10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2015

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________________TO _______________________

Commission File number 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)	(IRS Employer Identification Number)

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

(Address of principal executive offices) (Zip Code)

800-293-2532

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes☒ No ☐

Indicate by check mark whether the registrant has electronically submitted and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒No ☐

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

Large accelerated filer ☐      Accelerated filer ☒    Non-accelerated filer ☐ Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value –14,172,923 outstanding as of May 3, 2015

FEDERATED NATIONAL HOLDING COMPANY

INDEX

PART I: FINANCIAL INFORMATION		PAGE
ITEM 1	Financial Statements	3
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	50
ITEM 4	Controls and Procedures	53
PART II: OTHER INFORMATION
ITEM 1	Legal Proceedings	54
ITEM 1A	Risk Factors	54
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	54
ITEM 3	Defaults upon Senior Securities	54
ITEM 4	Mine Safety Disclosures	54
ITEM 5	Other Information	55
ITEM 6	Exhibits	56
SIGNATURES		57

- 2 -

PART I: FINANCIAL INFORMATION

Item1. Financial Statements

FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	Period Ending
	March 31, 2015		December 31, 2014
ASSETS	(Dollars in Thousands)
Investments
Debt maturities, available for sale, at fair value	$	288,193	$	284,099
Debt maturities, held to maturity, at amortized cost		7,462		7,417
Equity securities, available for sale, at fair value		40,726		39,247
Total investments		336,381		330,763
Cash and short term investments		88,163		40,157
Prepaid reinsurance premiums		46,039		54,502
Premiums receivable, net of allowance for credit losses of $148 and $148, respectively		29,809		27,275
Reinsurance recoverable, net		13,034		12,534
Deferred policy acquisition costs		15,765		13,610
Income taxes receivable		2,090		1,810
Property, plant and equipment, net		1,720		1,749
Other assets		8,265		7,231
Contingent quota-share profit sharing		14,000		14,000
Total assets	$	555,266	$	503,631
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and LAE	$	84,475	$	78,330
Unearned premiums		203,433		192,424
Debt		5,000		-
Premiums deposits and customer credit balances		11,291		7,381
Deferred income taxes, net		1,897		1,341
Claims payments outstanding		9,653		10,152
Accounts payable and accrued expenses		8,967		10,924
Deferred quota-share profit sharing		8,750		10,500
Total liabilities		333,466		311,052
Shareholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding 13,701,122 and 13,632,414, respectively		137		136
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding		-		-
Additional paid-in capital		128,611		127,302
Accumulated other comprehensive income
Unrealized net gains on investments, available for sale		8,925		7,718
Total accumulated other comprehensive income		8,925		7,718
Retained earnings		66,140		57,423
Total Federated National Holding Company equity		203,813		192,579
Non-controlling interest		17,987		-
Total shareholders' equity		221,800		192,579
Total liabilities and shareholders' equity	$	555,266	$	503,631

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- 3 -

FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended March 31,
	2015			2014
	(Dollars in Thousands)
Revenue:
Gross premiums written	$	106,702		$	81,102
Gross premiums ceded		(25,958	)		(3,306	)
Net premiums written		80,744			77,796
Decrease in prepaid reinsurance premiums		(24,949	)		(16,795	)
Increase in unearned premiums		(11,009	)		(16,997	)
Net change in prepaid reinsurance premiums and unearned premiums		(35,958	)		(33,792	)
Net premiums earned		44,786			44,004
Commission income		1,126			954
Finance revenue		427			311
Direct written policy fees		2,492			1,827
Net investment income		1,546			1,007
Net realized investment gains		1,704			1,331
Other income		1,378			281
Quota-share profit sharing, net		1,477			-
Total revenue		54,936			49,715
Expenses:
Losses and LAE		23,949			20,828
Operating and underwriting expenses		6,322			3,667
Salaries and wages		5,137			3,050
Amortization of deferred policy acquisition costs		5,044			8,442
Total expenses		40,452			35,987
Income before provision for income tax expense		14,484			13,728
Provision for income tax expense		5,711			5,305
Income before non-controlling interest		8,773			8,423
Non-controlling interest		(511	)		-
Net income attributable to Federated National Holding Company common stockholders	$	9,284		$	8,423
Net income per share - basic	$	0.68		$	0.77
Net income per share - diluted	$	0.66		$	0.74
Weighted average number of common shares outstanding - basic		13,656,190			10,948,646
Weighted average number of common shares outstanding - diluted		13,976,131			11,317,458
Dividends paid per share	$	0.04		$	0.03

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- 4 -

FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended March 31,
	2015			2014
	(Dollars in Thousands)
Net income	$	9,284		$	8,423
Change in net unrealized gains on investments available for sale		1,965			880
Comprehensive income before tax		11,249			9,303
Income tax expense related to items of other comprehensive income		(758	)		(430	)
Comprehensive income	$	10,491		$	8,873

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- 5 -

FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
	2015			2014
	(Dollars in Thousands)
Cash flow from operating activities:
Net income	$	9,284		$	8,423
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of investment premium or discount, net		1,253			844
Depreciation and amortization of property plant and equipment, net		152			76
Net realized investment gains		(1,704	)		(1,331	)
Non-cash compensation		999			134
Changes in operating assets and liabilities:
Premiums receivable		(2,535	)		(1,537	)
Prepaid reinsurance premiums		8,463			6,755
Reinsurance recoverable, net		(500	)		33
Income taxes recoverable		(280	)		-
Deferred income tax expense, net of other comprehensive income		(202	)		(574	)
Policy acquisition costs, net of amortization		(2,156	)		(1,757	)
Other assets		(1,034	)		(970	)
Contingent quota-share profit sharing		(1,750	)		-
Unpaid losses and LAE		6,145			1,538
Unearned premiums		11,009			16,997
Debt		5,000			-
Premium deposits and customer credit balances		3,911			3,383
Income taxes payable		-			1,978
Claims payments outstanding		(499	)		(991	)
Accounts payable and accrued expenses		(1,957	)		(383	)
Net cash provided by operating activities		33,599			32,618
Cash flow used by investing activities:
Proceeds from sale of investment securities		56,264			20,946
Purchases of investment securities available for sale		(59,466	)		(44,387	)
Purchases of property and equipment		(122	)		(218	)
Net cash used by investing activities		(3,324	)		(23,659	)
Cash flow provided by financing activities:
Exercised stock options	$	27		$	353
Dividends paid		(566	)		(341	)
Non-controlling interest		17,987			-
Tax benefit related to non-cash compensation		283			72
Net cash provided by financing activities		17,731			84
Net increase in cash and short term investments		48,006			9,043
Cash and short term investments at beginning of period		40,157			41,446
Cash and short term investments at end of period	$	88,163		$	50,489

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- 6 -

FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
(continued)	2015		2014
	(Dollars in Thousands)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	5,662	$	3,885
Non-cash investing and finance activities:
Accrued dividends payable	$	567	$	336

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- 7 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

(1) Organization and Business

In this Quarterly Report on Form 10-Q, “FNHC” and the terms “Company”, “we”, “us” and “our” refer to Federated National Holding Company and its subsidiaries, unless the context indicates otherwise. 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 23 years.

FNHC is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents.

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

Our wholly owned insurance subsidiary is Federated National Insurance Company (“FNIC”). 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 3,800 independent agents, of which approximately 2,300 actively sell and service our products, FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines, and personal 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. FNIC also underwrites homeowners’ insurance in Alabama and Louisiana and just became admitted in South Carolina to underwrite homeowners insurance. Additionally, we underwrite personal automobile insurance in Georgia and Texas.

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

The Company has entered into a joint venture to organize Monarch National Insurance Company, which received its certificate of authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the “Florida OIR”) on March 19, 2015.  The Company’s joint venture partners are a majority-owned limited partnership of Crosswinds Holdings Inc., f/k/a C.A. Bancorp Inc., a publicly traded Canadian private equity firm and asset manager; and Transatlantic Reinsurance Company.  For more information regarding the organization of Monarch National Insurance Company, please see Note 11, Subsequent Events.

We previously entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with Federated Mutual Insurance Company (“Federated Mutual”) pursuant to which, among other things, we may continue to use “Federated” until at least August 30, 2020, after which time we have agreed to either cease using “Federated” in commerce or otherwise adopt and use trade names that are not confusingly similar to Federated Mutual’s trademarks.  We continue to develop our brand under the “FedNat” name, which is the name by which agents generally know us.

As of September 30, 2014, we had satisfied all applicable conditions of the Consent Order we entered into in January 2011 (the “Consent Order”) with the Florida Office of Insurance Regulation (“Florida OIR”).  We entered into the Consent Order in connection with the merger of our one of our wholly owned insurance subsidiaries, American Vehicle Insurance Company (“American Vehicle”), into FNIC, with FNIC continuing the operations of both entities.  As of the date of this Report, the only operational restriction that remains in effect is a requirement to obtain OIR approval prior to writing commercial multi-peril business or any new commercial property business, including condo associations, under any other line of business for which FNIC is authorized.  FNIC currently has no commercial multi-peril policy premium in-force and the current commercial habitation book of business is fully earned. The Consent Order required us to, among other things, limit the number of policies that we write in the Tri-County area and imposed certain other operational requirements on us, all of which we have complied with.

- 8 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

During the three months ended March 31, 2015, 91.7%, 3.7%, 1.4% and 3.2% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively. During the three months ended March 31, 2015, $19.7 million or 20.1% of the $97.8 million of the 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 FNIC products. The $19.7 million of homeowners’ premiums produced under this agreement with ISA represents 82.6% of the total increase in the sale of homeowners’ policies during the three months ended March 31, 2015. During the three months ended March 31, 2014, $11.6 million or 15.7% of the $74.0 million of the homeowners’ premiums we underwrote were produced under an agency agreement with ISA. This network of agents began writing for FNIC in March 2013. During the three months ended March 31, 2014, 91.2%, 3.9%, 1.9% and 3.0% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively.

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

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

FedNat Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, Inc., 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, Nevada, South Carolina and Texas. FNU has contracted with other unaffiliated insurance companies to sell personal umbrella 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 per policy fee which ranges from $25 to $55 and a commission fee from its affiliate, FNIC, which totaled 4% during the three months ended March 31, 2015. The Florida OIR periodically reviews our managing general agent’s fee structure to ensure that it is neither excessive nor inadequate to operate.

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

During 2014, the Florida OIR approved an application to allow the claims administration operations of FNA to be assumed by FNU. Under the amended managing general agency agreement between FNU and FNIC, FNU will provide the same claims administration services under the same fee structure. The combination of these services in FNU had no effect on consolidated net income.

- 9 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

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

(2) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America referred to as Generally Accepted Accounting Principles (“GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2015 and the results of operations and cash flows for the periods presented.

The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2015. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2014 included in the Company’s Form 10-K, which was filed with the SEC on March 16, 2015.

In preparing the interim unaudited condensed consolidated financial statements, management was required to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates.

Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of loss and LAE, ceded reinsurance balances payable, the recoverability of Deferred Policy Acquisition Costs (“DPAC”), the determination of federal income taxes, and the net realizable value of reinsurance recoverables. Although considerable variability is inherent in these estimates, management believes that the amounts provided are reasonable. These estimates are continually reviewed and adjusted as necessary. Such adjustments are reflected in current operations.

All significant intercompany balances and transactions have been eliminated. No material reclassifications have been made to the prior-period balances to conform to the current-period presentation.

(3) Summary of Significant Accounting Policies and Practices

(A)  Critical Accounting Policies

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

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management’s evaluation of the determination of (i) liability for unpaid losses and LAE, (ii) the amount and recoverability of amortization of DPAC, and (iii) estimates for our reserves with respect to finance contracts, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates, which are described in greater detail in Footnote 2 of the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2014, which we included in the Company’s Annual Report on Form 10-K which was filed with the SEC on March 16, 2015.

- 10 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

We believe that there were no significant changes in those critical accounting policies and estimates during the first three months of fiscal 2015. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Form 10-Q with the Audit Committee of our Board of Directors.

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

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 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.

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.”

- 11 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

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.

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

The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on March 31, 2015 and December 31, 2014. Changes in interest rates subsequent to March 31, 2015 and December 31, 2014 may affect the fair value of our investments.

The carrying amounts for the following financial instrument categories approximate their fair values at March 31, 2015 and December 31, 2014 because of their short-term nature: cash and short-term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, claims payments outstanding, accounts payable and accrued expenses.

(B) Impact of New Accounting Pronouncements

In April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

In February 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-02,  Consolidation (Topic 810): Amendments to the Consolidation Analysis  (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements and significantly changes the consolidation analysis required. The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (i) modify the evaluation of whether limited partnership and similar legal entities are VIEs ,(ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Act of 1940 for registered money market funds. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

- 12 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

In June 2014, the FASB issued Accounting Standard Update (“ASU”) No. 2014-12: Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, a consensus of the FASB Emerging Issues Task Force.  The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period.  That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved.  The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a non-vesting condition that affects the grant-date fair value of an award.  The amendments in this ASU provide explicit guidance for those awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

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. 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.

- 13 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

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.

- 14 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

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

(C) Stock Options

Pursuant to FASB issued guidance, compensation cost recognized during the three months ended March 31, 2015 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the guidance.

(D) Earnings per Share

Basic earnings per share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share (“Diluted EPS”) is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period presented.

(E) Reclassifications

No material reclassification of the 2014 financial statements was necessary to conform to the 2015 presentation.

(4) Commitments and Contingencies

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

(A) Insured Claim Activity

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

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

The Company also faces, in the ordinary course of business, lawsuits that seek damages beyond policy limits. The Company continually evaluates potential liabilities and reserves for litigation of these types 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.

- 15 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

(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.

FNIC is also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. FNIC was not assessed by the JUA Plan during 2015 or 2014. Future assessments by this association are undeterminable at this time.

(C) Operational Matters

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for 2011 - 2014 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities. The Company’s 2011 federal tax return was reviewed by the IRS and a “no change” report was issued indicating that the IRS is in agreement with the tax positions presented on the 2011 return. The 2013 federal and state income tax returns were timely filed by the extended filing deadline of September 15, 2014.  The Company does not have any known uncertain tax positions and all tax positions are evaluated in accordance with FIN 48.  Any change to or resolution of tax reserves could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

The Company has recorded a net deferred tax liability of $1.9 million as of March 31, 2015 compared with$1.3 million as of December 31, 2014.

The calculation of current and deferred income taxes presents management’s assessment of the amount of current and future taxes to be paid. The calculation of deferred tax assets and liabilities is in accordance with ASC 740. These assets and liabilities may be impacted if new information not previously available is considered in future analysis and calculations. Because of the unpredictability and complexity of these future uncertainties the ultimate resolution of the tax payment may be an amount that is materially different from the current estimate of the tax liabilities. As of March 31, 2015 the Company has recorded a net deferred tax liability of $1.9 million. The primary reason for the increase in deferred tax liabilities include the tax impact of the appreciation in the market value of the available-for-sale securities.  Any change in circumstances leading to a change in the tax liability would be recorded in the period that the change in circumstances occurs.

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. Our original lease for this office space was scheduled to expire in May 2017. During March 2014, we extended our lease term to expire in August 2019 and expanded the leased premises to include an additional 13,642 square feet. All of our operations are consolidated within these facilities. 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.

- 16 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

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

Fiscal Year	Payments
	(Dollars in Thousands)
2015		545
2016		714
2017		726
2018		740
Thereafter		502
Total	$	3,227

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

(5) Investments

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.”

Total investments increased $5.6 million, or 1.7%, to $336.4 million as of March 31, 2015, compared with $330.8 million as of December 31, 2014.

The debt and equity securities that are available-for-sale and carried at fair value represent 98% of total investments as of March 31, 2015 and December 31, 2014.

We did not hold any trading investment securities during the three months ended March 31, 2015.

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;

- 17 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

· 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 the three months ended March 31, 2015 and the three months ended March 31,  2014, respectively, in connection with the process, we have not charged operations with investment losses.

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

As of March 31, 2015 and December 31, 2014, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of March 31, 2015, 78% of our debt portfolio was in diverse industries and 22% was in United States government bonds. As of March 31, 2015, approximately 88% of our equity holdings were in equities related to diverse industries and 12% were in mutual funds. As of December 31, 2014, 77% of our debt portfolio was in diverse industries and 23% is in United States government bonds. As of December 31, 2014, approximately 88% of our equity holdings were in equities related to diverse industries and 12% were in mutual funds.

As of March 31, 2015 and December 31, 2014, we have classified $7.5 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 the three months ended March 31, 2015 and 2014, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

- 18 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

(A) Debt and Equity Securities

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

	March 31, 2015					December 31, 2014
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	59,551		17.70	%	$	62,323		18.84	%
Obligations of states and political subdivisions		92,172		27.40	%		91,614		27.70	%
Corporate		125,020		37.18	%		119,024		35.99	%
International		11,450		3.40	%		11,138		3.37	%
		288,193		85.68	%		284,099		85.90	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,564		1.36	%		4,490		1.36	%
Corporate		2,701		0.80	%		2,681		0.81	%
International		197		0.06	%		246		0.07	%
		7,462		2.22	%		7,417		2.24	%
Total debt securities		295,655		87.90	%		291,516		88.14	%
Equity securities, at market:		40,726		12.10	%		39,247		11.86	%
Total investments	$	336,381		100.00	%	$	330,763		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015					2014
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(Dollars in Thousands)
Debt securities	$	515		$	34,860	$	135		$	9,668
Equity securities		1,395			3,084		1,610			4,815
Total realized gains		1,910			37,944		1,745			14,483
Debt securities		(103	)		15,072		(70	)		3,699
Equity securities		(103	)		459		(344	)		1,338
Total realized losses		(206	)		15,531		(414	)		5,037
Net realized gains on investments	$	1,704		$	53,475	$	1,331		$	19,520

Net realized investment gains totaled $1.7 million for the three months ended March 31, 2015, compared with $1.3 million during the three months ended March 31, 2014.

- 19 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at March 31, 2015 and December 31, 2014 is as follows.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
March 31, 2015
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	58,136	$	1,466	$	53	$	59,549
Obligations of states and political subdivisions		91,125		1,102		55		92,172
Corporate		122,736		2,396		111		125,021
International		11,340		118		7		11,451
	$	283,337	$	5,082	$	226	$	288,193
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,564	$	54	$	131	$	4,487
Corporate		2,701		52		1		2,752
International		197		3		-		200
	$	7,462	$	109	$	132	$	7,439
Equity securities - common stocks	$	31,200	$	10,231	$	705	$	40,726
December 31, 2014
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	61,376	$	1,022	$	75	$	62,323
Obligations of states and political subdivisions		90,728		956		70		91,614
Corporate		117,778		1,578		332		119,024
International		11,139		53		54		11,138
	$	281,021	$	3,609	$	531	$	284,099
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,490	$	41	$	225	$	4,306
Corporate		2,681		31		5		2,707
International		246		1		1		246
	$	7,417	$	73	$	231	$	7,259
Equity securities - common stocks	$	29,908	$	9,836	$	497	$	39,247

- 20 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of March 31, 2015.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	54	$	49	$	5
Obligations of states and political subdivisions		55		55		-
Corporate		111		68		43
International		5		5		-
		225		177		48
Equity securities:
Common stocks		706		672		34
Total debt and equity securities	$	931	$	849	$	82

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of December 31, 2014.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	75	$	22	$	53
Obligations of states and political subdivisions		70		66		4
Corporate		332		260		72
International		54		54		-
		531		402		129
Equity securities:
Common stocks		497		461		36
Total debt and equity securities	$	1,028	$	863	$	165

Below is a summary of debt securities at March 31, 2015 and December 31, 2014, by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Due in one year or less	$	17,357	$	17,355	$	16,777	$	16,797
Due after one through five years		169,008		170,974		173,236		174,273
Due after five through ten years		104,439		107,274		98,404		100,259
Due after ten years		26		33		26		33
Total	$	290,830	$	295,636	$	288,443	$	291,362

- 21 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

United States Treasury notes with a book value of $64,639 and $2,055,445, maturing in 2016 and 2022, and a certificate of deposit with a book value of $0.3 million, were on deposit with the Florida OIR as of March 31, 2015, as required by law for FNIC and Monarch Insurance, respectively, and are included with other investments held until maturity.

United States Treasury notes with a book value of $61,465 and $2,208,588, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2014, as required by law for FNIC, and are included with other investments held until maturity.

The table below sets forth investment results for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	(Dollars in Thousands)
Interest on debt securities	$	1,342	$	895
Dividends on equity securities		106		111
Interest on cash and cash equivalents		98		1
Total investment income	$	1,546	$	1,007
Net realized gains	$	1,704	$	1,331

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the three months ended March 31, 2015 and 2014, were approximately $56.3 million and $20.9 million, respectively.

The table below sets forth a summary of net realized investment gains during the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	(Dollars in Thousands)
Net realized gains
Debt securities	$	412	$	65
Equity securities		1,292		1,266
Total	$	1,704	$	1,331

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

	Unrealized Gains
	March 31, 2015		December 31, 2014
	(Dollars in Thousands)
Net unrealized gains
Debt securities	$	4,856	$	3,078
Equity securities		9,526		9,339
Total	$	14,382	$	12,417

- 22 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

(6) 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.

- 23 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

Assets measured at fair value on a recurring basis as of March 31, 2015, presented in accordance with this guidance, are as follows.

	As of March 31, 2015
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	39,419	$	20,130	$	-	$	59,549
Obligations of states and political subdivisions		-		92,172		-		92,172
Corporate		-		125,021		-		125,021
International		-		11,451		-		11,451
		39,419		248,774		-		288,193
Equity securities:
Common stocks		40,726		-		-		40,726
		40,726		-		-		40,726
Total debt and equity securities	$	80,145	$	248,774	$	-	$	328,919

Assets measured at fair value on a recurring basis as of December 31, 2014, presented in accordance with this guidance, are as follows.

	As of December 31, 2014
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	46,002	$	16,321	$	-	$	62,323
Obligations of states and political subdivisions		-		91,614		-		91,614
Corporate		-		119,024		-		119,024
International		-		11,138		-		11,138
		46,002		238,097		-		284,099
Equity securities:
Common stocks		39,247		-		-		39,247
		39,247		-		-		39,247
Total debt and equity securities	$	85,249	$	238,097	$	-	$	323,346

(7) 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 FHCF.

- 24 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

Quota share reinsurance is a pro rata agreement among the primary insurer and one or more reinsurers where each party shares a fixed and predetermined percentage of the program’s premiums and losses. Excess of loss risk transfer agreements involve the transfer of premium in exchange for reimbursement for claims, if they occur, as a result of specific events such as severe catastrophic weather. For quota share and excess of loss reinsurance, coverage is generally afforded based on meeting predetermined risk characteristics. In contrast, facultative reinsurance is negotiated between the primary insurer and the reinsurer(s) on a case-by-case basis with no obligation on either part to cede or assume share of the risk.

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

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

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

For the 2014–2015 hurricane season, the excess of loss and FHCF treaties insured the property lines for approximately $1.49 billion of aggregate catastrophic losses and LAE with a maximum single event coverage totaling approximately $1.01 billion, with the Company retaining the first $11.20 million in Florida and $3.0 million in Louisiana for losses and LAE from each event. Florida risks represent 98.5%, or $1.46 billion of the $1.49 billion of total aggregate catastrophic losses and LAE. The reinsurance program includes coverage purchased from the private market, which affords optional reinstatement premium protection that provides coverage beyond the first event, along with any remaining coverage from the FHCF. The FHCF only affords coverage for losses sustained in Florida. Coverage afforded by the FHCF totals approximately $546.3 million, or 37.4% of Florida’s $1.46 billion of aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire season, subject to maximum payouts, without regard to any particular insurable event.

The estimated cost to the Company for the excess of loss reinsurance products for the 2014–2015 hurricane season, inclusive of approximately $40.20 million payable to the FHCF and the prepaid automatic premium reinstatement protection, is approximately $117.0 million.

- 25 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

Included in this year’s program is a 30% quota share reinsurance treaty for the Company’s in-force new and renewal homeowners’ insurance program in the State of Florida. This two-year quota share reinsurance treaty provides 30% of $200 million of aggregate catastrophe coverage per year with maximum single event coverage of 30% of $100 million per year. The approximate cost of this quota share is projected to be $6.7 million per year, net of ceding commissions, and it is included in the $117.0 million amount referenced above. The quota share treaty contains commutation provisions for the Company to share profits based on loss experience during the term of the treaty.

The 30% quota share reinsurance treaty described above contains profit sharing provisions that will adjust over its two-year term depending on the Company’s loss experience from catastrophic and non-catastrophic events during the term. The frequency and severity of catastrophic events, coupled with non-catastrophic loss experience, will determine the ultimate profit share, if any. In accordance with GAAP, the Company will initially recognize an asset and liability and the resultant net income or loss. For example, deferred quota-share profit sharing totaled $8.8 million and $10.5 million as of March 31, 2015 and December 31, 2014, respectively. The deferred quota-share profit sharing was originally recorded at $14.0 million at the program’s July 1, 2014 inception and will continue to amortize over the life of the program. Subsequently, the Company will adjust the value of the asset and liability based on information available at the time of valuation. Upward and downward adjustments to the asset’s value will affect the Company’s results of operations by increasing or decreasing net income in the period of the adjustment.

- 26 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

The 2014-2015 private reinsurance companies and their respective A.M. Best Company (“A.M. Best”) and S&P ratings are listed in the table as follows.

	Reinsurer	A.M. Best Rating			S&P Rating
UNITED STATES
	American Agricultural Insurance Company		A-			NR
	American Standard Insurance Company of Wisconsin		A			NR
	AIG (National Union Fire Insurance Company of Pittsburgh, PA)		A			A+
	Everest Reinsurance Company		A+			A+
	Odyssey Reinsurance Company		A			A-
	QBE Reinsurance Corporation		A			A+
	RLI Insurance Company		A+			A+
	Transatlantic Reinsurance Company		A			A+
BERMUDA
	ACE Tempest Reinsurance Limited		A++			AA-
	Allied World Assurance Company, Limited		A			A
	Arch Reinsurance Limited		A+			A+
	Argo Reinsurance Limited		A			NR
	Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)		A-			A+
	Aspen Bermuda Limited		A			A
	AXIS Specialty Limited		A+			A+
	BGS Services (Bermuda) Limited/Lloyds Syndicate 2987		A			A+
	DaVinci Reinsurance Ltd		A			AA-
	Endurance Specialty Insurance Limited		A			A
	Hamilton Re, Limited		A-			NR
	Hiscox Insurance Company (Bermuda) Limited		A			NR
	Partner Reinsurance Company Limited		A+			A+
	Platinum Underwriters Bermuda Limited		A			A-
	Renaissance Reinsurance, Limited		A+			AA-
	Securis Re III Limited Bermuda		NR	*	**	NR
	Securis Re IV Limited Bermuda		NR	*	**	NR
	Tokio Millennium Re AG, Bermuda Branch		A++			AA-
	XL RE Limited		A			A+
UNITED KINGDOM
	A.F. Beazley Syndicate No. 623 (AFB)		A			A+
	A.F. Beazley Syndicate No. 2623 (AFB)		A			A+
	Amlin Syndicate No. 2001 (AML)		A			A+
	Antares Syndicate No. 1274 (AUL)		A			A+
	Ariel Syndicate No. 1910 (ARE)		A			A+
	ARK Syndicate No. 4020 (ARK)		A			A+
	Ascot Syndicate No. 1414 (ASC)		A			A+
	Barbican Syndication No. 1955 (BAR)		A			A+
	Canopius Syndicate No. 958 (CNP)		A			A+
	Canopius Syndicate No. 4444 (CNP)		A			A+
	Cathederal Syndicate No. 2010 (MMX)		A			A+
	Chaucer Syndicate No. 1084 (CSL)		A			A+
	Dale Underwriting Syndicate No. 1729 (DUW)		A			A+
	Faraday Syndicate No. 435 (FDY)		A			A+
	Hiscox Syndicate No. 0033 (HIS)		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)		A			A+
	MAP Underwriting Syndicate No. 2791 (MAP)		A			A+
	MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)		A			A+
	Novae Syndicate No. 2007 (NVA)		A			A+
	S.J.O, Catlin & Others No. 2003 (SJC)		A			A+
EUROPE
	Amlin AG, Switzerland, Bermuda Branch		A			A
	Hannover Rueck SE (obo Pillar Capital Management)		NR	*	**	NR
	Lansforsakringar Sak Forsakringsaktiebolag (publ)		NR			A
	SCOR Global P&C SE, Paris, Zurich Branch		A			A
ASIA
	China Reinsurance (Group) Corporation		A			NR
	Qatar Reinsurance Company LLC		A			A
* Reinstatement Premium Protection Program Participants
** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market value.

- 27 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

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.

- 28 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

The 2013-2014 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			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.

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, 2014 change to total insured value was an increase of $5.4 billion or 8.2% and the change to reinsurance premiums was an increase of $0.4 million. The September 30, 2013 change to total insured value was an increase of $8.7 billion or 25.3% and the change to reinsurance premiums was an increase of $8.3 million or 13.3%.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 2014–2015 and 2013–2014 excess of loss and FHCF treaties.

- 29 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

The quota share retrocessionaire reinsurance agreements require FNIC to securitize credit, regulatory and business risk. Fully funded trust agreements totaled $4.9 million as of March 31, 2015 and December 31, 2014.

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

(8) 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 Incurred but Not Yet Reported (“IBNR”).

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

	Period Ending
	March 31, 2015			December 31, 2014
	(Dollars in Thousands)
Balance at January 1	$	78,330		$	61,016
Less reinsurance recoverables		(12,534	)		(2,742	)
Net balance at January 1	$	65,796		$	58,274
Incurred related to
Current year	$	28,180		$	79,932
Prior years		(4,231	)		1,104
Total incurred	$	23,949		$	81,036
Paid related to
Current year	$	6,908		$	42,391
Prior years		11,396			31,123
Total paid	$	18,304		$	73,514
Net balance at period end	$	71,441		$	65,796
Plus reinsurance recoverables		13,034			12,534
Balance as of period end	$	84,475		$	78,330

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

Our review of the liability for losses and LAE includes a re-evaluation of the adequacy of reserve levels for prior year’s claims. We decreased the liability for losses and LAE for claims occurring in prior years by $4.2 million during the three months ended March 31, 2015. We increased the liability for losses and LAE for claims occurring in prior years by $1.1 million during the year ended December 31, 2014.

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.

- 30 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

(9) Stock Compensation Plans

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 March 31, 2015 and December 31, 2014, we had outstanding exercisable options to purchase 210,284 and 219,285 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 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.

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, 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 September 9, 2014, a total of 130,000 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, 45,000 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 50,000 shares were granted to the Company's directors and the remaining 20,000 shares were granted to other employees of the Company.

On December 9, 2014, a total of 50,000 restricted shares from the 2012 Plan were granted to the Company’s Chief Executive Officer and President pursuant to the vesting requirements and other terms and conditions set forth in the restricted stock agreement.

On March 10, 2015, a total of 66,140 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, 32,997 shares were granted to the Company's Chief Executive Officer and President and 9,551 shares were granted to the Company's Chief Financial Officer. An aggregate of 6,252 shares were granted to the Company's directors and the remaining 17,340 shares were granted to other employees of the Company.

- 31 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

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.

Activity in our stock option and incentive plans for the period from January 1, 2013 to March 31, 2015 is as follows.

	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, 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 January 1, 2014		3,000		$	8.67		523,521		$	4.54		249,500		$	5.54
Granted		-		$	-		-		$	-		268,648		$	5.54
Exercised		(3,000	)	$	8.67		(299,735	)	$	5.10		(68,988	)	$	-
Cancelled		-		$	-		(4,501	)	$	3.49		(1,359	)	$	5.54
Outstanding at January 1, 2015		-		$	8.67		219,285		$	3.79		447,801		$	5.54
Granted		-		$	-		-		$	-		66,140		$	28.79
Exercised		-		$	-		(9,001	)	$	2.98		(59,707	)	$	10.47
Cancelled		-		$	-		-		$	-		-		$	-
Outstanding at March 31, 2015		-		$	-		210,284		$	3.83		454,234		$	19.41

Options outstanding as of March 31, 2015 are exercisable as follows.

	2002 Plan
Options Exercisable at:	Number of  Shares		Weighted Average  Option  Exercise Price
March 31, 2015		153,584	$	3.83
December 31, 2015		56,700	$	3.83
December 31, 2016		-	$	3.83
December 31, 2017		-	$	3.83
December 31, 2018		-	$	3.83
December 31, 2019		-	$	3.83
Thereafter		-	$	3.83
Total options exercisable		210,284

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.

- 32 -

Federated National Holding Company

Notes to Condensed Consolidated Financial Statements

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 2015 and 2014 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 the three months ended March 31, 2015 are lower by approximately $752,000 and $469,000, respectively, than if it had continued to account for share-based compensation under APB guidance. The Company’s income from continuing operations before provision for income tax expense and net income for the three months ended March 31, 2014 are lower by approximately $192,000 and $119,000, respectively, than if it had continued to account for share-based compensation under APB guidance.

Basic and diluted earnings per share for the three months ended March 31, 2015 would have been $0.71 and $0.69, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.68 and $0.66, respectively. Basic and diluted earnings per share for the three months ended March 31, 2014 would have been $0.78 and $0.75, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.77 and $0.74, respectively.

Because the change in income taxes payable 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.

Summary information about the Company’s stock option plans at March 31, 2015 is as follows.

	Range of Exercise Price		Outstanding at March 31, 2015		Weighted Average Contractual Periods in Years		Weighted Average Exercise Price		Exercisable at March 31, 2015
2002 Plan	$	2.45 - $4.40		210,284		6.41	$	3.83		153,584

(10) Stockholders’ Equity

Capital Stock

The Company’s authorized capital consists of 1,000,000 shares of preferred stock, par value $0.01 per share, and 25,000,000 shares of common stock, par value $0.01 per share. As of March 31, 2015, there were no preferred shares issued or outstanding and there were 13,701,122 shares of common stock outstanding.

(11) Subsequent Events

The Company has entered into a joint venture to organize Monarch National Insurance Company (“Monarch Insurance”), which received its certificate of authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the “Florida OIR”) on March 19, 2015.  The Company’s joint venture partners are a majority-owned limited partnership of Crosswinds Holdings Inc., f/k/a C.A. Bancorp Inc., a publicly traded Canadian private equity firm and asset manager (“Crosswinds”); and Transatlantic Reinsurance Company (“TransRe”).

The Company and Crosswinds have each invested $14.0 million in Monarch Delaware Holdings LLC, the indirect parent company of Monarch Insurance (“Monarch Delaware”), for a 42.4% interest in Monarch Delaware (each holding 50% of the voting interests in Monarch Delaware).  TransRe has invested $5.0 million for a 15.2% non-voting interest in Monarch Delaware and has advanced an additional $5.0 million in debt evidenced by a six-year promissory note bearing 6% annual interest payable by Monarch National Holding Company (“Monarch Holding”), a wholly owned subsidiary of Monarch Delaware and the direct parent company of Monarch Insurance.

In connection with the organization of Monarch Insurance, the parties entered into the following agreements dated as of March 17, 2015:

· Monarch Insurance entered into a Managing General Agent and Claims Administration Agreement (the “Monarch MGA Agreement”) with FNU, a wholly owned subsidiary of the Company, pursuant to which FNU provides underwriting, accounting, reinsurance placement and claims administration services to Monarch.  For its services under the Monarch MGA Agreement, FNU will receive 4% of Monarch’s total written annual premium, excluding acquisition expenses payable to agents, for FNU’s managing general agent services; 3.6% of Monarch’s total earned annual premium for FNU’s claims administration services; and a per-policy administrative fee of $25 for each policy underwritten for Monarch.  The Company will also receive an annual expense reimbursement for accounting and related services.

· Monarch Insurance, Monarch Holding and Monarch Delaware (collectively, the “Monarch Entities”) entered into an Investment Management Agreement (the “Monarch Investment Agreement”) with Crosswinds AUM LLC, a wholly owned subsidiaryof Crosswinds (“Crosswinds AUM”), pursuant to which Crosswinds AUM will manage the investment portfolios of the Monarch Entities.  The management fee, on an annual basis, is 0.75% of assets under management up to $100 million; 0.50% of assets under management of more than $100 million but less than $200 million; and 0.30% of assets under management of more than $200 million.

· Monarch Insurance also entered into a Reinsurance Capacity Right of First Refusal Agreement with TransRe, pursuant to which TransRe has a right of first refusal for all quota share and excess of loss reinsurance that Monarch Insurance deems necessary in its sole discretion for so long as TransRe remains a member of Monarch Delaware or the Monarch Holding debt remains outstanding.  Pursuant to this agreement, TransRe has the right to provide, at market rates and terms, a maximum of 15% of any reinsurance coverage obtained by Monarch Delaware in any individual reinsurance contract.

· The Limited Liability Company Agreement of Monarch Delaware Holdings LLC dated as of March 17, 2015 (the “Monarch LLC Agreement”) provides that Monarch Delaware is managed by a seven-member Board of Managers, three of whom have been designated by the Company, three of whom have been designated by Crosswinds, and one who will be jointly selected by the Company and Crosswinds.  The Company’s designees are Michael H. Braun, the Company’s President and Chief Executive Officer and a director of the Company; Peter J. Prygelski, III, the Company’s Chief Financial Officer and a director of the Company; and Jenifer G. Kimbrough, a director of the Company.  Crosswinds’ designees are Colin King, Robert Wolf, and Charles S. Duncker.  The Company and Crosswinds have agreed to identify the seventh member of the Board of Managers within six months.

· The LLC Agreement provides that certain material transactions must be approved by a supermajority of the managers, including a termination, amendment or non-renewal of the Monarch MGA Agreement or the Monarch Investment Agreement.  The Company will be entitled to receive a termination fee equal to the aggregate fees paid under the Monarch MGA Agreement for the 12 calendar months prior to the date of termination, if the Monarch MGA Agreement is terminated other than for cause.  The Monarch LLC Agreement also provides the members with certain redemption, tag-along, drag-along and buy-sell rights.  In addition, the Monarch LLC Agreement provides the Company and Crosswinds with the right, for 24 months from the closing date, to participate in certain other transactions relating to the formation or acquisition of homeowners’ property and casualty insurers undertaken by the other.

In connection with the organization of Monarch Insurance, the Company’s Board of Directors approved amendments dated March 17, 2015 to the Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreements dated as of August 5, 2013 with each of Mr. Braun and Mr. Prygelski (each, a “Restrictive Covenant Agreement”) to permit each of them to hold their respective positions with the Monarch Entities while remaining employed by the Company.  Mr. Braun’s Restrictive Covenant Agreement was further amended to permit him to continue to hold his positions with the Monarch Entities if he is terminated without cause by the Company.  In addition, Mr. Braun’s Second Amended and Restated Employment Agreement dated as of January 18, 2012 (the “Employment Agreement”) was amended to extend the term of his Employment Agreement to four years from the date of the amendment (the “Term”) with automatic extensions so that at all times the balance of the Term is not less than two years unless sooner terminated as provided in the Employment Agreement.

- 33 -

Federated National Holding Company

General information about Federated National Holding Company can be found at www.FedNat.com; however, the information that can be accessed through our web site is not part of our report. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 available free of charge on our web site, as soon as reasonably practicable after they are electronically filed with the SEC.

Item 2

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

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and information included under this Item 2 and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2015 (“Form 10-K”). Unless the context requires otherwise, as used in this Form 10-Q, the terms “FNHC” “Company,” “we,” “us” and “our,” refers to Federated National Holding Company and its subsidiaries. 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 23 years.

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q for the three months ended March 31, 2015 (“Form 10-Q”)  or in documents that are incorporated by reference that are not historical fact are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements.  The risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions and projections relating to unpaid losses and loss adjustment expenses (“LAE”) and other accounting policies, losses from the nine hurricanes that occurred in fiscal years 2005 and 2004 and in other estimates, assumptions and projections contained in this Form 10-Q; inflation and other changes in economic conditions (including changes in interest rates and financial markets); the impact of new regulations adopted in Florida which affect the property and casualty insurance market; the costs of reinsurance, assessments charged by various governmental agencies; pricing competition and other initiatives by competitors; our ability to obtain regulatory approval for requested rate changes and the timing thereof; legislative and regulatory developments; the outcome of various litigation matters pending against us, including the terms of any settlements; risks related to the nature of our business; dependence on investment income and the composition of our investment portfolio; the adequacy of our liability for loss and loss adjustment expense; insurance agents; claims experience; ratings by industry services; catastrophe losses; reliance on key personnel; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail); changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs; and other matters described from time to time by us in this report, and in our other  filings with the SEC, including the Company’s Form 10-K.

You are cautioned not to place reliance on these forward-looking statements, which are valid only as of the date they were made.  The Company undertakes no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.  In addition, readers should be aware that Generally Accepted Accounting Principles (“GAAP”) prescribes when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods.

- 34 -

Federated National Holding Company

Overview

FNHC is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents.

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

Our wholly owned insurance subsidiary is Federated National Insurance Company (“FNIC”). 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 3,800 independent agents, of which approximately 2,300 actively sell and service our products, FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines, and personal 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. FNIC also underwrites homeowners’ insurance in Alabama and Louisiana and just became admitted in South Carolina to underwrite homeowners insurance. Additionally, we underwrite personal automobile insurance in Georgia and Texas.

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

We previously entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with Federated Mutual Insurance Company (“Federated Mutual”) pursuant to which, among other things, we may continue to use “Federated” until at least August 30, 2020, after which time we have agreed to either cease using “Federated” in commerce or otherwise adopt and use trade names that are not confusingly similar to Federated Mutual’s trademarks.  We continue to develop our brand under the “FedNat” name, which is the name by which agents generally know us.

Organization of Monarch National Insurance Company

The Company has entered into a joint venture to organize Monarch National Insurance Company (“Monarch Insurance”), which received its certificate of authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the “Florida OIR”) on March 19, 2015.  The Company’s joint venture partners are a majority-owned limited partnership of Crosswinds Holdings Inc., f/k/a C.A. Bancorp Inc., a publicly traded Canadian private equity firm and asset manager (“Crosswinds”); and Transatlantic Reinsurance Company (“TransRe”).

The Company and Crosswinds have each invested $14.0 million in Monarch Delaware Holdings LLC, the indirect parent company of Monarch Insurance (“Monarch Delaware”), for a 42.4% interest in Monarch Delaware (each holding 50% of the voting interests in Monarch Delaware).  TransRe has invested $5.0 million for a 15.2% non-voting interest in Monarch Delaware and has advanced an additional $5.0 million in debt evidenced by a six-year promissory note bearing 6% annual interest payable by Monarch National Holding Company (“Monarch Holding”), a wholly owned subsidiary of Monarch Delaware and the direct parent company of Monarch Insurance.

In connection with the organization of Monarch Insurance, the parties entered into the following agreements dated as of March 17, 2015:

· Monarch Insurance entered into a Managing General Agent and Claims Administration Agreement (the “Monarch MGA Agreement”) with FNU, a wholly owned subsidiary of the Company, pursuant to which FNU provides underwriting, accounting, reinsurance placement and claims administration services to Monarch.  For its services under the Monarch MGA Agreement, FNU will receive 4% of Monarch’s total written annual premium, excluding acquisition expenses payable to agents, for FNU’s managing general agent services; 3.6% of Monarch’s total earned annual premium for FNU’s claims administration services; and a per-policy administrative fee of $25 for each policy underwritten for Monarch.  The Company will also receive an annual expense reimbursement for accounting and related services.

· Monarch Insurance, Monarch Holding and Monarch Delaware (collectively, the “Monarch Entities”) entered into an Investment Management Agreement (the “Monarch Investment Agreement”) with Crosswinds AUM LLC, a wholly owned subsidiaryof Crosswinds (“Crosswinds AUM”), pursuant to which Crosswinds AUM will manage the investment portfolios of the Monarch Entities.  The management fee, on an annual basis, is 0.75% of assets under management up to $100 million; 0.50% of assets under management of more than $100 million but less than $200 million; and 0.30% of assets under management of more than $200 million.

· Monarch Insurance also entered into a Reinsurance Capacity Right of First Refusal Agreement with TransRe, pursuant to which TransRe has a right of first refusal for all quota share and excess of loss reinsurance that Monarch Insurance deems necessary in its sole discretion for so long as TransRe remains a member of Monarch Delaware or the Monarch Holding debt remains outstanding.  Pursuant to this agreement, TransRe has the right to provide, at market rates and terms, a maximum of 15% of any reinsurance coverage obtained by Monarch Delaware in any individual reinsurance contract.

· The Limited Liability Company Agreement of Monarch Delaware Holdings LLC dated as of March 17, 2015 (the “Monarch LLC Agreement”) provides that Monarch Delaware is managed by a seven-member Board of Managers, three of whom have been designated by the Company, three of whom have been designated by Crosswinds, and one who will be jointly selected by the Company and Crosswinds.  The Company’s designees are Michael H. Braun, the Company’s President and Chief Executive Officer and a director of the Company; Peter J. Prygelski, III, the Company’s Chief Financial Officer and a director of the Company; and Jenifer G. Kimbrough, a director of the Company.  Crosswinds’ designees are Colin King, Robert Wolf, and Charles S. Duncker.  The Company and Crosswinds have agreed to identify the seventh member of the Board of Managers within six months.

· The LLC Agreement provides that certain material transactions must be approved by a supermajority of the managers, including a termination, amendment or non-renewal of the Monarch MGA Agreement or the Monarch Investment Agreement.  The Company will be entitled to receive a termination fee equal to the aggregate fees paid under the Monarch MGA Agreement for the 12 calendar months prior to the date of termination, if the Monarch MGA Agreement is terminated other than for cause.  The Monarch LLC Agreement also provides the members with certain redemption, tag-along, drag-along and buy-sell rights.  In addition, the Monarch LLC Agreement provides the Company and Crosswinds with the right, for 24 months from the closing date, to participate in certain other transactions relating to the formation or acquisition of homeowners’ property and casualty insurers undertaken by the other.

Our executive offices are located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 and our telephone number is (800) 293-2532.

- 35 -

Federated National Holding Company

Our Subsidiaries

During the three months ended March 31, 2015, 91.7%, 3.7%, 1.4% and 3.2% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively. During the three months ended March 31, 2015, $19.7 million or 20.1% of the $97.8 million of the 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 FNIC products. The $19.7 million of homeowners’ premiums produced under this agreement with ISA represents 82.6% of the total increase in the sale of homeowners’ policies during the three months ended March 31, 2015. During the three months ended March 31, 2014, $11.6 million or 15.7%of the $74.0 million of the homeowners’ premiums we underwrote were produced under an agency agreement with ISA. This network of agents began writing for FNIC in March 2013. During the three months ended March 31, 2014, 91.2%, 3.9%, 1.9% and 3.0% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively.

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

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

FedNat Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, Inc., 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, Nevada, South Carolina and Texas. FNU has contracted with other unaffiliated insurance companies to sell personal umbrella 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 per policy fee which ranges from $25 to $55 and a commission fee from its affiliate, FNIC, which totaled 4% during the three months ended March 31, 2015. The Florida OIR periodically reviews our managing general agent’s fee structure to ensure that it is neither excessive nor inadequate to operate.

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

During 2014, the Florida OIR approved an application to allow the claims administration operations of FNA to be assumed by FNU. Under the amended managing general agency agreement between FNU and FNIC, FNU will provide the same claims administration services under the same fee structure. The combination of these services in FNU had no effect on consolidated net income.

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

- 36 -

Federated National Holding Company

Insurance Markets in Which We Operate

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

In Florida, more than 100 companies compete with us in the homeowners’ insurance market.  Several of our larger competitors are Citizens Propery Insurance Corporation (“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.

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 in January 2014, for 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. Effective March 30, 2014 FNIC joined as a participating insurance company in the Clearinghouse.

Critical Accounting Policies

See Note 3, “Summary of Significant Accounting Policies” in the Notes to the Company’s condensed consolidated financial statements for the quarter ended March 31, 2015 included in Item 1 of this Quarterly Report on Form 10-Q for a discussion of the Company’s critical accounting policies.

New Accounting Pronouncements

See Note 3, “Summary of Significant Accounting Policies” in the Notes to the Company’s  condensed consolidated financial statements for the quarter ended March 31, 2015 included in Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements and their effect, if any, on the Company.

Analysis of Financial Condition

As of March 31, 2015 Compared with December 31, 2014

Our recent investment in Monarch National Holding Company (“MNHC”) has impacted our consolidated balance sheet at March 31, 2015 by inclusion of MNHC’s asset and liability line items and recognition of the non-controlling interest within shareholders’ equity.

Total Investments

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.”

- 37 -

Federated National Holding Company

Total investments increased $5.6 million, or 1.7%, to $336.4 million as of March 31, 2015, compared with $330.8 million as of December 31, 2014.

The debt and equity securities that are available-for-sale and carried at fair value represent 98% of total investments as of March 31, 2015 and December 31, 2014.

We did not hold any trading investment securities during the three months ended March 31, 2015.

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 the three months ended March 31, 2015 and the three months ended March 31,  2014, respectively, in connection with the process, we have not charged operations with investment losses.

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

As of March 31, 2015 and December 31, 2014, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of March 31, 2015, 78% of our debt portfolio was in diverse industries and 22% was in United States government bonds. As of March 31, 2015, approximately 88% of our equity holdings were in equities related to diverse industries and 12% were in mutual funds. As of December 31, 2014, 77% of our debt portfolio was in diverse industries and 23% is in United States government bonds. As of December 31, 2014, approximately 88% of our equity holdings were in equities related to diverse industries and 12% were in mutual funds.

- 38 -

Federated National Holding Company

As of March 31, 2015 and December 31, 2014, we have classified $7.5 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 the three months ended March 31, 2015 and 2014, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

Below is a summary of net unrealized gains (losses) as of March  31, 2015 and December 31, 2014, by category.

	Unrealized Gains (Losses)
	March 31, 2015		December 31, 2014
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	1,413	$	945
Obligations of states and political subdivisions		1,047		886
Corporate		2,284		1,249
International		111		(1	)
		4,855		3,079
Equity securities:
Common stocks		9,527		9,338
Total debt and equity securities	$	14,382	$	12,417

The net unrealized gain of $14.4 million is inclusive of $0.9 million of unrealized losses; $0.2 million of unrealized losses are from debt securities and $0.7 million of unrealized losses are from equity securities.

The $0.2 million of unrealized losses from debt securities are made up mainly of losses from corporate securities. 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 March 31, 2015 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 $0.7 million of unrealized losses from equity securities are from common stocks and mutual funds held in diverse industries as of March 31, 2015. 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 March 31, 2015.

- 39 -

Federated National Holding Company

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

	March 31, 2015					December 31, 2014
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	59,551		17.70	%	$	62,323		18.84	%
Obligations of states and political subdivisions		92,172		27.40	%		91,614		27.70	%
Corporate		125,020		37.18	%		119,024		35.99	%
International		11,450		3.40	%		11,138		3.37	%
		288,193		85.68	%		284,099		85.90	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,564		1.36	%		4,490		1.36	%
Corporate		2,701		0.80	%		2,681		0.81	%
International		197		0.06	%		246		0.07	%
		7,462		2.22	%		7,417		2.24	%
Total debt securities		295,655		87.90	%		291,516		88.14	%
Equity securities, at market:		40,726		12.10	%		39,247		11.86	%
Total investments	$	336,381		100.00	%	$	330,763		100.00	%

Cash and Short-Term Investments

Cash and short-term investments, which include cash, certificates of deposits, and money market accounts, increased $48.0 million, or 119.5%, to $88.2 million as of March 31, 2015, compared with $40.2 million as of December 31, 2014. The increase in cash and short-term investments is due to our $25.6 million increase in gross premiums written during the same period, the investment of $18.9 million from the joint venture partners Monarch Delaware Holdings LLC, the parent of Monarch National Holding Company (“Monarch Holding”) and a $5.0 million loan to Monarch Holding from Transatlantic Reinsurance Company, reduced by $0.8 million disbursed to our joint venture partners to reimburse start-up costs incurred.

Prepaid Reinsurance Premiums

Prepaid reinsurance premiums decreased $8.5 million, or 15.5%, to $46.0 million as of March 31, 2015, compared with the $54.5 million as of December 31, 2014 as the result of the amortization of our payment patterns, in addition to a decrease in ceded unearned premiums on the Property 30% Quota Share reinsurance agreement effective July 1, 2014. 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 $2.5 million, or 9.3%, to $29.8 million as of March 31, 2015, compared with $27.3 million as of December 31, 2014.

Our homeowners’ insurance premiums receivable increased $2.3 million, or 10.5%, to $24.7 million as of March 31, 2015, compared with $22.4 million as of December 31, 2014. Our commercial general liability insurance premiums receivable increased $0.3 million, or 133.9%, to $0.5 million as of March 31, 2015, compared with $0.2 million as of December 31, 2014. Our automobile insurance premiums receivable decreased $0.1 million, or 2.5%, to $4.7 million as of March 31, 2015, compared with $4.8 million as of December 31, 2014. Our allowance for credit losses remained unchanged at $0.1 million as of March 31, 2015, compared with December 31, 2014.

Reinsurance Recoverable, Net

Reinsurance recoverable, net, increased $0.5 million, or 4.0%, to $13.0 million as of March 31, 2015, compared with $12.5 million as of December 31, 2014. The change is due to the payment patterns by our reinsurers, as influenced by the diminishing catastrophe related claims and to the Property 30% Quota Share agreement effective July 1, 2014. All amounts are current and deemed collectable. We believe concentrations of credit risk associated with our reinsurance recoverables, net, are not significant.

- 40 -

Federated National Holding Company

Deferred Policy Acquisition Costs (“DPAC”)

DPAC increased $2.2 million, or 15.8%, to $15.8 million as of March 31, 2015, compared with $13.6 million as of December 31, 2014. The change reflects in part the deferral of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned associated with our increased unearned premium, which during the three months ended March 31, 2015 total approximately $2.4 million. The $2.4 million increase was offset by a $0.2 million reduction associated with our Property 30% Quota Share agreement effective July 1, 2014.

Income Taxes Receivable

Income taxes receivable totaled $2.1 million as of March 31, 2015, compared with $1.8 million as of December 31, 2014. The change is due to estimated tax payments made in excess of the related accrued liability.

Property, Plant and Equipment, Net

Property, plant and equipment, net remained unchanged at $1.7 million as of March 31, 2015, compared with December 31, 2014.

