FedNat Holding Co - Quarter Report: 2015 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 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

 

(Exact name of registrant as specified in its charter)

 

(Address of principal executive offices) (Zip Code)

(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.

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 –14,228,923 outstanding as of August 3, 2015

 

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FEDERATED NATIONAL HOLDING COMPANY

INDEX

 

 

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PART I: FINANCIAL INFORMATION

Item 1

Financial Statements

 

FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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FEDERATED NATIONAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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(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”).

 

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.

 

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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.

 

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 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.

(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 June 30, 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, quota share profit sharing, prepaid reinsurance, unrealized investment gains and losses, deferred tax assets and liabilities, 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.

 

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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.

We believe that there were no significant changes in those critical accounting policies and estimates during the six months ended June 30, 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.

 

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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 June 30, 2015 and December 31, 2014. Changes in interest rates subsequent to June 30, 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 June 30, 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 May 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-09, Financial Services – Insurance (Topic 944): Disclosures about Short-Duration-Contracts. The amendments in this ASU apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services—Insurance. The amendments require insurance entities to disclose for annual reporting periods the following information about the liability for unpaid claims and claim adjustment expenses: (1) Incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding (that need not exceed 10 years, including the most recent reporting period presented in the statement of financial position). Each period presented in the disclosure about claims development that precedes the current reporting period is considered to be supplementary information. (2) A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position. (3) For each accident year presented of incurred claims development information, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses, accompanied by a description of reserving methodologies (as well as any changes to those methodologies). (4) For each accident year presented of incurred claims development information, quantitative information about claim frequency (unless it is impracticable to do so) accompanied by a qualitative description of methodologies used for determining claim frequency information (as well as any changes to these methodologies). (5) For all claims except health insurance claims, the average annual percentage payout of incurred claims by age (that is, history of claims duration) for the same number of accident years as presented in (3) and (4) above. The amendments in this ASU are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016.

 

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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.

 

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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.

 

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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 six months ended June 30, 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.

 

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(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.

(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.

 

---

The Company has recorded a net deferred tax liability of $5.0 million as of June 30, 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 June 30, 2015 the Company has recorded a net deferred tax liability of $5.0 million. The primary reason for the change 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.

 

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 $35.2 million, or 10.7%, to $366.0 million as of June 30, 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 June 30, 2015 and December 31, 2014.

We did not hold any trading investment securities during the six months ended June 30, 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 six months ended June 30, 2015 and 2014, respectively, in connection with the process, we have not charged operations with investment losses.

As of June 30, 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 June 30, 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 June 30, 2015, 78% of our debt portfolio was in diverse industries and 22% was in United States government bonds. As of June 30, 2015, approximately 86% of our equity holdings were in equities related to diverse industries and 14% 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 June 30, 2015 and December 31, 2014, we have classified $6.4 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 six months ended June 30, 2015, we did re-classify approximate fair value of $1.0 million of our bond portfolio to available-for-sale from held-to-maturity. During the six months ended June 30, 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 June 30, 2015 and December 31, 2014.

 

---

		Three Months Ended June 30,
		2015								2014
		Gains (Losses)				Fair Value at Sale				Gains (Losses)				Fair Value at Sale
		(Dollars in Thousands)
Debt securities		$	265			$	14,626			$	157			$	12,576
Equity securities			915				2,675				1,949				6,138
Total realized gains			1,180				17,301				2,106				18,714
Debt securities			(224	)			15,649				(28	)			3,007
Equity securities			(43	)			193				(22	)			183
Total realized losses			(267	)			15,842				(50	)			3,190
Net realized gains on investments		$	913			$	33,143			$	2,056			$	21,904

		Six Months Ended June 30,
		2015								2014
		Gains (Losses)				Fair Value at Sale				Gains (Losses)				Fair Value at Sale
		(Dollars in Thousands)
Debt securities		$	746			$	49,932			$	292			$	22,244
Equity securities			2,342				5,759				3,560				10,953
Total realized gains			3,088				55,691				3,852				33,197
Debt securities			(326	)			30,275				(98	)			6,706
Equity securities			(145	)			653				(366	)			1,521
Total realized losses			(471	)			30,928				(464	)			8,227
Net realized gains on investments		$	2,617			$	86,619			$	3,388			$	41,424

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Dollars in Thousands)
June 30, 2015
Debt Securities  - Available-For-Sale:
United States government obligations and authorities		$	67,495			$	752			$	418			$	67,829
Obligations of states and political subdivisions			99,800				739				255				100,284
Corporate			136,049				1,266				762				136,553
International			11,948				58				95				11,911
		$	315,292			$	2,815			$	1,530			$	316,577
Debt Securities  - Held-To-Maturity:
United States government obligations and authorities		$	4,093			$	36			$	174			$	3,955
Corporate			2,219				25				4				2,240
International			125				1				1				125
		$	6,437			$	62			$	179			$	6,320
Equity securities - common stocks		$	33,882			$	10,111			$	989			$	43,004
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

 

		Unrealized Losses				Less than 12 months				12 months or longer
		(Dollars in Thousands)
Debt securities:
United States government obligations and authorities		$	418			$	401			$	17
Obligations of states and political subdivisions			255				255				-
Corporate			762				738				24
International			95				95				-
			1,530				1,489				41
Equity securities:
Common stocks			989				866				123
Total debt and equity securities		$	2,519			$	2,355			$	164

		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

		June 30, 2015								December 31, 2014
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
		(Dollars in Thousands)
Due in one year or less		$	22,398			$	22,435			$	16,777			$	16,797
Due after one through five years			173,755				174,992				173,236				174,273
Due after five through ten years			123,587				123,471				98,404				100,259
Due after ten years			1,992				1,999				26				33
Total		$	321,732			$	322,897			$	288,443			$	291,362

