UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SeptemberSEPTEMBER 30, 20182019
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
FedNatHoldingCompany
(Exact name of registrant as specified in its charter)
Florida65-0248866
Florida65-0248866
(State or Other Jurisdictionother jurisdiction of Incorporationincorporation or Organization)organization)(IRS Employer Identification Number)
14050 N.W. 14th14th 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 classTrading SymbolName of each exchange on which registered
Common StockFNHCNasdaq 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.     YesþNo¨
Indicate by check mark whether the registrant has electronically submitted and posted on its corporate website, if any,electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YesþNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer," “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated Filer¨
Accelerated filerFiler
þ
Non-accelerated Filer¨
Non‑accelerated filer¨
Smaller reporting company¨
(Do not check if a 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¨Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 1, 2018,2019, the registrant had 12,774,44412,869,366 shares of common stock outstanding.





FEDNAT HOLDING COMPANY
TABLE OF CONTENTS
 






-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)
໿
 September 30,December 31,
 20192018
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $452,698 and $433,664, respectively)$468,130  $428,641  
Debt securities, held-to-maturity, at amortized cost4,369  5,126  
Equity securities, at fair value19,014  17,758  
Total investments491,513  451,525  
Cash and cash equivalents121,418  64,423  
Prepaid reinsurance premiums170,294  108,577  
Premiums receivable, net of allowance of $117 and $77, respectively39,932  29,791  
Reinsurance recoverable, net202,875  211,424  
Deferred acquisition costs, net48,539  39,436  
Income taxes, net1,056  5,220  
Other assets25,602  14,975  
Total assets$1,101,229  $925,371  
       
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves$286,948  $296,230  
Unearned premiums317,393  281,992  
Reinsurance payable122,802  63,599  
Long-term debt, net of deferred financing costs of $1,518 and $596, respectively98,482  44,404  
Deferred revenue6,239  4,585  
Other liabilities31,976  19,302  
Total liabilities863,840  710,112  
Commitments and contingencies (see Note 10)
Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized—  —  
Common stock, $0.01 par value: 25,000,000 shares authorized; 12,869,366 and 12,784,444 issued and outstanding, respectively129  128  
Additional paid-in capital143,088  141,128  
Accumulated other comprehensive income (loss)11,648  (3,750) 
Retained earnings82,524  77,753  
Total shareholders’ equity237,389  215,259  
Total liabilities and shareholders' equity$1,101,229  $925,371  
  September 30, December 31,
  2018 2017
ASSETS    
Investments:    
Debt securities, available-for-sale, at fair value (amortized cost of $432,051 and $422,300, respectively) $424,148
 $423,238
Debt securities, held-to-maturity, at amortized cost 5,255
 5,349
Equity securities, at fair value 19,535
 15,434
Total investments (including $0 and $26,284 related to the VIE, respectively) 448,938
 444,021
Cash and cash equivalents (including $0 and $14,211 related to the VIE, respectively) 69,457
 86,228
Prepaid reinsurance premiums 134,285
 135,492
Premiums receivable, net of allowance of $81 and $70, respectively (including $0 and $1,184 related to the VIE, respectively) 34,286
 46,393
Reinsurance recoverable, net 134,736
 124,601
Deferred acquisition costs, net 47,395
 40,893
Income taxes, net 3,006
 9,817
Property and equipment, net 4,120
 4,025
Other assets (including $0 and $2,322 related to the VIE, respectively) 14,388
 13,403
Total assets $890,611
 $904,873
     
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Liabilities    
Loss and loss adjustment expense reserves $221,114
 $230,515
Unearned premiums 296,329
 294,423
Reinsurance payable 77,004
 71,944
Long-term debt, net of deferred financing costs of $623 and $749, respectively 44,377
 49,251
Deferred revenue 4,913
 6,222
Other liabilities 23,938
 25,059
Total liabilities 667,675
 677,414
     
Commitments and contingencies (see Note 9)    
     
Shareholders' Equity    
Preferred stock, $0.01 par value: 1,000,000 shares authorized 
 
Common stock, $0.01 par value: 25,000,000 shares authorized; 12,774,444 and 12,988,247 shares issued and outstanding, respectively 128
 130
Additional paid-in capital 140,608
 139,728
Accumulated other comprehensive income (loss) (5,901) 1,770
Retained earnings 88,101
 70,009
Total shareholders’ equity attributable to FedNat Holding Company shareholders 222,936
 211,637
Non-controlling interest 
 15,822
Total shareholders’ equity 222,936
 227,459
Total liabilities and shareholders' equity $890,611
 $904,873


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 EndedNine Months Ended
September 30,September 30,
2019201820192018
Revenues:  
Net premiums earned$87,374  $98,493  $268,464  $264,159  
Net investment income4,068  3,137  12,037  9,058  
Net realized and unrealized investment gains (losses)794  1,760  5,050  916  
Direct written policy fees2,514  3,796  7,308  10,685  
Other income4,726  3,646  13,115  14,833  
Total revenues99,476  110,832  305,974  299,651  
       
Costs and expenses:      
Losses and loss adjustment expenses62,105  62,457  194,284  156,098  
Commissions and other underwriting expenses24,854  31,373  75,650  91,467  
General and administrative expenses5,246  5,000  17,336  16,345  
Interest expense1,894  1,032  8,860  3,139  
Total costs and expenses94,099  99,862  296,130  267,049  
       
Income (loss) before income taxes5,377  10,970  9,844  32,602  
Income tax expense (benefit)718  3,020  1,940  8,587  
Net income (loss)4,659  7,950  7,904  24,015  
Net income (loss) attributable to non-controlling interest—  —  —  (218) 
Net income (loss) attributable to FedNat Holding Company shareholders$4,659  $7,950  $7,904  $24,233  
      