Other Assets

Other assets increased $1.1 million, or 14.3%, to $8.3 million as of March 31, 2015, compared with $7.2 million as of December 31, 2014. Major components of other assets are shown in the following table. The accrued interest income receivable is primarily investment related and the commission income receivable is primarily related to the commission income sharing with our reinsurance intermediary.

	March 31, 2015		December 31, 2014
	(Dollars in Thousands)
Accrued interest income receivable	$	2,559	$	2,600
Commission receivable		3,454		2,077
Deposits		308		281
Prepaid expenses		1,318		1,496
Receivable for investments sold		-		31
Other		626		746
Total	$	8,265	$	7,231

Contingent Quota-Share Profit Sharing

Contingent quota-share profit sharing totaled $14.0 million as of March 31, 2015 and December 31, 2014. The $14.0 million is our current estimated profit-sharing benefit associated with our Property 30% Quota Share agreement effective July 1, 2014. The provisions of this program allow for profit-sharing up to approximately $32.0 million at the end of the two-year contract term. The ultimate benefit is based upon the occurrence of future catastrophic events and predefined non-catastrophic loss ratios.

Unpaid Losses and LAE

Unpaid losses and LAE increased $6.2 million, or 7.8%, to $84.5 million as of March 31, 2015, compared with $78.3 million as of December 31, 2014 in conjunction with the increase to net premiums earned during the three months ended March 31, 2015 as compared with the three months ended March 31, 2014.The $6.2 million increase was net of a $6.7 million reduction associated with our Property 30% Quota Share agreement effective July 1, 2014.

- 41 -

Federated National Holding Company

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

			March 31, 2015						December 31, 2014
	Case		Bulk		Total		Case		Bulk		Total
	(Dollars in Thousands)						(Dollars in Thousands)
Homeowners'	$	15,416	$	38,604	$	54,020	$	14,223	$	35,192	$	49,415
Commercial General Liability		5,803		12,487		18,290		5,646		12,505		18,151
Automobile		4,147		8,018		12,165		3,672		7,092		10,764
Total	$	25,366	$	59,109	$	84,475	$	23,541	$	54,789	$	78,330

Please see “Results of Operations - Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014 - Losses and LAE” for a description of the factors that affect unpaid losses and LAE.

Unearned Premium

Unearned premiums increased $11.0 million, or 5.7%, to $203.4 million as of March 31, 2015, compared with $192.4 million as of December 31, 2014. The change was due to a $10.1 million increase in unearned homeowners’ insurance premiums, a $0.3 million decrease in unearned flood insurance premiums, a $0.8 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. The $11.0 million total increase and the $10.1 million homeowners’ increase were net of a $1.9 million reduction associated with our Property 30% Quota Share agreement effective July 1, 2014.

Debt

Debt totaled $5.0 million as of March 31, 2015, compared with nothing as of December 31, 2014, reflecting the $5.0 million loan to Monarch Holding from Transatlantic Reinsurance Company.

Premium Deposits and Customer Credit Balances

Premium deposits and customer credit balancesincreased $3.9 million, or 53.0%, to $11.3 million as of March 31, 2015, compared with $7.4 million as of December 31, 2014. Premium deposits are monies received on policies not yet in-force, the change of which is due to the increase in gross written premiums during this same period.

Deferred Income Taxes, Net

Deferred income taxes, net, increased $0.6 million to a net liability balance of $1.9 million as of March 31, 2015, compared with $1.3 million as of December 31, 2014. Deferred income taxes, net, is comprised of approximately $10.1 million and $9.7 million of deferred tax assets, net of approximately $12.0 million and $11.0 million of deferred tax liabilities as of March 31, 2015 and December 31, 2014.

Claims Payments Outstanding

Claims payments outstanding decreased $0.5 million, or 4.9%, to $9.7 million as of March 31, 2015, compared with $10.2 million as of December 31, 2014. The claims payments outstanding relate 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 decreased $2.0 million, or 17.9%, to 9.0 million as of March 31, 2015, compared with $11.0 million as of December 31, 2014. The $2.0 million change includes decreases of $1.4 million for premium taxes and $1.1 million for the remittance of recouped assessments, as well as an increase of $0.5 million for commissions.

- 42 -

Federated National Holding Company

Deferred Quota-Share Profit Sharing

Deferred quota-share profit sharing totaled $8.8 million as of March 31, 2015, compared with $10.5 million as of December 31, 2014, and relates to the quota-share program. The deferred quota-share profit sharing was originally recorded at $14.0 million at the program’s July 1, 2014 inception and will continue to amortize over the life of the program.

Results of Operations

Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014

Our recent investment in Monarch National Holding Company (“MNHC”) has impacted our consolidated statement of operations for the three months ended March 31, 2015 by inclusion of MNHC’s revenue and expense line items and recognition of the non-controlling  interest when computing net income attributable to FNHC common stockholders.

Gross Premiums Written

Gross premiums written increased $25.6 million, or 31.6%, to $106.7 million for the three months ended March 31, 2015, compared with $81.1 million for the three months ended March 31, 2014. The following table denotes gross premiums written by major product line. The increase in gross premiums written during the 2015period is primarily due to the increase in the sale of homeowners’ policies. Beginning in 2013, our improved underwriting, risk management and product distribution enabled us to write more policies than in prior years.

	Three Months Ended March 31,
	2015					2014
			(Dollars in Thousands)
	Amount		Percentage			Amount		Percentage
Homeowners'	$	97,778		91.64	%	$	73,980		91.22	%
Commercial General Liability		3,970		3.72	%		3,144		3.88	%
Federal Flood		1,492		1.40	%		1,518		1.87	%
Automobile		3,462		3.24	%		2,460		3.03	%
Gross written premiums	$	106,702		100.00	%	$	81,102		100.00	%

The increase in the sale of homeowners’ policies by $23.8 million, or 32.2%, to $97.8 million for the three months ended March 31, 2015, compared with $74.0 million for the three months ended March 31, 2014, 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 March 31, 2015, 75.8% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $357.3 million (a 50.0% reduction of in-force premium), while 79.5% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $254.3 million, (a 50.4% reduction of in-force premium), as of March 31, 2014.

During the three months ended March 31, 2015, $19.7 million or 20.1% of the $97.8 million of the 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 FNIC products. The $19.7 million of homeowners’ premiums produced under this agreement with ISA represents 82.6% of the total increase in the sale of homeowners’ policies during the three months ended March 31, 2015. During the three months ended March 31, 2014, $11.6 million or 15.7% of the $74.0 million of the homeowners’ premiums we underwrote were produced under the agreement with ISA. This network of agents began writing for FNIC in March 2013.

During the three months ended March 31, 2015 and 2014, the change to the cumulative wind mitigation credits afforded our policyholders totaled $20.6 million and $37.6 million, respectively. These premium discounts have had a significant effect on both written and earned premium. Wind mitigation credits are 50.0% of the pre-credit premium, or $714.3 million, as of March 31, 2015, as compared with 50.4% of the pre-credit premium, or $504.5 million, as of March 31, 2014. Our number of in-force homeowners’ policies increased by approximately 14,300 or 7.9%, to approximately 196,900 as of March 31, 2015, compared with approximately 182,600 as of December 31, 2014.

- 43 -

Federated National Holding Company

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

The Company’s sale of commercial general liability policies increased $0.9 million, or 26.3%, to $4.0 million for the three months ended March 31, 2015, compared with $3.1 million for the three months ended March 31, 2014.

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

	Three Months Ended March 31,
	2015					2014
	Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
State
Alabama	$	60		1.51	%	$	24		0.76	%
Florida		3,604		90.78	%		2,998		95.36	%
Georgia		45		1.14	%		-		0.00	%
Louisiana		23		0.57	%		20		0.64	%
Texas		238		6.00	%		102		3.24	%
Total	$	3,970		100.00	%	$	3,144		100.00	%

The Company’s sale of auto insurance policies increased $1.0 million, or 40.7%, to $3.5 million for the three months ended March 31, 2015, compared with $2.5 million for the three months ended March 31, 2014.

We are currently rated by Demotech, Inc. (“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.

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.

Gross Premiums Ceded

Gross premiums ceded increased $22.7 million, or 684.9%, to $26.0 million for the three months ended March 31, 2015, compared with $3.3 million for the three months ended March 31, 2014. Gross premiums ceded relating to our homeowners’, commercial general liability, flood and automobile programs totaled$21.7 million, $0.1 million, $1.5 million and $2.7 million for 2015.Gross premiums ceded relating to our homeowners’ includes $20.7 million associated with our Property 30% Quota Share agreement effective July 1, 2014.

Decrease in Prepaid Reinsurance Premiums

The decrease in prepaid reinsurance premiums was $24.9 million for the three months ended March 31, 2015, compared with $16.8 million for the three months ended March 31, 2014. The increased charge to written premium is associated with the timing of our reinsurance payments measured against the term of the underlying reinsurance policies.

- 44 -

Federated National Holding Company

Increase in Unearned Premiums

The increase in unearned premiums was $11.0 million for the three months ended March 31, 2015, compared with $17.0 million for the three months ended March 31, 2014. The $11.0 million charge to written premium was due to a $10.1 million increase in unearned homeowners’ insurance premiums, a $0.3 million decrease in unearned flood premiums, a $0.8 million increase in unearned commercial general liability premiumsand a $0.4 million increase in unearned automobile insurance premiums during the three months ended March 31, 2015.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.The $11.0 million total increase and the $10.1 million homeowners’ increase were net of a $1.9 million reduction associated with our Property 30% Quota Share agreement effective July 1, 2014.

Net Premiums Earned

Net premiums earned increased $0.8 million, or 1.8%, to $44.8 million for the three months ended March 31, 2015, compared with $44.0 million for the three months ended March 31, 2014. The $0.8 million increase is net of an $18.8 million decrease due to accounting for our quota-share program. The net impact of the quota-share program was a $0.8 million charge to pre-tax income.  The reduction in net premiums earned and a charge to losses and LAE of $0.5 million was offset by an estimated $10.0 million reduction in our reinsurance costs, a reduction in amortization of deferred policy acquisition costs of $6.8 million, and the recognition of $1.7 million of the aforementioned accrued income resulting from the quota-share agreement.

The following table denotes net premiums earned by product line.

	Three Months Ended March 31,
	2015					2014
	Amount		Percentage			Amount		Percentage
			(Dollars in Thousands)
Homeowners'	$	41,034		91.62	%	$	40,926		93.01	%
Commercial General Liability		3,001		6.70	%		2,453		5.57	%
Automobile		751		1.68	%		625		1.42	%
Net premiums earned	$	44,786		100.00	%	$	44,004		100.00	%

The $0.1 million increase in homeowners’ net premiums earned is due to a$23.8 million increase in gross written premium as discussed, a $21.8 million increase in gross premiums ceded and a $1.9 million increase in the net change to prepaid reinsurance premiums and unearned premium.

The $0.8 million total increase and the $0.1 million homeowners’ increase were net of a $18.8 million reduction associated with our Property 30% Quota Share agreement effective July 1, 2014.

The $0.6 million increase in commercial general liability net premiums earned is a result of a $0.8 million increase in gross written premium, a less than $0.1 million increase in gross premiums ceded and a $0.3 million increase in the net change to unearned premium.

The $0.1 million increase in automobile net premiums earned is a result of a$1.0 million increase in gross written premium as discussed, a $0.8 million increase in gross premiums cededand a $0.1 million increase in the net change to prepaid reinsurance premiums and unearned premium.

Commission Income

Commission income increased $0.1 million, or 18.0%, to $1.1 million for the three months ended March 31, 2015, compared with $1.0 million for the three months ended March 31, 2014. 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.

- 45 -

Federated National Holding Company

Finance Revenue

Finance revenue increased $0.1 million, or 37.8%, to $0.4 million for the three months ended March 31, 2015, compared with $0.3 million for the three months ended March 31, 2014. The primary source of finance revenue is service fees and interest income from our direct billing program, wherein we accept receivables from our insureds.

Direct Written Policy Fees

Direct written policy fees increased $0.7 million, or 36.4%, to $2.5 million for the three months ended March 31, 2015, compared with $1.8 million for the three months ended March 31, 2014. The change is due to the increase in gross premiums written during this same period.

Net Investment Income

Net investment income increased $0.5 million, or 53.6%, to $1.5 million for the three months ended March 31, 2015, compared with $1.0 million for the three months ended March 31, 2014.

Our investment yields, net and gross of investment expenses, excluding equities and including cash, were 2.2% and 2.4% respectively, for the three months ended March 31, 2015. Our investment yields, net and gross of investment expenses, excluding equities and including cash, were 1.8% and 2.1%, respectively, for the three months ended March 31, 2014.

Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, were 2.3% and 2.5%, respectively, for the three months ended March 31, 2015. Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, were 1.9% and 2.3%, respectively, for the three months ended March 31, 2014.

See also “Analysis of Financial Condition as of March 31, 2015 Compared with December 31, 2014 – Investments” for a further discussion on our investment portfolio.

Net Realized Investment Gains

Net realized investment gains totaled $1.7 million for the three months ended March 31, 2015, compared with $1.3 million during the three months ended March 31, 2014.

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 the three months ended March 31, 2015 and the three months ended March 31, 2014, in connection with the process, we have not charged operations with investment losses.

- 46 -

Federated National Holding Company

The table below depicts the net realized investment gains (losses) by investment category during the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015			2014
	(Dollars in Thousands)
Realized gains:
Debt securities	$	515		$	135
Equity securities		1,395			1,610
Total realized gains		1,910			1,745
Realized losses:
Debt securities		(103	)		(70	)
Equity securities		(103	)		(344	)
Total realized losses		(206	)		(414	)
Net realized gains on investments	$	1,704		$	1,331

Other Income

Other income increased to $1.4 million for the three months ended March 31, 2015, compared with $0.3 million for the three months ended March 31, 2014. The increase is primarily due to the commission sharing agreement with our reinsurance intermediary.

Quota-Share Profit Sharing

Quota-share profit sharing totaled $1.5 million for the three months ended March 31, 2015, compared with nothing for the three months ended March 31, 2014. The deferred quota-share profit sharing was originally estimated and recorded at $14.0 million at the program’s July 1, 2014 inception, based upon the likely occurance of future catastrophic events and predefined non-catastrophic loss ratios. This estimate, subject to future adjustments, will continue to be amortized over the remaining life of the quota-share program.

The $1.5 million, net total includes a $1.8 million benefit associated with our Property 30% Quota Share agreement effective July 1, 2014 and a $0.3 million charge associated with our profit sharing agreement with SageSure.

Favorable adjustments to the deferred quota-share profit sharing total will increase the amount we recognize over the remaining life of the program. Unfavorable adjustments to the deferred quota-share profit sharing total will decrease the amount we recognize over the remaining life of the program and could result in a current period charge to operations for some or all of the previously recognized profit sharing.

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 $3.1 million, or 15.0%, to $23.9 million for the three months ended March 31, 2015, compared with $20.8 million for the three months ended March 31, 2014. The overall change includes a $3.0 million increase in our homeowners’ program, a $0.3 million increase in our commercial general liability programand a $0.2 million decrease in connection with our automobile program.

The change to losses and LAE typically reflects the change to reserves in response to the change in the number of policies we wrote during the same period. Homeowners’ losses and LAE for the three months ended March 31, 2015, are net of a $0.5 million increase relating to the quota-share program for which our actual net premiums earned were reduced by $18.8 million.

- 47 -

Federated National Holding Company

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.

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

			March 31, 2015						December 31, 2014
	Case		Bulk		Total		Case		Bulk		Total
	(Dollars in Thousands)						(Dollars in Thousands)
Homeowners'	$	15,416	$	38,604	$	54,020	$	14,223	$	35,192	$	49,415
Commercial General Liability		5,803		12,487		18,290		5,646		12,505		18,151
Automobile		4,147		8,018		12,165		3,672		7,092		10,764
Total	$	25,366	$	59,109	$	84,475	$	23,541	$	54,789	$	78,330

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 (“IBNR”). Periodic estimates by management of the ultimate costs required to settle all claim files are based on the Company’s analysis of historical data and estimations of the impact of numerous factors such as (i) per claim information; (ii) Company and industry historical loss experience; (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 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 $6.1 million during the three months ended March 31, 2015. This overall change includes a $4.6 million increase in reserves for our homeowners’ program, a $0.1 million increase in reserves for commercial general liability and a $1.4 million increase in reserves for our automobile program.

In accordance with GAAP and as discussed above, 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 the three months ended March 31, 2015 was 53.5% compared with 47.3% for the same period in 2014.

Operating and Underwriting Expenses

Operating and underwriting expenses increased $2.6 million, or 72.4%, to $6.3 million for the three months ended March 31, 2015, compared with $3.7 million for the three months ended March 31, 2014. The change is primarily due to a $0.8 million increase in premium tax, a $0.6 million increase in legal fees, a $0.4 million increase in credit card fees, a $0.2 million increase in 401K employer’s fees and a $0.6 million increase in other general expenses.

Salaries and Wages

Salaries and wages increased $2.1 million, or 68.5%, to $5.1 million for the three months ended March 31, 2015, compared with $3.0 million for the three months ended March 31, 2014 and is primarily due to an increased number of employees, as well as an increased expense for restricted shares and executive and employee bonuses. The charge to operations for stock-based compensation, in accordance with FASB guidance, was approximately $752,000 during the three months ended March 31, 2015 compared with approximately $192,000 for the three months ended March 31, 2014.

- 48 -

Federated National Holding Company

Amortization of Deferred Policy Acquisition Costs

Amortization of deferred policy acquisition costs decreased $3.4 million, or 40.3%, to $5.0 million for the three months ended March 31, 2015, compared with$8.4 million for the three months ended March 31, 2014.

The change to amortization of DPAC typically corresponds to the change in net premiums earned during the same period, and consists of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned, which for the three months ended March 31, 2015 totaled approximately $3.4 million. The $3.4 million was offset by a $6.8 million benefit associated with our Property 30% Quota Share agreement effective July 1, 2014.

Provision for Income Tax Expense

The provision for income tax expense was $5.7 million for the three months ended March 31, 2015, compared with $5.3 million for the three months ended March 31, 2014. The effective rate for income taxes was 38.08% for the three months ended March 31, 2015, compared with 38.65% for the three months ended March 31, 2014.

Non-Controlling Interest

The benefit to the consolidated statement of operations for non-controlling interest was $0.5 million for the three months ended March 31, 2015, compared with nothing for the three months ended March 31, 2014. MNHC experienced a $0.9 million loss during the three months ended March 31, 2015, during which time they generated no revenue and incurred expenses by way of reimbursing our joint venture partners for start-up costs incurred. The $0.9 million is included in our above discussed operating and underwriting expenses which totaled $6.3 million. Because our interest in MNHC is approximately 42.4%, our consolidated statement of operations is being adjusted for the other 57.6% non-controlling interest held by our joint-venture partners.

Net Income attributable to FNHC common stockholders

Net income attributable to FNHC common stockholders increased $0.9 million, or 10.2%, to $9.3 million for the three months ended March 31, 2015, compared with $8.4 million for the three months ended March 31, 2014.

Liquidity and Capital Resources

During the three months ended March 31, 2015, our primary sources of capital includedproceeds from the sale of investment securities, recognition of a non-controlling interest, increased unearned premiums, decreased prepaid reinsurance premiums, increased unpaid losses and LAE and increased debt. Additional sources of capital included increased premium deposits and customer credit balances, amortization of investment premium or discount, net, non-cash compensation, a tax benefit related to non-cash compensation, depreciation and amortization and exercised stock options. Because we are a holding company, we are largely dependent upon fees and commissions from our subsidiaries for cash flow.

During the three months ended March 31, 2015 and 2014,operations provided net operating cash flow of $33.6 million and $32.6 million, respectively.

During the three months ended March 31, 2015, operations generated$46.2 million of gross cash flow, due to an $11.0 million increase in unearned premiums, a $8.5 million decrease in prepaid reinsurance premiums, a $6.1 million increase in unpaid losses and LAE and a $5.0 million increase in debt. Additional sources of cash included a $3.9 million increase in premium deposits and customer credit balances, $1.3 million of amortization of investment premium or discount, net, $1.0 million non-cash compensation and $0.1 million of depreciation and amortization, all in conjunction with $9.3 million of net income.

During the three months ended March 31, 2015, operations used $12.6 million of gross cash flow, due to a a $2.5 million increase in premiums receivable, a $2.2 million increase in policy acquisition costs, a $2.0 million decrease in accounts payable and accrued expenses, a $1.7 million increase in contingent quota-share profit sharing and $1.7 million in net realized investment gains. Additional uses of cash included a $1.0 million increase in other assets, a $0.5 million increase in reinsurance recoverable, net, a $0.5 million decrease in claims payments outstanding, a $0.3 million increase in income taxes recoverable and a $0.2 million increase in deferred income tax expense, net of other comprehensive income.

- 49 -

Federated National Holding Company

During the three months ended March 31, 2015 and 2014, net cash used by investing activities was $3.3 million and $23.7 million, respectively. Our available-for-sale investment portfolio is highly liquid as it consists entirely of readily marketable securities.During the three months ended March 31, 2015, investing activitiesgenerated $56.3 million and used $59.6 million.

During the three months ended March 31, 2015 and 2014, net financing activities provided $17.7 million and $0.1 million, respectively. In 2015, the sources of cash in connection with financing activities included$18.0 million from the recognition of a non-controlling interest and $0.3 million from a tax benefit related to non-cash compensation, while the useage included $0.6 million for 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.

As discussed above, we have experienced significant growth, as evidenced by the 31.6% increase in gross premiums written during the first three months of 2015 as compared with the same period in 2014. 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.

As of March 31, 2015, 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 herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and LAE.

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

Item 3

Quantitative and Qualitative Disclosures 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.

- 50 -

Federated National Holding Company

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 March 31, 2015, approximately 90% 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 97% 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 summarizes, by type, our investments as of March 31, 2015 and December 31, 2014.

	March 31, 2015					December 31, 2014
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	59,551		17.70	%	$	62,323		18.84	%
Obligations of states and political subdivisions		92,172		27.40	%		91,614		27.70	%
Corporate		125,020		37.18	%		119,024		35.99	%
International		11,450		3.40	%		11,138		3.37	%
		288,193		85.68	%		284,099		85.90	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,564		1.36	%		4,490		1.36	%
Corporate		2,701		0.80	%		2,681		0.81	%
International		197		0.06	%		246		0.07	%
		7,462		2.22	%		7,417		2.24	%
Total debt securities		295,655		87.90	%		291,516		88.14	%
Equity securities, at market:		40,726		12.10	%		39,247		11.86	%
Total investments	$	336,381		100.00	%	$	330,763		100.00	%

Available-for-sale debt securities are carried on the balance sheet at market and held-to-maturity debt securities are carried on the balance sheet at amortized cost. As of March  31, 2015 and December 31, 2014, debt securities has 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.

	March 31, 2015					December 31, 2014
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
AAA	$	33,828		11.45	%	$	40,119		13.76	%
AA		123,529		41.78	%		125,385		43.01	%
A		75,162		25.42	%		67,818		23.26	%
BBB		62,812		21.24	%		58,172		19.96	%
Not rated		324		0.11	%		22		0.01	%
	$	295,655		100.00	%	$	291,516		100.00	%

- 51 -

Federated National Holding Company

The following table summarizes, by maturity, the debt securities as of March 31, 2015 and December 31, 2014.

	March 31, 2015					December 31, 2014
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
Matures In:
One year or less	$	17,343		5.87	%	$	16,796		5.76	%
One year to five years		170,942		57.82	%		174,260		59.78	%
Five years to 10 years		107,337		36.30	%		100,427		34.45	%
More than 10 years		33		0.01	%		33		0.01	%
Total debt securities	$	295,655		100.00	%	$	291,516		100.00	%

At March 31, 2015, the duration of the debt portfolio was approximately 3.8 years.

The following table provides information about the financial instruments as of March 31, 2015 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.

	2015			2016			2017			2018			2019			Thereafter			Total			Carrying Amount
Principal amount by expected maturity:
United States government obligations and authorities	$	196		$	2,189		$	4,033		$	4,640		$	6,860		$	24,324		$	42,242		$	43,714
Obligations of states and political subdivisions		3,935			9,380			17,730			9,805			13,140			27,895			81,885			92,172
Corporate securities		3,320			16,109			19,889			18,527			14,837			38,050			110,732			118,274
International securities		491			2,087			2,822			1,955			1,315			2,617			11,287			11,648
Collateralized mortgage obligations		1,279			3,696			3,772			2,654			4,396			12,260			28,057			29,847
Equity securities, at market		-			-			-			-			-			-			-			40,726
All investments	$	9,221		$	33,461		$	48,246		$	37,581		$	40,548		$	105,146		$	274,203		$	336,381
Weighted average interest rate by expected maturity:
United States government obligations and authorities		0.38	%		1.87	%		0.70	%		1.31	%		1.70	%		2.31	%		1.92	%
Obligations of states and political subdivisions		4.27	%		4.72	%		4.57	%		4.99	%		5.04	%		4.84	%		4.79	%
Corporate securities		4.07	%		4.06	%		3.53	%		4.52	%		4.62	%		4.18	%		4.16	%
International securities		0.74	%		2.15	%		2.20	%		3.15	%		2.10	%		3.68	%		2.62	%
Collateralized mortgage obligations		5.28	%		5.56	%		3.93	%		4.03	%		4.02	%		3.85	%		4.19	%
Equity securities, at market		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
All investments		4.07	%		4.15	%		3.63	%		4.14	%		4.12	%		3.87	%		3.94	%

- 52 -

Federated National Holding Company

Item 4

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as of March 31, 2015. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of March 31, 2015, were effective to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by us in such reports 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.

There were no changes during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

- 53 -

Federated National Holding Company

Part II: OTHER INFORMATION

Item 1

Legal Proceedings

See Item 1 of Part I, “Financial Statements – Note 4 – Commitments and Contingencies.”

Item 1A

Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1, Risk Factors, in the Company’s Form 10-K for the fiscal year ended December 31, 2014.

Additional Risk Factors

The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

(a) None

(b) None

(c) None

Item 3

Defaults upon Senior Securities

(a) None

(b) None

Item 4

Mine Safety Disclosures

Not applicable

- 54 -

Federated National Holding Company

Item 5

Other Information

(a) On May 6, 2015, the Company entered into a Consulting Agreement with Bruce F. Simberg (the “Agreement”) pursuant to which Mr. Simberg will provide consulting services relating to legal, claims processes and compliance matters when and as requested by the Company's Board or management (including the head of claims administration).  Mr. Simberg, who had been a director of the Company until March 2015, is an attorney with significant experience in insurance defense.  The Agreement is for an initial one-year term that renews for additional one-year terms unless terminated by either party upon 30 days’ notice, and provides for the payment of a consulting fee of $10,000 per quarter.  Under the Agreement, Mr. Simberg is subject to non-disclosure, non-competition and non-solicitation covenants and has agreed to abide by the Company's insider trading policy and remain subject to Section 16 of the Securities Exchange Act of 1934, as amended.

(b) None

- 55 -

Federated National Holding Company

Item 6

Exhibits

10.1	Managing General Agent and Claims Administration Agreement dated as of March 17, 2015 between Monarch National Insurance Company and FedNat Underwriters, Inc.*
10.2	Limited Liability Company Agreement of Monarch Delaware Holdings LLC dated as of March 17, 2015*
10.3	Amendment to Employment Agreement and Restrictive Covenant Agreement effective as of March 17, 2015 between Federated National Holding Company and Michael H. Braun*
10.4	Non-Competition, Non-Disclosure and Non-Solicitation Agreement effective as of March 17, 2015 between Monarch Delaware Holdings LLC and Michael H. Braun*
10.5	Amendment No. 1 to the Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement effective as of March 17, 2015 between Federated National Holding Company and Peter J. Prygelski, III*
10.6	Second Amendment to Insurance Agency Master Agreement dated January 1, 2015 between Federated National Underwriters, Inc. and Ivantage Select Agency, Inc.*
10.7	Consulting Agreement dated as of May 6, 2015 between Bruce F. Simberg and Federated National Holding Company*
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. **

*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 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

- 56 -

Federated National Holding Company

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto 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)

Date: May 11, 2015

- 57 -

Federated National Holding Company

EXHIBIT INDEX

10.1	Managing General Agent and Claims Administration Agreement dated as of March 17, 2015 between Monarch National Insurance Company and FedNat Underwriters, Inc.*
10.2	Limited Liability Company Agreement of Monarch Delaware Holdings LLC dated as of March 17, 2015*
10.3	Amendment to Employment Agreement and Restrictive Covenant Agreement effective as of March 17, 2015 between Federated National Holding Company and Michael H. Braun*
10.4	Non-Competition, Non-Disclosure and Non-Solicitation Agreement effective as of March 17, 2015 between Monarch Delaware Holdings LLC and Michael H. Braun*
10.5	Amendment No. 1 to the Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement effective as of March 17, 2015 between Federated National Holding Company and Peter J. Prygelski, III*
10.6	Second Amendment to Insurance Agency Master Agreement dated January 1, 2015 between Federated National Underwriters, Inc. and Ivantage Select Agency, Inc.*
10.7	Consulting Agreement dated as of May 6, 2015 between Bruce F. Simberg and Federated National Holding Company*
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. **

*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 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

- 58 -

EX-10.1

Exhibit 10.1

Execution version

MANAGING GENERAL AGENCY

AND CLAIMS ADMINISTRATION AGREEMENT

("Agreement")

Between

FedNat Underwriters, Inc.

(Hereinafter called the "MGA")

And

Monarch National Insurance Company

(Hereinafter called the "Company")

Made as of the 17^th day of March, 2015.

WHEREAS, the Company is admitted to transact insurance business in the State of Florida and such other states identified in Schedule I of this Agreement, and authorized to issue policies of insurance in those states and may be admitted in additional jurisdictions in the future; and

WHEREAS, the Company desires MGA to act as its managing general agent with respect to insurance policies for the authorized insurance coverages as specifically set forth in this Agreement (the "Authorized Coverages") set forth in Schedule I to this Agreement (the applied for, issued coverages are sometimes referred to as "Policy(ies)"), in each state in which the Company is licensed and authorized to transact insurance, including renewals, issued from the Effective Date of this Agreement until terminated as hereinafter set forth; and

WHEREAS, MGA desires to produce, administer and manage the Policies and to adjust claims and provide other services in connection with such policies, including but not limited to marketing, claims analysis, general ledger accounting, information services, product and underwriting development and management, reinsurance negotiation and catastrophe risk management on behalf of the Company; and

NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the parties have agreed that the terms of this Agreement shall be effective as of March 17, 2015, (the "Effective Date") and do otherwise agree as follows:

ARTICLE I - GENERAL PRINCIPLES

1.1.In accordance with Section 626.7451, Florida Statutes ("F.S."), or such other laws and regulations of such other jurisdictions encompassed by this Agreement, the Company appoints MGA for the purpose of producing and handling Policies for the Authorized Coverages of business set forth in Schedule I and issued or renewed on or after the Effective Date of this Agreement.  MGA agrees to produce the Authorized Coverages of business in accordance with the territory and limits of liability set forth in Schedule I hereto and the Company's established and approved underwriting requirements and premiums for the Authorized Coverages of business.

1.2.The Company, relying upon the expertise of MGA, grants authority to MGA hereunder solely with respect to production and administration of the Policies.  Nonetheless, the Company being at risk and having ultimate responsibility and authority for the Policies issued by MGA, at all times shall have the overriding authority and discretion with respect to any decisions and all matters pertaining to the Polices and to the general welfare of the Company.

1.3.Consistent with the intention of the parties to produce an operating profit for the Company, MGA shall manage its affairs in accordance with the terms of the Agreement in an ethical and professional manner and in accordance with all applicable laws and regulations of the State of Florida or the applicable laws and regulations of such other states in which the Company is licensed and authorized to transact insurance.

1.4.The Company, relying upon the expertise of MGA, grants authority to MGA to solicit and negotiate reinsurance with respect to the programs authorized by the Company; but MGA acknowledges that the Company is a party to that certain Reinsurance Capacity Right of First Refusal Agreement, dated the date hereof, by and between the Company and Transatlantic Reinsurance Company (the “ROFR”), and MGA agrees to solicit and negotiate reinsurance on behalf of the Company in accordance with the terms and conditions of the ROFR. Nonetheless, the Company being at risk and having ultimate responsibility for all reinsurance contracts issued, will have the ultimate authority and discretion to approve or disapprove all contracts for reinsurance, retention levels and other aspects of the reinsurance program.

1.5The Term of this Agreement shall continue for a period of three (3) years from the Effective Date unless sooner terminated pursuant to the terms of this Agreement (the “Initial Term”).  This agreement shall automatically renew for additional one (1) year terms (each a “Renewal Term”) unless either party provides the other with written notice of intent not to renew at least one hundred and eighty (180) days prior to the expiration of the Initial Term or any Renewal Term.

ARTICLE II - UNDERWRITING AUTHORITY

2.1.Agents.  The Company hereby grants to MGA authority to accept applications to issue the Policies received through appointed licensed insurance agents ("Producing Agents") and agents authorized as "Brokering Agents" (as defined in Section 626.752, F.S. or as defined by other similar statutes in any state in which the Company issues Policies).  MGA may not authorize or facilitate the appointment of any insurance broker or agent, or any other entity, to issue Policies on behalf of the Company without the prior written consent of the Company.  MGA may not appoint a sub-managing general agent for the business of the Company.  The Company reserves the right, at the discretion of its Board of Directors, to appoint one or more sub-Managing General Agents for the business of the Company. MGA may not permit any of its sub-producers to serve on its Board of Directors.  MGA will comply with any underwriting guidelines promulgated by the Company.

2.2.Agent Agreements.  Any and all agreements with any insurance broker, agent, Producing Agent, Brokering Agent or other entity (hereinafter collectively called the "Agent") shall be made directly between MGA and such Agent.  Such agreements shall provide that with respect to any action taken or not taken by MGA in connection with a Policy(ies) or this Agreement, the Agent shall look solely to MGA for any and all expenses, costs, causes of action and damages suffered by the Agent.  Nothing in this Section is intended to create a cause or claim against MGA that the Agent would not otherwise have against the Company.

2.3.Agent Responsibility.  MGA shall process all Agent appointments made by the Company and bear sole responsibility to oversee the placement of business through Agents.  With respect to a Policy(ies) or this Agreement, MGA shall indemnify and hold the Company harmless and reimburse the Company for any and all fines and expenses levied against or incurred by the Company as a result of MGA accepting business from an unlicensed Agent, or the failure of the Company, MGA, or any Brokering Agent to comply with Section 626.752, F.S. regulating the exchange of business between insurer and Brokering Agents, unless such costs and expenses result solely from the Company's failure to take legally required or reasonably necessary specific actions recommended to the Company by MGA.'

2.4.Policy Services.  Pursuant to the terms and provisions of this Agreement, the Company hereby grants to MGA authority to receive and accept proposals of insurance from the Effective Date of this Agreement until the termination of this Agreement for the Authorized Coverages.  Such authority shall include the binding of coverage, the issuing and endorsing of Policies in the name of the Company, and the canceling and non-renewing of such binders and contracts when the best judgment of MGA dictates and in accordance with any underwriting guidelines promulgated by the Company.

2.5.Underwriting.  The Company grants MGA authority to provide the Policies pursuant to the underwriting guidelines provided in writing to MGA by the Company, as the same may be amended by the Company in its sole discretion from time to time (the “Underwriting Guidelines”).  Such Underwriting Guidelines shall include, but not be limited to, guidelines pertaining to the basis of the rates to be charged, types of risks to be written, maximum limits of liability, applicable exclusions, territorial limitations, policy cancellation provisions, and maximum policy period. All Underwriting Guidelines that the Company provides MGA, in writing, shall be deemed incorporated in this Agreement by reference and adoption.  The Company grants MGA authority to operate within written guidelines approved in writing by the Company, subject, however, to the professional judgment of supervisory underwriting personnel; and any Policy issued by or at the request of MGA which does not fall within such guidelines shall, at the Company's request, be promptly terminated, and MGA shall indemnify the Company from and against any liability thereunder.  MGA agrees to provide promptly to the Company such information as it may reasonably require in order to ensure that MGA is fairly allocating risk between the Company and any other affiliated insurer of MGA. MGA will at all times manage the Policies and the Company’s risk in accordance with the Underwriting Guidelines as determined by the Company from time to time.

2.6.One-Year Terms.  The Company only grants MGA authority to issue or have issued Policies having a maximum term of one year.

2.7.Policy Language.  The Company grants MGA authority to utilize only insurance contract wordings, endorsement wordings and rates that are approved by the Company and are properly filed and approved, to the extent necessary, by the appropriate regulatory authorities of the State of Florida or of such other states in which the Company is licensed and authorized to transact insurance.

2.8.MGA Appointment:   Maximum Annual Net Written Premium Production.  The Company appoints MGA to issue Policies on behalf of the Company in the State of Florida and such other states in which the Company is licensed and authorized to transact insurance.  Other than through MGA, Company agrees not to write the Authorized Coverages of business that the Company is duly licensed to write, or to appoint another managing general agent to write the Authorized Coverages of business that the Company is duly licensed to write, in the State of Florida or such other jurisdictions identified on Schedule I of this Agreement during the term of this Agreement as set forth in paragraph 1.5 herein (the "Term").  Under no circumstances shall MGA produce from the Authorized Coverages direct and assumed written premium in excess of $250,000,000 in any year without the express written approval of the Company. MGA shall not produce an amount of business requiring the Company to infuse additional capital or surplus solely as a result of such production, but MGA will not be liable to the extent any business is produced requiring an additional capital infusion or surplus due to the Company failing to advise MGA that the Company is approaching its yearly written premium limit.

2.9.Policyholder Information. The Company and MGA shall fully comply with the provisions of any applicable Federal laws, the laws of the State of Florida and the applicable laws of such other states in which the Company is licensed and authorized to transact insurance applicable to policyholder information. The policyholder information will be the property of the Company.

2.10.Expirations. In the event of the termination of this Agreement, MGA's records and the use and control of expirations of the Company's business produced by Agents registered or appointed by the Company shall be the property of the Company, and MGA will ensure that all agreements between the Agents and MGA so provide.  Upon such termination, MGA will turn over to the Company all such books and records and all policyholder information.  During the term of this Agreement and for five (5) years following its termination, MGA shall not, and shall not encourage any other person to, make any statement or take any action which has either the intention or the effect of disparaging the Company or its business.   During the term of this Agreement and for two (2) years following its termination, MGA and its affiliates agree that they shall not collaborate with any Agent to move a Policy from the Company to any issuer of insurance policies affiliated with MGA, nor take any other action reasonably calculated to cause an Agent to move any business away from the Company, including, but not limited to, offering or coordinating with any other issuer of insurance policies to offer a “Me Too” program with respect to the Policies.  In addition, MGA will not interfere, directly or indirectly, with the Company’s or any successor managing general agent’s renewal of any of the Company’s business.  Without limiting the foregoing, the Company agrees that advertising by an affiliate of MGA, including Federated National Insurance Company (“FNIC”), that is directed at the public at large regarding its products and services generally shall not violate this Section.

2.11.Premium Financing.  With respect to Policies, MGA shall have the authority to enter into agreements with premium finance companies ("PFCs"), to receive notices of premium financing, to receive proceeds of premium financing, and to receive and act upon notices and requests of cancellations from PFCs; but in entering into any agreement with a PFC, MGA will (a) promptly disclose the terms of such agreement to the Company, and (b) reserve the Company’s right (i) to terminate such agreement upon 30 days’ notice, and MGA will indemnify and hold harmless the Company from any penalties incurred as a result of such termination, and (ii) to cause such premium financing to be replaced by a competitive product offered by the Company or by another PFC in the marketplace.  MGA shall not delegate this authority to any Agent.  Subject to the PFCs contracts with the insureds and applicable statutes (e.g. F.S. §627.848) and rules and regulations of the State of Florida or of such other states in which the Company transacts insurance, and to the extent of the contract balances due the PFCs from the insureds, MGA shall return all unearned premium directly to the PFCs to the extent held by MGA and shall cause the Agents to return all unearned commission to the PFCs to the extent held by the Agents.

ARTICLE III - HANDLING OF FUNDS

3.1.Depository Account.  MGA shall accept in a fiduciary capacity, on behalf of the Company, all premiums, policies, fees, interest, and service charges collected and other funds relating to the business written under this Agreement.  The Company shall establish and maintain a "Depository Account" in a bank mutually agreed upon by MGA and the Company.  The bank must be a member of the Federal Reserve System whose accounts are insured by the Federal Deposit Insurance Corporation.  All premiums, policy fees, interest, and service charges collected by MGA shall be deposited into the Depository Account.  Deposits to the Depository Account are to be made daily or no less seldom than weekly if daily determination of the deposit amount required is not feasible.  Subject to the terms of this Agreement, the proceeds of the Depository Account shall be used for payments as directed by the Company.  There may be retained in such Depository Account no more than sixty (60) days of estimated claim payments and Allocated Loss Adjustment Expenses. It is acknowledged and agreed that any investment income earned and costs assessed in connection with the Depository Account belong to the Company.

3.2.No Commingling.  MGA shall not commingle any premium or escrow trust funds with personal accounts or other funds held by MGA in any other capacity.

3.3.Premiums.  MGA assumes responsibilities for, and shall promptly deposit into the Depository Account in accordance with Section 3.1 hereof, all premiums collected on Policies issued by or through MGA or on MGA's behalf for the Company.  MGA shall be responsible for the collection of all premiums due from Producing Agents, Brokering Agents and insureds for Policies issued hereunder.

3.4.Disbursement Account.  The Company will maintain and adequately fund a Disbursement Account ("Disbursement Account") for the payment by MGA of unearned premiums arising due to cancellation or endorsement of the Company's Policies produced by MGA.  The Company will provide MGA revocable signature authority over this account.

3.5.Bank Failure.  MGA shall not be liable for any loss which occurs by reason of the default or failure of the bank in which the Depository Account and Disbursement Account are maintained and such loss shall not affect MGA's obligations under this Agreement.

3.6.Return Commissions.  MGA shall refund to the Company unearned commissions on policy cancellations, reductions in premiums or any other return premiums at the same rate of which such commissions were originally retained.

3.7.Policy Fee.  MGA shall comply with the provisions   of Section 626.7451(11), F.S., and the applicable laws and regulations of such other states in which the Company is licensed and authorized to transact insurance, and shall be entitled to retain as fully earned upon payment by the customer any duly authorized and collected per-policy fee pursuant to such law(s).  The per-policy fee in Florida shall not exceed $25.00 or such other amount as may be authorized under Florida law or the amount established by applicable laws and regulations in such other states in which the Company is licensed and authorized to transact insurance, as applicable.  In no instance shall the aggregate of the per-policy fees for a placement of business authorized under Section 626.7451(11), F.S., when combined with any other per-policy fee charged by the Company, result in per-policy fees which exceed the aggregate amount of $25.00 or the amount as may be authorized by Florida law or the amount established by the applicable laws and regulations in such other states in which the Company is licensed and authorized to transact insurance, as applicable.  The per-policy fee shall be a component of the Company’s rate filing, if required by the applicable laws of each state in which the Company transacts business.

ARTICLE IV - OTHER REPORTS & REQUIREMENT

4.1.Underwriting Records and Financial Reporting.  MGA shall maintain separate, complete and orderly underwriting files or electronic files, records and accounts of all transactions involving the Company in accordance with generally accepted accounting principles (“GAAP”) and statutory accounting principles approved by the National Association of Insurance Commissioners and as modified by Florida law or the laws of such other states in which the Company is licensed and authorized to transact insurance and the regulations pertaining thereto (“SAP”), as applicable.  Furthermore, MGA will provide such reports as required by the Company to assist FNHC and Crosswinds Holdings Inc. (“Crosswinds”) in fulfilling their respective reporting obligations as public companies.

4.2.Inspection.  The Company or its authorized representatives shall have the right (but not the obligation) at all reasonable times during business hours of operations to inspect MGA's books, records and bank accounts, wherever located, which pertain to the business which is the subject of this Agreement and shall have the right to copy or make abstracts from such books and records.

4.3.Written Operating Procedures.  MGA shall establish and maintain written operating procedures regarding the issuance of all Policies and endorsements, as well as the collection of premiums related thereto.  Such procedures shall be forwarded to the Company and shall be subject to the Company's review, modification and written approval.

4.4.Reserved.

4.5.Records.  MGA shall ensure that copies of all Policies and applications and correspondence related to the Policies, either as hard copies, on microfiche or archived in electronic media shall be maintained, or otherwise readily accessible, by MGA and available for inspection by the Company.  The Company shall have access and the right to copy all accounts and records related to business written hereunder in a form usable by the Company.  MGA shall provide access to all of MGA's books, bank accounts, and records to the Florida Office of Insurance Regulation and Department of Financial Services (collectively, the "Department") or other applicable regulatory authorities in each state in which the Company transacts insurance in a form usable by the Department or such other regulatory authority.  All records shall be retained by MGA according to the provisions of Section 626.561, F.S., or the applicable laws and regulations of such other states in which the Company is licensed and authorized to transact insurance.  Upon termination of this Agreement, MGA will turn over all such records to the Company, which will not destroy these permanent copies without the written permission of MGA for the longer of five (5) years from the termination date of the Policy or the period specified by the applicable Florida statute regulating preservation of records or the other applicable laws and regulations of such other states in which the Company is licensed and authorized to transact insurance.

4.6.Complaints:  MGA and the Company's Duty to Forward Complaints.  MGA shall maintain and make available for inspection by the Company, a complaint log(s) of all written: (i) complaints and requests for assistance received by MGA or the Company from the Department or any other agency or department of the State of Florida or any other state or jurisdiction, at the request of an insured, claimant, lienholder, or any other interested party to a Policy or claim thereunder; and (ii) lawsuits and arbitrations.  The log(s) will include the name of the complainant, the Policy number and/or claim number, and the date the complaint was received.  MGA shall maintain copies of the complaints and MGA's written response regarding resolution and remedy of said complaint.  The Company shall forward to MGA, by next day delivery service, all complaints, time-demand correspondence, and subpoenas received by the Company relevant to MGA in connection with this Agreement. MGA shall send Notice to the Company as soon as MGA becomes aware of (i) a claim or threat of claim that threatens a bad faith cause of action or class action, or (ii) an intent to bring an administrative action against MGA or the Company on the part of the Florida Office of Insurance Regulation (“OIR”), the Florida Department of Financial Services (“DFS”), or any analogous administrative body in such other states in which the Company is licensed and authorized to transact insurance.

4.7.Licenses.  The Company and MGA shall maintain all licenses and regulatory approvals necessary to conduct the business covered under this Agreement.  MGA represents that it holds a currently effective managing agent's license in Florida and any other license required in such other jurisdictions in which the Company does business with MGA pursuant to this Agreement and agrees to maintain such license in good standing during the Term of this Agreement and any extensions thereof.

4.8.Cancellations.  Notwithstanding the authority granted to MGA by the Company, the Company may require MGA to terminate coverage provided by any Policy so long as such termination does not violate Florida law or the laws and regulations of any other state in which the Company is licensed and authorized to transact insurance.  If the Company exercises this right, the Company shall do so in a writing which includes the reasons for such termination and which instructs MGA to send appropriate non-renewal or cancellation notice as required by contract wording or relevant regulatory or statutory authority to terminate coverage.

4.9.Agent Licensing.  MGA is required and agrees to be in compliance with, and MGA shall make reasonable inquiry and take all reasonable steps to ascertain that all Agents are in compliance with, all state laws and regulations, which affect the Policies and the Agents.

4.10.IRS Forms.  MGA, or an affiliate designated by MGA and approved by the Company in writing, shall prepare and furnish each Agent with an IRS form 1099 each year when required.

4.11.Advertisement.  MGA shall obtain the approval of the Company before issuing any advertisement, circular, pamphlet or other publication, which contains the Company’s name or logo.

4.12.Errors and Omissions Coverage.  To further secure the Company, MGA shall maintain an errors and omissions insurance policy issued by an insurance carrier admitted in Florida, rated "B+" or better by A.M. Best, with policy limits of no less than an amount to be determined by the Board of Directors of the Company, and in no event less than One Million Dollars ($1,000,000), and a deductible no greater than One Hundred Thousand Dollars ($100,000).

4.13.Report of Accounts.  MGA shall render accounts to the Company detailing all transactions and remit all funds due under the terms of this Agreement to the Company on a monthly or more frequent basis as requested by the Company.

4.14.Additional Limitations on Authority.  The Company does not grant MGA authority to, and MGA shall not:

a. Negotiate, cede, purchase, or bind any reinsurance or retrocession, including but not limited to facultative or treaty, on behalf of the Company without prior approval by the Company.

b. Commit the Company to participate in insurance or reinsurance syndicates.

c. Appoint any Agent or producer without assuring that such Agent or producer is lawfully licensed to transact the type of insurance for which such Agent is appointed.

d. Collect any payment from a reinsurer without the Company's prior approval.  If prior approval is given, a report must be promptly forwarded to the Company.

e. Without the prior approval of the Company, pay or commit the Company to pay a claim over a specified amount, net of reinsurance, which exceeds one (1%) percent of the Company’s policyholder’s surplus as of December 31 of the last completed calendar year.

4.15.Additional Services.  MGA will manage the Company’s production of quarterly and annual financial statements for remittance to the OIR; periodic license renewals of the Company; regulatory filings of the Company with the Florida Hurricane Catastrophe Fund; submission of the Company’s rate filings for approval with the OIR; handling of financial and market conduct exams with the OIR; and such other insurance company filings and duties that may arise from time to time.

ARTICLE V - MGA'S COMPENSATION

5.1.Compensation.  The Company shall pay to MGA, as its sole and full compensation for all authorized business placed with the Company under this Agreement, and not including the fees and expenses to be paid to MGA for those claim adjustment services provided in Article VII herein, the commission and policy fee set forth in Schedule II to this Agreement (hereinafter the "Compensation").

ARTICLE VI- EXPENSES

6.1.MGA's Expenses.  Except as otherwise provided in this Agreement, MGA shall pay all expenses incurred by MGA in connection with the underwriting, production, marketing and servicing of the Policies, including but not limited to the following:

a. Printing of proposals, policy jackets, contracts of insurance, endorsements, cancellation notices, premium notices, records and reports, and all other documents required to fulfill the obligations of MGA under this Agreement.

b. Advertising and public relations expenses authorized by MGA.  The Company's prior written approval shall be required with respect to any advertising or public relations material that contains the Company's name or logo.

c. MGA's general office expenses, including rent, salaries, utilities, data processing performed by MGA, transportation, furniture, fixtures, equipment, supplies, telephone, postage, and other general overhead expenses.

6.2.Company's Expenses.  The Company shall pay directly all charges and expenses directly attributable to its operations, including but not being limited to the following: Board and Bureau fees; state guaranty fund assessments and other assessments for, or based on, business written pursuant to this Agreement; premium taxes and any other assessments levied by a state or local governmental authority on business written hereunder; cost of reinsurance; and legal and auditing expenses incurred at the direction of the Company.

6.3.Reimbursement by MGA.  In addition to any rights granted to the Company hereunder, the Company shall be entitled to immediate reimbursement or payment from MGA for all ordinary, reasonable and necessary costs, charges and expenses (collectively called "Expenses") paid or incurred by the Company by reason of or in connection with (i) the termination of this Agreement pursuant to Section 8.2, or (ii) the breach or non-performance of any covenant or obligation to be observed or performed by MGA or any Agent; provided, however, that in the case of a breach or non-performance by MGA, the Company shall have given MGA written notice of the breach or non-performance and MGA shall not have cured same within thirty (30) days after the date of the notice, or if same is of such a nature that it cannot reasonably be cured within such time, if MGA has not within such time commenced to cure same and does not diligently continue to and actually cure same within ninety (90) days after the date of the notice.  Any expenses incurred by the Company after the giving of such notice shall be promptly reimbursed by MGA.  Without limiting the generality of the foregoing, MGA's covenants and obligations as referred to herein shall include but not be limited to:

a. the obligation to deposit, report and remit premiums to the Company;

b. the obligation to remit return premiums to the insureds when due;

c. the obligation to process all policies, endorsements and notices of cancellation and/or non-renewal pursuant to the Company's Underwriting Guidelines;

d. the obligation to observe and comply with Underwriting Guidelines and sub-agent appointment procedures;

e. the obligation to observe and comply with all statutes, regulations, rules and rates;

f. the obligation to comply with the requirements of Article III hereinabove; and

g. the obligation to administer and pay claims.

6.4Unauthorized Business.  The writing, binding or issuance of policies and risks by MGA not in accordance with the conditions set forth in this Agreement and any Addenda hereto constitutes a breach of this Agreement, and any loss and expense incurred by the Company resulting from such breach shall be paid or reimbursed by MGA.  In the event the Company sustains a loss on a Policy or risk which MGA has written, issued or bound which is not within the scope of its authority under this Agreement and any addendum hereto, MGA shall reimburse the Company for the amount of the loss plus the expenses incurred by the Company because of the loss.

6.5.Coverage.  In the event that any obligation to grant or extend insurance coverage is imposed on the Company by a Court or the Department or any other state or jurisdiction as a result of any breach or non-performance by MGA or any Agent of its or their obligations under the Policies, then and in that event, MGA shall (a) pay any fine or penalty imposed upon the Company and all Expenses incurred by the Company.  MGA may seek reimbursement for such fine, penalty, or Expenses from the responsible Agent or cause such Agent to pay such fine, penalty, or Expense.

ARTICLE VII – CLAIMS ADMINISTRATION SERVICES

7.1.General Authority.  The Company appoints MGA for the purpose of investigating, evaluating, handling, adjusting, and settling each claim which may arise during the term of this Agreement under the Policies (“Claims Services”) within the established authority for claims as set forth in Schedule III which is incorporated herein by reference.

