.4	Federated National Holding Company 1998 Stock Option Plan, as amended, and Stock Plan Acknowledgment (incorporated by reference to Annex A in the Company’s Definitive Proxy Statement filed with the SEC on May 12, 2000).+
10.5	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).
10.6	Consent Order for Case Number 114165-10-CO between Federated National Insurance Company, American Vehicle Insurance Company, 21st Century Holding Company and the Florida Office of Insurance Regulation filed January 25, 2011 to approve of the merger of Federated National Insurance Company with and into American Vehicle Insurance Company (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on January 27, 2011).
10.7	Amended Consent Order dated February 5, 2013 between the Florida Office of Insurance Regulation and Federated National Insurance Company (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on February 8, 2013).
10.8	Reimbursement Contract between Federated National Insurance Company and The State Board of Administration of Florida (SBA) which administers the Florida Hurricane Catastrophe Fund (FHCF) and Addendum No. 1 effective June 1, 2013 (incorporated by reference to Exhibit 10.1 – 10.2 in the Company’s Current Report on Form 8-K filed with the SEC on February 21, 2013).
10.9	Fourth Excess Catastrophe Reinsurance Contract, effective July 1, 2013, between Federated National Insurance Company and subscribing reinsurers (incorporated by reference from Exhibit 10.1 in the Company’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.10	Fourth Excess Catastrophe Reinsurance Contract, effective July 1, 2013, between Federated National Insurance Company and subscribing reinsurers (incorporated by reference from Exhibit 10.2 in the Company’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).

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Federated National Holding Company and Subsidiaries

10.11	Fourth Reinstatement Premium Protection Reinsurance Contract, effective July 1, 2013, between Federated National Insurance Company and subscribing reinsurers (incorporated by reference from Exhibit 10.3 in the Company’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.12	Underlying Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2013, between Federated National Insurance Company and subscribing reinsurers (incorporated by reference from Exhibit 10.4 in the Company’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.13	Second Amended and Restated Employment Agreement dated January 18, 2012 between the Company and Michael H. Braun (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on January 20, 2012).+
10.14	Second Amended and Restated Employment Agreement dated January 18, 2012 between the Company and Peter J. Prygelski, III (incorporated by reference to Exhibit 10.2 in the Company’s Current Report on Form 8-K filed with the SEC on January 20, 2012).+
10.15	Form of Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement between the Company and certain employees of the Company (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2013).+
10.16	Insurance Agency Master Agreement dated February 4, 2013 between Ivantage Select Agency, Inc. and Federated National Underwriters, Inc. (incorporated by reference from Exhibit 10.5 in the Company’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.17	First Amendment to Insurance Agency Master Agreement dated February 12, 2013 between Ivantage Select Agency, Inc. and Federated National Underwriters, Inc. (incorporated by reference from Exhibit 10.6 in the Company’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2013 filed with the SEC on November 6, 2013).
10.18	Reimbursement Contract between Federated National Insurance Company and The State Board of Administration of Florida (SBA) which administers the Florida Hurricane Catastrophe Fund (FHCF) effective June 1, 2014 (incorporated by reference to Exhibits 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on February 28, 2014).
21.1	Subsidiaries of the Company *
23.1	Consent of Goldstein, Schechter, Koch, P.A. Independent Certified Public Accountants *
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act *
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act *
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act *
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act *

101.INS-XBRL Instance Document. **

101.SCH-XBRL Taxonomy Extension Schema Document. **

101.CAL-XBRL Taxonomy Extension Calculation Linkbase Document. **

101.LAB-XBRL Taxonomy Extension Label Linkbase Document. **

101.PRE-XBRL Taxonomy Extension Presentation Linkbase Document. **

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Federated National Holding Company and Subsidiaries

+   Management Compensation Plan or Arrangement

* Filed herewith

** In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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Federated National Holding Company and Subsidiaries

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K report to be signed on its behalf by the undersigned, thereto duly authorized.

FEDERATED NATIONAL HOLDING COMPANY
By:	/s/ Michael H. Braun
	Michael H. Braun, Chief Executive Officer
	(Principal Executive Officer)
	/s/ Peter J. Prygelski, III
	Peter J. Prygelski, III, Chief Financial Officer
	(Principal Financial and Accounting Officer)

Dated:  March 17, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature	Title	Date
/s/ Michael H. Braun	Chief Executive Officer	March 17, 2014
Michael H. Braun	(Principal Executive Officer)
/s/ Peter J. Prygelski, III	Chief Financial Officer	March 17, 2014
Peter J. Prygelski, III	(Principal Financial and Accounting Officer)
/s/ Carl Dorf	Director	March 17, 2014
Carl Dorf
/s/ Bruce F. Simberg	Director	March 17, 2014
Bruce F. Simberg	Chairman of the Board
/s/ Charles B. Hart, Jr.	Director	March 17, 2014
Charles B. Hart, Jr.
/s/ Richard W. Wilcox, Jr.	Director	March 17, 2014
Richard W. Wilcox, Jr.
/s/ Jenifer G. Kimbrough	Director	March 17, 2014
Jenifer G. Kimbrough

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Federated National Holding Company and Subsidiaries

EXHIBIT INDEX

21.1	Subsidiaries
23.1	Consent of Goldstein Schechter Koch, P.A., Independent Certified Public Accountants
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

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EX-21.1

Federated National Holding Company and Subsidiaries

EXHIBIT 21.1

SUBSIDIARIES

Federated National Underwriters, Inc., a Florida corporation

Century Risk Insurance Services, Inc., a Florida corporation

Federated National Insurance Company, a Florida corporation

Federated Premium Finance, Inc., a Florida corporation

Insure-Link, Inc., a Florida corporation

Federated National Adjusting, Inc., a Florida corporation

EX-23.1

Federated National Holding Company and Subsidiaries

EXHIBIT 23.1

Federated National Holding Company and Subsidiaries

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in previously filed Registration Statements on Form S-8, File No. 333-188217, which was effective on April 29, 2013, of our report dated March 17, 2014 relating to our audit of the consolidated financial statements and internal control over financial reporting, which appear in the Annual Report on Form 10-K of Federated National Holding Company (the “Company”) for the year ended December 31, 2013.

/s/ Goldstein Schechter Koch, P.A.

Fort Lauderdale, Florida

March 17, 2014

EX-31.1

Federated National Holding Company and Subsidiaries

EXHIBIT 31.1

CERTIFICATION

I, Michael H. Braun, certify that:

1.     I have reviewed this annual report on Form 10-K of Federated National Holding Company;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  March 17, 2014

/s/ Michael H. Braun

Michael H. Braun

Chief Executive Officer

EX-31.2

Federated National Holding Company and Subsidiaries

EXHIBIT 31.2

CERTIFICATION

I, Peter J. Prygelski, III, certify that:

1.     I have reviewed this annual report on Form 10-K of Federated National Holding Company;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 17, 2014

/s/  Peter J. Prygelski, III

Peter J. Prygelski, III

Chief Financial Officer

EX-32.1

Federated National Holding Company and Subsidiaries

EXHIBIT 32.1

STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Federated National Holding Company (the "Company") for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael H. Braun, Chief Executive Officer of the Company, certify that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael H. Braun

Michael H. Braun

 March 17, 2014

The foregoing certification is made solely for the purpose of 18 U. S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

EX-32.2

Federated National Holding Company and Subsidiaries

EXHIBIT 32.2

STATEMENTS REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Federated National Holding Company (the "Company") for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter J. Prygelski, III, Chief Financial Officer of the Company, certify that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Peter J. Prygelski, III

Peter J. Prygelski, III

 March 17, 2014

 The foregoing certification is made solely for the purpose of 18 U. S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

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NET INCOME PER SHARE (Tables)

12 Months Ended

Dec. 31, 2013

NET INCOME PER SHARE [Abstract]

Schedule of calculation of numerator and denominator in earnings per share

A summary of the numerator and denominator of the basic and fully diluted 2013, 2012 and 2011 net income (loss) per share is presented below.

	Income (loss)			Shares Outstanding		Per-share
	(Numerator)			(Denominator)		Amount
	(Dollars in Thousands)
For the year ended December 31, 2013
Basic net income per share	$	12,727			8,506	$	1.50
Fully diluted income per share	$	12,727			8,772	$	1.45
For the year ended December 31, 2012
Basic net income per share	$	4,313			7,952	$	0.53
Fully diluted income per share	$	4,313			8,016	$	0.53
For the year ended December 31, 2011
Basic net loss per share	$	(430	)		7,946	$	(0.05	)
Fully diluted loss per share	$	(430	)		7,946	$	(0.05	)

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LEASES (Details) (USD $)	12 Months Ended
	Dec. 31, 2013 sqft	Dec. 31, 2012	Dec. 31, 2011
LEASES [Abstract]
Property interest sold date	Mar. 01, 2006
Lease facilities term	5 years
Lease agreement and note receivable amendment date	Sep. 01, 2010
Lease expiration date	Dec. 31, 2011
Square footage of office facility	18,500
Lease future expiration date	May 31, 2017
Expected future lease payouts [Abstract]
2014	$ 392,000
2015	400,000
2016	408,000
2017	156,000
Total	1,356,000
Rent expense	$ 400,000	$ 200,000	$ 700,000

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PROPERTY, PLANT AND EQUIPMENT (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	$ 4,621	$ 3,993
Accumulated depreciation	(3,692)	(3,429)
Property, plant and equipment, net	929	564
Depreciation of property, plant and equipment	263	195	168
Computer Equipment [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	$ 4,621	$ 3,993

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RELATED PARTY TRANSACTIONS (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
RELATED PARTY TRANSACTIONS [Abstract]
Fees paid to related party	$ 30,500	$ 27,175	$ 3,349

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Details) (USD $)	12 Months Ended
	Dec. 31, 2013 Plan	Dec. 31, 2009 IntangibleAsset
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES [Abstract]
Maximum number of months of maturities to be considered as short term investments	3 months
Number of workings days to issue policy from the date the cash and policy application are received	30 days
Number of days to consider, allowance for credit losses	90 days
Application fee per policy	$ 25
CONCENTRATION OF CREDIT RISK [Abstract]
Fees earned per policy	25
Percentage of gross written premium the managing general agency fees are traditionally (in hundredths)	6.00%
Percentage of gross written premiums the managing general agency fees minimum (in hundredths)	2.00%
Percentage of gross written premiums the managing general agency fees maximum (in hundredths)	4.00%
Number of compensation plans adopted	3
Stock-based employee compensation cost	0
Property, Plant and Equipment [Line Items]
Minimum limit for expenditure to be capitalized	1,000
Minimum useful life of asset to be capitalized	1 year
Impairment of property, plant and equipment	0
Finite-Lived Intangible Assets [Line Items]
Number of intangible assets purchased		1
Intangible asset purchased		$ 100,000
Minimum [Member]
Finite-Lived Intangible Assets [Line Items]
Definite finite life of intangible asset		6 months
Maximum [Member]
Finite-Lived Intangible Assets [Line Items]
Definite finite life of intangible asset		12 months
Building and Improvements [Member]
Property, Plant and Equipment [Line Items]
Estimated useful lives of property, plant and equipment	30 years
Furniture and Fixtures [Member]
Property, Plant and Equipment [Line Items]
Estimated useful lives of property, plant and equipment	7 years

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PROPERTY, PLANT AND EQUIPMENT (Tables)

12 Months Ended

Dec. 31, 2013

PROPERTY, PLANT AND EQUIPMENT [Abstract]

Property, plant and equipment

Property, plant and equipment consist of the following.

	Years Ended December 31,
	2013				2012
	(Dollars in Thousands)
Computer equipment		$	4,621			$	3,993
Property, plant and equipment, gross			4,621				3,993
Accumulated depreciation			(3,692	)			(3,429	)
Property, plant and equipment, net		$	929			$	564

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STOCK COMPENSATION PLANS (Details) (USD $)	0 Months Ended		12 Months Ended
	Aug. 05, 2013	Mar. 04, 2013	Dec. 31, 2013		Dec. 31, 2012		Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term of stock options in Black-Scholes option pricing model, previous			4 years
Expected term of stock options in Black-Scholes option pricing model, revised			2 years
Options Weighted Average Option Exercise Price at [Abstract]
Decrease in income from continuing operations due to change in accounting pronouncement			$ 447,000		$ 265,900
Decrease in net income due to change in accounting pronouncement			$ 278,600		$ 165,700
Net income (loss) per share after change in accounting pronouncement, basic (in dollars per share)			$ 1.53		$ 0.55
Net income (loss) per share after change in accounting pronouncement, diluted (in dollars per share)			$ 1.48		$ 0.55
Net income (loss) per share - basic (in dollars per share)			$ 1.50		$ 0.53		$ (0.05)
Net income (loss) per share - diluted (in dollars per share)			$ 1.45		$ 0.53		$ (0.05)
Weighted average fair value of options granted (in dollars per share)			$ 0		$ 1.45
Fair value of options granted is estimated on date of grant used assumptions [Abstract]
Dividend yield (in hundredths)				[1]		[1]		[1]
Expected volatility (in hundredths)				[1]	39.79%
Risk-free interest rate (in hundredths)				[1]	0.28%
Expected life				[1]	4 years 5 months 12 days
Minimum [Member]
Options Weighted Average Option Exercise Price at [Abstract]
Weighted average fair value of options granted (in dollars per share)							$ 0.72
Fair value of options granted is estimated on date of grant used assumptions [Abstract]
Expected volatility (in hundredths)							35.21%
Risk-free interest rate (in hundredths)							0.20%
Expected life							4 years 3 months 14 days
Maximum [Member]
Options Weighted Average Option Exercise Price at [Abstract]
Weighted average fair value of options granted (in dollars per share)							$ 0.78
Fair value of options granted is estimated on date of grant used assumptions [Abstract]
Expected volatility (in hundredths)							39.08%
Risk-free interest rate (in hundredths)							0.25%
Expected life							4 years 4 months 6 days
1998 Stock Option Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized to grant options to purchase (in shares)			900,000
Share-based payment award, expiration date			Sep. 30, 2008
Stock Option Plans, Shares Outstanding [Abstract]
Outstanding (in shares)			78,500		89,750		89,750
Granted (in shares)			0		0		0
Exercised (in shares)			(500)		0		0
Cancelled (in shares)			(75,000)		(11,250)		0
Outstanding (in shares)			3,000		78,500		89,750
Stock Options, Weighted Average Option Exercise Price [Abstract]
Outstanding (in dollars per share)			$ 12.73		$ 12.83		$ 12.83
Granted (in dollars per share)			$ 0		$ 0		$ 0
Exercised (in dollars per share)			$ 8.67		$ 0		$ 0
Cancelled (in dollars per share)			$ 12.92		$ 13.54		$ 0
Outstanding (in dollars per share)			$ 8.67		$ 12.73		$ 12.83
Options Exercisable at [Abstract]
December 31, 2013 (in shares)			3,000
December 31, 2014 (in shares)			0
December 31, 2015 (in shares)			0
December 31, 2016 (in shares)			0
December 31, 2017 (in shares)			0
Thereafter (in shares)			0
Total options exercisable (in shares)			3,000
Options Weighted Average Option Exercise Price at [Abstract]
December 31, 2013 (in dollars per share)			$ 8.67
December 31, 2014 (in dollars per share)			$ 8.67
December 31, 2015 (in dollars per share)			$ 8.67
December 31, 2016 (in dollars per share)			$ 8.67
December 31, 2017 (in dollars per share)			$ 8.67
Thereafter (in dollars per share)			$ 8.67
Summary information about stock options outstanding [Abstract]
Options Outstanding (in shares)			3,000
Weighted Average Contractual Periods in Years			0 years 6 months 29 days
Weighted Average Exercise Price (in dollars per share)			$ 8.67
Options Exercisable (in shares)			3,000
1998 Stock Option Plan [Member] | Minimum [Member]
Summary information about stock options outstanding [Abstract]
Range of Exercise Price, Maximum (in dollars per share)			$ 8.67
1998 Stock Option Plan [Member] | Maximum [Member]
Summary information about stock options outstanding [Abstract]
Range of Exercise Price, Minimum (in dollars per share)			$ 8.67
2002 Stock Option Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized to grant options to purchase (in shares)			1,800,000
Share-based payment award, expiration date			Apr. 30, 2012
Stock Option Plans, Shares Outstanding [Abstract]
Outstanding (in shares)			702,597		624,700		574,800
Granted (in shares)			0		181,500		179,000
Exercised (in shares)			(165,577)		(33,104)		0
Cancelled (in shares)			(13,499)		(70,499)		(129,100)
Outstanding (in shares)			523,521		702,597		624,700
Stock Options, Weighted Average Option Exercise Price [Abstract]
Outstanding (in dollars per share)			$ 5.17		$ 6.15		$ 9.12
Granted (in dollars per share)			$ 0		$ 4.40		$ 2.45
Exercised (in dollars per share)			$ 7.15		$ 3.86		$ 0
Cancelled (in dollars per share)			$ 5.41		$ 12.45		$ 14.29
Outstanding (in dollars per share)			$ 4.54		$ 5.17		$ 6.15
Options Exercisable at [Abstract]
December 31, 2013 (in shares)			310,475
December 31, 2014 (in shares)			138,146
December 31, 2015 (in shares)			74,900
December 31, 2016 (in shares)			0
December 31, 2017 (in shares)			0
Thereafter (in shares)			0
Total options exercisable (in shares)			523,521
Options Weighted Average Option Exercise Price at [Abstract]
December 31, 2013 (in dollars per share)			$ 4.54
December 31, 2014 (in dollars per share)			$ 4.54
December 31, 2015 (in dollars per share)			$ 4.54
December 31, 2016 (in dollars per share)			$ 4.54
December 31, 2017 (in dollars per share)			$ 4.54
Thereafter (in dollars per share)			$ 4.54
Summary information about stock options outstanding [Abstract]
Options Outstanding (in shares)			523,521
Weighted Average Contractual Periods in Years			5 years 4 months 6 days
Weighted Average Exercise Price (in dollars per share)			$ 4.54
Options Exercisable (in shares)			310,475
2002 Stock Option Plan [Member] | Minimum [Member]
Summary information about stock options outstanding [Abstract]
Range of Exercise Price, Maximum (in dollars per share)			$ 2.45
2002 Stock Option Plan [Member] | Maximum [Member]
Summary information about stock options outstanding [Abstract]
Range of Exercise Price, Minimum (in dollars per share)			$ 13.24
2012 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized to grant options to purchase (in shares)			1,000,000
Share-based payment award, expiration date			Apr. 05, 2022
Other Than Stock Option Plans, Shares Outstanding [Abstract]
Outstanding (in shares)			0		0		0
Granted (in shares)	150,000	100,000	250,000		0		0
Exercised (in shares)			0		0		0
Cancelled (in shares)			(500)		0		0
Outstanding (in shares)			249,500		0		0
Other Than Stock Options, Fair Market Value at Grant [Abstract]
Outstanding (in dollars per share)			$ 0		$ 0		$ 0
Granted (in dollars per share)			$ 5.54		$ 0		$ 0
Exercised (in dollars per share)			$ 0		$ 0		$ 0
Cancelled (in dollars per share)			$ 5.54		$ 0		$ 0
Outstanding (in dollars per share)			$ 5.54		$ 0		$ 0
2012 Stock Incentive Plan [Member] | Chief Executive Officer and President [Member]
Other Than Stock Option Plans, Shares Outstanding [Abstract]
Granted (in shares)	100,000	25,000
2012 Stock Incentive Plan [Member] | Chief Financial Officer [Member]
Other Than Stock Option Plans, Shares Outstanding [Abstract]
Granted (in shares)	50,000	15,000
2012 Stock Incentive Plan [Member] | Director [Member]
Other Than Stock Option Plans, Shares Outstanding [Abstract]
Granted (in shares)		20,000
2012 Stock Incentive Plan [Member] | Other Employees [Member]
Other Than Stock Option Plans, Shares Outstanding [Abstract]
Granted (in shares)		40,000

[1] NA - Not applicable

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COMPREHENSIVE INCOME (LOSS)

12 Months Ended

Dec. 31, 2013

COMPREHENSIVE INCOME (LOSS) [Abstract]

COMPREHENSIVE INCOME (LOSS)

