(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”) and is licensed as an admitted carrier in Florida. An admitted carrier is an insurance company that has received a license from the state department of insurance giving the company the authority to write specific lines of insurance in that state. These companies are also bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices, including fraud. Admitted carriers are also required to financially contribute to the state guarantee fund, which is used to pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders. 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. Non-Florida commercial general liability operations have not been material to the Company’s overall operations. Although FNIC has underwritten commercial general liability insurance in those states, the Company has decided to eliminate its commercial general liability operations in Alabama, Louisiana, Georgia and Texas ultimately resulting in no new premium for this particular line of business. FNIC continues to underwrite commercial general liability operations in Florida. FNIC also underwrites homeowners’ insurance in Alabama and Louisiana and was admitted in South Carolina to underwrite homeowners’ insurance. Homeowner operations in South Carolina are expected to commence in 2015. 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 (“MNIC”), which received its certificate of authority to write homeowners’ property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the “Florida OIR”) 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 ("MNHC"), a wholly owned subsidiary of Monarch Delaware and the direct parent company of MNIC.

In connection with the organization of MNIC, the parties entered into a Managing General Agent and Claims Administration Agreement (the "Monarch MGA Agreement") dated March 17, 2015, with FedNat Underwriters, Inc. ("FNU"), a wholly owned subsidiary of the Company, pursuant to which FNU provides underwriting, accounting, reinsurance placement and claims administration services to Monarch. For its services under the Monarch MGA Agreement, FNU will receive 4% of Monarch's total written annual premium, excluding acquisition expenses payable to agents, for FNU's managing general agent services; 3.6% of Monarch's total earned annual premium for FNU's claims administration services; and a per-policy administrative fee of $25 for each policy underwritten for Monarch. The Company will also receive an annual expense reimbursement for accounting and related services.

The Company has, in recent years, used analytic modeling to assist it in underwriting its insurance products. The Florida Office of Insurance Regulation (the "Florida OIR") issued a cease and desist order dated May 19, 2015, ordering FNIC to cease use of an unfiled analytic model. FNIC confirmed to the Florida OIR in a meeting on June 5, 2015 that it would immediately cease use of such analytic model, which FNIC has done. FNIC has submitted the necessary filing to enable the Florida OIR to review and approve the Company's analytic models, which review remains ongoing as of the date of this Report. The Florida OIR has not asserted that FNIC's use of an unfiled analytic model in its underwriting process constitutes "price optimization." "Price optimization" has recently been defined in an industry white paper as a practice that uses predictive modeling and data analytics in pricing insurance products. This has been a topic of recent discussion by various state insurance regulators, including the Florida OIR.

In lieu of its underwriting analytics, FNIC has used its current filed and approved rule-based underwriting to manage all new and existing business since early June 2015. For the first nine weeks of the quarter ended June 30, 2015, the Company wrote an average of $3.3 million dollars of new Florida homeowners' business weekly. Since discontinuing the use of the underwriting analytics, the average weekly new premium written increased by approximately 47% to $4.9 million in the last three weeks of June and during the month of July, but has since returned to levels consistent with our production prior to discontinuing our analytics. The Company does not believe that the additional written premium will have a material impact on the Company's results of operations. The Company cannot predict at this time the outcome of the review of the Company's filing or whether any restrictions, fees or fine will be imposed by the Florida OIR as it relates to the prior use of analytics.

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 OIR. We entered into the Consent Order in connection with the merger of one of our wholly owned insurance subsidiaries, FNIC, into American Vehicle Insurance Company ("American Vehicle"), with American Vehicle continuing the operations of both entities under the name FNIC. 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 June 30, 2015, 93.6%, 2.9%, 1.7% and 1.8% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively. During the three months ended June 30, 2015, $27.5 million or 22.2% of the $123.5 million of the homeowners’ premiums we underwrote were produced under Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to offer certain FNIC products. The $8.7 million increased homeowners’ premiums we underwrote under ISA represents 34.9% of the $24.9 million increased total homeowners’ premiums we underwrote during the three months ended June 30, 2015. During the three months ended June 30, 2014, $18.8 million or 19.1% of the $98.6 million of the homeowners’ premiums we underwrote were produced under ISA. This network of agents began writing for FNIC in March 2013. During the three months ended June 30, 2014, 91.8%, 3.0%, 2.2% and 3.0% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively.

During the six months ended June 30, 2015, 92.7%, 3.2%, 1.6% and 2.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and automobile insurance, respectively. During the six months ended June 30, 2015, $47.0 million or 21.3% of the $221.3 million of the homeowners’ premiums we underwrote were produced under ISA. The $16.7 million increased homeowners’ premiums we underwrote under ISA represents 34.3% of the $48.7 million increased total homeowners’ premiums we underwrote during the six months ended June 30, 2015. During the six months ended June 30, 2014, $30.3 million or 17.6% of the $172.6 million of the homeowners’ premiums we underwrote were produced under ISA. This network of agents began writing for FNIC in March 2013. During the six months ended June 30, 2014, 91.5%, 3.4%, 2.1% 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.

FNU, formerly known as Assurance Managing General Agents, Inc., a wholly owned subsidiary of the Company, acts as FNIC’s and MNIC’s exclusive managing general agent and is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Nevada, South Carolina and Texas. FNU is an appointed Lloyds of London coverholder to write homeowners’ multi peril insurance in Florida on an excess and surplus lines basis and has contracted with other unaffiliated insurance companies to sell personal umbrella through FNU’s existing network of agents. Operations for Lloyds of London are expected to commence in the third quarter of this year.

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 and MNIC, which totaled 4% during the three months ended June 30, 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. 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, workers’ compensation, boat and recreational vehicle and personal articles and jewelry insurance through their agency appointments with over forty-seven different carriers.