7.2.Duties of MGA.  In addition to, and without limiting, any duties which may be owed by MGA pursuant to Florida law or the laws of such other states in which the Company is licensed and authorized to transact insurance, and the applicable regulations pertaining thereto, MGA shall:

a. Utilize and enter the Company claims data into the claims administrative system as directed by the Company in a timely manner.

b. Dedicate sufficient and appropriate human, equipment and computer resources to provide the Company with the Claims Services enumerated in Schedule III to this Agreement.  The Claims Services shall use only licensed adjusters (as defined in Chapter 626,  Part VI, F.S. or the other laws and regulations of such other states in which the Company is licensed and authorized to transact insurance and does transact business (if applicable)), and licensed private investigators (as described in Chapter 493, F.S. or the laws and regulations of such other states in which the Company is licensed and authorized to transact insurance and does transact business (if applicable)), or catastrophic adjusters, where applicable, (as defined in Section 626.859, F.S. or the laws and regulations of such other states in which the Company is licensed and authorized and does transact insurance (if applicable)), and such adjusters and investigators shall comply with and conform to the Florida Statutes, and any applicable rules, orders, and written interpretations issued by the Department or such other laws and regulations of such other states in which the Company is licensed and authorized and does transact insurance.

c. Investigate, evaluate, handle, adjust and settle each claim assigned MGA within the authority established for claims as set forth in Schedule III, which authority is subject to termination for cause or upon termination of this agreement in accordance with Section 626.7451(7(d), F.S. or such other laws and regulations of such other states in which the Company is licensed and authorized and does transact insurance (if applicable).

d. Designate an employee to act as liaison with the Company to facilitate the provision of the Claims Services.

e. Maintain the confidentiality of data or information which is the property of the Company and which is accessible by MGA in the implementation and performance of the Claims Services.

f. Maintain complete, accurate and orderly claims books, files, records and accounts of all transactions in accordance with GAAP and SAP, which files shall be the joint property of the Company and MGA. The data in any electronic claims files maintained by MGA shall be transmitted to the Company in a timely manner as reasonably directed by the Company.

g. Maintain during the term of this Agreement copies of all claims and correspondence related to the claims for a period of six (6) years after the date of closure of such claim.  MGA shall not destroy these copies without the written permission of the Company. MGA may, with permission from Company, use magnetic, optical, and other types of technology to store such data.  At the end of such six (6) year period relevant to any claim, the Company shall authorize MGA to either (a) destroy the closed file or (b) return such file to the Company at the Company’s expense.    Upon an order of liquidation of the Company, the claims files shall become the sole property of the Company or its estate once MGA has been paid for the services rendered.  MGA shall have reasonable access to and the right to copy all files, books and records on a timely basis.

h. MGA shall adjust and handle through completion all claims still open upon termination or cancellation of this Agreement for an agreed upon fee per claim.  The Company shall continue to be responsible for the payment and reimbursement of expenses for such claims as provided in this Article VII. Notwithstanding the foregoing, any settlement authority granted to MGA may be terminated for cause upon the Company’s written notice to MGA or upon termination of this Agreement. The Company may suspend MGA’s settlement authority during the pendency of any dispute regarding the cause for termination.

i. MGA agrees that all claims occurring during the Term of this Agreement will be reported to the Company and will be assigned to properly licensed persons.

j. MGA agrees that Notice shall be sent by MGA to the Company as soon as it becomes known that a claim:

a. Exceeds the limit set by the insurer;

b. Involves a coverage dispute;

c. Exceeds the managing general agent's claims settlement authority;

d. Is open for more than 6 months; or

e. Is closed by payment of an amount set by the Department or an amount set by the insurer, whichever is less;

7.3.Company Discretion.  MGA acknowledges and agrees that the Company, as the party at risk and having ultimate responsibility for the claims to be administered by MGA, shall at all times have ultimate discretion and authority with respect to all matters pertaining to the claims including, without limitation, the processing, handling, disposition, settlement, defense and litigation of all claims.  The Company’s exercise or failure to exercise such discretion and authority shall not in any way diminish, impair or otherwise affect the obligations of MGA hereunder, including, without limitation, the obligations to exercise reasonable care, to act in good faith, and to otherwise act in a prudent, fair and appropriate manner with regard to the Claims Services.

7.4.Duties of Company.

a. The Company agrees that all claims occurring during the Term of, and under, this Agreement will be reported and assigned to MGA, unless the Company otherwise notifies MGA.  The Company will provide all information, in its possession, relevant to particular claims assigned to MGA in order for MGA to fulfill its duties and obligations as set out in Schedule III.  MGA shall notify the Company, in writing, should the Company fail to provide any relevant information requested by MGA regarding any specific claim.

b. The Company shall appoint an individual with sufficient authority within the Company’s organization to facilitate MGA’s performance of the Claims Services enumerated in Schedule III.

c. The Company and MGA acknowledge and agree that no claims payment and settlement of One Hundred Thousand Dollars ($100,000) or greater may be effected by MGA without the Company’s prior written consent.

d. MGA shall provide to the Company at no cost to the Company access to the policy or claims administrator system of MGA on a twenty-four (24) hours a day, seven (7) days a week basis.

7.5.Audit Provisions.  The Company, its employees, and/or its authorized agents shall have the right, at any reasonable time during normal business hours and with reasonable notice to MGA, to review and/or audit the Company's claim files maintained by MGA.

7.6.Price and Payment.

a. The Company agrees to pay Service Fees and Rates as specified in Schedule III A through Schedule III D of this Agreement.  Schedule III A shall govern the Service Fees and Rates payable to MGA by the Company on all new and renewal business written by the Company.   Schedule III B shall govern the Services Fees and Rates payable to MGA by the Company for subrogation and salvage activities.  Schedule III C shall govern the Services Fees and Rates payable to MGA by the Company under those special circumstances as agreed to in writing by the parties.   Schedule III D shall govern the Services Fees and Rates payable to MGA by the Company for catastrophic management services.

b. The Service Fees and Rates may increase or decrease by mutual written agreement, if changes in the Claims Services mutually agreed to in writing substantially alter the servicing personnel, equipment, or result in the servicing being done on a different system.

c. The Company agrees to pay all tariffs and taxes that are now or may become applicable to the Claims Services rendered.

d. Service Fees and Rates for Claims Services will be due and payable fifteen (15) days after the close of the month in which Claims Services are performed in amounts pursuant to Schedules III A through III D attached to this Agreement.

e. MGA and the Company will renegotiate, in good faith, the Claims Services Fees in the event of statutory, regulatory, or judicial changes that require additional activities not contemplated at the inception of this Agreement.  Should the parties be unable to reach an agreement within thirty (30) days of such changes, such disagreement will be resolved by binding arbitration in accordance with Article IX of this Agreement.

7.7.Definition and Payment of “Allocated Loss Adjustment Expense.”  All Allocated Loss Adjustment Expenses shall be paid by the Company. For purposes of this Agreement, “Allocated Loss Adjustment Expense(s)” shall mean any expense which is chargeable or attributable to the investigation, coverage analysis, adjustment, negotiation, settlement, defense or general handling of any Claim(s) or action(s) related thereto, or to the protection and/or perfection of the Company’s and/or its insured’s right of subrogation, contribution or indemnification.  Allocated Loss Adjustment Expense(s) includes, but is not limited to, the following:

a. Reasonable out-of-pocket attorney’s fees and disbursements incurred in connection with the determination of coverage and/or the adjustment, defense, negotiation or settlement of any Claim; reasonable out-of-pocket attorney’s fees incurred for representation at depositions, hearings, pretrial conferences and/or trials;

b. Costs incurred in handling any Alternative Dispute resolution proceeding (“ADR”), legal actions, including trials or appeals, or in pursuing any declaratory judgment action, including deposition fees, cost of appeal bonds, court reporter or stenographic service fees, filing fees, and other court costs, fees and expenses, transcript or printing costs and all discovery expenses; fees for service of process; fees for witnesses’ testimony, opinions, or attendance at hearings or trial;

c. Statutory fines or penalties; pre- and post-judgment interest paid as a result of litigation, unless legal requirements define such interest as indemnity payments;

d. Subcontractors fees and travel expenses, including independent adjusters, automobile and property appraisers, to the extent that same are incurred in the adjustment, negotiation, settlement or defense of any Claim (excluding MGA’s employees);

e. Experts’ fees including reconstruction experts, engineers, cause and origin reports, photographers, accountants, economists, metallurgists, cartographers, architects, hand-writing experts, physicians, appraisers and other natural and physical science experts, plus the costs associated with preparation of expert reports, depositions, and testimony;

f. Fees for surveillance, undercover operative and detective services or any other investigations;

g. Costs for medical examinations, or autopsies, including diagnostic services, and related transportation costs, fees for medical reports and rehabilitation evaluations;

h. Costs for any public records, medical records, credit bureau reports, and other like reports;

i. Costs and expenses incurred in pursuit of the rights of contribution, indemnification or subrogation of the Company and/or its insured, including reasonable out-of-pocket attorney and collection agency fees and/or expenses;

j. Medical or vocational rehabilitation expenses, and all other medical cost containment services, including, but not limited to, utilization review, pre-audit admission authorization, hospital bill audit or adjudication, provider bill audit or adjudication, and review of medical case management;

k. Extraordinary travel and related expenses incurred by MGA at the express written request and approval of the Board of Directors of the Company, which are not otherwise payable under this Agreement; and

l. With respect to MGA’s determination that an expense(s) incurred pursuant to this Agreement is an Allocated Loss Adjustment Expense, MGA makes no representation or warranty and assumes no responsibility that such determination (i) is in compliance with or meets the requirements of any statistical plan filing, statutory, regulatory, or insurance industry reporting scheme or the definition of the Allocated Loss Adjustment Expense thereunder; (ii) is or could be characterized as payment of loss or indemnity; or (iii) is or is not subject to insurance or reinsurance coverage or limits.  The Company agrees that it is responsible for making all such judgments and for complying with any and all such requirements.

Nothing stated in this Section 7.7 expands MGA’s authority as otherwise stipulated in this Agreement, and MGA’s discretion will be subject to the oversight of the Board of Directors of the Company.

7.8.Limitation of Liability and Remedies.

a. In providing the Claims Services hereunder, MGA shall have a duty to act with a reasonable due care and caution, in good faith, and in a prudent manner. MGA shall be liable to the Company for any loss or damage sustained by the Company as a result of, or related in whole or part to, the bad faith, gross negligence or other intentional misconduct on the part of MGA, or its officers, directors, employees or agents.

b. MGA agrees to indemnify, defend and hold harmless the Company, its shareholder, officers, directors, employees, agents, designees and affiliates and any of such affiliates’ officers, directors, employees, agents and designees (collectively “MGA-Indemnified Parties”), from and against any and all claims, causes of action, liabilities, liens, fines, penalties, demands, costs, fees, expenses (including reasonable attorney’s fees), suits, judgments, adjudications and losses of whatever kind or nature incurred by, or claimed against, any of the MGA-Indemnified Parties by reason of any bad faith, negligence, or other misconduct by MGA, or any of its officers, directors, employees or agents, or by reason of any breach of this Agreement by MGA.

c. MGA shall have no indemnity obligation under this Agreement for any act or omission of MGA taken or omitted to be taken at the express direction of the Company.

d. All indemnity obligations of MGA under this Agreement shall survive the termination or expiration of this Agreement.

e. MGA warrants that it now has and shall maintain during the term of this Agreement for the protection and benefit of the Company and MGA liability insurance coverage and errors and omissions coverage in an amount of not less than One Million Dollars ($1,000,000) for any one event and in an amount of not less than Two Million Dollars ($2,000,000) in the aggregate. Such coverages shall be in a form and with a company acceptable to the Company and proof of such coverages shall be provided to the Company upon request.

ARTICLE VIII- TERMINATION

8.1.Continuing Authority.  The authority of MGA to issue Policies under this Agreement shall be continuous until terminated, except for mandatory renewals of existing Policies to the extent required by applicable law; and MGA agrees that such mandatory renewals will be with the Company.  This Agreement may be terminated by either party, at the end of any calendar quarter, without cause, by giving the other party not less than one hundred eighty (180) days prior written notice of such termination.

8.2.Termination by the Company with or without Cause.  This Agreement shall terminate:

a. Automatically and immediately at the written election of the Company, if any public authority cancels or declines to renew any of the licenses of MGA necessary to fulfill the terms of this Agreement.

b. Automatically and immediately in the event of a transfer, sale or pledge of the majority of the stock or a substantial portion of the assets of MGA, unless this Agreement is assigned with the express written consent of the Company, or unless the pledge of stock is to a federal or state charted bank to secure loans from the bank to MGA, provided in the event of such permitted pledge that this Agreement shall terminate if the pledged stock is foreclosed upon or otherwise acquired by the pledgee.

c. At the election of the Company upon MGA's material violation of any provision of this Agreement; provided, however, that MGA will be allowed thirty (30) days, after written notice, to cure any non-monetary breach or default.

d. Immediately, at the election of the Company for any failure by MGA to comply with the provisions of Section 6.3 a. or b.

e. Sixty (60) days after delivery of written notice to terminate to MGA at the election of the Company for any reason.

f. Sixty (60) days after any Change of Control. For purposes of this Agreement, a “Change of Control” means, with respect to the Company, (i) the sale of all or substantially all of the Company’s assets, (ii) the acquisition of a beneficial ownership interest of more than fifty percent (50%) of the outstanding voting equity interests of the Company or of Monarch National Holding Company by any person (except FNHC and Crosswinds and their respective affiliates in the case of a holding company affiliate transaction in which the ultimate direct or indirect beneficial ownership remains unchanged), or (iii) the acquisition of a beneficial ownership interest of twenty percent (20%) of the outstanding voting equity interests of FNIC or Federated National Holding Company (“FNHC”) by any person (other than any existing holder of voting equity interests of FNIC or FNHC, including Crosswinds and its affiliates) engaged in, or whose affiliate is engaged in, the business of providing property and casualty insurance in the United States of America.

8.3.Termination by MGA.  This Agreement may be terminated at the election of and upon written notice from MGA upon the failure of the Company: (a) to remain licensed in the State of Florida or any other state in which the Company is licensed and authorized to transact insurance; (b) to materially comply with Florida laws and Department Rules and Regulations and the applicable laws of such other states in which the Company is licensed and authorized to transact insurance, except if such failure is the result of any action or inaction of MGA; or (c) to comply with the material provisions of this Agreement; provided, however, that Company will be allowed thirty (30) days, after written notice, to cure any non-monetary breach or default.

8.4.Suspension and Revocation of Authority.  The Company may suspend MGA's underwriting authority during the pendency of any dispute regarding the termination of this Agreement.  The Company and MGA shall fulfill their obligations under the Policies regardless of any dispute.

8.5.Effect of Termination.  In the event of proper termination of this Agreement:

a. Except as set forth in Section 7.2.h. herein,  the obligations of MGA and the Company under this Agreement shall be discharged promptly;

b. No party shall have a claim upon the other for loss of prospective profit or damage to the business arising therefrom; and

c. All records pertaining to the Policies shall remain the property of the Company. MGA shall be entitled to retain copies of any such records. This provision shall survive termination of this Agreement.

8.6.Run-off.

a. The Company shall, concurrent with its notice of termination or within thirty (30) days of MGA's notice of termination, notify MGA of whether the Company intends to have MGA service the Policies through their run-off, or whether it intends to manage the run-off itself.  Except as set forth in Section 7.2.h. herein, MGA's compensation in either event is set forth in Schedule II to this Agreement.  For purposes of this Agreement, the term "run-off" shall mean confirming coverage under the Polices to claims adjusters, administering the in-force Policies and any required renewals and endorsement thereof, providing reports to the Company as elsewhere required by this Agreement, paying premium to the Company and return premium to the insureds, collecting all sums due from Agents, including return commissions, and such other activities of MGA specifically required by this Agreement.

b. MGA shall upon demand return to the Company any Policies, forms or other supplies imprinted with the Company's name regardless of who incurred the cost for same, or any Policies, forms or other supplies furnished to MGA by the Company, with the exception of any forms which in MGA's reasonable opinion are required to complete an orderly run-off of operations; but any forms so retained by MGA will be promptly returned to the Company upon completion of run-off operations. Following termination of this Agreement, neither FNHC nor any affiliate of FNHC may use the Company’s name in connection with any advertisement, circular, pamphlet or other publication related to insurance products.

c. In the event this Agreement terminates and/or MGA refuses or is unable to administer and run-off business produced under this Agreement, then in that event MGA shall immediately provide the Company with an electronic back-up of all programs and data libraries, including updated source code and data files, used in the production and administration of business hereunder (the "Data").  The Company agrees that it shall utilize the Data solely for the purpose of administering and running off the business produced hereunder.

d. MGA hereby grants, at no cost to the Company, a limited license to the Company to use MGA's software in connection with the administration and run-off of the business produced hereunder.  MGA shall deliver the software, together with the source and object code for the software, as well as all available related manuals, immediately upon delivery of the Data to the Company as provided in the preceding Section.

e. In the event that the Company elects to manage the run-off itself or through a third party, MGA will reasonably cooperate with the transfer of its administrative duties, including by returning originals (or copies to the extent originals are unavailable despite best efforts) of all records to the Company.

ARTICLE IX- ARBITRATION

9.1.Any controversy, claim or dispute arising out of or relating to this Agreement, including questions regarding the arbitrability of any issues or the scope, applicability, enforceability, validity or breach of this or any other provision of this Agreement or differences of opinion as to the interpretation of this Agreement, shall be submitted to arbitration, one arbitrator to be chosen by the Company, one by MGA, and an umpire by the two arbitrators (the arbitrators and umpire are referred to as the "Panel").

9.2.The Panel shall, unless the parties otherwise agree, meet in Fort Lauderdale, Florida.  Members of the Panel shall be disinterested officers or former officers of property and casualty insurance companies or insurance agencies authorized to transact business in the state in which the controversy, claim or dispute arose.

9.3.The arbitration shall be instituted by the claimant serving a notice upon the respondent setting forth a statement of the nature of the dispute and the name, address and current (or last, if retired) employment position of the arbitrator appointed by the claimant.  The respondent shall appoint its arbitrator within twenty (20) days after service of claimant's notice and shall, within such time, similarly notify claimant of the name, address and current (or last, if retired) employment position of the respondent's arbitrator.  If the respondent fails to appoint its arbitrator within such twenty (20) day period, the claimant shall also appoint the second arbitrator within ten (10) days after the expiration of the twenty (20) days for respondent to appoint its arbitrator.  If the two arbitrators fail to agree upon the appointment of an umpire at the end of the twenty (20) days following the last date of the appointment of the arbitrators, then they each shall, within ten (10) days thereafter, name three (3) candidates who serve as umpire, and within ten (10) days thereafter each shall decline two (2) of the candidates named by the other; within five (5) days thereafter, a decision shall be made by drawing lots as to which of the last two (2) candidates shall be the umpire.

9.4.The respondent shall submit its statement within twenty (20) days after receipt of the claimant's statement, and the claimant may submit a reply statement within ten (10) days after the receipt of the respondent's statement.  Copies of all statements shall be sent to the parties and the Panel.

9.5.Any hearing shall commence within thirty (30) days following the selection of the umpire.  The Panel shall render its decision within thirty (30) days following the termination of the hearings unless the parties consent to an extension.

9.6.The Panel shall issue its decision in writing upon evidence introduced at a hearing or by other means of submitting evidence in which strict rules of evidence need not be followed, but in which cross examination and rebuttal shall be allowed if requested.  The majority decision of the Panel shall be final and binding upon all parties to the proceeding.  Judgment may be entered confirming the award of the Panel in any court having jurisdiction thereof.

9.7.Each party shall bear the expense of its own arbitrator and shall jointly and equally bear the expense of the umpire.  The remaining costs of the arbitration proceedings shall be allocated by the Panel in its sole discretion.

9.8.In the event of subsequent actions or proceedings necessary to enforce the judgment entered thereon or any other rights flowing therefrom, the prevailing party shall be entitled to recover its reasonable attorney's fees.

9.9.Any suit, action, or other proceeding by or against either party to this Agreement, including any proceeding to compel arbitration, to confirm the arbitration award, or to enforce any remedy available to either party may be brought in the Circuit Court of the State of Florida, County of Broward, or in the United States District Court for the Southern District of Florida, and each of the parties hereto submits and consents to the non-exclusive jurisdiction of each such court for the purpose of any such suit, action or proceeding.  The parties agree that process in any action or proceeding shall be personally served and that such service shall be sufficient to confer in personam jurisdiction over the party so served.

ARTICLE X- INDEMNITY AGREEMENT

10.1.MGA shall indemnify the MGA-Indemnified Parties against and in respect of any and all liabilities (as defined below), made or instituted against or incurred by the MGA-Indemnified Parties and which arise, either directly or indirectly, out of any action or inaction of MGA or any Agent, or their employees or representatives, in connection with any obligations of MGA arising out of this Agreement, including but not limited to any action or inaction of MGA concerning the termination of Agent(s) pursuant to all applicable laws.  This Section 11.1 does not apply to the extent that the loss resulted from action or inaction of MGA, which is a result of acting in accordance with the written instructions of the Company.

10.2.The Company shall indemnify MGA and its subsidiaries, successors, reinsurers and assignees, as well as its and their respective shareholders, directors, officers and agents (collectively, the “Company-Indemnified Parties”) against and in respect of any and all liabilities (as defined below) made or instituted against or incurred by the Company-Indemnified Parties and which arise, either directly or indirectly, out of any action or inaction of the Company, or their employees or representatives, in connection with any obligations of the Company arising out of this Agreement; but no Company-Indemnified Party will have a right to indemnification under this Section 10.2 to the extent any liabilities are the result of any action or inaction of any employee of either MGA or any affiliate of MGA in such employee’s capacity as an officer, director, employee, or agent of the Company or any of its affiliates.

10.3.For purposes of this Article X, "liabilities" means all claims, demands, actions, proceedings, liability, losses, damages, costs or expenses, including without limitation, attorneys' fees, disbursements and court costs.

10.4.The indemnification provisions of this Article X do not apply to covered claims made under any policy issued in accordance with this Agreement nor with regard to the Claims Services, as set forth in Section 7.8. herein.

10.5.All indemnity obligations herein shall survive the termination or expiration of this Agreement.

ARTICLE XI - GENERAL PROVISIONS

11.1.Survival.  Article IX on Arbitration, Section 8.5.c., Section 8.6 on "run-off", and all other provisions of this Agreement that are pertinent to the "run-off" and the Claims Services to be rendered under Section 7.2.h. shall survive the termination of this Agreement.

11.2.Independent Contractor Relationship.  Nothing herein shall create the relationship of employer and employee between the Company and MGA, it being understood and agreed that MGA is an independent contractor of the Company for the purposes set forth herein with all rights, powers and duties as such.

11.3.Non-Assignable.  Neither the Company nor MGA may assign this Agreement or any part thereof to another person or entity.

11.3(a)            Subcontracting.MGA may subcontract or delegate its duties under this Agreement with other persons or entities, subject to the prior written consent of the Company, which consent may not be unreasonably withheld, but MGA will remain liable for such subcontractors’ and delegates’ action or inaction to the same extent as MGA would be liable if MGA took such action or failed to so act.

11.4.Modification.  This Agreement may not be changed, nor may any provision hereof be waived, except by a written document signed by both parties hereto and approved by the OIR.

11.5.Non-Waiver.  The failure of the Company or MGA to insist on strict compliance with this Agreement, or to exercise any right or remedy hereunder, shall not constitute a waiver of any rights contained herein or estop the parties from thereafter demanding full and complete compliance therewith, or prevent the parties from thereafter demanding full and complete compliance therewith, nor prevent the parties from exercising any right or remedy in the future.

11.6.Notice.  Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed duly given if delivered personally, or by a recognized courier service, or by registered or certified mail, return receipt requested, to the party for whom it is intended at the following address or such other address as the party may designate from time to time.

For MGA: FedNat Underwriters, Inc. 14050 NW 14^th Street, Suite 180 Sunrise, FL 33323

Attn: James G. Jennings, III

For the Company: Monarch National Insurance Company 14050 NW 14^th Street, Suite 180 Sunrise, FL 33323

Attn: Michael H. Braun

With a copy to: Monarch National Holding Company 14050 NW 14^th Street, Suite 180 Sunrise, FL 33323

Attn: Board of Directors

And: Dechert LLP US Bank Tower 633 West 5^th Street, 37^th Floor Los Angeles, CA 90071

Attn: Philippe Phaneuf, Esq.

And: Broad and Cassel 7777 Glades Road, Suite 300 Boca Raton, FL 33434

Attn: Nina S. Gordon, Esq.

Notices shall be deemed given when delivered, or three (3) days after delivery to the courier or mailing, as above provided.

11.7.Invalidity.  If any provision of this Agreement should be found to be invalid or unenforceable, the remaining provisions of this Agreement shall remain in full force and effect.

11.8.Governing Law.  This Agreement shall be interpreted under and pursuant to the laws of the State of Florida, without giving effect to its conflicts of laws provisions.  The parties to this Agreement each hereby waives, to the fullest extent permitted by law, any right to trial by jury of any claim, demand, action, or cause of action (i) arising under this Agreement or (ii) in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the transactions related hereto; in each case, whether now existing or hereafter arising, and whether in contract, tort, equity, or otherwise.  The parties to this Agreement each hereby agrees and consents that any such claim, demand, action, or cause of action will be decided by court trial without a jury and that the parties to this Agreement may file an original counterpart of a copy of this Agreement with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury.

11.9.Assigns.  Subject to the provisions of 12.3 hereof, this Agreement shall bind and benefit the successors and permitted assigns of the parties.

11.10.Company Action.  Any matter in this Agreement requiring the consent of the Company (which will not include MGA’s settlement of claims except as authorized herein) will require the consent of the Board of Directors of the Company together with the Company’s shareholder’s consent.

11.11.Counterparts.  This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same agreement.

11.12.Entire Agreement.  This Agreement and other written agreements between the Company and MGA of even date herewith constitute the entire agreement between the Company and MGA and supersede all prior contracts or agreements with respect to MGA’s production and administration of the Policies, whether oral or written, including any term sheet exchanged between the parties, as the same may be amended, restated, supplemented, or otherwise modified from time to time.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written.

FEDNAT UNDERWRITERS, INC.
BY:	/s/ James G. Jennings, III	Date:	March 17, 2015
Name:	James G. Jennings, III
Its:	President
MONARCH NATIONAL INSURANCE COMPANY
BY:	/s/ Michael H. Braun	Date:	March 17, 2015
Name:	Michael H. Braun
Its:	President

[Signature Page to MGA Agreement]

SCHEDULE I

AUTHORIZED COVERAGES, TERRITORY AND

LIMITS OF COVERAGE

MGA is authorized as respects:

Coverages: MGA is authorized to administer and manage the Policies for all coverages for which the Company is licensed.

Territory: MGA is authorized to represent the Company in the following jurisdictions in which the Company has a valid license and certificate of authority:

FLORIDA

Any jurisdiction upon which theCompany obtains a license and certificate of authority to transact business after the Effective Date of this Agreement shall be automatically included within the territory in which MGA is authorized to represent the Company. 

Limits: MGA is authorized to commit the Company to all coverages and limits as further described in the Monarch National Insurance Company Underwriting Manuals as filed by the Company with its rate and form filing with the Florida Office of Insurance Regulation or any other state insurance regulatory authority where the Company transacts business.

SCHEDULE II

COMPENSATION

Commission Applicable to New and Renewal Business for MGA Services

The Company and MGA agree to the following commission schedule for the Managing General Agent Services, excluding Claims Services, described in this Agreement and its Schedules with respect to Company’s new and renewal business.

MGA shall retain four percent (4.0%) of the Company's Total Written Annual Premium exclusive of the actual acquisition expenses payable to the Producing Agents as MGA’s commission for its Managing General Agent Services.  Said compensation shall be inclusive of all services to be provided hereunder other than the Claims Services.  Such commission shall be deducted from the premiums remitted to Company by MGA and adjusted on the 15th day after the end of each and every consecutive month during the Term of the Agreement beginning with the Effective Date.

For purposes of this Agreement, the term “Total Written Annual Premium” is defined as the total of gross direct and assumed written premium per the statutory financial statements of the Company, but shall not include any flood insurance premium written by the Company.  Further, Total Written Annual Premium shall not include any policy fees or assessments.

The total Written Annual Premium shall exclude MGA policy fee as provided in Section 3.7 of this Agreement, EMT charges or other non-commissionable fees.  MGA shall be entitled to the policy fee in addition to all other sums payable hereunder.

The above fees do not include Allocated Loss Adjustment Expenses as defined in Section 7.7 of the Agreement.  The above fees do not apply to class action suits, catastrophic events or subrogation or salvage activities.

SCHEDULE III

To the

MANAGING GENERAL AGENCY AGREEMENT

By and between

FedNat Underwriters, Inc. (“MGA”)

And

Monarch National Insurance Company (“Company”)

A. SERVICES

During the term of this Agreement, MGA shall be the exclusive provider of the claims administration services (the "Claims Services") defined below for all reported and assigned claims of the Company for policies of insurance written by or through Company.  MGA will provide the services and general management of the Claims Services described herein for subject claims as follows:

1.The Company grants MGA the authority to investigate, evaluate, handle, adjust and settle each claim assigned according to applicable state law, the terms and conditions of the policy and any written standards that may be provided by Company in addition to the provisions of this Agreement.

2.Loss reporting will be by Internet, fax, or phone.  Losses may be reported 24 hours a day.  The Internet, fax and phone reporting will be checked for new losses every two (2) hours from 8:00 AM until 11:00 PM.

3.Coverage will be verified on all cases through the Company by procedures mutually agreed upon, in writing, by the parties.  Contact will be made with claimant or insured within twenty-four (24) hours of loss reporting, excluding catastrophic events.

4.MGA will administer the claim valuation process and will use in this endeavor a combination of staff, adjusters, and appraisers.

5.MGA will perform all reasonable, necessary and customary administrative and clerical work in connection with claim or loss reports.

6.MGA will establish and maintain a claim file for each reported claim or loss with a copy of the policy for each reported claim.  The claim file will have an activity log which shall be reviewable at any and all reasonable times by the Company subject to the provisions of Section 7.5. of this Agreement.  Catastrophe claims will not require an activity log.

7.MGA will retain and coordinate legal counsel on behalf of the Company in connection with any litigation of the Company relating to claims arising under Policies.  MGA will work with counsel to determine the best course of action within a reasonable budget within the scope of authority granted by the Company.  The selection and retention of legal counsel shall be the Company’s sole prerogative.

8.For non-catastrophic claims, MGA will enter in the Company’s designated claims administration system each claim and a recommended reserve within forty-eight (48) hours which initial reserves will be a statistical reserve and adjusted within fifteen (15) business days based upon the adjuster’s inspection of damages barring unforeseen circumstances beyond MGA’s control.  The Company shall have the ultimate authority in establishing all reserves and all component aspects thereof.  MGA shall consult with the Company and provide notice to the Company in a timely manner with respect to any of the following:

(a)Any loss or claim resulting in legal action being instituted against MGA or theCompany;

(b)Any loss or claim causing a complaint to be filed with any regulatory authority;

(c)Any inquiry from any regulatory authority, including but not limited to, any insurancedepartment, with respect to any claim or claims.

(d)Any claim for which MGA deems it appropriate to deny policy coverage or which involves a coverage dispute;

(e)Any claim which might ultimately result in payment(s) in excess of one hundred thousand dollars ($100,000).  MGA shall forward a copy of such claim file to Company at its request.  The Company grants MGA claims settlement authority up to one hundred thousand dollars ($100,000);

(f)Any open claim that involves an allegation of extra-contractual obligations;

(g)Any claim involving a fatality, amputation, spinal cord or brain damage, loss of eyesight, extensive burns, poisoning, or multiple fractures;

(h)Any claim involving a minor; or

(i)any claim involving a claim of bad faith or seeking class action certification.

9.        MGA will perform periodic review (at least semi-annually) at mutually agreed upon intervals of outstanding claim reserves, and recommend changes to outstanding claim reserves.

10.      MGA will prepare all compromises, releases, agreements and any other documents reasonably necessary to finalize and close claims.  For all settlements, MGA will issue payments of claims and allocate loss adjustment expenses only on checks of, and as authorized by, the Company.  A check in payment of a claim shall be issued within forty-eight (48) hours after the claim is determined payable by MGA, except in the event of a catastrophic event.

MGA hereby agrees to prepare, sign and issue checks in accordance with the procedures adopted by the Company.  Any check prepared by MGA must be signed by authorized individuals.

MGA shall promptly transmit any monies collected through salvage and subrogation to the Company, and maintain a register of all such collections (the “Salvage and Subrogation Register”).  The Salvage and Subrogation Register shall include, but shall not be limited to, the following information:  date of receipt of funds, the claim number, the payer, and the amount of such payment.

MGA shall have a fiduciary duty to the Company with respect to MGA’s receipt and disposition of all money of the Company coming into the possession or control of MGA.

12.Service standards and claims documentation will be in compliance with all state regulations dealing with the adjusting and handling of claims.  MGA will periodically review the development of the claims handling procedure with the Company to identify problems and recommend corrective action.

13.MGA will diligently pursue and prosecute the Company’s salvage and subrogation rights relating to any losses.  MGA will use reasonable efforts to collect funds arising from the enforcement of such rights.

B. LOCATION OF PROVISION OF SERVICES:

As mutually agreed upon by the Company and MGA.

SCHEDULE III A

Fees Applicable to New and Renewal Business for Claims Services

Company and MGA agree to the following fee schedule for the Claims Services described in this Agreement and its Schedules with respect to Company’s new and renewal business.

Company shall pay MGA 3.6% of the Company's Total Earned Annual Premium for Claims Services rendered by MGA.  For purposes of this Agreement, the term “Total Earned Annual Premium” is defined as the total of gross direct and assumed earned premium per the statutory financial statements of the Company but shall not include any flood insurance premium written by the Company.  Further, Total Written Annual Premium shall not include any policy fees or assessments.

Such fees shall be payable on the 15th day of each and every consecutive month during the Term of the Agreement beginning with the Effective Date.  These fees will be adjusted when the Company’s Total Earned Annual Premium is determined and identified on the Company’s annual report filed with the Florida Office of Insurance Regulation.  Any balance due from these adjustments shall be paid to the other party no later than March 15th of the year in which such annual report is due and filed.

The above fees do not include Allocated Loss Adjustment Expenses as defined in Section 7.7 of the Agreement.  The above fees do not apply to class action suits, catastrophic events or subrogation or salvage activities.

Total Earned Annual Premium shall exclude MGA policy fee of as provided in Section 3.7 of this Agreement, EMT charges or other non-commissionable fees.

SCHEDULE III B

Additional Compensation

On a monthly basis, the Company shall pay MGA 25% of all subrogation and salvage amounts recovered by MGA.

SCHEDULE III C

Time and Expense Fees

Any other services not contemplated by this Agreement shall be provided by MGA, as follows:

Any other services not contemplated by this Agreement shall be provided by MGA, as mutually agreed to by the parties hereto, on a time and materials basis at a rate of seventy-five dollars ($75.00) per person-hour plus reasonable actual incurred out of pocket expenses.

The fees set forth in this Schedule are not to be utilized unless specifically agreed to in writing by the parties for specifically agreed to matters.

The following matters are specifically agreed to as being governed by this Schedule III C:

Assistance with any DFS, OIR, or other regulatory audit or investigation required of the Company.

SCHEDULE III D

Catastrophe Management Services & Fees

Catastrophe Loss expense shall be reimbursed as follows:

$200 per claim for file setup, assignment, review and payment plus the following amounts per the CAT fee schedule basis.

Claim Range	Fee
Erroneous Assignment	$	50.00
Claim Withdrawn	$	50.00
Claim Closed Without Payment	$	225.00
Re-opens (no additional loss payments)	T&E (max $225)
Re-opens (with additional loss payment)	Gross amount of written

$	01 - 1,000	$	325.00
$	1,000.01 - $2,500	$	450.00
$	2,500.01 - $5,000	$	525.00
$	5,000.01 - $7,500	$	600.00
$	7,500.01 - $10,000	$	675.00
$	10,000.01 - $15,000	$	775.00
$	15,000.01 - $25,000	$	875.00
$	25,000.01 - $35,000	$	1,025.00
$	35,000.01 - $50,000	$	1,275.00
$	50,000.01 - $100,000	$	1,625.00
$	100,000.01 - $250,000	2.3% but not less than $3,000
$	250,000.01 and up	2.1% but not less than $5,750
Sinkholes		T&E

The adjustment includes prompt contact, premise inspection, scope, itemized estimate, collection of invoices, receipts, photographs displaying damaged and non-damaged areas and compliance to service standards.

EX-10.2

Exhibit 10.2

Execution Version

LIMITED LIABILITY COMPANY AGREEMENT

OF

MONARCH DELAWARE HOLDINGS LLC

Dated as of March 17, 2015

THE INTERESTS IN MONARCH DELAWARE HOLDINGS LLC (THE “INTERESTS”) ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER AND OTHER TERMS AND CONDITIONS SET FORTH IN ARTICLE 8 OF THIS AGREEMENT. THE INTERESTS HAVE NOT BEEN REGISTERED UNDER ANY STATE SECURITIES LAWS OR UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”).  NEITHER THE INTERESTS, NOR ANY PART THEREOF, MAY BE OFFERED FOR SALE, PLEDGED, HYPOTHECATED, SOLD, ASSIGNED OR TRANSFERRED AT ANY TIME EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF ARTICLE 8 OF THIS AGREEMENT AND PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR IN A TRANSACTION THAT IS EXEMPT FROM REGISTRATION UNDER SUCH SECURITIES LAWS OR THAT IS OTHERWISE IN COMPLIANCE WITH SUCH SECURITIES LAWS.

TABLE OF CONTENTS

		Page
ARTICLE 1 DEFINITIONS		1
Section 1.1	Definitions	1
Section 1.2	Terms Generally	14
Section 1.3	Other Definitions	15
ARTICLE 2 FORMATION; OPERATING GUIDELINES		15
Section 2.1	Formation of Company	15
Section 2.2	Company Name	15
Section 2.3	Term	15
Section 2.4	Scope of Members’ Authority	15
Section 2.5	Registered Office and Agent	15
Section 2.6	Outside Activities	16
Section 2.7	Principal Office	16
Section 2.8	Purpose	16
ARTICLE 3 CAPITAL CONTRIBUTIONS		16
Section 3.1	Authorization and Issuance of Interests	16
Section 3.2	Capital Contributions of the Members	17
Section 3.3	Company Capital.	17
Section 3.4	Liability of Members.	18
Section 3.5	Loans by Members or Affiliates	18
Section 3.6	Capital Accounts	19
Section 3.7	Limitation on Issuance of New Interests	20
ARTICLE 4 ALLOCATIONS AND DISTRIBUTIONS		20
Section 4.1	Allocations of Net Profits and Net Losses	20
Section 4.2	Loss Limitation	21
Section 4.3	Tax Allocations	21
Section 4.4	Special Allocations	21
Section 4.5	704(c) Allocations	22
Section 4.6	Distributions	22
Section 4.7	Tax Withholding	23
Section 4.8	Tax Distributions	24
Section 4.9	Prohibited Distributions	24
ARTICLE 5 ADMINISTRATIVE PROVISIONS; REPORTS		25
Section 5.1	Books of Account	25
Section 5.2	Availability of Books of Account	25
Section 5.3	Bank Accounts	25
Section 5.4	Tax Elections	25
Section 5.5	Designation of Tax Matters Partner	25
Section 5.6	Independent Accountant	25
Section 5.7	Cooperation Regarding Public Reporting Obligations	26

i

ARTICLE 6 MANAGEMENT OF THE COMPANY		26
Section 6.1	Management of the Company	26
Section 6.2	Powers and Duties of the Board	30
Section 6.3	Liability for Conduct	35
Section 6.4	Indemnity of Officers and Managers.	35
Section 6.5	[Reserved]	37
Section 6.6	Other Matters Concerning the Board	37
ARTICLE 7 MEMBERS		38
Section 7.1	Member Management Rights	38
Section 7.2	Investment Representations by Members	39
Section 7.3	Additional Representations	40
Section 7.4	[Reserved]	40
Section 7.5	Withdrawals or Resignations	40
Section 7.6	Transactions between the Company and Members	40
Section 7.7	Remuneration to Members	41
Section 7.8	Covenant Not to Withdraw, Transfer or Dissolve	41
Section 7.9	Class C Preemptive Rights	41
Section 7.10	Class B Preemptive Rights	42
ARTICLE 8 SALE OR TRANSFER OF INTERESTS IN COMPANY OR SUBSIDIARY; TRANSFER RESTRICTIONS		43
Section 8.1	Disposition and Assignment of Interests	43
Section 8.2	Transfer in Violation of Agreement	43
Section 8.3	Rights in Connection with a Conveyance Triggering Event.	43
Section 8.4	Bankruptcy of Member	44
Section 8.5	Change of Control Call Right	44
Section 8.6	Tag-Along Rights.	46
Section 8.7	Drag-Along Rights	47
Section 8.8	Sales Price and Terms of Sale	49
ARTICLE 9 ADDITIONAL MEMBER RIGHTS		49
Section 9.1	Company Valuation	49
Section 9.2	Board Meeting to Determine Exit Strategy	49
Section 9.3	[Reserved]	49
Section 9.4	FNHC Right of First Offer	50
Section 9.5	Participation Rights	51
Section 9.6	Buy-Sell Rights	52
Section 9.7	TransRe Sale Rights	54
Section 9.8	Subsidiary Management Rights and Obligations	56
Section 9.9	Termination of FNHC Services Agreement other than for Cause	57
Section 9.10	Debt Participation Right	57

ii

ARTICLE 10 DISSOLUTION AND LIQUIDATION		58
Section 10.1	Dissolution	58
Section 10.2	Involuntary Dissolution	58
Section 10.3	Reformation of Company	58
Section 10.4	Liquidation Procedures	59
Section 10.5	Distributions in Liquidation	59
Section 10.6	Distributions In Kind	60
ARTICLE 11 AMENDMENT OF AGREEMENT; MEETINGS		60
Section 11.1	Amendments.	60
Section 11.2	Meetings of Members.	61
ARTICLE 12 GENERAL PROVISIONS		62
Section 12.1	Further Assurances	62
Section 12.2	Notices	62
Section 12.3	Headings and Captions	63
Section 12.4	Counterparts	63
Section 12.5	Governing Law; Submission to Jurisdiction; Waiver of Jury Trial	63
Section 12.6	Partition	64
Section 12.7	Invalidity	64
Section 12.8	Successors and Assigns	64
Section 12.9	Entire Agreement	64
Section 12.10	Additional or Substituted Members	64
Section 12.11	No Third Party Beneficiaries	64
Section 12.12	Maintenance as a Separate Entity	64
Section 12.13	Construction of Agreement	64
Section 12.14	Confidentiality	65
Section 12.15	Additional Default Remedies	65
Section 12.16	Legal Representation	65
ARTICLE 13 POWER OF ATTORNEY		66
Section 13.1	Company as Attorney-In-Fact	66
Section 13.2	Nature as Special Power	66
SCHEDULE 1		1
SCHEDULE 2		1
SCHEDULE 3		1
EXHIBIT A		1

iii

LIMITED LIABILITY COMPANY AGREEMENTOFMONARCH DELAWARE HOLDINGS LLC

THIS LIMITED LIABILITY COMPANY AGREEMENT of MONARCH DELAWARE HOLDINGS LLC (the “Company”) is made and entered into on March 17, 2015 (the “Effective Date”), by and among Crosswinds Investor Monarch LP, a Delaware limited partnership (“Crosswinds”), Federated National Holding Company, a Florida corporation (“FNHC”), and Transatlantic Reinsurance Company, a New York corporation (“TransRe”), and each Person subsequently admitted as a member of the Company (in such capacity, individually, a “Member”, and collectively, the “Members”).

RECITALS

WHEREAS, on September 10, 2014, a Certificate of Formation for the Company (the “Certificate of Formation”) was filed with the Secretary of State of the State of Delaware in accordance with the provisions of the Delaware Limited Liability Company Act, 6 Del. C. § 18-101 through § 18-1109, as the same may be amended from time to time, and the provisions of succeeding law (the “Act).

WHEREAS, the Members have agreed to provide cash or other assets, as the case may be, to the Company in exchange for equity interests in the Company simultaneously with the execution and delivery of this Agreement.

WHEREAS, the Company and the Members desire to enter into this Agreement to allocate among themselves certain economic and non-economic rights in respect of their interests.

NOW, THEREFORE, for and in consideration of the mutual agreements hereinafter contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree that the rights, duties and liabilities of the Members shall be as provided in the Act, except as otherwise provided in this Agreement.

ARTICLE 1DEFINITIONS

Section 1.1 Definitions.  As used in this Agreement, the following terms shall have the meanings set forth below:

“4-Year Valuation” shall have the meaning set forth in Section 9.1.

“4th-Year Call Closing” shall have the meaning set forth in Section 9.6.5.

“4th-Year Call Closing Date” shall have the meaning set forth in Section 9.6.5.

“4th-Year Call Option Notice” shall have the meaning set forth in Section 9.6.1.

“4th-Year Call Right” shall have the meaning set forth in Section 9.6.1.

“4th-Year Call Units” shall have the meaning set forth in Section 9.6.1.

“4th-Year Exercising Member” shall have the meaning set forth in Section 9.6.1.

“4th-Year Purchase Price” shall have the meaning set forth in Section 9.6.2.

“Act” shall have the meaning set forth in the Recitals to this Agreement.

“Additional Capital Contribution” means the amount of a Capital Contribution made, or deemed made, by a Member (including an Additional Member) other than the Initial Capital Contribution of such Member pursuant to Section 3.2.1.

“Additional Member” shall have the meaning set forth in Section 3.2.2(b).

“Adjusted Capital Account Balance” means, with respect to any Member, the balance in such Member’s Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments:

(a) credit to such Capital Account any amounts that such Member is obligated to restore, because of a promissory note to the Company or otherwise, or is deemed to be obligated to restore pursuant to the penultimate sentence in each of Regulations Sections 1.704-2(g)(1)(ii) and 1.704-2(i)(5); and

(b) debit to such Capital Account the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4); 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6).

This definition of Adjusted Capital Account Balance is intended to comply with Section 1.704-1(b)(2) of the Regulations and shall be interpreted consistent with such Regulations.

“Adjusted Capital Account Deficit” means a deficit in the Adjusted Capital Account Balance.

“Affiliate” means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries Controls or is Controlled by or is under common Control with such Person; but, the Company and its Subsidiaries shall not be deemed to be Affiliates of a Manager or any of its Affiliates, and a Manager and its Affiliates shall not be deemed to be Affiliates of the Company.

“Agreement” means this Limited Liability Company Agreement, as it may hereafter be amended or modified from time to time.

“Annual Budget” means a yearly budget that includes forecasts of all budgeted revenues, expenses and capital expenditures of the Company and its Subsidiaries, in such form as approved by the Board.

2

“Assumed Tax Rate” means, with respect to a Fiscal Year, the highest marginal combined federal, provincial, state and local income tax rate applicable to any Member, taking into account the character (e.g. long-term or short-term capital gain or ordinary or tax-exempt) of the applicable income.

“Bankruptcy” or “Bankrupt”means, with respect to any Person, that (a) such Person (i) makes a general assignment for the benefit of creditors; (ii) files a voluntary bankruptcy petition; (iii) becomes the subject of an order for relief or is declared insolvent in any federal or state bankruptcy or insolvency proceedings; (iv) files a petition or answer seeking for such Person a reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any law; (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against such Person in a proceeding of the type described in subclauses (i) through (iv) of this clause (a); or (vi) seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of such Person’s or of all or any substantial part of such Person’s properties; or (b) against such Person, a proceeding seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any law has been commenced and 120 days have expired without dismissal thereof or with respect to which, without such Person’s consent or acquiescence, a trustee, receiver, or liquidator of such Person or of all or any substantial part of such Person’s properties has been appointed and 120 days have expired without the appointment having been vacated or stayed, or 120 days have expired after the date of expiration of a stay, if the appointment has not previously been vacated.

“Bankruptcy Notice” shall have the meaning set forth in Section 8.4.

“Board” means the Board of Managers of the Company.

“Business” means the property and casualty insurance business, including, without limitation, homeowners’, condominium and cooperative multi-peril and other lines of insurance in any state in the United States (but with respect to the Company and/or its Subsidiaries, initially in the State of Florida) and premium finance related to such insurance.

“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York, are authorized or required by law to close.

“Call Closing” shall have the meaning set forth in Section 8.5.4.

“Call Closing Date” shall have the meaning set forth in Section 8.5.4.

“Call Option Notice” shall have the meaning set forth in Section 8.5.1.

“Call Right” shall have the meaning set forth in Section 8.5.1.

“Call Units” shall have the meaning set forth in Section 8.5.1.

“Capital Account(s)” shall have the meaning set forth in Section 3.6.1.

3

“Capital Contribution” means, when used with respect to any Member, except as otherwise provided herein, the aggregate amount of capital contributed, or deemed contributed, to the Company by such Member on a date or a series of related contribution dates, and shall be further designated with respect to each Interest as being an Initial Capital Contribution or Additional Capital Contribution.  The amount of the Capital Contribution shall be the sum of money and the fair market value of any property or services, as determined by the Board as of the date contributed by the Member, net of any liabilities assumed by the Company or subject to the contributed property under Code Section 752 and the Regulations thereunder.

“Capital Event” means (a) a sale of all or substantially all of the assets of the Company or any Affiliate of the Company, or (b) any other transaction that occurs outside of the ordinary course of business of the Company or any Affiliate of the Company and that results in Cash Flow to the Company in excess of 50% of the book value of the assets of the Company.

“Cash Flow” means, for any period or upon Capital Event, as applicable, the Gross Receipts of the Company less Company expenses less any reserves held in the discretion of the Board for other liabilities of the Company or for taxes withheld pursuant to Section 4.7, less any amounts invested by the Company in tangible or intangible assets, plus any Company expenses that did not require the expenditure of cash (such as depreciation or amortization).

“Cash Flow from a Capital Event” means Cash Flow that, as determined by the Board, is (a) attributable to a Capital Event, and (b) not Cash Flow from Liquidation, but, unless approved by the Class B Members, in calculating Cash Flow from a Capital Event the Board shall not reduce Cash Flow by any amounts invested by the Company in assets other than assets related to the Business.

“Cash Flow from Liquidation” means Cash Flow that, as determined by the Board, is attributable to the liquidation of the Company under Article 10.

“Cash Flow from Operations” means Cash Flow that, as determined by the Board, is not (a) Cash Flow from a Capital Event, or (b) Cash Flow from Liquidation.

“Certificate of Formation” shall have the meaning set forth in the Recitals to this Agreement.

“Chairperson” shall have the meaning set forth in Section 6.1.2(j).

“Change of Control” means, with respect to a Class A Member or an Affiliate that Controls such Class A Member, such time as (a) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of such Class A Member or Controlling Affiliate and its subsidiaries, taken as a whole, to any Competitor; (b) a Competitor, other than any existing equity holder of such Class A Member or Controlling Affiliate as of the Effective Date, becomes (i) the ultimate “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the total voting power of the voting stock or other equity interests of such Class A Member or Controlling Affiliate on a fully diluted basis, or (ii) becomes the general partner or managing member of any limited partnership or limited liability company that is a Class A Member or Controlling Affiliate, and, in either case, the ownership of such Class A Member or Controlling Affiliate represents a greater percentage of the total voting power of such Class A Member or Controlling Affiliate, on a fully diluted basis, than is held by the existing equity holders of such Class A Member or Controlling Affiliate on such date; or (c) such Class A Member or Controlling Affiliate consolidates with, or merges with or into, any Competitor, or any Competitor consolidates with, or merges with or into, such Class A Member or Controlling Affiliate, in any such event pursuant to a transaction in which any of the outstanding equity interests of such Class A Member or Controlling Affiliate or such Competitor is converted into or exchanged for cash, securities or other property where immediately after such transaction, a Competitor, other than any existing stockholder as of the Effective Date, becomes the ultimate beneficial owner (as defined above) of 20% or more of the voting power of the voting stock of the surviving or transferee Person.

4

“Claim” shall have the meaning set forth in Section 6.4.2.

“Class A Members” means each Person (a) holding a Class A Unit and (b) admitted to the Company as a Member.

“Class A Units” means a common Unit designated on the date of issuance as a “Class A Unit.”  Class A Units are voting Interests in the Company initially held by Crosswinds and FNHC.

“Class B Members” means each Person (a) holding a Class B Unit and (b) admitted to the Company as a Member.

“Class B Units” means a common Unit designated on the date of issuance as a “Class B Unit.”  Class B Units are non-voting Interests in the Company initially held by TransRe.

“Class B Participation Rights Notice Period” shall have the meaning set forth in Section 7.10.2.

“Class B Participation Rights Offer” shall have the meaning set forth in Section 7.10.1.

“Class C Members” means each Person (a) holding a Class C Unit and (b) admitted to the Company as a Member.

“Class C Units” means a common Unit designated on the date of issuance as a “Class C Unit.”  Class C Units are non-voting Interests in the Company to be issued in conjunction with any Additional Capital Contribution by Crosswinds, FNHC, TransRe or any Additional Member.

“COC Exercising Member” means Crosswinds, with respect to a Change of Control of FNHC, or FNHC, with respect to a Change of Control of Crosswinds, as the case may be.

“COC Selling Member” means Crosswinds and its Affiliates, with respect to a Change of Control of Crosswinds, or FNHC and its Affiliates, with respect to a Change of Control of FNHC, as the case may be.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, or any corresponding provision(s) of succeeding law.

“Company” shall have the meaning set forth in the first paragraph of this Agreement.

5

“Competitor” means any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Exchange Act) that is engaged in the business of providing property and casualty insurance in the United States of America, or any Affiliate of such “person” or “group” that Controls such “person” or “group”; but, the term Competitor shall not include, in the case of FNHC, FNHC and its Subsidiaries or, in the case of Crosswinds, Crosswinds and its Subsidiaries.

“Control” means, with respect to a corporation or limited liability company, the right to exercise, directly or indirectly, more than 35%of the voting rights attributable to the controlled corporation or limited liability company; and, with respect to any individual, partnership, trust, other entity or association, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity or the actions of the individual, as the case may be.  The terms “Controlled” and “Controlling” have correlative meanings.

“Conveyance Triggering Event” means (a) the agreement by the Board to cause the sale, conveyance, exchange or assignment by Members, Assignees, the Company or a Subsidiary of the Company, in one transaction or series of related transactions, of 50% or more of the Outstanding Units or the outstanding equity interests of any Subsidiary of the Company to Persons who, prior to such sale, did not own more than 50% of the Outstanding Units or equity interests of such Subsidiary, as applicable; or (b) a public offering, pursuant to a registration statement under the Securities Act, of any Interests of the Company and/or any Subsidiary of the Company.

“Crosswinds” shall have the meaning set forth in the Recitals, and any successor or permitted assign.