(17) COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, 2013, 2012 and 2011, comprehensive income (loss) consisted of the following.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Net income (loss)	$	12,727		$	4,313		$	(430	)
Change in net unrealized gains on investments available for sale		3,041			5,114			572
Comprehensive income before tax		15,768			9,427			142
Income tax expense related to items of other comprehensive income (loss)		(1,144	)		(1,924	)		(215	)
Comprehensive income (loss)	$	14,624		$	7,503		$	(73	)

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UNPAID LOSSES AND LAE (Details) (USD $)	12 Months Ended
	Dec. 31, 2013 Group Method	Dec. 31, 2012	Dec. 31, 2011
UNPAID LOSSES AND LAE [Abstract]
Unpaid losses and LAE, period start	$ 49,908,000	$ 59,983,000	$ 66,529,000
Less reinsurance recoverables	(3,503,000)	(2,087,000)	(6,809,000)
Unpaid Losses and LAE, net, period start	46,405,000	57,895,000	59,720,000
Incurred related to Unpaid losses and LAE [Abstract]
Current year	56,209,000	31,636,000	31,893,000
Prior years	201,000	(1,427,000)	(997,000)
Total incurred losses and LAE	56,410,000	30,209,000	30,896,000
Paid Related To Unpaid Losses And LAE [Abstract]
Current year	22,695,000	15,892,000	13,672,000
Prior years	21,846,000	25,807,000	19,048,000
Total paid	44,541,000	41,699,000	32,720,000
Unpaid Losses and LAE, net, period end	58,274,000	46,405,000	57,895,000
Plus reinsurance recoverables	2,742,000	3,503,000	2,087,000
Unpaid losses and LAE, period end	61,016,000	49,908,000	59,983,000
Statutory loss and LAE reserves, net basis, range low	51,500,000
Statutory loss and LAE reserves, net basis, range high	60,900,000
Statutory loss and LAE reserves	55,500,000
Net loss and LAE reserves carried on a statutory basis	$ 54,000,000
Percentage of loss and loss adjustment expenses reserve (in hundredths)	2.60%
Loss reserves are categorized in number of distinct groups	2
Number of actuarial methods	4

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FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED) (Tables)

12 Months Ended

Dec. 31, 2013

FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED) [Abstract]

Schedule of condensed balance sheet

Condensed Balance Sheets (Unaudited)	Period Ending December 31,
ASSETS	2013			2012
	(Dollars in Thousands)
Cash and short term investments	$	2,143		$	1,494
Investments and advances to subsidiaries		105,797			61,005
Deferred income taxes receivable		1,006			4,338
Income taxes receivable		8,157			9,515
Property, plant and equipment, net		184			98
Other assets		4,446			4,069
Total assets	$	121,733		$	80,519
LIABILITIES AND SHAREHOLDERS' EQUITY
Income taxes payable		1,690			-
Dividends payable		330			-
Capital contribution payable		16,000			-
Other liabilities		238			125
Total liabilities		18,258			125
Shareholders' equity:
Common stock		110			80
Additional paid-in capital		74,086			45,378
Accumulated other comprehensive loss		(1,727	)		(1,039	)
Retained earnings		31,006			35,975
Total shareholders' equity		103,475			80,394
Total liabilities and shareholders' equity	$	121,733		$	80,519

Schedule of condensed statements of operations

Condensed Statements of Operations (Unaudited)	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Revenue:
Management fees from subsidiaries	$	1,864	$	1,228	$	1,734
Equity in income of subsidiaries		21,623		8,787		(48	)
Net investment income		136		34		31
Other income		11		476		1,345
Total revenue		23,634		10,525		3,062
Expenses:
Salaries and wages		2,022		1,853		1,775
Legal fees		113		198		54
Other expenses		2,281		1,726		2,233
Total expenses		4,416		3,777		4,062
Income (loss) before provision for income tax expense (benefit)		19,218		6,748		(1,000	)
Provision for income tax expense (benefit)		6,491		2,435		(570	)
Net income (loss)	$	12,727	$	4,313	$	(430	)

Schedule of condensed statements of cash flow

Condensed Statements of Cash Flow (Unaudited)
	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Cash flow from operating activities:
Net income (loss)	$	12,727		$	4,313		$	(430	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Equity in (income) loss  of subsidiaries		(21,623	)		(8,787	)		48
Depreciation and amortization of property plant and equipment, net		33			23			7
Deferred income tax (benefit) expense		(3,332	)		(4,274	)		696
Income tax recoverable  (payable)		1,690			(78	)		78
Change in dividends payable		330			-			-
Non-cash compensation		293			188			263
Changes in operating assets and liabilities:
Property, plant and equipment		119			(138	)		73
Deferred gain on sale of assets		-			(30	)		(506	)
Other assets		377			45			(292	)
Capital contribution payable		16,000			-			-
Other liabilities		112			(18	)		(770	)
Net cash provided (used) by operating activities		6,726			(8,756	)		(833	)
Cash flow used in investing activities:
Purchases of investment securities available for sale		(44,792	)		(451	)		(846	)
Cash flow used in investing activities:		(44,792	)		(451	)		(846	)
Net cash provided in financing activities:
Dividends paid		(1,232	)		(159	)		-
Stock options exercised		858			128			-
Tax benefit related to non-cash compensation		168			100			92
Issuance of common stock		27,879			-			-
Advances from subsidiaries		11,042			8,349			668
Net cash provided in financing activities:		38,715			8,418			760
Net increase (decrease) in cash and short term investments		649			(789	)		(919	)
Cash and short term investments at beginning of year		1,494			2,283			3,202
Cash and short term investments at end of year	$	2,143		$	1,494		$	2,283

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REGULATORY REQUIREMENTS AND RESTRICTIONS (Tables)

12 Months Ended

Dec. 31, 2013

REGULATORY REQUIREMENTS AND RESTRICTIONS [Abstract]

Schedule of range and test results as per IRIS Ratios

The table below reflects the range and test results for FNIC for the years ended December 31, 2013 and 2012, respectively.

IRIS Ratios	Unusual Values Equal to Or					2013			2012
	Over		Under			FNIC			FNIC
Gross Premiums to Policyholders' Surplus		900		-			325			233
Net Premium to Policyholders' Surplus		300		-			217			135
Change in Net Writings		33		(33	)		137	*		32
Surplus Aid to Policyholders' Surplus		15		-			0			1
Two-year Overall Operating Ratio		100		-			84			92
Investment Yield		6.5		3.0			1.4	*		2.4	*
Gross Change in Policyholders' Surplus		50		(10	)		48			32
Net Change in Adjusted Policyholders' Surplus		25		(10	)		17			32	*
Liabilities to Liquid Assets		105		-			79			69
Gross Agents' Balance to Policyholders' Surplus		40		-			13			3
One-Year Reserve Development to Policyholders' Surplus		20		-			(4	)		(3	)
Two-Year Reserve Development to Policyholders' Surplus		20		-			(7	)		(2	)
Estimated Current Reserve Deficiency to Policyholders' Surplus		25		-			56	*		50	*
* indicates an unusual value

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REGULATORY REQUIREMENTS AND RESTRICTIONS (Details) (USD $)	12 Months Ended
	Dec. 31, 2013		Dec. 31, 2012		Dec. 31, 2011	Dec. 31, 2010
Statutory Accounting Practices [Line Items]
Managing general agency fees on percentage of gross written premium (in hundredths)	6.00%
Claims service fees payable on percentage of gross earned premium (in hundredths)	4.50%
Reduction in claims service fees payable on percentage of gross earned premium (in hundredths)	3.60%
Percentage of liabilities to maintain capital and surplus balance (in hundredths)	10.00%
Minimum capital surplus required	$ 5,000,000
Statutory capital and surplus	76,900,000		52,100,000		39,300,000
Carrying value of bonds	2,300,000		2,200,000
Percentage of capital surplus considered for dividend distribution under condition one (in hundredths)	10.00%
Number of years carryforward in addition to net income under condition one	2 years
Percentage of capital surplus with dividends payable under condition two (in hundredths)	10.00%
Number of years carryforward in addition to net investment income under condition three	3 years
Percentage of capital surplus considered for dividend distribution under condition three (in hundredths)	10.00%
Percentage of unrealized capital gains under condition three (in hundredths)	25.00%
Percentage of unrealized capital gains under condition two (in hundredths)	25.00%
Percentage of insurers capital surplus considered for dividend distribution (in hundredths)	10.00%
Percentage of minimum statutory capital surplus after the dividend or distribution (in hundredths)	115.00%
Number of business days prior to dividend payment	10 days
Number of days after the Florida OIR has received notice of such dividend or distribution	30 days
Number of major areas of risk facing property and casualty insurers	3
Unusual Values Equal to Or Over [Member]
The range and test results as per IRIS Ratios [Abstract]
Gross Premiums to Policyholders Surplus (in hundredths)	900.00%
Net Premium to Policyholders' Surplus (in hundredths)	300.00%
Change in Net Writings (in hundredths)	33.00%
Surplus Aid to Policyholders' Surplus (in hundredths)	15.00%
Two-year Overall Operating Ratio (in hundredths)	100.00%
Investment Yield (in hundredths)	6.50%
Gross Change in Policyholders' Surplus (in hundredths)	50.00%
Net Change in Adjusted Policyholders' Surplus (in hundredths)	25.00%
Liabilities to Liquid Assets (in hundredths)	105.00%
Gross Agents' Balance to Policyholders' Surplus (in hundredths)	40.00%
One-Year Reserve Development to Policyholders' Surplus (in hundredths)	20.00%
Two-Year Reserve Development to Policyholders' Surplus (in hundredths)	20.00%
Estimated Current Reserve Deficiency to Policyholders' Surplus (in hundredths)	25.00%
Unusual Values Equal to Or Under [Member]
The range and test results as per IRIS Ratios [Abstract]
Gross Premiums to Policyholders Surplus (in hundredths)	0.00%
Net Premium to Policyholders' Surplus (in hundredths)	0.00%
Change in Net Writings (in hundredths)	(33.00%)
Surplus Aid to Policyholders' Surplus (in hundredths)	0.00%
Two-year Overall Operating Ratio (in hundredths)	0.00%
Investment Yield (in hundredths)	3.00%
Gross Change in Policyholders' Surplus (in hundredths)	(10.00%)
Net Change in Adjusted Policyholders' Surplus (in hundredths)	(10.00%)
Liabilities to Liquid Assets (in hundredths)	0.00%
Gross Agents' Balance to Policyholders' Surplus (in hundredths)	0.00%
One-Year Reserve Development to Policyholders' Surplus (in hundredths)	0.00%
Two-Year Reserve Development to Policyholders' Surplus (in hundredths)	0.00%
Estimated Current Reserve Deficiency to Policyholders' Surplus (in hundredths)	0.00%
Statutory Ratio 1 [Member]
Statutory Accounting Practices [Line Items]
Percentage of statutory surplus of the ACL amount (in hundredths)	200.00%
Statutory Ratio 2 [Member]
Statutory Accounting Practices [Line Items]
Percentage of statutory surplus of the ACL amount (in hundredths)	150.00%
Statutory Ratio 4 [Member]
Statutory Accounting Practices [Line Items]
Percentage of statutory surplus of the ACL amount (in hundredths)	70.00%
Federated National [Member]
Statutory Accounting Practices [Line Items]
Percentage of statutory surplus of the ACL amount (in hundredths)	312.10%		474.40%		409.70%
Statutory examination period						5 years
Previous regulatory examination period						3 years
Number of years of overall operating ratio and investment yield			2 years
The range and test results as per IRIS Ratios [Abstract]
Gross Premiums to Policyholders Surplus (in hundredths)	325.00%		233.00%
Net Premium to Policyholders' Surplus (in hundredths)	217.00%		135.00%
Change in Net Writings (in hundredths)	137.00%	[1]	32.00%
Surplus Aid to Policyholders' Surplus (in hundredths)	0.00%		1.00%
Two-year Overall Operating Ratio (in hundredths)	84.00%		92.00%
Investment Yield (in hundredths)	1.40%	[1]	2.40%	[1]
Gross Change in Policyholders' Surplus (in hundredths)	48.00%		32.00%
Net Change in Adjusted Policyholders' Surplus (in hundredths)	17.00%		32.00%	[1]
Liabilities to Liquid Assets (in hundredths)	79.00%		69.00%
Gross Agents' Balance to Policyholders' Surplus (in hundredths)	13.00%		3.00%
One-Year Reserve Development to Policyholders' Surplus (in hundredths)	(4.00%)		(3.00%)
Two-Year Reserve Development to Policyholders' Surplus (in hundredths)	(7.00%)		(2.00%)
Estimated Current Reserve Deficiency to Policyholders' Surplus (in hundredths)	56.00%	[1]	50.00%	[1]
Statutory net income	3,600,000		6,600,000		800,000
Statutory non-admitted assets	0		0
Federated National or American Vehicle [Member]
Statutory Accounting Practices [Line Items]
Dividends paid	$ 0		$ 0		$ 0
Minimum [Member]
Statutory Accounting Practices [Line Items]
Managing general agency fees on percentage of gross written premium (in hundredths)	2.00%
Number of ratios falling outside usual ranges	4
Minimum [Member] | Federated National [Member]
Statutory Accounting Practices [Line Items]
Number of ratios falling outside usual ranges	3		3		2
Maximum [Member]
Statutory Accounting Practices [Line Items]
Managing general agency fees on percentage of gross written premium (in hundredths)	4.00%
Maximum [Member] | Federated National [Member]
Statutory Accounting Practices [Line Items]
Number of ratios falling outside usual ranges	13		13		13
Tri County Area [Member]
Statutory Accounting Practices [Line Items]
Homeowners' policies (in hundredths)	18.30%
Tri County Area [Member] | Maximum [Member]
Statutory Accounting Practices [Line Items]
Percentage of reduction in total number of its homeowners policies (in hundredths)	35.00%
Without Prior Approval of the Florida OIR [Member]
Statutory Accounting Practices [Line Items]
Description of dividend payments	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% 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.
With Prior Approval of Florida OIR [Member]
Statutory Accounting Practices [Line Items]
Description of dividend payments	(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% of required statutory capital surplus as to policyholders.

[1] Indicates an unusual value.

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AUTHORIZATION OF PREFERRED STOCK (Details)	Dec. 31, 2013	Dec. 31, 2012
AUTHORIZATION OF PREFERRED STOCK [Abstract]
Preferred stock, authorized (in shares)	1,000,000	1,000,000
Preferred stock, issued (in shares)	0	0

XML

INVESTMENTS (Details) (USD $)	1 Months Ended	12 Months Ended
	Nov. 30, 2013	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
INVESTMENTS [Abstract]
Increase in total investments		$ 90,600,000
Percentage increase in investments (in hundredths)		69.70%
Increase in gross premiums written		123,900,000
Proceeds from offering	28,100,000	27,879,000	0	0
Ratio of available-for-sale securities to total investments (in hundredths)		97.00%	94.00%
Net realized investment losses charged to operations		0	44,000
Schedule of Available-for-sale Securities [Line Items]
Bond portfolio reclassified between available-for-sale and held-to-maturity		150,000	0
Irrevocable letter of credit		15,000,000
Amount held in trust		1,000,000	1,000,000
Debt securities, at market [Abstract]
Debt securities, at market		174,912,000	101,755,000
Percent of debt securities at market to total investments (in hundredths)		79.26%	78.22%
Debt securities, at amortized cost [Abstract]
Debt securities, at amortized cost		7,214,000	7,359,000
Percent of debt securities at amortized cost to total investments (in hundredths)		3.27%	5.65%
Total debt securities		182,126,000	109,114,000
Percent of debt securities to total investments (in hundredths)		82.53%	83.87%
Equity securities, at market		38,584,000	20,982,000
Percentage of equity securities to total investments (in hundredths)		17.47%	16.13%
Total investments		220,710,000	130,096,000
Total investments (in hundredths)		100.00%	100.00%
Realized gains (losses) [Abstract]
Total realized gains		4,548,000	3,186,000
Fair Value at Sale of securities with realized gains		53,308,000	57,659,000
Total realized losses		(1,667,000)	(2,114,000)
Fair Value at Sale of securities with realized losses		46,803,000	19,851,000
Net realized gains on investments		2,881,000	1,072,000
Fair Value of Investments at Sale		100,111,000	77,510,000
Debt Securities Available For Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost		174,511,000	97,121,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains		1,727,000	4,735,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses		1,326,000	101,000
Debt Securities - Available-For-Sale, Estimated Fair Value		174,912,000	101,755,000
Debt Securities - Held-To-Maturity [Abstract]
Debt Securities - Held-To-Maturity, Amortized Cost		7,214,000	7,359,000
Debt Securities - Held-To-Maturity, Gross Unrealized Gains		54,000	210,000
Debt Securities - Held-To-Maturity, Gross Unrealized Losses		344,000	15,000
Debt Securities - Held-To-Maturity, Estimated Fair Value		6,924,000	7,554,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)		1,601,000
Debt/Equity securities, Less than 12 months		1,460,000
Debt/Equity securities, 12 months or longer		141,000
Amortized Cost [Abstract]
Due in one year or less, Amortized Cost		5,161,000	2,925,000
Due after one through five years, Amortized Cost		113,027,000	49,826,000
Due after five through ten years, Amortized Cost		62,656,000	35,070,000
Due after ten years, Amortized Cost		881,000	16,659,000
Total Amortized Cost		181,725,000	104,480,000
Estimated Fair Value [Abstract]
Due in one year or less, Estimated Fair Value		5,181,000	2,944,000
Due after one through five years, Estimated Fair Value		113,561,000	51,523,000
Due after five through ten years, Estimated Fair Value		62,220,000	37,182,000
Due after ten years, Estimated Fair Value		874,000	17,660,000
Total Estimated Fair Value		181,836,000	109,309,000
Investment income [Abstract]
Interest on debt securities		2,850,000	3,380,000	3,681,000
Dividends on equity securities		478,000	436,000	394,000
Interest on cash and cash equivalents		4,000	3,000	4,000
Total investment income		3,332,000	3,819,000	4,079,000
Net realized gains		2,881,000	1,072,000	2,725,000
Proceeds from sales and maturity of marketable securities		106,100,000	90,400,000	108,300,000
Net realized and unrealized investment gains (losses) [Abstract]
Net realized gains (losses)		2,881,000	1,072,000	2,725,000
Net unrealized gains (losses)		9,562,000	6,521,000	1,406,000
Federated National [Member]
INVESTMENTS [Abstract]
Proceeds from offering		27,879,000	0	0
Realized gains (losses) [Abstract]
Fair Value of Investments at Sale		44,792,000	451,000	846,000
Diverse Industries Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Percentage of debt securities to total debt portfolio (in hundredths)		83.00%	69.00%
Percentage of equity holdings to total equity portfolio (in hundredths)		91.00%	87.00%
United States Government Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Percentage of debt securities to total debt portfolio (in hundredths)		17.00%	31.00%
Mutual Funds [Member]
Schedule of Available-for-sale Securities [Line Items]
Percentage of equity holdings to total equity portfolio (in hundredths)		9.00%	13.00%
United States Government Obligations and Authorities [Member]
Debt securities, at market [Abstract]
Debt securities, at market		27,209,000	27,392,000
Percent of debt securities at market to total investments (in hundredths)		12.33%	21.06%
Debt securities, at amortized cost [Abstract]
Debt securities, at amortized cost		4,630,000	6,016,000
Percent of debt securities at amortized cost to total investments (in hundredths)		2.10%	4.62%
Debt Securities Available For Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost		27,422,000	26,825,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains		186,000	632,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses		399,000	65,000
Debt Securities - Available-For-Sale, Estimated Fair Value		27,209,000	27,392,000
Debt Securities - Held-To-Maturity [Abstract]
Debt Securities - Held-To-Maturity, Amortized Cost		4,630,000	6,016,000
Debt Securities - Held-To-Maturity, Gross Unrealized Gains		32,000	149,000
Debt Securities - Held-To-Maturity, Gross Unrealized Losses		326,000	12,000
Debt Securities - Held-To-Maturity, Estimated Fair Value		4,336,000	6,153,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)		399,000
Debt/Equity securities, Less than 12 months		391,000
Debt/Equity securities, 12 months or longer		8,000
Obligations of States and Political Subdivisions [Member]
Debt securities, at market [Abstract]
Debt securities, at market		52,064,000	3,939,000
Percent of debt securities at market to total investments (in hundredths)		23.59%	3.03%
Debt Securities Available For Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost		51,883,000	3,738,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains		303,000	202,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses		122,000	1,000
Debt Securities - Available-For-Sale, Estimated Fair Value		52,064,000	3,939,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)		122,000
Debt/Equity securities, Less than 12 months		122,000
Debt/Equity securities, 12 months or longer		0
Corporate [Member]
Debt securities, at market [Abstract]
Debt securities, at market		91,941,000	67,313,000
Percent of debt securities at market to total investments (in hundredths)		41.66%	51.74%
Debt securities, at amortized cost [Abstract]
Debt securities, at amortized cost		2,475,000	1,203,000
Percent of debt securities at amortized cost to total investments (in hundredths)		1.12%	0.92%
Debt Securities Available For Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost		91,475,000	63,553,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains		1,233,000	3,794,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses		767,000	34,000
Debt Securities - Available-For-Sale, Estimated Fair Value		91,941,000	67,313,000
Debt Securities - Held-To-Maturity [Abstract]
Debt Securities - Held-To-Maturity, Amortized Cost		2,475,000	1,203,000
Debt Securities - Held-To-Maturity, Gross Unrealized Gains		22,000	61,000
Debt Securities - Held-To-Maturity, Gross Unrealized Losses		17,000	2,000
Debt Securities - Held-To-Maturity, Estimated Fair Value		2,480,000	1,262,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)		767,000
Debt/Equity securities, Less than 12 months		761,000
Debt/Equity securities, 12 months or longer		6,000
Debt Securities [Member]
Realized gains (losses) [Abstract]
Total realized gains		1,690,000	1,783,000
Fair Value at Sale of securities with realized gains		41,256,000	50,950,000
Total realized losses		(1,001,000)	(391,000)
Fair Value at Sale of securities with realized losses		43,239,000	13,291,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)		1,326,000
Debt/Equity securities, Less than 12 months		1,312,000
Debt/Equity securities, 12 months or longer		14,000
Investment income [Abstract]
Net realized gains		689,000	1,392,000	2,974,000
Net realized and unrealized investment gains (losses) [Abstract]
Net realized gains (losses)		689,000	1,392,000	2,974,000
Net unrealized gains (losses)		401,000	4,634,000	2,345,000
Equity Securities [Member]
Realized gains (losses) [Abstract]
Total realized gains		2,858,000	1,403,000
Fair Value at Sale of securities with realized gains		12,052,000	6,709,000
Total realized losses		(666,000)	(1,723,000)
Fair Value at Sale of securities with realized losses		3,564,000	6,560,000
Investment income [Abstract]
Net realized gains		2,192,000	(320,000)	(249,000)
Net realized and unrealized investment gains (losses) [Abstract]
Net realized gains (losses)		2,192,000	(320,000)	(249,000)
Net unrealized gains (losses)		9,161,000	1,887,000	(939,000)
International [Member]
Debt securities, at market [Abstract]
Debt securities, at market		3,698,000	3,111,000
Percent of debt securities at market to total investments (in hundredths)		1.68%	2.39%
Debt securities, at amortized cost [Abstract]
Debt securities, at amortized cost		109,000	140,000
Percent of debt securities at amortized cost to total investments (in hundredths)		0.05%	0.11%
Debt Securities Available For Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost		3,731,000	3,005,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains		5,000	107,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses		38,000	1,000
Debt Securities - Available-For-Sale, Estimated Fair Value		3,698,000	3,111,000
Debt Securities - Held-To-Maturity [Abstract]
Debt Securities - Held-To-Maturity, Amortized Cost		109,000	140,000
Debt Securities - Held-To-Maturity, Gross Unrealized Gains		0	0
Debt Securities - Held-To-Maturity, Gross Unrealized Losses		1,000	1,000
Debt Securities - Held-To-Maturity, Estimated Fair Value		108,000	139,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)		38,000
Debt/Equity securities, Less than 12 months		38,000
Debt/Equity securities, 12 months or longer		0
Common Stock [Member]
Debt Securities - Held-To-Maturity [Abstract]
Equity securities - common stocks, Amortized Cost		29,423,000	19,095,000
Equity securities - common stocks, Gross Unrealized Gains		9,436,000	2,505,000
Equity securities - common stocks, Gross Unrealized Losses		275,000	618,000
Equity securities - common stocks, Estimated Fair Value		38,584,000	20,982,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)		275,000
Debt/Equity securities, Less than 12 months		148,000
Debt/Equity securities, 12 months or longer		127,000
United States Treasury Notes [Member] | Federated National [Member]
Estimated Fair Value [Abstract]
Due in one year or less, Estimated Fair Value		62,490
Due after one through five years, Estimated Fair Value			2,193,814
United States Treasury Notes [Member] | American Vehicle [Member]
Estimated Fair Value [Abstract]
Due in one year or less, Estimated Fair Value		63,481
Due after one through five years, Estimated Fair Value			$ 2,193,300

