0001069996Q12020false--12-31534,551512,64518915953—1,4381,4780.010.011,000,0001,000,0000.010.0125,000,00025,000,00013,949,97114,414,82113,949,97114,414,8210.45.426.29.5P3Yone year00010699962020-01-012020-03-31xbrli:shares00010699962020-05-01iso4217:USD00010699962020-03-3100010699962019-12-31iso4217:USDxbrli:shares00010699962019-01-012019-03-310001069996us-gaap:PreferredStockMember2019-12-310001069996us-gaap:CommonStockMember2019-12-310001069996us-gaap:AdditionalPaidInCapitalMember2019-12-310001069996us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001069996us-gaap:RetainedEarningsMember2019-12-310001069996us-gaap:RetainedEarningsMember2019-01-0100010699962019-01-010001069996us-gaap:RetainedEarningsMember2020-01-012020-03-310001069996us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001069996us-gaap:CommonStockMember2020-01-012020-03-310001069996us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001069996us-gaap:PreferredStockMember2020-03-310001069996us-gaap:CommonStockMember2020-03-310001069996us-gaap:AdditionalPaidInCapitalMember2020-03-310001069996us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310001069996us-gaap:RetainedEarningsMember2020-03-310001069996us-gaap:PreferredStockMember2018-12-310001069996us-gaap:CommonStockMember2018-12-310001069996us-gaap:AdditionalPaidInCapitalMember2018-12-310001069996us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001069996us-gaap:RetainedEarningsMember2018-12-3100010699962018-12-310001069996us-gaap:RetainedEarningsMember2019-01-012019-03-310001069996us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-03-310001069996us-gaap:CommonStockMember2019-01-012019-03-310001069996us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-310001069996us-gaap:PreferredStockMember2019-03-310001069996us-gaap:CommonStockMember2019-03-310001069996us-gaap:AdditionalPaidInCapitalMember2019-03-310001069996us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-310001069996us-gaap:RetainedEarningsMember2019-03-3100010699962019-03-31xbrli:pure0001069996us-gaap:CustomerConcentrationRiskMemberfnhc:IvantageSelectAgencyIncMemberfnhc:HomeownersMultiperilInsuranceProductLineMemberfnhc:PremiumsWrittenNetMember2020-01-012020-03-310001069996us-gaap:CustomerConcentrationRiskMemberfnhc:IvantageSelectAgencyIncMemberfnhc:HomeownersMultiperilInsuranceProductLineMemberfnhc:PremiumsWrittenNetMember2019-01-012019-03-310001069996us-gaap:CustomerConcentrationRiskMemberfnhc:HomeownersMultiperilInsuranceProductLineMemberfnhc:SageSureInsuranceManagersLLCMemberfnhc:PremiumsWrittenNetMember2020-01-012020-03-310001069996us-gaap:CustomerConcentrationRiskMemberfnhc:HomeownersMultiperilInsuranceProductLineMemberfnhc:SageSureInsuranceManagersLLCMemberfnhc:PremiumsWrittenNetMember2019-01-012019-03-310001069996us-gaap:AccountingStandardsUpdate201613Memberfnhc:CumulativeEffectPeriodOfAdoptionAdjustmentMember2020-01-010001069996fnhc:A1347PropertyInsuranceHoldingsIncMember2020-01-012020-03-310001069996fnhc:MaisonCompaniesMember2019-01-012019-03-310001069996us-gaap:FairValueInputsLevel1Memberus-gaap:USTreasuryAndGovernmentMember2020-03-310001069996us-gaap:FairValueInputsLevel2Memberus-gaap:USTreasuryAndGovernmentMember2020-03-310001069996us-gaap:USTreasuryAndGovernmentMember2020-03-310001069996us-gaap:FairValueInputsLevel1Memberus-gaap:USStatesAndPoliticalSubdivisionsMember2020-03-310001069996us-gaap:FairValueInputsLevel2Memberus-gaap:USStatesAndPoliticalSubdivisionsMember2020-03-310001069996us-gaap:USStatesAndPoliticalSubdivisionsMember2020-03-310001069996us-gaap:FairValueInputsLevel1Memberus-gaap:CorporateDebtSecuritiesMember2020-03-310001069996us-gaap:FairValueInputsLevel2Memberus-gaap:CorporateDebtSecuritiesMember2020-03-310001069996us-gaap:CorporateDebtSecuritiesMember2020-03-310001069996us-gaap:FairValueInputsLevel1Memberus-gaap:ForeignCorporateDebtSecuritiesMember2020-03-310001069996us-gaap:ForeignCorporateDebtSecuritiesMemberus-gaap:FairValueInputsLevel2Member2020-03-310001069996us-gaap:ForeignCorporateDebtSecuritiesMember2020-03-310001069996us-gaap:FairValueInputsLevel1Member2020-03-310001069996us-gaap:FairValueInputsLevel2Member2020-03-310001069996us-gaap:FairValueInputsLevel1Memberus-gaap:USTreasuryAndGovernmentMember2019-12-310001069996us-gaap:FairValueInputsLevel2Memberus-gaap:USTreasuryAndGovernmentMember2019-12-310001069996us-gaap:USTreasuryAndGovernmentMember2019-12-310001069996us-gaap:FairValueInputsLevel2Memberus-gaap:USStatesAndPoliticalSubdivisionsMember2019-12-310001069996us-gaap:USStatesAndPoliticalSubdivisionsMember2019-12-310001069996us-gaap:FairValueInputsLevel2Memberus-gaap:CorporateDebtSecuritiesMember2019-12-310001069996us-gaap:CorporateDebtSecuritiesMember2019-12-310001069996us-gaap:ForeignCorporateDebtSecuritiesMemberus-gaap:FairValueInputsLevel2Member2019-12-310001069996us-gaap:ForeignCorporateDebtSecuritiesMember2019-12-310001069996us-gaap:FairValueInputsLevel1Member2019-12-310001069996us-gaap:FairValueInputsLevel2Member2019-12-310001069996us-gaap:FairValueInputsLevel1Memberfnhc:UsGovernmentObligationsAndAuthoritiesCorporateAndInternationalSecuritiesMember2020-03-310001069996us-gaap:FairValueInputsLevel2Memberfnhc:UsGovernmentObligationsAndAuthoritiesCorporateAndInternationalSecuritiesMember2020-03-310001069996fnhc:UsGovernmentObligationsAndAuthoritiesCorporateAndInternationalSecuritiesMember2020-03-310001069996us-gaap:FairValueInputsLevel1Memberfnhc:UsGovernmentObligationsAndAuthoritiesCorporateAndInternationalSecuritiesMember2019-12-310001069996us-gaap:FairValueInputsLevel2Memberfnhc:UsGovernmentObligationsAndAuthoritiesCorporateAndInternationalSecuritiesMember2019-12-310001069996fnhc:UsGovernmentObligationsAndAuthoritiesCorporateAndInternationalSecuritiesMember2019-12-3100010699962019-01-012019-06-300001069996us-gaap:DebtSecuritiesMember2020-03-310001069996us-gaap:DebtSecuritiesMember2019-12-310001069996us-gaap:DebtSecuritiesMember2020-01-012020-03-310001069996us-gaap:DebtSecuritiesMember2019-01-012019-03-310001069996us-gaap:EquitySecuritiesMember2020-01-012020-03-310001069996us-gaap:EquitySecuritiesMember2019-01-012019-03-31fnhc:security0001069996fnhc:FederatedNational20182019ReinsuranceProgramsMember2020-03-310001069996stpr:FLfnhc:FederatedNationalSFloridaMemberfnhc:FederatedNational20182019ReinsuranceProgramsMember2020-03-310001069996fnhc:FloridaHurricaneCatastropheFundMemberstpr:FLfnhc:FederatedNational20182019ReinsuranceProgramsMember2020-03-310001069996fnhc:PrivateAndFhcfReinsuranceMemberstpr:FLfnhc:FederatedNational20182019ReinsuranceProgramsMember2020-03-310001069996fnhc:FloridaHurricaneCatastropheFundMemberstpr:FLfnhc:FederatedNational20182019ReinsuranceProgramsMember2020-01-012020-03-310001069996fnhc:FederatedNational20182019ReinsuranceProgramsMembersrt:MaximumMember2020-03-310001069996fnhc:FirstEventCoverageMemberfnhc:FederatedNational20182019ReinsuranceProgramsMember2020-03-310001069996srt:MaximumMemberfnhc:MultipleYearProtectionTerminatedMember2020-03-310001069996srt:MaximumMemberfnhc:MultipleYearProtectionPlanExpiredMember2020-03-310001069996fnhc:FederatedNationalsInsuranceCompanyNonFloridaReinsuranceProgram20182019Membersrt:MaximumMember2020-03-310001069996fnhc:FirstEventCoverageMemberfnhc:FederatedNationalsInsuranceCompanyNonFloridaReinsuranceProgram20182019Member2020-03-310001069996fnhc:SecondEventCoverageMemberfnhc:FederatedNationalsInsuranceCompanyNonFloridaReinsuranceProgram20182019Membersrt:MaximumMember2020-03-310001069996fnhc:SecondEventCoverageMemberfnhc:FederatedNationalsInsuranceCompanyNonFloridaReinsuranceProgram20182019Member2020-03-310001069996fnhc:FirstEventCoverageMemberfnhc:FederatedNationalsInsuranceCompanyNonFloridaReinsuranceProgram20182019Member2020-01-012020-03-310001069996fnhc:SecondEventCoverageMemberfnhc:FederatedNationalsInsuranceCompanyNonFloridaReinsuranceProgram20182019Member2020-01-012020-03-310001069996fnhc:PrivateAndFhcfReinsuranceMemberfnhc:FederatedNationalsInsuranceCompanyNonFloridaReinsuranceProgram20182019Member2020-03-310001069996fnhc:PrivateAndFhcfReinsuranceMemberfnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMember2020-03-310001069996fnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMemberfnhc:FederatedNationalInsuranceCompanyMember2020-01-012020-03-310001069996fnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMember2020-03-310001069996fnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMemberfnhc:FederatedNationalInsuranceCompanyMember2020-03-310001069996fnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMemberfnhc:MonarchNationalSFloridaMember2020-03-310001069996fnhc:MaisonMemberfnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMember2020-03-310001069996stpr:FLfnhc:FederatedNationalSFloridaMemberfnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMember2020-03-310001069996fnhc:FloridaHurricaneCatastropheFundMemberfnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMember2020-03-310001069996fnhc:PrivateAndFhcfReinsuranceMemberfnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMembersrt:MaximumMember2020-01-012020-03-310001069996fnhc:FloridaHurricaneCatastropheFundMemberfnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMembersrt:MaximumMember2020-01-012020-03-310001069996fnhc:SecondEventCoverageMemberfnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMembersrt:MaximumMember2020-03-310001069996fnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMemberfnhc:FirstEventCoverageMembersrt:MaximumMember2020-01-012020-03-310001069996fnhc:SecondEventCoverageMemberfnhc:CombinedFNICMNICandMaisonTwentyNineteentoTwentyTwentyCatastropheExcessLossReinsuranceProgramsMembersrt:MaximumMember2020-01-012020-03-310001069996fnhc:QuotaShareOneMemberfnhc:FloridaHomeownersBookOfBusinessMemberfnhc:FederatedNationalInsuranceCompanyMember2020-01-012020-03-310001069996fnhc:FloridaHomeownersBookOfBusinessMemberfnhc:QuotaShareTwoMemberfnhc:FederatedNationalInsuranceCompanyMember2020-01-012020-03-310001069996stpr:FLfnhc:FederatedNationalInsuranceCompanyMemberus-gaap:PropertyInsuranceProductLineMemberfnhc:QuotaShareTreatiesMember2020-01-012020-03-310001069996stpr:FLfnhc:QuotaShareOneMemberus-gaap:PropertyInsuranceProductLineMember2016-07-010001069996fnhc:QuotaShareOneMemberfnhc:FederatedNationalInsuranceCompanyMemberus-gaap:PropertyInsuranceProductLineMember2017-07-010001069996fnhc:QuotaShareOneMemberfnhc:FloridaHomeownersBookOfBusinessMemberfnhc:FederatedNationalInsuranceCompanyMember2018-07-012018-07-010001069996fnhc:FederatedNationalInsuranceCompanyMember2020-03-310001069996fnhc:FederatedNationalInsuranceCompanyMember2019-12-310001069996us-gaap:HurricaneMembersrt:MaximumMember2020-03-310001069996us-gaap:HurricaneMembersrt:MaximumMember2019-12-310001069996us-gaap:PremiumsReceivableMember2019-12-310001069996fnhc:ReinsuranceRecoverableNetMember2019-12-310001069996us-gaap:CorporateDebtSecuritiesMemberfnhc:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-12-310001069996us-gaap:PremiumsReceivableMemberfnhc:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-12-310001069996fnhc:ReinsuranceRecoverableNetMemberfnhc:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-12-310001069996fnhc:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-12-310001069996us-gaap:CorporateDebtSecuritiesMember2020-01-012020-03-310001069996us-gaap:PremiumsReceivableMember2020-01-012020-03-310001069996fnhc:ReinsuranceRecoverableNetMember2020-01-012020-03-310001069996us-gaap:PremiumsReceivableMember2020-03-310001069996fnhc:ReinsuranceRecoverableNetMember2020-03-310001069996fnhc:FinancialAssetCurrentMember2020-03-310001069996us-gaap:FinancingReceivables1To29DaysPastDueMember2020-03-310001069996us-gaap:FinancingReceivables30To59DaysPastDueMember2020-03-310001069996us-gaap:FinancingReceivables60To89DaysPastDueMember2020-03-310001069996us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember2020-03-310001069996stpr:FLfnhc:FederatedNationalS20162017ReinsuranceProgramsMember2020-01-012020-03-310001069996stpr:FLfnhc:FederatedNationalS20162017ReinsuranceProgramsMember2019-01-012019-03-310001069996stpr:FLus-gaap:PropertyInsuranceProductLineMemberfnhc:QuotaShareTreatiesMember2016-07-012016-07-310001069996stpr:FLus-gaap:PropertyInsuranceProductLineMemberfnhc:QuotaShareTreatiesMember2017-07-012017-07-010001069996srt:MaximumMember2019-12-310001069996srt:MaximumMember2020-03-300001069996srt:MaximumMember2020-03-310001069996us-gaap:SubsequentEventMember2020-05-060001069996us-gaap:RestrictedStockMember2020-01-012020-03-310001069996us-gaap:RestrictedStockMember2019-01-012019-03-310001069996us-gaap:EmployeeStockOptionMember2020-01-012020-03-310001069996us-gaap:EmployeeStockOptionMember2019-01-012019-03-310001069996srt:MinimumMemberus-gaap:RestrictedStockMember2020-01-012020-03-310001069996us-gaap:RestrictedStockMembersrt:MaximumMember2020-01-012020-03-310001069996srt:MinimumMember2020-01-012020-03-310001069996srt:MaximumMember2020-01-012020-03-310001069996us-gaap:RestrictedStockMember2019-12-310001069996us-gaap:RestrictedStockMember2020-03-3100010699962020-02-012020-02-290001069996us-gaap:SubsequentEventMember2020-04-012020-04-30fnhc:numberOfCatastrophicEvents0001069996us-gaap:SubsequentEventMemberus-gaap:CatastropheMember2020-04-012020-04-30fnhc:numberOfReportedClaims0001069996srt:AffiliatedEntityMemberus-gaap:SubsequentEventMemberus-gaap:CatastropheMemberfnhc:FederatedNationalInsuranceCompanyMember2020-04-300001069996us-gaap:SubsequentEventMemberus-gaap:CatastropheMember2020-04-300001069996srt:AffiliatedEntityMemberus-gaap:SubsequentEventMemberus-gaap:CatastropheMemberfnhc:FederatedNationalInsuranceCompanyMember2020-04-012020-04-300001069996fnhc:MaisonCompaniesMember2020-03-310001069996fnhc:MonarchNationalSFloridaMember2020-03-31
 