Net Income (Loss) Per Common Share      
Basic$0.36  $0.62  $0.62  $1.90  
Diluted$0.36  $0.62  $0.61  $1.88  
      
Weighted Average Number of Shares of Common Stock Outstanding      
Basic12,854  12,749  12,831  12,775  
Diluted12,897  12,870  12,880  12,866  
      
Dividends Declared Per Common Share$0.08  $—  $0.24  $0.16  
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2018 2017 2018 2017
Revenues:        
Net premiums earned $98,493
 $80,764
 $264,159
 $245,978
Net investment income 3,137
 2,603
 9,058
 7,481
Net realized and unrealized investment gains (losses) 1,760
 6,101
 916
 8,644
Direct written policy fees 3,796
 4,098
 10,685
 13,617
Other income 3,646
 5,131
 14,833
 14,190
Total revenues 110,832
 98,697
 299,651
 289,910
   
  
    
Costs and expenses:  
  
    
Losses and loss adjustment expenses 62,457
 75,367
 156,098
 188,683
Commissions and other underwriting expenses 31,373
 28,386
 91,467
 86,883
General and administrative expenses 5,000
 5,042
 16,345
 14,737
Interest expense 1,032
 81
 3,139
 247
Total costs and expenses 99,862
 108,876
 267,049
 290,550
   
  
    
Income (loss) before income taxes 10,970
 (10,179) 32,602
 (640)
Income tax expense (benefit) 3,020
 (3,781) 8,587
 (358)
Net income (loss) 7,950
 (6,398) 24,015
 (282)
Net income (loss) attributable to non-controlling interest 
 (1,674) (218) (1,975)
Net income (loss) attributable to FedNat Holding Company shareholders $7,950
 $(4,724) $24,233
 $1,693
   
  
    
Net Income (Loss) Per Common Share  
  
    
Basic $0.62
 $(0.36) $1.90
 $0.13
Diluted $0.62
 $(0.36) $1.88
 $0.13
   
  
    
Weighted Average Number of Shares of Common Stock Outstanding  
  
    
Basic 12,749
 13,135
 12,775
 13,211
Diluted 12,870
 13,135
 12,866
 13,302
   
  
    
Dividends Declared Per Common Share $
 $0.08
 $0.16
 $0.24


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 EndedNine Months Ended
September 30,September 30,
2019201820192018
Net income (loss)$4,659  $7,950  $7,904  $24,015  
  
Change in net unrealized gains (losses) on investments, available-for-sale, net of tax2,388  (551) 15,398  (6,601) 
Comprehensive income (loss)7,047  7,399  23,302  17,414  
  
Less: comprehensive income (loss) attributable to non-controlling interest, net of tax—  —  —  (447) 
Comprehensive income (loss) attributable to FedNat Holding Company shareholders$7,047  $7,399  $23,302  $17,861  
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2018 2017 2018 2017
         
Net income (loss) $7,950
 $(6,398) $24,015
 $(282)
         
Change in net unrealized gains (losses) on investments, available-for-sale, net of tax (551) (2,445) (6,601) 514
Comprehensive income (loss) 7,399
 (8,843) 17,414
 232
         
Less: comprehensive income (loss) attributable to non-controlling interest, net of tax 
 (1,674) (447) (2,233)
Comprehensive income (loss) attributable to FedNat Holding Company shareholders
 $7,399
 $(7,169) $17,861
 $2,465


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




-5-


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


໿
Total
Shareholders'
Equity
AccumulatedAttributable to
Common StockAdditionalOtherFedNat HoldingNon-Total
PreferredIssuedPaid-inComprehensiveRetainedCompanyControllingShareholders'
StockSharesAmountCapitalIncome (Loss)EarningsShareholdersInterestEquity
Balance as of June 30, 2019$—  12,849,319  $128  $142,486  $9,260  $78,911  $230,785  $—  $230,785  
Net income (loss)—  —  —  —  —  4,659  4,659  —  4,659  
Other comprehensive income (loss)—  —  —  —  2,388  —  2,388  —  2,388  
Dividends declared—  —  —  —  —  (1,046) (1,046) —  (1,046) 
Shares issued under share-based compensation plans—  20,047   —  —  —   —   
Share-based compensation—  —  —  602  —  —  602  —  602  
Balance as of September 30, 2019$—  12,869,366  $129  $143,088  $11,648  $82,524  $237,389  $—  $237,389  

Total
Shareholders'
Equity
AccumulatedAttributable to
Common StockAdditionalOtherFedNat HoldingNon-Total
PreferredIssuedPaid-inComprehensiveRetainedCompanyControllingShareholders'
StockSharesAmountCapitalIncome (Loss)EarningsShareholdersInterestEquity
Balance as of June 30, 2018$—  12,731,777  $127  $140,102  $(5,350) $80,149  $215,028  $—  $215,028  
Net income (loss)—  —  —  —  —  7,950  7,950  —  7,950  
Other comprehensive income (loss)—  —  —  —  (551) —  (551) —  (551) 
Dividends declared—  —  —  —  —    —   
Shares issued under share-based compensation plans—  42,667   22  —  —  23  —  23  
Share-based compensation—  —  —  484  —  —  484  —  484  
Balance as of September 30, 2018$—  12,774,444  $128  $140,608  $(5,901) $88,101  $222,936  $—  $222,936  

The accompanying notes are an integral part of the unaudited consolidated financial statements.
              Total    
              Shareholders'    
              Equity    
          Accumulated   Attributable to    
    Common Stock Additional Other   FedNat Holding Non- Total
  Preferred Issued   Paid-in Comprehensive Retained Company Controlling Shareholders'
  Stock Shares Amount Capital Income (Loss) Earnings Shareholders Interest Equity
Balance as of June 30, 2018 $
 12,731,777
 $127
 $140,102
 $(5,350) $80,149
 $215,028
 $
 $215,028
Net income (loss) 
 