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ORGANIZATION AND BUSINESS

12 Months Ended

Dec. 31, 2013

ORGANIZATION AND BUSINESS [Abstract]

ORGANIZATION AND BUSINESS

(1) ORGANIZATION AND BUSINESS

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Federated National Holding Company (“FNHC”, “Company”, “we”, “us”), formerly known as 21st Century Holding Company is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents. We changed our name on September 11, 2012, pursuant to approval received at our annual shareholders’ meeting, from 21st Century Holding Company so that our parent company and other subsidiary companies’ names are consistent with our primary insurance subsidiary and the name under which we have been writing insurance for more than 20 years.

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

Our insurance subsidiary is Federated National Insurance Company (“FNIC”). FNIC is licensed as an admitted carrier in Florida. An admitted carrier is an insurance company that has received a license from the state department of insurance giving the company the authority to write specific lines of insurance in that state. These companies are also bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices,including fraud. Admitted carriers are also required to financially contribute to the state guarantee fund, which is used to pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders. Through contractual relationships with a network of approximately 3,600 independent agents, of which approximately 1,800 actively sell and service our products, FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines and personal and commercial automobile insurance in Florida.  FNIC is licensed as an admitted carrier in Alabama, Louisiana, Georgia and Texas and underwrites commercial general liability insurance in those states, homeowners’ insurance in Louisiana and personal automobile insurance in Georgia and Texas.

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

In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. In connection with this merger, the Company, FNIC and American Vehicle entered into a Consent Order with the Florida Office of Insurance Regulation (“Florida OIR”) pursuant to which we agreed to certain restrictions on our business operations. The Consent Order was amended in February 2013 to lessen or eliminate certain of the original requirements, due to FNIC’s statutory underwriting profit during 2012. See "Footnote 8 – Regulatory Requirements and Restrictions”.

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

 Until June 2011, we offered premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).

Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, a wholly owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s existing network of agents.

FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliate, FNIC. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed above, reduced its fee to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.

The homeowner policy provides FNU the right to cancel any policy within a period of 90 days from the policy's inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our underwriting criteria.

Although we are authorized to underwrite the various lines described above, our business is primarily underwriting homeowners’ policies. During 2013, 89.6%, 4.3%, 2.6% and 3.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively. During 2013, $29.7 million or 13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents 25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents began writing for FNIC in March 2013. During 2012, 85.3%, 7.8%, 4.4% and 2.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively.

During the years ended December 31, 2013, 2012 or 2011, we did not experience any weather-related catastrophic events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or other insurable events will affect our future results of operations and liquidity. Loss and loss adjustment expenses (“LAE”) are affected by a number of factors, many of which are partially or entirely beyond our control, including the following.

· the nature and severity of the loss;

· weather-related patterns;

· the availability, cost and terms of reinsurance;

· underlying settlement costs, including medical and legal costs;

· legal and political factors such as legislative initiatives and public opinion;

· macroeconomic issues.

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

We have entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with Federated Mutual Insurance Company (“Federated Mutual”) in response to correspondence received from Federated Mutual’s counsel alleging that our use of the name “Federated” infringed certain federal trademarks held by Federated Mutual.  Although we believe that we have meritorious defenses to this allegation, we sought to avoid litigation and therefore negotiated and entered into the Coexistence Agreement.  Under the Coexistence Agreement, among other things, we may continue to use “Federated” until at least August 30, 2020, after which time we have agreed to either cease using “Federated” in commerce or otherwise adopt and use trade names that are not confusingly similar to Federated Mutual’s trademarks.  During this period, we continue to develop our brand under the “FedNat” name, which is the name by which agents generally know us.

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

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FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED) (Details) (USD $) In Thousands, unless otherwise specified	1 Months Ended	12 Months Ended
	Nov. 30, 2013	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
ASSETS
Cash and short term investments		$ 41,446	$ 21,143	$ 15,205
Deferred income taxes receivable		1,006	4,338
Income taxes receivable		0	39
Property, plant and equipment, net		929	564
Other assets		3,194	2,658
Total assets		316,741	185,888
LIABILITIES AND SHAREHOLDERS' EQUITY
Income taxes payable		2,379	0
Total liabilities		208,247	119,983
Shareholders' equity:
Common stock		109	80
Additional paid-in capital		80,525	51,356
Accumulated other comprehensive loss		5,964	4,067
Retained earnings		21,896	10,402
Total shareholders' equity		108,494	65,905	58,144	57,931
Total liabilities and shareholders' equity		316,741	185,888
Revenue:
Net investment income		3,332	3,819	4,079
Other income		1,435	517	1,741
Total revenue		121,737	68,647	60,163
Expenses:
Salaries and wages		10,188	8,439	8,004
Total expenses		102,519	61,899	61,163
Income (loss) before provision for income tax expense (benefit)		19,218	6,748	(1,000)
Provision for income tax expense (benefit)		6,491	2,435	(570)
Net income (loss)		12,727	4,313	(430)
Cash flow from operating activities:
Net income (loss)		12,727	4,313	(430)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization of property plant and equipment, net		263	195	168
Income tax recoverable (payable)		39	(39)	2,393
Changes in operating assets and liabilities:
Other assets		(536)	(552)	(308)
Net cash provided (used) by operating activities		79,713	1,540	4,083
Cash flow used in investing activities:
Purchases of investment securities available for sale		(100,111)	(77,510)
Net cash (used) provided by investing activities		(87,083)	4,329	(5,176)
Net cash provided in financing activities:
Dividends paid		(1,232)	(159)	0
Stock options exercised		858	128	0
Tax benefit related to non-cash compensation		168	100	92
Issuance of common stock	28,100	27,879	0	0
Net cash provided by financing activities		27,673	69	92
Net increase (decrease) in cash and short term investments		20,303	5,938	(1,001)
Cash and short term investments at beginning of period		21,143	15,205	16,206
Cash and short term investments at end of period		41,446	21,143	15,205
Parent Company [Member]
ASSETS
Cash and short term investments		2,143	1,494	2,283
Investments and advances to subsidiaries		105,797	61,005
Deferred income taxes receivable		1,006	4,338
Income taxes receivable		8,157	9,515
Property, plant and equipment, net		184	98
Other assets		4,446	4,069
Total assets		121,733	80,519
LIABILITIES AND SHAREHOLDERS' EQUITY
Income taxes payable		1,690	0
Dividends payable		330	0
Capital contribution payable		16,000	0
Other liabilities		238	125
Total liabilities		18,258	125
Shareholders' equity:
Common stock		110	80
Additional paid-in capital		74,086	45,378
Accumulated other comprehensive loss		(1,727)	(1,039)
Retained earnings		31,006	35,975
Total shareholders' equity		103,475	80,394
Total liabilities and shareholders' equity		121,733	80,519
Revenue:
Management fees from subsidiaries		1,864	1,228	1,734
Equity in loss (income) loss of subsidiaries		21,623	8,787	(48)
Net investment income		136	34	31
Other income		11	476	1,345
Total revenue		23,634	10,525	3,062
Expenses:
Salaries and wages		2,022	1,853	1,775
Legal fees		113	198	54
Other expenses		2,281	1,726	2,233
Total expenses		4,416	3,777	4,062
Income (loss) before provision for income tax expense (benefit)		19,218	6,748	(1,000)
Provision for income tax expense (benefit)		6,491	2,435	(570)
Net income (loss)		12,727	4,313	(430)
Cash flow from operating activities:
Net income (loss)		12,727	4,313	(430)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Equity in (income) loss of subsidiaries		(21,623)	(8,787)	48
Depreciation and amortization of property plant and equipment, net		33	23	7
Deferred income tax (benefit) expense		(3,332)	(4,274)	696
Income tax recoverable (payable)		1,690	(78)	78
Change in dividends payable		330	0	0
Non-cash compensation		293	188	263
Changes in operating assets and liabilities:
Property plant and equipment		119	(138)	73
Deferred gain on sale of assets		0	(30)	(506)
Other assets		377	45	(292)
Capital contribution payable		16,000	0	0
Other liabilities		112	(18)	(770)
Net cash provided (used) by operating activities		6,726	(8,756)	(833)
Cash flow used in investing activities:
Purchases of investment securities available for sale		(44,792)	(451)	(846)
Net cash (used) provided by investing activities		(44,792)	(451)	(846)
Net cash provided in financing activities:
Dividends paid		(1,232)	(159)	0
Stock options exercised		858	128	0
Tax benefit related to non-cash compensation		168	100	92
Issuance of common stock		27,879	0	0
Advances from subsidiaries		11,042	8,349	668
Net cash provided by financing activities		38,715	8,418	760
Net increase (decrease) in cash and short term investments		649	(789)	(919)
Cash and short term investments at beginning of period		1,494	2,283	3,202
Cash and short term investments at end of period		$ 2,143	$ 1,494	$ 2,283

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SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED) (Tables)

12 Months Ended

Dec. 31, 2013

SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED) [Abstract]

Schedule of supplemental information concerning property-casualty insurance operations

(20) SCHEDULE VI – SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED)

	Loss and LAE - Current Year		Loss and LAE - Prior year			Amortization of deferred policy acquisition costs		Paid losses and LAE expenses		Net premiums written
	(Dollars in Thousands)
2013	$	56,209	$	201		$	21,447	$	22,695	$	160,665
2012	$	31,636	$	(1,427	)	$	13,255	$	15,892	$	68,374
2011	$	31,893	$	(997	)	$	12,347	$	13,672	$	51,976
Affiliation with registrant	Deferred policy acquisition costs		Reserves for losses and LAE			Discount, if any, deducted from previous column		Unearned premiums		Net premiums earned
	(Dollars in Thousands)
Consolidated Property and Casualty Subsidiaries
2013	$	16,708	$	61,016		$	-	$	128,343	$	104,381
2012	$	8,479	$	49,908		$	-	$	59,006	$	59,359
2011	$	7,718	$	59,983		$	-	$	47,933	$	48,523

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FAIR VALUE DISCLOSURE

12 Months Ended

Dec. 31, 2013

FAIR VALUE DISCLOSURE [Abstract]

FAIR VALUE DISCLOSURE

(21) FAIR VALUE DISCLOSURE

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

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

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

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

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

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

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

Assets measured at fair value on a recurring basis as of December 31, 2013, presented in accordance with this guidance, are as follows.

	As of December 31, 2013
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	-	$	27,209	$	-	$	27,209
Obligations of states and political subdivisions		-		52,064		-		52,064
Corporate		-		91,941		-		91,941
International		-		3,698		-		3,698
		-		174,912		-		174,912
Equity securities:
Common stocks		38,584		-		-		38,584
		38,584		-		-		38,584
Total debt and equity securities	$	38,584	$	174,912	$	-	$	213,496

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SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED)

12 Months Ended

Dec. 31, 2013

SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED) [Abstract]

SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED)

(20) SCHEDULE VI – SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED)

	Loss and LAE - Current Year		Loss and LAE - Prior year			Amortization of deferred policy acquisition costs		Paid losses and LAE expenses		Net premiums written
	(Dollars in Thousands)
2013	$	56,209	$	201		$	21,447	$	22,695	$	160,665
2012	$	31,636	$	(1,427	)	$	13,255	$	15,892	$	68,374
2011	$	31,893	$	(997	)	$	12,347	$	13,672	$	51,976
Affiliation with registrant	Deferred policy acquisition costs		Reserves for losses and LAE			Discount, if any, deducted from previous column		Unearned premiums		Net premiums earned
	(Dollars in Thousands)
Consolidated Property and Casualty Subsidiaries
2013	$	16,708	$	61,016		$	-	$	128,343	$	104,381
2012	$	8,479	$	49,908		$	-	$	59,006	$	59,359
2011	$	7,718	$	59,983		$	-	$	47,933	$	48,523

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NET INCOME PER SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Income (Loss) (Numerator) [Abstract]
Basic net income (loss)	$ 12,727	$ 4,313	$ (430)
Fully diluted income (loss)	$ 12,727	$ 4,313	$ (430)
Shares Outstanding (Denominator) [Abstract]
Basic net income (loss) per share (in shares)	8,505,967	7,951,906	7,946,384
Fully diluted income (loss) per share (in shares)	8,772,060	8,016,110	7,946,384
Per-share Amount [Abstract]
Basic net income (loss) per share (in dollars per share)	$ 1.50	$ 0.53	$ (0.05)
Fully diluted income (loss) per share (in dollars per share)	$ 1.45	$ 0.53	$ (0.05)

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FAIR VALUE DISCLOSURE (Tables)

12 Months Ended

Dec. 31, 2013

FAIR VALUE DISCLOSURE [Abstract]

Assets measured at fair value on a recurring basis

Assets measured at fair value on a recurring basis as of December 31, 2013, presented in accordance with this guidance, are as follows.

	As of December 31, 2013
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	-	$	27,209	$	-	$	27,209
Obligations of states and political subdivisions		-		52,064		-		52,064
Corporate		-		91,941		-		91,941
International		-		3,698		-		3,698
		-		174,912		-		174,912
Equity securities:
Common stocks		38,584		-		-		38,584
		38,584		-		-		38,584
Total debt and equity securities	$	38,584	$	174,912	$	-	$	213,496

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SUBSEQUENT EVENTS

12 Months Ended

Dec. 31, 2013

SUBSEQUENT EVENTS [Abstract]

SUBSEQUENT EVENTS

 (22) SUBSEQUENT EVENTS

On March 4, 2014, a total of 88,648 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in Restricted Stock Agreements.  Of the total, 43,997 shares were granted to the Company's Chief Executive Officer and President and 16,341 shares were granted to the Company's Chief Financial Officer.  An aggregate of 15,710 shares were granted to the Company's directors and the remaining 12,600 shares were granted to other employees of the Company.

On February 24, 2014, Federated National entered into a Reimbursement Contract with the SBA for the 2014-2015 hurricane season.  This Reimbursement Contract is part of the Company’s reinsurance program and will reimburse Federated National for covered property losses under its homeowners’ insurance policies resulting from hurricanes that cause damage in the State of Florida through May 31, 2015.

Under this Reimbursement Contract, the FHCF will provide approximately $531.0 million of aggregate seasonal coverage for covered losses in excess of approximately $225.0 million, subject to a 10.0% Company participation. Federated National’s premium for the FHCF reinsurance coverage will be approximately $41.4 million payable in three installments between August 2014 and December 2014.  The actual attachment point, total coverage and cost will not be finalized until December 31, 2014.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Policies)

12 Months Ended

Dec. 31, 2013

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES [Abstract]

CASH AND SHORT TERM INVESTMENTS

(a) CASH AND SHORT TERM INVESTMENTS

We consider all short-term highly liquid investments with original maturities of less than three months to be short term investments.

INVESTMENTS

(b) INVESTMENTS

Our investment securities have been classified as either available-for-sale or held to maturity in response to our liquidity needs, changes in market interest rates and asset-liability management strategies, among other reasons. Investments available-for-sale are stated at fair value on the balance sheet. Investments designated as held to maturity are stated at amortized cost on the balance sheet. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income within shareholders' equity, net of related deferred income taxes.

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

PREMIUM REVENUE

(c) PREMIUM REVENUE

Premium revenue on all lines is earned on a pro-rata basis over the life of the policies. Unearned premiums represent the portion of the premium related to the unexpired policy term.

DEFERRED ACQUISITION COSTS

(d) DEFERRED ACQUISITION COSTS

Deferred acquisition costs primarily represent commissions paid to outside agents at the time of policy issuance (to the extent they are recoverable from future premium income) net of ceded premium commission earned from reinsurers, salaries and premium taxes net of policy fees, and are amortized over the life of the related policy in relation to the amount of premiums earned. The method followed in computing deferred acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, unpaid losses and LAE and certain other costs expected to be incurred as the premium is earned. There is no indication that these costs will not be fully recoverable in the near term.