“Crosswinds Alternate Transaction” means a transaction consummated within 24 months of the date of this Agreement in which Crosswinds or any of its wholly-owned Affiliates makes a direct equity investment in any insurance company that will engage in the Business in any coastal state of the United States.  For the avoidance of doubt, any indirect investment in a holding company or other vehicle not predominantly engaged in the Business in any coastal state of the United States will not constitute a Crosswinds Alternate Transaction.

“Crosswinds Designees” shall have the meaning set forth in Section 6.1.2(a).

“Crosswinds Participation Acceptance Period” shall have the meaning set forth in Section 9.5.1.

“Crosswinds Participation Notice” shall have the meaning set forth in Section 9.5.1.

“Crosswinds Services Agreement” shall mean any agreement between Crosswinds and/or any of its Affiliates on the one hand and the Company, Monarch National or any other Subsidiary of the Company on the other hand for the provision of asset management services by Crosswinds and/or any of its Affiliates, as any such agreement may be amended or superseded from time to time.

6

“Culpable Act” means, with respect to any Person, such Person’s bad faith, fraud or willful misconduct in carrying out such Person’s obligations under this Agreement, or such Person’s receipt of a personal benefit in violation or breach of any provision of this Agreement which, in each case, results in a material adverse effect on the Company; provided, however, that a “bad faith” claim by insured parties in connection with claims administration under applicable insurance law without more shall not be deemed a Culpable Act.

“Depreciation” means, for each Fiscal Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Fiscal Year or other period; but, if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction with respect to such asset for such Fiscal Year or other period bears to such beginning adjusted tax basis; and provided further, that if the federal income tax depreciation, amortization or other cost recovery deduction for such Fiscal Year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Board.

“Debt Acceptance Period” shall have the meaning set forth in Section 9.10.

“Debt Notice” shall have the meaning set forth in Section 9.10.

“Disabled” or “Disability” means that an individual is unable to perform substantially all of his duties as a manager, employee or consultant of the Company or any of its Subsidiaries, as the case may be, due to injury, illness, or disability (physical or mental) that either (a) remains in effect for any 90 consecutive days or (b) remains in effect for any combination of 180 days (whether consecutive or not) out of any 360 day period.

“Drag-Along Member” shall have the meaning set forth in Section 8.7.1.

“Drag-Along Purchaser” shall have the meaning set forth in Section 8.7.1.

“Drag-Along Sale” shall have the meaning set forth in Section 8.7.1.

“Drag-Along Seller” shall have the meaning set forth in Section 8.7.1.

“Drag-Along Units” shall have the meaning set forth in Section 8.7.1.

“Drag Notice” shall have the meaning set forth in Section 8.7.2.

“Effective Date” shall have the meaning set forth in the first paragraph of this Agreement.

“Encumbrance” means any lien, order, security interest, contract, easement, covenant, community property interest, equitable interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, disposition, receipt of income, or exercise of any other attribute of ownership.

7

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Exercising Member” shall have the meaning set forth in Section 9.7.3.

“Extended Rights Offer” shall have the meaning set forth in Section 7.9.3.

“Extended Rights Period” shall have the meaning set forth in Section 7.9.3.

“Fair Market Value” shall have the meaning set forth in Section 8.8.

“Final Determination” means (a) a final, non-appealable determination by a court of competent jurisdiction, (b) a determination made through binding arbitration or other final alternative dispute resolution process agreed to by the parties to such dispute, or (c) a written admission of a Person specifically stating that such admission shall constitute a Final Determination against such Person for purposes of this Agreement.

“Fiscal Year” means the 12-month period ending December 31 of each calendar year; provided that the first Fiscal Year shall be the period beginning on the Effective Date and ending on December 31, 2015, and the last Fiscal Year shall be the period beginning on January 1 of the calendar year in which the final liquidation and termination of the Company is completed and ending on the date such final liquidation and termination is completed (to the extent any computation or other provision herein provides for an action to be taken on a Fiscal Year basis, an appropriate proration or other adjustment shall be made in respect of the first or final Fiscal Year to reflect that such period is less than a full calendar year period).

“FNHC” shall have the meaning set forth in the Recitals.

“FNHC Alternate Transaction” means a transaction consummated within 24 months of the date of this Agreement in which the management team of FNHC or any of its Affiliates either (a) assists a third party in the formation of an insurance company or a holding company for an insurance company or (b) acquires, directly or indirectly, an insurance company, in each such case, which insurance company or insurance holding company will be jointly owned by FNHC or any of its Affiliates or in which FNHC or any of  its Affiliates will receive a profit participation, and that will engage in the Business.

“FNHC Designees” shall have the meaning set forth in Section 6.1.2(a).

“FNHC Participation Acceptance Period” shall have the meaning set forth in Section 9.5.2.

“FNHC Participation Notice” shall have the meaning set forth in Section 9.5.2(a).

“FNHC Services Agreement”shall mean that certain Managing General Agency and Claims Administration Agreement, dated of even date herewith, by and between Monarch National and FedNat Underwriters, Inc., a Florida corporation, as the same may be amended or superseded from time to time.

8

“Governmental Authority” means any nation, state, territory, province, county, city or other unit or subdivision thereof or any entity, authority, agency, department, board, commission, instrumentality, court or other judicial body authorized on behalf of any of the foregoing to exercise legislative, judicial, regulatory or administrative functions of or pertaining to government, and any governmental or non-governmental self-regulatory organization.

“Gross Asset Value” means, with respect to any asset, such asset’s adjusted basis for federal income tax purposes, except as follows:

(a) the initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as agreed to by the contributing Member and the Board;

(b) the Gross Asset Value of all Company assets shall be adjusted to equal their respective gross fair market values, as determined by the Board, as of the following times: (i) the acquisition of an additional interest in the Company by any Member or Additional Member in exchange for more than a de minimis Capital Contribution or in exchange for services; (ii) the distribution by the Company to a Member of more than a de minimis amount of Company assets as consideration for an interest in the Company; and (iii) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); but, adjustments pursuant to Clause (i) and Clause (ii) of this sentence shall be made only if the Board reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company;

(c) the Gross Asset Value of any Company asset distributed to any Member shall be the gross fair market value of such asset on the date of distribution, as determined by the Board; and

(d) The Gross Asset Values of Company assets shall be adjusted to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m).

If the Gross Asset Value of an asset has been determined or adjusted pursuant to Paragraph (a) or Paragraph (b) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Profits and Net Losses.

“Gross Receipts” means all revenues and receipts, calculated on a cash basis, from the Business from all sources but excluding amounts contributed by the Members to the capital of the Company (other than such amounts paid by the Board to reimburse the Company for any operating expenses).

“Indemnified Party” shall have the meaning set forth in Section 6.4.2.

9

“Independent Designee” shall have the meaning set forth in Section 6.1.2(a).

“Initial Capital Contribution” means the amount of the Capital Contribution made, or deemed made, by a Member at the time of its admission to the Company, as of the Effective Date or as of the date of their admission as an Additional Member, as the case may be.

“Interest” or “Interests” means the entire interest of a Member in the Company at any particular time, including the right of such Member to any and all benefits associated with such interest and the Capital Account to which a Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all the terms and provisions of this Agreement.

“Manager” means each Person designated as a Manager of the Company as provided in Section 6.1.

“Member Approval” means the approval by or consent of the Members holding voting Interests.

“Members” shall have the meaning set forth in the first paragraph of this Agreement.

“Minimum Control Threshold Amount” means (a) with respect to Crosswinds and its Affiliates, an Ownership Percentage (in the aggregate) of at least 10%, and (b) with respect to FNHC and its Affiliates, an Ownership Percentage (in the aggregate) of at least 10%.

“Monarch National” means Monarch National Insurance Company, a Florida corporation and Subsidiary of Monarch National Holdings.

“Monarch National Holdings” means Monarch National Holding Company, a Florida corporation and Subsidiary of the Company.

“Net Profit” or “Net Loss” means for each Fiscal Year or other relevant period, an amount equal to the Company’s taxable income or taxable loss for such Fiscal Year or period as determined under Section 703(a) of the Code, and Regulations Section 1.703-1, but with the following adjustments:

(a) Any tax-exempt income, as described in Section 705(a)(1)(B) of the Code, realized by the Company during such Fiscal Year shall be added to such taxable income or taxable loss;

(b) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code for such Fiscal Year or treated as being so described in Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into account in this subsection shall be subtracted from such taxable income or taxable loss;

(c) In the event the Gross Asset Value of any Company asset is adjusted in accordance with Paragraph (b) or Paragraph (c) of the definition of “Gross Asset Value,” the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Profits or Losses;

10

(d) Gain or loss resulting from any disposition of any asset of the Company with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the asset disposed of, notwithstanding that the adjusted tax basis of such asset differs from its Gross Asset Value;

(e) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period, computed in accordance with the definition of “Depreciation;” and

(f) Any item of income, gain, loss or deduction that is required to be allocated to a Member under Section 4.4 or Section Error! Reference source not found. shall not be taken into account in computing such taxable income or taxable loss.

This definition is intended to comply with the Regulations and any and all other items which must be included in Net Profit or Net Loss in order for this Agreement to comply with said Regulations shall be included in such concept.  Notwithstanding any other provision of this definition, any items of income, gain, deduction, loss or credit that are specially allocated shall not be taken into account in computing Net Profit or Net Loss.  The intent of this definition is that no reference to Net Profit or Net Loss include such specially allocated items.

“Notice Date” shall have the meaning set forth in Section 8.8.

“Offered Debt” shall have the meaning set forth in Section 9.10.

“Officer” shall have the meaning set forth in Section 6.2.4(b).

“Outstanding Units” means, with respect to a specified date, the total number of issued and outstanding Units.

“Ownership Percentage” means, as of a particular time for a Member and its Affiliates, the amount, expressed as a percentage, obtained by dividing (a) the aggregate number of Units owned by such Member and each of its Affiliates at such time, by (b) the Outstanding Units at such time.

“Participation Rights Notice Period” shall have the meaning set forth in Section 7.9.2.

“Participation Rights Offer” shall have the meaning set forth in Section 7.9.1.

“Permitted Transfer” means, with respect to each Person bound by the terms of this Agreement, the Transfer of Interests to a Person that is an Affiliate of such Person; but in the event any such Affiliate ceases to be an Affiliate of the transferring Member due to such Member’s Transfer of its direct or indirect interest in such Affiliate, such transferring Member shall cause such Affiliate to transfer to such Member or another Affiliate of such Member all Interests owned by such Affiliate immediately prior to the time such Affiliate would cease to be an Affiliate of such Member, provided, further, that if such transfer of Interests does not occur prior to such disposition of such interest in such Affiliate, such disposition shall be deemed a Transfer that is subject to all of the restrictions as set forth in Article 8.

11

“Person” means any individual, partnership, corporation, firm, limited liability company, trust or other legal entity.

“Preliminary FNHC Participation Notice” shall have the meaning set forth in Section 9.5.2(a).

“Proceeding” shall have the meaning set forth in Section 6.4.2.

“Proposed Purchaser” shall have the meaning set forth in Section 8.6.1.

“Proposed Sale” shall have the meaning set forth in Section 8.6.1.

“Pro Rata Basis” means, at any specified time for a specific Member, that portion of the Interest that is available for purchase determined by taking such Member’s Units held at such time, and dividing it by the total Units held by such Member and all other Members at such time.

“Purchase Price” shall have the meaning set forth in Section 8.5.2.

“Purchaser” shall have the meaning set forth in Section 8.8.

“Qualifying ROFO Offer” shall have the meaning set forth in Section 9.4.

“Regulations” means the United States Department of Treasury Regulations (including temporary Regulations) promulgated under the Code, as such regulations may be amended, modified or supplemented from time to time.

“Released Party” shall have the meaning set forth in Section 6.4.1.

“Representative(s)” shall have the meaning set forth in Section 12.14.

“ROFO Acceptance Period” shall have the meaning Section 9.4.

“ROFO Notice”shall have the meaning set forth in Section 9.4.

“ROFO Option Period” shall have the meaning set forth in Section 9.4.

“ROFO Price” shall have the meaning set forth in Section 9.4.

“ROFO Transaction”shall have the meaning set forth in Section 9.4.

“Sale Notice” shall have the meaning set forth in Section 8.6.1.

“Sale Request” shall have the meaning set forth in Section 8.6.1.

12

“Securities Act” shall have the meaning set forth on the cover page to this Agreement.

“Seller” shall have the meaning set forth in Section 8.8.

“Selling Member(s)” shall have the meaning set forth in Section 9.6.1.

“Subsidiary” means, with respect to a specified Person, any Person in which, at the time of the applicable determination, such specified Person has, directly or indirectly, a 50% or greater ownership interest or any Person with respect to which such specified Person possesses (through one or more intermediaries) the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; but in no event shall the Company or any of its Subsidiaries be deemed to be a Subsidiary of the Members.

“Supermajority of Managers” means the approval of at least five Managers.

“Tax” means all U.S. federal, state, local or foreign taxes of any kind, including all interest, penalties and additions to tax imposed thereon.

“Tax Liability Amount” means, with respect to any Member, for any given Fiscal Year, an amount equal to (a) the Assumed Tax Rate multiplied by (i) the taxable income and gain allocated to such Member for such Fiscal Year (as shown on the applicable Internal Revenue Service Form 1065 Schedule K-1 filed by the Company), excluding partner-level taxable income adjustments made under Code Section 743(b), minus (ii) the cumulative losses that have been allocated to such Member to the extent such losses have not previously reduced taxable income and gain pursuant to this provision, minus (b) the sum of (x) such Member’s pro rata share of any creditable foreign taxes imposed on and paid by the Company to a non-U.S. governmental authority, and (y) the amount, if any, of taxes withheld by the Company pursuant to Section 4.7 with respect to such Member.

“Tax Matters Partner” shall have the meaning set forth in Section 5.5.

“Taxing Authority” means, with respect to any Tax, the Governmental Authority that imposes such Tax and the agency (if any) charged with the collection of such Tax for such Governmental Authority.

“Third Party Offer” shall have the meaning set forth in Section 9.4.

“Transfer” means, with respect to a specified Interest, any transfer, sale, pledge, hypothecation, Encumbrance, disposal or assignment of all or any portion of such Interest, whether voluntarily, by merger or consolidation or by operation of law, by court order, by judicial process, or by foreclosure, levy, or attachment, and whether effected during the transferring Member’s existence.

“Transferor” shall have the meaning set forth in Section 8.6.1.

“TransRe” shall have the meaning set forth in the Recitals, and includes any successor or permitted assign.

13

“TransRe Redemption Date” shall have the meaning set forth in Section 9.7.6.

“TransRe Redemption Notice” shall have the meaning set forth in Section 9.7.6.

“TransRe Redemption Price” shall have the meaning set forth in Section 9.7.5.

“TransRe Sale Offer” shall have the meaning set forth in Section 9.7.1.

“TransRe Sale Price” shall have the meaning set forth in Section 9.7.2.

“TransRe Redemption Request” shall have the meaning set forth in Section 9.7.5.

“TransRe Sale Request” shall have the meaning set forth in Section 9.7.3.

“Unit” means the units into which the Interests in the Company have been divided and assigned to a Member in accordance with Section 3.1 and shall include all types and classes of Units.

“Unrecovered Capital” means, at any time, with respect to the Units held by a Member, (a) the aggregate Capital Contributions of such Member with respect to such Units; plus (b) the Unrecovered Capital Accrual; minus (c) cumulative distributions to such Member pursuant to Section 4.6.

“Unrecovered Capital Accrual” means, at any time, with respect to Units held by a Member the cumulative amount then accrued (commencing on the Effective Date) at a rate per annum equal to 6.00%, compounded annually, on (a) the aggregate Capital Contributions of such Member with respect to such Units less (b) distributions to such Member pursuant to Section 4.6.

“Withholding Advances” shall have the meaning set forth in Section 4.7.1.

Section 1.2 Terms Generally.  For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires:

(a) all pronouns and all variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or entity may require;

(b) the terms defined in this Article  (or elsewhere herein) include both the plural and the singular;

(c) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, Schedule, Exhibit or other subdivision;

(d) the reference in this Agreement to a Section, Exhibit, Schedule or Article  shall refer to a Section, Article or Schedule of, or an Exhibit to, this Agreement unless otherwise clearly indicated to the contrary; and

14

(e) the words “including” and “include” and other words of similar import shall be deemed to be followed by the phrase “without limitation.”

Section 1.3 Other Definitions.  In addition to the terms defined in Section 1.1, other terms will have the definitions provided elsewhere in this Agreement.

ARTICLE 2FORMATION; OPERATING GUIDELINES

Section 2.1 Formation of Company.  On September 10, 2014, the Company was formed as a Delaware limited liability company by the filing with and issuance of the Certificate of Formation by the Secretary of State of the State of Delaware in accordance with the provisions of the Act.  The Members hereby agree to execute and file any required documents with the Secretary of State of the State of Delaware and shall do all other acts requisite for the constitution of the Company as a limited liability company pursuant to the Act or any other applicable law.  The rights and obligations of the Members shall be governed by this Agreement and by the Act.  If there is a conflict between the provisions of this Agreement and the Act, the provisions of the Act shall control (it being understood, however, that if the Act provides for a particular rule but allows the members of a limited liability company to provide to the contrary in their limited liability company agreement, and if the parties hereto have so provided hereunder, then such provisions shall not be deemed to constitute a conflict for purposes of the foregoing).

Section 2.2 Company Name.  The business of the Company shall be conducted under the name of “Monarch Delaware Holdings LLC” and under such name or such assumed names as the Board deems necessary or appropriate to comply with the requirements of any other jurisdiction in which the Company may be required to qualify.  The Board is authorized to change the Company name at any time upon the approval of a Supermajority of Managers and without the consent of the Members.

Section 2.3 Term.  The term of the Company commenced as of the date of formation and shall continue in full force and effect until the dissolution, winding up and termination of the Company in accordance with Article 10.

Section 2.4 Scope of Members’ Authority.  Except as otherwise expressly and specifically provided in this Agreement, no Member solely by virtue of its status as a Member shall have any authority to bind, to act for, to sign for or to assume any obligation or responsibility on behalf of the Company.

Section 2.5 Registered Office and Agent.  The Company’s registered agent in Delaware is The Corporation Trust Company, having an address of Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.  The Company may change its registered agent to such person as may at any time or from time to time be determined by the Board.

15

Section 2.6 Outside Activities.  Except as set forth in Section 9.5, this Agreement shall not be deemed to restrict in any way the rights of any Member or Manager, or any director, officer, shareholder, member, manager, partner or Affiliate of any Member or Manager, to engage in, or to conduct any other trade, business or activity, independently or with others, including, without limitation, the ownership, operation and management of other ventures engaged in the Business or an activity related thereto, whether or not any such activity, trade or business is adverse to, competes with, is complementary with, or is enhanced by, the business of the Company or the other Members, and neither the Company nor the other Members shall have any rights in or to any such trade, business or activity or the income or profits derived therefrom.  Except as set forth in Section 9.5, neither the Company, nor any Member or any other Person shall have any rights by virtue of this Agreement or the limited liability company relationship established hereby in any business ventures of any other Person, and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Company, any Member, or any other Person, even if such opportunity is of a character which, if presented to the Company, such Member or such other Person, could be taken by the Company, such Member or such Person.

Section 2.7 Principal Office.  The principal office of the Company shall be at the executive offices of FNHC or such other location as the Board may select.  The Company may change its place of business to such location as may at any time or from time to time be determined by the Board.  The mailing address of the Company shall be 14050 N.W. 14^th Street, Suite  180, Sunrise, Florida  33323, or such other address as may be selected from time to time by the Board.  The Board may change the Company’s mailing address to such location at any time.

Section 2.8 Purpose.  The purpose and character of the business of the Company is to transact any or all lawful business for which limited liability companies may be formed under the Act.

ARTICLE 3CAPITAL CONTRIBUTIONS

Section 3.1 Authorization and Issuance of Interests.

3.1.1 The Company shall be authorized to issue three classes of Units as follows:

Class of Units	Number of Units Authorized
Class A Units	280
Class B Units	500
Class C Units	2,000

3.1.2 The holders of each class of Units shall be entitled to the rights and subject to the obligations ascribed to such class by this Agreement.  Any holder of a class of Units who is admitted as a Member, shall be referred to as a Member of such class of Units (e.g., a holder of Class A Units who is admitted as a Member shall be referred to as a Class A Member).  Any holder of more than one class of Units shall have the separate rights and obligations under this Agreement with respect to each class of Unit held by such Member.  For example, a holder of Class A Units and Class B Units shall be referred to and shall be treated separately in its separate capacities as both a Class A Member and a Class B Member.

16

Section 3.2 Capital Contributions of the Members.

3.2.1 Initial Capital Contributions.  Each of the Members admitted to the Company as of the Effective Date shall have contributed such Member’s Initial Capital Contribution as set forth on Schedule 1 attached hereto and hereby made a part of this Agreement.  Upon making its Initial Capital Contribution, each Member shall receive the number of Units set forth opposite the name of such Member on Schedule 1 attached hereto, as adjusted from time to time pursuant to the terms of this Agreement.

3.2.2 No Additional Member Funding Required; Additional Members; Additional Capital Contributions.

(a) No Additional Capital Contributions shall be made by the Members, and no additional Members shall be admitted to the Company, without the approval of a Supermajority of Managers.

(b) Subject to Section 3.2.2(a), the Board may authorize, in accordance with the terms of this Agreement, the admission of Persons other than Crosswinds, FNHC and TransRe as Members (each, an “Additional Member”), and may request Additional Capital Contributions from the Members.

(c) The Board shall make a request for Additional Capital Contributions in accordance with the provisions of Section 7.9 and/or Section 7.10, as applicable.

(d) The Members agree that the failure of a Member to consent to make an Additional Capital Contribution, a Member’s decision to make an Additional Capital Contribution on less than a full Pro Rata Basis, or the failure of a Member to deliver the amount of an Additional Capital Contribution by or on the Contribution Date (i) will not prohibit the Company from receiving Additional Capital Contributions that are approved by the Board or from issuing new Interests in respect thereof, and (ii) in the event that the Company determines to issue new Interests in respect of such Additional Capital Contributions, the Interest of the Member failing to give consent or contribute shall be appropriately diluted by the issuance of such new Interests.  The Company may issue Class C Units or Class B Units to Persons who are not Members subject to Section 7.9 and Section 7.10, as applicable, and if the Company issues Class C Units or Class B Units to Members (including Crosswinds, FNHC, TransRe and Additional Members) it shall do so only in connection with any Additional Capital Contributions.

Section 3.3 Company Capital.

3.3.1 No Member shall be paid interest on any Capital Contribution.

17

3.3.2 No Member shall have the right to resign or withdraw all or any part of its Capital Contributions or to demand to receive any return on any portion of its Capital Contributions, except as may be otherwise specifically provided in this Agreement.

3.3.3 Under circumstances involving a return of any Capital Contribution, no Member shall have the right to receive property other than cash, except as specifically provided herein.

3.3.4 Except as otherwise expressly provided in this Agreement, no Member shall have any priority over any other Member as to the return of its Capital Contributions.

Section 3.4 Liability of Members.

3.4.1 No Member shall, by virtue of executing this Agreement, be responsible or liable for any indebtedness, contracts, or obligations of the Company or any other Member incurred or arising either before or after the Effective Date, except to the extent provided in the Act or as to those responsibilities, liabilities, indebtedness, or obligations expressly assumed by the Member in writing as of the Effective Date or after the Effective Date pursuant to and as limited by the terms of this Agreement.  Each Member covenants and agrees that it will comply in all respects with any contract or agreement approved by the Board as permitted under this Agreement.

3.4.2 No Member shall have any liability or obligation to the Company or to the other Members (a) to make Additional Capital Contributions to the Company (except as set forth in Section 3.2.2), (b) to make any loans to the Company, (c) to endorse or guarantee the payment of any loan to the Company, or (d) otherwise to make any payment to or on behalf of the Company, except as expressly set forth in this Agreement.

3.4.3 The Company shall not be liable for the return of all or any portion of the Capital Contributions of any Member.

Section 3.5 Loans by Members or Affiliates.  Any Member or any Affiliate of a Member may (but shall not be obligated to) at any time, upon obtaining the consent of the Board, loan money pursuant to commercially reasonable terms and conditions to the Company, which loan shall be treated the same as if coming from a third party and the making of such loan shall not affect the Ownership Percentage of any Member.  If any Member or an Affiliate of any Member lends funds to the Company, such Member or such Affiliate shall be entitled to receive interest on such loan, at a reasonable interest rate to be agreed upon by such Member or such Affiliate and the Board.

18

Section 3.6. Capital Accounts

3.6.1 Separate “Capital Accounts” shall be maintained for each Member in the manner required by Section 1.704-1(b)(2)(iv) of the Regulations.  To the extent consistent therewith, each Member’s Capital Account shall be equal to the sum of the following:

(a) the amount of any cash and the fair market value of any property (as determined as of the date of contribution by the Board) that the Member contributes to the Company (net of liabilities securing the property that the Company is considered to assume or take subject to under Section 752 of the Code); plus

(b) the aggregate Net Profit and items in the nature of income or gain allocated to the Member under Article 4 of this Agreement or other positive adjustment required by the Regulations; minus

(c) the amount of any cash and the fair market value of any property (as determined by the Board taking into consideration the most recent third-party valuation of the Company’s assets) distributed to the Member (net of liabilities securing the property that the Member is considered to assume or take subject to under Section 752 of the Code), as of the date of distribution; and minus

(d) the aggregate Net Loss and items in the nature of deduction or losses allocated to the Member under Article 4 of this Agreement or other negative adjustment required by the Regulations.

3.6.2 The Capital Accounts of the Members shall be adjusted to reflect a revaluation of Company property (as established by the Board) in the manner set forth in Section 1.704-1(b)(2)(iv)(f) of the Regulations as of the following times:  (a) the issuance of an Interest by the Company to a Member; (b) the acquisition of an additional Interest by any Member or Additional Member in exchange for more than a de minimis Capital Contribution; (c) the distribution by the Company to a Member of more than a de minimis amount of Company assets as consideration for the redemption of an Interest in the Company; (d) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); or (e) any other time determined by the Board in a manner consistent with Regulations Section 1.704-1(b)(2)(iv)(f); but, adjustments pursuant to clauses (a), (b) and (d) above shall be made only if the Board reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members of the Company.

3.6.3 If, pursuant to Sections 1.704-1(b)(2)(iv)(d) or 1.704-1(b)(2)(iv)(f) of the Regulations, Company property is reflected on the books of the Company at a book value that differs from the adjusted tax basis of such property, the Members’ Capital Accounts shall be adjusted in accordance with Section 1.704-1(b)(2)(iv)(g) of the Regulations for allocations of depreciation, and of gain or loss as computed for book purposes, with respect to such property.

3.6.4 In accordance with Section 1.704-1(b)(2)(iv)(d) of the Regulations, if the Company distributes property in kind to Members, the Capital Accounts will be adjusted first to reflect the manner in which any unrealized gain or loss inherent in the property would have been allocated among the Members as if the property had been sold instead for fair market value (as determined as of the date of distribution by the Board pursuant to the most recent third party valuation of the Company’s assets) to the extent not already reflected.

19

3.6.5 Upon the Transfer of an Interest in the Company after the Effective Date, the Capital Account of the transferor Member that is attributable to the transferred Interest will be carried over to the transferee Member.

3.6.6 The Capital Accounts shall be adjusted as required by Section 1.704‑1(b)(2)(iv)(m) of the Regulations upon an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b).

3.6.7 The foregoing provisions of Section 3.6 and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Section 1.704-1(b) of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations.  In the event the Board shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, debits or credits relating to liabilities that are secured by contributed or distributed property or that are assumed by the Company or the Members), are computed in order to comply with such Regulations, the Board may make such modification.

Section 3.7 Limitation on Issuance of New Interests. 

Section 3.8 The Company shall neither (a) issue new Interests nor (b) authorize any Subsidiary of the Company to issue equity interests, in either case, with privileges, preference, duties, liabilities, obligations or rights greater than those of the Class B Units without the prior written consent of the Class B Members. The Company shall not authorize any Subsidiary of the Company to enter into any recapitalization or other change in the capital structure of the Subsidiary that results in equity interests of such Subsidiary with privileges, preference, duties, liabilities, obligations or rights greater than those of the Class B Units without the prior written consent of the Class B Members.

ARTICLE 4ALLOCATIONS AND DISTRIBUTIONS

Section 4.1 Allocations of Net Profits and Net Losses.  For each Fiscal Year of the Company, after adjusting each Member’s Capital Account for all special allocations pursuant to Section 4.4 with respect to such Fiscal Year, all Net Profits and Net Losses (other than Net Profits and Net Losses specially allocated pursuant to Section 4.4) shall be allocated to the Members’ Capital Accounts in a manner such that, as of the end of such Fiscal Year, the Capital Account of each Member (which may be either a positive or negative balance) shall be equal to (a) the amount which would be distributed to such Member, determined as if the Company were to sell all of its assets for the Gross Asset Value thereof, pay all liabilities allocable to such assets according to their terms (limited, with respect to each nonrecourse liability, to the Gross Asset Value of the assets securing such liability) and distribute the proceeds thereof pursuant to Section 10.5, minus (b) the sum of (i) such Member’s share of Company Minimum Gain (as determined according to Section 1.704-2(d) and (g)(3) of the Regulations) and Member Nonrecourse Debt Minimum Gain (as determined according to Section 1.704-2(i) of the Regulations) and (ii) the amount, if any, which such Member is obligated to contribute to the capital of the Company as of the last day of such Fiscal Year.

20

Section 4.2 Loss Limitation.  Notwithstanding anything to the contrary in Section 4.1, the amount of items of Company expense and loss allocated pursuant to Section 4.1 to any Member shall not exceed the maximum amount of such items that can be so allocated without causing such Member to have an Adjusted Capital Account Deficit at the end of any taxable year. All such items in excess of the limitation set forth in this Section 4.2 shall be allocated first to Members who would not have an Adjusted Capital Account Deficit, pro rata in proportion to their Capital Account balances as adjusted in accordance with the definition of Adjusted Capital Account Deficit.

Section 4.3 Tax Allocations.  Except as provided in Section 4.5, for income tax purposes, Company income, gain, loss, deduction or credit (or any item thereof) for each Fiscal Year shall be allocated to and among the Members in order to reflect the allocations made pursuant to the provisions of this Article 4 for such Fiscal Year (other than allocations of items that are not deductible or are excluded from taxable income).

Section 4.4 Special Allocations.  Prior to any allocation of Net Profit or Net Loss pursuant to Section 4.1, the following special allocations shall be made in the following order:

4.4.1 Minimum Gain Chargeback.  To the extent required by Section 1.704-2(f) of the Regulations, if there is a net decrease in “partnership minimum gain” (within the meaning of Section 1.704-2(b)(2) of the Regulations) in a Fiscal Year, then each Member will be allocated items of income and gain that Fiscal Year, before any other allocation of Net Profit or Net Loss, equal to that Member’s share of the net decrease in partnership minimum gain.

4.4.2 Member Minimum Gain Chargeback.  If a Member suffers a net decrease in “partner nonrecourse debt minimum gain” (within the meaning of Section 1.704-2(i)(4) of the Regulations) in any Fiscal Year, then that Member will be allocated items of income and gain to the extent required by Section 1.704-2(i)(4) of the Regulations.

4.4.3 Qualified Income Offset.  In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), Sections 1.704-1(b)(2)(ii)(d)(5) or Sections 1.704-1(b)(2)(ii)(d)(6), items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 4.4.3 shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article  have been tentatively made as if this Section 4.4.3 were not in the Agreement.

21

  4.4.4 Nonrecourse Deductions.  If there are any “nonrecourse deductions”(within the meaning of Sections 1.704-2(b)(1) and 1.704-2(c) of the Regulations) in a Fiscal Year, then such deductions shall be allocated to the Members pro rata in proportion to their relative aggregate Capital Contributions.

4.4.5 Member Nonrecourse Deductions.  If there are any “partner nonrecourse deductions” (within the meaning of Section 1.704-2(i)(1) of the Regulations) in a Fiscal Year, then such deductions will be allocated to the Member who bears the economic risk of loss for the “partner nonrecourse liability” (within the meaning of Section 1.704-2(b)(4) of the Regulations) to which the deductions are attributable.

Section 4.5 704(c) Allocations.  Notwithstanding any other provision of this Agreement to the contrary, any gain or loss and any depreciation and cost recovery deductions recognized by the Company for income tax purposes in any Fiscal Year with respect to all or any part of the Company’s property that is required or permitted to be allocated among the Members in accordance with Section 704(c) of the Code and any Regulations promulgated thereunder so as to take into account the variation, if any, between the adjusted tax basis of such property and the initial fair market value of such property at the time of its contribution to the Company shall be allocated to the Members for income tax purposes pursuant to the “traditional method” as defined in Section 1.704-3(b) of the Regulations.  If and when the Capital Accounts of the Members are required to be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(f) or (g) of the Regulations with respect to a revaluation of any asset of the Company, then subsequent allocations of income, gain, loss, and deduction, including depreciation or deductions for cost recovery with respect to such asset, shall take into account any variation between the then existing adjusted basis of such asset for federal income tax purposes and the agreed value of such asset, as such computations may be required under Sections 704(b) and 704(c) of the Code and Regulation Section 1.704-1(b)(4)(i).  Any elections or other decisions relating to such allocations shall be made by the Board in its sole and absolute discretion.

Section 4.6 Distributions.  Except as otherwise provided in Section 10.1.3 (regarding Cash Flow from Liquidation), Cash Flow from Operations and Cash Flow from a Capital Event shall be distributed at such times and in such amounts as set forth in this Section 4.6.

4.6.1 Cash Flow from Operations.  Cash Flow from Operations will only be distributed to the Members with Board approval, in which case such distributions will be made to the Members pari passu in accordance with their respective Ownership Percentages at the time of the distribution.

4.6.2 Cash Flow from a Capital Event.  Cash Flow from a Capital Event will be distributed to the Members within five days of the receipt of the cash and proceeds from such Capital Event in the following order and priority:

(a) First, to the Class B Members until each Class B Member receives an amount equal to its Unrecovered Capital corresponding to its Class B Units;

22

(b) Second, pari passu, to the Class A Members until each Class A Member receives an amount equal to its Unrecovered Capital corresponding to its Class A Units;

(c) Third, pari passu, to the Class C Members, if any, until each receives an amount equal to its Unrecovered Capital corresponding to its Class C Units;

(d) Fourth, pari passu, to the Class A Members until each Class A Member receives an amount equal to 10% of the Cash Flow from a Capital Event remaining after all distributions pursuant to subsections (a), (b) and (c) of this Section 4.6.2; and

(e) Fifth, the balance, to the Members pari passu in accordance with their respective Ownership Percentages at the time of the distribution.

Section 4.7 Tax Withholding.

4.7.1 Withholding Advances.  If the Company withholds or incurs any obligation to pay to any Taxing Authority any amount in respect of any Tax  imposed on allocation or distributions made to any Member or former Member (“Withholding Advances”), any Withholding Advances so required to be withheld or paid by the Company with respect to such Person shall be treated for all purposes of this Agreement as if such amounts had been distributed to such Person pursuant to Section 4.6 at the time of such Withholding Advance, and the Board shall cause the Company to give prompt written notice to such Person of the date and amount of such deemed distribution.  Any Withholding Advances shall be withheld at the maximum applicable statutory rate under the applicable tax law unless the Board shall have received an opinion of counsel or other evidence, satisfactory to the Board in its sole and absolute discretion, to the effect that a lower rate is applicable or that no withholding is applicable.

4.7.2 Repayment of Withholding. Any Withholding Advance made by the Company to a Taxing Authority on behalf of a Member that is not used to offset the amount of a distribution to that Member shall:

(a) be promptly repaid to the Company by the Member on whose behalf the Withholding Advance was made (which repayment by the Member shall not constitute a Capital Contribution, but shall credit the Member’s Capital Account if the Board shall have initially charged the amount of the Withholding Advance to the Capital Account); or

(b) with the consent of the Board, be repaid by reducing the amount of the next succeeding distribution or distributions to be made to such Member (which reduction amount shall be deemed to have been distributed to the Member, but which shall not further reduce the Member’s Capital Account if the Board shall have initially charged the amount of the Withholding Advance to the Capital Account).

23

4.7.3 Indemnification.  Each Member hereby agrees to indemnify and hold harmless the Company and the other Members from and against any liability with respect to Taxes, interest or penalties which may be asserted by reason of the Company’s failure to deduct and withhold Tax on amounts distributable or allocable to such Member. The provisions of this Section 4.7.3 and the obligations of a Member pursuant to Section 4.7.2 shall survive the termination, dissolution, liquidation and winding up of the Company and the withdrawal of such Member from the Company or transfer of all or a portion of its Units. The Company may pursue and enforce all rights and remedies it may have against each Member under this Section 4.7.3, including bringing a lawsuit to collect repayment with interest of any Withholding Advances.

4.7.4 Overwithholding.  Neither the Company, the Board, the Managers nor the members of any committee established by the Board shall be liable for any excess Taxes withheld in respect of any distribution or allocation of income or gain to a Member. In the event of an overwithholding, a Member’s sole recourse shall be to apply for a refund from the appropriate Taxing Authority. Notwithstanding the foregoing, nothing in this Section 4.7.4 shall prevent the Board from making such correction to any overwithholding as deemed appropriate in its sole discretion.

Section 4.8 Tax Distributions.  Notwithstanding the foregoing provisions of Article 4 and subject to Section 4.9, to the extent such funds are legally available for distribution the total distributions to a Member for each Fiscal Year (and the 90-day period following such Fiscal Year) shall not be less than such Member’s Tax Liability Amount, and such distributions will be made on a quarterly basis.  Any amount distributed pursuant to this Section 4.8 shall be treated as an advance against future distributions, and to the extent that such minimum distributions requirement increases the amount of distributions beyond the amount to which a Member would be entitled in the absence thereof, the excess portion shall be considered a prepayment of future distributions allocable to such Member; provided that adjustments to any such future distributions to that Member shall not decrease such Member’s aggregate distributions below an amount necessary to meet the Tax Liability Amount for such Member for subsequent Fiscal Years.

Section 4.9 Prohibited Distributions.  Notwithstanding anything to the contrary in this Agreement, no distribution shall be made to any Member if, and to the extent that, such distribution would not be permitted under the Act or other applicable law.

24

ARTICLE 5ADMINISTRATIVE PROVISIONS; REPORTS

Section 5.1 Books of Account.  At all times during the continuance of the Company, the Board shall keep or cause to be kept true and complete books of account in which shall be entered fully and accurately each transaction of the Company.  Such books shall be kept on the basis of the Fiscal Year in accordance with the accrual method of accounting, except to the extent prohibited or modified by the Regulations.

Section 5.2 Availability of Books of Account.

5.2.1 All of the books of account referred to in Section 5.1, together with an executed copy of this Agreement and the Certificate of Formation, and any amendments thereto, shall at all times be maintained at the principal office of the Company, and upon reasonable notice to the Board, shall, subject to Section 12.14, be open to the inspection, examination and, solely to the extent necessary to comply with a Member’s public reporting obligations, duplication by the Members or their representatives during reasonable business hours.

5.2.2 Notwithstanding the foregoing, the Members acknowledge and agree that they have no other right to inspect or examine or request to inspect or examine any other documents or information and that, to the extent that such inspection or examination is not reasonably necessary for the Member’s public reporting obligations, the Board may limit the inspection and examination of the Company’s books and records if a Member may be engaged in a competitive enterprise, in which event the Board will make such books and records available to a third party licensed attorney or certified public accountant after execution of a non-disclosure agreement reasonably acceptable to the Board.

Section 5.3 Bank Accounts.  All funds of the Company shall be deposited in its name in an account or accounts maintained with a financial institution selected by the Board in its sole and absolute discretion.

Section 5.4 Tax Elections.  The Company shall to the extent permissible under applicable law elect to be treated as a “partnership” for state and federal income tax purposes.  Except as provided in the immediately preceding sentence, any and all federal, state or local tax elections and decisions for the Company shall be made by the Board in its sole and absolute discretion.

Section 5.5 Designation of Tax Matters Partner.  Pursuant to Section 6231(a)(7)(A) of the Code, the Members hereby designate Crosswindsas the Company’s “Tax Matters Partner”, who shall serve as such at the expense of the Company with all powers and authority granted to a Tax Matters Partner under the Code.  Each Member shall give prompt notice to the Company of any and all notices it receives from the Internal Revenue Service concerning the Company, including any notice of audit and any notice of a deficiency in tax concerning the Company’s federal income tax return.

Section 5.6 Independent Accountant.  The Company’s independent accountant shall at all times be an independent certified public accounting firm selected by the Board with experience in accounting and auditing limited liability companies engaged in similar business to that of the Company.  Crosswinds shall, at the expense of the Company, manage the accounting matters of the Company.

25

Section 5.7 Cooperation Regarding Public Reporting Obligations.  Each of FNHC, Crosswinds and TransRe agrees that, to the extent that any of them is obligated under applicable law to make public disclosure of the Company’s financial results or any material aspect of the Company’s business and operations, it will provide a copy of such disclosure to the other Members as soon as reasonably practicable prior to the filing thereof.  Although each of FNHC, Crosswinds and TransRe acknowledges and agrees that each party’s reporting obligations are its alone, each agrees to use reasonable efforts to ensure that all descriptions of the Company’s results, business and operations are consistent to the extent possible under applicable law.  Any copies of reports provided pursuant to this Section are confidential and shall be maintained as such in accordance with Section 12.14 hereof.

ARTICLE 6

MANAGEMENT OF THE COMPANY

Section 6.1 Management of the Company.

6.1.1 Management of the Company by Board.  Subject to the provisions of this Agreement, the Business, property and affairs of the Company shall be managed and all powers of the Company shall be exercised by or under the direction of the Board. 

6.1.2 Designation of Managers.

(a) Number and Election of Managers.  The number of Managers constituting the Board shall be fixed at six for the six month period following the Effective Date.  The Board initially shall consist of three natural Persons appointed by Crosswinds (the “Crosswinds Designees”), and three natural Persons appointed by FNHC (the “FNHC Designees”).  No later than six months from the Effective Date, Crosswinds and FNHC will agree upon one natural Person who is not a director or officer of Crosswinds or FNHC or their Affiliates, and who has not acted in such capacity within the prior five years, to act as the seventh Manager (the “Independent Designee”).  The Members hereby agree that the initial Board will consist of Colin King, Robert Wolf, and Charles S. Duncker, who will act as the Crosswinds Designees; and Michael H. Braun, Peter J. Prygelski, III, and Jenifer Kimbrough, who will act as the FNHC Designees.  Crosswinds and FNHC shall each retain the right to appoint the number of Manager designees set forth in this Section 6.1.2(a), subject to the termination of such rights set forth in Section 6.1.2(b).  The initial term for each Manager shall be for two years beginning on the Effective Date (and beginning on the date of appointment for the Independent Designee), and the Managers shall continue to be elected to two-year terms thereafter; but, in the event Crosswinds and FNHC cannot agree on a new Independent Designee at the end of an Independent Designee’s term, then such Independent Designee’s term on the Board will be extended for a further two years.  Each Manager shall serve until the earlier of (i) the appointment of such Manager’s successor in accordance with the terms of this Agreement, (ii) the removal of such Manager in accordance with the terms of this Agreement, (iii) such Manager’s resignation, and (iv) such Manager’s death or Disability.  A Manager may, but need not be, a Member.

26

(b) Loss of Designation Right.  Each of Crosswinds’ and FNHC’s right to designate, appoint and remove Manager(s), including the Independent Designee, shall terminate at such time as their Ownership Percentage falls below the Minimum Control Threshold Amount for such Member.  Notwithstanding anything to the contrary in this Agreement, in the event either of Crosswinds’ or FNHC’s Ownership Percentage falls below the Minimum Control Threshold Amount applicable to such Member, then the Managers appointed by the Member whose Ownership Percentage falls below the Minimum Control Threshold Amount applicable to such Member may be removed at such time by the Member still possessing an Ownership Percentage equal to or greater than the Minimum Control Threshold Amount applicable to such Member; and such Member may appoint the successors of such removed Managers.

(c) Resignation.  Any Manager may resign at any time by giving written notice to the Members and the remaining Managers.  The resignation of any Manager shall take effect upon receipt of that notice or at such later time as shall be specified in the notice.  Unless otherwise specified in the notice, the acceptance of the resignation shall not be necessary to make it effective.  Upon the resignation of any Manager, but subject to Section 6.1.2(b), the Member who appointed such resigning Manager may appoint a successor.  In the event of the Independent Designee’s resignation, Crosswinds and FNHC will mutually agree upon a replacement for the Independent Designee within six months of notice of such resignation; but in the interim, Charles S. Duncker and Jenifer Kimbrough will be deemed appointed as joint Chairpersons without further action required by the Board.

(d) Disability.  A Manager may be removed by the Board upon the determination of the Board of such Manager’s Disability.  The determination of Disability of a Manager is to be made in good faith by the Board, with such determination being binding on the Manager and may be set aside by a court or arbitrator only on a showing of bad faith of the Board by clear and convincing evidence.  Upon the removal of a Manager for Disability, but subject to Section 6.1.2(b),the Member who appointed such Disabled Manager may appoint a successor.  In the event of the Independent Designee’s resignation, Crosswinds and FNHC will mutually agree upon a replacement for the Independent Designee.

(e) Removal.  Subject to Section 6.1.2(b), any Manager may be removed at any time and with or without cause only by the Member who appointed such Manager.  Upon the removal of any Manager, the Member who appointed such removed Manager may appoint a successor.  Crosswinds and FNHC may mutually agree in writing to remove the Independent Designee on the condition that they have first identified a Person to replace the Independent Designee as Manager.

(f) Vacancies.  Upon the vacancy of any Manager for any reason, but subject to Section 6.1.2(b), the Member(s) who appointed the Manager whose position has been vacated may appoint a successor.

(g) Failure to Designate.  In the event any Member entitled to designate a Manager pursuant to this Agreement chooses not to designate a Manager (i) such Manager position(s) shall remain vacant, (ii) notwithstanding anything to the contrary in this Agreement, in the case of Crosswinds, the existing Crosswinds Designee(s) shall have the right to cast votes or grant consents for three Managers even if there are less than three Crosswinds Designees, and in the case of FNHC, the existing FNHC Designee(s) shall have the right to cast votes or grant consents for three Managers even if there are less than three FNHC Designees.

27

(h) Absence of Controlling Members.  In the event that no Member has an Ownership Percentage meeting the Minimum Control Threshold Amount, the Managers may be selected by the vote of the majority of the Ownership Percentage of the Class A Members.

(i) Member Actions.  Subject to Section 6.1.2(a), each of the Members and the Company shall take all action within their respective power (including having their Interest in the Company represented in person or by proxy at all meetings of the Members, voting their Interest, acting by written consent, and using all reasonable efforts to cause any Manager designated by such Member, if any, not to take any action inconsistent with this Agreement) required to cause the Board at all times to consist of the number of Managers set forth in this Section 6.1.2 and to elect the Crosswinds Designees and the FNHC Designees, if any.

(j) Chairperson of the Board.

(i) Charles S. Duncker and Jenifer Kimbrough will act as joint Chairpersons of the Board of Managers (the “Chairpersons”), until the appointment of the Independent Designee in accordance with Section 6.1.2(a), upon which Charles S. Duncker and Jenifer Kimbrough will be deemed to have resigned as Chairpersons and the Independent Designee will be deemed appointed as Chairperson without further action required by the Board.

(ii) The Chairperson(s) shall preside at all meetings of the Board.

(k) Compensation of Managers.

(i) The Company shall compensate the Independent Designee for such Manager’s service to the Company in such amount as shall be set forth in the Annual Budget. The compensation of the initial Independent Designee shall be agreed upon by Crosswinds and FNHC and shall be ratified at the first meeting of the Managers after the Effective Date.

(ii) Any Manager who is not an executive officer of either Crosswinds or FNHC may be compensated by the Company for such Manager’s service to the Company if and in such amount as the Board so determines.

28

6.1.3 Meetings of the Board.

(a) Notice and Call of Meetings.  Meetings of the Board may be called by any Manager.  All meetings shall be held upon at least five Business Days written notice, accompanied by the proposed agenda for such meeting (with confirmed receipt).  Notice of a meeting need not be given to any Manager who signs a waiver of notice or a consent to holding the meeting (which waiver or consent need not specify the purpose of the meeting) or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting, except when such Manager attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.  All such waivers, consents and approvals shall be filed with the Company records or made a part of the minutes of the meeting.

(b) Place. Meetings of the Board will be held at the offices of FNHC or such other place within or without the State of Delaware that has been designated in the notice of the meeting as may be approved by the Board; and meetings of the Board may be held via teleconference.

(c) Quorum.  The presence of Managers sufficient to approve a matter pursuant to this Agreement constitutes a quorum of the Board for the transaction of business with respect to such matter.  Managers may participate in a meeting through use of conference telephone, electronic video screen communication, or other communications equipment, so long as all Managers participating in such meeting can hear one another.  Participation in a meeting in such manner constitutes a presence in person at such meeting.

(d) First Meeting; Annual Meetings.  As soon as practicable, and in no event later than two weeks following the Effective Date, the Board will hold its first meeting.  Meetings of the Board must be held at least once annually.

6.1.4 Action Without a Meeting.  Any action required or permitted to be taken by the Board may be taken by the Board without a meeting if such number of Managers sufficient to approve such action pursuant to the terms of this Agreement consent thereto in writing.  Such action by written consent shall have the same force and effect as if taken at a meeting of the Board.

6.1.5 Reliance.  The Board (without any Member Approval) is hereby authorized by all Members to designate any Manager to execute and deliver, on behalf of the Company, any and all documents, contracts, certificates, agreements, promissory notes, guarantees, mortgages, deeds, and instruments, and to take any action of any kind and to do anything and everything the Board, in its sole and absolute discretion, deems necessary or appropriate in order to carry out the business of the Company in accordance with the provisions of this Agreement and applicable law.  No Person shall be required to inquire into said authority or discretion of the Board or such Manager to execute and perform any document on behalf of the Company.

29

Section 6.2 Powers and Duties of the Board.  Notwithstanding anything in the Act to the contrary and except as otherwise specifically set forth in this Agreement, without limiting the generality of Section 6.1.1, the Board (without any Member Approval) shall have the sole and exclusive right, authority, power and discretion to control, direct, manage and administer the business and affairs of the Company and to do all things necessary to carry on the business and purposes of the Company.  The acts of the Board shall bind the Company when carried out within the scope of the Board’s authority and discretion expressly granted hereunder.  The Board shall conduct or cause to be conducted the management of the business and affairs of the Company in accordance with and as limited by this Agreement.

6.2.1 Authority.  Notwithstanding anything in the Act to the contrary and except as otherwise specifically set forth in this Agreement (including Section 6.2.2), without limiting the generality of the foregoing, the Board (without any Member Approval) shall have the following rights and powers, which it may exercise in its sole and absolute discretion and at the risk of the Company, to:

(a) change the name of the Company or any of its Subsidiaries;

(b) administer all matters pertaining to insurance with respect to any asset of the Company or the assets of its Subsidiaries, including maintaining such insurance for the benefit of the Company, any of its Subsidiaries, its Managers, and the Members as it deems necessary;

(c) employ, terminate the employment of, supervise and compensate such Persons, including any and all employees, agents, independent contractors, brokers, attorneys and accountants, for and in connection with the Business as it may deem necessary or desirable;

(d) approve and implement any change, improvements, repairs, alterations or changes or addition to or alteration of any asset of the Company or of its Subsidiaries;

(e) acquire, dispose of, mortgage, pledge, encumber, hypothecate or exchange any or all of the assets of the Company or of any of its Subsidiaries (including any such mortgage, pledge, encumbrance or hypothecation containing the usual and customary security clauses and whether voluntarily, by merger or consolidation or otherwise by operation of law);

(f) use the assets of the Company and its Subsidiaries (including cash on hand) for any purpose and on any terms it sees fit, including repayment of obligations of the Company and its Subsidiaries, and the conduct of additional Company and Subsidiary operations;

(g) negotiate and execute (on any terms it deems desirable) any contracts, conveyances or other instruments that it considers useful or necessary in connection with the conduct of the Company’s operations, the operations of any Subsidiary,  or the implementation of its powers under this Agreement;

30

(h) keep all books of account and other records of the Company;

(i) make expenditures, incur debt or any other obligations it deems necessary to conduct the activities of the Company and of its Subsidiaries, and to pay all debts and other obligations of the Company and of its Subsidiaries;

(j) prepare (or have prepared) and file, or have filed, all tax returns for and on behalf of the Company (but not the tax returns or other reports of the Members) and of its Subsidiaries, and to pay all taxes, levies, assessments, rents and other impositions applicable to the Company and to any of its Subsidiaries, using its commercially reasonable efforts to pay same before delinquency and prior to the addition thereto of interest or penalties and to undertake when appropriate any action or proceeding seeking to reduce such taxes, assessments, rents or other impositions;

(k) deposit all monies received for or on behalf of the Company and any of its Subsidiaries at a financial institution selected by the Board in its sole and absolute discretion as a depository for the Company and for its Subsidiaries, and to invest any excess funds and to disburse and pay all funds on deposit on behalf of and in the name of the Company and any of its Subsidiaries in such amounts and at such times as the same are required in connection with the business of the Company and its Subsidiaries;

(l) establish the amount of cash reserves to be retained when calculating Cash Flow;

(m) defend, adjust, settle, compromise or pay any claim, obligation, debt, demand, suit, litigation or judgment by or against the Company and any of its Subsidiaries, and to assert or initiate any claim, suit, litigation or other proceeding against any Person or any Governmental Authority or official thereof;

(n) make and perform such other agreements and undertakings, as may be necessary or advisable to the carrying out of any of the foregoing powers, objects or purposes;

(o) elect directors to the board of any Subsidiary of the Company and select the officers for such Subsidiary; and

(p) admit Additional Members, issue any additional Interest in the Company and adjust the Capital Accounts in accordance with the terms and conditions of this Agreement.