 
 
 
 7,950
 7,950
 
 7,950
Other comprehensive income (loss) 
 
 
 
 (551) 
 (551) 
 (551)
Dividends declared 
 
 
 
 
 2
 2
 
 2
Shares issued under share-based compensation plans 
 42,667
 1
 22
 
 
 23
 
 23
Repurchases of common stock 
 
 
 
 
 
 
 
 
Share-based compensation 
 
 
 484
 
 
 484
 
 484
Balance as of September 30, 2018 $
 12,774,444
 $128
 $140,608
 $(5,901) $88,101
 $222,936
 $
 $222,936

-6-

              Total    
              Shareholders'    
              Equity    
          Accumulated   Attributable to    
    Common Stock Additional Other   FedNat Holding Non- Total
  Preferred Issued   Paid-in Comprehensive Retained Company Controlling Shareholders'
  Stock Shares Amount Capital Income (Loss) Earnings Shareholders Interest Equity
Balance as of June 30, 2017 $
 13,060,207
 $130
 $138,191
 $5,157
 $73,126
 $216,604
 $18,169
 $234,773
Net income (loss) 
 
 
 
 
 (4,724) (4,724) (1,674) (6,398)
Other comprehensive income (loss) 
 
 
 
 (2,444) 
 (2,444) (1) (2,445)
Dividends declared 
 
 
 
 
 (1,097) (1,097) 
 (1,097)
Shares issued under share-based compensation plans 
 77,519
 
 102
 
 
 102
 
 102
Repurchases of common stock 
 (84,445) 
 1
 
 (1,317) (1,316) 
 (1,316)
Share-based compensation 
 
 
 867
 
 
 867
 
 867
Balance as of September 30, 2017 $
 13,053,281
 $130
 $139,161
 $2,713
 $65,988
 $207,992
 $16,494
 $224,486










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


Total
Shareholders'
Equity
AccumulatedAttributable to
Common StockAdditionalOtherFedNat HoldingNon-Total
PreferredIssuedPaid-inComprehensiveRetainedCompanyControllingShareholders'
StockSharesAmountCapitalIncome (Loss)EarningsShareholdersInterestEquity
Balance as of January 1, 2019$—  12,784,444  $128  $141,128  $(3,750) $77,753  $215,259  $—  $215,259  
Net income (loss)—  —  —  —  —  7,904  7,904  —  7,904  
Other comprehensive income (loss)—  —  —  —  15,398  —  15,398  —  15,398  
Dividends declared—  —  —  —  —  (3,133) (3,133) —  (3,133) 
Shares issued under share-based compensation plans—  84,922   —  —  —   —   
Share-based compensation—  —  —  1,960  —  —  1,960  —  1,960  
Balance as of September 30, 2019$—  12,869,366  $129  $143,088  $11,648  $82,524  $237,389  $—  $237,389  
              Total    
              Shareholders'    
              Equity    
          Accumulated   Attributable to    
    Common Stock Additional Other   FedNat Holding Non- Total
  Preferred Issued   Paid-in Comprehensive Retained Company Controlling Shareholders'
  Stock Shares Amount Capital Income (Loss) Earnings Shareholders Interest Equity
Balance as of January 1, 2018 $
 12,988,247
 $130
 $139,728
 $1,770
 $70,009
 $211,637
 $15,822
 $227,459
Cumulative effect of new accounting standards 
 
 
 
 (994) 994
 
 
 
Net income (loss) 
 
 
 
 
 24,233
 24,233
 (218) 24,015
Other comprehensive income (loss) 
 
 
 
 (6,372) 
 (6,372) (229) (6,601)
Dividends declared 
 
 
 
 
 (2,077) (2,077) 
 (2,077)
Acquisition of non-controlling interest 
 
 
 (1,005) (305) 
 (1,310) (15,375) (16,685)
Shares issued under share-based compensation plans 
 112,905
 1
 38
 
 
 39
 
 39
Repurchases of common stock 
 (326,708) (3) 
 
 (5,058) (5,061) 
 (5,061)
Share-based compensation 
 
 
 1,847
 
 
 1,847
 
 1,847
Balance as of September 30, 2018 $
 12,774,444
 $128
 $140,608
 $(5,901) $88,101
 $222,936
 $
 $222,936


Total
Shareholders'
Equity
AccumulatedAttributable to
Common StockAdditionalOtherFedNat HoldingNon-Total
PreferredIssuedPaid-inComprehensiveRetainedCompanyControllingShareholders'
StockSharesAmountCapitalIncome (Loss)EarningsShareholdersInterestEquity
Balance as of January 1, 2018$—  12,988,247  $130  $139,728  $1,770  $70,009  $211,637  $15,822  $227,459  
Net income (loss)—  —  —  —  —  24,233  24,233  (218) 24,015  
Other comprehensive income (loss)—  —  —  —  (6,372) —  (6,372) (229) (6,601) 
Dividends declared—  —  —  —  —  (2,077) (2,077) —  (2,077) 
Cumulative effect of new accounting standards—  —  —  —  (994) 994  —  —  —  
Acquisition of non-controlling interest—  —  —  (1,005) (305) —  (1,310) (15,375) (16,685) 
Shares issued under share-based compensation plans—  112,905   38  —  —  39  —  39  
Repurchases of common stock—  (326,708) (3) —  —  (5,058) (5,061) —  (5,061) 
Share-based compensation—  —  —  1,847  —  —  1,847  —  1,847  
Balance as of September 30, 2018$—  12,774,444  $128  $140,608  $(5,901) $88,101  $222,936  $—  $222,936  
              Total    
              Shareholders'    
              Equity    
          Accumulated   Attributable to    
    Common Stock Additional Other   FedNat Holding Non- Total
  Preferred Issued   Paid-in Comprehensive Retained Company Controlling Shareholders'
  Stock Shares Amount Capital Income (Loss) Earnings Shareholders Interest Equity
Balance as of January 1, 2017 $
 13,473,120
 $134
 $136,779
 $1,941
 $76,884
 $215,738
 $18,727
 $234,465
Net income (loss) 
 
