Schedule II – Condensed Financial Information of Registrant

Condensed Balance Sheets

FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)

December 31, 2015 and 2014

	December 31,
	2015		2014
ASSETS	(in thousands)
Investments in subsidiaries	$	282,504	$	208,853
Investments securities, available-for-sale, at fair value		25,649		43,962
Cash and cash equivalents		2,397		12,053
Deferred income taxes, net		485		332
Income taxes receivable		10,471		8,966
Other assets		1,506		1,555
Total assets	$	323,012	$	275,721

LIABILITIES AND SHAREHOLDERS’ EQUITY
Due to subsidiaries	$	70,079	$	63,649
Capital contribution payable		-		18,501
Other liabilities		2,174		992
Total liabilities		72,253		83,142

Preferred stock		-		-
Common stock		138		136
Additional paid-in capital		131,998		127,302
Accumulated other comprehensive income		3,985		7,718
Retained earnings		96,461		57,423
Total shareholders’ equity attributable Federated National Holding Company shareholders		232,582		192,579
Noncontrolling interest		18,177		-
Total shareholders’ equity		250,759		192,579
Total liabilities and shareholders’ equity	$	323,012	$	275,721

See accompanying notes to condensed financial statements.

Schedule II – Condensed Financial Information of Registrant (continued)

Condensed Statements of Earnings

FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)

	Year Ended December 31,
	2015			2014		2013
	(in thousands)
Revenue:
Management fees	$	2,489		$	2,387	$	1,864
Net investment income		609			417		147
Equity in income of consolidated subsidiaries		71,905			61,653		21,623
Total revenue		75,003			64,457		23,634

Costs and expenses:
General and administrative expenses		9,810			7,150		4,416
Total costs and expenses		9,810			7,150		4,416

Income before income taxes		65,193			57,307		19,218
Income taxes		24,753			20,108		6,491
Net income		40,440			37,199		12,727
Net loss attributable to noncontrolling interest		(445	)		-		-

Net income attributable to Federated National Holding Company shareholders	$	40,885		$	37,199	$	12,727

See accompanying notes to condensed financial statements.

Schedule II – Condensed Financial Information of Registrant (continued)

Condensed Statements of Cash Flows

FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)

	Year Ended December 31,
	2015			2014			2013
	(in thousands)
Cash flow from operating activities:
Net income	$	40,440		$	37,199		$	12,727
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed income of consolidated subsidiaries		(71,905	)		(61,653	)		(21,623	)
Share-based compensation		4,527			2,140			461
Changes in operating assets and liabilities:
Deferred income taxes, net of other comprehensive (loss) income		(153	)		674			3,333
Income taxes receivable, net		24,352			16,521			1,732
Capital contribution payable		(18,501	)		2,501			16,000
Other, net		8,551			2,483			5,339
Net cash (used in) provided by operating activities		(12,689	)		(135	)		17,969

Cash flow from investing activities:
Capital contributions to consolidated subsidiaries, net		(32,743	)		(18,501	)		(16,000	)
Sales, maturities and redemptions of investments securities		38,612			22,414			1,524
Purchases of investment securities		(21,354	)		(36,949	)		(30,366	)
Purchases from property and equipment		(113	)		(391	)		(149	)
Net cash used in investing activities		(15,598	)		(33,427	)		(44,991	)
Cash flow from financing activities:
Noncontrolling interest equity investment		18,743			-			-
Tax benefit related to share-based compensation		1,564			480			169
Issuance of common stock for share-based awards		171			1,555			858
Issuance of common stock in public offering		-			43,109			27,879
Dividends paid		(1,847	)		(1,672	)		(1,233	)
Net cash provided by financing activities		18,631			43,472			27,673
Net (decrease) increase in cash and cash equivalents		(9,656	)		9,910			651
Cash and cash equivalents at beginning of period		12,053			2,143			1,492
Cash and cash equivalents at end of period	$	2,397		$	12,053		$	2,143

See accompanying notes to condensed financial statements.

(1)	ORGANIZATION AND BASIS OF PRESENTATION

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

The accompanying condensed financial statements include the activity of the Parent Company and, on an equity basis, its consolidated subsidiaries. Accordingly, these condensed financial statements have been presented for the parent company only. These condensed financial statements should be read in conjunction with the consolidated financial statements and related notes of FNHC and subsidiaries set forth in Part II, Item 8 “Financial Statements and Supplemental Data” of this Form 10-K.

In applying the equity method to our consolidated subsidiaries, we record the investment at cost and subsequently adjust for additional capital contributions, distributions and proportionate share of earnings or losses.

Certain amounts in prior year’s condensed financial statements have been reclassified to conform to the 2015 presentation.