31

6.2.2 Board Approval Matters.  Except as otherwise provided by this Agreement (including this Section 6.2.2), an affirmative vote by a simple majority of the Managers shall be considered the action of the Board.  Notwithstanding anything to the contrary contained in Section 6.1 and this Section 6.2, without the approval of a Supermajority of Managers, the Board shall not have the power or authority to:

(a) appoint any director to the Board of a Subsidiary of the Company except as set forth in Section 9.8, or provide the Company’s consent to any matter requiring the Company’s consent under Section 9.8 with respect to a Subsidiary of the Company if such matter would require the approval of a Supermajority of Managers if the matter in question were with respect to the Company;

(b) dissolve and wind up the Company;

(c) dissolve and wind up any of the Company’s Subsidiaries;

(d) knowingly do any act that would make it impossible to carry on the Business, except as otherwise provided in this Agreement;

(e) possess property of the Company or its Subsidiaries, or assign rights in specific property of the Company or its Subsidiaries, for other than a Company purpose or a purpose of such Subsidiary;

(f) authorize the issuance or sale, or agree to issue or sell, to any Person (A) any equity interests of the Company or any of its Subsidiaries, including any rights, options or warrants to acquire any such interests, or any securities convertible into or exchangeable or exercisable for such interests, (B) any securities, the provisions of which, by their terms, set or provide a mandatory formula for determining, directly or indirectly, the participation in earnings and profits of the Company or any of its Subsidiaries or (C) any securities which are convertible into or exchangeable or exercisable for securities described in this subsection (f);

(g) authorize any split, combination or reclassification of any equity interests of the Company or its Subsidiaries or authorize the issuance of any other securities in respect of, in lieu of or in substitution for equity interests in the Company or its Subsidiaries;

(h) authorize the redemption, repurchase, retirement or other acquisition for value any of the equity interests of the Company or any of its Subsidiaries;

(i) approve any agreement or transaction with or for the benefit of (x) a Manager or any officer of the Company or any of its Subsidiaries, or (y) any Member(s), or any of their respective Affiliates;

(j) to the extent not set forth in the Annual Budget, approve the compensation of any employees, officers, or independent contractors of the Company or its Subsidiaries in excess of $200,000;

32

(k) to the extent not set forth in the Annual Budget and subject to the requirements of Section 9.10, authorize, with respect to the Company or any of its Subsidiaries, (i) the incurrence or assumption of any long-term debt or, except in the ordinary course of business, the incurrence or assumption of short-term indebtedness exceeding $250,000 in the aggregate, (ii) the assumption, guarantee, endorsement or otherwise becoming liable or responsible (whether directly, contingently or otherwise) for the obligations of any other Person, except in the ordinary course of business and consistent with industry practice, or (iii) entry into any agreement to maintain the financial statement condition of any Person;

(l) authorize the sale of all or substantially all of the assets of the Company;

(m) agree to a Conveyance Triggering Event regarding the Company;

(n) sell all or substantially all of the assets of any of the Company’s Subsidiaries;

(o) authorize the acquisition of the equity or assets of any other Person;

(p) terminate or amend the FNHC Services Agreement, or authorize the non-renewal of the FNHC Services Agreement if such renewal includes no material change to the terms of the agreement;

(q) terminate or amend the Crosswinds Services Agreement, or authorize the non-renewal of the Crosswinds Services Agreement if such renewal includes no material change to the terms of the agreement; or

(r) approve an exit strategy pursuant to Section 9.2.

6.2.3 Class B Member Approval Matters.  Notwithstanding anything to the contrary contained in Section 6.1 and this Section 6.2, for so long as any Class B Member other than Crosswinds or FNHC or their respective Affiliates holds any Units, without the approval of such Class B Members, the Board shall not have the power or authority to:

(a) dissolve and wind up the Company

(b) knowingly do any act that would make it impossible to carry on the Business, except as otherwise provided in this Agreement;

(c) possess property of the Company or its Subsidiaries, or assign rights in specific property of the Company or its Subsidiaries, for other than a Company purpose or a purpose of such Subsidiary;

(d) authorize the redemption, repurchase, retirement or other acquisition for value by the Company of any of the Class A Units or Class C Units; or

33

(e) approve any agreement or transaction with or for the benefit of (x) a Manager or any officer of the Company or any of its Subsidiaries, or (y) any Member(s), or any of their respective Affiliates, but the consent of the Class B Members shall not be required for any such agreement or transaction, or in connection with an amendment of any agreement, between the Company and any Member or any of their respective Affiliates that is entered into on market terms the Company could reasonably expect to obtain negotiating at arm’s length with an unaffiliated third party.  The Class B Members have expressly approved those agreements between the various Members and their respective Affiliates set forth on Schedule 3.

6.2.4 Delegation of Duties.

(a) General.  The Board in its sole and absolute discretion may delegate all or any of its duties hereunder to or consult with such other Person or Persons as the Board deems necessary or desirable for the transaction of the Business, and in furtherance of any such delegation or consulting, shall have the right to appoint, employ or contract with and compensate any other Persons, but in such event the Board will not be released from its responsibilities hereunder.  Such Persons may (i) under the supervision of the Board, administer or assist in the administration of the routine day-to-day management of the Company and its business and affairs; (ii) serve as advisors and consultants to the Board in connection with decisions made by the Board, including investment decisions; (iii) act as accountants, correspondents, attorneys, brokers, escrow agents, or in any other capacity; and (iv) perform such other acts or services for the Company as the Board in its sole and absolute discretion may approve.

(b) Officers.  Without limiting the generality of the provisions of Section 6.2.4(a), the Board, in its sole and absolute discretion, may, from time to time, designate one or more Persons to be officers of the Company (an “Officer”).  The initial Officers of the Company shall be Michael H. Braun, Chief Executive Officer and President, and Peter J. Prygelski, III, Chief Financial Officer. No Officer need be a resident of the State of Delaware or a Manager.  Any Officers so designated shall have such authority and perform such duties as the Board may, from time to time, delegate to them.  The Board may assign titles to particular Officers.  Unless the Board decides otherwise, if the title is one commonly used for Officers of a business corporation formed under the Delaware General Corporation Law, the assignment of such title shall constitute the delegation to such Officer of the authority and duties that are normally associated with that office, subject to any specific delegation of authority and duties made to such Officer by the Board pursuant to the third sentence of this Section 6.2.4(b).  Each Officer shall hold office until his successor shall be duly designated and shall qualify or until his death or Disability or until he shall resign or shall have been removed in the manner hereinafter provided.  The same Person may hold any number of offices.

34

(c) Resignation or Removal of Officers.  Any Officer may resign as such at any time.  Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the Board.  The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.  The Board may remove any Officer as such, either with or without cause.  The Board may fill any vacancy occurring in any office of the Company.

6.2.5 No Limitation of Power.  The expression of any power or authority of the Board in this Agreement shall not in any way limit or exclude any other power or authority permitted under the Act that is not specifically or expressly set forth in this Agreement.

6.2.6 Member Taxes.  In exercising its authority under this Agreement, the Board shall be under no obligation to take into account the tax consequences to any Member of any action taken (or inaction) by it, and the Board and the Company shall not have liability to a Member under any circumstances as a result of an income tax liability incurred by such Member as a result of an action (or inaction) by the Board pursuant to its authority under this Agreement and consistent with any express provision of this Agreement.

Section 6.3 Liability for Conduct.  No (a) Member (in such Member’s capacity as a Member), (b) Manager (in such Manager’s capacity as a Manager) or (c) officer, director, manager, partner, member, authorized person, employee, advisor and agent of the Company or any of its Affiliates (in their respective capacities as such), shall be personally liable, responsible or accountable in damages or otherwise to the Company, any third party or to any Member for (a) any error of judgment, (b) any mistake of fact or of law, or (c) any action or omission taken or suffered in connection with the Company, unless, in any such case, a Final Determination is made that such Person is liable for a Culpable Act.  Furthermore, no Member or Manager or any Affiliate, officer, director, manager, partner or employee thereof shall be personally liable, responsible or accountable in damages or otherwise to the Company, any third party or to any Member for any act or omission of any agent, consultant or broker of the Company selected, engaged or retained by such Person in good faith.

Section 6.4 Indemnity of Officers and Managers.

6.4.1 Neither the Company nor any Member shall have any claim against any Manager or Officer by reason of any act or omission of such Manager or Officer of the Company (each a “Released Party”), provided that such act or omission did not involve a Culpable Act by such Released Party, REGARDLESS OF WHETHER SUCH ACT OR OMISSION CONSTITUTED THE SOLE, PARTIAL OR CONCURRENT NEGLIGENCE (WHETHER ACTIVE OR PASSIVE) OF A RELEASED PARTY.  Notwithstanding the above, a Released Party shall have no liability hereunder for failing to act if such act required the consent of some or all of the Members and the required consent to such action was not granted.  Any amendment, modification or repeal of this Section 6.4.1 or any provision in this Section 6.4.1 shall be prospective only and shall not in any way affect the limitations on a Released Party’s liability to the Company and the Members under this Section 6.4.1 as in effect immediately prior to such amendment, modification or repeal with respect to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when claims relating to such matters may arise or be asserted.

35

6.4.2 The Company shall indemnify its employees, Officers and Managers and its Affiliates’ officers, managers and employees (each, an “Indemnified Party,” and collectively, the “Indemnified Parties”) from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including reasonable legal fees and expenses), judgments, fines, settlements, and other amounts (each a “Claim”) arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Company as set forth in this Agreement in which an Indemnified Party may be involved, or is threatened to be involved, as a party or otherwise (a “Proceeding”), REGARDLESS OF WHETHER ARISING FROM ANY ACT OR OMISSION WHICH CONSTITUTED THE SOLE, PARTIAL OR CONCURRENT NEGLIGENCE (WHETHER ACTIVE OR PASSIVE) OF THE INDEMNIFIED PARTY, unless it is established that:  (a) the act or omission of such Indemnified Party was material to the matter giving rise to the Proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (b) such Indemnified Party actually received an improper personal benefit in money, property or services; (c) such Indemnified Party did not reasonably believe that it was acting in the best interests of the Company; or (d) in the case of any criminal Proceeding, such Indemnified Party had reasonable cause to believe that the act or omission was unlawful.  The termination of any Proceeding by judgment, order or settlement does not create a presumption that an Indemnified Party did not meet the requisite standard of conduct set forth in this Section 6.4.2.  The termination of any Proceeding by conviction or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that an Indemnified Party acted in a manner contrary to that specified in this Section 6.4.2.  Any indemnification pursuant to this Section 6.4 shall be made only out of the assets of the Company.

6.4.3 The Company shall reimburse such Indemnified Party on a monthly basis for reasonable expenses incurred by such Indemnified Party who is a party to a Proceeding in advance of the Final Determination of the Proceeding upon receipt by the Company of a written affirmation by such Indemnified Party of such Indemnified Party’s good faith belief that the standard of conduct necessary for indemnification by the Company as authorized in this Section 6.4 has been met; provided that such Indemnified Party provides the Company with a written undertaking to repay to the Company all amounts that have been reimbursed to such Indemnified Party by the Company in the event such Indemnified Party has been determined by a court of competent jurisdiction to not be entitled to indemnification under Section 6.4.2.

6.4.4 The Company shall indemnify each Indemnified Party from and against all Claims arising from or related to appearing as a witness, or other participation, in a Proceeding that involves, relates to, or affects the Company.

36

6.4.5 The indemnification provided by Section 6.4 shall be in addition to any other rights to which an Indemnified Party may be entitled under any agreement, as a matter of law or otherwise.

6.4.6 The Company may purchase and maintain insurance on behalf of its Managers, an Officer or an employee, as the Board shall determine, against any liability that may be asserted against or expenses that may be incurred by a Manager, an Officer or an employee in connection with the Company’s activities, regardless of whether the Company would have the power to indemnify a Manager, an Officer or an employee against such liability under the provisions of this Agreement; and the Company shall maintain directors’ and officers’ liability insurance and other insurance in such amounts and with such coverage as are appropriate and typical for a company operating in the Company’s industry.

6.4.7 In no event may any Indemnified Party subject the Members to personal liability by reason of the indemnification provisions set forth in this Agreement.

6.4.8 No Indemnified Party shall be denied indemnification in whole or in part under this Section 6.4 because such Indemnified Party had an interest in the transaction with respect to which the indemnification applies if the transaction was appropriately approved and otherwise permitted by the terms of this Agreement.

6.4.9 The provisions of this Section 6.4 are for the benefit of any Indemnified Party and their respective successors and assigns and shall not be deemed to create any rights for the benefit of any other Persons.

Section 6.5 [Reserved]

Section 6.6 Other Matters Concerning the Board.

6.6.1 Reliance on Documents.  Each Manager and Officer may rely upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document reasonably believed by them to be genuine and to have been signed or presented by the proper party or parties and any act taken or omitted to be taken in reliance upon any such document as so described shall be considered for purposes of this Agreement to have been done or omitted in good faith.

6.6.2 Reliance on Consultants and Advisers.  Each Manager and Officer may consult with legal counsel, accountants, real estate industry experts, appraisers, management consultants, investment bankers and other consultants and advisers selected by such Manager or such Person, and any act taken or omitted to be taken in reliance upon and in accordance with the opinion of such consultants and advisers as to matters which the Board or such Person reasonably believes to be within such consultant’s or adviser’s professional or expert competence shall be considered for purposes of this Agreement to have been done or omitted in good faith.

37

6.6.3 Action Through Attorneys.  The Board shall have the right, in respect of any of its powers or obligations hereunder, to act through a duly appointed attorney or attorneys-in-fact.  Each such attorney shall, to the extent provided by the Board in the power of attorney, have full power and authority to do and perform all and every act and duty that is permitted or required to be done by the Board hereunder.

6.6.4 Reimbursement for Company Expenses.  Notwithstanding any provision of this Agreement to the contrary, the Board may, in its sole discretion, pay all or any portion of Company expenses.  Each Manager shall be reimbursed by the Company for any and all reasonable and necessary direct expenses paid by it on behalf of the Company or in connection with the Company’s business.

6.6.5 Independent Activities.  Each Manager shall be required to devote only such time to the affairs of the Company as such Manager determines in its sole discretion may be necessary to manage and operate the Company, and each such Person, to the extent not otherwise directed by the Board, shall be free to serve any other Person or enterprise in any capacity that it may deem appropriate in its discretion.

6.6.6 Committees.  The Board will establish committees that will, at the first meeting of the Board (to be held within two weeks of the date hereof), set forth an audit policy, an investment policy, and a risk policy (each policy as may be amended by the Board from time to time) to govern the business operations of the Company and its subsidiaries.

ARTICLE 7MEMBERS

Section 7.1 Member Management Rights.  Except for those approval rights expressly set forth in this Agreement, as required by the Act or as set forth in the FNHC Services Agreement or the Crosswinds Services Agreement, no Member shall have any right to participate in the management of the Company.  Notwithstanding the foregoing, if any Member, or employee or officer of a Member, is also an employee or an Officer of the Company, such Person may perform the duties consistent with such status as delegated to such Person by the Board from time-to-time without being deemed to be participating in the management of the Company in the capacity of a Member.

38

Section 7.2 Investment Representations by Members.

7.2.1 Investment Intent.  Each Member represents and warrants to and agrees with the Company, the Board and all other Members that:  (a) it has acquired its Interest for investment purposes only, for its own account (and not for separate accounts administered by it), and it has no present intention of selling, granting a participation in, or otherwise distributing the same; (b) it will not offer, sell, transfer or assign all or any part of its Interest in contravention of this Agreement or the Securities Act or any state or federal law; (c) it has no contract, understanding, agreement or arrangement with any Person to sell, transfer or grant a participation to such Person or any other Person, with respect to any or all of such Interest; (d) it understands that Interests in the Company are not being registered under the Securities Act and are being issued in reliance upon an exemption which is in part predicated on the representations, warranties and agreements made by it in Section 7.2; (e) it is an “accredited investor” within the meaning of Regulation D under the Securities Act and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the Company (including evaluation of the nature and effects of a performance-based compensation arrangement) and is able to bear the economic risk of such investment; (f) it has consulted its own counsel with respect to its acquisition of the Interests in the Company and it is not relying on the Board or the Company for any tax or other advice with respect thereto; and (g) it is able to fend for itself, can bear the economic risk of the investment in the Company, and has adequate means for providing for its current needs and personal contingencies.

7.2.2 Unregistered Interests.  Each Member further understands and acknowledges that the Company and the other Members are relying upon its representations and warranties contained in Section 7.2 as the basis for the exemption of the Members’ Interests in the Company from the registration requirements of the Securities Act and under any applicable state securities laws.  Each Member further acknowledges that the Company will not and has no obligation to recognize any Transfer of a Member’s Interest to any Person unless and until the provisions of Article 8 hereof have been fully satisfied.

7.2.3 Adequate Information and Opportunity for Discovery.  Each Member has been provided an opportunity for a reasonable time prior to the date hereof to obtain information concerning the offering of the Interests, the Company and all other information to the extent the Company possesses such information or can acquire it without unreasonable effort or expense.  Such Member has been given the opportunity for a reasonable time prior to the date hereof to ask questions of, and receive answers from, the Company or its representatives concerning the terms and conditions of the offering of the Interests and other matters pertaining to this investment.  Such Member has not been furnished with any oral representation or oral information in connection with the offering of the Interests and such Member is not relying on the Company or its Affiliates with respect to economic considerations involved in this investment.

7.2.4 Indemnification.  Except as otherwise required by law, each Member shall and hereby agrees to indemnify and save harmless the Company and the other Members from any liability, loss, cost, damage and expense (including, without limitation, the costs of litigation and attorneys’ fees) arising out of, resulting from, or in any way related to the breach of any representation or warranty of such Member set forth in Section 7.2.

39

Section 7.3 Additional Representations.

7.3.1 Power and Authority.  Each Member has all requisite power and authority to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved and authorized by all necessary action, including, if applicable, corporate action, by or on behalf of such Member.  This Agreement has been duly executed and delivered by such Member and constitutes a valid and binding obligation of the Member, enforceable in accordance with its terms, subject to the laws of general application relating to Bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief and equitable remedies.  No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority, is required by or with respect to such Member in connection with the execution and delivery of this Agreement by such Member, or such Member’s performance of this Agreement, other than in all cases where the failure to obtain such consent, approval, order or authorization, or registration, declaration, or filing would not, individually or in the aggregate reasonably be expected to have a material adverse effect on the ability of such Member to consummate the transactions contemplated hereby.

7.3.2 No Violation.  The execution, delivery and performance of this Agreement does not and will not conflict with or result in a violation of the organizational and other governing documents, if any, of each Member, or conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of, or constitute a default under (a) any instrument, indenture, lease, mortgage or other agreement or contract to which such Member is a party or to which such Member or any of such Member’s directly held assets or properties may be subject, or (b) any federal, state, local or foreign judgment, writ, decree, order, ordinance, statute, rule or regulation applicable to the Member or the Member’s directly held assets or properties.

Section 7.4 [Reserved]

Section 7.5 Withdrawals or Resignations.  No Member shall have the right or power to voluntarily withdraw or resign as a Member from the Company and receive any assets until the dissolution of the Company or with respect to assets only, except as expressly set forth in the Agreement or until the Board determines to make a distribution to the Members.

Section 7.6 Transactions between the Company and Members.  Subject to Section 3.5 and Section 6.2, and notwithstanding that it may constitute a conflict of interest, any Member or Manager may, and may cause its Affiliates to, lend money or engage in any transactions (including the purchase, sale, lease or exchange of any property or the rendering of any service, or the establishment of terms of employment) with the Company or its Subsidiaries so long as such transaction is not expressly prohibited by this Agreement and the terms and conditions of such transaction, on an overall basis, are fair and reasonable to the Company or its Subsidiary, as the case may be.  Subject to applicable law, such Member or Manager has the same rights and obligations with respect thereto as a Person who is not a Member or Manager.

40

Section 7.7 Remuneration to Members.  Except as otherwise specifically provided in this Agreement and in accordance with Section 7.6, no Member (acting solely in the capacity of a Member) is entitled to remuneration for acting in the business and affairs of the Company.

Section 7.8 Covenant Not to Withdraw, Transfer or Dissolve.  Except as otherwise permitted by this Agreement, each Member hereby covenants and agrees not to (a) take any action to file a certificate of dissolution or its equivalent with respect to itself, (b) take any action that would cause a voluntary Bankruptcy of such Member, (c) withdraw or attempt to withdraw from the Company, (d) exercise any power under the Act to dissolve the Company, or (e) petition for judicial dissolution of the Company.

Section 7.9 Class C Preemptive Rights.  In the event a Supermajority of Managers determines that it is in the best interest of the Company and proposes to sell and issue Class C Units, the provisions of this Section 7.9 shall apply.

7.9.1 Not less than 20 Business Days prior to the issuance by the Company of Class C Units, the Company shall offer to each Member the opportunity to purchase Class C Units on a Pro Rata Basis at the same price, on the same terms and pursuant to the same conditions as the Company proposes to issue Class C Units, by delivering to each Member a notice identifying the securities to be issued and setting forth the price, terms and conditions of such issuance (the “Participation Rights Offer”).

7.9.2 A Member shall have up to a period of 15 Business Days after the receipt of such notice (the “Participation Rights Notice Period”) within which to notify the Company in writing that it wishes to accept the Participation Rights Offer.  If a Member wishes to purchase Class C Units on less than a Pro Rata Basis, such notice shall so state and shall expressly state the maximum number of Class C Units that such Member is willing to purchase.  If a Member gives such written notice within the Participation Rights Notice Period, it shall be bound to purchase such Class C Units on the same terms and pursuant to the same conditions as the other purchasers of securities, and it shall do all things necessary to consummate the transaction, including executing and delivering the same documentation that is to be executed and delivered by the other purchasers of such securities, at the same time as the other purchasers of such securities.  If a Member does not give notice of acceptance of the Participation Rights Offer within the Participation Rights Notice Period, it shall be deemed to have irrevocably rejected the Participation Rights Offer with respect to such issuance.

7.9.3 To the extent that any Member declines to exercise its rights to purchase Class C Units on a Pro Rata Basis under Section 7.9, written notice shall be provided by the Company to all other Members who have elected to purchase Class C Units under Section 7.9, offering to such Members the right to purchase, on a Pro Rata Basis, the Class C Units not purchased by the Members declining to accept the Participation Rights Offer (the “Extended Rights Offer”).  Each Member who elects to participate in the purchase of Class C Units pursuant to this Section 7.9.3 may exercise the right to purchase by delivery of a written notice to the Board within five calendar days (the “Extended Rights Period”) after receipt of the Extended Rights Offer.  The purchase of such Class C Units shall be consummated on the later of (i) the closing of the issuance of the Class C Units triggering the Participation Rights Offer and (ii) the Business Day immediately following the Extended Rights Period.

41

7.9.4 If the Members have not elected to purchase, and purchased, all of the Class C Units that each is entitled to purchase under Section 7.9, the Company may sell and issue, within 90 days after the expiration of such Participation Rights Notice Period and Extended Rights Period, if applicable, such Class C Units that are not purchased by the existing Members, to any Person on the same price and terms as set forth in the Participation Rights Offer, which Person(s) shall, as a condition to such purchase, agree in writing with the remaining Member(s) to be bound by the terms of this Agreement prior to such issuance by executing and delivering a joinder agreement substantially in the form attached hereto as Exhibit A, and from and after such sale, such Person shall be deemed to be an Additional Member for all purposes hereunder.

Section 7.10 Class B Preemptive Rights.  In the event a Supermajority of Managers determines that it is in the best interest of the Company and proposes to sell and issue Class B Units, the provisions of this Section 7.10 shall apply

7.10.1 Not less than 20 Business Days prior to the issuance by the Company of Class B Units, the Company shall offer to each Class B Member, pro rata based on the Class B Members’ proportionate ownership of the Class B Units, the opportunity to purchase such Class B Units at the same price, on the same terms and pursuant to the same conditions as the Company proposes to issue Class B Units, by delivering to the Class B Members a notice identifying the securities to be issued and setting forth the price, terms and conditions of such issuance (the “Class B Participation Rights Offer”).

7.10.2 Each Class B Member shall have up to a period of 15 Business Days after the receipt of such notice (the “Class B Participation Rights Notice Period”) within which to notify the Company in writing that it wishes to accept the Class B Participation Rights Offer.  If a Class B Member wishes to purchase less than all of the Class B Units, such notice shall so state and shall expressly state the maximum number of Class B Units that such Class B Member is willing to purchase.  If a Class B Member gives such written notice within the Class B Participation Rights Notice Period, it shall be bound to purchase such Class B Units on the same terms and pursuant to the same conditions as the other purchasers of securities, if any, and it shall do all things necessary to consummate the transaction, including executing and delivering the same documentation that is to be executed and delivered by the other purchasers of such securities, at the same time as the other purchasers of such securities.  If a Class B Member does not give notice of acceptance of the Class B Participation Rights Offer within the Class B Participation Rights Notice Period, it shall be deemed to have irrevocably rejected the Class B Participation Rights Offer with respect to such issuance.

42

7.10.3 If the Class B Members has not elected to purchase, and purchased, all of the Class B Units that they are entitled to purchase under Section 7.10, the Company may sell and issue, within 90 days after the expiration of such Class B Participation Rights Notice Period, such Class B Units that are not purchased by the Class B Members, to any Person on the same price and terms as set forth in the Class B Participation Rights Offer, which Person(s) shall, as a condition to such purchase, agree in writing with the remaining Member(s) to be bound by the terms of this Agreement prior to such issuance by executing and delivering a joinder agreement substantially in the form attached hereto as Exhibit A, and from and after such sale, such Person shall be deemed to be an Additional Member for all purposes hereunder.

ARTICLE 8SALE OR TRANSFER OF INTERESTS IN COMPANY OR SUBSIDIARY; TRANSFER RESTRICTIONS

Section 8.1 Disposition and Assignment of Interests.  Except as otherwise provided in this ARTICLE 8 or ARTICLE 9, each Member agrees not to Transfer or permit to be Transferred (voluntarily or involuntarily) any Interest in the Company, except for Permitted Transfers or as otherwise permitted under this Agreement, without Board approval, which approval will not be unreasonably withheld, conditioned or delayed.

Section 8.2 Transfer in Violation of Agreement.  To the fullest extent permitted by applicable law, any purported Transfer of any Interests that is not permitted by this ARTICLE 8, or that is in violation of such provisions, shall be void and of no force and effect whatsoever and shall not be recognized by the Company, and no distribution of any kind whatsoever nor any distribution pursuant to liquidation or otherwise shall be paid by the Company in respect of such Interests (all rights to receive such distributions being deemed waived), and the voting rights, if any, of such Interests on any matter whatsoever shall be suspended, during the period commencing with such Member’s initial failure to comply with this ARTICLE 8 and ending either when the other Members shall have been given a full opportunity to exercise their rights under and in accordance with this ARTICLE 8 or when the Board shall agree to terminate such suspension, and to permit such Transfer.

Section 8.3 Rights in Connection with a Conveyance Triggering Event.

8.3.1 Disposition of Interests in Subsidiary Generally. If the Company with the Approval of a Supermajority of Managers enters into an agreement for a Conveyance Triggering Event regarding its Subsidiary, the Company shall have the right to convey to the transferee a portion or all of its interests in such Subsidiary.  The consideration from such Conveyance Triggering Event will be distributed to the Members in accordance with Section 4.6.

43

Section 8.4 Bankruptcy of Member. In the event of the Bankruptcy of a Member, and subject to applicable law and any other required court approvals, the Bankrupt Member shall offer in a written instrument (the “Bankruptcy Notice”) to sell all of the Interest of such Bankrupt Member to the Company and the Class A Members for the price and on the terms and conditions specified in Section 8.8 (pursuant to which the Company and the Class A Members will be designated as the “Purchaser” and the Bankrupt Member will be designated as the “Seller”).  The Company shall have the first right for 10 days after it receives the Bankruptcy Notice from the Bankrupt Member to elect to purchase such Interest and if it notifies the Bankrupt Member and the Class A Members of its intent to do so within such 10 day period, it shall complete the purchase within 30 days of its receipt of the Bankruptcy Notice.  In the event the Company fails to give timely notice of its intent to purchase such Interest of the Bankrupt Stockholder, or fails to complete such purchase timely, the Class A Members may purchase such Interest.  The Class A Members shall have 30 days after receipt of such notification that the Company declined or failed to purchase such Interest to purchase such portion of the remaining Interest not purchased by the Company on a Pro Rata Basis, excluding the Interest held by the Bankrupt Member, or as the Class A Members may otherwise agree among themselves.  In the event that the Company and the Class A Members do not elect to purchase all of such Interest of the Bankrupt Member, the Bankrupt Member (or its legal representative) may proceed to distribute the remaining portion of such Bankrupt Member’s Interest to the successors in interest entitled to receive the same as a result of the Bankrupt Member’s Bankruptcy, so long as (a) such successors in interest provide the Board such documentation as requested by the Board to evidence the rightful ownership interest of that Interest, and (b) the successors in interest execute and deliver a written agreement, in form and substance satisfactory to the Board, that states that the successor in interest is an “Assignee” of that Interest, and agrees to be bound by all of the terms and conditions of this Agreement.

Section 8.5 Change of Control Call Right.

8.5.1 Within the later of (i) 90 days following the occurrence of a Change of Control, and (ii) 30 days following the determination of Fair Market Value pursuant to Section 8.8 (pursuant to which the COC Exercising Member will be designated as the “Purchaser” and the COC Selling Member will be designated as the “Seller”), the COC Exercising Member shall have the right and option to purchase (a “Call Right”) all, and not less than all, of the Units owned by the COC Selling Member (such Units, the “Call Units”) in the manner, for the price and on the terms and conditions contained in Section 8.5 and set forth in the written notice of such exercise (the “Call Option Notice”) to the COC Exercising Member.

8.5.2 The purchase price (the “Purchase Price”) of any Unit pursuant to the exercise of a Call Right shall be, subject to adjustment as provided in Section 8.5.5, set forth in the Call Option Notice.

8.5.3 The Purchase Price with respect to any Call Units purchased by the COC Exercising Member shall be paid by wire transfer of immediately available funds to an account designated by the COC Selling Member (or, in the event that the COC Selling Member shall fail to timely designate an account to receive such wire transfer, to an escrow account established pursuant to Section 8.5.5) promptly upon delivery of the documents reasonably required for the Closing under Section 8.5.4.

44

8.5.4 Any purchase of Units pursuant to Section 8.5 shall be consummated (the “Call Closing”) at the Company’s principal office at 10:00 a.m., prevailing business time, on the date (the “Call Closing Date”) which is the 120th day after the date of the Call Option Notice or such earlier date as Crosswinds and FNHC may agree upon; but, if any approval or waiting period of any Governmental Authority is required in connection with any such purchase, then such 120-day period shall be extended by the number of days necessary to satisfy such regulatory requirement plus two days, but in no event shall such period be extended by more than 60 days.   If such date is not a Business Day, the Call Closing shall occur at the same time and place on, and the Call Closing Date shall be, the next succeeding Business Day. At the Call Closing, the COC Selling Member shall deliver to the COC Exercising Member duly executed written instruments of transfer of such Units to be sold by it in connection with the Call Right, in form and substance satisfactory to the COC Exercising Member, and such Units being free and clear of any Encumbrances, together with any documents reasonably required to be executed in connection with such sale.

8.5.5 In the event the COC Selling Member fails to designate an account to receive a wire transfer or fails to deliver such Units, in proper form for Transfer, on the Call Closing Date, the COC Exercising Member may elect to deposit the cash representing the Purchase Price (minus any escrow fees) with an escrow agent.  From and after the deposit of such adjusted Purchase Price, such Units shall be deemed for all purposes (including the right to vote, receive payment of distributions and exercise rights under this Agreement) to have been transferred to the purchaser(s) thereof, and the Units registered in the name of the COC Selling Member shall be deemed to have been canceled and to represent solely a right to receive payment of the Purchase Price (minus any escrow fees), without interest, from the escrow account.  If the proceeds of sale have not been claimed by the COC Selling Member (by delivery of duly executed written instruments of transfer of such Units, in proper form for transfer) prior to the fourth anniversary of the Call Closing Date, the escrow deposits, and all interest earned thereon, shall be returned to the COC Exercising Member, and the COC Selling Member shall look solely to the COC Exercising Member for payment of the Purchase Price.  The escrow agent shall not be liable for any action or inaction taken by him in good faith.

8.5.6 Upon the delivery of the Call Option Notice, the COC Selling Member’s respective rights under Section 6.1.2 and Section 7.9 shall terminate; but, if the Call Closing shall not have occurred on or before the applicable Call Closing Date (other than due to a failure of the COC Selling Member to comply with its obligations under Section 8.5), then the COC Selling Member’s respective rights under Section 6.1.2 and Section 7.9 shall be reinstated.

45

Section 8.6 Tag-Along Rights.

8.6.1 General.  If, subject to the terms of this Agreement, any or all of the Class A Members (whether one or more, the “Transferor”) propose to sell any Class A Units owned by such Transferor, to any Person other than an Affiliate of a Member or another Member (a “Proposed Purchaser”), then the Transferor will promptly provide the Class B Members written notice (a “Sale Notice”) of such proposed Transfer (a “Proposed Sale”) and the material terms of the Proposed Sale as of the date of such Sale Notice.  Each Class B Member shall have the right to sell for a price per Class B Unit, determined in accordance with Section 8.8, up to the number of Class B Units equal to (a) the total number of Class B Units held by such Class B Member multiplied by (b) a fraction, the numerator of which is the number of Class A Units to be Transferred in the Proposed Sale and the denominator of which is the number of all Class A Units then outstanding.  A Class B Member shall exercise its right to participate in the Proposed Sale by delivering the Transferor written notice within ten Business Days of the receipt of the Sale Notice (a “Sale Request”) that shall set forth the number of Class B Units the Class B Member desires to include in the Proposed Sale.  If the Transferor has not received the Sale Request in the required time, the Class B Members shall be deemed to have irrevocably waived its rights under this Section 8.6.1 with respect to such Proposed Sale, and the Transferor shall thereafter be free, for a period of 180 days from the date of the Sale Notice, to Sell the Class A Units specified in the Sale Notice upon the same terms and conditions set forth in the Sale Notice.  Except as set forth in this Section 8.6, any Sale Request delivered by a Class B Member shall be irrevocable, and once received by the Transferor, such Class B Member shall be obligated to sell to the Proposed Purchaser its Class B Units in accordance with this Section 8.6.1, provided, that if the Proposed Sale shall not have occurred on or before the 120th day following the date of the Sale Notice (other than due to a failure of the Class B Member to comply with its obligations under Section 8.6), then the Sale Request shall be deemed revoked.  In connection with the delivery of the Sale Request, the Class B Member shall deliver to the Transferor duly executed written instruments of transfer of such Class B Units, in form and substance satisfactory to the Transferor, to warrant that such Class B Units shall be surrendered free and clear of any Encumbrances, together with any other documents reasonably required to be executed in connection with such sale.  If the Class B Member should fail to so deliver such documents to the Transferor, (i) the Transferor shall have the right to complete the Proposed Sale on the terms that would have applied had the Class B Member not provided the Sale Notice, and the Class B Member shall be deemed to have revoked its Sale Request and to have irrevocably waived its rights under this Section 8.6.1 with respect to such Proposed Sale or (ii), if the Transferor does not exercise its right set forth in clause (i) of this sentence, the Company shall cause its books and records to show that such Class B Units are bound by the provisions of this Section 8.6.1 and that such Class B Units shall be transferred to the Proposed Purchaser immediately upon surrender for transfer by the Class B Member; but, the foregoing shall not preclude the Transferor from seeking any remedy to which it may otherwise be entitled as a result of the Class B Member’s failure to so deliver such documents.  The Transferor shall not consummate any Proposed Sale without compliance with this Section 8.6.1, and the Company shall not recognize or give effect to any purported transfer of Units not made in compliance with this Section 8.6.1.  If there is more than one Transferor, the Transferor will designate, in the Sale Notice, one Person for notice purposes under this Section 8.6, and delivery of notice to such Person by the Class B Members will be as effective as if delivered to each Transferor; and the Class B Member smay rely upon such notice, and such notice shall be as effective, as if delivered to each Transferor.

46

8.6.2 Terms.  Units subject to a Sale Request will be included in a Proposed Sale pursuant hereto and to any agreement with the Proposed Purchaser relating thereto, on the same terms and subject to the same conditions applicable to the Units which the Transferor propose to sell in the Proposed Sale.  Such terms and conditions shall be determined in the sole discretion of the Transferor, and shall include (i) the form of consideration and (ii) the provision of information, representations, warranties, covenants and requisite indemnifications; but, (x) if the terms set forth in such definitive documents differ in any material respect from the material terms set forth in the Sale Notice with respect to such Proposed Sale, then notwithstanding the delivery of a Sale Request with respect to such Proposed Sale, a Class B Member shall have the right to rescind such Sale Request by delivering written notice of such rescission to the Transferor within two Business Days of receipt of such definitive documents, and (y) any representations and warranties relating specifically to any Member shall only be made by that Member and any indemnification provided by such Member shall be on a several, not joint, basis and shall be based on the number of Units being sold by each Member in the Proposed Sale (determined on a fully diluted basis calculated using the treasury method).  In addition, such Class B Member shall reimburse the Transferor for its proportionate share (based on consideration received) of the out-of-pocket costs and expenses incurred by the Transferor in connection with any such Proposed Sale.

Section 8.7 Drag-Along Rights.

8.7.1 General.  If, subject to the terms of this Agreement, at any time any or all of the Class A Members, (whether one or more, the “Drag-Along Seller”) proposes to sell any Class A Units to any Person other than an Affiliate of a Member or another Member (the “Drag-Along Purchaser”) in an arm’s-length transaction (a “Drag-Along Sale”), the Drag-Along Seller may, at its option, require each, but not less than all, of the Class B Members (each, a “Drag-Along Member”) to sell in such transaction on the terms and conditions set forth below the number of Units (the “Drag-Along Units”) equal to the product obtained by multiplying the number of Units held by such Drag-Along Member by a fraction, the numerator of which is the number of Class A Units that the Drag-Along Seller proposes to Transfer in the Drag-Along Sale and the denominator of which is the number of all Class A Units then outstanding.

8.7.2 Written Notice.  The Drag-Along Seller shall provide written notice of such Drag-Along Sale to the other Members (a “Drag Notice”) and a draft of the agreement pursuant to which such Units are proposed to be transferred.  The purchase price per Class B Unit included in the Drag-Along Sale shall be determined in accordance with Section 8.8. The Drag Notice shall state (i) the name and address of the Drag-Along Purchaser, (ii) the material terms and conditions (including price) of the contemplated sale and (iii) the expected closing date of the transaction.  Each Member must participate in such Drag-Along Sale on the terms and conditions set forth in the Drag Notice.

47

8.7.3 Transfer of Interest.  Within ten Business Days following the receipt of the Drag Notice, each Member shall deliver to the Drag-Along Seller, or their representative designated in the Drag Notice, if any, duly executed written instruments of transfer of such Member’s Drag-Along Units, in form and substance reasonably satisfactory to the Drag-Along Seller, such Drag-Along Units to be free and clear of any Encumbrances, together with any other documents reasonably required to be executed in connection with such Drag-Along Sale.  If any such Drag-Along Member should fail to deliver such documents to the Drag-Along Seller, the Company shall cause its books and records to show that such Drag-Along Units are subject to the provisions of this Section 8.7.3 and that such Drag-Along Units shall be transferred to the transferee identified in the Drag Notice immediately upon surrender for transfer by such Drag-Along Member.

8.7.4 Consummation of Sale.  Promptly after the consummation of the Drag-Along Sale pursuant to Section 8.7, the Drag-Along Seller shall give notice thereof to the other Members, shall direct the purchaser to remit to each such Member who has surrendered its Drag-Along Units the total consideration for the Drag-Along Units, and, in any event, shall furnish such other evidence of the completion and time of completion of such Drag-Along Sale and the terms thereof as may be reasonably requested by such other Members.  If within 180 days after the Drag-Along Seller give the Drag Notice, the Sale has not been completed, the Drag-Along Seller will, if applicable, return to each of the other Members any documents delivered for transfer pursuant hereto, together with any documents in their possession executed by the other Members in connection with such proposed transaction, and the Drag-Along Seller shall thereafter be required to re-comply with the provisions of Section 8.7 if they wish to require the other Members to sell Units in any transaction subject to Section 8.7.

8.7.5 Terms.  Units subject to Section 8.7 will be included in a Proposed Sale pursuant hereto and be subject to any agreement with the Drag-Along Purchaser relating thereto, on the same terms (other than price per Unit) and subject to the same conditions applicable to the Units which the Drag-Along Seller propose to sell in such transaction.  Such terms and conditions shall be determined in the sole discretion of the Drag-Along Seller, and shall include (i) the form of consideration and (ii) the provision of information, representations, warranties, covenants and requisite indemnifications; but, any representations and warranties relating specifically to any Member shall only be made by that Member and any indemnification provided by the Members shall be on a several, not joint, basis and shall be based on the number of Units being Transferred by each Member in such transaction.  In addition, each Drag-Along Member shall reimburse the Drag-Along Seller for their proportionate share (based on consideration received) of the out-of-pocket costs and expenses incurred by the Drag-Along Seller in connection with any such transaction.

48

Section 8.8 Sales Price and Terms of Sale.The sales price of each Interest or interest therein to be sold under this Article 8 shall be the Fair Market Value (as hereinafter defined) of such Interest or interest therein.  “Fair Market Value” shall mean the amount of distributions that would be received by the holder of the Interest or interest therein to be sold if 100% of the Interests or assets of the Company were sold for their fair market value as of the date of determination of the Fair Market Value and the Company were dissolved and its affairs wound up and distributions were made in accordance with Section 10.5.  The Member whose Interest or interest therein is to be sold hereunder (the “Seller”) and the Person purchasing such Interest or interest therein (whether one or more, the “Purchaser”) shall attempt to agree on the Fair Market Value of the Interest or interest therein to be sold.  If the Purchaser and the Seller are unable to agree on such Fair Market Value within 10 days after notice is given by the Purchaser or the Seller requesting such an agreement as to Fair Market Value (the date on which such notice is given being referred to herein as, the “Notice Date”), each of Purchaser and Seller will select an independent appraiser, and each such appraiser will estimate the Fair Market Value (each, an “FMV Estimate”). A third qualified independent appraiser (the “Binding Appraiser”) jointly appointed by the Purchaser and Seller will conduct its own appraisal and select one of FMV Estimates which the Binding Appraiser determines is most accurate, and such selection will be binding on the Parties. If the Purchaser and Seller fail to agree on the appointment of the Binding Appraiser, then the two initially selected independent appraisers will mutually agree on and appoint the Binding Appraiser.  The Binding Appraiser will make its selection between FMV Estimates within 20 days of such appraiser’s appointment.  The fees and expenses of the initial independent appraisers shall be borne by the Member appointing such appraiser, and the fees and expenses of the Binding Appraiser shall be borne equally by the Purchaser and the Seller.  Fair Market Value shall be determined as of a date as near as reasonably practicable to the date of the occurrence of the event that results in the sale of the Interest or interest therein hereunder.

ARTICLE 9ADDITIONAL MEMBER RIGHTS

Section 9.1 Company Valuation.  Each Class A Member agrees that within 30 days after the fourth anniversary of the Effective Date, the Company shall appoint a qualified independent appraiser to determine the Fair Market Value of all Units (pursuant to which Crosswinds will be designated as the “Purchaser” and the FNHC will be designated as the “Seller”) (such valuation, the “4-Year Valuation”), and the costs and fees of such appraisal shall be borne by the Company. If the Board is unable to select a qualified independent appraiser, then such 4-Year Valuation will be determined pursuant to the appraisal procedures of Section 8.8, including the provisions regarding allocation of costs and expenses.

Section 9.2 Board Meeting to Determine Exit Strategy.  Within 30 days following the determination of the 4-Year Valuation, the Board shall call a special meeting of the Board of the Company for the purpose of reaching a Supermajority of Managers on a proposed exit strategy, including a sale of the Company to a third-party, an initial public offering of Monarch National or Monarch National Holdings or such other transactions as may be proposed by the Board. Prior to such meeting and the determination of the exit strategy, the Class A Members shall (i) disclose the 4-Year Valuation to the Class B Members and (ii) provide the Class B Members the opportunity to submit recommendations for consideration by the Board at the special meeting.

Section 9.3 [Reserved].

49

  Section 9.4 FNHC Right of First Offer.  At any time within the 180-day period following the final determination of the 4-Year Valuation, upon the written request of Crosswinds to the Company (the “ROFO Notice”), each of the Members and the Company shall take all action within their respective power (including having all of their Interests represented in person or by proxy at all meetings of Members, voting their Interests, acting by written consent, and using all reasonable efforts to cause any Manager designated by such Member not to take any action inconsistent with this Agreement) required to cause the Company or any of its Subsidiaries to initiate a bona fide, arm’s-length transaction or series of transactions in order sell all of the equity interests in Monarch National Holdings or Monarch National, or all or substantially all of the businesses and assets of either (such transaction(s), the “ROFO Transaction”).  FNHC shall have up to a period of 90 days (the “ROFO Option Period”) after the receipt of the ROFO Notice within which to provide Crosswinds with a Qualifying ROFO Offer.  A “Qualifying ROFO Offer” means a bona fide firm written offer by FNHC to consummate the ROFO Transaction, which shall (a) be solely for cash, (b) set forth the material terms and conditions of such offer and the price (such price, the “ROFO Price”), and (c) by its terms be irrevocable within the ROFO Acceptance Period.  Crosswinds shall have a period of up to 60 days (the “ROFO Acceptance Period”) after receipt of the Qualifying ROFO Offer within which to notify FNHC in writing that it wishes to accept or reject the Qualifying ROFO Offer.  If Crosswinds accepts the Qualifying ROFO Offer, then the each of the Members and the Company shall take all action within their respective power to consummate the ROFO Transaction within 120 days of the expiration of the ROFO Acceptance Period and on the terms and conditions set forth in the Qualifying ROFO Offer.  Notwithstanding the foregoing, if 120 days is not sufficient time to enable FNHC to obtain all necessary consents from any third party or Governmental Authority and enter into any necessary agreements and amendments of existing agreements, such 120 days will be extended for the period reasonably necessary to complete such actions, but not in excess of 60 additional days.  If FNHC does not make a Qualifying ROFO Offer within the ROFO Option Period, or if, having made such offer, FNHC fails to consummate the transaction within the requisite 120 days (which may be extended pursuant to the previous sentence, but not beyond an additional 60 days) provided above or Crosswinds rejects the Qualifying ROFO Offer, Crosswinds shall be free to secure a bona fide offer for the ROFO Transaction from a third party (“Third Party Offer”) and, if Crosswinds accepts a Third Party Offer, then each of the Members and the Company shall take all action within their respective power to consummate the ROFO Transaction with such third party, provided that such ROFO Transaction is consummated within 12 months after the expiration of the ROFO Acceptance Period upon substantially the same terms and conditions (other than price, which may be higher, but, unless Crosswinds accepted the Qualifying ROFO Offer and FNHC failed to consummate the ROFO Transaction, may not be less than, the ROFO Price) as set forth in the Qualifying ROFO Offer, including consideration of cash.

50

Section 9.5 Participation Rights.

9.5.1 Crosswinds Participation Right.  For so long as FNHC is a Member, in the event that FNHC or any of its Affiliates solicits, initiates or takes any action to facilitate or encourage any inquiries or the making of any proposal from a Person or group of Persons other than Crosswinds and its Affiliates that may constitute, or could reasonably be expected to lead to, an FNHC Alternate Transaction, FNHC shall offer Crosswinds the opportunity, but not the obligation, to invest in such FNHC Alternate Transaction on an equal basis with FNHC and any of its Affiliates, as the case may be. FNHC shall provide Crosswinds with written notice (the “Crosswinds Participation Notice”) of the material terms and conditions of the FNHC Alternate Transaction. Crosswinds shall have a period of up to 60 days (the “Crosswinds Participation Acceptance Period”) after receipt of the Participation Notice within which to notify FNHC that it wishes to exercise its option to participate in the FNHC Alternate Transaction.  Crosswinds may participate in the FNHC Alternate Transaction either directly or indirectly through any Person that is an Affiliate of Crosswinds. If Crosswinds exercises its option to participate, then Crosswinds, FNHC and, if applicable, any Affiliate of FNHC shall take all action within their respective power to consummate the FNHC Alternate Transaction within 120 days of the expiration of the Participation Acceptance Period on the terms and conditions set forth in the Participation Notice. Notwithstanding the foregoing, if 120 days is not sufficient time to enable Crosswinds, FNHC and, if applicable, any Affiliate of FNHC to obtain all necessary consents from any third party or Governmental Authority and enter into any necessary agreements and amendments of existing agreements, such 120 days will be extended for the period reasonably necessary to complete such actions, but not in excess of 60 additional days.  If Crosswinds does not exercise its right to invest in such FNHC Alternate Transaction or if, having exercised its right to participate in such FNHC Alternate Transaction, Crosswinds fails to consummate its investment in the FNHC Alternate Transaction, FNHC shall be free to engage in the FNHC Alternate Transaction described in the Participation Notice with a third party, provided that such FNHC Alternate Transaction is consummated within 12 months after the expiration of the Participation Acceptance Period upon substantially the same terms and conditions (other than price, which may be higher, but, unless Crosswinds exercised its right to participate but failed to consummate the FNHC Alternate Transaction, may not be less than the price set forth in the Participation Notice) as set forth in the Participation Notice.

51

9.5.2 FNHC Participation Right.

(a) For so long as Crosswinds is a Member, promptly following a decision by Crosswinds or one of its wholly-owned Affiliates to take substantial steps to explore a potential Crosswinds Alternate Transaction, Crosswinds shall provide written notice to FNHC (a “Preliminary FNHC Participation Notice”), which notice shall describe in reasonable detail the nature of the action(s) triggering the notice.  Crosswinds shall keep FNHC informed on a current basis as to the status of any potential Crosswinds Alternate Transaction as well as any material developments related to such proposed Crosswinds Alternate Transaction. Within five Business Days of entering into a definitive written agreement that, if consummated, would constitute a Crosswinds Alternate Transaction, Crosswinds shall provide written notice to FNHC of such agreement (the “FNHC Participation Notice”) and, subject to the execution of any confidentiality, process, or other similar letter or agreement as may be required by the counterparty to such agreement, offer FNHC the opportunity, but not the obligation, to invest in such Crosswinds Alternate Transaction on substantially similar material terms and conditions as those agreed to by Crosswinds; but FNHC shall not be entitled to (i) any rights associated with any commercial or strategic relationship to be entered into between Crosswinds or one of its wholly-owned Affiliates as part of the transaction, or (ii) in the event that Crosswinds or any of its Affiliates acts as an investment manager in connection with such Crosswinds Alternate Transaction, any share of any investment manager fees, other fees typically earned by an investment manager or sponsor in comparable transactions, or any other preferred compensation related to Crosswinds’ investment manager status.  FNHC shall have a period of up to 60 days (the “FNHC Participation Acceptance Period”) after receipt of the FNHC Participation Notice within which to notify Crosswinds that it wishes to exercise its option to participate in the Crosswinds Alternate Transaction.  FNHC may participate in the Crosswinds Alternate Transaction either directly or indirectly through any Person that is an Affiliate of FNHC in an amount equal to the total size of Crosswinds’ proposed investment in such Crosswinds Alternate Transaction.  If FNHC does not exercise its right to invest in such Crosswinds Alternate Transaction, or if, having exercised its right to participate in such Crosswinds Alternate Transaction, FNHC fails to consummate its investment in the Crosswinds Alternate Transaction, Crosswinds  shall be free to engage in the Crosswinds Alternate Transaction described in the FNHC Participation Notice with a third party, provided that such Crosswinds Alternate Transaction is consummated within 12 months after the expiration of the FNHC Participation Acceptance Period upon substantially the same terms and conditions (other than price, which may be higher, but, unless FNHC exercised its right to participate but failed to consummate the Crosswinds Alternate Transaction, may not be less than the price set forth in the Participation Notice) as set forth in the FNHC Participation Notice. Notwithstanding the foregoing, nothing in this Section 9.5.2 shall restrict Crosswinds from consummation of a Crosswinds Alternate Transaction during the FNHC Participation Acceptance Period, provided Crosswinds complies with the requirements of Section 9.5.2(b).

(b) If FNHC elects to exercise its opportunity to invest in a Crosswinds Alternate Transaction in accordance with Section (a) and such Crosswinds Alternate Transaction is consummated prior to the expiration of the FNHC Participation Acceptance Period, Crosswinds shall use its commercially reasonable efforts to assign or participate to FNHC FNHC’s portion of the investment in exchange for cash consideration in an equal amount.

Section 9.6 Buy-Sell Rights.

9.6.1 In the event neither Crosswinds nor FNHC has exercised its respective rights under Section 9.3 or Section 9.4, respectively, and in the event the voting Members have not agreed upon an exit strategy pursuant to Section 9.2, for a period of 120 days following the expiration of the 180-day period for delivery of the ROFO Notice set forth in Section 9.4, either Crosswinds or FNHC (the “4th-Year Exercising Member”) shall have the right and option to purchase (a “4th–Year Call Right”) all, and not less than all, of the Class A Units (such Units, the “4th-Year Call Units”) in the manner, for the price and on the terms and conditions contained in Section 9.4 and set forth in the written notice of such exercise (the “4th-Year Call Option Notice”) to all other Class A Members (the “Selling Members”).

9.6.2 The purchase price per Unit (the “4th-Year Purchase Price”) of any 4th-Year Call Unit shall be determined at the discretion of the 4th-Year Exercising Member and set forth in the 4th-Year Call Option Notice.

52

9.6.3 Upon receipt of the 4th-Year Call Option Notice, FNHC or Crosswinds, as applicable, shall have the right to become the 4th-Year Exercising Member (and the initial 4th-Year Exercising Member shall become a Selling Member) and purchase all, and not less than all of the Class A Units owned by the Selling Members for the 4th-Year Purchase Price set forth in the 4th-Year Call Option Notice. The replacement 4th-Year Exercising Member shall send the initial 4th-Year Exercising Member and all other Members written notice of its exercise and thereafter, for purposes of this Section 9.6, the 4th-Year Call Units shall be deemed to be as described in this Section 9.6.3.

9.6.4 The 4th-Year Purchase Price with respect to any 4th-Year Call Units purchased by the 4th-Year Exercising Member shall be paid by wire transfer of immediately available funds to an account designated by each Selling Member promptly upon delivery of the documents reasonably required for the 4th-Year Call Closing under Section 9.6.5.