 
 
 
 1,693
 1,693
 (1,975) (282)
Other comprehensive income (loss) 
 
 
 
 772
 
 772
 (258) 514
Dividends declared 
 
 
 
 
 (3,189) (3,189) 
 (3,189)
Shares issued under share-based compensation plans 
 159,014
 
 103
 
 
 103
 
 103
Repurchases of common stock 
 (578,853) (4) 
 
 (9,400) (9,404) 
 (9,404)
Share-based compensation 
 
 
 2,279
 
 
 2,279
 
 2,279
Balance as of September 30, 2017 $
 13,053,281
 $130
 $139,161
 $2,713
 $65,988
 $207,992
 $16,494
 $224,486


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)


໿
Nine Months Ended
September 30,
20192018
Cash flow from operating activities:  
Net income (loss)$7,904  $24,015  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:  
Net realized and unrealized investment (gains) losses(5,050) (916) 
Loss (gain) on early extinguishment of debt3,575  —  
Amortization of investment premium or discount, net606  1,333  
Depreciation and amortization1,088  1,033  
Share-based compensation1,960  1,847  
Changes in operating assets and liabilities:  
Prepaid reinsurance premiums(61,717) 1,207  
Premiums receivable, net(10,141) 12,107  
Reinsurance recoverable, net8,549  (10,135) 
Deferred acquisition costs(9,103) (6,502) 
Income taxes, net(893) 9,051  
Deferred revenue1,654  (1,309) 
Loss and loss adjustment expense reserves(9,282) (9,401) 
Unearned premiums35,401  1,906  
Reinsurance payable59,203  5,060  
Other2,632  (1,038) 
Net cash provided by (used in) operating activities26,386  28,258  
Cash flow from investing activities:  
Proceeds from sales of equity securities7,461  7,407  
Proceeds from sales of debt securities123,415  153,970  
Purchases of equity securities(5,190) (8,377) 
Purchases of debt securities(169,933) (254,110) 
Maturities and redemptions of debt securities29,158  86,935  
Purchases of property and equipment(1,562) (1,002) 
Net cash provided by (used in) investing activities(16,651) (15,177) 
Cash flow from financing activities:  
Issuance of long-term debt, net of issuance costs98,390  —  
Payment of long-term debt and prepayment penalties(48,000) (5,000) 
Purchase of non-controlling interest—  (16,685) 
Purchases of FedNat Holding Company common stock—  (5,061) 
Issuance of common stock for share-based awards 39  
Dividends paid(3,131) (3,145) 
Net cash provided by (used in) financing activities47,260  (29,852) 
Net increase (decrease) in cash and cash equivalents56,995  (16,771) 
Cash and cash equivalents at beginning-of-period64,423  86,228  
Cash and cash equivalents at end-of-period$121,418  $69,457  
  Nine Months Ended
  September 30,
  2018 2017
Cash flow from operating activities:    
Net income (loss) $24,015
 $(282)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Net realized and unrealized investment (gains) losses (916) (8,644)
Amortization of investment premium or discount, net 1,333
 3,065
Depreciation and amortization 1,033
 312
Share-based compensation 1,847
 2,279
Tax impact related to share-based compensation (32) (150)
Changes in operating assets and liabilities:    
Prepaid reinsurance premiums 1,207
 (33,025)
Premiums receivable, net 12,107
 (291)
Reinsurance recoverable, net (10,135) (286,630)
Deferred acquisition costs (6,502) (2,363)
Income taxes, net 9,083
 (5,110)
Deferred revenue (1,309) (73)
Loss and loss adjustment expense reserves (9,401) 303,115
Unearned premiums 1,906
 18,205
Reinsurance payable 5,060
 47,325
Other (1,038) 4,517
Net cash provided by (used in) operating activities 28,258
 42,250
Cash flow from investing activities:    
Proceeds from sales of equity securities 7,407
 57,016
Proceeds from sales of debt securities 153,970
 195,090
Purchases of equity securities (8,377) (34,339)
Purchases of debt securities (254,110) (268,999)
Maturities and redemptions of debt securities 86,935
 28,718
Purchases of property and equipment (1,002) (304)
Net cash provided by (used in) investing activities (15,177) (22,818)
Cash flow from financing activities:    
Payment of long-term debt (5,000) 
Purchase of non-controlling interest (16,685) 
Purchases of FedNat Holding Company common stock (5,061) (9,404)
Issuance of common stock for share-based awards 39
 103
Dividends paid (3,145) (3,189)
Net cash provided by (used in) financing activities (29,852) (12,490)
Net increase (decrease) in cash and cash equivalents (16,771) 6,942
Cash and cash equivalents at beginning-of-period 86,228
 74,593
Cash and cash equivalents at end-of-period $69,457
 $81,535


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



-8-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
 
໿
Nine months ended
September 30,
20192018
Supplemental disclosure of cash flow information:  
Cash paid (received) during the period for interest$4,860  $2,983  
Cash paid (received) during the period for income taxes$2,729  $(466) 
Significant non-cash investing and financing transactions:
Right-of-use asset$(7,860) $—  
Lease liability$7,860  $—  
  Nine Months Ended
  September 30,
  2018 2017
Supplemental disclosure of cash flow information:    
Cash paid (received) during the period for income taxes $(466) $(414)


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






- 9-
-9-



FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20182019


1. ORGANIZATION, CONSOLIDATION AND BASIS OF PREPARATIONPRESENTATION


Organization


FedNat Holding Company (“FNHC,” the “Company,” “we,” “us,” or "our") is an 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.  The Company, through its wholly owned subsidiaries, is authorized to underwrite and/or place homeowners multi-peril ("homeowners"), federal flood and other lines of insurance in Florida and other states. The Company markets, distributes and services its 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 specific lines of insurance by the state’s insurance departments, in Florida, Louisiana, Texas, Georgia, South Carolina, Alabama and Alabama.Mississippi.  Monarch National Insurance Company (“MNIC”), our other insurance subsidiary, is licensed as an admitted carrier in Florida. Admitted carriers are bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices. Admitted carriers are also required to financially contribute to the state guarantee fund used to pay for losses if an insurance carrier becomes insolvent or unable to pay loss amounts due to their policyholders.