PREMIUM DEPOSITS

(e) PREMIUM DEPOSITS

Premium deposits represent premiums received primarily in connection with homeowner policies that are not yet effective. We take approximately 30 working days to issue the policy from the date the cash and policy application are received.

UNPAID LOSSES AND LAE

(f) UNPAID LOSSES AND LAE

Unpaid losses and LAE are determined by establishing liabilities in amounts estimated to cover incurred losses and LAE. Such liabilities are determined based upon our assessment of claims pending and the development of prior years' loss liability. These amounts include liabilities based upon individual case estimates for reported losses and LAE and estimates of such amounts that are incurred but not yet reported (“IBNR”). Changes in the estimated liability are charged or credited to operations as the losses and LAE are settled.

The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

There can be no assurance that our liability for unpaid losses and LAE will be adequate to cover actual losses. If our liability for unpaid losses and LAE proves to be inadequate, we will be required to increase the liability with a corresponding reduction in our net income in the period in which the deficiency is identified. Future loss experience substantially in excess of established liability for unpaid losses and LAE could have a material adverse effect on our business, results of operations and financial condition.

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

We do not discount unpaid losses and LAE for financial statement purposes.

FINANCE REVENUE

(g) FINANCE REVENUE

Interest and service income, resulting from the financing of insurance premiums, is recognized using a method that approximates the effective interest method. Late charges are recognized as income when chargeable.

PREMIUMS RECEIVABLE, NET OF ALLOWANCE FOR CREDIT LOSSES

(h) PREMIUMS RECEIVABLE, NET OF ALLOWANCE FOR CREDIT LOSSES

Provisions for credit losses are provided in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover anticipated losses. Generally, accounts that are over 90 days old are written off to the allowance for credit losses. We have been increasing our reliance on direct billing of our policyholders for their insurance premiums. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring payment of the full amount of the policy, either directly from the insured or from a premium finance company. We manage the credit risk associated with our direct billing program through our integrated computer system which allows us to monitor the equity in the unearned premium to the underlying policy. Underwriting criteria are designed with down payment requirements and monthly payments that create policyholder equity, also called unearned premium, in the insurance policy. The equity in the policy is collateral for the extension of credit to the insured.

MANAGING GENERAL AGENT ("MGA") FEES

(i) MANAGING GENERAL AGENT (“MGA”) FEES

If all the costs substantially associated with the MGA contracts, which do not involve affiliated insurers, are incurred during the underwriting process, then the MGA fees and the related acquisition costs are recognized at the time the policy is underwritten, net of estimated cancellations. If the MGA contract requires significant involvement subsequent to the completion of the underwriting process, then the MGA fees and related acquisition costs are deferred and recognized over the life of the policy. Included in MGA Fees are policy fees charged by the insurance companies and passed through to FNU. Policy fees are discussed below.

POLICY FEES

(j) POLICY FEES

Policy fees represent a $25 non-refundable application fee for insurance coverage, which are intended to reimburse us for the costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is underwritten.  These fees are netted against underwriting costs and are included as a component of deferred acquisition costs.

REINSURANCE

(k) REINSURANCE

We recognize the income and expense on reinsurance contracts principally on a pro-rata basis over the term of the reinsurance contracts or until the reinsurers maximum liability is exhausted, whichever comes first. We are reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve us from our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We only cede risks to reinsurers whom we believe to be financially sound. At December 31, 2013, all reinsurance recoverables are considered current and deemed collectable.

INCOME TAXES

(l) INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date.

CONCENTRATION OF CREDIT RISK

(m) CONCENTRATION OF CREDIT RISK

FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliates FNIC and American Vehicle. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed in “Regulation – Consent Order” reduced its fee, to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.

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

RECENT ACCOUNTING PRONOUNCEMENTS

(n) RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

In July 2012, the FASB issued ASU No. 2012-02: Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendments in this ASU is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories.  The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.   Upon adoption, these amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012; early adoption is permitted.  The adoption of these amendments did not have a material impact on our financial condition, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05: Comprehensive Income (Topic 220):  Presentation of Comprehensive Income. The guidance in this ASU is intended to increase the prominence of items reported in other comprehensive income in the financial statements by presenting the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The guidance in this ASU does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Upon adoption, this update is to be applied retrospectively and is effective during interim and annual periods beginning after December 15, 2011.  Early adoption is permitted. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-12:  Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  The guidance defers certain provisions contained in ASU No. 2011-05 requiring the requirement to present components of reclassifications of other comprehensive income on the face of the income statement or in the notes to the financial statements. However, this deferral does not impact the other requirements contained in the new standard on comprehensive income as described above. This ASU is effective during interim and annual periods beginning after December 15, 2011.  The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In September 2011, the FASB issued ASU No. 2011-08: Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which amends ASC Topic 350, Intangibles-Goodwill and Other. The guidance in this ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-11: Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which requires new disclosure requirements mandating that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. This ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In October 2010, the FASB issued ASU No. 2010-26: Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, a consensus of FASB Emerging Issues Task Force.  The amendments in this update modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The amendments in this update specify that the costs must be based on successful efforts (that is, acquiring a new or renewal contract).  The amendments also specify that advertising costs should be included as deferred acquisition costs under certain circumstances.  The amendments in this update are effective for fiscal years, and interim period within those fiscal years, beginning after December 15, 2011.  The amendments in this update should be applied prospectively upon adoption.  Retrospective application to all prior periods presented upon the date of adoption also is permitted.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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

USE OF ESTIMATES

 (o) USE OF ESTIMATES

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

Similar to other property and casualty insurers, our liability for unpaid losses and LAE, although supported by actuarial projections and other data, is ultimately based on management's reasoned expectations of future events. Although considerable variability is inherent in these estimates, we believe that this liability is adequate. Estimates are reviewed regularly and adjusted as necessary. Such adjustments are reflected in current operations. In addition, the realization of our deferred income tax assets is dependent on generating sufficient future taxable income. It is reasonably possible that the expectations associated with these accounts could change in the near term and that the effect of such changes could be material to the Consolidated Financial Statements.

OPERATIONAL RISKS

(p) OPERATIONAL RISKS

We are subject to certain risks in our business operations which are described below. Careful consideration of these risks should be made before making an investment decision. The risks and uncertainties described below are not the only ones facing FNHC. Additional risks and uncertainties not presently known or currently deemed immaterial may also impair our business operations.

Risks Related to Our Business

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”.

· Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.

· Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance fluctuates and we may not be able to successfully alleviate risk through reinsurance arrangements.

· We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of operations and/or financial condition.

· Our January 2011 Consent Order with the Florida OIR, as amended in February 2013, limits our business in certain respects and may prevent us from growing our business.

· If we are unable to continue our growth because our capital must be used to pay greater than anticipated claims, our financial results may suffer.

· We may require additional capital in the future which may not be available or only available on unfavorable terms.

· Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

· We may experience financial exposure from climate change.

· Our loss reserves may be inadequate to cover our actual liability for losses, causing our results of operations to be adversely affected.

· Our revenues and operating performance may fluctuate due to statutorily approved assessments that support property and casualty insurance pools and associations.

· Our investment portfolio may suffer reduced returns or losses, which would significantly reduce our earnings.

· We may experience a loss due to the concentration of credit risk.

· The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or our results of operations.

· The effects of emerging claim and coverage issues on our business are uncertain.

· Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.

· Our insurance company is subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.

· Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance industry.

· We may not obtain the necessary regulatory approvals to expand the types of insurance products we offer or the states in which we operate.

· Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable policies or obtain adequate insurance, which could limit or halt our growth and harm our business.

· We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain independent and general agents, our revenues would be negatively affected.

· We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our operations.

· Nonstandard automobile insurance historically has a higher frequency of claims than standard automobile insurance, thereby increasing our potential for loss exposure beyond what we would be likely to experience if we offered only standard automobile insurance.

· Florida's personal injury protection insurance statute contains provisions that favor claimants, causing us to experience a higher frequency of claims than might otherwise be the case if we operated only outside of Florida.

· Our success depends on our ability to accurately price the risks we underwrite.

· Current operating resources are necessary to develop future new insurance products.

· Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our business and adversely impact our financial results.

· Our participation in the new Florida Property Insurance Clearinghouse may not result in an increase in our premium revenue.

· Our senior management team is critical to the strategic direction of our company. If there were an unplanned loss of service by any of our officers our business could be harmed.

· We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth.

· New homeowners’ insurance operations outside of the State of Florida may not be profitable.

· We face risks in connection with potential material weakness resulting from our Sarbanes-Oxley Section 404 management report and any related remedial measures that we undertake.

Risks Related to an Investment in Our Shares

· Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price of our common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.

· If we report a material weakness in our internal controls and procedures, we may lose investor confidence and remedial measures may be costly.

· Our controls and procedures may fail or be circumvented which could have a material adverse effect on our business, results of operations and financial condition.

· We have authorized but unissued preferred stock, which could affect rights of holders of common stock.

· Provisions in our articles of incorporation and our bylaws, as amended, and the Florida Business Corporation Act could make it more difficult to acquire us and may reduce the market price of our common stock.

· As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and dividends to the holding company as the primary source of our income.

· Future sales of our common stock may depress our stock price.

FAIR VALUE

(q) FAIR VALUE

The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on December 31, 2013 and 2012. Changes in interest rates subsequent to December 31, 2013 may affect the fair value of our investments. Refer to Footnote 21 of the Notes to Consolidated Financial Statements for details.

The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2013 and 2012 because of their short-term nature: cash and short term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, bank overdraft, accounts payable and accrued expenses.

STOCK OPTION PLANS

(r) STOCK OPTION PLANS

During the year ended December 31, 2013, the Company had three stock-based employee compensation plans, which are described later in Footnote 14, Stock Compensation Plans. Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the Accounting Principles Board (“APB”) and related Interpretation, as permitted by FASB issued guidance.Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2013, 2012 and 2011 include:

· Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and

· Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as they are not required to be by the pronouncement.

PROPERTY, PLANT AND EQUIPMENT

(s) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation on property, plant and equipment is calculated on a straight-line basis over the following estimated useful lives: building and improvements - 30 years and furniture and fixtures - 7 years. We capitalize betterments and any other expenditure in excess of $1,000 if the asset is expected to have a useful life greater than one year.  The carrying value of property, plant and equipment is periodically reviewed based on the expected future undiscounted operating cash flows of the related item. Based upon our most recent analysis, we believe that no impairment of property, plant and equipment exists at December 31, 2013.

RECLASSIFICATIONS

(t) RECLASSIFICATIONS

The 2012 and 2011 financial statement amounts have not been reclassified to conform to the 2013 presentations.

GOODWILL AND INTANGIBLE ASSETS

(u) GOODWILL AND INTANGIBLE ASSETS

During 2009, the Company purchased one intangible asset totaling $0.1 million. In accordance with FASB issued guidance, the accounting for the recognized intangible asset was based on its useful life to the Company. The useful life of the intangible asset was the period over which it was expected to contribute directly or indirectly to the future cash flows of the Company. The intangible asset had a definite finite life ranging from six to twelve months, and was amortized accordingly.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Cash flow from operating activities:
Net income (loss)	$ 12,727	$ 4,313	$ (430)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of investment premium discount, net	1,761	1,356	1,249
Depreciation and amortization of property plant and equipment, net	263	195	168
Net realized investment gains	(2,881)	(1,072)	(2,725)
Non-cash impairment recognition	0	(44)	0
(Recovery) provision for credit losses, net	0	(12)	18
(Recovery) provision for uncollectible premiums receivable	(74)	5	(5)
Non-cash compensation	293	188	196
Changes in operating assets and liabilities:
Premiums receivable	(14,317)	(2,412)	29
Prepaid reinsurance premiums	(546)	1,293	2,076
Reinsurance recoverable, net	761	(1,415)	5,951
Income taxes recoverable	39	(39)	2,393
Deferred income tax expense, net of other comprehensive income (loss)	2,188	2,350	(912)
Policy acquisition costs, net of amortization	(8,229)	(761)	161
Other assets	(536)	(552)	(308)
Unpaid losses and LAE	11,108	(10,075)	(6,547)
Unearned premiums	69,336	11,074	797
Premium deposits and customer credit balances	1,376	(347)	441
Income taxes payable	2,379	(77)	77
Bank overdraft	216	(1,942)	498
Accounts payable and accrued expenses	3,849	(486)	956
Net cash provided by operating activities	79,713	1,540	4,083
Cash flow (used) provided by investing activities:
Proceeds from sale of investment securities	106,173	90,449	108,318
Purchases of investment securities available for sale	(192,627)	(86,203)	(113,251)
Purchases of property and equipment	(629)	83	(243)
Net cash (used) provided by investing activities	(87,083)	4,329	(5,176)
Cash flow provided by financing activities:
Exercised stock options	858	128	0
Dividends paid	(1,232)	(159)	0
Issuance of common stock	27,879	0	0
Tax benefit related to non-cash compensation	168	100	92
Net cash provided by financing activities	27,673	69	92
Net increase (decrease) in cash and short term investments	20,303	5,938	(1,001)
Cash and short term investments at beginning of period	21,143	15,205	16,206
Cash and short term investments at end of period	41,446	21,143	15,205
Cash paid during the period for:
Income taxes	1,870	165	0
Non-cash investing and finance activities:
Accrued dividends payable	$ 330	$ 159	$ 0

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INVESTMENTS (Tables)

12 Months Ended

Dec. 31, 2013

INVESTMENTS [Abstract]

Schedule of investments

The following table summarizes, by type, our investments as of December 31, 2013 and 2012.

	December 31, 2013					December 31, 2012
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	27,209		12.33	%	$	27,392		21.06	%
Obligations of states and political subdivisions		52,064		23.59	%		3,939		3.03	%
Corporate		91,941		41.66	%		67,313		51.74	%
International		3,698		1.68	%		3,111		2.39	%
		174,912		79.26	%		101,755		78.22	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,630		2.10	%		6,016		4.62	%
Corporate		2,475		1.12	%		1,203		0.92	%
International		109		0.05	%		140		0.11	%
		7,214		3.27	%		7,359		5.65	%
Total debt securities		182,126		82.53	%		109,114		83.87	%
Equity securities, at market:		38,584		17.47	%		20,982		16.13	%
Total investments	$	220,710		100.00	%	$	130,096		100.00	%

Realized gains (losses)

The following table shows the realized gains (losses) for debt and equity securities for the years ended December 31, 2013 and 2012.

	Years Ended December 31,
	2013					2012
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)
Debt securities	$	1,690		$	41,256	$	1,783		$	50,950
Equity securities		2,858			12,052		1,403			6,709
Total realized gains		4,548			53,308		3,186			57,659
Debt securities		(1,001	)		43,239		(391	)		13,291
Equity securities		(666	)		3,564		(1,723	)		6,560
Total realized losses		(1,667	)		46,803		(2,114	)		19,851
Net realized gains on investments	$	2,881		$	100,111	$	1,072		$	77,510

Unrealized gain (loss)

A summary of the amortized cost, estimated fair value, gross unrealized gains and losses of debt and equity securities at December 31, 2013 and 2012 is as follows.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in Thousands)
December 31, 2013
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	27,422	$	186	$	399	$	27,209
Obligations of states and political subdivisions		51,883		303		122		52,064
Corporate		91,475		1,233		767		91,941
International		3,731		5		38		3,698
	$	174,511	$	1,727	$	1,326	$	174,912
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,630	$	32	$	326	$	4,336
Corporate		2,475		22		17		2,480
International		109		-		1		108
	$	7,214	$	54	$	344	$	6,924
Equity securities - common stocks	$	29,423	$	9,436	$	275	$	38,584
December 31, 2012
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	26,825	$	632	$	65	$	27,392
Obligations of states and political subdivisions		3,738		202		1		3,939
Corporate		63,553		3,794		34		67,313
International		3,005		107		1		3,111
	$	97,121	$	4,735	$	101	$	101,755
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	6,016	$	149	$	12	$	6,153
Corporate		1,203		61		2		1,262
International		140		-		1		139
	$	7,359	$	210	$	15	$	7,554
Equity securities - common stocks	$	19,095	$	2,505	$	618	$	20,982

Continuous unrealized loss position

The table below reflects our unrealized investment losses by investment class, aged for length of time in an unrealized loss position.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	399	$	391	$	8
Obligations of states and political subdivisions		122		122		-
Corporate		767		761		6
International		38		38		-
		1,326		1,312		14
Equity securities:
Common stocks		275		148		127
Total debt and equity securities	$	1,601	$	1,460	$	141

Investments classified by contractual maturity date

Below is a summary of debt securities at December 31, 2013 and 2012 by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2013				December 31, 2012
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(Dollars in Thousands)
Due in one year or less	$	5,161	$	5,181	$	2,925	$	2,944
Due after one through five years		113,027		113,561		49,826		51,523
Due after five through ten years		62,656		62,220		35,070		37,182
Due after ten years		881		874		16,659		17,660
Total	$	181,725	$	181,836	$	104,480	$	109,309

Investment income

The table below sets forth investment results for the periods indicated.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Interest on debt securities		$	2,850		$	3,380		$	3,681
Dividends on equity securities			478			436			394
Interest on cash and cash equivalents			4			3			4
Total investment income		$	3,332		$	3,819		$	4,079
Net realized gains		$	2,881		$	1,072		$	2,725

Net realized and unrealized investment gains (losses)

A summary of net realized investment gains and increases in net unrealized gains follows.

	Years Ended December 31,
	2013		2012			2011
	(Dollars in Thousands)
Net realized gains
Debt securities	$	689	$	1,392		$	2,974
Equity securities		2,192		(320	)		(249	)
Total	$	2,881	$	1,072		$	2,725
Net unrealized gains
Debt securities	$	401	$	4,634		$	2,345
Equity securities		9,161		1,887			(939	)
Total	$	9,562	$	6,521		$	1,406

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STOCK COMPENSATION PLANS (Tables)

12 Months Ended

Dec. 31, 2013

STOCK COMPENSATION PLANS [Abstract]

Activity in stock option plans

Activity in our stock option and incentive plans for the period from January 1, 2011 to December 31, 2013 is summarized below.

	1998 Plan					2002 Plan					2012 Plan
	Number of Shares			Weighted Average Option Exercise Price		Number of Shares			Weighted Average Option Exercise Price		Number of Shares			Fair Market Value at Grant
Outstanding at January 1, 2011		89,750		$	12.83		574,800		$	9.12		-		$	-
Granted		-		$	-		179,000		$	2.45		-		$	-
Exercised		-		$	-		-		$	-		-		$	-
Cancelled		-		$	-		(129,100	)	$	14.29		-		$	-
Outstanding at January 1, 2012		89,750		$	12.83		624,700		$	6.15		-		$	-
Granted		-		$	-		181,500		$	4.40		-		$	-
Exercised		-		$	-		(33,104	)	$	3.86		-		$	-
Cancelled		(11,250	)	$	13.54		(70,499	)	$	12.45		-		$	-
Outstanding at January 1, 2013		78,500		$	12.73		702,597		$	5.17		-		$	-
Granted		-		$	-		-		$	-		250,000		$	5.54
Exercised		(500	)	$	8.67		(165,577	)	$	7.15		-		$	-
Cancelled		(75,000	)	$	12.92		(13,499	)	$	5.41		(500	)	$	5.54
Outstanding at December 31, 2013		3,000		$	8.67		523,521		$	4.54		249,500		$	5.54

Maturity schedule of exercisable options outstanding

Options outstanding as of December 31, 2013 are exercisable as follows.

	1998 Plan				2002 Plan
Options Exercisable at:	Number of Shares		Weighted Average Option Exercise Price		Number of Shares		Weighted Average Option Exercise Price
December 31, 2013		3,000	$	8.67		310,475	$	4.54
December 31, 2014		-	$	8.67		138,146	$	4.54
December 31, 2015		-	$	8.67		74,900	$	4.54
December 31, 2016		-	$	8.67		-	$	4.54
December 31, 2017		-	$	8.67		-	$	4.54
Thereafter		-	$	8.67		-	$	4.54
Total options exercisable		3,000				523,521

Assumptions used to estimate the fair value of options granted

The fair value of options granted is estimated on the date of grant using the following assumptions.