 
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, 2020
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 000-25001
 FedNat 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. 14th Street, Suite 180, Sunrise, FL
33323
(Address of principal executive offices) (Zip Code)
800-293-2532
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock FNHC Nasdaq Global Market
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 þ   No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes þ   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨
Accelerated Filer
þ
Non-accelerated Filer ¨
Smaller reporting company
   
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 1, 2020, the registrant had 13,673,319 shares of common stock outstanding.



FEDNAT HOLDING COMPANY
TABLE OF CONTENTS
 
    
PART I: FINANCIAL INFORMATION PAGE
     
ITEM 1
3
     
ITEM 2
     
ITEM 3
     
ITEM 4
     
PART II: OTHER INFORMATION  
     
ITEM 1
     
ITEM 1A
     
ITEM 2
     
ITEM 3
     
ITEM 4
     
ITEM 5
     
ITEM 6
     
SIGNATURES


-2-


PART I: FINANCIAL INFORMATION
Item 1.  Financial Statements
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
໿
  March 31, December 31,
  2020 2019
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $534,551 and $512,645, respectively)
$ 542,835    $ 526,265   
Debt securities, held-to-maturity, at amortized cost, net of allowance of $2 and $0, respectively
4,271    4,337   
Equity securities, at fair value 17,324    20,039   
Total investments 564,430    550,641   
Cash and cash equivalents 123,190    133,361   
Prepaid reinsurance premiums 89,465    145,659   
Premiums receivable, net of allowance of $189 and $159, respectively
38,337    41,422   
Reinsurance recoverable, net of allowance of $53 and $0, respectively
261,150    209,615   
Deferred acquisition costs and value of business acquired, net 57,715    56,136   
Current and deferred income taxes, net 2,358    2,552   
Goodwill 10,997    10,997   
Other assets 29,456    28,633   
Total assets $ 1,177,098    $ 1,179,016   
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves $ 375,675    $ 324,362   
Unearned premiums 358,258    360,870   
Reinsurance payable 63,051    102,467   
Long-term debt, net of deferred financing costs of $1,438 and $1,478, respectively
98,562    98,522   
Deferred revenue 6,770    6,856   
Other liabilities 35,608    37,246   
Total liabilities 937,924    930,323   
Commitments and contingencies (see Note 11)
Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized
—    —   
Common stock, $0.01 par value: 25,000,000 shares authorized; 13,949,971 and 14,414,821 issued and outstanding, respectively
139    144   
Additional paid-in capital 168,130    167,677   
Accumulated other comprehensive income (loss) 6,253    10,281   
Retained earnings 64,652    70,591   
Total shareholders’ equity 239,174    248,693   
Total liabilities and shareholders' equity $ 1,177,098    $ 1,179,016   

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-3-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
໿
Three Months Ended
March 31,
2020 2019
Revenues:    
Net premiums earned $ 105,910    $ 88,784   
Net investment income 3,892    3,710   
Net realized and unrealized investment gains (losses) (2,825)   2,301   
Direct written policy fees 3,466    2,391   
Other income 5,256    4,011   
Total revenues 115,699    101,197   
           
Costs and expenses:          
Losses and loss adjustment expenses 68,930    66,839   
Commissions and other underwriting expenses 36,355    28,234   
General and administrative expenses 6,245    6,311   
Interest expense 1,915    5,051   
Total costs and expenses 113,445    106,435   
           
Income (loss) before income taxes 2,254    (5,238)  
Income tax expense (benefit) 121    (1,373)  
Net income (loss) $ 2,133    $ (3,865)  
         
Net Income (Loss) Per Common Share          
Basic $ 0.15    $ (0.30)  
Diluted $ 0.15    $ (0.30)  
         
Weighted Average Number of Shares of Common Stock Outstanding          
Basic 14,249    12,795   
Diluted 14,312    12,795   
         
Dividends Declared Per Common Share $ 0.09    $ 0.08   

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-4-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
໿
Three Months Ended
March 31,
2020 2019
Net income (loss) $ 2,133    $ (3,865)  
   
Change in net unrealized gains (losses) on investments, available-for-sale, net of tax
(4,028)   6,888   
Comprehensive income (loss) $ (1,895)   $ 3,023   

The accompanying notes are an integral part of the unaudited consolidated financial statements.
 