Monarch National Insurance Company

We completed our acquisition of MNIC in February 2018 by acquiring the membership interests in MNIC’s indirect parent, Monarch Delaware Holdings LLC (“Monarch Delaware”), held by our joint venture partners.  Our joint venture partners were Crosswinds Investor Monarch LP (“Crosswinds Investor”), a wholly owned subsidiary of Crosswinds Holdings Inc. (“Crosswinds Holdings”), a private equity firm and asset manager, and Transatlantic Reinsurance Company (“TransRe”), an international property and casualty reinsurance company. We purchased the 42.4% Class A membership interest in Monarch Delaware held by Crosswinds Investor for $12.3 million and the 15.2% non-voting membership interest in Monarch Delaware held by TransRe for $4.4 million. We also repaid the outstanding principal balance and interest due on the $5.0 million promissory note to TransRe. MNIC was organized in March 2015 and writes homeowners property and casualty insurance in Florida. 

Crosswinds AUM LLC, a subsidiary of Crosswinds Holdings, serves as an investment consultant to FNHC through December 31, 2018 for a quarterly fee of $75,000.  In addition, subsidiaries of Crosswinds Holdings and TransRe each have a right of first refusal through December 31, 2018 to participate in our catastrophe excess of loss reinsurance program, at market rates and terms, up to a placement of $10.0 million in reinsurance limit in the aggregate from Crosswinds Holdings and up to a placement of $10.0 million in reinsurance limit in excess of its placement on our current catastrophe excess of loss reinsurance program from TransRe. TransRe does currently participate in the reinsurance program.

Please referRefer to Basis of Presentation and Principles of Consolidation and Note 12 below.


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 the Company’s homeowners insurance products to consumers in Florida. As a percentage of the total homeowners premiums we underwrote, 24.5%23.6% and 24.6%24.5% were from Allstate’s network of Florida agents, for the three months ended September 30, 20182019 and 2017,2018, respectively. For the nine months ended September 30, 2019 and 2018, 23.5% and 2017, 23.9% and 24.0%, respectively, of the homeowners premiums we underwrote were from Allstate's network of Florida agents.


- 10-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


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, 16.2%25.2% and 10.7%16.2%, respectively, of the Company’s premiums were underwritten by SageSure, for the three months ended September 30, 20182019 and 2017,2018, respectively. For the nine months ended September 30, 2019 and 2018, 22.4% and 2017, 14.2% and 9.7%, respectively, of the Company's homeowners premiums were underwritten by SageSure.Sagesure.


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.


As of December 31, 2017, in connection with the investment in Monarch Delaware, the
-10-


FedNat Holding Company had determined that the Company possessed the powerand Subsidiaries
Notes to direct the activities of the VIE that most significantly impact its economic performance and the Company was the primary beneficiary of the VIE.  As such, the Company consolidated Monarch Delaware in its consolidated financial statements. Refer to Monarch National Insurance Company above, related to our 100% ownership of Monarch Delaware that became effective on February 21, 2018. In accordance with the accounting standard on consolidation, a primary beneficiary that acquires additional ownership of the previously controlled and consolidated subsidiaries is accounted for as an equity transaction and re-measurement of assets and liabilities of previously controlled and consolidated subsidiaries is not permitted. As a result, we accounted for this transaction by eliminating the carrying value of the non-controlling interest to reflect our 100% ownership interest in MNIC as of February 21, 2018. The difference between the consideration paid and the amount by which the non-controlling interest was eliminated has been recognized in additional paid-in capital. Following the closing, Monarch Delaware and Monarch Holdings were merged into MNIC.

Revisions of Previously Issued Financial Statements

Revisions to the three and nine months ended September 30, 2017, were described in Note 1 and Note 16 to our Consolidated Financial Statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data" included in our most recent Form 10-K for the year ended December 31, 2017 (the "2017 Form 10-K").(Continued)

September 30, 2019

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES


Our significant accounting policies were described in Note 2 of our 20172018 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 nine months ended September 30, 2018.2019.


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

- 11-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

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 May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”("ASU") 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The update replaces all general and most industry specific revenue recognition guidance (excluding insurance) currently prescribed by GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a promised good or service to customers in an amount that reflects that consideration to which the entity expects to be entitled in exchange for that good or service. The Company adopted this update and the other related revenue standard clarifications and technical guidance effective January 1, 2018, using the modified retrospective approach. The Company completed the analysis of its non-insurance revenues and has concluded that the implementation did not have any impact on the Company’s consolidated financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments.  In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.Most notably, the combined new guidance required equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Company adopted the guidance effective January 1, 2018, by reflecting a cumulative adjustment, which increased retained earnings and decreased accumulated other comprehensive income by $1.0 million. This adjustment represented the level of net unrealized gains and losses associated with our equity investments with readily determinable market values as of January 1, 2018. The adoption also resulted in the recognition of $2.6 million in our consolidated statements of operations and statements of comprehensive income (loss), which represented the change in net unrealized gains and losses on our equity securities for the first nine months of 2018. This new guidance increases our earnings volatility compared to the prior accounting rules.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows2016-02, Leases (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) to improve the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update provides guidance on specific cash flow classification issues including the following: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Previous GAAP did not include specific guidance on these eight cash flow classification issues. The Company adopted the guidance effective January 1, 2018, and the provisions of this update did not have an impact on our consolidated statements of cash flows or results of operations.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The update allowed a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act of 2017 ("Tax Act"). Guidance had previously required the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to accumulated other comprehensive income. The Company adopted the guidance effective January 1, 2018, by reflecting a cumulative effect adjustment to retained earnings with an off-setting adjustment to accumulated other comprehensive income for less than $0.1 million.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting842).  The update expandssuperseded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The guidance requires non-employee share-based payments awards to be measured consistently with the accounting for employee share-based payment awards, which is the grant date fair value of the equity security, with measurement at the grant date. Previously, non-employee share-based payment awards were measured at either the fair value of consideration received or the fair value of the equity, at the earlier of the date the non-employee committed to perform or the date of performance completion.

