Schedule II – Condensed Financial Information of Registrant

Condensed Balance Sheets

FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)

December 31, 2017 and 2016

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	December 31,
	2017			2016
ASSETS	(In thousands)
Investments in subsidiaries	$	220,901		$	280,277
Investments securities, available-for-sale, at fair value	15,826			31,750
Cash and cash equivalents	46,717			7,786
Deferred income taxes, net	—			—
Income taxes receivable	7,700			9,811
Other assets	1,938			2,031
Total assets	$	293,082		$	331,655

LIABILITIES AND SHAREHOLDERS’ EQUITY
Due to subsidiaries	$	19,624		$	93,653
Deferred income taxes, net	(415		)	1,642
Long-term debt, net of deferred financing costs	44,321			—
Other liabilities	2,093			1,895
Total liabilities	65,623			97,190

Preferred stock	—			—
Common stock	130			134
Additional paid-in capital	139,728			136,779
Accumulated other comprehensive income	1,770			1,941
Retained earnings	70,009			76,884
Total shareholders’ equity attributable to Federated National Holding Company shareholders	211,637			215,738
Non-controlling interest	15,822			18,727
Total shareholders’ equity	227,459			234,465
Total liabilities and shareholders’ equity	$	293,082		$	331,655

The accompanying note is an integral part of the condensed financial statements.

Schedule II – Condensed Financial Information of Registrant (Continued)

Condensed Statements of Earnings

FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)

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	Year Ended December 31,
	2017			2016		2015
	(In thousands)
Revenue:
Management fees	$	2,611		$	2,492	$	2,489
Net investment income	501			623		609
Equity in income of consolidated subsidiaries	16,902			8,550		69,657
Total revenue	20,014			11,665		72,755

Costs and expenses:
General and administrative expenses	11,087			9,862		9,810
Total costs and expenses	11,087			9,862		9,810

Income before income taxes	8,927			1,803		62,945
Income taxes	3,585			542		24,089
Net income	5,342			1,261		38,856
Net (loss) income attributable to non-controlling interest	(2,647		)	246		(445		)

Net income attributable to Federated National Holding Company shareholders	$	7,989		$	1,015	$	39,301

The accompanying note is an integral part of the condensed financial statements.

Schedule II – Condensed Financial Information of Registrant (Continued)

Condensed Statements of Cash Flows

FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)

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	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Cash flow from operating activities:
Net income	$	5,342		$	1,261		$	38,856
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed income of consolidated subsidiaries	(16,902		)	(10,691		)	(70,321		)
Depreciation and amortization	88			73			64
Share-based compensation	2,846			4,420			4,527
Changes in operating assets and liabilities:
Deferred income taxes, net of other comprehensive income	(2,057		)	2,127			(153		)
Income taxes receivable, net	6,411			2,978			24,352
Capital contribution payable	—			—			(18,501		)
Due to subsidiaries	20,468			23,574			6,430
Other, net	1,450			3,786			2,057
Net cash provided by (used in) operating activities	17,646			27,528			(12,689		)

Cash flow from investing activities:
Capital contributions to consolidated subsidiaries, net	(25,000		)	—			(32,743		)
Sales, maturities and redemptions of investments securities	42,979			76,928			38,612
Purchases of investment securities	(26,828		)	(83,724		)	(21,354		)
Purchases of property and equipment	(102		)	(299		)	(113		)
Net cash used in investing activities	(8,951		)	(7,095		)	(15,598		)

Cash flow from financing activities:
Proceeds from issuance of long-term debt	45,000			—			—
Non-controlling interest equity investment	—			—			18,743
Tax impact related to share-based compensation	—			589			1,564
Issuance of common stock for share-based awards	103			361			171
Purchases of Federated National Holding Company common stock	(10,616		)	(11,317		)	—
Dividends paid	(4,251		)	(4,677		)	(1,847		)
Net cash provided by (used in) financing activities	30,236			(15,044		)	18,631
Net increase (decrease) in cash and cash equivalents	38,931			5,389			(9,656		)
Cash and cash equivalents at beginning of period	7,786			2,397			12,053
Cash and cash equivalents at end of period	$	46,717		$	7,786		$	2,397

The accompanying note is an integral part of the condensed financial statements.

Schedule II – Condensed Financial Information of Registrant (Continued)

Note to Condensed Financial Statements

FEDERATED NATIONAL HOLDING COMPANY (Parent Company Only)

(1) ORGANIZATION AND BASIS OF PRESENTATION

Federated National Holding Company (“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 Annual Report.

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.