-5-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

໿
Accumulated
Common Stock Additional Other Total
Preferred Issued Paid-in Comprehensive Retained Shareholders'
Stock Shares Amount Capital Income (Loss) Earnings Equity
Balance as of January 1, 2020 $ —    14,414,821    $ 144    $ 167,677    $ 10,281    $ 70,591    $ 248,693   
Cumulative effect of new accounting standards —    —    —    —    —    (25)   (25)  
Net income (loss) —    —    —    —    —    2,133    2,133   
Other comprehensive income (loss) —    —    —    —    (4,028)   —    (4,028)  
Dividends declared —    —    —    —    —    (1,302)   (1,302)  
Shares issued under share-based compensation plans —    58,733    —    —    —    —    —   
Repurchases of common stock —    (523,583)   (5)   —    —    (6,745)   (6,750)  
Share-based compensation —    —    —    453    —    —    453   
Balance as of March 31, 2020 $ —    13,949,971    $ 139    $ 168,130    $ 6,253    $ 64,652    $ 239,174   

Accumulated
Common Stock Additional Other Total
Preferred Issued Paid-in Comprehensive Retained Shareholders'
Stock Shares Amount Capital Income (Loss) Earnings Equity
Balance as of January 1, 2019 $ —    12,784,444    $ 128    $ 141,128    $ (3,750)   $ 77,753    $ 215,259   
Net income (loss) —    —    —    —    —    (3,865)   (3,865)  
Other comprehensive income (loss) —    —    —    —    6,888    —    6,888   
Dividends declared —    —    —    —    —    (1,041)   (1,041)  
Shares issued under share-based compensation plans —    51,957    —    —    —    —    —   
Share-based compensation —    —    —    675    —    —    675   
Balance as of March 31, 2019 $ —    12,836,401    $ 128    $ 141,803    $ 3,138    $ 72,847    $ 217,916   

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-6-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

໿
Three Months Ended
March 31,
2020 2019
Cash flow from operating activities:    
Net income (loss) $ 2,133    $ (3,865)  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Net realized and unrealized investment (gains) losses 2,825    (2,301)  
Loss (gain) on early extinguishment of debt —    3,575   
Amortization of investment premium or discount, net 400    197   
Depreciation and amortization 465    355   
Share-based compensation 453    675   
Changes in operating assets and liabilities:    
Prepaid reinsurance premiums 56,194    38,719   
Premiums receivable, net 3,085    7,107   
Reinsurance recoverable, net (51,567)   (90,498)  
Deferred acquisition costs and value of business acquired, net (1,579)   (796)  
Income taxes, net 1,510    (1,146)  
Deferred revenue (86)   (18)  
Loss and loss adjustment expense reserves 51,313    77,894   
Unearned premiums (2,612)   (6,132)  
Reinsurance payable (39,416)   (32,200)  
Other (1,745)   1,639   
Net cash provided by (used in) operating activities 21,373    (6,795)  
Cash flow from investing activities:    
Proceeds from sales of equity securities 2,056    1,506   
Proceeds from sales of debt securities 103,118    49,174   
Purchases of equity securities (3,428)   (2,188)  
Purchases of debt securities (134,971)   (62,741)  
Maturities and redemptions of debt securities 10,850    8,271   
Purchases of property and equipment (1,224)   (486)  
Net cash provided by (used in) investing activities (23,599)   (6,464)  
Cash flow from financing activities:    
Proceeds from issuance of long-term debt, net of issuance costs —    98,464   
Payment of long-term debt and prepayment penalties —    (48,000)  
Purchases of FedNat Holding Company common stock (6,643)   —   
Dividends paid (1,302)   (1,039)  
Net cash provided by (used in) financing activities (7,945)   49,425   
Net increase (decrease) in cash and cash equivalents (10,171)   36,166   
Cash and cash equivalents at beginning-of-period 133,361    64,423   
Cash and cash equivalents at end-of-period $ 123,190    $ 100,589   

The accompanying notes are an integral part of the unaudited consolidated financial statements.

-7-



FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
 
໿
Three Months Ended
March 31,
2020 2019
Supplemental disclosure of cash flow information:    
Cash paid (received) during the period for interest $ 3,750    $ 902   
Cash paid (received) during the period for income taxes $ (811)   $ (277)  
Significant non-cash investing and financing transactions:
Right-of-use asset $ (7,938)   $ (8,103)  
Lease liability $ 7,938    $ 8,103   

The accompanying notes are an integral part of the unaudited consolidated financial statements.


-8-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2020

1. ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION

Organization

FedNat Holding Company (“FNHC,” the “Company,” “we,” “us,” or “our”) is a regional insurance holding company that controls substantially all aspects of the insurance underwriting, distribution and claims processes through our subsidiaries and contractual relationships with independent agents and general agents.  We, through our wholly owned subsidiaries, are authorized to underwrite and/or place homeowners multi-peril (“homeowners”), federal flood and other lines of insurance in Florida and other states. We market, distribute and service our own and third-party insurers’ products and other services through a network of independent and general agents.

FedNat Insurance Company (“FNIC”), our largest wholly owned insurance subsidiary, is licensed as an admitted carrier to write homeowners property and casualty insurance by the state’s insurance departments, in Florida, Louisiana, Texas, Georgia, South Carolina, Alabama and Mississippi.

Maison Insurance Company ("MIC"), an insurance subsidiary, is licensed as an admitted carrier to write homeowners property and casualty insurance as well as wind/hail-only exposures by the state's insurance departments in Louisiana, Texas and Florida.

Monarch National Insurance Company (“MNIC”), an insurance subsidiary, is licensed as an admitted carrier to write homeowners property and casualty insurance in Florida.