	December 31, 2013		December 31, 2012		December 31, 2011
Dividend yield		N/A		N/A		N/A
Expected volatility		N/A		39.79%		35.21% -39.08%
Risk-free interest rate		N/A		0.28%		0.20% - 0.25%
Expected life (in years)		N/A		4.45		4.29 - 4.35

Summary of non-expired stock option plans outstanding

Summary information about the Company’s stock options outstanding at December 31, 2013 follows.

	Range of Exercise Price		Outstanding at December 31, 2013		Weighted Average Contractual Periods in Years		Weighted Average Exercise Price		Exercisable at December 31, 2013
1998 Plan	$	8.67		3,000		0.58	$	8.67		3,000
2002 Plan	$	2.45 - $13.24		523,521		5.35	$	4.54		310,475

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COMMITMENTS AND CONTINGENCIES (Details) (USD $)	12 Months Ended
	Dec. 31, 2013 Category	Dec. 31, 2012
COMMITMENTS AND CONTINGENCIES [Abstract]
Number of major categories the entity commitments and contingencies are grouped into	3
Insurer solvency association regulatory assessments		$ 800,000
Net deferred tax asset	$ 1,006,000	$ 4,338,000

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Investments
Debt maturities, available for sale, at fair value	$ 174,912	$ 101,755
Debt maturities, held to maturity, at amortized cost	7,214	7,359
Equity securities, available for sale, at fair value	38,584	20,982
Total investments	220,710	130,096
Cash and short term investments	41,446	21,143
Prepaid reinsurance premiums	7,592	7,045
Premiums receivable, net of allowance for credit losses of $143 and $69, respectively	22,414	8,023
Reinsurance recoverable, net	2,742	3,503
Deferred policy acquisition costs	16,708	8,479
Deferred income taxes, net	1,006	4,338
Income taxes receivable	0	39
Property, plant and equipment, net	929	564
Other assets	3,194	2,658
Total assets	316,741	185,888
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and LAE	61,016	49,908
Unearned premiums	128,343	59,006
Premiums deposits and customer credit balances	3,833	2,458
Bank overdraft	6,203	5,987
Income taxes payable	2,379	0
Accounts payable and accrued expenses	6,473	2,624
Total liabilities	208,247	119,983
Shareholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding 10,901,716 and 7,979,488, respectively	109	80
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding	0	0
Additional paid-in capital	80,525	51,356
Accumulated other comprehensive income
Unrealized net gains on investments, available for sale	5,964	4,067
Total accumulated other comprehensive income	5,964	4,067
Retained earnings	21,896	10,402
Total shareholders' equity	108,494	65,905
Total liabilities and shareholders' equity	$ 316,741	$ 185,888

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ORGANIZATION AND BUSINESS (Details) (USD $)	12 Months Ended
	Dec. 31, 2013 Agent	Dec. 31, 2012
ORGANIZATION AND BUSINESS [Abstract]
Number of independent agents	3,600
Number of agents that actively sell and service the entity's products	1,800
Fees earned per policy	$ 25
Percentage of gross written premium the managing general agency fees are traditionally (in hundredths)	6.00%
Percentage of gross written premiums the managing general agency fees minimum (in hundredths)	2.00%
Percentage of gross written premiums the managing general agency fees maximum (in hundredths)	4.00%
Maximum number of days from the policy inception MGA has the right to cancel any policy	90 days
Number of days notice to cancel any policy for MGA	25 days
Number of days after policy inception MGA has right to cancel any policy	90 days
Number of days of notice after policy inception MGA has the right to cancel any policy	95 days
Ratio of homeowners' premiums underwritten to total premiums underwritten (in hundredths)	89.60%	85.30%
Ratio of commercial general liability premiums underwritten to total premiums underwritten (in hundredths)	4.30%	7.80%
Ratio of federal flood premiums underwritten to total premiums underwritten (in hundredths)	2.60%	4.40%
Ratio of automobile insurance premiums underwritten to total premiums underwritten (in hundredths)	3.50%	2.50%
Homeowners' Gross Premiums Written	218,300,000
Portion of Homeowners' Gross Premium Written Produced Under the Agreement With "ISA"	$ 29,700,000
Percentage of Homeowners' Gross Premium Written Produced Under the Agreement With "ISA" (in hundredths)	13.60%
Percentage of total increase in sale of Homeowners' policy (in hundredths)	25.50%

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME (USD $) In Thousands, unless otherwise specified	Comprehensive (Loss) Income [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Other Comprehensive Income [Member]	Retained Earnings [Member]	Total
Balance at Dec. 31, 2010		$ 79	$ 50,654	$ 520	$ 6,678	$ 57,931
Increase (Decrease) in Stockholders' Equity
Net income (loss)	(430)				(430)	(430)
Cash dividends					0	0
Treasury stock acquired						0
Shares based compensation			286			286
Net unrealized change in investments, net of tax effect	357			357		357
Comprehensive income (loss)	(73)
Balance at Dec. 31, 2011		79	50,940	877	6,248	58,144
Increase (Decrease) in Stockholders' Equity
Net income (loss)	4,313				4,313	4,313
Cash dividends					(159)	(159)
Treasury stock acquired						0
Stock options exercised		1	128			129
Shares based compensation			288			288
Net unrealized change in investments, net of tax effect	3,190			3,190		3,190
Comprehensive income (loss)	7,503
Balance at Dec. 31, 2012		80	51,356	4,067	10,402	65,905
Increase (Decrease) in Stockholders' Equity
Net income (loss)	12,727				12,727	12,727
Cash dividends					(1,233)	(1,233)
Stock issued for capital raised		28	27,851			27,879
Treasury stock acquired						0
Stock options exercised		1	857			858
Shares based compensation			461			461
Net unrealized change in investments, net of tax effect	1,897			1,897		1,897
Comprehensive income (loss)	14,624
Balance at Dec. 31, 2013		$ 109	$ 80,525	$ 5,964	$ 21,896	$ 108,494

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ACQUISITIONS (Details)	12 Months Ended
	Dec. 31, 2013
ACQUISITIONS [Abstract]
Merger effective date	Jan. 26, 2011

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UNPAID LOSSES AND LAE (Tables)

12 Months Ended

Dec. 31, 2013

UNPAID LOSSES AND LAE [Abstract]

Schedule of liability for future insurance policy benefits

Activity in the liability for unpaid losses and LAE is summarized as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Balance at January 1	$	49,908		$	59,983		$	66,529
Less reinsurance recoverables		(3,503	)		(2,088	)		(6,809	)
Net balance at January 1	$	46,405		$	57,895		$	59,720
Incurred related to
Current year	$	56,209		$	31,636		$	31,893
Prior years		201			(1,427	)		(997	)
Total incurred	$	56,410		$	30,209		$	30,896
Paid related to
Current year	$	22,695		$	15,892		$	13,672
Prior years		21,846			25,807			19,048
Total paid	$	44,541		$	41,699		$	32,720
Net balance at period end	$	58,274		$	46,405		$	57,896
Plus reinsurance recoverables		2,742			3,503			2,087
Balance at period end	$	61,016		$	49,908		$	59,983

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SUBSEQUENT EVENTS (Details) (USD $) In Millions, except Share data, unless otherwise specified	2 Months Ended
	Mar. 04, 2014 Subsequent Event - Restricted Stock Grants[Member] Restricted Stock [Member]	Mar. 04, 2014 Subsequent Event - Restricted Stock Grants[Member] Restricted Stock [Member] Chief Executive Officer and President [Member]	Mar. 04, 2014 Subsequent Event - Restricted Stock Grants[Member] Restricted Stock [Member] Chief Financial Officer [Member]	Mar. 04, 2014 Subsequent Event - Restricted Stock Grants[Member] Restricted Stock [Member] Director [Member]	Mar. 04, 2014 Subsequent Event - Restricted Stock Grants[Member] Restricted Stock [Member] Other Employees [Member]	Feb. 24, 2014 Subsequent Event - FHCF Reimbursement Contract [Member] Installment
Restricted Stock Grants [Abstract]
Restricted stock agreements, grants in period (in shares)	88,648	43,997	16,341	15,710	12,600
Reimbursement Contract [Abstract]
FHCF aggregate seasonal coverage, 2013 - 2014 hurricane season						$ 531.0
Covered loss in excess, threshold						225.0
Loss coverage threshold, Company participation (in hundredths)						10.00%
Installment premium amount						$ 41.4
Installment premium payments						3

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STOCK COMPENSATION PLANS

12 Months Ended

Dec. 31, 2013

STOCK COMPENSATION PLANS [Abstract]

STOCK COMPENSATION PLANS

(14) STOCK COMPENSATION PLANS

We implemented a stock option plan in 1998 (the “1998 Plan”), which expired in September 2008. Under this plan, we were authorized to grant options to purchase up to 900,000 common shares, and as of December 31, 2013 and December 31, 2012, we had outstanding exercisable options to purchase 3,000 and 78,500 shares, respectively.

We implemented a stock option plan in 2002 (the “2002 Plan”), which expired in April 2012. Under this plan, we were authorized to grant options to purchase up to 1,800,000 common shares, and as of December 31, 2013 and December 31, 2012, we had outstanding exercisable options to purchase 523,521 and 702,597 shares, respectively.

In April 2012, our Board of Directors adopted, and in September 2012 our shareholders approved, the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan permits the issuance of up to 1,000,000 shares of our common stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive awards, such as incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, and performance shares. Officers, directors and executive, managerial, administrative and professional employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be granted singly, in combination, or in tandem. The 2012 Plan was amended and restated in March 2013 to clarify the plan administrator’s authority to permit the vesting of unvested restricted shares in the event of the death of the grantee. The 2012 Plan will expire on April 5, 2022.

On August 5, 2013, a total of 150,000 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 100,000 shares were granted to the Company's Chief Executive Officer and President and 50,000 shares were granted to the Company's Chief Financial Officer.

On March 4, 2013, a total of 100,000 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in restricted stock agreements. Of the total, 25,000 shares were granted to the Company's Chief Executive Officer and President and 15,000 shares were granted to the Company's Chief Financial Officer. An aggregate of 20,000 shares were granted to the Company's directors and the remaining 40,000 shares were granted to other employees of the Company.

Activity in our stock option and incentive plans for the period from January 1, 2011 to December 31, 2013 is summarized below.

	1998 Plan					2002 Plan					2012 Plan
	Number of Shares			Weighted Average Option Exercise Price		Number of Shares			Weighted Average Option Exercise Price		Number of Shares			Fair Market Value at Grant
Outstanding at January 1, 2011		89,750		$	12.83		574,800		$	9.12		-		$	-
Granted		-		$	-		179,000		$	2.45		-		$	-
Exercised		-		$	-		-		$	-		-		$	-
Cancelled		-		$	-		(129,100	)	$	14.29		-		$	-
Outstanding at January 1, 2012		89,750		$	12.83		624,700		$	6.15		-		$	-
Granted		-		$	-		181,500		$	4.40		-		$	-
Exercised		-		$	-		(33,104	)	$	3.86		-		$	-
Cancelled		(11,250	)	$	13.54		(70,499	)	$	12.45		-		$	-
Outstanding at January 1, 2013		78,500		$	12.73		702,597		$	5.17		-		$	-
Granted		-		$	-		-		$	-		250,000		$	5.54
Exercised		(500	)	$	8.67		(165,577	)	$	7.15		-		$	-
Cancelled		(75,000	)	$	12.92		(13,499	)	$	5.41		(500	)	$	5.54
Outstanding at December 31, 2013		3,000		$	8.67		523,521		$	4.54		249,500		$	5.54

Options outstanding as of December 31, 2013 are exercisable as follows.

	1998 Plan				2002 Plan
Options Exercisable at:	Number of Shares		Weighted Average Option Exercise Price		Number of Shares		Weighted Average Option Exercise Price
December 31, 2013		3,000	$	8.67		310,475	$	4.54
December 31, 2014		-	$	8.67		138,146	$	4.54
December 31, 2015		-	$	8.67		74,900	$	4.54
December 31, 2016		-	$	8.67		-	$	4.54
December 31, 2017		-	$	8.67		-	$	4.54
Thereafter		-	$	8.67		-	$	4.54
Total options exercisable		3,000				523,521

Upon the exercise of options, the Company issues authorized shares.

Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the APB and related Interpretation, as permitted by FASB issued guidance.Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2013 and 2012 include the following.

· Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and

· Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as they are not required to be by the pronouncement.

As a result of adopting FASB issued guidance on January 1, 2006, the Company’s income from continuing operations before provision for income tax expense and net income for 2013 are lower by approximately $447,000 and $278,600, respectively, than if it had continued to account for share-based compensation under APB guidance.

As a result of adopting FASB issued guidance on January 1, 2006, the Company’s income from continuing operations before provision for income tax expense and net income for 2012 are lower by approximately $265,900 and $165,700, respectively, than if it had continued to account for share-based compensation under APB guidance.

Basic and diluted earnings per share for 2013 would have been $1.53 and $1.48, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $1.50 and $1.45, respectively.

Basic and diluted income per share for 2012 would have been $0.55, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted income per share of $0.53.

Because the change in income taxes receivable includes the effect of excess tax benefits, those excess tax benefits also must be shown as a separate operating cash outflow so that operating cash flows exclude the effect of excess tax benefits. FASB issued guidance requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

FASB issued guidance requires that when valuing an employee stock option under the Black-Scholes option pricing model, the fair value be based on the option’s expected term and expected volatility rather than the contractual term. The estimate of the fair value on the grant date should reflect the assumptions marketplace participants now use on the date of the measurement (i.e. grant date). During 2011, management changed the expected term in the Black –Scholes option pricing model from four years to two years for new options granted.  Management believes that share price volatility over the last two years is more indicative of future share price volatility. The change has had an immaterial impact on the financial statements.

The weighted average fair value of options granted during 2012 and 2011 estimated on the date of grant using the Black-Scholes option-pricing model was $1.45 and $0.72 to $0.78, respectively; no options were granted during 2013.

The fair value of options granted is estimated on the date of grant using the following assumptions.

	December 31, 2013		December 31, 2012		December 31, 2011
Dividend yield		N/A		N/A		N/A
Expected volatility		N/A		39.79%		35.21% -39.08%
Risk-free interest rate		N/A		0.28%		0.20% - 0.25%
Expected life (in years)		N/A		4.45		4.29 - 4.35

Summary information about the Company’s stock options outstanding at December 31, 2013 follows.

	Range of Exercise Price		Outstanding at December 31, 2013		Weighted Average Contractual Periods in Years		Weighted Average Exercise Price		Exercisable at December 31, 2013
1998 Plan	$	8.67		3,000		0.58	$	8.67		3,000
2002 Plan	$	2.45 - $13.24		523,521		5.35	$	4.54		310,475

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2013

INCOME TAXES [Abstract]

Summary of provision for income tax benefit

A summary of the provision for income tax expense (benefit) is as follows.

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Federal
Current	$	4,289	$	63	$	310
Deferred		1,393		2,052		(490	)
Provision for Federal income tax expense (benefit)		5,682		2,115		(180	)
State
Current		-		-		-
Deferred		809		320		(390	)
Provision for state income tax expense (benefit)		809		320		(390	)
Provision for income tax expense (benefit)	$	6,491	$	2,435	$	(570	)

Components of effective federal and state tax rates to income before provision for income tax benefit

The actual income tax expense (benefit) differs from the "expected" income tax expense (benefit) (computed by applying the combined applicable effective federal and state tax rates to income before provision for income tax expense (benefit) as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Computed expected tax expense (benefit) provision, at federal rate	$	6,535		$	2,294		$	(341	)
State tax, net of federal deduction expense (benefit)		698			245			(36	)
Tax-exempt interest		(31	)		(26	)		(41	)
Dividend received deduction		(97	)		(88	)		(80	)
Stock option expense and other permanent differences		(34	)		72			87
AMT Tax credit		-			(113	)		-
True-up		(306	)		-			-
Other		(274	)		51			(159	)
Provision for income tax expense (benefit)	$	6,491		$	2,435		$	(570	)

Components of net deferred tax asset

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax asset are as follows.

	Years Ended December 31,
	2013			2012
Deferred tax assets:
Unpaid losses and loss adjustment expenses	$	1,157		$	1,725
Unearned premiums		6,864			2,629
Discount on advance premiums		243			167
Allowance for credit losses		59			31
Allowance for impairments		21			91
FIGA Guaranty Assessment		-			306
Depreciation & amortization		149			366
Reserve for claims settlements		1,844			809
NOL Carryforward		73			3,259
AMT credit		-			253
Flow-through income or loss		4			-
Stock option expense per ASC 718		550			432
Total deferred tax assets		10,964			10,068
Deferred tax liabilities:
Deferred acquisition costs, net		(6,287	)		(3,191	)
Dividends Collected vs. Earned		(6	)		(18	)
Regulatory assessments		(67	)		(67	)
Unrealized Gain on investment securities		(3,598	)		(2,454	)
Total deferred tax liabilities		(9,958	)		(5,730	)
Net deferred tax asset	$	1,006		$	4,338

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ACQUISITIONS

12 Months Ended

Dec. 31, 2013

ACQUISITIONS [Abstract]

ACQUISITIONS

(16) ACQUISITIONS

We made no acquisitions during 2013 or 2012.

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”. See " Footnote 8 - Regulation – Consent Order”.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME (Parenthetical) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME
Net unrealized change in investments, tax effect	$ (1,144)	$ (1,924)	$ (215)

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
ASSETS
Premiums receivable, allowance for credit losses	$ 143	$ 69
Shareholders' equity:
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized (in shares)	25,000,000	25,000,000
Common stock, issued (in shares)	10,901,716	7,979,488
Common stock, outstanding (in shares)	10,901,716	7,979,488
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, authorized (in shares)	1,000,000	1,000,000
Preferred stock, issued (in shares)	0	0
Preferred stock, outstanding (in shares)	0	0

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2013

COMMITMENTS AND CONTINGENCIES [Abstract]

COMMITMENTS AND CONTINGENCIES

(9) COMMITMENTS AND CONTINGENCIES

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

(A) Insured Claim Activity

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

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

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

(B) Assessment Related Activity

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

During December 2012, the Company was assessed $0.8 million by FIGA relating to the failures of Florida domestic property and casualty insurance companies. Future assessments are likely, although the impact of these assessments on our balance sheet, results of operations or cash flow are undeterminable at this time.

FNIC is also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. FNIC was not assessed by the JUA Plan during 2013 or 2012. Future assessments by this association are undeterminable at this time.

(C) Operational Matters

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for 2010 - 2012 are open for review by the IRS and the various state taxing authorities. The Company’s 2011 federal tax return is currently under review by the IRS. The 2012 federal and state income tax returns were filed by the extended due date in the third quarter of 2013. The 2013 federal and state income tax returns have been extended as of March 2014 and will be timely filed in the third quarter of 2014.

The Company has recorded a net deferred tax asset of $1.0 million and $4.3 million as of December 31, 2013 and December 31, 2012, respectively.  Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2013, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

The Company is not currently involved in any material legal actions arising from the ordinary course of business that are not related to insured claims activity.

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2013	Mar. 11, 2014	Jun. 30, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	FEDERATED NATIONAL HOLDING CO
Entity Central Index Key	0001069996
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float			$ 72,651,131
Entity Common Stock, Shares Outstanding		11,264,864
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	FY
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2013

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LEASES

12 Months Ended

Dec. 31, 2013

LEASES [Abstract]

LEASES

(10) LEASES

Relative to the Company’s commitments stemming from operational matters, on or about March 1, 2006 we sold our interest in the building that housed our operations in Lauderdale Lakes through December 16, 2011, to an unrelated party. As part of this transaction, we agreed to lease the same facilities for a five-year term.  We amended the lease agreement and the note receivable on September 1, 2010. As part of the amendment, we discounted the note receivable and have discontinued the interest on the note. In consideration, we paid a reduced lease payment for the remainder of the lease. Our lease for this office space expired in December 2011.

Our executive offices are located at 14050 N.W. 14^th Street, Suite 180, Sunrise, Florida 33323 in an 18,500 square foot office facility. All of our operations are consolidated within this facility. We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the lease term. Our lease for this office space will expire in May 2017.