9.6.5 Any purchase of Units pursuant to this Section 9.6 shall be consummated (the “4th-Year Call Closing”) at the Company’s principal office at 10:00 a.m., prevailing business time, on the date (the “4th-Year Call Closing Date”) which is the 120th day after the date of the 4th-Year Call Option Notice; but, if any regulatory approval or waiting period is required in connection with any such purchase, then such 120-day period shall be extended by the number of days necessary to satisfy such regulatory requirement, but in no event shall such period be extended by more than 60 days.   If such date is not a Business Day, the 4th-Year Call Closing shall occur at the same time and place on, and the 4th-Year Call Closing Date shall be, the next succeeding Business Day. At the 4th-Year Call Closing, the Selling Members shall deliver to the 4th-Year Exercising Member the duly executed written instruments of transfer of such Units to be sold by it in connection with the 4th-Year Call Right, in form and substance satisfactory to 4th-Year Exercising Member.

9.6.6 In the event a Selling Member fails to designate an account to receive a wire transfer or fails to deliver such Units, in proper form for Transfer, on the 4th-Year Call Closing Date, the 4th-Year Exercising Member may elect to deposit the cash representing the 4th-Year Purchase Price (minus any escrow fees) with an escrow agent.  From and after the deposit of such adjusted 4th-Year Purchase Price, such Units shall be deemed for all purposes (including the right to vote, receive payment of distributions and exercise rights under this Agreement) to have been transferred to the 4th-Year Exercising Member, and the Units registered in the name of such Selling Member shall be deemed to have been canceled and to represent solely a right to receive payment of the 4th-Year Purchase Price (minus any escrow fees), without interest, from the escrow account.  If the proceeds of sale have not been claimed by such Selling Member (by delivery of duly executed written instruments of transfer of such Units, in proper form for transfer) prior to the fourth anniversary of the 4th-Year Call Closing Date, the escrow deposits, and all interest earned thereon, shall be returned to the 4th-Year Exercising Member, and such Selling Member shall look solely to the 4th-Year Exercising Member for payment of the 4th-Year Purchase Price.  The escrow agent shall not be liable for any action or inaction taken by him in good faith.

53

9.6.7 Upon the delivery of the 4th-Year Call Option Notice, the Selling Member’s respective rights, as a Class A Member, under this Agreement shall terminate; but, if the 4th-Year Call Closing shall not have occurred on or before the applicable 4th-Year Call Closing Date (other than due to a failure of the Selling Member to comply with its obligations under Section 9.6), then such Selling Member’s rights as a Class A Member shall be reinstated.

9.6.8 For the period between March 1st and April 15th of 2019 and for each calendar year thereafter, each of the Class A Members may exercise the 4th-Year Call Right upon the same terms as set forth in this Section 9.6.

Section 9.7 TransRe Sale Rights.

9.7.1 In the event the voting Members have not agreed upon an exit strategy pursuant to Section 9.2, for a period of 120 days following (a) the expiration of the 180-day period set forth for delivery of the ROFO Notice in Section 9.4 or (b) if Crosswinds delivered a ROFO Notice and a ROFO Transaction with FNHC was not consummated within the time required by Section 9.4, the earlier of (i) notice from Crosswinds to TransRe that it is no longer pursuing a Third Party Offer or (ii) expiration of the 12-month period for consummation of a Third Party Offer in Section 9.4, TransRe shall offer Crosswinds and FNHC the opportunity, but not the obligation, to purchase all, but not less than all, of the Units held by TransRe in the manner, for the price and on the terms and conditions set forth in the written notice of such exercise  (the “TransRe Sale Offer”) to Crosswinds and FNHC.

9.7.2 The purchase price per Unit (the “TransRe Sale Price”) of the Units to be sold by TransRe pursuant to this Section 9.7 shall be determined at the discretion of TransRe and set forth in the TransRe Sale Notice.

9.7.3 Each of Crosswinds and FNHC shall have a period of up to 30 days after receipt of the TransRe Sale Offer within which to notify TransRe (the “TransRe Sale Request”) that it wishes to exercise its option to purchase all, but not less than all, of the Units held by TransRe (each Member who delivers a TransRe Sale Request, whether one or more, the “Exercising Member”). In the event that both Crosswinds and FNHC accept the TransRe Sale Offer, together Crosswinds and FNHC shall purchase all of the Units held by TransRe with each purchasing such Units in proportion to the relative number of Class A Units held by each Exercising Member.  If either or both of Crosswinds and FNHC has not accepted the offer contained in the TransRe Sale Offer by delivering a TransRe Sale Request in the required time, each such party that did not deliver a TransRe Sale Request shall be deemed to have irrevocably waived its rights under this Section 9.7 with respect to such TransRe Sale Offer. If both Crosswinds and FNHC shall fail to deliver a TransRe Sale Request in the required time, TransRe shall thereafter be free, for a period of 180 days from the date of the TransRe Sale Offer, to Transfer all of its Units on the same terms (other than price per Unit, which may be higher, but may not be lower) and subject to the same conditions applicable to the Units set forth in the TransRe Sale Offer.

54

9.7.4 Within ten Business Days following the receipt of the TransRe Sale Request, TransRe shall execute and deliver to the Exercising Member duly executed written instruments of transfer of TransRe’s Units, in form and substance reasonably satisfactory to the Exercising Member, that warrant to the Exercising Member that  TransRe shall Transfer its Units free and clear of any Encumbrances, together with any other documents reasonably required to be executed in connection with such Transfer of Units. If TransRe shall fail to deliver such documents to the Exercising Member, the Company shall cause its books and records to show that TransRe’s Units are subject to the provisions of this Section 9.7.4 and that such Units shall be transferred to the Exercising Member immediately upon surrender for transfer by TransRe.

9.7.5 In the event that TransRe did not sell its Units to a third party within the required time described in Section 9.7.3, for a period of 10 days following the expiration of such 180-day period set forth in Section 9.7.3, TransRe shall have the right to require the Company to redeem all and not less than all of its Units at a price (the “TransRe Redemption Price”) equal to the Fair Market Value calculated in accordance with Section 8.8 of such Units, but, the valuation methodology for determination of Fair Market Value shall be the same as used in the determination of the 4-Year Valuation and the cost of the qualified independent appraiser shall be borne solely by the Company. TransRe may only exercise this redemption right by serving a written notice on the Company (the “TransRe Redemption Request”) requesting redemption of all of the Units held by TransRe.  No TransRe Redemption Notice, once delivered to the Company, may be withdrawn and is considered irrevocable.

9.7.6 The Company shall establish a date (the “TransRe Redemption Date”) to redeem all of the Units of TransRe as the Board reasonably determines, but in no event shall the TransRe Redemption Date be later than 30 days after, the final determination of the TransRe Redemption Price. The Company shall deliver a written notice of the TransRe Redemption Date (the “TransRe Redemption Notice”) to TransRe not less than 5 days subsequent to the final determination of the Fair Market Value of the Units of TransRe to be redeemed.  The TransRe Redemption Notice shall include:

(a) The TransRe Redemption Date;

(b) The TransRe Redemption Price; and

(c) A document that TransRe is to duly execute and deliver to warrant to the Company that TransRe shall surrender its Units free and clear of any Encumbrances.

55

9.7.7 On or before the applicable TransRe Redemption Date, TransRe  shall deliver the document referred to in Section 9.7.6(c). The purchase price for such Units shall be due and payable upon the earlier of a Conveyance Triggering Event or the fourth anniversary of the TransRe Redemption Date, increased annually on a compound basis by the Mid-Term Applicable Federal Rate published for the month on which TransRe Redemption Date occurs; but, the Company may, in its sole discretion, prepay, without premium or penalty, the Redemption Price in whole or in part on any earlier date or dates.

9.7.8 If the TransRe Redemption Notice shall have been duly given, then notwithstanding TransRe’s failure to deliver the document referred to in Section 9.7.6(c), all rights with respect to such Units shall forthwith after the Redemption Date terminate, except only the right of TransRe to receive the TransRe Redemption Price as set forth in Section 9.7.7 without additional interest upon delivery of such document to the Company.

9.7.9 Notwithstanding anything contained in this Agreement, the Company may pay the TransRe Redemption Price by making a liquidating distribution of Monarch National Holdings stock to TransRe in an amount equal to the TransRe Redemption Price, as adjusted pursuant to Section 9.7.7, which stock the Company agrees to buy back, or to cause Monarch National Holdings to buy back, for cash in an amount equal to the TransRe Redemption Price as adjusted pursuant to Section 9.7.7.

Section 9.8 Subsidiary Management Rights and Obligations

9.8.1 The action of the board of any Subsidiary of the Company will require the prior approval of the Board on behalf of the Company in its capacity as direct or indirect shareholder of such Subsidiary.  Each Member agrees to cause any Person acting as a director or officer of any such Subsidiary to act in accordance with this Section 9.8 and this Agreement.  The executive officers of each Subsidiary of the Company shall be designated by FNHC, subject to Board oversight.

9.8.2 For so long as Crosswinds and FNHC each hold a Percentage Interest above the Minimum Control Threshold Amount, each will have the right to designate half of the directors to be elected to the board of any Subsidiary by the Company, except Monarch National; which right Crosswinds and FNHC may respectively also exercise in the event of the resignation, removal or death of such designated directors.

9.8.3 In the event Crosswinds’ Percentage Interest falls below the Minimum Control Threshold Amount, FNHC will have the right to designate all of the directors to be elected to the board of any Subsidiary for so long as FNHC’s Percentage Interest is equal to or greater than the Minimum Control Threshold Amount; in which case FNHC may request, and the Company shall cause the removal of, the director(s) to such Subsidiary designated by Crosswinds.

56

9.8.4 In the event FNHC’s Percentage Interest falls below the Minimum Control Threshold Amount, Crosswinds will have the right to designate all of the directors to be elected to the board of any Subsidiary for so long as Crosswinds’ Percentage Interest is equal to or greater than the Minimum Control Threshold Amount; in which case Crosswinds may request, and the Company shall cause the removal of, the director(s) to such Subsidiary designated by FNHC.

9.8.5 In the event both Crosswinds’ and FNHC’s Percentage Interests, respectively, fall below the Minimum Control Threshold Amount, the Board will have the right to designate two directors to be elected to the board of any Subsidiary, and the Board may cause the removal of any directors previously designated by Crosswinds or FNHC.

9.8.6 The directors elected to the board of any Subsidiary will carry out their duties in accordance with the instructions of the Board acting in accordance with the terms of this Agreement, any director elected to the board of a Subsidiary that fails to carry out such instructions, subject only to the requirements of applicable law, shall be removed by the Board.

9.8.7 The Board and the Members will take all actions within their respective powers required to cause the Company to effectuate the provisions of this Section 9.7, and the Board and the Members will not take any action that would contravene or impede the Company from effectuating the provisions of this Section 9.7.

Section 9.9 Termination of FNHC Services Agreement other than for Cause.  If the FNHC Services Agreement is terminated by Monarch National other than for cause (as defined therein), FNHC shall be entitled to receive from the Company a termination fee equal to the aggregate fees paid by Monarch National under the FNHC Services Agreement for the twelve (12) calendar months immediately preceding the date of termination.  Such termination fee shall be due and payable to FNHC within five Business Days from the date of termination of the FNHC Services Agreement.

Section 9.10 Debt Participation Right.  In the event that the Company or any of its Subsidiaries determines to incur any debt or liability described in Section 6.2.2(k) (excluding short-term indebtedness not exceeding $250,000 in the aggregate that is incurred in the ordinary course of business),  including as set forth in the Annual Budget (the “Offered Debt”), the Company shall offer the Members the opportunity, but not the obligation, to participate, on a Pro Rata Basis, in such Offered Debt on the material terms and conditions set forth in a “Debt Notice.” Each Member shall have a period of 30 days (the “Debt Acceptance Period”) after receipt of the Debt Notice within which to notify the Company that it wishes to exercise its option to participate in the Offered Debt.  After the expiration of the Debt Acceptance Period and if any Offered Debt remains after allocating the Offered Debt to the Participating Members (the “Remaining Debt”), the Company shall promptly, in writing, notify each Member that elected to participate in the Offered Debt (each, a “Participating Member”) of the amount of such Remaining Debt and shall offer the Participating Members the opportunity, but not the obligation, to participate in all or such portion of the Remaining Debt. Each Participating Member shall have a period of 10 days after receipt of notice from the Company of the Remaining Debt within which to notify the Company that it wishes to exercises its option to participate in the Remaining Debt and such notice (the “Additional Participation Notice”) shall set forth the amount in which the Participating Member desires to participate. In the event that the aggregate amounts set forth in all of the Additional Participation Notices received by the Company in the required time exceeds the Remaining Debt, each Participating Member shall participate in the Remaining Debt in proportion to the relative number of Units held by each Participating Member.  If none of the Members exercise the right to participate in the Offered Debt, if the Participating Members do not desire to participate in 100% of the Remaining Debt or if, having exercised its right to participate in such Offered Debt, any Member fails to consummate its participation, the Company shall be free to enter into an agreement with a third party for such Offered Debt, provided that the Offered Debt is consummated within six months after the expiration of the Debt Acceptance Period upon substantially the same terms and conditions (other than price, which may be higher, but, unless a Member exercised its right to participate but failed to consummate its participation, may not be less than the price set forth in the Debt Notice) as set forth in the Debt Notice.

57

ARTICLE 10DISSOLUTION AND LIQUIDATION

Section 10.1 Dissolution.  The Company shall dissolve and its affairs shall be wound up on the first to occur of the following:

10.1.1 Unanimous consent of the Members;

10.1.2 The entry of a decree of judicial dissolution; or

10.1.3 The sale of substantially all the assets of the Company and the distribution to the Members of all proceeds from such sale.

Section 10.2 Involuntary Dissolution.  The Company shall not be dissolved upon the occurrence of the following:

10.2.1 The Bankruptcy or dissolution of a Member; or

10.2.2 Any other event specified by the Act that terminates the continued membership in the Company of a Member.

Section 10.3 Reformation of Company. If, notwithstanding the provisions of Section 10.2, the Company is deemed involuntarily dissolved by operation of law as a result of the occurrence of any of the events enumerated in Section 10.2,the Company shall not be dissolved if a majority in Interest of the remaining Members not responsible for the occurrence of such event, within 90 days after the date of any of such events, elect to continue the business of the Company, in a reconstituted form.

58

Section 10.4 Liquidation Procedures. Upon the dissolution of the Company in accordance with the provisions of Section 10.1 or Section 10.2, the Company shall be liquidated in accordance with the following procedures:

10.4.1 Winding Up.  Upon dissolution of the Company pursuant to Section 10.1 hereof, the Company shall immediately commence to wind up its affairs and the Company shall proceed with reasonable promptness to liquidate the business of the Company and (at least to the extent necessary to pay any debts and liabilities of the Company) to convert the Company’s assets into cash.  A reasonable time shall be allowed for the orderly liquidation of the business and assets of the Company in order to reduce any risk of loss that might otherwise be attendant upon such liquidation.

10.4.2 Management Rights During Winding Up.  During the period of the winding up of the affairs of the Company, the Board shall manage the Company and shall make with due diligence and in good faith all decisions relating to the conduct of any business or operations during the winding up period and to the sale or other disposition of the assets of the Company.

10.4.3 Liquidating Trustee. The Board may approve a Person who shall conduct such winding up and termination of the business and affairs of the Company and shall act as Liquidating Trustee of the Company.

10.4.4 Form of Distributions. The Board or Liquidating Trustee (as the case may be) shall determine whether the liquidating distributions shall be entirely in cash or in whole or in part a distribution of the Company’s assets in kind.

Section 10.5 Distributions in Liquidation. The Company shall apply or distribute Cash Flow from Liquidation in the following manner and in the following order of priority:

10.5.1 In payment of debts and obligations of the Company owed to third parties, which shall include any Member as the holder of any secured loan and to the expenses of liquidation in the order of priority as provided by law; then

10.5.2 To the setting up of any reserves which the Board or Liquidating Trustee (as the case may be) may deem necessary for any contingent or unforeseen liabilities or obligations of the Company; then

10.5.3 In payment of any debts or obligations of the Company to any Manager, including any non-reimbursed Company expenses; then

10.5.4 In payment of any accrued but unpaid interest on, and then in payment of the unpaid principal balance, if any, of any and all loans made by any Member to the Company in accordance with this Agreement; then

10.5.5 To the Members in accordance with Section 4.6.2 as though such liquidation was a Capital Event.

Net Losses attributable to the expenditure of funds held under the reserve in Section 10.5.2 shall be allocated to each Member to the extent such expenditure will reduce the amount of cash eventually distributed to each Member.

59

Section 10.6 Distributions In Kind.  The Board shall use its best efforts to dispose of the assets of the Company so that the liquidating distributions under Section 10.5 may be made to the Members in cash; but, at the time of the termination of the Company, the Board may determine, in its sole discretion, that certain assets owned by the Company shall be distributed in kind to the Members, in lieu of cash, proportionately to their right to receive the assets of the Company on an equitable basis reflecting the then fair market value of the assets so distributed, which fair market value shall be determined as of the date of such distribution by an appraisal from an experienced third-party appraiser engaged by the Board.  Each Member’s Capital Account shall be charged or credited, as the case may be, as if each asset distributed in kind had been sold for cash at fair market value and the Net Profit or Net Loss recognized thereby had been allocated to and among the Members in accordance with Article 4.

ARTICLE 11AMENDMENT OF AGREEMENT; MEETINGS

Section 11.1 Amendments.

11.1.1 Power to Amend.  Notwithstanding anything in the Act or this Agreement to the contrary, the Board shall have the power, without Member Approval, to amend this Agreement or the Certificate of Formation as may be required to facilitate or implement any of the following purposes to:

(a) add to the obligations of the Board or surrender any right or power granted to the Board or any Affiliate of the Members designating the members of the Board for the benefit of the Members;

(b) reflect the admission, substitution, termination, or withdrawal of Members in accordance with this Agreement;

(c) reflect the Transfer of Units in accordance with this Agreement;

(d) reflect a change that does not adversely affect the Members;

(e) satisfy any requirement, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency, any order of any court of competent jurisdiction, any opinion of any relevant court interpreting a statute or other law, or contained in any federal or state statute; and

(f) amend the provisions of the Agreement relating to the allocation of profits or losses or items thereof (including nontaxable receipts and nondeductible expenditures) or credits among Members if the Company is advised by its independent certified public accountants or legal counsel that it is likely that such allocations would not be respected for federal income tax purposes, but such amendments to the maximum extent possible shall not alter the rights of Members to receive distributions as provided in the Agreement.

60

11.1.2 Consent of Members Required.  Except as otherwise provided in Section 11.1.1, this Agreement shall not be amended unless such amendment is adopted by a Supermajority of Managers and approved by (a) the unanimous consent of the Members in the case of (i) any amendment to Section 11.1 or (ii) any amendment that would be reasonably likely to jeopardize the status of the Company as a limited liability company under federal income tax law; (b) each Member adversely affected in the case of any amendment that would (i) impose an obligation on any Member to increase or reduce its Capital Contributions, (ii) modify the limited liability of any Member, (iii) further restrict the transferability of all or any part of a Member’s Interest, or (iv) increase the liabilities or obligations, or diminish the rights and protections of, a particular Member or group of Members; and (c) the Class B Members, other than (if applicable) Crosswinds or FNHC or their respective Affiliates, in the case of (i) any amendment to Section 6.2.3 , Section 3.7 or (ii) any amendment that results in a recapitalization or other change in the capital structure of the Company that adversely affects any preference of the Class B Units set forth in this Agreement.

Section 11.2 Meetings of Members.

11.2.1 General.  The Board may call meetings of Members.  In addition, the Board shall call a meeting upon the request in writing (including by e-mail) , of any Member who has an Ownership Percentage of at least 50% at such time.  Such meetings shall be held at the principal office of the Company, or at such other place as may be designated by the Board.  Notice of any such meeting shall be given to all Members not less than 10 days or more than 60 days prior to the date of such meeting.  The notice shall state the purpose(s) of the meeting.  Members may vote in person or by proxy at such meeting.

11.2.2 Actions Without a Meeting.  Any action required or permitted to be taken at a meeting of Members may be taken without a meeting upon request by the adoption of a resolution in writing, including by e-mail or other electronic vote conducted according to the procedures set forth in Section 11.2.3, setting forth the action so taken and signed or authenticated by the Members holding a majority of the voting Interests (or such greater percentage as is expressly required by this Agreement or the Act).  Such writing or electronic vote may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Members (or such greater percentage as is expressly required by this Agreement or the Act) at a meeting of the Members.  Such writing or electronic vote shall be filed with the Board.  An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.  For the purposes of the actions taken by the Members pursuant to this Section 11.2.2, the Board shall be permitted to participate as part of the unanimous consent of the Members, notwithstanding the definition of such term in this Agreement.

61

11.2.3 Conduct of Electronic Voting. Notwithstanding the attendance of a quorum at a meeting of the Members, and to the extent not prohibited by the Act, voting on resolutions properly brought before any meeting may be taken at such meeting, or if the resolution so provides, may be made electronically, by e-mail sent by the Member voting to the Board, if there is no reason to believe that such e-mail is not authentic. The period for electronic voting shall be set forth in the resolution to be voted on, but shall open within 24 hours of the question being called, and shall remain open for a minimum of seven days after notice is provided to each Member of the electronic vote to be taken.  Any Member not present at the meeting at which the question is called shall promptly be given notice of the resolution and the manner in which votes are being taken.  As soon as the number of Members required for the passage or defeat of the resolution in question have voted for its passage or defeat, the Board shall then give notice to each Member, and the period for electronic voting shall close approximately 24 hours thereafter at the time set forth in the Board’s notice, even if the seven day window will not yet have expired.  An electronic vote may be withdrawn by a Member by notice to the Board, but such notice (which may be by e-mail notice) must occur before the Board has announced that the number of Members required for the passage or defeat of the resolution in question have voted for its passage or defeat; thereafter, no vote submitted on the question at any time may be withdrawn except upon the sworn affidavit of the Member in question that the vote recorded was not submitted by such Member or pursuant to any clerical authority granted by such Member.  Voting on any question or resolution electronically in accordance with this Agreement shall constitute a waiver of notice of the meeting at which such question was posed or resolution proposed, and shall also constitute a waiver of the use of the validity of electronic voting for such question or resolution, except for the Member using electronic means to clearly and conspicuously assert that the question or resolution may not be properly submitted to an electronic vote, or that the vote is being taken in a manner that is contrary to the Act or this Agreement.

11.2.4 Proxy.  Each Member may authorize any Person or Persons to act for him by proxy on all matters in which the Member is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting.  Every proxy must be signed by the Member or its attorney-in-fact.  For any proxy that must be in writing, this requirement is satisfied if the proxy is by e-mail and a copy of the proxy e-mail is delivered to the proxy holder.  No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy.  Every proxy shall be revocable at the pleasure of the Member executing it.

ARTICLE 12GENERAL PROVISIONS

Section 12.1 Further Assurances.  Each party to this Agreement agrees to execute, acknowledge, deliver, file and record such further certificates, amendments, instruments and documents, and to do all such other acts and things, as may be required by law or as the Board may reasonably deem necessary or advisable to carry out the intent and purpose of this Agreement.

Section 12.2 Notices.  Unless otherwise specified in this Agreement, all notices, demands, elections, requests or other communications that any party to this Agreement may desire or be required to give hereunder shall be in writing, or by e-mail if an e-mail address has been provided to the Board, and shall be given by hand by depositing the same, or if e-mail a copy of, in the United States mail, first class postage prepaid, certified mail, return receipt requested, or by a recognized overnight courier service providing executed confirmation of delivery, to, with respect to each Member, the address set forth under such Member’s name in Schedule 1 and, with respect to the Board and the Company, to the Company’s registered office address as set forth in Section 2.5 or at such other address as may be designated by the addressee thereof (which in the case of the Company, shall be designated by the Board) upon written notice to all of the Members.  All notices given pursuant to this Agreement shall be deemed to have been given (a) if delivered by hand on the date of delivery or on the date delivery was refused by the addressee, (b) if sent by United States mail, three Business Days following deposit of the notice in the mail, (c) if sent by overnight courier or express mail, one Business Day following deposit of the notice with the courier or express mail provider, or (d) if sent by e-mail, one Business Day following the sending of the e-mail, as long as the sender did not receive correspondence attesting to the failure of the electronic delivery.

62

Section 12.3 Headings and Captions.  All headings and captions contained in this Agreement and the table of contents hereto are inserted for convenience only and shall not be deemed a part of this Agreement.

Section 12.4 Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one Agreement.  Any signature page of any such counterpart, or any electronic facsimile thereof, may be attached or appended to any other counterpart to complete a fully executed counterpart of this Agreement, and any telecopy or other facsimile transmission of any signature shall be deemed an original and shall bind such party.

Section 12.5 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial.

12.5.1 This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, applicable to contracts executed in and to be performed entirely within that State, without regard to conflicts of laws principles.

12.5.2 All actions and proceedings arising out of or relating to this Agreement shall be heard and determined in the Chancery Court of the State of Delaware or any federal court sitting in the State of Delaware, and the parties to this Agreement hereby irrevocably submit to the exclusive jurisdiction of such court (and, in the case of appeals, appropriate appellate courts therefrom) in any such action or proceeding and irrevocably waive the defense of an inconvenient forum to the maintenance of any such action or proceeding.  The consent to jurisdiction set forth in this paragraph shall not constitute general consents to service of process in the State of Delaware and shall have no effect for any purpose except as provided in this paragraph and shall not be deemed to confer rights on any Person other than the parties to this Agreement or as specifically provided herein.  The parties to this Agreement agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by applicable law.

63

12.5.3 EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

Section 12.6 Partition.  The Members hereby agree that no Member nor any successor-in-interest to any Member shall have the right to have the property of the Company partitioned, or to file a complaint or institute any proceeding at law or in equity to have the property of the Company partitioned, and each Member, on behalf of himself, his successors, representatives, heirs and assigns, hereby waives any such right.

Section 12.7 Invalidity.  In the event that any provision or requirement of this Agreement is in violation of any law or regulation or otherwise found to be invalid or unenforceable in any jurisdiction, (a) such provision or requirement shall not be enforced except to the extent it is not in violation of such laws or regulations or otherwise invalid or unenforceable, (b) the Parties will promptly renegotiate to restore such provision or requirement of this Agreement as near as possible to its original interest and effect, and (c) all other provisions and requirements of this Agreement shall remain in full force and effect.

Section 12.8 Successors and Assigns.  This Agreement shall be binding upon the parties hereto and their respective successors, executors, administrators, legal representatives, heirs and legal assigns and shall inure to the benefit of the parties hereto and, except as otherwise provided herein, their respective successors, executors, administrators, legal representatives, heirs and legal assigns.  No Person other than the parties hereto and their respective successors, executors, administrators, legal representatives, heirs and permitted assigns shall have any rights or claims under this Agreement.

Section 12.9 Entire Agreement.  This Agreement, together with the recitals contained herein and Exhibits and Schedules attached hereto, supersedes all prior agreements among the parties with respect to the subject matter hereof and contains the entire agreement among the parties with respect to such subject matter.

Section 12.10 Additional or Substituted Members.  If this Agreement shall be amended as a result of adding or substituting a Member, the amendment to this Agreement shall be signed by each Manager and by the Person to be added or substituted and by the assigning Member, if any.  In making any amendments, the Board shall prepare and file (or cause to be prepared and filed) for recordation such documents and certificates as shall be required to be prepared and filed.

Section 12.11 No Third Party Beneficiaries.  This Agreement is not intended and shall not be construed as granting any rights, benefits or privileges to any Person not a party to this Agreement.

Section 12.12 Maintenance as a Separate Entity.  The Company shall maintain books, records and accounts separate from those of its Affiliates and hold itself out to the public as a legal entity separate and distinct from its Affiliates.

Section 12.13 Construction of Agreement.  This Agreement and any documents or instruments delivered pursuant hereto shall be construed without regard to the identity of the Person who drafted the various provisions of the same.  Further, each Member acknowledges and agrees that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments.

64

Section 12.14 Confidentiality.  Subject to applicable legal and regulatory requirements, each Member shall maintain the confidentiality of the existence and contents of this Agreement, each Member’s identity and the Company’s business, operations, trade secrets and financial results.  No Member will reveal such matters to others except (a) as approved by the Board, (b) to its lenders, advisors, counsel, representatives, members, partners, shareholders, officers or directors (collectively, its “Representatives”), or (c) to the extent ordered by a court or required by law; but, its Representatives shall be informed by the relevant Member of the confidential nature of the contents of this Agreement and such Member shall be responsible for causing such Representatives to comply with the foregoing confidentiality undertaking.  Except as required by applicable law, no advertisement or other publicity concerning this Agreement will be made or disseminated by any Member without the approval of the Board, which approval will not be unreasonably withheld.  Notwithstanding the foregoing provisions of this Section 12.14, each Member and its Representatives may disclose to any and all Persons, without limitation of any kind, the tax treatment and tax structure of the transactions and all materials of any kind (including opinions or other tax analyses) that are provided to the Member relating to such tax treatment or tax structure.  Furthermore, each Member acknowledges and agrees that it does not know or have reason to know that its use or disclosure of information related to the tax treatment or tax structure with respect to the offering of Interests or the Company is limited in any other manner for the benefit of any other Person.

Section 12.15 Additional Default Remedies.  In the event of a default by any Member (that is not cured within any applicable cure period), the non-defaulting Members and/or the Company, in addition to the rights and remedies set forth elsewhere in this Agreement, shall have all rights and remedies at law and in equity, including the right to specific performance.  In addition, if any Member(s) (or the Company) brings any action to collect an amount due to it hereunder, the prevailing party in such action shall be entitled to all costs incurred therein, including reasonable legal fees.

Section 12.16 Legal Representation.  Each party to this Agreement acknowledges that it may have an actual or potential adverse interest or conflict of interest in relationship to the other parties.  Each party to this Agreement acknowledges that counsel to the Company drafted this Agreement on behalf of the Company and not on behalf of any other party.  Accordingly, each party acknowledges that it has been advised by legal counsel for the Company to obtain independent legal counsel, if desired, to review this Agreement.

65

ARTICLE 13POWER OF ATTORNEY

Section 13.1 Company as Attorney-In-Fact.  Each Member hereby makes, constitutes, and appoints the Company with full power of substitution and resubstitution, his true and lawful attorney-in-fact for him and in his name, place, and stead and for his use and benefit, to sign, execute, certify, acknowledge, swear to, file, and record:  (a) all certificates of limited liability company, amended name or similar certificates, and other certificates and instruments (including counterparts of this Agreement) that the Company may deem necessary or appropriate to be filed by the Company under the laws of the State of Delaware; (b) any and all certificates and forms, including without limitation IRS Form 8832, establishing the tax classification of the Company; (c) any and all amendments or changes to this Agreement and the instruments described in (a), as now or hereafter amended, that the Company may deem necessary or appropriate to effect a change or modification of the Company in accordance with the terms of this Agreement, as provided in Article 11; (d) all certificates of cancellation and other instruments which the Company may deem necessary or appropriate to effect the dissolution and termination of the Company pursuant to the terms of this Agreement; and (e) any other instrument which is now or may hereafter be required by law to be filed on behalf of the Company or is deemed necessary or appropriate by the Company to carry out fully the provisions of this Agreement in accordance with its terms.  Each Member authorizes each such attorney-in-fact to take any further action that such attorney-in-fact shall consider necessary or advisable in connection with any of the foregoing, hereby giving each such attorney-in-fact full power and authority to do and perform each and every act or thing whatsoever requisite or advisable to be done in connection with the foregoing as fully as such Member might or could do personally, and hereby ratifying and confirming all that any such attorney-in-fact shall lawfully do or cause to be done by virtue thereof or hereof.

Section 13.2 Nature as Special Power.  The power of attorney granted pursuant to this Article 13:

(a) Is a special power of attorney coupled with an interest and is irrevocable;

(b) May be exercised by any such attorney-in-fact by listing the Members executing any agreement, certificate, instrument, or other document with the single signature of any such attorney-in-fact acting as attorney-in-fact for such Members; and

(c) Shall survive the death, disability, legal incapacity, bankruptcy, insolvency, dissolution, or cessation of existence of a Member and shall survive the delivery of an assignment by a Member of the whole or a portion of his Interests, except that where the assignment is of such Member’s entire Interests and the assignee is admitted as a Member, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling any such attorney-in-fact to effect such substitution.

[Remainder of this page intentionally left blank.  Signature page follows.]

66

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

COMPANY:
MONARCH DELAWARE HOLDINGS LLC,
a Delaware limited liability company
By:	/s/ Colin King
	Name: Colin King
	Title:  Manager

[SIGNATURE PAGE TO OPERATING

AGREEMENT OF MONARCH DELAWARE HOLDINGS LLC]

MEMBER:

CROSSWINDS INVESTOR MONARCH LP,

a Delaware limited partnership

By:	Crosswinds Monarch GP LLC,
	a Delaware limited liability company
	its General Partner

By:	/s/ Colin King
	Name: Colin King
	Title: Chief Executive Officer

[SIGNATURE PAGE TO OPERATING

AGREEMENT OF MONARCH DELAWARE HOLDINGS LLC]

MEMBER:
FEDERATED NATIONAL HOLDING COMPANY,
a Florida corporation
By:	/s/ Michael H. Braun
	Name: Michael H. Braun
	Title:  Chief Executive Officer & President

[SIGNATURE PAGE TO OPERATING

AGREEMENT OF MONARCH DELAWARE HOLDINGS LLC]

MEMBER:
TRANSATLANTIC REINSURANCE COMPANY,
a New York corporation
By:	/s/ Thomas Cholnoky
	Name:  Thomas Cholnoky
	Title:  Executive Vice President

[SIGNATURE PAGE TO OPERATING

AGREEMENT OF MONARCH DELAWARE HOLDINGS LLC]

 SCHEDULE 1

Member Name and Address for  Notice	Capital Contribution	Class A Units	Class B Units
Crosswinds Investor Monarch LP 1325 Avenue of the Americas, 28th Floor New York, New York 10019 Attn:  Chief Executive Officer Phone:  (212) 521-1005 E-mail:  colin@crosswindsinc.com	US$14,000,000.00	140	0
Federated National Holding Company 14050 Northwest 14th Street, Suite 180 Sunrise, Florida 33323 Attn:  Chief Executive Officer Phone:  (954) 308-1322 E-mail:  mbraun@fednat.com	US$14,000,000.00	140	0
Transatlantic Reinsurance Company One Liberty Plaza, 165 Broadway New York, NY 10006 Attn:  Vice-President and Assistant General Counsel Phone:  (212) 365-2294 E-mail:  kyapp@transre.com	US$5,000,000.00	0	50
TOTAL	US$33,000,000.00	280	50

Schedule 1 - Page 1

SCHEDULE 2

RESERVED

Schedule 2 - Page 1

SCHEDULE 3

APPROVED AGREEMENTS

a) The FNHC Services Agreement.

b) That certain Investment Management Services Agreement, dated March 17, 2015, by and among the Company, Monarch National, Monarch National Holdings, and Crosswinds AUM LLC, a Delaware limited liability company.

c) That certain Reinsurance Capacity Right of First Refusal Agreement, dated March 17, 2015, by and between Monarch National and TransRe.

d) That certain Promissory Note, dated March 17, 2015, issued by Monarch National Holdings to TransRe.

e) That certain Funds Flow Memorandum, dated March 17, 2015, by and among Crosswinds, FNHC, TransRe, the Company, Monarch National, Monarch National Holdings, Charles S. Duncker, an individual U.S. investor (“Duncker”), and Crosswinds Holdings Inc., an Alberta corporation (“Crosswinds Parent”).

f) That certain Income Tax Allocation Agreement, dated March 17, 2015, by and between Monarch National and Monarch National Holdings.

g) That certain Broker Services Letter Agreement, dated March 17, 2015, by and between Monarch National and Century Risk Insurance Services, Inc., a Florida corporation.

h) That certain Cost Sharing Agreement, dated March 17, 2015, by and between Monarch National and Monarch National Holdings.

i) That certain Cost Sharing Agreement, dated March 17, 2015, by and between Monarch National and FedNat Underwriters, Inc., a Florida corporation.

j) That certain Management Agreement, dated March 17, 2015, by and between Monarch National and Monarch National Holdings.

k) That certain Assignment and Assumption Agreement, dated March 17, 2015, by and between Crosswinds Parent and Crosswinds.

l) That certain Subscription and Contribution Agreement, dated March 17, 2015, by and between the Company and Monarch National Holdings.

m) That certain Subscription and Contribution Agreement, dated March 17, 2015, by and between Monarch National Holdings and Monarch National.

n) That certain License Agreement, dated March 17, 2015, by and among FNHC, Monarch National, and Monarch National Holdings.

o) That certain Amendment to Employment Agreement and Restrictive Covenant Agreement, dated March 17, 2015, by and between Michael H. Braun and FNHC.

p) That certain Non-Competition, Non-Disclosure and Non-Solicitation Agreement, dated March 17, 2015, by and between Michael H. Braun and the Company.

Schedule 3 - Page 1

EXHIBIT A

Joinder to Limited Liability Company Agreement of

MONARCH DELAWARE HOLDINGS LLC

Name of Member (full legal name)
Member Interest
Units
Capital Contribution
Applicant 's Postal Address
Telephone
Facsimile
Taxation Identification number of Applicant
Bank Account Details for distributions	Bank   Branch   Account Number

· The representations and warranties set forth in Section 7.2 and Section 7.3 of the Limited Liability Company Agreement of Monarch Delaware Holdings LLC are hereby incorporated, mutatis mutandis, and Member hereby declares, represents and warrants to the Company, the Tax Matters Partner and each other Members that such representations and warranties are true and correct.

· Member will provide the Tax Matters Partner with such information as the Tax Matters Partner reasonably requests from time to time with respect to Member’s identity, citizenship, residency, ownership, tax status, business or control so as to permit the Tax Matters Partner to evaluate and comply with any regulatory and tax requirements applicable to the Partnership, but any confidential information so provided shall be kept confidential by the Tax Matters Partner and shall not be disclosed to any third party unless required by law or by any court of law or by any regulatory authority.

· Member hereby authorizes the Tax Matters Partner to disclose to Members (including prospective Members) its name, the balance of its Capital Account, if any, and the number of Units held by Member.

Exhibit A - Page 1

THE MEMBER AGREES NOT TO OFFER, SELL, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF, DIRECTLY OR INDIRECTLY, ALL OR ANY PART OF THE INTEREST OR ANY INTEREST THEREIN, EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS OF THE LIMITED LIABILITY COMPANY AGREEMENT, AS AMENDED FROM TIME TO TIME AND APPLICABLE LAW (INCLUDING, WITHOUT LIMITATION, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR AN EXEMPTION THEREFROM, AND ANY OTHER APPLICABLE SECURITIES LAWS).  IN ADDITION, MEMBER FURTHER AGREES THAT MEMBER WILL NOT SELL, TRANSFER OR OTHERWISE DISPOSE OF ALL OR ANY PART OF THE INTEREST (OR ANY INTEREST THEREIN) ON AN “ESTABLISHED SECURITIES MARKET”, A “SECONDARY MARKET”, AN OVER-THE-COUNTER MARKET OR THE “SUBSTANTIAL EQUIVALENT THEREOF”, IN EACH CASE WITHIN THE MEANING OF SECTION 7704 OF THE CODE, AS AMENDED, AND THE UNITED STATES TREASURY REGULATIONS PROMULGATED THEREUNDER.

This Acceptance of Limited Liability Company Agreement of Monarch Delaware Holdings LLC and the rights, obligations and relationships of the parties under this Acceptance of Limited Liability Company Agreement of Monarch Delaware Holdings LLC and the Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.

Words and expressions used in this Acceptance of Limited Liability Company Agreement of Monarch Delaware Holdings LLC shall bear the same meanings as in the Limited Liability Company Agreement, as amended from time to time.

Exhibit A - Page 2

IN WITNESS WHEREOF, this Joinder to Limited Liability Company Agreement of Monarch Delaware Holdings LLC has been executed and delivered as a deed this ___ day of __________, 2015.

ACKNOWLEDGMENT

State of	§
	§
County/Parrish of	§

BEFORE ME, the undersigned authority, did personally appear ____________________, who after having established to me his/her identity, did execute the above Joinder to Limited Liability Company Agreement of Monarch Delaware Holdings LLC for the purposes stated therein.

Notary Public in and for the State of

and the County of  

Name: 

My Commission Expires: 

[Affix Notary Seal, if required by law]

Exhibit A - Page 3

EX-10.3

Exhibit 10.3

Execution Version

AMENDMENT

TO

EMPLOYMENT AGREEMENT AND RESTRICTIVE COVENANT AGREEMENT

THIS AMENDMENT TO EMPLOYMENT AGREEMENT AND RESTRICTIVE COVENANT AGREEMENT (the “Amendment”) is entered into effective as of March 17, 2015 (the “Amendment Effective Date”) by and between:

(i) Michael H. Braun (the “Employee”); and

(ii) FEDERATED NATIONAL HOLDING COMPANY, a Florida corporation (the “Company”).

P R E L I M I N A R Y   S T A T E M E N T

WHEREAS, the Company and the Employee are parties to that certain Second Amended and  Restated Employment Agreement dated as of January 18, 2012 (the “Employment Agreement”) and that certain Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement dated as of August 5, 2013 (the “Restrictive Covenant Agreement”);

WHEREAS, the Company is undertaking a joint venture in which it will become a member of Monarch Delaware Holdings LLC, a Delaware limited liability company (“Monarch Delaware”), which will engage, through its direct subsidiary Monarch National Holding Company, a Florida corporation (“Monarch National Holding”), and its indirect subsidiary Monarch National Insurance Company, a Florida corporation (“Monarch Insurance,” and together with Monarch National Holding, the “Monarch Subsidiaries,” and together with Monarch Delaware, the “Monarch Entities”), in the property and casualty insurance business;

WHEREAS, the Company desires that the Employee serve as a member of the Board of Managers and President and Chief Executive Officer of Monarch Delaware and President of the Monarch Subsidiaries for so long as the Employee remains employed by the Company (collectively, and together with any other executive position at any of the Monarch Entities, the “Permitted Monarch Positions”);

WHEREAS, the Company desires to amend the Employment Agreement to extend the Term (as defined therein); and

WHEREAS, the Company and the Employee desire to amend Restrictive Covenant Agreement to permit the Employee to serve in the Permitted Monarch Positions during the Term (as amended herein) and thereafter as set forth in this Amendment.

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.            Capitalized Terms.  Capitalized terms used but not defined in this Amendment shall have the meanings as set forth in the Employment Agreement.

1

2.             Amendment to Section 2 of Employment Agreement.  Section 2 of the Employment Agreement is hereby deleted and restated in its entirety as follows:

“2. Term of Employment.  The Employee shall serve as the Company’s Chief Executive Officer and be employed for a period of four (4) years beginning on the Amendment Effective Date (the “Term”); provided, however, that the Term of this Agreement shall automatically be extended so that at all times the balance of the Term shall not be less than two (2) years unless sooner terminated as provided herein.”

3.             Permitted Activities During Term of Employment and Following Termination.

(a) The Company hereby consents and agrees that, for so long as the Employee is employed by the Company, the Employee shall be permitted to serve in the Permitted Monarch Positions.  The foregoing consent and agreement shall terminate, however, upon termination of the Employee’s employment (a) by the Company for Cause or as a result of the Employee’s Disability; or (b) by the Employee.

(b) The Company hereby consents and agrees that if the Employee’s employment is terminated by the Company without Cause, the Employee’s continued service in the Permitted Monarch Positions shall not be a breach of the Restrictive Covenant Agreement.

4.            Effect of Amendment.  Except as expressly set forth in this Amendment, the provisions of the Employment Agreement and the Restrictive Covenant Agreement shall be unmodified and remain in full force and effect.

5.            Third-Party Beneficiary.  The parties agree that the Monarch Entities shall be third-party beneficiaries of the provisions of this Amendment.

6.             Injunction.  It is recognized and hereby acknowledged by the parties hereto that a breach by the Employee of the covenants set forth in this Amendment will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain.  As a result, the Employee recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of the covenants contained in this Amendment by the Employee or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess.

7.            Entire Agreement; Conflict with Restrictive Covenant Agreement.  This Amendment, the Employment Agreement and the Restrictive Covenant Agreement constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, letters and understandings relating to the subject matter hereof.  If any provision of this Amendment shall conflict with the Employment Agreement or the Restrictive Covenant Agreement, the terms of this Amendment shall control.

8.            Amendment.  This Amendment may not be amended, supplemented or modified in whole or in part except by an instrument in writing signed by the party or parties against whom enforcement of any such amendment, supplement or modification is sought.

9.             Choice of Law.  This Amendment will be interpreted, construed and enforced in accordance with the laws of the State of Florida, without giving effect to the application of the principles pertaining to conflicts of laws.

10.           Effect of Waiver.  The failure of any party at any time or times to require performance of any provision of this Amendment will in no manner affect the right to enforce the same.  The waiver by any party of any breach of any provision of this Amendment will not be construed to be a waiver by any such party of any succeeding breach of that provision or a waiver by such party of any breach of any other provision.

2

11.           Severability.  The invalidity, illegality or unenforceability of any provision of this Amendment will not affect any other provision of this Amendment, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Amendment affect the balance of such provision.  In the event that any provision of this Amendment shall for any reason be held to be invalid, illegal or unenforceable in any respect, the parties agree that this Amendment shall be modified, reformed, construed and enforced so that such invalid, illegal or unenforceable provision is enforceable and comes closest to expressing the intention of the unenforceable provision.

12.          Enforcement.  Should it become necessary for any party to institute legal action to enforce the terms and conditions of this Amendment, the successful party will be awarded reasonable attorneys’ fees at all trial and appellate levels, expenses and costs.  Any suit, action or proceeding with respect to this Amendment shall be brought in the courts of Broward County in the State of Florida or in the U.S. District Court for the Southern District of Florida.  Each party hereto consents to service of process by any means authorized by the applicable law of such forum and each party irrevocably waives, to the fullest extent each may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

Venue for any such action, in addition to any other venue permitted by statute, will be Broward County, Florida.  The parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Amendment or any judgment entered by any court in respect thereof brought in Broward County, Florida, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Broward County, Florida, has been brought in an inconvenient forum.

13.           Assignment; Binding Effect.  This Amendment may not be assigned by the Employee.  This Amendment may be assigned by the Company, in whole or in part, without the consent of the Employee.  This Amendment shall be binding upon and inure to the benefit of the parties, their heirs, personal representatives, successors and permitted assigns.

14.          Counterparts.  This Amendment may be executed in one or more counterparts, including by facsimile or other electronic transmission, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

15.           Notice.  Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when sent by facsimile with receipt confirmed or when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or by overnight courier, addressed to the Employee at 19331 NW 3 Street, Pembroke Pines, FL 33029 and to the Company at 14050 N.W. 14^th Street, Suite 180, Sunrise, FL  33323, or to such other address as either party hereto shall from time to time designate to the other party by notice in writing as provided herein.

16.          Voluntary Execution.  Employee acknowledges that he has read and understands this Amendment, has had an opportunity to consult with an attorney, and signs this Amendment voluntarily, without coercion, based upon his own judgment and not in reliance upon any representations or promises other than those set forth herein.

[SIGNATURES ON FOLLOWING PAGE]

3

IN WITNESS WHEREOF, this Amendment has been duly signed by the parties hereto effective as of the day and year first above written.

FEDERATED NATIONAL HOLDING COMPANY
By:	/s/ Peter J. Prygelski, III
Name:			Peter J. Prygelski, III
Title:		Chief Financial Officer and Treasurer
EMPLOYEE
/s/ Michael H. Braun
Michael H. Braun

[Signature Page to Amendment No. 1 to Non-Compete]

4

EX-10.4

Exhibit 10.4

Execution Version

NON-COMPETITION, NON-DISCLOSURE

AND NON-SOLICITATION AGREEMENT

THIS NON-COMPETITION, NON DISCLOSURE AND NON-SOLICITATION AGREEMENT (the "Agreement") is effective as of March 17, 2015, by and between:

(i) Michael H. Braun, an individual residing at 19331 NW 3 Street, Pembroke Pines, FL 33029 (the "Executive"); and

(ii) MONARCH DELAWARE HOLDINGS LLC, a Delaware limited liability company (the "Company").

P R E L I M I N A R Y   S T A T E M E N T

WHEREAS, the Company proposes to engage, through its direct subsidiary Monarch National Holding Company, a Florida corporation (“Monarch National Holding”), and its indirect subsidiary Monarch National Insurance Company, a Florida corporation (“Monarch Insurance,” and together with Monarch National Holding, the “Monarch Subsidiaries”), in the property and casualty insurance business, including, without limitation, homeowners’, condominium and cooperative multi-peril and other lines of insurance initially in the State of Florida and premium finance related to such insurance (collectively, the “Company Business”);

WHEREAS, the Company intends that the Executive serve as the President and Chief Executive Officer and a member of the Board of Managers of the Company, as the President and Chief Executive Officer and a member of the Board of Directors of Monarch National Holding, and as the President and a member of the Board of Directors of Monarch Insurance (collectively, and together with any other executive position at the Company or at either of the Monarch Subsidiaries the the Executive may hold from time to time, the “Monarch Positions”); and

WHEREAS, in connection with his service in the Monarch Positions, the Company and the Executive desire to set forth certain covenants and agreements of the Executive, as set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.Non-Competition. For so long as the Executive serves in any of the Monarch Positions (the “Term”) and for a period of two years following the date on which the Executive ceases, whether due to termination, resignation, or any other reason, to hold any Monarch Position (the “Restricted Period”), the Executive shall not, directly or indirectly, engage in or have any interest in, directly or indirectly, any sole proprietorship, partnership, corporation, company, business or any other person or entity (whether as an employee, officer, director, partner, member, agent, security holder, creditor, consultant or otherwise) that, directly or indirectly, engages primarily in the development, marketing, distribution, underwriting or sale of products and services competitive with the Company Business in any and all states in which the Company and/or any Monarch Subsidiary conducts the Company Business during the Term or at the time of termination of the Executive’s employment with the Company (the “Restricted Territory”); provided, however, that Executive may continue to hold securities of the Company and/or acquire, solely as an investment, shares of capital stock or other equity securities of any entity engaging in a business competitive with the Company Business, so long as the Executive does not control or acquire a controlling interest in, or become a member of a group which exercises direct or indirect control of more than five percent of, any class of equity security of such entity; and provided further that the Restricted Territory shall include any state in which the Company or a Monarch Subsidiary has completed substantially all the steps necessary, including regulatory applications, to conduct the Company Business in such state; and provided, further, that the Executive’s employment by Federated National Holding Company (“FNHC”), his service on the Board of Directors of FHNC, and his positions as an officer and/or director of any Subsidiary or Affiliate of FNHC (each, a “Permitted FNHC Position, and collectively, the “Permitted FNHC Positions”) shall be permitted in all respects throughout the Term and the Restricted Period and shall not be a breach of the restrictions set forth in this Section 1. As used herein, (a) the term “Subsidiary” means a partnership, corporation, limited liability company, trust or other legal entity for which FNHC, directly or indirectly, has the power to direct or cause the direction of the management and policies through the ownership of voting securities; and (b) the term “Affiliate” means any person or entity that, directly or indirectly, controls, is controlled by or under common control with FNHC. For the avoidance of doubt, the Executive’s implementation of any directives of the Board of Directors of FNHC or the carrying out of the obligations of FNHC or its Subsidiaries or Affiliates under any agreement to which FNHC or a Subsidiary of Affiliate is a party, in each case while the Executive is serving in a Permitted FNHC Position, shall not be a breach of this Section 1 so long as any such directives or obligations are not intended to circumvent, nor do they result in the circumvention of, the provisions of this Agreement.

2.Non-Disclosure. From the date of this Agreement through the Restricted Period, the Executive shall not divulge, communicate, use to the detriment of the Company or for the benefit of any other person or persons, or misuse in any way, any Confidential Information (as hereinafter defined) pertaining to the Company Business; provided, however, that (a) any Confidential Information received by FNHC or any of its affiliates pursuant to that certain Managing General Agency and Claims Administration Agreement between Monarch Insurance and FedNat Underwriters, Inc. or (b) any Confidential Information disclosed by the Executive to FNHC through his service in the Permitted FNHC Positions shall not be a breach of this Section 2. Any Confidential Information now or hereafter acquired by the Executive with respect to the Company Business shall be deemed a valuable, special and unique asset of the Company that is received by the Executive in confidence and as a fiduciary. For purposes of this Agreement, “Confidential Information” means information disclosed to the Executive or known by the Executive as a consequence of or through his service in the Monarch Positions (including information conceived, originated, discovered or developed by the Executive) prior to or after the date hereof and not generally known or in the public domain, about the Company or its business, including, but not limited to, information concerning the Company’s or any Monarch Subsidiary’s financial condition, prospects, technology, customers, business partners, reinsurers, methods of doing business, and marketing, distribution, underwriting or sale of the Company’s or any Monarch Subsidiary’s products and services. Notwithstanding the foregoing, nothing herein shall be deemed to restrict the Executive from disclosing Confidential Information to the extent required by law.

3.Non-Solicitation of Employees. From the date of this Agreement through the Restricted Period, the Executive shall not directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company or any Monarch Subsidiary, unless such employee or former employee has not been employed by the Company or a Monarch Subsidiary for a period in excess of six months.

4.Books and Records. All books, records, accounts and similar repositories of Confidential Information of the Company, whether prepared by the Executive or otherwise coming into the Executive’s possession, shall be the exclusive property of the Company and shall be returned immediately to the Company on termination of the Executive’s service in the Monarch Positions or at the Board’s request at any time.

5.Injunction. It is recognized and hereby acknowledged by the parties hereto that a breach by the Executive of any of the covenants contained in this Agreement will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, the Executive recognizes and hereby acknowledges and agrees that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in this Agreement by the Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess.

6.Terminology. The terms “Monarch Subsidiary” or “Monarch Subsidiaries” as used in this Agreement shall mean all entities in which the Company holds, directly or indirectly, an equity interest, other than solely for investment purposes. References to the “Company” in this Agreement shall mean Monarch Delaware Holdings LLC and all of the Monarch Subsidiaries, taken as a whole, unless the context requires otherwise. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and vice versa. Titles of sections are for convenience only, and neither limit nor amplify the provisions of the Agreement itself.

7.Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior negotiations, letters and understandings relating to the subject matter hereof.

8.Amendment. This Agreement may not be amended, supplemented or modified in whole or in part except by an instrument in writing signed by the party or parties against whom enforcement of any such amendment, supplement or modification is sought.