Material Distribution Relationships

Ivantage Select Agency, Inc.
The Company is a party to an insurance agency master agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company (“Allstate”), pursuant to which the Company has been authorized by ISA to appoint Allstate agents to offer our FNIC homeowners insurance products to consumers in Florida. As a percentage of the total homeowners premiums we underwrote, 20.5% and 22.8% were from Allstate’s network of Florida agents, for the three months ended March 31, 2020 and 2019, respectively.

SageSure Insurance Managers, LLC
The Company is a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) to facilitate growth in our FNIC homeowners business outside of Florida.  As a percentage of the total homeowners premiums, 24.2% and 19.6% of the Company’s premiums were underwritten by SageSure, for the three months ended March 31, 2020 and 2019, respectively. As part of our partnership with SageSure, we entered into a profit share agreement, whereby we share 50% of net profits of this line of business, as calculated per the terms of the agreement, subject to certain limitations. The profit share cost is reflected in commissions and underwriting expenses on our consolidated statement of operations.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).  The consolidated financial statements include the accounts of FNHC and its wholly-owned subsidiaries and all entities in which the Company has a controlling financial interest and any variable interest entity (“VIE”) of which the Company is the primary beneficiary. The Company’s management believes the consolidated financial statements reflect all material adjustments, including normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows of the Company for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company identifies a VIE as an entity that does not have sufficient equity to finance its own activities without additional financial support or where the equity investors lack certain characteristics of a controlling financial interest.  The Company assesses its contractual, ownership or other interests in a VIE to determine if the Company’s interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders.  The Company performs an ongoing qualitative assessment of its variable interests in a VIE to determine whether the Company has a controlling financial interest and would therefore be considered the primary beneficiary of the VIE.  If the Company determines it is the primary beneficiary of a VIE, the Company consolidates the assets and liabilities of the VIE in its consolidated financial statements.
-9-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Our significant accounting policies were described in Note 2 of our 2019 Form 10-K. Other than the changes noted in "Recently Issued Accounting Pronouncements, Adopted" below, there have been no significant changes in our significant accounting policies for the three months ended March 31, 2020.

Accounting Estimates and Assumptions

The Company prepares the accompanying consolidated financial statements in accordance with GAAP, which 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 may materially differ from those estimates.

Similar to other property and casualty insurers, the Company’s liability for loss and loss adjustment expenses ("LAE") reserves, although supported by actuarial projections and other data, is ultimately based on management’s reasoned expectations of future events. Although considerable variability is inherent in these estimates, the Company believes that the liability and LAE reserve is adequate. The Company reviews and evaluates its estimates and assumptions regularly and makes adjustments, reflected in current operations, as necessary, on an ongoing basis.

Recently Issued Accounting Pronouncements, Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The update requires entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as currently performed under the other-than-temporary impairment ("OTTI") model. The update also requires enhanced disclosures for financial assets measured at amortized cost and available-for-sale debt securities to help the financial statement users better understand significant judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The Company adopted the guidance effective January 1, 2020, by reflecting a cumulative effect adjustment of less than $0.1 million, after-tax, which decreased retained earnings, held-to-maturity debt securities and reinsurance recoverable.

Refer to Note 7 for additional information regarding allowances for credit loss.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. The Company adopted the guidance effective January 1, 2020, which did not have any impact on the Company’s consolidated financial condition or results of operations.

Recently Issued Accounting Pronouncements, Not Yet Adopted

In January 2020, the FASB issued ASU 2020-1, Accounting for Equity Securities and Equity Investments, which clarifies the interaction between accounting standards related to equity securities (Topic 321), equity method investments (Topic 323), and certain derivatives (Topic 815). The update clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The update is effective for interim and annual reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is in the early stage of evaluating the impact that the update will have on the Company’s consolidated financial position or results of operations.

-10-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020


3. ACQUISITIONS

On December 2, 2019, the Company completed its acquisition of the insurance operations of 1347 Property Insurance Holdings, Inc. ("PIH"). Specifically, the Company purchased from PIH all of the outstanding equity of MIC, Maison Managers, Inc., and ClaimCor LLC (collectively, the "Maison Companies"). The Maison Companies provide multi-peril and wind/hail only coverage to personal residential dwellings and manufactured/mobile homes in Louisiana, Texas and Florida. The acquisition enables us to increase geographic diversification of our book of business outside Florida and generate additional business with operating synergies and general and administrative expense savings.

Revenues and net income of the business acquired were $15.4 million and $1.7 million, respectively for the three months ended March 31, 2020.

The following unaudited pro forma condensed consolidated statements of operations of the Company assume that the acquisition of the Maison Companies was completed on January 1, 2019:

Three
Months
Ended
March 31, 2019
(In thousands)
Revenue $ 118,621   
Net income (loss) (3,395)  

Pro forma adjustments include the revenue and net income (loss) of the Maison Companies for each period as well as estimates for amortization of identifiable intangible assets acquired and fair value adjustments associated with investments, VOBA (different than deferred acquisition costs) and reinsurance recoverable. Other pro forma adjustments include the incremental increase to interest expense attributable to financing the acquisition and the impact of reflecting acquisition and integration costs earlier in 2019.

For more information regarding our acquisition, refer to Note 3 of our 2019 Form 10-K.

4. FAIR VALUE

Fair Value Disclosures of Financial Instruments

The Company accounts for financial instruments at fair value or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs are based on market data from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information.  All assets and liabilities that are recorded at fair value are classified and disclosed in one of the following three categories:

Level 1 - Quoted market prices (unadjusted) for identical assets or liabilities in active markets is defined as a market where transactions for the financial statement occur with sufficient frequency and volume to provide pricing information on an ongoing basis, or observable inputs.
Level 2 - Quoted market prices for similar assets or liabilities and valuations, using models or other valuation techniques using observable market data.  Significant other observable that can be corroborated by observable market data; and
Level 3 - Instruments that use non-binding broker quotes or model driven valuations that do not have observable market data or those that are estimated based on an ownership interest to which a proportionate share of net assets is attributed.

