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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 JUNE 30, 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 August 3, 2020, the registrant had 13,703,175 shares of common stock outstanding.



FEDNAT HOLDING COMPANY
TABLE OF CONTENTS
 
    
PART I: FINANCIAL INFORMATION PAGE
     
ITEM 1
1
     
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





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)
໿
  June 30, December 31,
  2020 2019
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $536,896 and $512,645, respectively)
$ 555,961    $ 526,265   
Debt securities, held-to-maturity, at amortized cost —    4,337   
Equity securities, at fair value 18,040    20,039   
Total investments 574,001    550,641   
Cash and cash equivalents 163,910    133,361   
Prepaid reinsurance premiums 81,564    145,659   
Premiums receivable, net of allowance of $150 and $159, respectively
49,632    41,422   
Reinsurance recoverable, net of allowance of $34 and $0, respectively
228,709    209,615   
Deferred acquisition costs and value of business acquired, net 63,022    56,136   
Current and deferred income taxes, net 11,408    2,552   
Goodwill 10,997    10,997   
Other assets 31,543    28,633   
Total assets $ 1,214,786    $ 1,179,016   
     
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves $ 387,723    $ 324,362   
Unearned premiums 383,739    360,870   
Reinsurance payable 67,876    102,467   
Long-term debt, net of deferred financing costs of $1,397 and $1,478, respectively
98,603    98,522   
Deferred revenue 6,984    6,856   
Other liabilities 48,181    37,246   
Total liabilities 993,106    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; 13,703,175 and 14,414,821 issued and outstanding, respectively
137    144   
Additional paid-in capital 168,485    167,677   
Accumulated other comprehensive income (loss) 14,390    10,281   
Retained earnings 38,668    70,591   
Total shareholders’ equity 221,680    248,693   
Total liabilities and shareholders' equity $ 1,214,786    $ 1,179,016   

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-1-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
໿
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Revenues:    
Net premiums earned $ 111,478    $ 92,306    $ 217,388    $ 181,090   
Net investment income 3,341    4,259    7,233    7,969   
Net realized and unrealized investment gains (losses) 10,383    1,955    7,558    4,256   
Direct written policy fees 3,593    2,403    7,059    4,794   
Other income 5,224    4,378    10,480    8,389   
Total revenues 134,019    105,301    249,718    206,498   
     
Costs and expenses:    
Losses and loss adjustment expenses 129,916    65,340    198,846    132,179   
Commissions and other underwriting expenses 29,270    22,562    65,625    50,796   
General and administrative expenses 5,663    5,779    11,908    12,090   
Interest expense 1,915    1,915    3,830    6,966   
Total costs and expenses 166,764    95,596    280,209    202,031   
     
Income (loss) before income taxes (32,745)   9,705    (30,491)   4,467   
Income tax expense (benefit) (11,266)   2,595    (11,145)   1,222   
Net income (loss) $ (21,479)   $ 7,110    $ (19,346)   $ 3,245   
   
Net Income (Loss) Per Common Share    
Basic $ (1.57)   $ 0.55    $ (1.38)   $ 0.25   
Diluted (1.57)   0.55    (1.38)   0.25   
   
Weighted Average Number of Shares of Common Stock Outstanding    
Basic 13,714    12,844    13,981    12,820   
Diluted 13,714    12,883    13,981    12,876   
   
Dividends Declared Per Common Share $ 0.09    $ 0.08    $ 0.18    $ 0.16   

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-2-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
໿
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income (loss) $ (21,479)   $ 7,110    $ (19,346)   $ 3,245   
   
Change in net unrealized gains (losses) on investments, available-for-sale, net of tax
8,137    6,122    4,109    13,010   
Comprehensive income (loss) $ (13,342)   $ 13,232    $ (15,237)   $ 16,255   

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

-3-


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 April 1, 2020 $ —    13,949,971    $ 139    $ 168,130    $ 6,253    $ 64,652    $ 239,174   
Net income (loss) —    —    —    —    —    (21,479)   (21,479)  
Other comprehensive income (loss) —    —    —    —    8,137    —    8,137   
Dividends declared —    —    —    —    —    (1,258)   (1,258)  
Shares issued under share-based compensation plans —    29,856      —    —    —     
Repurchases of common stock —    (276,652)   (3)   —    —    (3,247)   (3,250)  
Share-based compensation —    —    —    355    —    —    355   
Balance as of June 30, 2020 $ —    13,703,175    $ 137    $ 168,485    $ 14,390    $ 38,668    $ 221,680   