9.Choice of Law. This Agreement will be interpreted, construed and enforced in accordance with the laws of the State of Florida, without giving effect to the application of the principles pertaining to conflicts of laws.

10.Effect of Waiver. The failure of any party at any time or times to require performance of any provision of this Agreement will in no manner affect the right to enforce the same. The waiver by any party of any breach of any provision of this Agreement will not be construed to be a waiver by any such party of any succeeding breach of that provision or a waiver by such party of any breach of any other provision.

11.Severability. The invalidity, illegality or unenforceability of any provision or provisions of this Agreement will not affect any other provision of this Agreement, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Agreement affect the balance of such provision. In the event that any one or more of the provisions contained in this Agreement or any portion thereof shall for any reason be held to be invalid, illegal or unenforceable in any respect, the parties agree that this Agreement shall be modified, reformed, construed and enforced so that such invalid, illegal or unenforceable provision is enforceable and comes closest to expressing the intention of the unenforceable provision.

12.Enforcement. Should it become necessary for any party to institute legal action to enforce the terms and conditions of this Agreement, the successful party will be awarded reasonable attorneys' fees at all trial and appellate levels, expenses and costs. Any suit, action or proceeding with respect to this Agreement shall be brought in the courts of Broward County in the State of Florida or in the U.S. District Court for the Southern District of Florida. Each party hereto consents to service of process by any means authorized by the applicable law of such forum and each party irrevocably waives, to the fullest extent each may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

Venue for any such action, in addition to any other venue permitted by statute, will be Broward County, Florida. The parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any judgment entered by any court in respect thereof brought in Broward County, Florida, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Broward County, Florida, has been brought in an inconvenient forum.

13.Assignment; Binding Effect. This Agreement may not be assigned by the Executive. This Agreement may be assigned by the Company, in whole or in part, without the consent of the Executive. This Agreement shall be binding upon and inure to the benefit of the parties, their heirs, personal representatives, successors and permitted assigns.

14.Counterparts. This Agreement may be executed in one or more counterparts, including by facsimile or other electronic transmission, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

15.Notice. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when sent by facsimile with receipt confirmed or when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or by overnight courier, addressed to the Executive at 19331 NW 3 Street, Pembroke Pines, FL 33029 and to the Company at 14050 N.W. 14^th Street, Suite 180, Sunrise, FL 33323, or to such other address as either party hereto shall from time to time designate to the other party by notice in writing as provided herein.

16.Voluntary Execution. The Executive acknowledges that he has read and understands this Agreement, has had an opportunity to consult with an attorney, and signs this Agreement voluntarily, without coercion, based upon his own judgment and not in reliance upon any representations or promises other than those set forth herein.

[SIGNATURES ON FOLLOWING PAGE]

IN WITNESS WHEREOF, this Agreement has been duly signed by the parties hereto effective as of the day and year first above written.

MONARCH DELAWARE HOLDINGS LLC
By:	/s/ Colin King
Name:	Colin King
Title:	Manager
EXECUTIVE
/s/ Michael H. Braun
Michael H. Braun

EX-10.5

Exhibit 10.5

AMENDMENT NO 1

TO

AMENDED AND RESTATED NON-COMPETITION, NON-DISCLOSURE

AND NON-SOLICITATION AGREEMENT

THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED NON-COMPETITION, NON DISCLOSURE AND NON-SOLICITATION AGREEMENT (the “Agreement”) is entered into effective as of March 17, 2015 by and between:

(i) Peter J. Prygelski, III (the “Employee”); and

(ii) FEDERATED NATIONAL HOLDING COMPANY, a Florida corporation (the “Company”).

P R E L I M I N A R Y   S T A T E M E N T

WHEREAS, the Company and the Employee are parties to that certain Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement dated as of August 5, 2013 (the “Restrictive Covenant Agreement”);

WHEREAS, the Company is undertaking a joint venture in which it will become a member of Monarch Delaware Holdings LLC, a Delaware limited liability company (“Monarch Delaware”), which will engage, through its direct subsidiary Monarch National Holding Company, a Florida corporation (“Monarch National Holding”), and its indirect subsidiary Monarch National Insurance Company, a Florida corporation (“Monarch Insurance,” and together with Monarch National Holding, the “Monarch Subsidiaries,” and together with Monarch Delaware, the “Monarch Entities”), in the property and casualty insurance business;

WHEREAS, the Company desires that the Employee serve as a member of the Board of Managers and Chief Financial Officer and Treasurer of Monarch Delaware and Chief Financial Officer and Treasurer of the Monarch Subsidiaries for so long as the Employee remains employed by the Company (the “Permitted Monarch Positions”); and

WHEREAS, the Company and the Employee desire to amend Restrictive Covenant Agreement to permit the Employee to serve in the Permitted Monarch Positions, as set forth in this Amendment.

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.             Permitted Activities During Term of Employment.  The Company hereby consents and agrees that, for so long as the Employee is employed by the Company (whether pursuant to that certain Second Amended and Restated Employment Agreement dated as of January 18, 2013, as may be hereafter amended, or otherwise), the Employee shall be permitted to serve in the Permitted Monarch Positions; provided, however, that the foregoing consent and agreement shall terminate upon the termination of the Employee’s employment with the Company for any reason.

2.             Effect of Amendment.  Except as expressly set forth in this Amendment, the provisions of the Restrictive Covenant Agreement shall be unmodified and remain in full force and effect.

3.             Third-Party Beneficiary.  The parties agree that the Monarch Entities shall be third-party beneficiaries of the provisions of this Amendment.

1

4.             Injunction.  It is recognized and hereby acknowledged by the parties hereto that a breach by the Employee of the covenants set forth in this Amendment will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain.  As a result, the Employee recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of the covenants contained in this Amendment by the Employee or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess.

5.             Entire Agreement; Conflict with Restrictive Covenant Agreement.  This Amendment and the Restrictive Covenant Agreement constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, letters and understandings relating to the subject matter hereof.  If any provision of this Amendment and the Restrictive Covenant Agreement shall conflict, the terms of this Amendment shall control.

6.             Amendment.  This Amendment may not be amended, supplemented or modified in whole or in part except by an instrument in writing signed by the party or parties against whom enforcement of any such amendment, supplement or modification is sought.

7.             Choice of Law.  This Amendment will be interpreted, construed and enforced in accordance with the laws of the State of Florida, without giving effect to the application of the principles pertaining to conflicts of laws.

8.             Effect of Waiver.  The failure of any party at any time or times to require performance of any provision of this Amendment will in no manner affect the right to enforce the same.  The waiver by any party of any breach of any provision of this Amendment will not be construed to be a waiver by any such party of any succeeding breach of that provision or a waiver by such party of any breach of any other provision.

9.             Severability.  The invalidity, illegality or unenforceability of any provision of this Amendment will not affect any other provision of this Amendment, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Amendment affect the balance of such provision.  In the event that any provision of this Amendment shall for any reason be held to be invalid, illegal or unenforceable in any respect, the parties agree that this Amendment shall be modified, reformed, construed and enforced so that such invalid, illegal or unenforceable provision is enforceable and comes closest to expressing the intention of the unenforceable provision.

10.           Enforcement.  Should it become necessary for any party to institute legal action to enforce the terms and conditions of this Amendment, the successful party will be awarded reasonable attorneys’ fees at all trial and appellate levels, expenses and costs.  Any suit, action or proceeding with respect to this Amendment shall be brought in the courts of Broward County in the State of Florida or in the U.S. District Court for the Southern District of Florida.  Each party hereto consents to service of process by any means authorized by the applicable law of such forum and each party irrevocably waives, to the fullest extent each may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

Venue for any such action, in addition to any other venue permitted by statute, will be Broward County, Florida.  The parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Amendment or any judgment entered by any court in respect thereof brought in Broward County, Florida, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Broward County, Florida, has been brought in an inconvenient forum.

2

11.           Assignment; Binding Effect.  This Amendment may not be assigned by Employee.  This Amendment may be assigned by the Company, in whole or in part, without the consent of Employee.  This Amendment shall be binding upon and inure to the benefit of the parties, their heirs, personal representatives, successors and permitted assigns.

12.          Counterparts.  This Amendment may be executed in one or more counterparts, including by facsimile or other electronic transmission, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

13.           Notice.  Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when sent by facsimile with receipt confirmed or when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or by overnight courier, addressed to the Employee at 11857 NW 12 Drive, Coral Springs, FL 33071 and to the Company at 14050 N.W. 14^th Street, Suite 180, Sunrise, FL  33323, or to such other address as either party hereto shall from time to time designate to the other party by notice in writing as provided herein.

14.           Voluntary Execution.  Employee acknowledges that he has read and understands this Amendment, has had an opportunity to consult with an attorney, and signs this Amendment voluntarily, without coercion, based upon his own judgment and not in reliance upon any representations or promises other than those set forth herein.

[SIGNATURES ON FOLLOWING PAGE]

3

IN WITNESS WHEREOF, this Amendment has been duly signed by the parties hereto effective as of the day and year first above written.

FEDERATED NATIONAL HOLDING COMPANY
By:	/s/ Michael H. Braun
Name:			Michael H. Braun
Title:		Chief Executive Officer and President
EMPLOYEE
/s/ Peter J. Prygelski, III
Peter J. Prygelski, III

4

EX-10.6

Exhibit 10.6

SECOND AMENDMENT TO

INSURANCE AGENCY MASTER AGREEMENT

THIS SECOND AMENDMENT TO THE INSURANCE AGENCY MASTER AGREEMENT (this “Second Amendment”) is effective the 1st day of January, 2015, by and between Federated National Underwriters, Inc., a Florida corporation (“COMPANY”), and Ivantage Select Agency, Inc. (“ISA”), an Illinois insurance company (singularly “Party” and collectively the “Parties”).

RECITALS

WHEREAS, COMPANY and ISA entered into an Insurance Agency Master Agreement, dated as of February 4, 2013 (“the Agreement”);

WHEREAS, pursuant to Section 20, the Agreement may be amended or modified in writing as agreed to and signed by authorized representatives of both Parties; and

WHEREAS, COMPANY and ISA desire to amend the Agreement as more particularly described herein.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration and for the mutual covenants set forth below, the Parties hereto, intending legally to be bound, hereby agree as follows:

1. COMPANY and ISA agree to replace the First Revised Schedule A of the Agreement with Second Revised Schedule A, attached hereto and made a part of the Agreement. COMPANY and ISA further agree that Second Revised Schedule A supersedes First Revised Schedule A.

2. Capitalized terms used but not otherwise defined herein shall have the respective meaning ascribed to them in the Agreement.

3. Unless expressly modified by this Second Amendment, the terms and conditions of the Agreement remain unchanged and in full force and effect.

4. This Second Amendment may be signed in multiple counterparts, which together shall constitute a single instrument.

IN WITNESS WHEREOF, the Parties hereto have executed this Second Amendment as of the day and year first set forth above.

Accepted by:

FEDERATED NATIONAL		IVANTAGE SELECT AGENCY, INC.
UNDERWRITERS, INC.
By:	/s/ J.G. Jennings	By:	/s/ William B. Burst, III
Name:	J.G. Jennings	Name:	William B. Burst, III
Title:	President	Title:	Vice President Ivantage
Date:	3/10/15	Date:	3/12/15

Second Revised Schedule A

This Schedule is effective the 1st day of January, 2015, by and between Federated National Underwriters, Inc. (“COMPANY”), and Ivantage Select Agency, Inc., (“ISA”) pursuant to Section 3 of that certain Insurance Agency Master Agreement dated February 4, 2013, between COMPANY and ISA (“Agreement”). This Schedule is attached to and subject to the terms and conditions of that Agreement and contains the following terms and conditions.

Coverage

ISA agrees to allow certain of designated Producers to place Homeowners, Dwelling Fire Condominium, Renters, and Commercial General Liability coverage with COMPANY. All policies written pursuant to this Schedule shall be written by Federated National Insurance Company (“Carrier”), unless agreed to otherwise in writing by ISA.

Commissions

COMPANY shall pay commissions to ISA on a premiums received basis (net of endorsements, cancellations, reinstatements, and any additional mandatory fees) as follows:

3% of new business premium and 3% of renewal business premium on Homeowners, Dwelling Fire, Condominium, Renters policies written pursuant to this Schedule.

3% of new business premium and 3% of renewal business premium on Commercial General Liability policies written pursuant to this Agreement.

COMPANY shall pay commission to Producers on a premiums received basis (net of endorsements, cancellations, reinstatements, and any additional mandatory fees) as follows:

8% of new business premium and 8% of renewal business premium on Homeowners, Dwelling Fire, Condominium, and Renters policies for the first twenty-five (25) policies written pursuant to this Agreement. Commissions shall be 10% of new business premium and 10% of renewal business premium thereafter once Producer meets the threshold of twenty-five (25) on Homeowners, Dwelling Fire, Condominium, and Renters policies written pursuant to this Schedule.

15% of new premium and 15% of renewal premium on Commercial General Liability policies written pursuant to this Agreement.

Payments and any necessary adjustments will be made on the 10th business day of each month for the preceding month’s business. All payments to ISA will be remitted via electronic funds transfer.

Mandatory additional fees shall be defined as additional fees as authorized under law, including but not limited to: $25 policy service fee, $2 Emergency Management Preparedness and Assistance Trust Fund (state fee), Citizen 2005 Emergency Assessment (state fee), Florida Hurricane Catastrophe Fund Emergency Assessment (state fee).

Territory

The state of Florida.

Bonus

In addition to the Commission, as of the date of this Schedule and all subsequent years, COMPANY shall pay ISA a bonus of an additional 1% of new business written premium (net of endorsements, cancellations, reinstatements, and any mandatory additional fees) on new business in excess of $5,000,000 per calendar quarter. The bonus shall be paid in one lump sum on all new business written which qualifies under this section during each calendar quarter.

If applicable, each quarter’s payment shall be made on the 10th business day of the month for the preceding quarter. All payments to ISA will be remitted via electronic funds transfer.

Preservation of Business Written

Notwithstanding any provision in the Agreement to the contrary, during the term of the Agreement, ISA shall not initiate nor perform a wholesale transfer of business written pursuant to this Agreement to another carrier, including Allstate Insurance Company or Castle Key Insurance Company, or any affiliate thereof. This provision shall not be violated by: a policyholder initiated request to change insurance carriers, or policy movement to another carrier by individual Producers except if such policy movement is requested by ISA. Further, ISA shall be under no obligation to comply with the obligations contained in this provision if: Allstate Insurance Company or Castle Key Insurance Company are ordered to write new business in the State of Florida by regulatory mandate; Carrier’s rating falls below at least an “A” rating from Demotech FSR; COMPANY or Carrier lose any necessary licenses to transact business; enforcement actions or sanctions are initiated against COMPANY or Carrier; COMPANY repeatedly fails to meet the Service Level Objectives contained in Exhibit D of the Agreement; or a transaction involving (a) a sale or merger of COMPANY or Federated National Holding Company (“FNHC”) in which COMPANY or FNHC, as applicable, is not the surviving company in such sale or merger; (b) a change in ownership of more than 50% of the outstanding voting stock of COMPANY or FNHC, as applicable, or (c) an assignment by COMPANY, in whole or in part, directly, indirectly, or contingently, of this Agreement or any rights or obligations under it whether by operation of law or otherwise, is consummated.

Termination

This Schedule may be terminated pursuant to the terms of Section 17 of the Agreement. In addition, and without prejudice to the right of either Party to invoke any applicable right of termination under said Section 17, Section 17 of the Agreement is hereby amended to provide for the following additional termination event: ISA, in its sole discretion, may immediately terminate this Schedule upon a Carrier’s failure to maintain at least an “A“ rating from Demotech FSR.

Accepted by:

FEDERATED NATIONAL		IVANTAGE SELECT AGENCY, INC.
UNDERWRITERS, INC.
By:	/s/ J.G. Jennings	By:	/s/ William B. Burst, III
Name:	J.G. Jennings	Name:	William B. Burst, III
Title:	President	Title:	Vice President Ivantage
Date:	3/10/15	Date:	3/12/15

EX-10.7

Exhibit 10.7

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT (the "Agreement") is entered into effective as of May 6, 2015 (the “Effective Date”) by and between:

(i) BRUCE F. SIMBERG, an individual residing at 488 Addison Park Ln., Boca Raton, Florida 33432 (the "Consultant"); and

(ii) FEDERATED NATIONAL HOLDING COMPANY, a Florida corporation (the "Company").

R E C I T A L S:

WHEREAS, the Company is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through its Subsidiaries (as defined below) and its contractual relationships with independent agents and general agents, and, in that regard, underwrites and/or places through its Subsidiaries, its own and third-party insurers’ products (including homeowners’ multi-peril, commercial general liability, federal flood, personal auto and various other lines of insurance) through a network of independent agents and general agents in Florida and various other states, and provides other related services (collectively, the “Company Business”);

WHEREAS, the Consultant was a member of the Board of Directors of the Company (the “Board”) until March 2015, and, as such, has significant institutional knowledge about the Company, as well as significant knowledge about legal, claims processes, and compliance matters relevant to the insurance industry generally; and

WHEREAS, the Company desires to engage the Consultant as a consultant, on the terms and subject to the conditions set forth herein.

A G R E E M E N T:

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.Consulting Services. The Company agrees to engage the Consultant as a consultant to the Company, and the Consultant agrees to provide consulting services to the Company. The Consultant shall consult on such matters as the Board or the management of the Company (including the head of claims administration) may request from time to time. The term of this Agreement shall begin on the Effective Date, and continue for a one-year term that renews automatically for additional one-year terms until terminated by either party hereto upon 30 days’ written notice to the other party. For his services hereunder, the Consultant shall receive a fee equal to $10,000 per quarter.The Consultant shall also be reimbursed for any pre-approved out-of-pocket expenses. Upon any termination, non-renewal or expiration of this Agreement (a “Termination”), the Consultant shall be entitled to receive the pro rata portion of any quarterly consulting fees accrued through the date of Termination and any pending reimbursements.

2.Ongoing Obligations.

(a)The Consultant hereby acknowledges that, as a result of his services to the Company as a consultant under this Agreement, he may receive material non-public information about the Company and, as such, will continue to be subject to the Company’s Insider Trading Policy until such time as he no longer possesses material non-public information. The Consultant acknowledges receipt of the Company’s Insider Trading Policy as currently in effect. In addition, the Consultant acknowledges that he will continue to be subject to reporting obligations under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that he is solely responsible for the timeliness, completeness and correctness of all required filings under Section 16 of the Exchange Act or otherwise.

1

(b)The Consultant further agrees on behalf of himself and his affiliates (collectively, the “Consultant Restricted Parties”) that, during the term of this Agreement and until the earlier of (i) one year from the Termination of this Agreement or (ii) such time as the Company enters into a definitive agreement with respect to a party’s acquisition of more than 50% of the Company’s common stock or assets, unless specifically authorized in writing in advance by an authorized representative of the Company, no Consultant Restricted Party, nor any person acting on behalf of or in concert with a Consultant Restricted Party, will in any manner, directly or indirectly, (a) acquire, agree to acquire or offer or assist, advise or encourage any other person in acquiring any equity securities of the Company, any warrants or options to acquire such securities, any securities convertible into or exchangeable for such securities, or any other right to acquire such securities; (b) enter into or offer to enter into any merger or other business combination involving the Company or any recapitalization, restructuring, liquidation, dissolution or other similar transaction involving the Company, other than a transaction applicable to all shareholders on a pro rata basis; (c) make, or in any way participate in, any “solicitation” of proxies or consents (whether or not relating to the election or removal of directors) within the meaning of Rule 14a-1 under the Exchange Act with respect to any voting securities of the Company, or seek to advise or influence any person with respect to the voting of any voting securities of the Company or demand a copy of the stock ledger, list of shareholders, or any other books and records of the Company, in each case, to seek to advise or influence any person with respect to the voting of any voting securities of the Company; (iv) form, join or in any way participate in a “group” (within the meaning of Section 13(d)(3) of the Exchange Act) with respect to any voting securities of the Company that is seeking control of the Company; (v) otherwise act, alone or in concert with others, to seek to control the management or Board of Directors of the Company; (vi) enter into any arrangements, understandings or agreements (whether written or oral) with, or advise, finance, assist or encourage, any other persons in connection with any of the foregoing; or (vii) make any publicly disclosed proposal regarding any of the foregoing.

3.Non-Competition. During the term of this Agreement and for a period of two years following the Termination hereof for any reason (the “Restricted Period”), the Consultant shall not, directly or indirectly, engage in or have any interest in, directly or indirectly, any sole proprietorship, partnership, corporation, company, business or any other person or entity (whether as an employee, officer, director, partner, member, agent, security holder, creditor, consultant or otherwise) that, directly or indirectly, engages primarily in the development, marketing, distribution, underwriting or sale of products and services competitive with the Company Business in any and all states in which the Company and/or any Subsidiary conducts the Company Business during the Restricted Period, including any state in which the Company or a Subsidiary has begun the steps necessary, including preparation of regulatory applications, to conduct the Company Business in such state (the “Restricted Territory”). The Consultant will not be considered in violation of the provisions of this Section 3 if he (a) holds securities of the Company and/or acquires, solely as an investment, shares of capital stock or other equity securities of any entity engaging in a business competitive with the Company Business, so long as the Consultant does not control or acquire a controlling interest in, or become a member of a group that exercises direct or indirect control of more than 5% of, any class of equity security of such entity and (b) engages in the practice of law and, in that regard, provides legal services to entities engaging in a business competitive with the Company Business, provided that he otherwise complies with all covenants in this Agreement while providing such legal services.

4.Non-Disclosure. During the term of this Agreement and thereafter following the Termination of this Agreement, the Consultant shall not divulge, communicate, use to the detriment of the Company or for the benefit of any other person or persons, or misuse in any way, any Confidential Information (as hereinafter defined) pertaining to the Company Business. Any Confidential Information now or hereafter acquired by the Consultant with respect to the business of the Company or any Subsidiary shall be deemed a valuable, special and unique asset of the Company that is received by the Consultant in confidence and as a fiduciary. For purposes of this Agreement, “Confidential Information” means information disclosed to the Consultant or known by the Consultant as a consequence of or through his service as a member of the Board (including information conceived, originated, discovered or developed by the Consultant) prior to or after the date hereof and not generally known or in the public domain, about the Company or its business, including, but not limited to, information concerning the Company’s or any Subsidiary’s financial condition, prospects, technology, customers, business partners, reinsurers, methods of doing business, and marketing, distribution, underwriting or sale of the Company’s or any Subsidiary’s products and services. Notwithstanding the foregoing, nothing herein shall be deemed to restrict the Consultant from disclosing Confidential Information to the extent required by law.

2

5.Non-Solicitation. During the Restricted Period, the Consultant shall not directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, attempt to employ or enter into any contractual arrangement with any current or former director, officer or employee of the Company or any Subsidiary, unless such director, officer or employee has not been providing services to or employed by the Company or a Subsidiary for more than six months.

6.Books and Records. All books, records, accounts and similar repositories of Confidential Information of the Company, whether prepared by the Consultant or otherwise coming into the Consultant’s possession, shall be the exclusive property of the Company and shall be returned immediately to the Company on Termination of this Agreement or at the Board’s request at any time.

7.Injunction. It is recognized and hereby acknowledged by the parties hereto that a breach by the Consultant of any of the covenants contained in this Agreement will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, the Consultant recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in this Agreement by the Consultant or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess.

8.Terminology. The terms “Subsidiary” or “Subsidiaries” as used in this Agreement shall mean all entities in which the Company holds, directly or indirectly, an equity interest, other than solely for investment purposes. References to the “Company” in this Agreement shall mean Federated National Holding Company and all of its Subsidiaries, taken as a whole, unless the context requires otherwise. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and vice versa. Titles of sections are for convenience only, and neither limit nor amplify the provisions of the Agreement itself.

9.Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior negotiations, correspondence and understandings relating to the subject matter hereof.

10.Amendment. This Agreement may not be amended, supplemented or modified in whole or in part except by an instrument in writing signed by both of the parties to this Agreement.

11.Choice of Law. This Agreement will be interpreted, construed and enforced in accordance with the laws of the State of Florida.

12.Effect of Waiver. The failure of any party at any time or times to require performance of any provision of this Agreement will in no manner affect the right to enforce the same. The waiver by any party of any breach of any provision of this Agreement will not be construed to be a waiver by any such party of any succeeding breach of that provision or a waiver by such party of any breach of any other provision.

3

13.Severability. The invalidity, illegality or unenforceability of any provision or provisions of this Agreement will not affect any other provision of this Agreement, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Agreement affect the balance of such provision. If any one or more of the provisions contained in this Agreement or any portion thereof shall for any reason be held to be invalid, illegal or unenforceable in any respect, the parties agree that this Agreement shall be modified, reformed, construed and enforced so that such invalid, illegal or unenforceable provision is enforceable and comes closest to expressing the intention of the unenforceable provision.

14.Enforcement. Should it become necessary for any party to institute legal action to enforce the terms and conditions of this Agreement, the successful party will be awarded reasonable attorneys' fees at all trial and appellate levels, expenses and costs. Any suit, action or proceeding with respect to this Agreement shall be brought in the courts of Broward County in the State of Florida or in the U.S. District Court for the Southern District of Florida. Each party hereto consents to service of process by any means authorized by the applicable law of such forum.

Venue for any such action, in addition to any other venue permitted by statute, will be Broward County, Florida. The parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any judgment entered by any court in respect thereof brought in Broward County, Florida, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Broward County, Florida, has been brought in an inconvenient forum.

15.Assignment; Binding Effect. This Agreement may not be assigned by the Consultant. This Agreement may be assigned by the Company, in whole or in part, without the consent of the Consultant. This Agreement shall be binding upon and inure to the benefit of the parties, their heirs, personal representatives, successors and permitted assigns.

16.Counterparts. This Agreement may be executed in one or more counterparts, including by facsimile or other electronic transmission, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

17.Notice. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when sent by facsimile with receipt confirmed or when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or by overnight courier, addressed to the Consultant at his address set forth above and to the Company at 14050 N.W. 14^th Street, Suite 180, Sunrise, FL 33323, or to such other address as either party hereto shall from time to time designate to the other party by notice in writing as provided herein.

18.Nature of Relationship. For all purposes, the Consultant’s relationship to the Company during the term of this Agreement shall be that of an independent contractor and not an employee. The obligation of the Company to make any payments set forth herein shall terminate upon the death or disability of the Consultant except for accrued but unpaid amounts, if any.

[SIGNATURES ON FOLLOWING PAGE]

4

IN WITNESS WHEREOF, this Agreement has been duly signed by the parties hereto, effective as of the Effective Date.

FEDERATED NATIONAL HOLDING COMPANY:
By:	/s/ Michael H. Braun
Name:	Michael H. Braun
Title:	CEO and President
CONSULTANT:
/s/ Bruce F. Simberg
Bruce F. Simberg

5

EX-31.1

Federated National Holding Company

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Michael H. Braun, certify that:

1. I have reviewed this Form 10-Q 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 15(d)-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.

/s/ Michael H. Braun

Michael H. Braun

Chief Executive Officer

(Principal Executive Officer)

Dated: May 11, 2015

EX-31.2

Federated National Holding Company

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Peter J. Prygelski, III, certify that:

1. I have reviewed this Form 10-Q 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 15(d)-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.

/s/ Peter J. Prygelski, III

Peter J. Prygelski, III

Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: May 11, 2015

EX-32.1

Federated National Holding Company

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Quarterly Report on Form 10-Q of Federated National Holding Company for the quarter ended March 31, 2015 as filed with the Securities and Exchange Commission (the “Report”), I, Michael H. Braun, Chief Executive Officer of Federated National Holding Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Federated National Holding Company.

By:  /s/ Michael H. Braun

Michael H. Braun, Chief Executive Officer (Principal Executive Officer)

May 11, 2015

EX-32.2

Federated National Holding Company

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Quarterly Report on Form 10-Q of Federated National Holding Company for the quarter ended March 31, 2015 as filed with the Securities and Exchange Commission (the “Report”), I, Peter J. Prygelski, III, Chief Financial Officer of Federated National Holding Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Federated National Holding Company.

By:  /s/ Peter J. Prygelski, III

Peter J. Prygelski, III, Chief Financial Officer (Principal Financial and Accounting Officer)

May 11, 2015

XML

Stockholders' Equity (Details) (USD $)	Mar. 31, 2015	Dec. 31, 2014
Stockholders' Equity [Abstract]
Preferred stock, authorized (in shares)	1,000,000	1,000,000
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized (in shares)	25,000,000	25,000,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, issued (in shares)	0	0
Preferred stock, outstanding (in shares)	0	0
Common stock, issued (in shares)	13,701,122	13,632,414

XML

Organization and Business (Details) (USD $)	3 Months Ended
	Mar. 31, 2015 Carrier Agent	Mar. 31, 2014
Business Organization [Line Item]
Years in business (minimum)	23 years
Number of independent agents	3,800
Number of agents that actively sell and service the entity's products	2,300
Ratio of homeowners' premiums underwritten to total premiums underwritten (in hundredths)	91.70%	91.20%
Ratio of commercial general liability premiums underwritten to total premiums underwritten (in hundredths)	3.70%	3.90%
Ratio of federal flood premiums underwritten to total premiums underwritten (in hundredths)	1.40%	1.90%
Ratio of automobile insurance premiums underwritten to total premiums underwritten (in hundredths)	3.20%	3.00%
Portion of homeowners' gross premium written produced under the agreement with "ISA"	$ 19,700,000	$ 11,600,000
Percentage of homeowners' gross premium written produced under the agreement with "ISA" (in hundredths)	20.10%	15.70%
Homeowners' gross premiums written	97,800,000	74,000,000
Percentage of total increase in sale of Homeowners' policy related to ISA (in hundredths)	82.60%
Number of carriers the entity provides insurance through	40
Original percentage commission fee from its affiliate (in hundredths)	4.00%
Minimum [Member]
Business Organization [Line Item]
Fees earned per policy	25
Maximum [Member]
Business Organization [Line Item]
Fees earned per policy	$ 55

XML

Summary of Significant Accounting Policies and Practices

3 Months Ended

Mar. 31, 2015

Summary of Significant Accounting Policies and Practices [Abstract]

Summary of Significant Accounting Policies and Practices

(3) Summary of Significant Accounting Policies and Practices

(A)  Critical Accounting Policies

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

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management’s evaluation of the determination of (i) liability for unpaid losses and LAE, (ii) the amount and recoverability of amortization of DPAC, and (iii) estimates for our reserves with respect to finance contracts, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates, which are described in greater detail in Footnote 2 of the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2014, which we included in the Company’s Annual Report on Form 10-K which was filed with the SEC on March 16, 2015.

We believe that there were no significant changes in those critical accounting policies and estimates during the first three months of fiscal 2015. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Form 10-Q with the Audit Committee of our Board of Directors.

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

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 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.

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.”

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.

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

The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on March 31, 2015 and December 31, 2014. Changes in interest rates subsequent to March 31, 2015 and December 31, 2014 may affect the fair value of our investments.

The carrying amounts for the following financial instrument categories approximate their fair values at March 31, 2015 and December 31, 2014 because of their short-term nature: cash and short-term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, claims payments outstanding, accounts payable and accrued expenses.

(B) Impact of New Accounting Pronouncements

In April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

In February 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-02,  Consolidation (Topic 810): Amendments to the Consolidation Analysis  (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements and significantly changes the consolidation analysis required. The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (i) modify the evaluation of whether limited partnership and similar legal entities are VIEs ,(ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Act of 1940 for registered money market funds. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

In June 2014, the FASB issued Accounting Standard Update (“ASU”) No. 2014-12: Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, a consensus of the FASB Emerging Issues Task Force.  The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period.  That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved.  The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a non-vesting condition that affects the grant-date fair value of an award.  The amendments in this ASU provide explicit guidance for those awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

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. 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.

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

(C) Stock Options

Pursuant to FASB issued guidance, compensation cost recognized during the three months ended March 31, 2015 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the guidance.

(D) Earnings per Share

Basic earnings per share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share (“Diluted EPS”) is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period presented.

(E) Reclassifications

No material reclassification of the 2014 financial statements was necessary to conform to the 2015 presentation.

XML

Fair Value Disclosure (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2015	Dec. 31, 2014
Debt securities [Abstract]
Debt securities	$ 288,193	$ 284,099
Equity securities [Abstract]
Equity securities	40,726	39,247
Recurring [Member]
Debt securities [Abstract]
United States government obligations and authorities	59,549	62,323
Obligations of states and political subdivisions	92,172	91,614
Corporate	125,021	119,024
International	11,451	11,138
Debt securities	288,193	284,099
Equity securities [Abstract]
Common stocks	40,726	39,247
Equity securities	40,726	39,247
Total debt and equity securities	328,919	323,346
Level 1 [Member] | Recurring [Member]
Debt securities [Abstract]
United States government obligations and authorities	39,419	46,002
Obligations of states and political subdivisions	0	0
Corporate	0	0
International	0	0
Debt securities	39,419	46,002
Equity securities [Abstract]
Common stocks	40,726	39,247
Equity securities	40,726	39,247
Total debt and equity securities	80,145	85,249
Level 2 [Member] | Recurring [Member]
Debt securities [Abstract]
United States government obligations and authorities	20,130	16,321
Obligations of states and political subdivisions	92,172	91,614
Corporate	125,021	119,024
International	11,451	11,138
Debt securities	248,774	238,097
Equity securities [Abstract]
Common stocks	0	0
Equity securities	0	0
Total debt and equity securities	248,774	238,097
Level 3 [Member] | Recurring [Member]
Debt securities [Abstract]
United States government obligations and authorities	0	0
Obligations of states and political subdivisions	0	0
Corporate	0	0
International	0	0
Debt securities	0	0
Equity securities [Abstract]
Common stocks	0	0
Equity securities	0	0
Total debt and equity securities	$ 0	$ 0

XML

Investments (Details) (USD $)	3 Months Ended		12 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Dec. 31, 2014
Investments [Abstract]
Increase in total investments	$ 5,600,000
Percentage increase in investments (in hundredths)	1.70%
Total investments	336,381,000		330,763,000
Ratio of available-for-sale securities to total investments (in hundredths)	98.00%		98.00%
Debt securities at amortized cost [Line Items]
Debt Securities - Held-To-Maturity, Amortized Cost	7,462,000		7,417,000
Bond portfolio reclassified between available-for-sale and held-to-maturity	0		0
Debt securities, at market [Abstract]
Debt securities, at market	288,193,000		284,099,000
Percent of debt securities at market to total investments (in hundredths)	85.68%		85.90%
Debt securities, at amortized cost [Abstract]
Debt securities, at amortized cost	7,462,000		7,417,000
Percent of debt securities at amortized cost to total investments (in hundredths)	2.22%		2.24%
Total debt securities	295,655,000		291,516,000
Percent of debt securities to total investments (in hundredths)	87.90%		88.14%
Equity securities, at market	40,726,000		39,247,000
Percentage of equity securities to total investments (in hundredths)	12.10%		11.86%
Total investments	336,381,000		330,763,000
Total investments (in hundredths)	100.00%		100.00%
Realized gains (losses) [Abstract]
Total realized gains	1,910,000	1,745,000
Fair Value at Sale of securities with realized gains	37,944,000	14,483,000
Total realized losses	(206,000)	(414,000)
Fair Value at Sale of securities with realized losses	15,531,000	5,037,000
Net realized gains (losses) on investments	1,704,000	1,331,000
Fair Value of Investments at Sale	53,475,000	19,520,000
Debt Securities - Available-For-Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost	283,337,000		281,021,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains	5,082,000		3,609,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses	226,000		531,000
Debt Securities - Available-For-Sale, Estimated Fair Value	288,193,000		284,099,000
Debt Securities - Held-To-Maturity [Abstract]
Debt Securities - Held-To-Maturity, Amortized Cost	7,462,000		7,417,000
Debt Securities - Held-To-Maturity, Gross Unrealized Gains	109,000		73,000
Debt Securities - Held-To-Maturity, Gross Unrealized Losses	132,000		231,000
Debt Securities - Held-To-Maturity, Estimated Fair Value	7,439,000		7,259,000
Equity securities - common stocks, Amortized Cost	31,200,000		29,908,000
Equity securities - common stocks, Gross Unrealized Gains	10,231,000		9,836,000
Equity securities - common stocks, Gross Unrealized Loss	705,000		497,000
Equity securities - common stocks, Estimated Fair Value	40,726,000		39,247,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)	931,000		1,028,000
Debt/Equity securities, Less than 12 months	849,000		863,000
Debt/Equity securities, 12 months or longer	82,000		165,000
Amortized Cost [Abstract]
Due in one year or less, Amortized Cost	17,357,000		16,777,000
Due after one through five years, Amortized Cost	169,008,000		173,236,000
Due after five through ten years, Amortized Cost	104,439,000		98,404,000
Due after ten years, Amortized Cost	26,000		26,000
Total Amortized Cost	290,830,000		288,443,000
Estimated Fair Value [Abstract]
Due in one year or less, Estimated Fair Value	17,355,000		16,797,000
Due after one through five years, Estimated Fair Value	170,974,000		174,273,000
Due after five through ten years, Estimated Fair Value	107,274,000		100,259,000
Due after ten years, Estimated Fair Value	33,000		33,000
Total Estimated Fair Value	295,636,000		291,362,000
Investment income [Abstract]
Interest on debt securities	1,342,000	895,000
Dividends on equity securities	106,000	111,000
Interest on cash and cash equivalents	98,000	1,000
Total investment income	1,546,000	1,007,000
Net realized gains	1,704,000	1,331,000
Proceeds from sales and maturity of marketable securities	56,264,000	20,946,000
Net realized and unrealized investment gains [Abstract]
Net realized gains	1,704,000	1,331,000
Net unrealized gains	14,382,000		12,417,000
Diverse Industries Debt Securities [Member]
Debt securities at amortized cost [Line Items]
Percentage of debt securities to total debt portfolio (in hundredths)	78.00%		77.00%
United States Government Bonds [Member]
Debt securities at amortized cost [Line Items]
Percentage of debt securities to total debt portfolio (in hundredths)	22.00%		23.00%
Diverse Industries Equity Securities [Member]
Debt securities at amortized cost [Line Items]
Percentage of equity holdings to total equity portfolio (in hundredths)	88.00%		88.00%
Mutual Funds [Member]
Debt securities at amortized cost [Line Items]
Percentage of equity holdings to total equity portfolio (in hundredths)	12.00%		12.00%
United States Government Obligations and Authorities [Member]
Debt securities at amortized cost [Line Items]
Debt Securities - Held-To-Maturity, Amortized Cost	4,564,000		4,490,000
Debt securities, at market [Abstract]
Debt securities, at market	59,549,000		62,323,000
Percent of debt securities at market to total investments (in hundredths)	17.70%		18.84%
Debt securities, at amortized cost [Abstract]
Debt securities, at amortized cost	4,564,000		4,490,000
Percent of debt securities at amortized cost to total investments (in hundredths)	1.36%		1.36%
Debt Securities - Available-For-Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost	58,136,000		61,376,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains	1,466,000		1,022,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses	53,000		75,000
Debt Securities - Available-For-Sale, Estimated Fair Value	59,549,000		62,323,000
Debt Securities - Held-To-Maturity [Abstract]
Debt Securities - Held-To-Maturity, Amortized Cost	4,564,000		4,490,000
Debt Securities - Held-To-Maturity, Gross Unrealized Gains	54,000		41,000
Debt Securities - Held-To-Maturity, Gross Unrealized Losses	131,000		225,000
Debt Securities - Held-To-Maturity, Estimated Fair Value	4,487,000		4,306,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)	54,000		75,000
Debt/Equity securities, Less than 12 months	49,000		22,000
Debt/Equity securities, 12 months or longer	5,000		53,000
Obligations of States and Political Subdivisions [Member]
Debt securities, at market [Abstract]
Debt securities, at market	92,172,000		91,614,000
Percent of debt securities at market to total investments (in hundredths)	27.40%		27.70%
Debt Securities - Available-For-Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost	91,125,000		90,728,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains	1,102,000		956,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses	55,000		70,000
Debt Securities - Available-For-Sale, Estimated Fair Value	92,172,000		91,614,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)	55,000		70,000
Debt/Equity securities, Less than 12 months	55,000		66,000
Debt/Equity securities, 12 months or longer	0		4,000
Corporate [Member]
Debt securities at amortized cost [Line Items]
Debt Securities - Held-To-Maturity, Amortized Cost	2,701,000		2,681,000
Debt securities, at market [Abstract]
Debt securities, at market	125,021,000		119,024,000
Percent of debt securities at market to total investments (in hundredths)	37.18%		35.99%
Debt securities, at amortized cost [Abstract]
Debt securities, at amortized cost	2,701,000		2,681,000
Percent of debt securities at amortized cost to total investments (in hundredths)	0.80%		0.81%
Debt Securities - Available-For-Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost	122,736,000		117,778,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains	2,396,000		1,578,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses	111,000		332,000
Debt Securities - Available-For-Sale, Estimated Fair Value	125,021,000		119,024,000
Debt Securities - Held-To-Maturity [Abstract]
Debt Securities - Held-To-Maturity, Amortized Cost	2,701,000		2,681,000
Debt Securities - Held-To-Maturity, Gross Unrealized Gains	52,000		31,000
Debt Securities - Held-To-Maturity, Gross Unrealized Losses	1,000		5,000
Debt Securities - Held-To-Maturity, Estimated Fair Value	2,752,000		2,707,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)	111,000		332,000
Debt/Equity securities, Less than 12 months	68,000		260,000
Debt/Equity securities, 12 months or longer	43,000		72,000
Debt Securities [Member]
Realized gains (losses) [Abstract]
Total realized gains	515,000	135,000
Fair Value at Sale of securities with realized gains	34,860,000	9,668,000
Total realized losses	(103,000)	(70,000)
Fair Value at Sale of securities with realized losses	15,072,000	3,699,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)	225,000		531,000
Debt/Equity securities, Less than 12 months	177,000		402,000
Debt/Equity securities, 12 months or longer	48,000		129,000
Investment income [Abstract]
Net realized gains	412,000	65,000
Net realized and unrealized investment gains [Abstract]
Net realized gains	412,000	65,000
Net unrealized gains	4,856,000		3,078,000
Equity Securities [Member]
Realized gains (losses) [Abstract]
Total realized gains	1,395,000	1,610,000
Fair Value at Sale of securities with realized gains	3,084,000	4,815,000
Total realized losses	(103,000)	(344,000)
Fair Value at Sale of securities with realized losses	459,000	1,338,000
Investment income [Abstract]
Net realized gains	1,292,000	1,266,000
Net realized and unrealized investment gains [Abstract]
Net realized gains	1,292,000	1,266,000
Net unrealized gains	9,526,000		9,339,000
International [Member]
Debt securities at amortized cost [Line Items]
Debt Securities - Held-To-Maturity, Amortized Cost	197,000		246,000
Debt securities, at market [Abstract]
Debt securities, at market	11,451,000		11,138,000
Percent of debt securities at market to total investments (in hundredths)	3.40%		3.37%
Debt securities, at amortized cost [Abstract]
Debt securities, at amortized cost	197,000		246,000
Percent of debt securities at amortized cost to total investments (in hundredths)	0.06%		0.07%
Debt Securities - Available-For-Sale [Abstract]
Debt Securities - Available-For-Sale, Amortized Cost	11,340,000		11,139,000
Debt Securities - Available-For-Sale, Gross Unrealized Gains	118,000		53,000
Debt Securities - Available-For-Sale, Gross Unrealized Losses	7,000		54,000
Debt Securities - Available-For-Sale, Estimated Fair Value	11,451,000		11,138,000
Debt Securities - Held-To-Maturity [Abstract]
Debt Securities - Held-To-Maturity, Amortized Cost	197,000		246,000
Debt Securities - Held-To-Maturity, Gross Unrealized Gains	3,000		1,000
Debt Securities - Held-To-Maturity, Gross Unrealized Losses	0		1,000
Debt Securities - Held-To-Maturity, Estimated Fair Value	200,000		246,000
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)	5,000		54,000
Debt/Equity securities, Less than 12 months	5,000		54,000
Debt/Equity securities, 12 months or longer	0		0
Common Stock [Member]
Continuous unrealized loss position [Abstract]
Debt/Equity securities, Unrealized (Losses)	706,000		497,000
Debt/Equity securities, Less than 12 months	672,000		461,000
Debt/Equity securities, 12 months or longer	34,000		36,000
United States Treasury Notes [Member] | Federated National [Member]
Estimated Fair Value [Abstract]
Due after one through five years, Estimated Fair Value	64,639		61,465
Due after five through ten years, Estimated Fair Value	2,055,445		2,208,588
Treasury notes maturity date, maturing in one through five years	Dec. 31, 2016		Dec. 31, 2016
Treasury notes maturity date, maturing in five through ten years	Dec. 31, 2022		Dec. 31, 2022
Certificates of Deposit [Member] | Federated National [Member]
Estimated Fair Value [Abstract]
Total Estimated Fair Value	$ 300,000

XML

Reinsurance Agreements (Details) (USD $)	3 Months Ended
	Mar. 31, 2015 Structure	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2014	Jul. 01, 2014
Reinsurance Agreements [Abstract]
Number of types of reinsurance structures	3
Liability for Catastrophe Claims [Line Items]
Prepaid reinsurance premiums	$ 46,039,000			$ 54,502,000
Percentage of quota share reinsurance treaty (in hundredths)	30.00%
Deferred quota profit share	8,800,000			10,500,000	14,000,000
Number of years quota share reinsurance treaty	2 years
Aggregate catastrophe coverage per year with maximum single event coverage	100,000,000
Aggregate cost of quota share is projected	6,700,000
Increase in total insured value		5,400,000,000	8,700,000,000
Percentage increase in total insured value (in hundredths)		8.20%	25.30%
Increase reinsurance premiums for total insured value		400,000	8,300,000
Percentage increase in reinsurance premiums for total insured value (in hundredths)			13.30%
Trust agreement for loss exposure	4,900,000			4,900,000
Florida [Member]
Liability for Catastrophe Claims [Line Items]
Aggregate catastrophic loss coverage	200,000,000
Aggregate catastrophic loss coverage of Florida	200,000,000
2013-2014 Hurricane Season [Member]
Liability for Catastrophe Claims [Line Items]
Aggregate catastrophic loss coverage	562,700,000
Maximum single event coverage	420,400,000
Amount retained per Loss	7,000,000
Coverage afforded by FHCF	278,100,000
Percentage of FHCF coverage to total coverage (in hundredths)	49.40%
Reinsurance premium	21,700,000
Prepaid reinsurance premiums	67,900,000
Aggregate catastrophic loss coverage of Florida	562,700,000
2014-2015 Hurricane Season [Member]
Liability for Catastrophe Claims [Line Items]
Aggregate catastrophic loss coverage	1,490,000,000
Maximum single event coverage	1,010,000,000
Reinsurance premium	40,200,000
Prepaid reinsurance premiums	117,000,000
Aggregate catastrophic loss coverage of Florida	1,490,000,000
2014-2015 Hurricane Season [Member] | Florida [Member]
Liability for Catastrophe Claims [Line Items]
Aggregate catastrophic loss coverage	1,460,000,000
Amount retained per Loss	11,200,000
Percentage of Florida coverage to total coverage (in hundredths)	98.50%
Coverage afforded by FHCF	546,300,000
Percentage of FHCF coverage to total coverage (in hundredths)	37.40%
Aggregate catastrophic loss coverage of Florida	1,460,000,000
2014-2015 Hurricane Season [Member] | Louisiana [Member]
Liability for Catastrophe Claims [Line Items]
Amount retained per Loss	$ 3,000,000

XML

Unpaid losses and LAE (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2015	Dec. 31, 2014
Unpaid losses and LAE [Abstract]
Unpaid losses and LAE, period start	$ 78,330	$ 61,016
Less reinsurance recoverables	(12,534)	(2,742)
Unpaid Losses and LAE, net, period start	65,796	58,274
Incurred related to Unpaid losses and LAE [Abstract]
Current year	28,180	79,932
Prior years	(4,231)	1,104
Total incurred losses and LAE	23,949	81,036
Paid Related to Unpaid losses And LAE [Abstract]
Current year	6,908	42,391
Prior years	11,396	31,123
Total paid	18,304	73,514
Unpaid Losses and LAE, net, period end	71,441	65,796
Plus reinsurance recoverables	13,034	12,534
Unpaid losses and LAE, period end	$ 84,475	$ 78,330

XML

Basis of Presentation

3 Months Ended

Mar. 31, 2015

Basis of Presentation [Abstract]

Basis of Presentation

(2) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America referred to as Generally Accepted Accounting Principles (“GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2015 and the results of operations and cash flows for the periods presented.

The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2015. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2014 included in the Company’s Form 10-K, which was filed with the SEC on March 16, 2015.

In preparing the interim unaudited condensed consolidated financial statements, management was required to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates.

Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of loss and LAE, ceded reinsurance balances payable, the recoverability of Deferred Policy Acquisition Costs (“DPAC”), the determination of federal income taxes, and the net realizable value of reinsurance recoverables. Although considerable variability is inherent in these estimates, management believes that the amounts provided are reasonable. These estimates are continually reviewed and adjusted as necessary. Such adjustments are reflected in current operations.

All significant intercompany balances and transactions have been eliminated. No material reclassifications have been made to the prior-period balances to conform to the current-period presentation.

XML

Stock Compensation Plans (Details) (USD $)	3 Months Ended		12 Months Ended		0 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Dec. 31, 2014	Dec. 31, 2013	Mar. 10, 2015	Sep. 09, 2014	Mar. 04, 2014	Aug. 05, 2013	Mar. 04, 2013	Dec. 09, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options exercisable outstanding (in shares)	210,284		219,285
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 Exercisable at [Abstract]
March 31, 2015 (in shares)	210,284		219,285
Options Weighted Average Option Exercise Price at [Abstract]
Decrease in income from continuing operations due to change in accounting pronouncement	$ 752,000	$ 192,000
Decrease in net income due to change in accounting pronouncement	$ 469,000	$ 119,000
Net income (loss) per share after change in accounting pronouncement, basic (in dollars per share)	$ 0.71	$ 0.78
Net income (loss) per share after change in accounting pronouncement, diluted (in dollars per share)	$ 0.69	$ 0.75
Net income (loss) per share - basic (in dollars per share)	$ 0.68	$ 0.77
Net income per share - diluted (in dollars per share)	$ 0.66	$ 0.74
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	900,000
Share-based payment award, expiration date	Sep. 30, 2008
Stock Option Plans, Number of Shares [Abstract]
Outstanding, beginning of period (in shares)	0	3,000	3,000	78,500
Granted (in shares)	0		0	0
Exercised (in shares)	0		(3,000)	(500)
Cancelled (in shares)	0		0	(75,000)
Outstanding, end of period (in shares)	0		0	3,000
Stock Options, Weighted Average Option Exercise Price [Abstract]
Outstanding, beginning of period (in dollars per share)	$ 8.67	$ 8.67	$ 8.67	$ 12.73
Granted (in dollars per share)	$ 0		$ 0	$ 0
Exercised (in dollars per share)	$ 0		$ 8.67	$ 8.67
Cancelled (in dollars per share)	$ 0		$ 0	$ 12.92
Outstanding, end of period (in dollars per share)	$ 0		$ 8.67	$ 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		1,800,000
Share-based payment award, expiration date	Apr. 30, 2012
Options exercisable outstanding (in shares)	153,584
Stock Option Plans, Number of Shares [Abstract]
Outstanding, beginning of period (in shares)	219,285	523,521	523,521	702,597
Granted (in shares)	0		0	0
Exercised (in shares)	(9,001)		299,735	(165,577)
Cancelled (in shares)	0		(4,501)	(13,499)
Outstanding, end of period (in shares)	210,284		219,285	523,521
Stock Options, Weighted Average Option Exercise Price [Abstract]
Outstanding, beginning of period (in dollars per share)	$ 3.79	$ 4.54	$ 4.54	$ 5.17
Granted (in dollars per share)	$ 0		$ 0	$ 0
Exercised (in dollars per share)	$ 2.98		$ 5.10	$ 7.15
Cancelled (in dollars per share)	$ 0		$ 3.49	$ 5.41
Outstanding, end of period (in dollars per share)	$ 3.98		$ 3.79	$ 4.54
Options Exercisable at [Abstract]
March 31, 2015 (in shares)	153,584
December 31, 2015 (in shares)	56,700
December 31, 2016 (in shares)	0
December 31, 2017 (in shares)	0
December 31, 2018 (in shares)	0
December 31, 2019 (in shares)	0
Thereafter (in shares)	0
Total options exercisable (in shares)	210,284
Options Weighted Average Option Exercise Price at [Abstract]
March 31, 2014 (in dollars per share)	$ 3.83
December 31, 2014 (in dollars per share)	$ 3.83
December 31, 2015 (in dollars per share)	$ 3.83
December 31, 2016 (in dollars per share)	$ 3.83
December 31, 2017 (in dollars per share)	$ 3.83
December 31, 2018 (in dollars per share)	$ 3.83
Thereafter (in dollars per share)	$ 3.83
Summary information about stock options outstanding [Abstract]
Range of Exercise Price, Minimum (in dollars per share)	$ 2.45
Range of Exercise Price, Maximum (in dollars per share)	$ 4.40
Options Outstanding (in shares)	210,284
Weighted Average Contractual Periods in Years	6 years 4 months 28 days
Weighted Average Exercise Price (in dollars per share)	$ 3.83
Options Exercisable (in shares)	153,584
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, Number of Shares [Abstract]
Outstanding, beginning of period (in shares)	447,801	249,500	249,500	0
Granted (in shares)	66,140		268,648	250,000	66,140	130,000	88,648	150,000	100,000
Exercised (in shares)	(59,707)		(68,988)	0
Cancelled (in shares)	0		(1,359)	(500)
Outstanding, end of period (in shares)	454,234		447,801	249,500
Other Than Stock Options, Fair Market Value at Grant [Abstract]
Outstanding, beginning of period (in dollars per share)	$ 5.54	$ 5.54	$ 5.54	$ 0
Granted (in dollars per share)	$ 28.79		$ 5.54	$ 5.54
Exercised (in dollars per share)	$ 10.47		$ 0	$ 0
Cancelled (in dollars per share)	$ 0		$ 5.54	$ 5.54
Outstanding, end of period (in dollars per share)	$ 19.41		$ 5.54	$ 5.54
2012 Stock Incentive Plan [Member] | Chief Executive Officer and President [Member]
Other Than Stock Option Plans, Number of Shares [Abstract]
Granted (in shares)					32,997	45,000	43,997	100,000	25,000	50,000
2012 Stock Incentive Plan [Member] | Chief Financial Officer [Member]
Other Than Stock Option Plans, Number of Shares [Abstract]
Granted (in shares)					9,551	15,000	16,341	50,000	15,000
2012 Stock Incentive Plan [Member] | Director [Member]
Other Than Stock Option Plans, Number of Shares [Abstract]
Granted (in shares)					6,252	50,000	15,710		20,000
2012 Stock Incentive Plan [Member] | Other Employees [Member]
Other Than Stock Option Plans, Number of Shares [Abstract]
Granted (in shares)					17,340	20,000	12,600		40,000

XML

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2015	Dec. 31, 2014
Investments
Debt maturities, available for sale, at fair value	$ 288,193	$ 284,099
Debt maturities, held to maturity, at amortized cost	7,462	7,417
Equity securities, available for sale, at fair value	40,726	39,247
Total investments	336,381	330,763
Cash and short term investments	88,163	40,157
Prepaid reinsurance premiums	46,039	54,502
Premiums receivable, net of allowance for credit losses of $148 and $148, respectively	29,809	27,275
Reinsurance recoverable, net	13,034	12,534
Deferred policy acquisition costs	15,765	13,610
Income taxes receivable	2,090	1,810
Property, plant and equipment, net	1,720	1,749
Other assets	8,265	7,231
Contingent quota-share profit sharing	14,000	14,000
Total assets	555,266	503,631
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and LAE	84,475	78,330
Unearned premiums	203,433	192,424
Debt	5,000	0
Premiums deposits and customer credit balances	11,291	7,381
Deferred income taxes, net	1,897	1,341
Claims payments outstanding	9,653	10,152
Accounts payable and accrued expenses	8,967	10,924
Deferred quota-share profit sharing	8,750	10,500
Total liabilities	333,466	311,052
Shareholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding 13,701,122 and 13,632,414, respectively	137	136
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding	0	0
Additional paid-in capital	128,611	127,302
Accumulated other comprehensive income
Unrealized net gains on investments, available for sale	8,925	7,718
Total accumulated other comprehensive income	8,925	7,718
Retained earnings	66,140	57,423
Total Federated National Holding Company equity	203,813	192,579
Non-controlling interest	17,987	0
Total shareholders' equity	221,800	192,579
Total liabilities and shareholders' equity	$ 555,266	$ 503,631

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
Cash flow from operating activities:
Net income	$ 9,284	$ 8,423
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of investment premium or discount, net	1,253	844
Depreciation and amortization of property plant and equipment, net	152	76
Net realized investment gains	(1,704)	(1,331)
Non-cash compensation	999	134
Changes in operating assets and liabilities:
Premiums receivable	(2,535)	(1,537)
Prepaid reinsurance premiums	8,463	6,755
Reinsurance recoverable, net	(500)	33
Income taxes recoverable	(280)	0
Deferred income tax expense, net of other comprehensive income	(202)	(574)
Policy acquisition costs, net of amortization	(2,156)	(1,757)
Other assets	(1,034)	(970)
Contingent quota-share profit sharing	(1,750)	0
Unpaid losses and LAE	6,145	1,538
Unearned premiums	11,009	16,997
Debt	5,000	0
Premium deposits and customer credit balances	3,911	3,383
Income taxes payable	0	1,978
Claims payments outstanding	(499)	(991)
Accounts payable and accrued expenses	(1,957)	(383)
Net cash provided by operating activities	33,599	32,618
Cash flow used by investing activities:
Proceeds from sale of investment securities	56,264	20,946
Purchases of investment securities available for sale	(59,466)	(44,387)
Purchases of property and equipment	(122)	(218)
Net cash used by investing activities	(3,324)	(23,659)
Cash flow provided by financing activities:
Exercised stock options	27	353
Dividends paid	(566)	(341)
Non-controlling interest	17,987	0
Tax benefit related to non-cash compensation	283	72
Net cash provided by financing activities	17,731	84
Net increase in cash and short term investments	48,006	9,043
Cash and short term investments at beginning of period	40,157	41,446
Cash and short term investments at end of period	88,163	50,489
Cash paid during the period for:
Income taxes	5,662	3,885
Non-cash investing and finance activities:
Accrued dividends payable	$ 567	$ 336

XML

Reinsurance Agreements (Tables)

3 Months Ended

Mar. 31, 2015

Reinsurance Agreements [Abstract]

Private reinsurance companies

The 2014-2015 private reinsurance companies and their respective A.M. Best Company (“A.M. Best”) and S&P ratings are listed in the table as follows.