If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

-11-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020


The Company’s financial instruments measured at fair value on a recurring basis and the level of the fair value hierarchy of inputs used consisted of the following:
March 31, 2020
Level 1 Level 2 Level 3 Total
(In thousands)
Debt securities - available-for-sale, at fair value:        
United States government obligations and authorities $ 66,033    $ 130,330    $ —    $ 196,363   
Obligations of states and political subdivisions —    22,298    —    22,298   
Corporate securities —    293,730    —    293,730   
International securities —    30,444    —    30,444   
Debt securities, at fair value 66,033    476,802    —    542,835   
       
Equity securities, at fair value 13,720    3,604    —    17,324   
       
Total investments, at fair value $ 79,753    $ 480,406    $ —    $ 560,159   
໿
December 31, 2019
Level 1 Level 2 Level 3 Total
(In thousands)
Debt securities - available-for-sale, at fair value:        
United States government obligations and authorities $ 83,764    $ 110,429    $ —    $ 194,193   
Obligations of states and political subdivisions —    24,020    —    24,020   
Corporate securities —    278,302    —    278,302   
International securities —    29,750    —    29,750   
Debt securities, at fair value 83,764    442,501    —    526,265   
       
Equity securities, at fair value 17,361    2,678    —    20,039   
       
Total investments, at fair value $ 101,125    $ 445,179    $ —    $ 546,304   

Held-to-maturity debt securities reported on the consolidated balance sheets at amortized cost and disclosed at fair value below (and in Note 5) and the level of fair value hierarchy of inputs used consisted of the following:

Level 1 Level 2 Level 3 Total
(In thousands)
March 31, 2020 $ 3,439    $ 822    $ —    $ 4,261   
December 31, 2019 3,453    878    —    4,331   

We measure the fair value of our securities based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the security, and we consistently apply the valuation methodology to measure the security’s fair value. Our fair value measurement is based on a market approach that utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. We review the third-party pricing methodologies on a quarterly basis and validate the fair value prices to a separate independent data service and ensure there are no material differences. Additionally, market indicators, industry and economic events are monitored.


-12-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020

A summary of the significant valuation techniques and market inputs for each financial instrument carried at fair value includes the following:

United States Government Obligations and Authorities - In determining the fair value for United States government securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for United States government securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Obligations of States and Political Subdivisions - In determining the fair value for state and municipal securities, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Corporate and International Securities - In determining the fair value for corporate securities the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.
Equity Securities - In determining the fair value for equity securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for equity securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.

We did not have securities trading in less liquid or illiquid markets with limited or no pricing information, therefore we did not use unobservable inputs to measure fair value as of March 31, 2020 and December 31, 2019. Additionally, we did not have any assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2020 or December 31, 2019, and we noted no significant changes in our valuation methodologies between those periods.

There were no changes to the Company’s valuation methodology and the Company is not aware of any events or circumstances that would have a significant adverse effect on the carrying value of its assets and liabilities measured at fair value as of March 31, 2020 and December 31, 2019. There were no transfers between the fair value hierarchy levels during the three months ended March 31, 2020 and 2019.


-13-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020

5. INVESTMENTS

Unrealized Gains and Losses

The difference between amortized cost or cost and estimated fair value and gross unrealized gains and losses, by major investment category, consisted of the following:
໿
Amortized Gross Gross  
Cost Unrealized Unrealized  
or Cost Gains Losses Fair Value
(In thousands)
March 31, 2020        
Debt securities - available-for-sale:        
United States government obligations and authorities $ 187,452    $ 8,924    $ 13    $ 196,363   
Obligations of states and political subdivisions 21,935    400    37    22,298   
Corporate 293,927    5,745    5,942    293,730   
International 31,237    324    1,117    30,444   
534,551    15,393    7,109    542,835   
       
Debt securities - held-to-maturity:        
United States government obligations and authorities 3,555    53    65    3,543   
Corporate 671        672   
International 45      —    46   
4,271    61    71    4,261   
Total investments, excluding equity securities $ 538,822    $ 15,454    $ 7,180    $ 547,096   
໿

Amortized Gross Gross  
Cost Unrealized Unrealized  
or Cost Gains Losses Fair Value
(In thousands)
December 31, 2019        
Debt securities - available-for-sale:        
United States government obligations and authorities $ 191,546    $ 3,073    $ 426    $ 194,193   
Obligations of states and political subdivisions 23,748    294    22    24,020   
Corporate 268,182    10,252    132    278,302   
International 29,169    593    12    29,750   
512,645    14,212    592    526,265   
       
Debt securities - held-to-maturity:        
United States government obligations and authorities 3,585    12    39    3,558   
Corporate 697    20    —    717   
International 55      —    56   
4,337    33    39    4,331   
Total investments, excluding equity securities $ 516,982    $ 14,245    $ 631    $ 530,596   


-14-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020

Net Realized and Unrealized Gains and Losses

The Company calculates the gain or loss realized on the sale of investments by comparing the sales price (fair value) to the cost or amortized cost of the security sold. Net realized gains and losses on investments are determined in accordance with the specific identification method.

Net realized and unrealized gains (losses) recognized in earnings, by major investment category, consisted of the following:

໿
Three Months Ended
March 31,
2020 2019
(In thousands)
Gross realized and unrealized gains:    
Debt securities $ 1,386    $ 317   
Equity securities 319    2,830   
Total gross realized and unrealized gains 1,705    3,147   
   
Gross realized and unrealized losses:    
Debt securities (148)   (400)  
Equity securities (4,382)   (446)  
Total gross realized and unrealized losses (4,530)   (846)  
Net realized and unrealized gains (losses) on investments $ (2,825)   $ 2,301   

The above line item, net realized and unrealized gains (losses) on investments, includes the following equity securities gains (losses) recognized in earnings:

Three Months Ended
March 31,
2020 2019
(In thousands)
Net realized and unrealized gains (losses) $ (4,063)   $ 2,384   
Less:
Net realized and unrealized gains (losses) on securities sold (635)   326   
Net realized and unrealized gains (losses) recognized during the period still held as of the end-of-period
$ (3,428)   $ 2,058   



-15-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020

Contractual Maturity

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

Amortized cost and estimated fair value of debt securities, by contractual maturity, consisted of the following:

໿
March 31, 2020
Amortized  
Cost Fair Value
Securities with Maturity Dates (In thousands)
Debt securities, available-for-sale:    
One year or less $ 33,374    $ 33,413   
Over one through five years 170,802    171,418   
Over five through ten years 158,874    161,147   
Over ten years 171,501    176,857   
534,551    542,835   
Debt securities, held-to-maturity:    
One year or less 285    286   
Over one through five years 3,846    3,833   
Over five through ten years 39    39   
Over ten years 101    103   
4,271    4,261   
Total $ 538,822    $ 547,096   

Net Investment Income

Net investment income consisted of the following:
໿
Three Months Ended
March 31,
2020 2019
(In thousands)
Interest income $ 3,822    $ 3,657   
Dividends income 70    53   
Net investment income $ 3,892    $ 3,710   