- 12-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

The Company adopted the guidance effective June 30, 2018, and the provisions of this update did not have an impact on our consolidated financial position or results of operations.

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update provides corrections and improvements and clarifies certain aspects of the guidance issued in ASU 2016-01. The Company adopted the guidance effective July 1, 2018, and the provisions of this update did not have an impact on our consolidated financial position or results of operations.

Recently Issued Accounting Pronouncements, Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The update will supersede the currentprior lease guidance in Topic 840, Leases and lessees will beare required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.  Concurrently,Additionally, lessees will beare required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  The update isCompany adopted the guidance effective January 1, 2019, by reflecting a $6.1 million right-of-use asset, after-tax, and $6.1 million lease liability, after-tax, on our consolidated balance sheets for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.  The guidance is required to be applied using a modified retrospective transition approach forour leases existing at, or entered into after, the beginningin existence as of the earliest comparative periods presented in the financial statements.that date. All of the Company’sCompany's leases arewere classified as operating leases under current lease accounting guidance.  The Company intends to electand we elected the optional transition method and the package of practical expedient, which will allow us to recognize our leases as of January 1, 2019 through a cumulative-effect adjustment to retained earnings, withtherefore no adjustment to comparative prior periods presented.  We established a comprehensive approach to implementpresented have been made.  The provisions of this standard, andASU did not have gathered and assessed the necessary data to determine the scope ofan impact and now completing our evaluation of processes to meet the accounting and disclosure requirements.  The Company expects to recognize a right-of-sue asset and lease liability on our consolidated balance sheets, however the amount will depend on our leases in existence on January 1, 2019.  However, we do not expect there to be a significant difference in our pattern of lease expense recognition on our consolidated statements of operations, under this ASU.operations.


Refer to Note 10 below for additional information regarding leases.

Recently Issued Accounting Pronouncements, Not Yet 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 requirerequires 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 update is effective for interim and annual reporting periods beginning after December 15, 2019, 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.


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 update is effective for interim and annual reporting periods beginning after December 15, 2019, 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.


-11-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

3. ACQUISITIONS

On February 25, 2019, the Company executed a definitive agreement for the acquisition of the insurance operations of 1347 Property Insurance Holdings, Inc. ("PIH"). Specifically, the Company will purchase Maison Insurance Company ("MIC"), Maison Managers, Inc., and ClaimCor LLC (collectively, the "Maison Companies"). The purchase price is $51.0 million, which includes $25.5 million in cash and $25.5 million in shares of the Company’s common stock. The shares to be issued will be subsequently registered and will be subject to a five years standstill agreement. Additionally, in connection with the pending acquisition, on March 5, 2019, the Company closed on an offering of $100 million of Senior Unsecured Notes due 2029, which bear interest at the annual rate of 7.5%. A portion of the cash from the offering was used to retire the full $45.0 million of outstanding debt (thereby lowering our overall cost of borrowing) and the remainder will be used to purchase the Maison Companies and for other general corporate purposes.

In addition to the purchase price, PIH will receive five years rights of first refusal to provide reinsurance of up to 7.5% of any layer in FedNat’s catastrophe reinsurance program and a five years agreement for PIH to provide investment advisory services to FedNat. PIH has also agreed to a non-compete for five years following the closing with respect to residential property insurance in Alabama, Florida, Georgia, Louisiana, South Carolina and Texas.

The transaction, which is subject to the Maison Companies having consolidated GAAP net book value of at least $42 million as of closing and satisfaction of other customary closing conditions, is expected to close as soon as practicable after November 30, 2019, after the conclusion of the hurricane season.  

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.

- 13-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

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.


The classification of assets and liabilities inIf the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based uponon the lowest priority level input that is significant to the fair value.value measurement of the instrument.


-12-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

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:
 September 30, 2018September 30, 2019
 Level 1 Level 2 Level 3 TotalLevel 1Level 2Level 3Total
 (In thousands)(In thousands)
Debt securities - available-for-sale, at fair value:        Debt securities - available-for-sale, at fair value:    
United States government obligations and authorities $59,689
 $54,548
 $
 $114,237
United States government obligations and authorities$73,590  $100,650  $—  $174,240  
Obligations of states and political subdivisions 
 9,679
 
 9,679
Obligations of states and political subdivisions—  13,328  —  13,328  
Corporate securities 
 283,213
 
 283,213
Corporate securities—  255,399  —  255,399  
International securities 
 17,019
 
 17,019
International securities—  25,163  —  25,163  
Debt securities, at fair value 59,689
 364,459
 
 424,148
Debt securities, at fair value73,590  394,540  —  468,130  
            
Equity securities, at fair value 19,535
 
 
 19,535
Equity securities, at fair value16,570  2,444  —  19,014  
            
Total investments, at fair value $79,224
 $364,459
 $
 $443,683
Total investments, at fair value$90,160  $396,984  $—  $487,144  
໿
December 31, 2018
Level 1Level 2Level 3Total
(In thousands)
Debt securities - available-for-sale, at fair value:    
United States government obligations and authorities$43,918  $83,950  $—  $127,868  
Obligations of states and political subdivisions—  9,767  —  9,767  
Corporate securities—  268,731  —  268,731  
International securities—  22,275  —  22,275  
Debt securities, at fair value43,918  384,723  —  428,641  
    