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

Fiscal Year	Payments
	(Dollars in Thousands)
2014		392
2015		400
2016		408
2017		156
Total	$	1,356

Rent expense was $0.4 million, $0.2 million and $0.7 million in 2013, 2012 and 2011, respectively.

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Revenue:
Gross premiums written	$ 243,373	$ 119,459	$ 98,269
Gross premiums ceded	(82,709)	(51,085)	(46,293)
Net premiums written	160,665	68,374	51,976
Increase (decrease) in prepaid reinsurance premiums	13,052	2,059	(2,656)
Increase in unearned premiums	(69,336)	(11,074)	(797)
Net change in prepaid reinsurance premiums and unearned premiums	(56,284)	(9,015)	(3,453)
Net premiums earned	104,381	59,359	48,523
Commission income	2,646	1,377	994
Finance revenue	866	496	518
Direct written policy fees	6,196	2,007	1,583
Net investment income	3,332	3,819	4,079
Net realized investment gains	2,881	1,072	2,725
Other income	1,435	517	1,741
Total revenue	121,737	68,647	60,163
Expenses:
Losses and LAE	56,410	30,209	30,896
Operating and underwriting expenses	14,474	9,996	9,916
Salaries and wages	10,188	8,439	8,004
Amortization of deferred policy acquisition costs	21,447	13,255	12,347
Total expenses	102,519	61,899	61,163
Income (loss) before provision for income tax expense (benefit)	19,218	6,748	(1,000)
Provision for income tax expense (benefit)	6,491	2,435	(570)
Net income (loss)	$ 12,727	$ 4,313	$ (430)
Net income (loss) per share - basic (in dollars per share)	$ 1.50	$ 0.53	$ (0.05)
Net income (loss) per share - diluted (in dollars per share)	$ 1.45	$ 0.53	$ (0.05)
Weighted average number of common shares outstanding - basic (in shares)	8,505,967	7,951,906	7,946,384
Weighted average number of common shares outstanding - diluted (in shares)	8,772,060	8,016,110	7,946,384
Dividends paid per share (in dollars per share)	$ 0.11	$ 0.02	$ 0

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PROPERTY, PLANT AND EQUIPMENT

12 Months Ended

Dec. 31, 2013

PROPERTY, PLANT AND EQUIPMENT [Abstract]

PROPERTY, PLANT AND EQUIPMENT

(4) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following.

	Years Ended December 31,
	2013				2012
	(Dollars in Thousands)
Computer equipment		$	4,621			$	3,993
Property, plant and equipment, gross			4,621				3,993
Accumulated depreciation			(3,692	)			(3,429	)
Property, plant and equipment, net		$	929			$	564

Depreciation of property, plant, and equipment was $263,334, $195,078 and $167,753 during 2013, 2012 and 2011, respectively.

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INVESTMENTS

12 Months Ended

Dec. 31, 2013

INVESTMENTS [Abstract]

INVESTMENTS

(3) INVESTMENTS

Total investments increased $90.6 million, or 69.7%, to $220.7 million as of December 31, 2013, compared with $130.1 million as of December 31, 2012. This increase reflected the $123.9 million increase in gross premiums written compared with 2012 and the $28.1 million in net proceeds from the Company’s November 2013 offering. The excess cash was invested primarily in the bond portfolio.

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

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

The debt and equity securities that are available for sale and carried at fair value represent 97% of total investments as of December 31, 2013, compared with 94% as of December 31, 2012.

We did not hold any trading investment securities during 2013.

As of December 31, 2013 and 2012, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of December 31, 2013, 83% of our debt portfolio was in diverse industries and 17% is in United States government bonds. As of December 31, 2013, approximately 91% of our equity holdings were in equities related to diverse industries and 9% were in mutual funds. As of December 31, 2012, 69% of our debt portfolio was in diverse industries and 31% is in United States government bonds. As of December 31, 2012, approximately 87% of our equity holdings were in equities related to diverse industries and 13% were in mutual funds.

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

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

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

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

· prospects for the issuer’s industry segment;

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

· historical volatility of the fair value of the security.

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

In reaching a conclusion that a security is either other-than-temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via the general media channels. During 2013, in connection with the process, we have not charged any investment losses to operations. During 2012, in connection with the process, we have charged to operations $44,000 of investment losses.

As of December 31, 2013 and December 31, 2012, respectively, all of our securities are in good standing and not impaired, except as noted above, as defined by FASB issued guidance.

As of December 31, 2013 and December 31, 2012, we have classified $7.2 million and $7.4 million, respectively, of our bond portfolio as held-to-maturity. We classify bonds as held-to-maturity to support securitization of credit requirements.

During 2013 we reclassified $150,000 of our bond portfolio to available-for-sale from held-to-maturity.  During 2012, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the 100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was terminated in April 2007. During 2010, the letter of credit in favor of Republic was replaced by a fully funded trust agreement. As of December 31, 2013 and 2012 respectively, the amount held in trust was $1.0 million.

(a) DEBT AND EQUITY SECURITIES

The following table summarizes, by type, our investments as of December 31, 2013 and 2012.

	December 31, 2013					December 31, 2012
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	27,209		12.33	%	$	27,392		21.06	%
Obligations of states and political subdivisions		52,064		23.59	%		3,939		3.03	%
Corporate		91,941		41.66	%		67,313		51.74	%
International		3,698		1.68	%		3,111		2.39	%
		174,912		79.26	%		101,755		78.22	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,630		2.10	%		6,016		4.62	%
Corporate		2,475		1.12	%		1,203		0.92	%
International		109		0.05	%		140		0.11	%
		7,214		3.27	%		7,359		5.65	%
Total debt securities		182,126		82.53	%		109,114		83.87	%
Equity securities, at market:		38,584		17.47	%		20,982		16.13	%
Total investments	$	220,710		100.00	%	$	130,096		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the years ended December 31, 2013 and 2012.

	Years Ended December 31,
	2013					2012
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)
Debt securities	$	1,690		$	41,256	$	1,783		$	50,950
Equity securities		2,858			12,052		1,403			6,709
Total realized gains		4,548			53,308		3,186			57,659
Debt securities		(1,001	)		43,239		(391	)		13,291
Equity securities		(666	)		3,564		(1,723	)		6,560
Total realized losses		(1,667	)		46,803		(2,114	)		19,851
Net realized gains on investments	$	2,881		$	100,111	$	1,072		$	77,510

A summary of the amortized cost, estimated fair value, gross unrealized gains and losses of debt and equity securities at December 31, 2013 and 2012 is as follows.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in Thousands)
December 31, 2013
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	27,422	$	186	$	399	$	27,209
Obligations of states and political subdivisions		51,883		303		122		52,064
Corporate		91,475		1,233		767		91,941
International		3,731		5		38		3,698
	$	174,511	$	1,727	$	1,326	$	174,912
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,630	$	32	$	326	$	4,336
Corporate		2,475		22		17		2,480
International		109		-		1		108
	$	7,214	$	54	$	344	$	6,924
Equity securities - common stocks	$	29,423	$	9,436	$	275	$	38,584
December 31, 2012
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	26,825	$	632	$	65	$	27,392
Obligations of states and political subdivisions		3,738		202		1		3,939
Corporate		63,553		3,794		34		67,313
International		3,005		107		1		3,111
	$	97,121	$	4,735	$	101	$	101,755
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	6,016	$	149	$	12	$	6,153
Corporate		1,203		61		2		1,262
International		140		-		1		139
	$	7,359	$	210	$	15	$	7,554
Equity securities - common stocks	$	19,095	$	2,505	$	618	$	20,982

The table below reflects our unrealized investment losses by investment class, aged for length of time in an unrealized loss position.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	399	$	391	$	8
Obligations of states and political subdivisions		122		122		-
Corporate		767		761		6
International		38		38		-
		1,326		1,312		14
Equity securities:
Common stocks		275		148		127
Total debt and equity securities	$	1,601	$	1,460	$	141

Below is a summary of debt securities at December 31, 2013 and 2012 by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2013				December 31, 2012
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(Dollars in Thousands)
Due in one year or less	$	5,161	$	5,181	$	2,925	$	2,944
Due after one through five years		113,027		113,561		49,826		51,523
Due after five through ten years		62,656		62,220		35,070		37,182
Due after ten years		881		874		16,659		17,660
Total	$	181,725	$	181,836	$	104,480	$	109,309

United States Treasury notes with a book value of $62,490 and $2,193,814, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2013, as required by law for FNIC, and are included with other investments held until maturity.

United States Treasury notes with a book value of $63,481 and $2,193,300, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2012, as required by law for FNIC, and are included with other investments held until maturity.

The table below sets forth investment results for the periods indicated.

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Interest on debt securities	$	2,850	$	3,380	$	3,681
Dividends on equity securities		478		436		394
Interest on cash and cash equivalents		4		3		4
Total investment income	$	3,332	$	3,819	$	4,079
Net realized gains	$	2,881	$	1,072	$	2,725

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities in 2013, 2012 and 2011 were approximately $106.1 million, $90.4 million and $108.3 million, respectively.

A summary of net realized investment gains and increases in net unrealized gains follows.

	Years Ended December 31,
	2013		2012			2011
	(Dollars in Thousands)
Net realized gains
Debt securities	$	689	$	1,392		$	2,974
Equity securities		2,192		(320	)		(249	)
Total	$	2,881	$	1,072		$	2,725
Net unrealized gains
Debt securities	$	401	$	4,634		$	2,345
Equity securities		9,161		1,887			(939	)
Total	$	9,562	$	6,521		$	1,406

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EMPLOYEE BENEFIT PLAN

12 Months Ended

Dec. 31, 2013

EMPLOYEE BENEFIT PLAN [Abstract]

EMPLOYEE BENEFIT PLAN

(15) EMPLOYEE BENEFIT PLAN

We have established a profit sharing plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to contribute up to 100 percent of their compensation, not to exceed statutory limits. The Company match totaled $0.2 million during 2013 and $0.1 million during each of the years 2012 and 2011.

Through December 31, 2010, the Company matched 50% of the first 6% of a participant’s elective contributions.  Effective January 1, 2011, the Board of Directors approved an amendment to our 401(k) plan to be a qualified automatic contribution arrangement with an employer match of 100% of the first 1% of elective contributions and an employer match of 50% of the next 2% to 6% of elective contributions, which is vested 100% after 2 years of service.  Effective January 1, 2014, the Board of Directors approved the Company will match 100% of the first 6% of a participant’s elective contributions.

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RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2013

RELATED PARTY TRANSACTIONS [Abstract]

RELATED PARTY TRANSACTIONS

(11) RELATED PARTY TRANSACTIONS

One of our directors is a partner at a law firm that handles some of the Company’s claims litigation. Fees paid to this law firm amounted to approximately $30,500, $27,175 and $3,349 in 2013, 2012 and 2011, respectively, and is included in LAE.

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INCOME TAXES

12 Months Ended

Dec. 31, 2013

INCOME TAXES [Abstract]

INCOME TAXES

(7) INCOME TAXES

A summary of the provision for income tax expense (benefit) is as follows.

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Federal
Current	$	4,289	$	63	$	310
Deferred		1,393		2,052		(490	)
Provision for Federal income tax expense (benefit)		5,682		2,115		(180	)
State
Current		-		-		-
Deferred		809		320		(390	)
Provision for state income tax expense (benefit)		809		320		(390	)
Provision for income tax expense (benefit)	$	6,491	$	2,435	$	(570	)

The actual income tax expense (benefit) differs from the "expected" income tax expense (benefit) (computed by applying the combined applicable effective federal and state tax rates to income before provision for income tax expense (benefit) as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Computed expected tax expense (benefit) provision, at federal rate	$	6,535		$	2,294		$	(341	)
State tax, net of federal deduction expense (benefit)		698			245			(36	)
Tax-exempt interest		(31	)		(26	)		(41	)
Dividend received deduction		(97	)		(88	)		(80	)
Stock option expense and other permanent differences		(34	)		72			87
AMT Tax credit		-			(113	)		-
True-up		(306	)		-			-
Other		(274	)		51			(159	)
Provision for income tax expense (benefit)	$	6,491		$	2,435		$	(570	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax asset are as follows.

	Years Ended December 31,
	2013			2012
Deferred tax assets:
Unpaid losses and loss adjustment expenses	$	1,157		$	1,725
Unearned premiums		6,864			2,629
Discount on advance premiums		243			167
Allowance for credit losses		59			31
Allowance for impairments		21			91
FIGA Guaranty Assessment		-			306
Depreciation & amortization		149			366
Reserve for claims settlements		1,844			809
NOL Carryforward		73			3,259
AMT credit		-			253
Flow-through income or loss		4			-
Stock option expense per ASC 718		550			432
Total deferred tax assets		10,964			10,068
Deferred tax liabilities:
Deferred acquisition costs, net		(6,287	)		(3,191	)
Dividends Collected vs. Earned		(6	)		(18	)
Regulatory assessments		(67	)		(67	)
Unrealized Gain on investment securities		(3,598	)		(2,454	)
Total deferred tax liabilities		(9,958	)		(5,730	)
Net deferred tax asset	$	1,006		$	4,338

Based upon the results of our analysis and the application of ASC 740-10, we have determined that all material tax positions meet the recognition threshold and can be considered as highly certain tax positions. This is based on clear and unambiguous tax law, and we are highly confident that the full amount of each tax position will be sustained upon possible examination. Accordingly, the full amount of the tax positions will be recognized in the financial statements.

The Company has recorded a net deferred tax asset of $1.0 million and $4.3 million as of December 31, 2013 and December 31, 2012, respectively.  Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2013, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for 2010 - 2012 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities. The Company’s 2011 federal tax return is currently under review by the IRS. The 2012 federal and state income tax returns were filed by the extended due date in the third quarter of 2013. The 2013 federal and state income tax returns have been extended as of March 2014 and will be timely filed in the third quarter of 2014.

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COMPREHENSIVE INCOME (LOSS) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
COMPREHENSIVE INCOME (LOSS) [Abstract]
Net income (loss)	$ 12,727	$ 4,313	$ (430)
Change in net unrealized gains on investments available for sale	3,041	5,114	572
Comprehensive income before tax	15,768	9,427	142
Income tax expense related to items of other comprehensive income (loss)	(1,144)	(1,924)	(215)
Comprehensive income (loss)	$ 14,624	$ 7,503	$ (73)

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REINSURANCE

12 Months Ended

Dec. 31, 2013

REINSURANCE [Abstract]

REINSURANCE

(5) REINSURANCE

We reinsure (cede) a portion of written premiums on an excess of loss or a quota-share basis to nonaffiliated insurance companies in order to limit our loss exposure. To the extent that reinsuring companies are unable to meet their obligations assumed under these reinsurance agreements, we remain primarily liable to our policyholders.

The impact of the reinsurance treaties on the financial statements is as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Premium written
Direct and Assumed	$	243,374		$	119,459		$	98,269
Ceded		(82,709	)		(51,085	)		(46,293	)
	$	160,665		$	68,374		$	51,976
Premiums earned
Direct and Assumed	$	174,037		$	109,312		$	97,473
Ceded		(69,656	)		(49,953	)		(48,950	)
	$	104,381		$	59,359		$	48,523
Losses and LAE incurred
Direct and Assumed	$	59,820		$	33,329		$	33,055
Ceded		(3,410	)		(3,120	)		(2,159	)
	$	56,410		$	30,209		$	30,896

	As of December 31,
	2013			2012
	(Dollars in Thousands)
Unpaid losses and LAE, net
Direct and Assumed	$	61,015		$	49,908
Ceded		(2,742	)		(3,503	)
	$	58,273		$	46,405
Unearned premiums
Direct and Assumed	$	128,343		$	59,006
Ceded		(37,135	)		(24,083	)
	$	91,208		$	34,923

The Company holds collateral under related reinsurance agreements in the form of fully funded trust agreements totaling $4.9 million that can be drawn on for amounts that remain unpaid for more than 120 days.

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UNPAID LOSSES AND LAE

12 Months Ended

Dec. 31, 2013

UNPAID LOSSES AND LAE [Abstract]

UNPAID LOSSES AND LAE

(6) UNPAID LOSSES AND LAE

The liability for unpaid losses and LAE is determined on an individual-case basis for all incidents reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR.

Activity in the liability for unpaid losses and LAE is summarized as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Balance at January 1	$	49,908		$	59,983		$	66,529
Less reinsurance recoverables		(3,503	)		(2,088	)		(6,809	)
Net balance at January 1	$	46,405		$	57,895		$	59,720
Incurred related to
Current year	$	56,209		$	31,636		$	31,893
Prior years		201			(1,427	)		(997	)
Total incurred	$	56,410		$	30,209		$	30,896
Paid related to
Current year	$	22,695		$	15,892		$	13,672
Prior years		21,846			25,807			19,048
Total paid	$	44,541		$	41,699		$	32,720
Net balance at period end	$	58,274		$	46,405		$	57,896
Plus reinsurance recoverables		2,742			3,503			2,087
Balance at period end	$	61,016		$	49,908		$	59,983

Based upon consultations with our independent actuarial consultants and their statement of opinion on losses and LAE, we believe that the liability for unpaid losses and LAE is adequate to cover all claims and related expenses which may arise from incidents reported.

As shown above, and as a result of review of liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year’s claims, we increased the liability for losses and LAE for claims occurring in prior years by $0.2 million for the year ended December 31, 2013 and decreased the liability for losses and LAE for claims occurring in prior years by $1.4 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively.

We continue to revise our estimates of the ultimate financial impact of claims made resulting from past storms. The revisions to our estimates are based on our analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) Company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and (iv) trends in general economic conditions, including the effects of inflation.

For the year ended December 31, 2013, our actuarial firm determined range of statutory loss and LAE reserves on a net basis range from a low of $51.5 million to a high of $60.9 million, with a best estimate of $55.5 million. The Company’s net loss and LAE reserves are carried on a statutory basis at $54.0 million, and on a GAAP consolidated basis at $61.0 million which when netted with our $2.7 million reinsurance recoverable totals $58.3 million. The Company’s statutory point estimate for its reserves as of December 31, 2013 is 2.6% below our actuary’s best estimate, which reflects management’s current analysis of the status and expected timing of our anticipated claims, our analysis of expected weather patterns in the regions in which we sell policies, our re-focus of our business growth efforts to areas outside of South Florida, and other factors.

The following is an overview of management’s loss reserving process

The Company’s loss reserves can generally be categorized into two distinctgroups. One group is short-tail classes of business consisting principally of property risks in connection with homes and automobiles. The other group is long-tail casualty classes of business which include primarily commercial general liability and to a much lesser extent, homeowner and automobile liability. For operations writing short-tail coverages our loss reserves were generally geared toward determining an expected loss ratio for current business rather than maintaining a reserve for the outstanding exposure. Estimations of ultimate net loss reserves for long-tail casualty classes of business is a more complex process and depends on a number of factors including class and volume of business involved. Experience in the more recent accident years of long-tail casualty classes of business shows limited statistical credibility in reported net losses because a relatively low proportion of net losses would be reported claims and expenses and even smaller percentage would be net losses paid. Therefore, IBNR would constitute a relatively high proportion of net losses.

Additionally, the different methodologies are utilized the same, regardless of the line of business. However, the final selection of ultimate loss and LAE is certain to vary by both line of business and by accident period maturity. There is no prescribed combination of line of business, accident year maturity, and methodologies; consistency in results of the different methodologies and reasonableness of the result are the primary factors that drive the final selection of ultimate loss and LAE.

Methods Used to Estimate Loss and LAE Reserves

The methods we use for our short-tail business do not differ from the methods we use for our long-tail business. The Incurred and Paid Development Methods intrinsically recognize the unique development characteristics contained within the historical experience of each material short-tail and long-tail line of business. The Incurred and Paid Cape Cod Methods reflect similar historical development unique to each material short-tail and long-tail line of business.