-16-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020

Aging of Gross Unrealized Losses

Gross unrealized losses and related fair values for debt securities, grouped by duration of time in a continuous unrealized loss position, consisted of the following:
໿
Less than 12 months 12 months or longer Total
  Gross   Gross   Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
    (In thousands)    
March 31, 2020
Debt securities - available-for-sale:            
United States government obligations and authorities
$ 810    $   $ 268    $ 12    $ 1,078    $ 13   
Obligations of states and political subdivisions 5,544    37    —    —    5,544    37   
Corporate 117,591    5,754    —    188    117,591    5,942   
International 13,330    1,079    132    38    13,462    1,117   
137,275    6,871    400    238    137,675    7,109   
Debt securities, held-to-maturity:
United States government obligations and authorities
—    —    2,222    65    2,222    65   
Corporate 235      —    —    235     
International —    —    —    —    —    —   
235      2,222    65    2,457    71   
Total investments, excluding equity securities $ 137,510    $ 6,877    $ 2,622    $ 303    $ 140,132    $ 7,180   


Less than 12 months 12 months or longer Total
  Gross   Gross   Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
    (In thousands)    
December 31, 2019
Debt securities - available-for-sale:          
United States government obligations and authorities
$ 49,833    $ 409    $ 2,218    $ 17    $ 52,051    $ 426   
Obligations of states and political subdivisions 6,810    22    —    —    6,810    22   
Corporate 15,872    94    7,694    38    23,566    132   
International 3,856    10    179      4,035    12   
76,371    535    10,091    57    86,462    592   
           
Debt securities, held-to-maturity:
United States government obligations and authorities
—    —    2,287    39    2,287    39   
Corporate —    —    —    —    —    —   
International —    —    —    —    —    —   
—    —    2,287    39    2,287    39   
Total investments, excluding equity securities $ 76,371    $ 535    $ 12,378    $ 96    $ 88,749    $ 631   

-17-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020

As of March 31, 2020, the Company held a total of 522 debt securities that were in an unrealized loss position, of which 15 securities were in an unrealized loss position continuously for 12 months or more. As of December 31, 2019, the Company held a total of 203 debt securities that were in an unrealized loss position, of which 24 securities were in an unrealized loss position continuously for 12 months or more. The unrealized losses associated with these securities consisted primarily of losses related to corporate securities.

Collateral Deposits

Cash and cash equivalents and investments, the majority of which were debt securities, with fair values of $9.5 million and $11.2 million, were deposited with governmental authorities and into custodial bank accounts as required by law or contractual obligations as of March 31, 2020 and December 31, 2019, respectively.

6. REINSURANCE

Overview

Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. The Company reinsures (cedes) a portion of written premiums on an excess of loss or a quota-share basis in order to limit the Company’s loss exposure. To the extent that reinsuring companies are unable to meet their obligations assumed under these reinsurance agreements, the Company remains primarily liable to its policyholders.

The Company is selective in choosing reinsurers and considers numerous factors, the most important of which is the financial stability of the reinsurer or capital specifically pledged to uphold the contract, its history of responding to claims and its overall reputation.  In an effort to minimize the Company’s exposure to the insolvency of a reinsurer, the Company evaluates the acceptability and review the financial condition of the reinsurer at least annually with the assistance of the Company’s reinsurance broker.

Significant Reinsurance Contracts

2018-2019 Excess of Loss Reinsurance Programs
With the February 21, 2018 acquisition of the minority interests of MNIC, the Company combined both FNIC and MNIC under a single program allowing the Company to capitalize on efficiencies and scale. FNIC and MNIC’s combined 2018-2019 reinsurance program cost $148.8 million. This amount included $102.7 million for the private reinsurance for the Company’s exposure, including prepaid automatic premium reinstatement protection, along with $46.1 million payable to the FHCF. The combination of private and FHCF reinsurance treaties affords FNIC and MNIC $1.8 billion of aggregate coverage with a maximum single event coverage totaling $1.3 billion, exclusive of retentions. Both FNIC and MNIC maintained their FHCF participation at 75% for the 2018 hurricane season. FNIC’s single event pre-tax retention for a catastrophic event in Florida is $20.0 million, up slightly from the 2017-2018 reinsurance program and MNIC’s single event pre-tax retention for a catastrophic event is $3.0 million, down slightly from the 2017-2018 reinsurance program.

The combined FNIC and MNIC private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective July 1, 2018 and all private layers have prepaid automatic reinstatement protection, which afforded the Company additional coverage for subsequent events. These private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all layers attach after $20.0 million in losses for FNIC and after $3.0 million in losses for MNIC. If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted. Given market conditions, FNIC has elected not to purchase any multiple year protection and terminated the second year of the $89.0 million of multiple year protection that FNIC purchased in 2017 on a two-year basis. FNIC also had $156.0 million of multiple year protection that expired on June 30, 2018. The overall reinsurance programs are with reinsurers that currently have an A.M. Best or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

FNIC’s non-Florida excess of loss reinsurance treaties afforded us an additional $23.0 million of aggregate coverage with first event coverage totaling $5.0 million and second event coverage totaling $18.0 million, with the incremental $13.0 million of second event coverage applying to hurricane losses only. The end result is a non-Florida retention of $15.0 million for the first event and $2.0 million for the second event though these retentions are reduced to $7.5 million and $1.0 million after taking into account the profit-sharing agreement that FNIC has with the nonaffiliated managing general underwriter that writes FNIC non-Florida property
-18-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020

business. FNIC’s non-Florida reinsurance program cost included $2.0 million for this private reinsurance, including prepaid automatic premium reinstatement protection.

2019-2020 Catastrophe Excess of Loss Reinsurance Program
Given the December 2, 2019 acquisition of the Maison Companies, the Company and PIH agreed to combine FNIC, MNIC, and MIC under a single reinsurance program allowing the carriers to capitalize on efficiencies, spread of risk and scale.

The combined reinsurance treaties provide approximately $1.3 billion of single-event reinsurance coverage in excess of a $27 million retention for catastrophic losses on the first event (and $15 million on the second and third events), including hurricanes, and aggregate coverage of $1.9 billion, at an approximate total cost of $224.3 million.

The combined FNIC, MIC and MNIC private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective July 1, 2019 and all private layers have prepaid automatic reinstatement protection, which affords the carriers additional coverage for subsequent events. This private market excess of loss treaty structure breaks coverage into layers, with a cascading feature such that substantially all layers attach after $20 million in losses for FNIC, $2 million in losses for MNIC and $5 million in losses for MIC. For FNIC and MNIC, the second and third event attaches at $10 million per event, on a combined basis. If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted. The overall reinsurance program is with reinsurers that currently have an A.M. Best Company or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts. 