		Three Months Ended June 30,
		2015				2014
		(Dollars in Thousands)
Interest on debt securities		$	1,616			$	1,209
Dividends on equity securities			128				92
Interest on cash and cash equivalents			(43	)			1
Total investment income		$	1,701			$	1,302
Net realized gains		$	913			$	2,056

		Six Months Ended June 30,
		2015				2014
		(Dollars in Thousands)
Interest on debt securities		$	2,959			$	2,104
Dividends on equity securities			234				203
Interest on cash and cash equivalents			55				1
Total investment income		$	3,248			$	2,308
Net realized gains		$	2,617			$	3,388

		Three Months Ended June 30,
		2015				2014
		(Dollars in Thousands)
Net realized gains
Debt securities		$	41			$	129
Equity securities			872				1,927
Total		$	913			$	2,056

		Six Months Ended June 30,
		2015				2014
		(Dollars in Thousands)
Net realized gains
Debt securities		$	420			$	194
Equity securities			2,197				3,194
Total		$	2,617			$	3,388

		Unrealized Gains
		June 30, 2015				December 31, 2014
		(Dollars in Thousands)
Net unrealized gains
Debt securities		$	1,285			$	3,078
Equity securities			9,122				9,339
Total		$	10,407			$	12,417

 

		As of June 30, 2015
		Level 1				Level 2				Level 3				Total
		(Dollars in Thousands)
Debt securities:
United States government obligations and authorities		$	43,480			$	24,354			$	-			$	67,834
Obligations of states and political subdivisions			-				100,284				-				100,284
Corporate			-				147,956				-				147,956
International			-				503				-				503
			43,480				273,097				-				316,577
Equity securities:
Common stocks			43,004				-				-				43,004
			43,004				-				-				43,004
Total debt and equity securities		$	86,484			$	273,097			$	-			$	359,581

 

		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

Reinsurer	A.M. Best Rating			S&P Rating
UNITED STATES
American Agricultural Insurance Company		A-				NR
American Standard Insurance Company of Wisconsin		A				NR
Everest Reinsurance Company		A+				A+
Odyssey Reinsurance Company		A				A-
Partner Reinsurance Company of the US		A+				A+
QBE Reinsurance Corporation		A				A+
RLI Insurance Company		A+				A+
Transatlantic Reinsurance Company		A				A+
BERMUDA
ACE Tempest Reinsurance Ltd.		A++				AA
Allianz Risk Transfer AG, Bermuda Branch (obo Nephila)		A+				AA-
Allied World Assurance Company, Limited		A				A
Arch Reinsurance Limited		A+				A+
Argo Re Ltd		A				NR
Ariel Reinsurance Bermuda Ltd for and on Behalf of Ariel Syndicate 1910 (ARE)		A-				A+
Ascot Underwriting (Bermuda) Limited/AIG per AIRCO agreement		A				NR
Aspen Bermuda Limited		A				A
AXIS Specialty Limited		A+				A+
BGS Services (Bermuda) Limited/Lloyds Syndicate 2987		A				A+
Collateralised Re Ltd - LGT Capital		NR	*		**	NR
DaVinci Reinsurance Ltd.		A				AA-
Endurance Specialty Insurance Ltd.		A				A
Hamilton Re, Ltd.		A-				NR
Hiscox Insurance Company (Bermuda) Limited		A				NR
Horseshoe Re (obo Coriolis)		NR	*		**	NR
Markel Bermuda Limited		A				A
Partner Reinsurance Company Limited		A+				A+
Renaissance Reinsurance, Ltd.		A+				AA-
Securis Re II Ltd. Bermuda		NR	*		**	NR
Securis Re IV Ltd. Bermuda		NR	*		**	NR
Securis Re V Ltd. 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+
China Re Syndicate No. 2088 (CNR)		A				A+
Dale Underwriting Syndicate No. 1729 (DUW)		A				A+
Faraday Syndicate No. 435 (FDY)		A				A+
Hiscox Syndicate No. 0033 (HIS)		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+
Renaissance Re Syndicate No. 1458 (RNR)		A				A+
S.J.O, Catlin & Others No. 2003 (SJC)		A				A+
Vibe Syndicate No. 5678 (VSM)		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
Fubon Insurance Co., Ltd.		A				A-
General Insurance Corporation of India, trading as GIC Re		A-				NR
Peak Re		A-				NR
Pioneer CAT (obo Peak Re)		A-				NR
Pioneer CAT (obo Taiping)		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.

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.

		Period Ending
		June 30, 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		$	49,754			$	79,932
Prior years			(2,656	)			1,104
Total incurred		$	47,098			$	81,036
Paid related to
Current year		$	18,655			$	42,391
Prior years			21,451				31,123
Total paid		$	40,106			$	73,514
Net balance at period end		$	72,788			$	65,796
Plus reinsurance recoverables			15,294				12,534
Balance as of period end		$	88,082			$	78,330

		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			-			$	-				-			$	-				116,140			$	25.86
Exercised			-			$	-				(32,068	)		$	3.83				(83,134	)		$	1.37
Cancelled			-			$	-				-			$	-				-			$	-
Outstanding at June 30, 2015			-			$	-				187,217			$	3.83				480,807			$	14.69

		2002 Plan
Options Exercisable at:		Number of Shares				Weighted Average Option Exercise Price
June 30, 2015			177,017			$	3.83
December 31, 2015			10,200			$	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			187,217

		Range of Exercise Price				Outstanding at June 30, 2015				Weighted Average Contractual Periods in Years				Weighted Average Exercise Price				Exercisable at June 30, 2015
2002 Plan		$	2.45 - $4.40				187,217				6.11			$	3.79				177,017