Equity securities, at fair value16,037  1,721  —  17,758  
    
Total investments, at fair value$59,955  $386,444  $—  $446,399  
  December 31, 2017
  Level 1 Level 2 Level 3 Total
  (In thousands)
Debt securities - available-for-sale, at fair value:        
United States government obligations and authorities $51,219
 $46,918
 $
 $98,137
Obligations of states and political subdivisions 
 66,266
 
 66,266
Corporate securities 
 240,919
 
 240,919
International securities 
 17,916
 
 17,916
Debt securities, at fair value 51,219
 372,019
 
 423,238
         
Equity securities, at fair value 15,434
 
 
 15,434
         
Total investments, at fair value $66,653
 $372,019
 $
 $438,672


Held-to-maturity debt securities reported on the consolidated balance sheets at amortized cost and disclosed at fair value below (and in Note 4)5) and the level of fair value hierarchy of inputs used consisted of the following:
Level 1Level 2Level 3Total
(In thousands)
September 30, 2019$3,435  $914  $—  $4,349  
December 31, 20183,809  1,155  —  4,964  
  Level 1 Level 2 Level 3 Total
  (In thousands)
September 30, 2018 $3,846
 $1,232
 $
 $5,078
December 31, 2017 3,936
 1,338
 
 5,274


The Company has engaged a nationally recognized third party pricing service to provideWe measure the fair valuesvalue of our securities based on assumptions used by market participants in Level 2.pricing the security.  The Company reviewsmost appropriate valuation methodology is selected based on the third partyspecific 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 tests for significant differences betweenvalidate the fair value prices to a separate independent data service and ensure there are no material differences. Additionally, market price used to value the securitiesindicators, industry and the recent sales activities.economic events are monitored.



- 14-
-13-



FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018
2019


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: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.


There were no0 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 September 30, 20182019 and December 31, 2017.2018. There were no0 transfers between the fair value hierarchy levels during the nine months ended September 30, 20182019 and 2017.2018.


- 15-
-14-



FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 20182019


4.5. 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:
໿
AmortizedGrossGross 
 Amortized Gross Gross  CostUnrealizedUnrealized 
 Cost Unrealized Unrealized  or CostGainsLossesFair Value
 or Cost Gains Losses Fair Value(In thousands)
 (In thousands)
September 30, 2018        
September 30, 2019September 30, 2019    
Debt securities - available-for-sale:        Debt securities - available-for-sale:    
United States government obligations and authorities $116,969
 $20
 $2,752
 $114,237
United States government obligations and authorities$170,400  $3,986  $146  $174,240  
Obligations of states and political subdivisions 9,891
 9
 221
 9,679
Obligations of states and political subdivisions13,002  326  —  13,328  
Corporate 287,901
 246
 4,934
 283,213
Corporate244,735  10,765  101  255,399  
International 17,290
 20
 291
 17,019
International24,561  623  21  25,163  
 432,051
 295
 8,198
 424,148
452,698  15,700  268  468,130  
  
  
  
      
Debt securities - held-to-maturity:  
  
  
  Debt securities - held-to-maturity:    
United States government obligations and authorities 4,140
 1
 174
 3,967
United States government obligations and authorities3,589  18  62  3,545  
Corporate 1,035
 3
 6
 1,032
Corporate725  23  —  748  
International 80
 
 1
 79
International55   —  56  
 5,255
 4
 181
 5,078
4,369  42  62  4,349  
Total investments (1) $437,306
 $299
 $8,379
 $429,226
Total investments, excluding equity securitiesTotal investments, excluding equity securities$457,067  $15,742  $330  $472,479  
໿


(1) As a result of the adoption of ASU 2016-01 on January 1, 2018 (see additional details in Note 2 above) for our equity securities we now recognize changes in unrealized gains or losses within our statements of operations; therefore they are not included as of September 30, 2018.
AmortizedGrossGross 
CostUnrealizedUnrealized 
or CostGainsLossesFair Value
(In thousands)
December 31, 2018    
Debt securities - available-for-sale:    
United States government obligations and authorities$127,928  $1,091  $1,151  $127,868  
Obligations of states and political subdivisions9,870  27  130  9,767  
Corporate273,192  510  4,971  268,731  
International22,674  12  411  22,275  
433,664  1,640  6,663  428,641  
    
Debt securities - held-to-maturity:    
United States government obligations and authorities4,085   158  3,928  
Corporate986    982  
International55  —   54  
5,126   165  4,964  
Total investments, excluding equity securities$438,790  $1,643  $6,828  $433,605  

-15-
  Amortized Gross Gross  
  Cost Unrealized Unrealized  
  or Cost Gains Losses Fair Value
  (In thousands)
December 31, 2017        
Debt securities - available-for-sale:        
United States government obligations and authorities $98,739
 $244
 $846
 $98,137
Obligations of states and political subdivisions 66,319
 325
 378
 66,266
Corporate 239,435
 2,233
 749
 240,919
International 17,807
 136
 27
 17,916
  422,300
 2,938
 2,000
 423,238
         
Debt securities - held-to-maturity:        
United States government obligations and authorities 4,160
 9
 106
 4,063
Corporate 1,123
 21
 
 1,144
International 66
 1
 
 67
  5,349
 31
 106
 5,274
Equity securities 14,085
 1,628
 279
 15,434
Total investments $441,734
 $4,597
 $2,385
 $443,946