Accumulated
Common Stock Additional Other Total
Preferred Issued Paid-in Comprehensive Retained Shareholders'
Stock Shares Amount Capital Income (Loss) Earnings Equity
Balance as of April 1, 2019 $ —    12,836,401    $ 128    $ 141,803    $ 3,138    $ 72,847    $ 217,916   
Net income (loss) —    —    —    —    —    7,110    7,110   
Other comprehensive income (loss) —    —    —    —    6,122    —    6,122   
Dividends declared —    —    —    —    —    (1,046)   (1,046)  
Shares issued under share-based compensation plans —    12,918    —    —    —    —    —   
Share-based compensation —    —    —    683    —    —    683   
Balance as of June 30, 2019 $ —    12,849,319    $ 128    $ 142,486    $ 9,260    $ 78,911    $ 230,785   

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


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)
(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) —    —    —    —    —    (19,346)   (19,346)  
Other comprehensive income (loss) —    —    —    —    4,109    —    4,109   
Dividends declared —    —    —    —    —    (2,560)   (2,560)  
Shares issued under share-based compensation plans —    88,589      —    —    —     
Repurchases of common stock —    (800,235)   (8)   —    —    (9,992)   (10,000)  
Share-based compensation —    —    —    808    —    —    808   
Balance as of June 30, 2020 $ —    13,703,175    $ 137    $ 168,485    $ 14,390    $ 38,668    $ 221,680   

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) —    —    —    —    —    3,245    3,245   
Other comprehensive income (loss) —    —    —    —    13,010    —    13,010   
Dividends declared —    —    —    —    —    (2,087)   (2,087)  
Shares issued under share-based compensation plans —    64,875    —    —    —    —    —   
Share-based compensation —    —    —    1,358    —    —    1,358   
Balance as of June 30, 2019 $ —    12,849,319    $ 128    $ 142,486    $ 9,260    $ 78,911    $ 230,785   

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-5-


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

໿
Six Months Ended
June 30,
2020 2019
Cash flow from operating activities:    
Net income (loss) $ (19,346)   $ 3,245   
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Net realized and unrealized investment (gains) losses (7,558)   (4,256)  
Loss (gain) on early extinguishment of debt —    3,575   
Amortization of investment premium or discount, net 1,092    354   
Depreciation and amortization 1,105    725   
Share-based compensation 808    1,358   
Changes in operating assets and liabilities:    
Prepaid reinsurance premiums 64,095    25,796   
Premiums receivable, net (8,210)   (1,448)  
Reinsurance recoverable, net (19,126)   12,111   
Deferred acquisition costs and value of business acquired, net (6,886)   (6,103)  
Income taxes, net (10,184)   (1,566)  
Deferred revenue 128    537   
Loss and loss adjustment expense reserves 63,361    (27,495)  
Unearned premiums 22,869    21,816   
Reinsurance payable (34,591)   (10,839)  
Other 9,583    7,787   
Net cash provided by (used in) operating activities 57,140    25,597   
Cash flow from investing activities:    
Proceeds from sales of equity securities 5,706    2,242   
Proceeds from sales of debt securities 308,760    96,247   
Purchases of equity securities (4,451)   (2,971)  
Purchases of debt securities (349,807)   (117,564)  
Maturities and redemptions of debt securities 28,339    18,249   
Purchases of property and equipment (2,161)   (741)  
Net cash provided by (used in) investing activities (13,614)   (4,538)  
Cash flow from financing activities:    
Proceeds from issuance of long-term debt, net of issuance costs —    98,390   
Payment of long-term debt and prepayment penalties —    (48,000)  
Purchases of FedNat Holding Company common stock (10,418)   —   
Issuance of common stock for share-based awards   —   
Dividends paid (2,560)   (2,085)  
Net cash provided by (used in) financing activities (12,977)   48,305   
Net increase (decrease) in cash and cash equivalents 30,549    69,364   
Cash and cash equivalents at beginning-of-period 133,361    64,423   
Cash and cash equivalents at end-of-period $ 163,910    $ 133,787   

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)
(Continued)
 
໿
Six Months Ended
June 30,
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 (923)   2,732   
Significant non-cash investing and financing transactions:
Right-of-use asset (7,772)   (7,998)  
Lease liability 7,772    7,998   

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


-7-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 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, 21.2% and 23.9% were from Allstate’s network of Florida agents, for the three months ended June 30, 2020 and 2019, respectively. As a percentage of the total homeowners premiums we underwrote, 20.9% and 23.4% were from Allstate’s network of Florida agents, for the six months ended June 30, 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, 27.2% and 22.0% of the Company’s premiums were underwritten by SageSure, for the three months ended June 30, 2020 and 2019, respectively. As a percentage of the total homeowners premiums, 25.8% and 21.0% of the Company’s premiums were underwritten by SageSure, for the six months ended June 30, 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. In addition, refer to Note 6 for information regarding a fully collateralized quota-share treaty.