We apply the following general methods in projecting loss and LAE reserves:

· Paid  and Incurred Loss Development Method

· Paid and Incurred Bornhuetter-Ferguson Incurred Method

· Frequency / Severity Method

Description of Ultimate Loss Estimation Methods

The estimated Ultimate Loss and Defense and Cost Containment Expense (“DCCE”) is based on an analysis by line of business, coverage and by accident quarter performed using data as of December 31, 2013. The analysis relies primarily on four actuarial methods: Incurred Lossand DCCE Development Method, Paid Loss and DCCE Development Method, Bornhuetter-Ferguson Incurred Method, and Bornhuetter-Ferguson Paid Method. Each method relies on company experience, and, where relevant, the analysis includes comparisons to industry experience. The following is a description of each of these methods:

Incurred Loss and DCCE Development Method – This reserving method is based on the assumption that the historical incurred loss and DCCE development pattern as reflected by the Company is appropriate for estimating the future loss & DCCE development. Incurred paid plus case amounts separated by accident quarter of occurrence and at quarterly evaluations are used in this analysis. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development factors were calculated to measure the relative development of an accident quarter from one maturity point to the next. Loss and DCCE development factors (“LDF”) are selected based on a review of the historical relationships between incurred loss & DCCE at successive valuations and based on industry patterns.  The LDFs are multiplied together to derive cumulative LDF’s that, when multiplied by actual incurred loss and DCCE, produce estimates of ultimate loss and DCCE.

Paid Loss & DCCE Development Method – This method is similar to the Incurred Loss & DCCE Development Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.

Bornhuetter-Ferguson Incurred Method – This reserving method combines estimated initial expected unreported loss & DCCE with the actual loss & DCCE to yield the ultimate loss & DCCE estimate. Expected unreported loss & DCCE are equal to expected total loss & DCCE times the expected unreported percentage of loss & DCCE for each policy year.  The incurred loss & DCCE emergence pattern used to determine the unreported percentages in our projections is based on the selected LDF’s from the Incurred Loss & DCCE Development Method described above. The estimate of initial expected total loss & DCCE is based on the historical loss ratio for more mature accident years. While this approach reduces the independence of the Bornhuetter-Ferguson Method from the loss & DCCE development methods for older policy years, it is used primarily for estimating ultimate loss & DCCE for more recent, less mature, policy years.

Bornhuetter-Ferguson Paid Method – This method is similar to the Bornhuetter-Ferguson Incurred Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.

We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and December 31, 2013). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the overall estimate of unpaid losses & DCCE liability for the company.

We also produce an estimate of unpaid Adjusting and Other Expense (“A&O”), as a reserve is required under Statutory Accounting Principles (“SAP”) even if this expense has been pre-paid or with an unconsolidated affiliate. Although we do not prepay for A&O, the majority of the A&O incurred is with an affiliated company and eliminated under the accounting principles for consolidation. The unpaid A&O is added to unpaid losses & DCCE, resulting in total unpaid losses and LAE.

The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or variations in a company’s mix of business from year to year. Also, since the percentage of losses paid for immature years is often low, development factors can be volatile. A small variation in the number of claims paid can have a leveraging effect that could lead to significant changes in estimated ultimate values. Accordingly, our reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. We compute our estimated ultimate liability using the most appropriate principles and procedures applicable to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of operations and financial condition.

Frequency / Severity Method – This method separately estimates the two components of ultimate losses (the frequency, or number of claims and the severity, or cost per claim) and then combines the resulting estimates in a multiplicative fashion to estimate ultimate losses. The approach is valuable because sometimes there is more inherent stability in the frequency and severity data when viewed separately than in the total losses.

We developed reported claim counts to ultimate levels using the development approach. The mechanics of this approach are the same as we described previously for paid and incurred losses. The validity of the results of this method depends on the stability of claim reporting and settlement rates. Then we developed accident year incurred severities (incurred losses divided by reported claim counts) to ultimate levels using the development approach.

We trended these severities to accident year 2013 levels. Trend rates were selected based on a review of historical severities. Selected severity was chosen based on judgment considering the developed severities and the trended severities, considering industry benchmarks for each segment. The loss & ALAE, claim count and severity triangles are evaluated as of 12 months, 24 months, 36 months etc. We selected loss development factors based on the loss development history, to the extent credible, and supplemented with industry data where appropriate.

A key assumption underlying the estimation of the reserve for loss and LAE is that past experience serves as the most reliable estimator of future events. This assumption may materially affect the estimates when the insurance market, the regulatory environment, the legal environment, the economic environment, the book of business, the claims handling department, or other factors (known or unknown) have varied over time during the experience period and / or will vary (expectedly or unexpectedly) in the future. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made. Therefore, the ultimate liability for unpaid losses and LAE will likely differ from the amount recorded at December 31, 2013.

The following describes the extent of our procedures for determining the reserve for loss and LAE on both an annual and interim reporting basis:

Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for unpaid losses and LAE. Our independent actuarial firm, examining the exact same data set, will independently select a point estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations. If our point estimate falls within the range determined from the point estimate of our actuary, then the Company’s policy has been that no adjustments by management would be required. In consideration thereof, the company does not have a policy for adjusting the liability for unpaid losses and LAE to an amount that is different than an amount set forth within the range determined by our independent actuary, although the reserve level ultimately determined by us may not be the mid-point of our independent actuary’s range. Further, there can be no assurances that our actual losses will be within our actuary’s range.  Our independent actuary’s report expressly states that the report is based on assumptions developed from its own analysis and based on information provided by management and that notwithstanding its analysis, there is a significant risk of material adverse deviation from its range.

Interim – During 2013 our interim approach was very similar to the annual process noted above.

A number of other actuarial assumptions are generally made in the review of reserves for each class of business.

For each class of business, expected ultimate loss ratios for each accident year are estimated based on loss reserve development patterns. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend and the effect of rate changes and other quantifiable factors on the loss ratio.

In practice there are factors that change over time; however, many (such as inflation) are intrinsically reflected in the historical development patterns, and others typically do not materially affect the estimate of the reserve for unpaid losses and LAE. Therefore, no specific adjustments have been incorporated for such contingencies projecting future development of losses and LAE. There are no key assumptions as of December 31, 2013 premised on future emergence inconsistent with historical loss reserve development patterns.

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REGULATORY REQUIREMENTS AND RESTRICTIONS

12 Months Ended

Dec. 31, 2013

REGULATORY REQUIREMENTS AND RESTRICTIONS [Abstract]

REGULATORY REQUIREMENTS AND RESTRICTIONS

(8) REGULATORY REQUIREMENTS AND RESTRICTIONS

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”.

Consent Order

In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. As part of its approval of the merger between FNIC and American Vehicle, the Florida Office of Insurance Regulation (“Florida OIR”), the Company, FNIC and American Vehicle entered into a consent order with the Florida OIR dated January 25, 2011 (the “Consent Order”), which was amended in February 2013, due to FNIC’s statutory underwriting profit during 2012. Pursuant to the amended Consent Order, the Company and the resulting company in the merger (the “Merged Company”) have agreed to the following:

· The Merged Company retained the following licenses: (010) Fire, (020) Allied Lines, (040) Homeowners Multi Peril, (050) Commercial Multi Peril, (090) Inland Marine, (170) Other Liability, (192) Private Passenger Auto Liability, (194) Commercial Auto Liability, (211) Private Passenger Auto Physical Damage and (212) Commercial Auto Physical Damage.

· The Merged Company will not write commercial multi peril policy premium without prior approval from the Florida OIR. The Merged Company has no commercial multi peril policy premium in force.

· The Merged Company surrendered its surety license. The Merged Company has no surety policy premium in force.

· The Merged Company will not write new commercial habitation condominium associations without prior approval from the Florida OIR. The current commercial habitation book of business is fully earned.

· The Merged Company agreed to maintain the total number of its homeowners’ policies in Miami-Dade, Broward and Palm Beach counties (the “Tri-County Area”) at 35% of its entire homeowners’ book. As of December 31, 2013, the Company had approximately 18.3% of its homeowners’ policies located within Tri-County Area.

· The managing general agency fees payable by the Merged Company to Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, Inc., a wholly owned subsidiary of the Company, which were traditionally 6% of gross written premium, were reduced and will not exceed 4% without prior approval from the Florida OIR. The Merged Company has lowered the fee to amounts varying between 2% and 4% of gross written to further support the FNIC results of operations. This will have no impact on the Company’s consolidated financial results.

· The claims service fees payable by the Merged Company to Federated National Adjusting, Inc. (“FNA”), formerly known as Superior Adjusting, Inc., were reduced from the traditional 4.5% of gross earned premium to 3.6% of gross earned premium. This will have no impact on the Company’s consolidated financial results.

The merger of FNIC and American Vehicle will be an ongoing transition, many aspects of which will take effect over time. References to the companies contained herein are intended to be references to the operations of FNIC following the January 2011 merger. References to the historical activities of American Vehicle are appropriately identified throughout this document.

Other Regulatory Requirements and Restrictions

To retain our certificate of authority, the Florida Insurance Code (the "Code") requires FNIC to maintain capital and surplus equal to the greater of 10% of its’ liabilities or a statutory minimum capital and surplus as defined in the Code. FNIC is required to have a minimum capital surplus of $5.0 million.

At December 31, 2013, 2012 and 2011, FNIC’s statutory capital surplus was $76.9 million, $52.1 million and $39.3 million, respectively.

An insurance company is also required to adhere to prescribed premium-to-capital surplus ratios. As of December 31, 2013, 2012 and 2011, FNIC was in compliance with the prescribed premium-to-surplus ratio.

We had bonds with a carrying value of approximately $2.3 million and $2.2 million pledged to the Florida OIR, as of December 31, 2013 and 2012, respectively, in accordance with regulatory requirements.

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida OIR if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains.

Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida OIR (i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the Florida OIR at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115.0% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida OIR or (ii) 30 days after the Florida OIR has received notice of such dividend or distribution and has not disapproved it within such time.

No dividends were paid by FNIC or American Vehicle in 2013, 2012 and 2011, and none are anticipated in 2014. Although we believe that amounts required to meet our financial and operating obligations will be available from sources other than dividends from our insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida OIR will allow any dividends to be paid by FNIC to us, the parent company, in the future.The maximum dividends permitted by state law are not necessarily indicative of an insurer’s actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer’s competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs.

Insurance holding company regulations govern the amount that non-insurance company subsidiaries (FNU, FNA and any other affiliate)  may charge any of the insurance companies for service (e.g., management fees and commissions).

In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners (“NAIC”) established risk-based capital requirements for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. These requirements measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from investments. Insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The Florida OIR, which follows these requirements, could require FNIC to cease operations in the event they fail to maintain the required statutory capital.

Based upon the 2013 and 2012 statutory financial statements for FNIC, statutory surplus exceeded the regulatory action levels established by the NAIC’s risk-based capital requirements.

Based on risk-based capital requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its Authorized Control Level (“ACL”), as calculated under the NAIC’s requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC’s ratio of statutory surplus to its ACL was 312.1%, 474.4% and 409.7% at December 31, 2013, 2012 and 2011, respectively.

Most recently the Florida OIR subjected FNIC to a balance sheet audit as of December 31, 2009. There were no material findings by the independent auditors in connection with this examination. FNIC also experienced a regularly scheduled statutory examination by the Florida OIR which occurred during 2010 for the five years ended December 31, 2009. There were no material findings in connection with this examination. The previous regulatory examination conducted by the Florida OIR on FNIC covered the three-year period ended on December 31, 2004.

The NAIC has also developed IRIS ratios to assist state insurance departments in identifying companies which may be developing performance or solvency problems, as signaled by significant changes in the companies’ operations. Such changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling outside “usual ranges”, state regulators may investigate to determine the reasons for the variance and whether corrective action is warranted.

As of December 31, 2013, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions related to change in net writings, investment yield and estimated current reserve deficiency to policyholders’ surplus.

As of December 31, 2012, FNIC was outside NAIC’s usual range for three of thirteen IRIS ratios. These exceptions related to investment yield, net change in adjusted policyholders’ surplus and estimated current reserve deficiency to policyholders’ surplus.

As of December 31, 2011, FNIC was outside NAIC’s usual range for two of thirteen IRIS ratios. These exceptions related to two-years overall operating ratio and investment yield.

There was no action taken by the Florida OIR in connection with the December 31, 2012 or 2011 IRIS ratio results. We do not currently believe that the Florida OIR will take any significant action with respect to FNIC regarding the 2013 IRIS ratios, although there can be no assurance that will be the case.

The table below reflects the range and test results for FNIC for the years ended December 31, 2013 and 2012, respectively.

IRIS Ratios	Unusual Values Equal to Or					2013			2012
	Over		Under			FNIC			FNIC
Gross Premiums to Policyholders' Surplus		900		-			325			233
Net Premium to Policyholders' Surplus		300		-			217			135
Change in Net Writings		33		(33	)		137	*		32
Surplus Aid to Policyholders' Surplus		15		-			0			1
Two-year Overall Operating Ratio		100		-			84			92
Investment Yield		6.5		3.0			1.4	*		2.4	*
Gross Change in Policyholders' Surplus		50		(10	)		48			32
Net Change in Adjusted Policyholders' Surplus		25		(10	)		17			32	*
Liabilities to Liquid Assets		105		-			79			69
Gross Agents' Balance to Policyholders' Surplus		40		-			13			3
One-Year Reserve Development to Policyholders' Surplus		20		-			(4	)		(3	)
Two-Year Reserve Development to Policyholders' Surplus		20		-			(7	)		(2	)
Estimated Current Reserve Deficiency to Policyholders' Surplus		25		-			56	*		50	*
* indicates an unusual value

GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. FNIC’s statutory capital and surplus was $76.9 million and $52.1 million as of December 31, 2013 and 2012, respectively. FNIC’s statutory net income was $3.6 million, $6.6 million and $0.8 million for 2013, 2012 and 2011, respectively. FNIC’s statutory non-admitted assets were nearly nothing and nearly nothing as of December 31, 2013 and 2012, respectively.

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FAIR VALUE DISCLOSURE (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Debt securities [Abstract]
Debt securities	$ 174,912	$ 101,755
Equity securities [Abstract]
Equity securities	38,584	20,982
Recurring [Member]
Debt securities [Abstract]
United States government obligations and authorities	27,209
Obligations of states and political subdivisions	52,064
Corporate	91,941
International	3,698
Debt securities	174,912
Equity securities [Abstract]
Common stocks	38,584
Equity securities	38,584
Total debt and equity securities	213,496
Level 1 [Member] | Recurring [Member]
Debt securities [Abstract]
United States government obligations and authorities	0
Obligations of states and political subdivisions	0
Corporate	0
International	0
Debt securities	0
Equity securities [Abstract]
Common stocks	38,584
Equity securities	38,584
Total debt and equity securities	38,584
Level 2 [Member] | Recurring [Member]
Debt securities [Abstract]
United States government obligations and authorities	27,209
Obligations of states and political subdivisions	52,064
Corporate	91,941
International	3,698
Debt securities	174,912
Equity securities [Abstract]
Common stocks	0
Equity securities	0
Total debt and equity securities	174,912
Level 3 [Member] | Recurring [Member]
Debt securities [Abstract]
United States government obligations and authorities	0
Obligations of states and political subdivisions	0
Corporate	0
International	0
Debt securities	0
Equity securities [Abstract]
Common stocks	0
Equity securities	0
Total debt and equity securities	$ 0

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SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (UNAUDITED) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Supplemental Information for Property, Casualty Insurance Underwriters [Line Items]
Loss and LAE - Current Year	$ 56,209	$ 31,636	$ 31,893
Loss and LAE - Prior year	201	(1,427)	(997)
Amortization of deferred policy acquisition expenses	21,447	13,255	12,347
Paid losses and LAE expenses	22,695	15,892	13,672
Net premiums written	160,665	68,374	51,976
Consolidated Property and Casualty Subsidiaries [Member]
Supplemental Information for Property, Casualty Insurance Underwriters [Line Items]
Deferred policy acquisition costs	16,708	8,479	7,718
Reserves for losses and LAE	61,016	49,908	59,983
Discount, if any, deducted from previous column	0	0	0
Unearned premiums	128,343	59,006	47,933
Net premiums earned	$ 104,381	$ 59,359	$ 48,523

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REINSURANCE (Tables)

12 Months Ended

Dec. 31, 2013

REINSURANCE [Abstract]

Summary of impact of the excess of loss reinsurance treaties

The impact of the reinsurance treaties on the financial statements is as follows.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Premium written
Direct and Assumed	$	243,374		$	119,459		$	98,269
Ceded		(82,709	)		(51,085	)		(46,293	)
	$	160,665		$	68,374		$	51,976
Premiums earned
Direct and Assumed	$	174,037		$	109,312		$	97,473
Ceded		(69,656	)		(49,953	)		(48,950	)
	$	104,381		$	59,359		$	48,523
Losses and LAE incurred
Direct and Assumed	$	59,820		$	33,329		$	33,055
Ceded		(3,410	)		(3,120	)		(2,159	)
	$	56,410		$	30,209		$	30,896

	As of December 31,
	2013			2012
	(Dollars in Thousands)
Unpaid losses and LAE, net
Direct and Assumed	$	61,015		$	49,908
Ceded		(2,742	)		(3,503	)
	$	58,273		$	46,405
Unearned premiums
Direct and Assumed	$	128,343		$	59,006
Ceded		(37,135	)		(24,083	)
	$	91,208		$	34,923

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INCOME TAXES (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Federal [Abstract]
Current	$ 4,289	$ 63	$ 310
Deferred	1,393	2,052	(490)
Provision for Federal income tax expense (benefit)	5,682	2,115	(180)
State [Abstract]
Current	0	0	0
Deferred	809	320	(390)
Provision for state income tax expense (benefit)	809	320	(390)
Provision for income tax expense (benefit)	6,491	2,435	(570)
Components of effective federal and state tax rates to income before provision for income tax benefit [Abstract]
Computed expected tax expense (benefit) provision, at federal rate	6,535	2,294	(341)
State tax, net of federal deduction expense (benefit)	698	245	(36)
Tax-exempt interest	(31)	(26)	(41)
Dividend received deduction	(97)	(88)	(80)
Stock option expense and other permanent differences	(34)	72	87
AMT tax credit	0	(113)	0
True-up	(306)	0	0
Other	(274)	51	(159)
Provision for income tax expense (benefit)	6,491	2,435	(570)
Deferred tax assets [Abstract]
Unpaid losses and loss adjustment expenses	1,157	1,725
Unearned premiums	6,864	2,629
Discount on advance premiums	243	167
Allowance for credit losses	59	31
Allowance for impairments	21	91
FIGA Guaranty Assessment	0	306
Depreciation & amortization	149	366
Reserve for claims settlements	1,844	809
NOL Carryforward	73	3,259
AMT credit	0	253
Flow-through income or loss	4	0
Stock option expense per ASC 718	550	432
Total deferred tax assets	10,964	10,068
Deferred tax liabilities [Abstract]
Deferred acquisition costs, net	(6,287)	(3,191)
Dividends Collected vs. Earned	(6)	(18)
Regulatory assessments	(67)	(67)
Unrealized Gain on investment securities	(3,598)	(2,454)
Total deferred tax liabilities	(9,958)	(5,730)
Net deferred tax asset	$ 1,006	$ 4,338

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SEGMENT INFORMATION

12 Months Ended

Dec. 31, 2013

SEGMENT INFORMATION [Abstract]

SEGMENT INFORMATION

(13) SEGMENT INFORMATION

FASB issued guidance requires that the amount reported for each segment item be based on what is used by the chief operating decision maker in formulating a determination as to how many resources to assign to a segment and how to appraise the performance of that segment. The term chief operating decision maker may apply to the chief executive officer or chief operating officer or to a group of executives. Note: The term of chief operating decision maker may apply to a function and not necessarily to a specific person. This is a management approach rather than an industry approach in identifying segments. The segments are based on the Company’s organizational structure, revenue sources, nature of activities, existence of responsible managers, and information presented to the Board of Directors.

If any one of the following exists, a segment must be reported on.

· Revenue, including unaffiliated and inter-segment sales or transfers, is 10% or more of total revenue of all operating segments.

· Operating profit or loss is 10% or more of the greater, in absolute amount, of the combined operating profit (or loss) of all industry segments with operating profits (or losses).

· Identifiable assets are 10% or more of total assets of all operating segments.

Operating segments that are not reportable should be combined and disclosed in the ‘‘all other’’ category. Disclosure should be made of the sources of revenue for these segments.

Accordingly, we have no segment information to report.

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AUTHORIZATION OF PREFERRED STOCK

12 Months Ended

Dec. 31, 2013

AUTHORIZATION OF PREFERRED STOCK [Abstract]

AUTHORIZATION OF PREFERRED STOCK

(18) AUTHORIZATION OF PREFERRED STOCK

Our Amended and Restated Articles of Incorporation authorize the issuance of one million shares of preferred stock with designations, rights and preferences determined from time to time by our board of directors.  Accordingly, our Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock.  We have not issued preferred shares as of December 31, 2013.