As indicated above, FNIC, MIC and MNIC's combined 2019-2020 reinsurance program is estimated to cost $224.3 million. This amount includes approximately $178.9 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic premium reinstatement protection, along with approximately $45.9 million payable to the FHCF. The combination of private and FHCF reinsurance treaties affords FNIC, MNIC, and MIC approximately $1.9 billion of aggregate coverage with a maximum single event coverage totaling approximately $1.3 billion, exclusive of retentions. Each carrier will pay directly its allocated portion of the aggregate reinsurance ceded premium cost. The allocation methodology by which FNIC, MNIC, and MIC determines their share of the premium and distribution of reinsurance recoveries under the combined reinsurance tower is based on catastrophe loss modeling of the separate books of business. Each carrier shares the combined program cost in proportion to its contribution to the total expected loss in each reinsurance layer. Each carrier's reinsurance recoveries will be based on that carrier's contributing share of a given event's total loss. Both FNIC and MNIC maintained their FHCF participation at 75% for the 2019 hurricane season, and MIC increased its FHCF participation to 90%.

FNIC’s non-Florida excess of loss reinsurance treaty affords us an additional $18 million of coverage for a second event, which applies to hurricane losses only. The result is a non-Florida retention of $20 million for FNIC for the first event and $2 million for the second event, although these retentions are reduced to $10 million and $1 million after taking into account the profit-sharing agreement that FNIC has with the non-affiliated managing general underwriter that writes FNIC’s non-Florida property business. FNIC’s non-Florida reinsurance program cost for the above specific coverage approximates $1.8 million for this private reinsurance.

The insurance carriers’ cost and amounts of reinsurance are based on current analysis of exposure to catastrophic risk. The data is subjected to exposure level analysis at various dates through December 31, 2019. This analysis of the carriers’ exposure level in relation to the total exposures to the FHCF and excess of loss treaties may produce changes in retentions, limits and reinsurance premiums in total, and by carrier, as a result of increases or decreases in the carriers’ exposure levels.

Quota-Share Reinsurance Programs
FNIC's reinsurance programs also include quota-share treaties. One such treaty for 30% became effective July 1, 2014, and another for 10% became effective on July 1, 2015 with each running for two years. The combined treaties provided up to a 40% quota-share reinsurance on covered losses for the homeowners’ property and liability insurance program in Florida. The treaties are accounted for as retrospectively rated contracts whereby the estimated ultimate premium or commission is recognized over the period of the contracts.

On July 1, 2016, the 30% quota-share treaty expired on a cut-off basis, which means as of that date the Company retained an incremental 30% of its unearned premiums and losses. On July 1, 2017, the 10% quota-share treaty expired on a cut-off basis, which means as of that date we retained an incremental 10% of the underlying unearned premiums and losses. The reinsurers remain liable for the paid losses occurring during the terms of the treaties, until each treaty is commuted.

-19-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020

On July 1, 2017, FNIC bound a 10% quota-share on its Florida homeowners book of business, which excluded named storms, subject to certain limitations. This treaty is not subject to accounting as a retrospectively rated contract. This treaty expired on July 1, 2018 on a cut-off basis, meaning that the reinsurer will not be liable (under this agreement) for losses as a result of occurrences taking place after the date of termination, and the unearned premium previously ceded was returned to FNIC.

On July 1, 2018, FNIC renewed the quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal basis, excluding named storms, which was initially set at a 2%, cession and is subject to certain limitations. In addition, this quota-share allowed FNIC to prospectively increase or decrease the cession percentage up to three times during the term of the agreement. Effective October 1, 2018, FNIC elected to increase the cession percentage from 2% to 10% on an in-force, new and renewal basis.

The treaty expired on July 1, 2019 on a cut-off basis, meaning that the reinsurer will not be liable (under this agreement) for losses as a result of occurrences taking place after the date of termination, and the unearned premium previously ceded was returned to FNIC.

On July 1, 2019, FNIC renewed the quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal basis, excluding named storms, which was set at a 10% cession and is subject to certain limitations. In addition, this quota-share allows FNIC the flexibility to prospectively increase or decrease the cession percentage up to three times during the term of the agreement.

The Company’s private passenger automobile quota-share treaties are programs which became effective at different points in the year and cover auto policies across several states.

Associated Trust Agreements
Certain reinsurance agreements require FNIC to secure the credit, regulatory and business risk. Fully funded trust agreements securing these risks totaled less than $0.1 million as of March 31, 2020 and December 31, 2019.

Reinsurance Recoverable, Net

Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated with the reinsurance placement and presented on the consolidated balance sheet as reinsurance recoverable. Reinsurance recoverable, net consisted of the following:
໿
March 31, December 31,
2020 2019
(In thousands)
Reinsurance recoverable on paid losses $ 48,544    $ 45,186   
Reinsurance recoverable on unpaid losses 212,606    164,429   
Reinsurance recoverable, net $ 261,150    $ 209,615   

As of March 31, 2020, and December 31, 2019, the Company had reinsurance recoverable of $210.5 million and $163.7 million, respectively as a result of Hurricanes Michael and Irma. All reinsurers in our excess-of-loss reinsurance programs have an A.M. Best or Standard & Poor’s rating of “A-“ or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

-20-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2020


Net Premiums Written and Net Premiums Earned

Net premiums written and net premiums earned consisted of the following:
໿
໿
Three Months Ended
March 31,
2020 2019
(In thousands)
Net Premiums Written    
Direct $ 172,962    $ 132,233   
Ceded (13,766)   (11,793)  
$ 159,196    $ 120,440   
Net Premiums Earned    
Direct $ 175,574    $ 138,367   
Ceded (69,664)   (49,583)  
$ 105,910    $ 88,784   

7. ALLOWANCES FOR CREDIT LOSS

Overview

There is significant risk and judgment involved in determining estimates of our allowances for credit loss, which reduce the amortized cost of an asset to produce an estimate of the net amount that will be collected over the asset's contractual life. Longer time horizons generally present more uncertainty in expected cash flow. We evaluate the expected credit loss of assets on an individual basis, except in cases where assets collectively share similar risk characteristics where we pool them together. We evaluate and estimate our allowances for credit loss by considering reasonable, relevant and supportable available information.

Activity in the allowances for credit loss, by asset line item on the consolidated balance sheet, is summarized as follows:

Debt
Securities, Reinsurance
Held-to- Premiums Recoverable,
Maturity Receivable Net Total
(In thousands)
Balance as of December 31, 2019 $ —    $ 159    $ —    $ 159   
Cumulative effect of new accounting standard (1)   —    32    33   
Credit loss expense (recovery) (2)   30    21    52   
Balance as of March 31, 2020 $   $ 189    $ 53    $ 244   

(1)