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
-8-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 2020

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.

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 six months ended June 30, 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.

-9-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 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 loss of the business acquired were $16.8 million and $6.8 million, respectively for the three months ended June 30, 2020. Revenues and net loss of the business acquired were $32.3 million and $5.1 million, respectively for the six months ended June 30, 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 Six
Months Months
Ended Ended
June 30, 2019 June 30, 2019
(In thousands)
Revenue $ 118,995    $ 237,616   
Net income (loss) 2,848    (547)  

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.

-10-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 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:
June 30, 2020
Level 1 Level 2 Level 3 Total
(In thousands)
Debt securities - available-for-sale, at fair value:        
United States government obligations and authorities $ 58,888    $ 136,740    $ —    $ 195,628   
Obligations of states and political subdivisions —    23,213    —    23,213   
Corporate securities —    308,737    —    308,737   
International securities —    28,383    —    28,383   
Debt securities, at fair value 58,888    497,073    —    555,961   
       
Equity securities, at fair value 16,858    1,182    —    18,040   
       
Total investments, at fair value $ 75,746    $ 498,255    $ —    $ 574,001   
໿
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)
June 30, 2020 $ —    $ —    $ —    $ —   
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.


-11-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 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 June 30, 2020 and December 31, 2019. Additionally, we did not have any assets or liabilities measured at fair value on a nonrecurring basis as of June 30, 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 June 30, 2020 and December 31, 2019. There were no transfers between the fair value hierarchy levels during the six months ended June 30, 2020 and 2019.

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)
June 30, 2020        
Debt securities - available-for-sale:        
United States government obligations and authorities $ 192,968    $ 2,860    $ 200    $ 195,628   
Obligations of states and political subdivisions 22,414    799    —    23,213   
Corporate 294,159    15,163    585    308,737   
International 27,355    1,089    61    28,383   
$ 536,896    $ 19,911    $ 846    $ 555,961   
໿

-12-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 2020

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   


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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands)
Gross realized and unrealized gains:    
Debt securities $ 9,403    $ 834    $ 10,789    $ 1,151   
Equity securities 1,886    1,477    2,205    4,307   
Total gross realized and unrealized gains 11,289    2,311    12,994    5,458   
   
Gross realized and unrealized losses:    
Debt securities (2,339)   (120)   (2,487)   (520)  
Equity securities 1,433    (236)   (2,949)   (682)  
Total gross realized and unrealized losses (906)   (356)   (5,436)   (1,202)  
Net realized and unrealized gains (losses) on investments $ 10,383    $ 1,955    $ 7,558    $ 4,256   

-13-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 2020


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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands)
Net realized and unrealized gains (losses) $ 3,319    $ 1,241    $ (744)   $ 3,625   
Less:
Net realized and unrealized gains (losses) on securities sold 53    (76)   (582)   250   
Net realized and unrealized gains (losses) recognized during the period still held as of the end-of-period
$ 3,266    $ 1,317    $ (162)   $ 3,375   



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:

໿
June 30, 2020
Amortized  
Cost Fair Value
Securities with Maturity Dates (In thousands)
Debt securities, available-for-sale:    
One year or less $ 36,092    $ 36,331   
Over one through five years 186,332    193,816   
Over five through ten years 138,456    145,727   
Over ten years 176,016    180,087   
Total $ 536,896    $ 555,961   

Net Investment Income

Net investment income consisted of the following:
໿
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands)
Interest income $ 3,249    $ 4,169    $ 7,071    $ 7,826   
Dividends income 92    90    162    143   
Net investment income $ 3,341    $ 4,259    $ 7,233    $ 7,969   



-14-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 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:
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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)    
June 30, 2020
Debt securities - available-for-sale:            
United States government obligations and authorities
$ 52,573    $ 197    $ 149    $   $ 52,722    $ 200   
Obligations of states and political subdivisions 105    —    —    —    105    —   
Corporate 25,597    585    —    —    25,597    585   
International 4,962    60    206      5,168    61   
$ 83,237    $ 842    $ 355    $   $ 83,592    $ 846   


Less than 12 months 12 months or longer Total
  Gross   Gross   Gross