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REINSURANCE (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Premiums written [Abstract]
Direct and Assumed	$ 243,373,000	$ 119,459,000	$ 98,269,000
Ceded	(82,709,000)	(51,085,000)	(46,293,000)
Net premiums written	160,665,000	68,374,000	51,976,000
Premiums earned [Abstract]
Direct and Assumed	174,037,000	109,312,000	97,473,000
Ceded	(69,656,000)	(49,953,000)	(48,950,000)
Net premiums earned	104,381,000	59,359,000	48,523,000
Losses and LAE incurred [Abstract]
Direct and Assumed	59,820,000	33,329,000	33,055,000
Ceded	(3,410,000)	(3,120,000)	(2,159,000)
Losses and LAE incurred, net	56,410,000	30,209,000	30,896,000
Unpaid losses and LAE, net [Abstract]
Direct and Assumed	61,016,000	49,908,000	59,983,000	66,529,000
Ceded	(2,742,000)	(3,503,000)
Unpaid losses and LAE, net	58,273,000	46,405,000
Unearned premiums [Abstract]
Direct and Assumed	128,343,000	59,006,000
Ceded	(37,135,000)	(24,083,000)
Unearned premiums, net	91,208,000	34,923,000
Fully funded trust agreements	$ 4,900,000
Minimum number of days fully funded trust agreements can be drawn on for the amounts remain unpaid	120 days

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COMPREHENSIVE INCOME (LOSS) (Tables)

12 Months Ended

Dec. 31, 2013

COMPREHENSIVE INCOME (LOSS) [Abstract]

Schedule of comprehensive income (loss)

For the years ended December 31, 2013, 2012 and 2011, comprehensive income (loss) consisted of the following.

	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Net income (loss)	$	12,727		$	4,313		$	(430	)
Change in net unrealized gains on investments available for sale		3,041			5,114			572
Comprehensive income before tax		15,768			9,427			142
Income tax expense related to items of other comprehensive income (loss)		(1,144	)		(1,924	)		(215	)
Comprehensive income (loss)	$	14,624		$	7,503		$	(73	)

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) [Abstract]
Net income (loss)	$ 12,727	$ 4,313	$ (430)
Change in net unrealized gains on investments available for sale	3,041	5,114	572
Comprehensive income before tax	15,768	9,427	142
Income tax expense related to items of other comprehensive income (loss)	(1,144)	(1,924)	(215)
Comprehensive income (loss)	$ 14,624	$ 7,503	$ (73)

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

12 Months Ended

Dec. 31, 2013

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) CASH AND SHORT TERM INVESTMENTS

We consider all short-term highly liquid investments with original maturities of less than three months to be short term investments.

(b) INVESTMENTS

Our investment securities have been classified as either available-for-sale or held to maturity in response to our liquidity needs, changes in market interest rates and asset-liability management strategies, among other reasons. Investments available-for-sale are stated at fair value on the balance sheet. Investments designated as held to maturity are stated at amortized cost on the balance sheet. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income within shareholders' equity, net of related deferred income taxes.

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

(c) PREMIUM REVENUE

Premium revenue on all lines is earned on a pro-rata basis over the life of the policies. Unearned premiums represent the portion of the premium related to the unexpired policy term.

(d) DEFERRED ACQUISITION COSTS

Deferred acquisition costs primarily represent commissions paid to outside agents at the time of policy issuance (to the extent they are recoverable from future premium income) net of ceded premium commission earned from reinsurers, salaries and premium taxes net of policy fees, and are amortized over the life of the related policy in relation to the amount of premiums earned. The method followed in computing deferred acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, unpaid losses and LAE and certain other costs expected to be incurred as the premium is earned. There is no indication that these costs will not be fully recoverable in the near term.

(e) PREMIUM DEPOSITS

Premium deposits represent premiums received primarily in connection with homeowner policies that are not yet effective. We take approximately 30 working days to issue the policy from the date the cash and policy application are received.

(f) UNPAID LOSSES AND LAE

Unpaid losses and LAE are determined by establishing liabilities in amounts estimated to cover incurred losses and LAE. Such liabilities are determined based upon our assessment of claims pending and the development of prior years' loss liability. These amounts include liabilities based upon individual case estimates for reported losses and LAE and estimates of such amounts that are incurred but not yet reported (“IBNR”). Changes in the estimated liability are charged or credited to operations as the losses and LAE are settled.

The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

There can be no assurance that our liability for unpaid losses and LAE will be adequate to cover actual losses. If our liability for unpaid losses and LAE proves to be inadequate, we will be required to increase the liability with a corresponding reduction in our net income in the period in which the deficiency is identified. Future loss experience substantially in excess of established liability for unpaid losses and LAE could have a material adverse effect on our business, results of operations and financial condition.

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

We do not discount unpaid losses and LAE for financial statement purposes.

 (g) FINANCE REVENUE

Interest and service income, resulting from the financing of insurance premiums, is recognized using a method that approximates the effective interest method. Late charges are recognized as income when chargeable.

(h) PREMIUMS RECEIVABLE, NET OF ALLOWANCE FOR CREDIT LOSSES

Provisions for credit losses are provided in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover anticipated losses. Generally, accounts that are over 90 days old are written off to the allowance for credit losses. We have been increasing our reliance on direct billing of our policyholders for their insurance premiums. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring payment of the full amount of the policy, either directly from the insured or from a premium finance company. We manage the credit risk associated with our direct billing program through our integrated computer system which allows us to monitor the equity in the unearned premium to the underlying policy. Underwriting criteria are designed with down payment requirements and monthly payments that create policyholder equity, also called unearned premium, in the insurance policy. The equity in the policy is collateral for the extension of credit to the insured.

(i) MANAGING GENERAL AGENT (“MGA”) FEES

If all the costs substantially associated with the MGA contracts, which do not involve affiliated insurers, are incurred during the underwriting process, then the MGA fees and the related acquisition costs are recognized at the time the policy is underwritten, net of estimated cancellations. If the MGA contract requires significant involvement subsequent to the completion of the underwriting process, then the MGA fees and related acquisition costs are deferred and recognized over the life of the policy. Included in MGA Fees are policy fees charged by the insurance companies and passed through to FNU. Policy fees are discussed below.

(j) POLICY FEES

Policy fees represent a $25 non-refundable application fee for insurance coverage, which are intended to reimburse us for the costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is underwritten.  These fees are netted against underwriting costs and are included as a component of deferred acquisition costs.

(k) REINSURANCE

We recognize the income and expense on reinsurance contracts principally on a pro-rata basis over the term of the reinsurance contracts or until the reinsurers maximum liability is exhausted, whichever comes first. We are reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve us from our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We only cede risks to reinsurers whom we believe to be financially sound. At December 31, 2013, all reinsurance recoverables are considered current and deemed collectable.

(l) INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date.

 (m) CONCENTRATION OF CREDIT RISK

FNU earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. FNU earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliates FNIC and American Vehicle. During the fourth quarter of 2010, FNU, pursuant to the Consent Order as discussed in “Regulation – Consent Order” reduced its fee, to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.

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

(n) RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

In July 2012, the FASB issued ASU No. 2012-02: Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendments in this ASU is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories.  The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.   Upon adoption, these amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012; early adoption is permitted.  The adoption of these amendments did not have a material impact on our financial condition, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05: Comprehensive Income (Topic 220):  Presentation of Comprehensive Income. The guidance in this ASU is intended to increase the prominence of items reported in other comprehensive income in the financial statements by presenting the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The guidance in this ASU does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Upon adoption, this update is to be applied retrospectively and is effective during interim and annual periods beginning after December 15, 2011.  Early adoption is permitted. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-12:  Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  The guidance defers certain provisions contained in ASU No. 2011-05 requiring the requirement to present components of reclassifications of other comprehensive income on the face of the income statement or in the notes to the financial statements. However, this deferral does not impact the other requirements contained in the new standard on comprehensive income as described above. This ASU is effective during interim and annual periods beginning after December 15, 2011.  The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In September 2011, the FASB issued ASU No. 2011-08: Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which amends ASC Topic 350, Intangibles-Goodwill and Other. The guidance in this ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-11: Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which requires new disclosure requirements mandating that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. This ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In October 2010, the FASB issued ASU No. 2010-26: Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, a consensus of FASB Emerging Issues Task Force.  The amendments in this update modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The amendments in this update specify that the costs must be based on successful efforts (that is, acquiring a new or renewal contract).  The amendments also specify that advertising costs should be included as deferred acquisition costs under certain circumstances.  The amendments in this update are effective for fiscal years, and interim period within those fiscal years, beginning after December 15, 2011.  The amendments in this update should be applied prospectively upon adoption.  Retrospective application to all prior periods presented upon the date of adoption also is permitted.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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

 (o) USE OF ESTIMATES

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

Similar to other property and casualty insurers, our liability for unpaid losses and LAE, although supported by actuarial projections and other data, is ultimately based on management's reasoned expectations of future events. Although considerable variability is inherent in these estimates, we believe that this liability is adequate. Estimates are reviewed regularly and adjusted as necessary. Such adjustments are reflected in current operations. In addition, the realization of our deferred income tax assets is dependent on generating sufficient future taxable income. It is reasonably possible that the expectations associated with these accounts could change in the near term and that the effect of such changes could be material to the Consolidated Financial Statements.

 (p) OPERATIONAL RISKS

We are subject to certain risks in our business operations which are described below. Careful consideration of these risks should be made before making an investment decision. The risks and uncertainties described below are not the only ones facing FNHC. Additional risks and uncertainties not presently known or currently deemed immaterial may also impair our business operations.

Risks Related to Our Business

Effective January 26, 2011, FNIC merged with and into American Vehicle, and the resulting entity changed its name to “Federated National Insurance Company”.

· Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.

· Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance fluctuates and we may not be able to successfully alleviate risk through reinsurance arrangements.

· We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of operations and/or financial condition.

· Our January 2011 Consent Order with the Florida OIR, as amended in February 2013, limits our business in certain respects and may prevent us from growing our business.

· If we are unable to continue our growth because our capital must be used to pay greater than anticipated claims, our financial results may suffer.

· We may require additional capital in the future which may not be available or only available on unfavorable terms.

· Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

· We may experience financial exposure from climate change.

· Our loss reserves may be inadequate to cover our actual liability for losses, causing our results of operations to be adversely affected.

· Our revenues and operating performance may fluctuate due to statutorily approved assessments that support property and casualty insurance pools and associations.

· Our investment portfolio may suffer reduced returns or losses, which would significantly reduce our earnings.

· We may experience a loss due to the concentration of credit risk.

· The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or our results of operations.

· The effects of emerging claim and coverage issues on our business are uncertain.

· Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.

· Our insurance company is subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.

· Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance industry.

· We may not obtain the necessary regulatory approvals to expand the types of insurance products we offer or the states in which we operate.

· Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable policies or obtain adequate insurance, which could limit or halt our growth and harm our business.

· We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain independent and general agents, our revenues would be negatively affected.

· We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our operations.

· Nonstandard automobile insurance historically has a higher frequency of claims than standard automobile insurance, thereby increasing our potential for loss exposure beyond what we would be likely to experience if we offered only standard automobile insurance.

· Florida's personal injury protection insurance statute contains provisions that favor claimants, causing us to experience a higher frequency of claims than might otherwise be the case if we operated only outside of Florida.

· Our success depends on our ability to accurately price the risks we underwrite.

· Current operating resources are necessary to develop future new insurance products.

· Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our business and adversely impact our financial results.

· Our participation in the new Florida Property Insurance Clearinghouse may not result in an increase in our premium revenue.

· Our senior management team is critical to the strategic direction of our company. If there were an unplanned loss of service by any of our officers our business could be harmed.

· We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth.

· New homeowners’ insurance operations outside of the State of Florida may not be profitable.

· We face risks in connection with potential material weakness resulting from our Sarbanes-Oxley Section 404 management report and any related remedial measures that we undertake.

Risks Related to an Investment in Our Shares

· Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price of our common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.

· If we report a material weakness in our internal controls and procedures, we may lose investor confidence and remedial measures may be costly.

· Our controls and procedures may fail or be circumvented which could have a material adverse effect on our business, results of operations and financial condition.

· We have authorized but unissued preferred stock, which could affect rights of holders of common stock.

· Provisions in our articles of incorporation and our bylaws, as amended, and the Florida Business Corporation Act could make it more difficult to acquire us and may reduce the market price of our common stock.

· As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and dividends to the holding company as the primary source of our income.

· Future sales of our common stock may depress our stock price.

 (q) FAIR VALUE

The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on December 31, 2013 and 2012. Changes in interest rates subsequent to December 31, 2013 may affect the fair value of our investments. Refer to Footnote 21 of the Notes to Consolidated Financial Statements for details.

The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2013 and 2012 because of their short-term nature: cash and short term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, bank overdraft, accounts payable and accrued expenses.

(r) STOCK OPTION PLANS

During the year ended December 31, 2013, the Company had three stock-based employee compensation plans, which are described later in Footnote 14, Stock Compensation Plans. Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the Accounting Principles Board (“APB”) and related Interpretation, as permitted by FASB issued guidance.Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2013, 2012 and 2011 include:

· Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and

· Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as they are not required to be by the pronouncement.

 (s) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation on property, plant and equipment is calculated on a straight-line basis over the following estimated useful lives: building and improvements - 30 years and furniture and fixtures - 7 years. We capitalize betterments and any other expenditure in excess of $1,000 if the asset is expected to have a useful life greater than one year.  The carrying value of property, plant and equipment is periodically reviewed based on the expected future undiscounted operating cash flows of the related item. Based upon our most recent analysis, we believe that no impairment of property, plant and equipment exists at December 31, 2013.

(t) RECLASSIFICATIONS

The 2012 and 2011 financial statement amounts have not been reclassified to conform to the 2013 presentations.

(u) GOODWILL AND INTANGIBLE ASSETS

During 2009, the Company purchased one intangible asset totaling $0.1 million. In accordance with FASB issued guidance, the accounting for the recognized intangible asset was based on its useful life to the Company. The useful life of the intangible asset was the period over which it was expected to contribute directly or indirectly to the future cash flows of the Company. The intangible asset had a definite finite life ranging from six to twelve months, and was amortized accordingly.

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EMPLOYEE BENEFIT PLAN (Details) (USD $) In Millions, unless otherwise specified	12 Months Ended			1 Months Ended	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Jan. 31, 2014 Subsequent Event [Member]	Dec. 31, 2013 Minimum [Member]	Dec. 31, 2013 Maximum [Member]
EMPLOYEE BENEFIT PLAN [Abstract]
Eligible employees to contribution, percentage (in hundredths)	100.00%
Entity's matching contribution	$ 0.2	$ 0.1	$ 0.1
Entity's matching contribution percentage of elective contributions (in hundredths)			50.00%
Defined Benefit Plan Disclosure [Line Items]
Percentage of first elective contributions (in hundredths)	1.00%		6.00%	6.00%
Employers matching first elective contribution percentage (in hundredths)	100.00%			100.00%
Employers matching next elective contribution percentage (in hundredths)	50.00%
Percentage of next elective contributions (in hundredths)					2.00%	6.00%
Defined contribution plan vesting percentage (in hundredths)	100.00%
Requisite service period for vesting	2 years

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FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED)

12 Months Ended

Dec. 31, 2013

FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED) [Abstract]

FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED)

(19)  FEDERATED NATIONAL HOLDING COMPANY (UNAUDITED)

FNHC (the parent company only) has no long term obligations, guarantees or material contingencies as of December 31, 2013. The following summarizes the major categories of the parent company’s financial statements.

Condensed Balance Sheets (Unaudited)	Period Ending December 31,
ASSETS	2013			2012
	(Dollars in Thousands)
Cash and short term investments	$	2,143		$	1,494
Investments and advances to subsidiaries		105,797			61,005
Deferred income taxes receivable		1,006			4,338
Income taxes receivable		8,157			9,515
Property, plant and equipment, net		184			98
Other assets		4,446			4,069
Total assets	$	121,733		$	80,519
LIABILITIES AND SHAREHOLDERS' EQUITY
Income taxes payable		1,690			-
Dividends payable		330			-
Capital contribution payable		16,000			-
Other liabilities		238			125
Total liabilities		18,258			125
Shareholders' equity:
Common stock		110			80
Additional paid-in capital		74,086			45,378
Accumulated other comprehensive loss		(1,727	)		(1,039	)
Retained earnings		31,006			35,975
Total shareholders' equity		103,475			80,394
Total liabilities and shareholders' equity	$	121,733		$	80,519

Condensed Statements of Operations (Unaudited)	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Revenue:
Management fees from subsidiaries	$	1,864	$	1,228	$	1,734
Equity in income of subsidiaries		21,623		8,787		(48	)
Net investment income		136		34		31
Other income		11		476		1,345
Total revenue		23,634		10,525		3,062
Expenses:
Salaries and wages		2,022		1,853		1,775
Legal fees		113		198		54
Other expenses		2,281		1,726		2,233
Total expenses		4,416		3,777		4,062
Income (loss) before provision for income tax expense (benefit)		19,218		6,748		(1,000	)
Provision for income tax expense (benefit)		6,491		2,435		(570	)
Net income (loss)	$	12,727	$	4,313	$	(430	)

Condensed Statements of Cash Flow (Unaudited)
	Years Ended December 31,
	2013			2012			2011
	(Dollars in Thousands)
Cash flow from operating activities:
Net income (loss)	$	12,727		$	4,313		$	(430	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Equity in (income) loss  of subsidiaries		(21,623	)		(8,787	)		48
Depreciation and amortization of property plant and equipment, net		33			23			7
Deferred income tax (benefit) expense		(3,332	)		(4,274	)		696
Income tax recoverable  (payable)		1,690			(78	)		78
Change in dividends payable		330			-			-
Non-cash compensation		293			188			263
Changes in operating assets and liabilities:
Property, plant and equipment		119			(138	)		73
Deferred gain on sale of assets		-			(30	)		(506	)
Other assets		377			45			(292	)
Capital contribution payable		16,000			-			-
Other liabilities		112			(18	)		(770	)
Net cash provided (used) by operating activities		6,726			(8,756	)		(833	)
Cash flow used in investing activities:
Purchases of investment securities available for sale		(44,792	)		(451	)		(846	)
Cash flow used in investing activities:		(44,792	)		(451	)		(846	)
Net cash provided in financing activities:
Dividends paid		(1,232	)		(159	)		-
Stock options exercised		858			128			-
Tax benefit related to non-cash compensation		168			100			92
Issuance of common stock		27,879			-			-
Advances from subsidiaries		11,042			8,349			668
Net cash provided in financing activities:		38,715			8,418			760
Net increase (decrease) in cash and short term investments		649			(789	)		(919	)
Cash and short term investments at beginning of year		1,494			2,283			3,202
Cash and short term investments at end of year	$	2,143		$	1,494		$	2,283

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LEASES (Tables)

12 Months Ended

Dec. 31, 2013

LEASES [Abstract]

Schedule of expected future lease payouts

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

Fiscal Year	Payments
	(Dollars in Thousands)
2014		392
2015		400
2016		408
2017		156
Total	$	1,356

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NET INCOME PER SHARE

12 Months Ended

Dec. 31, 2013

NET INCOME PER SHARE [Abstract]

NET INCOME PER SHARE

(12) NET INCOME PER SHARE

Net income per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented. In accordance with GAAP, net loss per share would be antidilutive; therefore the basic and diluted loss per share is the same.

A summary of the numerator and denominator of the basic and fully diluted 2013, 2012 and 2011 net income (loss) per share is presented below.

	Income (loss)			Shares Outstanding		Per-share
	(Numerator)			(Denominator)		Amount
	(Dollars in Thousands)
For the year ended December 31, 2013
Basic net income per share	$	12,727			8,506	$	1.50
Fully diluted income per share	$	12,727			8,772	$	1.45
For the year ended December 31, 2012
Basic net income per share	$	4,313			7,952	$	0.53
Fully diluted income per share	$	4,313			8,016	$	0.53
For the year ended December 31, 2011
Basic net loss per share	$	(430	)		7,946	$	(0.05	)
Fully diluted loss per share	$	(430	)		7,946	$	(0.05	)