	Reinsurer	A.M. Best Rating			S&P Rating
UNITED STATES
	American Agricultural Insurance Company		A-			NR
	American Standard Insurance Company of Wisconsin		A			NR
	AIG (National Union Fire Insurance Company of Pittsburgh, PA)		A			A+
	Everest Reinsurance Company		A+			A+
	Odyssey Reinsurance Company		A			A-
	QBE Reinsurance Corporation		A			A+
	RLI Insurance Company		A+			A+
	Transatlantic Reinsurance Company		A			A+
BERMUDA
	ACE Tempest Reinsurance Limited		A++			AA-
	Allied World Assurance Company, Limited		A			A
	Arch Reinsurance Limited		A+			A+
	Argo Reinsurance Limited		A			NR
	Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)		A-			A+
	Aspen Bermuda Limited		A			A
	AXIS Specialty Limited		A+			A+
	BGS Services (Bermuda) Limited/Lloyds Syndicate 2987		A			A+
	DaVinci Reinsurance Ltd		A			AA-
	Endurance Specialty Insurance Limited		A			A
	Hamilton Re, Limited		A-			NR
	Hiscox Insurance Company (Bermuda) Limited		A			NR
	Partner Reinsurance Company Limited		A+			A+
	Platinum Underwriters Bermuda Limited		A			A-
	Renaissance Reinsurance, Limited		A+			AA-
	Securis Re III Limited Bermuda		NR	*	**	NR
	Securis Re IV Limited Bermuda		NR	*	**	NR
	Tokio Millennium Re AG, Bermuda Branch		A++			AA-
	XL RE Limited		A			A+
UNITED KINGDOM
	A.F. Beazley Syndicate No. 623 (AFB)		A			A+
	A.F. Beazley Syndicate No. 2623 (AFB)		A			A+
	Amlin Syndicate No. 2001 (AML)		A			A+
	Antares Syndicate No. 1274 (AUL)		A			A+
	Ariel Syndicate No. 1910 (ARE)		A			A+
	ARK Syndicate No. 4020 (ARK)		A			A+
	Ascot Syndicate No. 1414 (ASC)		A			A+
	Barbican Syndication No. 1955 (BAR)		A			A+
	Canopius Syndicate No. 958 (CNP)		A			A+
	Canopius Syndicate No. 4444 (CNP)		A			A+
	Cathederal Syndicate No. 2010 (MMX)		A			A+
	Chaucer Syndicate No. 1084 (CSL)		A			A+
	Dale Underwriting Syndicate No. 1729 (DUW)		A			A+
	Faraday Syndicate No. 435 (FDY)		A			A+
	Hiscox Syndicate No. 0033 (HIS)		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)		A			A+
	MAP Underwriting Syndicate No. 2791 (MAP)		A			A+
	MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)		A			A+
	Novae Syndicate No. 2007 (NVA)		A			A+
	S.J.O, Catlin & Others No. 2003 (SJC)		A			A+
EUROPE
	Amlin AG, Switzerland, Bermuda Branch		A			A
	Hannover Rueck SE (obo Pillar Capital Management)		NR	*	**	NR
	Lansforsakringar Sak Forsakringsaktiebolag (publ)		NR			A
	SCOR Global P&C SE, Paris, Zurich Branch		A			A
ASIA
	China Reinsurance (Group) Corporation		A			NR
	Qatar Reinsurance Company LLC		A			A
* Reinstatement Premium Protection Program Participants
** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market value.

The 2013-2014 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			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.

XML

Stock Compensation Plans (Tables)

3 Months Ended

Mar. 31, 2015

Stock Compensation Plans [Abstract]

Activity in stock option plans

Activity in our stock option and incentive plans for the period from January 1, 2013 to March 31, 2015 is as follows.

	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, 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 January 1, 2014		3,000		$	8.67		523,521		$	4.54		249,500		$	5.54
Granted		-		$	-		-		$	-		268,648		$	5.54
Exercised		(3,000	)	$	8.67		(299,735	)	$	5.10		(68,988	)	$	-
Cancelled		-		$	-		(4,501	)	$	3.49		(1,359	)	$	5.54
Outstanding at January 1, 2015		-		$	8.67		219,285		$	3.79		447,801		$	5.54
Granted		-		$	-		-		$	-		66,140		$	28.79
Exercised		-		$	-		(9,001	)	$	2.98		(59,707	)	$	10.47
Cancelled		-		$	-		-		$	-		-		$	-
Outstanding at March 31, 2015		-		$	-		210,284		$	3.83		454,234		$	19.41

Maturity schedule of exercisable options outstanding

Options outstanding as of March 31, 2015 are exercisable as follows.

	2002 Plan
Options Exercisable at:	Number of  Shares		Weighted Average  Option  Exercise Price
March 31, 2015		153,584	$	3.83
December 31, 2015		56,700	$	3.83
December 31, 2016		-	$	3.83
December 31, 2017		-	$	3.83
December 31, 2018		-	$	3.83
December 31, 2019		-	$	3.83
Thereafter		-	$	3.83
Total options exercisable		210,284

Summary of information about the stock option plans

Summary information about the Company’s stock option plans at March 31, 2015 is as follows.

	Range of Exercise Price		Outstanding at March 31, 2015		Weighted Average Contractual Periods in Years		Weighted Average Exercise Price		Exercisable at March 31, 2015
2002 Plan	$	2.45 - $4.40		210,284		6.41	$	3.83		153,584

XML

Organization and Business

3 Months Ended

Mar. 31, 2015

Organization and Business [Abstract]

Organization and Business

(1) Organization and Business

In this Quarterly Report on Form 10-Q, “FNHC” and the terms “Company”, “we”, “us” and “our” refer to Federated National Holding Company and its subsidiaries, unless the context indicates otherwise. 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 23 years.

FNHC is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents.

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

Our wholly owned insurance subsidiary is Federated National Insurance Company (“FNIC”). 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 3,800 independent agents, of which approximately 2,300 actively sell and service our products, FNIC is authorized to underwrite homeowners’, commercial general liability, fire, allied lines, and personal 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. FNIC also underwrites homeowners’ insurance in Alabama and Louisiana and just became admitted in South Carolina to underwrite homeowners insurance. Additionally, we underwrite personal automobile insurance in Georgia and Texas.

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

The Company has entered into a joint venture to organize Monarch National Insurance Company, which received its certificate of authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the “Florida OIR”) on March 19, 2015.  The Company’s joint venture partners are a majority-owned limited partnership of Crosswinds Holdings Inc., f/k/a C.A. Bancorp Inc., a publicly traded Canadian private equity firm and asset manager; and Transatlantic Reinsurance Company.  For more information regarding the organization of Monarch National Insurance Company, please see Note 11, Subsequent Events.

We previously entered into a Coexistence Agreement effective August 30, 2013 (the “Coexistence Agreement”) with Federated Mutual Insurance Company (“Federated Mutual”) pursuant to which, among other things, we may continue to use “Federated” until at least August 30, 2020, after which time we have agreed to either cease using “Federated” in commerce or otherwise adopt and use trade names that are not confusingly similar to Federated Mutual’s trademarks.  We continue to develop our brand under the “FedNat” name, which is the name by which agents generally know us.

As of September 30, 2014, we had satisfied all applicable conditions of the Consent Order we entered into in January 2011 (the “Consent Order”) with the Florida Office of Insurance Regulation (“Florida OIR”).  We entered into the Consent Order in connection with the merger of our one of our wholly owned insurance subsidiaries, American Vehicle Insurance Company (“American Vehicle”), into FNIC, with FNIC continuing the operations of both entities.  As of the date of this Report, the only operational restriction that remains in effect is a requirement to obtain OIR approval prior to writing commercial multi-peril business or any new commercial property business, including condo associations, under any other line of business for which FNIC is authorized.  FNIC currently has no commercial multi-peril policy premium in-force and the current commercial habitation book of business is fully earned. The Consent Order required us to, among other things, limit the number of policies that we write in the Tri-County area and imposed certain other operational requirements on us, all of which we have complied with.

During the three months ended March 31, 2015, 91.7%, 3.7%, 1.4% and 3.2% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively. During the three months ended March 31, 2015, $19.7 million or 20.1% of the $97.8 million of the 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 FNIC products. The $19.7 million of homeowners’ premiums produced under this agreement with ISA represents 82.6% of the total increase in the sale of homeowners’ policies during the three months ended March 31, 2015. During the three months ended March 31, 2014, $11.6 million or 15.7% of the $74.0 million of the homeowners’ premiums we underwrote were produced under an agency agreement with ISA. This network of agents began writing for FNIC in March 2013. During the three months ended March 31, 2014, 91.2%, 3.9%, 1.9% and 3.0% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively.

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

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

Fed Nat Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, Inc., 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, Nevada, South Carolina and Texas. FNU has contracted with other unaffiliated insurance companies to sell personal umbrella 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 per policy fee which ranges from $25 to $55 and a commission fee from its affiliate, FNIC, which totaled 4% during the three months ended March 31, 2015. The Florida OIR periodically reviews our managing general agent’s fee structure to ensure that it is neither excessive nor inadequate to operate.

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

During 2014, the Florida OIR approved an application to allow the claims administration operations of FNA to be assumed by FNU. Under the amended managing general agency agreement between FNU and FNIC, FNU will provide the same claims administration services under the same fee structure. The combination of these services in FNU had no effect on consolidated net income.

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

XML

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2015	Dec. 31, 2014
ASSETS
Premiums receivable, allowance for credit losses	$ 148	$ 148
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)	13,701,122	13,632,414
Common stock, outstanding (in shares)	13,701,122	13,632,414
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

XML

Subsequent Events

3 Months Ended

Mar. 31, 2015

Subsequent Events [Abstract]

Subsequent Events

(11) Subsequent Events

 

The Company has entered into a joint venture to organize Monarch National Insurance Company (“Monarch Insurance”), which received its certificate of authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the “Florida OIR”) on March 19, 2015.  The Company’s joint venture partners are a majority-owned limited partnership of Crosswinds Holdings Inc., f/k/a C.A. Bancorp Inc., a publicly traded Canadian private equity firm and asset manager (“Crosswinds”); and Transatlantic Reinsurance Company (“TransRe”).

The Company and Crosswinds have each invested $14.0 million in Monarch Delaware Holdings LLC, the indirect parent company of Monarch Insurance (“Monarch Delaware”), for a 42.4% interest in Monarch Delaware (each holding 50% of the voting interests in Monarch Delaware).  TransRe has invested $5.0 million for a 15.2% non-voting interest in Monarch Delaware and has advanced an additional $5.0 million in debt evidenced by a six-year promissory note bearing 6% annual interest payable by Monarch National Holding Company (“Monarch Holding”), a wholly owned subsidiary of Monarch Delaware and the direct parent company of Monarch Insurance.

In connection with the organization of Monarch Insurance, the parties entered into the following agreements dated as of March 17, 2015:

· Monarch Insurance entered into a Managing General Agent and Claims Administration Agreement (the “Monarch MGA Agreement”) with FNU, a wholly owned subsidiary of the Company, pursuant to which FNU provides underwriting, accounting, reinsurance placement and claims administration services to Monarch.  For its services under the Monarch MGA Agreement, FNU will receive 4% of Monarch’s total written annual premium, excluding acquisition expenses payable to agents, for FNU’s managing general agent services; 3.6% of Monarch’s total earned annual premium for FNU’s claims administration services; and a per-policy administrative fee of $25 for each policy underwritten for Monarch.  The Company will also receive an annual expense reimbursement for accounting and related services.

· Monarch Insurance, Monarch Holding and Monarch Delaware (collectively, the “Monarch Entities”) entered into an Investment Management Agreement (the “Monarch Investment Agreement”) with Crosswinds AUM LLC, a wholly owned subsidiaryof Crosswinds (“Crosswinds AUM”), pursuant to which Crosswinds AUM will manage the investment portfolios of the Monarch Entities.  The management fee, on an annual basis, is 0.75% of assets under management up to $100 million; 0.50% of assets under management of more than $100 million but less than $200 million; and 0.30% of assets under management of more than $200 million.

· Monarch Insurance also entered into a Reinsurance Capacity Right of First Refusal Agreement with TransRe, pursuant to which TransRe has a right of first refusal for all quota share and excess of loss reinsurance that Monarch Insurance deems necessary in its sole discretion for so long as TransRe remains a member of Monarch Delaware or the Monarch Holding debt remains outstanding.  Pursuant to this agreement, TransRe has the right to provide, at market rates and terms, a maximum of 15% of any reinsurance coverage obtained by Monarch Delaware in any individual reinsurance contract.

· The Limited Liability Company Agreement of Monarch Delaware Holdings LLC dated as of March 17, 2015 (the “Monarch LLC Agreement”) provides that Monarch Delaware is managed by a seven-member Board of Managers, three of whom have been designated by the Company, three of whom have been designated by Crosswinds, and one who will be jointly selected by the Company and Crosswinds.  The Company’s designees are Michael H. Braun, the Company’s President and Chief Executive Officer and a director of the Company; Peter J. Prygelski, III, the Company’s Chief Financial Officer and a director of the Company; and Jenifer G. Kimbrough, a director of the Company.  Crosswinds’ designees are Colin King, Robert Wolf, and Charles S. Duncker.  The Company and Crosswinds have agreed to identify the seventh member of the Board of Managers within six months.

· The LLC Agreement provides that certain material transactions must be approved by a supermajority of the managers, including a termination, amendment or non-renewal of the Monarch MGA Agreement or the Monarch Investment Agreement.  The Company will be entitled to receive a termination fee equal to the aggregate fees paid under the Monarch MGA Agreement for the 12 calendar months prior to the date of termination, if the Monarch MGA Agreement is terminated other than for cause.  The Monarch LLC Agreement also provides the members with certain redemption, tag-along, drag-along and buy-sell rights.  In addition, the Monarch LLC Agreement provides the Company and Crosswinds with the right, for 24 months from the closing date, to participate in certain other transactions relating to the formation or acquisition of homeowners’ property and casualty insurers undertaken by the other.

In connection with the organization of Monarch Insurance, the Company’s Board of Directors approved amendments dated March 17, 2015 to the Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreements dated as of August 5, 2013 with each of Mr. Braun and Mr. Prygelski (each, a “Restrictive Covenant Agreement”) to permit each of them to hold their respective positions with the Monarch Entities while remaining employed by the Company.  Mr. Braun’s Restrictive Covenant Agreement was further amended to permit him to continue to hold his positions with the Monarch Entities if he is terminated without cause by the Company.  In addition, Mr. Braun’s Second Amended and Restated Employment Agreement dated as of January 18, 2012 (the “Employment Agreement”) was amended to extend the term of his Employment Agreement to four years from the date of the amendment (the “Term”) with automatic extensions so that at all times the balance of the Term is not less than two years unless sooner terminated as provided in the Employment Agreement.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2015	May 03, 2015
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	Accelerated Filer
Entity Common Stock, Shares Outstanding		14,172,923
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2015

XML

Summary of Significant Accounting Policies and Practices (Policies)

3 Months Ended

Mar. 31, 2015

Summary of Significant Accounting Policies and Practices [Abstract]

Critical Accounting Policies

(A)  Critical Accounting Policies

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

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management’s evaluation of the determination of (i) liability for unpaid losses and LAE, (ii) the amount and recoverability of amortization of DPAC, and (iii) estimates for our reserves with respect to finance contracts, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates, which are described in greater detail in Footnote 2 of the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2014, which we included in the Company’s Annual Report on Form 10-K which was filed with the SEC on March 16, 2015.

We believe that there were no significant changes in those critical accounting policies and estimates during the first three months of fiscal 2015. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Form 10-Q with the Audit Committee of our Board of Directors.

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

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 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.

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.”

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.

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

The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on March 31, 2015 and December 31, 2014. Changes in interest rates subsequent to March 31, 2015 and December 31, 2014 may affect the fair value of our investments.

The carrying amounts for the following financial instrument categories approximate their fair values at March 31, 2015 and December 31, 2014 because of their short-term nature: cash and short-term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, claims payments outstanding, accounts payable and accrued expenses.

Impact of New Accounting Pronouncements

(B) Impact of New Accounting Pronouncements

In April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

In February 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-02,  Consolidation (Topic 810): Amendments to the Consolidation Analysis  (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements and significantly changes the consolidation analysis required. The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (i) modify the evaluation of whether limited partnership and similar legal entities are VIEs ,(ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Act of 1940 for registered money market funds. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

In June 2014, the FASB issued Accounting Standard Update (“ASU”) No. 2014-12: Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, a consensus of the FASB Emerging Issues Task Force.  The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period.  That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, an initial public offering or a profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved.  The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a non-vesting condition that affects the grant-date fair value of an award.  The amendments in this ASU provide explicit guidance for those awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and, earlier adoption is permitted.  The adoption of the amendments in this ASU will not have a material impact on our financial position, results of operations or cash flows.

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. 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.

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

Stock Options

(C) Stock Options

Pursuant to FASB issued guidance, compensation cost recognized during the three months ended March 31, 2015 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the guidance.

Earnings (Loss) per Share

(D) Earnings per Share

Basic earnings per share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share (“Diluted EPS”) is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period presented.

Reclassifications

(E) Reclassifications

No material reclassification of the 2014 financial statements was necessary to conform to the 2015 presentation.

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
Revenue:
Gross premiums written	$ 106,702	$ 81,102
Gross premiums ceded	(25,958)	(3,306)
Net premiums written	80,744	77,796
Decrease in prepaid reinsurance premiums	(24,949)	(16,795)
Increase in unearned premiums	(11,009)	(16,997)
Net change in prepaid reinsurance premiums and unearned premiums	(35,958)	(33,792)
Net premiums earned	44,786	44,004
Commission income	1,126	954
Finance revenue	427	311
Direct written policy fees	2,492	1,827
Net investment income	1,546	1,007
Net realized investment gains	1,704	1,331
Other income	1,378	281
Quota-share profit sharing, net	1,477	0
Total revenue	54,936	49,715
Expenses:
Losses and LAE	23,949	20,828
Operating and underwriting expenses	6,322	3,667
Salaries and wages	5,137	3,050
Amortization of deferred policy acquisition costs	5,044	8,442
Total expenses	40,452	35,987
Income before provision for income tax expense	14,484	13,728
Provision for income tax expense	5,711	5,305
Income before non-controlling interest	8,773	8,423
Non-controlling interest	(511)	0
Net income attributable to Federated National Holding Company common stockholders	$ 9,284	$ 8,423
Net income per share - basic (in dollars per share)	$ 0.68	$ 0.77
Net income per share - diluted (in dollars per share)	$ 0.66	$ 0.74
Weighted average number of common shares outstanding - basic (in shares)	13,656,190	10,948,646
Weighted average number of common shares outstanding - diluted (in shares)	13,976,131	11,317,458
Dividends paid per share (in dollars per share)	$ 0.04	$ 0.03

XML

Fair Value Disclosure

3 Months Ended

Mar. 31, 2015

Fair Value Disclosure [Abstract]

Fair Value Disclosure

(6) 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 March 31, 2015, presented in accordance with this guidance, are as follows.

	As of March 31, 2015
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	39,419	$	20,130	$	-	$	59,549
Obligations of states and political subdivisions		-		92,172		-		92,172
Corporate		-		125,021		-		125,021
International		-		11,451		-		11,451
		39,419		248,774		-		288,193
Equity securities:
Common stocks		40,726		-		-		40,726
		40,726		-		-		40,726
Total debt and equity securities	$	80,145	$	248,774	$	-	$	328,919

Assets measured at fair value on a recurring basis as of December 31, 2014, presented in accordance with this guidance, are as follows.

	As of December 31, 2014
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	46,002	$	16,321	$	-	$	62,323
Obligations of states and political subdivisions		-		91,614		-		91,614
Corporate		-		119,024		-		119,024
International		-		11,138		-		11,138
		46,002		238,097		-		284,099
Equity securities:
Common stocks		39,247		-		-		39,247
		39,247		-		-		39,247
Total debt and equity securities	$	85,249	$	238,097	$	-	$	323,346

XML

Investments

3 Months Ended

Mar. 31, 2015

Investments [Abstract]

Investments

(5) Investments

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.”

Total investments increased $5.6 million, or 1.7%, to $336.4 million as of March 31, 2015, compared with $330.8 million as of December 31, 2014.

The debt and equity securities that are available-for-sale and carried at fair value represent 98% of total investments as of March 31, 2015 and December 31, 2014.

We did not hold any trading investment securities during the three months ended March 31, 2015.

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 the three months ended March 31, 2015 and the three months ended March 31,  2014, respectively, in connection with the process, we have not charged operations with investment losses.

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

As of March 31, 2015 and December 31, 2014, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of March 31, 2015, 78% of our debt portfolio was in diverse industries and 22% was in United States government bonds. As of March 31, 2015, approximately 88% of our equity holdings were in equities related to diverse industries and 12% were in mutual funds. As of December 31, 2014, 77% of our debt portfolio was in diverse industries and 23% is in United States government bonds. As of December 31, 2014, approximately 88% of our equity holdings were in equities related to diverse industries and 12% were in mutual funds.

As of March 31, 2015 and December 31, 2014, we have classified $7.5 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 the three months ended March 31, 2015 and 2014, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

(A) Debt and Equity Securities

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

	March 31, 2015					December 31, 2014
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	59,549		17.70	%	$	62,323		18.84	%
Obligations of states and political subdivisions		92,172		27.40	%		91,614		27.70	%
Corporate		125,021		37.18	%		119,024		35.99	%
International		11,451		3.40	%		11,138		3.37	%
		288,193		85.68	%		284,099		85.90	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,564		1.36	%		4,490		1.36	%
Corporate		2,701		0.80	%		2,681		0.81	%
International		197		0.06	%		246		0.07	%
		7,462		2.22	%		7,417		2.24	%
Total debt securities		295,655		87.90	%		291,516		88.14	%
Equity securities, at market:		40,726		12.10	%		39,247		11.86	%
Total investments	$	336,381		100.00	%	$	330,763		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015					2014
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(Dollars in Thousands)
Debt securities	$	515		$	34,860	$	135		$	9,668
Equity securities		1,395			3,084		1,610			4,815
Total realized gains		1,910			37,944		1,745			14,483
Debt securities		(103	)	$	15,072		(70	)		3,699
Equity securities		(103	)		459		(344	)		1,338
Total realized losses		(206	)		15,531		(414	)		5,037
Net realized gains on investments	$	1,704		$	53,475	$	1,331		$	19,520

Net realized investment gains totaled $1.7 million for the three months ended March 31, 2015, compared with $1.3 million during the three months ended March 31, 2014.

A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at March 31, 2015 and December 31, 2014 is as follows.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
March 31, 2015
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	58,136	$	1,466	$	53	$	59,549
Obligations of states and political subdivisions		91,125		1,102		55		92,172
Corporate		122,736		2,396		111		125,021
International		11,340		118		7		11,451
	$	283,337	$	5,082	$	226	$	288,193
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,564	$	54	$	131	$	4,487
Corporate		2,701		52		1		2,752
International		197		3		-		200
	$	7,462	$	109	$	132	$	7,439
Equity securities - common stocks	$	31,200	$	10,231	$	705	$	40,726
December 31, 2014
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	61,376	$	1,022	$	75	$	62,323
Obligations of states and political subdivisions		90,728		956		70		91,614
Corporate		117,778		1,578		332		119,024
International		11,139		53		54		11,138
	$	281,021	$	3,609	$	531	$	284,099
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,490	$	41	$	225	$	4,306
Corporate		2,681		31		5		2,707
International		246		1		1		246
	$	7,417	$	73	$	231	$	7,259
Equity securities - common stocks	$	29,908	$	9,836	$	497	$	39,247

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of March 31, 2015.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	54	$	49	$	5
Obligations of states and political subdivisions		55		55		-
Corporate		111		68		43
International		5		5		-
		225		177		48
Equity securities:
Common stocks		706		672		34
Total debt and equity securities	$	931	$	849	$	82

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of December 31, 2014.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	75	$	22	$	53
Obligations of states and political subdivisions		70		66		4
Corporate		332		260		72
International		54		54		-
		531		402		129
Equity securities:
Common stocks		497		461		36
Total debt and equity securities	$	1,028	$	863	$	165

Below is a summary of debt securities at March 31, 2015 and December 31, 2014, by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Due in one year or less	$	17,357	$	17,355	$	16,777	$	16,797
Due after one through five years		169,008		170,974		173,236		174,273
Due after five through ten years		104,439		107,274		98,404		100,259
Due after ten years		26		33		26		33
Total	$	290,830	$	295,636	$	288,443	$	291,362

United States Treasury notes with a book value of $64,639 and $2,055,445, maturing in 2016 and 2022, and a certificate of deposit with a book value of $0.3 million, were on deposit with the Florida OIR as of March 31, 2015, as required by law for FNIC and Monarch Insurance, respectively, and are included with other investments held until maturity.

United States Treasury notes with a book value of $61,465 and $2,208,588, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2014, as required by law for FNIC, and are included with other investments held until maturity.

The table below sets forth investment results for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	(Dollars in Thousands)
Interest on debt securities	$	1,342	$	895
Dividends on equity securities		106		111
Interest on cash and cash equivalents		98		1
Total investment income	$	1,546	$	1,007
Net realized gains	$	1,704	$	1,331

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the three months ended March 31, 2015 and 2014, were approximately $56.3 million and $20.9 million, respectively.

The table below sets forth a summary of net realized investment gains during the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	(Dollars in Thousands)
Net realized gains
Debt securities	$	412	$	65
Equity securities		1,292		1,266
Total	$	1,704	$	1,331

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

	Unrealized Gains
	March 31, 2015		December 31, 2014
	(Dollars in Thousands)
Net unrealized gains
Debt securities	$	4,856	$	3,078
Equity securities		9,526		9,339
Total	$	14,382	$	12,417

XML

Unpaid losses and LAE (Tables)

3 Months Ended

Mar. 31, 2015

Unpaid losses and LAE [Abstract]

Summary of activity in the liability for unpaid losses and LAE

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

	Period Ending
	March 31, 2015			December 31, 2014
	(Dollars in Thousands)
Balance at January 1	$	78,330		$	61,016
Less reinsurance recoverables		(12,534	)		(2,742	)
Net balance at January 1	$	65,796		$	58,274
Incurred related to
Current year	$	28,180		$	79,932
Prior years		(4,231	)		1,104
Total incurred	$	23,949		$	81,036
Paid related to
Current year	$	6,908		$	42,391
Prior years		11,396			31,123
Total paid	$	18,304		$	73,514
Net balance at period end	$	71,441		$	65,796
Plus reinsurance recoverables		13,034			12,534
Balance as of period end	$	84,475		$	78,330

XML

Commitments and Contingencies (Tables)

3 Months Ended

Mar. 31, 2015

Commitments and Contingencies [Abstract]

Expected future lease payments

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

Fiscal Year	Payments
	(Dollars in Thousands)
2015		545
2016		714
2017		726
2018		740
Thereafter		502
Total	$	3,227

XML

Stock Compensation Plans

3 Months Ended

Mar. 31, 2015

Stock Compensation Plans [Abstract]

Stock Compensation Plans

(9) Stock Compensation Plans

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 March 31, 2015 and December 31, 2014, we had outstanding exercisable options to purchase 210,284 and 219,285 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 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.

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, 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 September 9, 2014, a total of 130,000 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, 45,000 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 50,000 shares were granted to the Company's directors and the remaining 20,000 shares were granted to other employees of the Company.

On December 9, 2014, a total of 50,000 restricted shares from the 2012 Plan were granted to the Company’s Chief Executive Officer and President pursuant to the vesting requirements and other terms and conditions set forth in the restricted stock agreement.

On March 10, 2015, a total of 66,140 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, 32,997 shares were granted to the Company's Chief Executive Officer and President and 9,551 shares were granted to the Company's Chief Financial Officer. An aggregate of 6,252 shares were granted to the Company's directors and the remaining 17,340 shares were granted to other employees of the Company.

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.

Activity in our stock option and incentive plans for the period from January 1, 2013 to March 31, 2015 is as follows.

	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, 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 January 1, 2014		3,000		$	8.67		523,521		$	4.54		249,500		$	5.54
Granted		-		$	-		-		$	-		268,648		$	5.54
Exercised		(3,000	)	$	8.67		(299,735	)	$	5.10		(68,988	)	$	-
Cancelled		-		$	-		(4,501	)	$	3.49		(1,359	)	$	5.54
Outstanding at January 1, 2015		-		$	8.67		219,285		$	3.79		447,801		$	5.54
Granted		-		$	-		-		$	-		66,140		$	28.79
Exercised		-		$	-		(9,001	)	$	2.98		(59,707	)	$	10.47
Cancelled		-		$	-		-		$	-		-		$	-
Outstanding at March 31, 2015		-		$	-		210,284		$	3.83		454,234		$	19.41

Options outstanding as of March 31, 2015 are exercisable as follows.

	2002 Plan
Options Exercisable at:	Number of  Shares		Weighted Average  Option  Exercise Price
March 31, 2015		153,584	$	3.83
December 31, 2015		56,700	$	3.83
December 31, 2016		-	$	3.83
December 31, 2017		-	$	3.83
December 31, 2018		-	$	3.83
December 31, 2019		-	$	3.83
Thereafter		-	$	3.83
Total options exercisable		210,284

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 2015 and 2014 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 the three months ended March 31, 2015 are lower by approximately $752,000 and $469,000, respectively, than if it had continued to account for share-based compensation under APB guidance. The Company’s income from continuing operations before provision for income tax expense and net income for the three months ended March 31, 2014 are lower by approximately $192,000 and $119,000, respectively, than if it had continued to account for share-based compensation under APB guidance.

Basic and diluted earnings per share for the three months ended March 31, 2015 would have been $0.71 and $0.69, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.68 and $0.66, respectively. Basic and diluted earnings per share for the three months ended March 31, 2014 would have been $0.78 and $0.75, respectively, if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.77 and $0.74, respectively.

Because the change in income taxes payable 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.

Summary information about the Company’s stock option plans at March 31, 2015 is as follows.

	Range of Exercise Price		Outstanding at March 31, 2015		Weighted Average Contractual Periods in Years		Weighted Average Exercise Price		Exercisable at March 31, 2015
2002 Plan	$	2.45 - $4.40		210,284		6.41	$	3.83		153,584

XML

Reinsurance Agreements

3 Months Ended

Mar. 31, 2015

Reinsurance Agreements [Abstract]

Reinsurance Agreements

(7) 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 FHCF.

Quota share reinsurance is a pro rata agreement among the primary insurer and one or more reinsurers where each party shares a fixed and predetermined percentage of the program’s premiums and losses. Excess of loss risk transfer agreements involve the transfer of premium in exchange for reimbursement for claims, if they occur, as a result of specific events such as severe catastrophic weather. For quota share and excess of loss reinsurance, coverage is generally afforded based on meeting predetermined risk characteristics. In contrast, facultative reinsurance is negotiated between the primary insurer and the reinsurer(s) on a case-by-case basis with no obligation on either part to cede or assume share of the risk.

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

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

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

For the 2014–2015 hurricane season, the excess of loss and FHCF treaties insured the property lines for approximately $1.49 billion of aggregate catastrophic losses and LAE with a maximum single event coverage totaling approximately $1.01 billion, with the Company retaining the first $11.20 million in Florida and $3.0 million in Louisiana for losses and LAE from each event. Florida risks represent 98.5%, or $1.46 billion of the $1.49 billion of total aggregate catastrophic losses and LAE. The reinsurance program includes coverage purchased from the private market, which affords optional reinstatement premium protection that provides coverage beyond the first event, along with any remaining coverage from the FHCF. The FHCF only affords coverage for losses sustained in Florida. Coverage afforded by the FHCF totals approximately $546.3 million, or 37.4% of Florida’s $1.46 billion of aggregate catastrophic losses and LAE. The FHCF affords coverage for the entire season, subject to maximum payouts, without regard to any particular insurable event.

The estimated cost to the Company for the excess of loss reinsurance products for the 2014–2015 hurricane season, inclusive of approximately $40.20 million payable to the FHCF and the prepaid automatic premium reinstatement protection, is approximately $117.0 million.

Included in this year’s program is a 30% quota share reinsurance treaty for the Company’s in-force new and renewal homeowners’ insurance program in the State of Florida. This two-year quota share reinsurance treaty provides 30% of $200 million of aggregate catastrophe coverage per year with maximum single event coverage of 30% of $100 million per year. The approximate cost of this quota share is projected to be $6.7 million per year, net of ceding commissions, and it is included in the $117.0 million amount referenced above. The quota share treaty contains commutation provisions for the Company to share profits based on loss experience during the term of the treaty.

The 30% quota share reinsurance treaty described above contains profit sharing provisions that will adjust over its two-year term depending on the Company’s loss experience from catastrophic and non-catastrophic events during the term. The frequency and severity of catastrophic events, coupled with non-catastrophic loss experience, will determine the ultimate profit share, if any. In accordance with GAAP, the Company will initially recognize an asset and liability and the resultant net income or loss. For example, deferred quota-share profit sharing totaled $8.8 million and $10.5 million as of March 31, 2015 and December 31, 2014, respectively. The deferred quota-share profit sharing was originally recorded at $14.0 million at the program’s July 1, 2014 inception and will continue to amortize over the life of the program. Subsequently, the Company will adjust the value of the asset and liability based on information available at the time of valuation. Upward and downward adjustments to the asset’s value will affect the Company’s results of operations by increasing or decreasing net income in the period of the adjustment.

The 2014-2015 private reinsurance companies and their respective A.M. Best Company (“A.M. Best”) and S&P ratings are listed in the table as follows.

	Reinsurer	A.M. Best Rating			S&P Rating
UNITED STATES
	American Agricultural Insurance Company		A-			NR
	American Standard Insurance Company of Wisconsin		A			NR
	AIG (National Union Fire Insurance Company of Pittsburgh, PA)		A			A+
	Everest Reinsurance Company		A+			A+
	Odyssey Reinsurance Company		A			A-
	QBE Reinsurance Corporation		A			A+
	RLI Insurance Company		A+			A+
	Transatlantic Reinsurance Company		A			A+
BERMUDA
	ACE Tempest Reinsurance Limited		A++			AA-
	Allied World Assurance Company, Limited		A			A
	Arch Reinsurance Limited		A+			A+
	Argo Reinsurance Limited		A			NR
	Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)		A-			A+
	Aspen Bermuda Limited		A			A
	AXIS Specialty Limited		A+			A+
	BGS Services (Bermuda) Limited/Lloyds Syndicate 2987		A			A+
	DaVinci Reinsurance Ltd		A			AA-
	Endurance Specialty Insurance Limited		A			A
	Hamilton Re, Limited		A-			NR
	Hiscox Insurance Company (Bermuda) Limited		A			NR
	Partner Reinsurance Company Limited		A+			A+
	Platinum Underwriters Bermuda Limited		A			A-
	Renaissance Reinsurance, Limited		A+			AA-
	Securis Re III Limited Bermuda		NR	*	**	NR
	Securis Re IV Limited Bermuda		NR	*	**	NR
	Tokio Millennium Re AG, Bermuda Branch		A++			AA-
	XL RE Limited		A			A+
UNITED KINGDOM
	A.F. Beazley Syndicate No. 623 (AFB)		A			A+
	A.F. Beazley Syndicate No. 2623 (AFB)		A			A+
	Amlin Syndicate No. 2001 (AML)		A			A+
	Antares Syndicate No. 1274 (AUL)		A			A+
	Ariel Syndicate No. 1910 (ARE)		A			A+
	ARK Syndicate No. 4020 (ARK)		A			A+
	Ascot Syndicate No. 1414 (ASC)		A			A+
	Barbican Syndication No. 1955 (BAR)		A			A+
	Canopius Syndicate No. 958 (CNP)		A			A+
	Canopius Syndicate No. 4444 (CNP)		A			A+
	Cathederal Syndicate No. 2010 (MMX)		A			A+
	Chaucer Syndicate No. 1084 (CSL)		A			A+
	Dale Underwriting Syndicate No. 1729 (DUW)		A			A+
	Faraday Syndicate No. 435 (FDY)		A			A+
	Hiscox Syndicate No. 0033 (HIS)		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)		A			A+
	MAP Underwriting Syndicate No. 2791 (MAP)		A			A+
	MAP Underwriting Syndicate No. 2791 (Parallel) (MAP)		A			A+
	Novae Syndicate No. 2007 (NVA)		A			A+
	S.J.O, Catlin & Others No. 2003 (SJC)		A			A+
EUROPE
	Amlin AG, Switzerland, Bermuda Branch		A			A
	Hannover Rueck SE (obo Pillar Capital Management)		NR	*	**	NR
	Lansforsakringar Sak Forsakringsaktiebolag (publ)		NR			A
	SCOR Global P&C SE, Paris, Zurich Branch		A			A
ASIA
	China Reinsurance (Group) Corporation		A			NR
	Qatar Reinsurance Company LLC		A			A
* Reinstatement Premium Protection Program Participants
** Participant will fund a trust agreement for their exposure with cash and U.S. Government obligations of American institutions at fair market value.

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.

The 2013-2014 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			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.

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, 2014 change to total insured value was an increase of $5.4 billion or 8.2% and the change to reinsurance premiums was an increase of $0.4 million. The September 30, 2013 change to total insured value was an increase of $8.7 billion or 25.3% and the change to reinsurance premiums was an increase of $8.3 million or 13.3%.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 2014–2015 and 2013–2014 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 as of March 31, 2015 and December 31, 2014.

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

XML

Unpaid losses and LAE

3 Months Ended

Mar. 31, 2015

Unpaid losses and LAE [Abstract]

Unpaid losses and LAE

(8) 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 Incurred but Not Yet Reported (“IBNR”).

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

	Period Ending
	March 31, 2015			December 31, 2014
	(Dollars in Thousands)
Balance at January 1	$	78,330		$	61,016
Less reinsurance recoverables		(12,534	)		(2,742	)
Net balance at January 1	$	65,796		$	58,274
Incurred related to
Current year	$	28,180		$	79,932
Prior years		(4,231	)		1,104
Total incurred	$	23,949		$	81,036
Paid related to
Current year	$	6,908		$	42,391
Prior years		11,396			31,123
Total paid	$	18,304		$	73,514
Net balance at period end	$	71,441		$	65,796
Plus reinsurance recoverables		13,034			12,534
Balance as of period end	$	84,475		$	78,330

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

Our review of the liability for losses and LAE includes a re-evaluation of the adequacy of reserve levels for prior year’s claims. We decreased the liability for losses and LAE for claims occurring in prior years by $4.2 million during the three months ended March 31, 2015. We increased the liability for losses and LAE for claims occurring in prior years by $1.1 million during the year ended December 31, 2014.

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.

XML

Stockholders' Equity

3 Months Ended

Mar. 31, 2015

Stockholders' Equity [Abstract]

Stockholders' Equity

(10) Stockholders’ Equity

Capital Stock

The Company’s authorized capital consists of 1,000,000 shares of preferred stock, par value $0.01 per share, and 25,000,000 shares of common stock, par value $0.01 per share. As of March 31, 2015, there were no preferred shares issued or outstanding and there were 13,701,122 shares of common stock outstanding.

XML

Subsequent Events (Details) (Monarch Delaware Holdings LLC [Member], USD $)	3 Months Ended
	Mar. 31, 2015 Manager
Subsequent Event [Line Items]
Ownership interest in Monarch Parent's equity (in hundredths)	42.40%
Capital contribution for voting interests	$ 14,000,000
Number of board of managers	7
Number of board of managers designated by entity	3
Number of board of managers jointly selected by entity and co-venturer	1
Period prior to date of termination the entity will be entitled to receive termination fees	12 months
Period within which to identify seventh member of Board of Managers	6 months
Period from the closing date during which the Company and Crosswinds are allowed to participate in certain other transactions	24 months
C.A. Bancorp Inc. [Member]
Subsequent Event [Line Items]
Ownership interest in Monarch Parent's equity (in hundredths)	42.40%
Capital contribution for voting interests	14,000,000
Percentage of assets under management payable as management fee for range one (in hundredths)	0.75%
Maximum threshold limit of assets for range one	100,000,000
Percentage of assets under management payable as management fee for range two (in hundredths)	0.50%
Minimum threshold limit of assets for range two	100,000,000
Maximum threshold limit of assets for range two	200,000,000
Percentage of assets under management payable as management fee for range three (in hundredths)	0.30%
Minimum threshold limit of assets for range three	200,000,000
Number of board of managers designated by entity	3
Transatlantic Reinsurance Company [Member]
Subsequent Event [Line Items]
Ownership interest in Monarch Parent's equity (in hundredths)	15.20%
Capital contribution for voting interests	5,000,000
Maximum percentage of reinsurance coverage obtained in any individual reinsurance contract (in hundredths)	15.00%
Transatlantic Reinsurance Company [Member] | Senior Debt [Member]
Subsequent Event [Line Items]
Long-term debt	5,000,000
Interest rate percentage (in hundredths)	6.00%
Maturity period of debt	6 years
Federated National Underwriters, Inc. [Member]
Subsequent Event [Line Items]
Percentage of written annual premium payable to agents for managing general agent services (in hundredths)	4.00%
Percentage of earned annual premium payable for claims administration services (in hundredths)	3.60%
Administrative fee per-policy underwritten	$ 25

XML

Fair Value Disclosure (Tables)

3 Months Ended

Mar. 31, 2015

Fair Value Disclosure [Abstract]

Assets measured at fair value on a recurring basis

Assets measured at fair value on a recurring basis as of March 31, 2015, presented in accordance with this guidance, are as follows.

	As of March 31, 2015
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	39,419	$	20,130	$	-	$	59,549
Obligations of states and political subdivisions		-		92,172		-		92,172
Corporate		-		125,021		-		125,021
International		-		11,451		-		11,451
		39,419		248,774		-		288,193
Equity securities:
Common stocks		40,726		-		-		40,726
		40,726		-		-		40,726
Total debt and equity securities	$	80,145	$	248,774	$	-	$	328,919

Assets measured at fair value on a recurring basis as of December 31, 2014, presented in accordance with this guidance, are as follows.

	As of December 31, 2014
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	46,002	$	16,321	$	-	$	62,323
Obligations of states and political subdivisions		-		91,614		-		91,614
Corporate		-		119,024		-		119,024
International		-		11,138		-		11,138
		46,002		238,097		-		284,099
Equity securities:
Common stocks		39,247		-		-		39,247
		39,247		-		-		39,247
Total debt and equity securities	$	85,249	$	238,097	$	-	$	323,346

XML

Summary of Significant Accounting Policies and Practices (Details)	3 Months Ended
	Mar. 31, 2015 Category
Summary of Significant Accounting Policies and Practices [Abstract]
Number of categories securities are classified	3

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) [Abstract]
Net income	$ 9,284	$ 8,423
Change in net unrealized gains on investments available for sale	1,965	880
Comprehensive income before tax	11,249	9,303
Income tax expense related to items of other comprehensive income	(758)	(430)
Comprehensive income	$ 10,491	$ 8,873

XML

Commitments and Contingencies

3 Months Ended

Mar. 31, 2015

Commitments and Contingencies [Abstract]

Commitments and Contingencies

(4) Commitments and Contingencies

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

(A) Insured Claim Activity

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

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

The Company also faces, in the ordinary course of business, lawsuits that seek damages beyond policy limits. The Company continually evaluates potential liabilities and reserves for litigation of these types 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.

FNIC is also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. FNIC was not assessed by the JUA Plan during 2015 or 2014. Future assessments by this association are undeterminable at this time.

(C) Operational Matters

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for 2011 - 2014 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities. The Company’s 2011 federal tax return was reviewed by the IRS and a “no change” report was issued indicating that the IRS is in agreement with the tax positions presented on the 2011 return. The 2013 federal and state income tax returns were timely filed by the extended filing deadline of September 15, 2014.  The Company does not have any known uncertain tax positions and all tax positions are evaluated in accordance with FIN 48.  Any change to or resolution of tax reserves could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

The Company has recorded a net deferred tax liability of $1.9 million as of March 31, 2015 compared with$1.3 million as of December 31, 2014.

The calculation of current and deferred income taxes presents management’s assessment of the amount of current and future taxes to be paid. The calculation of deferred tax assets and liabilities is in accordance with ASC 740. These assets and liabilities may be impacted if new information not previously available is considered in future analysis and calculations. Because of the unpredictability and complexity of these future uncertainties the ultimate resolution of the tax payment may be an amount that is materially different from the current estimate of the tax liabilities. As of March 31, 2015 the Company has recorded a net deferred tax liability of $1.9 million. The primary reason for the increase in deferred tax liabilities include the tax impact of the appreciation in the market value of the available-for-sale securities.  Any change in circumstances leading to a change in the tax liability would be recorded in the period that the change in circumstances occurs.

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. Our original lease for this office space was scheduled to expire in May 2017. During March 2014, we extended our lease term to expire in August 2019 and expanded the leased premises to include an additional 13,642 square feet. All of our operations are consolidated within these facilities. 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.

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

Fiscal Year	Payments
	(Dollars in Thousands)
2015		545
2016		714
2017		726
2018		740
Thereafter		502
Total	$	3,227

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

XML

Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2015 Category sqft	Dec. 31, 2014	Mar. 31, 2014
Loss Contingencies [Line Items]
Number of major categories the entity commitments and contingencies are grouped into	3
Net deferred tax liability	$ 1,897	$ 1,341	$ 1,300
Square footage of office facility	18,500
Original lease expiration date	May 31, 2017
Extended lease expiration date	Aug. 31, 2019
Increase in area of real estate property	13,642
Expected future lease payments [Abstract]
2014	545
2015	714
2016	726
2017	740
Thereafter	502
Total	$ 3,227

XML

Investments (Tables)

3 Months Ended

Mar. 31, 2015

Investments [Abstract]

Schedule of investments

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

	March 31, 2015					December 31, 2014
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	59,549		17.70	%	$	62,323		18.84	%
Obligations of states and political subdivisions		92,172		27.40	%		91,614		27.70	%
Corporate		125,021		37.18	%		119,024		35.99	%
International		11,451		3.40	%		11,138		3.37	%
		288,193		85.68	%		284,099		85.90	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,564		1.36	%		4,490		1.36	%
Corporate		2,701		0.80	%		2,681		0.81	%
International		197		0.06	%		246		0.07	%
		7,462		2.22	%		7,417		2.24	%
Total debt securities		295,655		87.90	%		291,516		88.14	%
Equity securities, at market:		40,726		12.10	%		39,247		11.86	%
Total investments	$	336,381		100.00	%	$	330,763		100.00	%

Realized gains (losses) for debt and equity securities

The following table shows the realized gains (losses) for debt and equity securities for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015					2014
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(Dollars in Thousands)
Debt securities	$	515		$	34,860	$	135		$	9,668
Equity securities		1,395			3,084		1,610			4,815
Total realized gains		1,910			37,944		1,745			14,483
Debt securities		(103	)	$	15,072		(70	)		3,699
Equity securities		(103	)		459		(344	)		1,338
Total realized losses		(206	)		15,531		(414	)		5,037
Net realized gains on investments	$	1,704		$	53,475	$	1,331		$	19,520

Summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities

A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at March 31, 2015 and December 31, 2014 is as follows.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
March 31, 2015
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	58,136	$	1,466	$	53	$	59,549
Obligations of states and political subdivisions		91,125		1,102		55		92,172
Corporate		122,736		2,396		111		125,021
International		11,340		118		7		11,451
	$	283,337	$	5,082	$	226	$	288,193
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,564	$	54	$	131	$	4,487
Corporate		2,701		52		1		2,752
International		197		3		-		200
	$	7,462	$	109	$	132	$	7,439
Equity securities - common stocks	$	31,200	$	10,231	$	705	$	40,726
December 31, 2014
Debt Securities  - Available-For-Sale:
United States government obligations and authorities	$	61,376	$	1,022	$	75	$	62,323
Obligations of states and political subdivisions		90,728		956		70		91,614
Corporate		117,778		1,578		332		119,024
International		11,139		53		54		11,138
	$	281,021	$	3,609	$	531	$	284,099
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities	$	4,490	$	41	$	225	$	4,306
Corporate		2,681		31		5		2,707
International		246		1		1		246
	$	7,417	$	73	$	231	$	7,259
Equity securities - common stocks	$	29,908	$	9,836	$	497	$	39,247

Continuous unrealized loss position

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of March 31, 2015.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	54	$	49	$	5
Obligations of states and political subdivisions		55		55		-
Corporate		111		68		43
International		5		5		-
		225		177		48
Equity securities:
Common stocks		706		672		34
Total debt and equity securities	$	931	$	849	$	82

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of December 31, 2014.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	75	$	22	$	53
Obligations of states and political subdivisions		70		66		4
Corporate		332		260		72
International		54		54		-
		531		402		129
Equity securities:
Common stocks		497		461		36
Total debt and equity securities	$	1,028	$	863	$	165

Investments classified by contractual maturity date

Below is a summary of debt securities at March 31, 2015 and December 31, 2014, by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Due in one year or less	$	17,357	$	17,355	$	16,777	$	16,797
Due after one through five years		169,008		170,974		173,236		174,273
Due after five through ten years		104,439		107,274		98,404		100,259
Due after ten years		26		33		26		33
Total	$	290,830	$	295,636	$	288,443	$	291,362

Investment income

The table below sets forth investment results for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	(Dollars in Thousands)
Interest on debt securities	$	1,342	$	895
Dividends on equity securities		106		111
Interest on cash and cash equivalents		98		1
Total investment income	$	1,546	$	1,007
Net realized gains	$	1,704	$	1,331

Net realized and unrealized investment gains

The table below sets forth a summary of net realized investment gains during the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	(Dollars in Thousands)
Net realized gains
Debt securities	$	412	$	65
Equity securities		1,292		1,266
Total	$	1,704	$	1,331

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

	Unrealized Gains
	March 31, 2015		December 31, 2014
	(Dollars in Thousands)
Net unrealized gains
Debt securities	$	4,856	$	3,078
Equity securities		9,526		9,339
Total	$	14,382	$	12,417