- 16-



FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018
2019



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 EndedNine Months Ended
September 30,September 30,
2019201820192018
(In thousands)
Gross realized and unrealized gains:  
Debt securities$897  $91  $2,048  $355  
Equity securities326  1,922  4,633  4,163  
Total gross realized and unrealized gains1,223  2,013  6,681  4,518  
  
Gross realized and unrealized losses:  
Debt securities(4) (253) (524) (2,571) 
Equity securities(425) —  (1,107) (1,031) 
Total gross realized and unrealized losses(429) (253) (1,631) (3,602) 
Net realized and unrealized gains (losses) on investments$794  $1,760  $5,050  $916  
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2018 2017 2018 2017
  (In thousands)
Gross realized and unrealized gains:        
Debt securities $91
 $618
 $355
 $1,471
Equity securities 1,922
 6,527
 4,163
 9,776
Total gross realized and unrealized gains 2,013
 7,145
 4,518
 11,247
   
      
Gross realized and unrealized losses:  
      
Debt securities (253) (103) (2,571) (1,293)
Equity securities 
 (941) (1,031) (1,310)
Total gross realized and unrealized losses (253) (1,044) (3,602) (2,603)
Net realized and unrealized gains (losses) on investments $1,760
 $6,101
 $916
 $8,644

Proceeds from sale of investment securities were $161.4 million and $252.1 million for the nine months ended September 30, 2018 and 2017, respectively.


The above line item, net realized and unrealized gains (losses) on investments, includes $1.6 million and $2.6 million of recognized net unrealized gains onthe following equity securities for the threegains (losses) recognized in earnings:


Three Months EndedNine Months Ended
September 30,September 30,
2019201820192018
(In thousands)
Net realized and unrealized gains (losses)$(99) $1,922  $3,526  $3,132  
Less:
Net realized and unrealized gains (losses) on securities sold1,012  409  394  674  
Net unrealized gains (losses) still held as of the end-of-period$(1,111) $1,513  $3,132  $2,458  


-16-


FedNat Holding Company and nine months ended Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018, respectively.2019


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:
໿

September 30, 2019
Amortized 
CostFair Value
Securities with Maturity Dates(In thousands)
Debt securities, available-for-sale:  
One year or less$24,715  $24,761  
Over one through five years152,917  157,160  
Over five through ten years139,570  146,237  
Over ten years135,496  139,972  
452,698  468,130  
Debt securities, held-to-maturity:  
One year or less206  207  
Over one through five years3,983  3,960  
Over five through ten years69  71  
Over ten years111  111  
4,369  4,349  
Total$457,067  $472,479  

Net Investment Income

Net investment income consisted of the following:
໿
Three Months EndedNine Months Ended
September 30,September 30,
2019201820192018
(In thousands)
Interest income$4,005  $3,089  $11,831  $8,904  
Dividends income63  48  206  154  
Net investment income$4,068  $3,137  $12,037  $9,058  


- 17-
-17-



FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018
2019


  September 30, 2018
  Amortized  
  Cost Fair Value
Securities with Maturity Dates (In thousands)
Debt securities, available-for-sale:    
One year or less $36,645
 $36,575
Over one through five years 212,426
 209,585
Over five through ten years 181,102
 176,126
Over ten years 1,878
 1,862
  432,051
 424,148
Debt securities, held-to-maturity:    
One year or less 750
 751
Over one through five years 4,033
 3,869
Over five through ten years 472
 458
  5,255
 5,078
Total $437,306
 $429,226

Net Investment Income

Net investment income consisted of the following:
໿
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2018 2017 2018 2017
  (In thousands)
Interest income $3,089
 $2,492
 $8,904
 $7,073
Dividends income 48
 111
 154
 408
Net investment income $3,137
 $2,603
 $9,058
 $7,481

Aging of Gross Unrealized Losses


Gross unrealized losses and related fair values for debt securities, (and equity securities as of December 31, 2017), grouped by duration of time in a continuous unrealized loss position, consisted of the following:
໿
Less than 12 months12 months or longerTotal
 Gross Gross Gross
FairUnrealizedFairUnrealizedFairUnrealized
ValueLossesValueLossesValueLosses
  (In thousands)  
September 30, 2019
Debt securities - available-for-sale:      
United States government obligations and authorities$20,948  $115  $6,238  $31  $27,186  $146  
Obligations of states and political subdivisions—  —  —  —  —  —  
Corporate10,502  36  5,277  65  15,779  101  
International2,202  18  1,023   3,225  21  
33,652  169  12,538  99  46,190  268  
Debt securities, held-to-maturity:
United States government obligations and authorities100  —  2,306  62  2,406  62  
Corporate20  —  —  —  20  —  
International—  —  —  —  —  —  
120  —  2,306  62  2,426  62  
Total investments, excluding equity securities$33,772  $169  $14,844  $161  $48,616  $330  
  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)    
September 30, 2018            
Debt securities - available-for-sale:            
United States government obligations and authorities $83,061
 $1,450
 $27,124
 $1,302
 $110,185
 $2,752
Obligations of states and political subdivisions 5,879
 94
 3,265
 127
 9,144
 221
Corporate 202,142
 3,701
 34,306
 1,233
 236,448
 4,934
International 13,439
 285
 161
 6
 13,600
 291
  $304,521
 $5,530
 $64,856
 $2,668
 $369,377
 $8,198




Less than 12 months12 months or longerTotal
 Gross Gross Gross
FairUnrealizedFairUnrealizedFairUnrealized
ValueLossesValueLossesValueLosses
  (In thousands)  
December 31, 2018
Debt securities - available-for-sale:     
United States government obligations and authorities$22,673  $246  $29,727  $905  $52,400  $1,151  
Obligations of states and political subdivisions3,254  18  4,786  112  8,040  130  
Corporate160,361  3,058  53,232  1,913  213,593  4,971  
International15,608  217  4,678  194  20,286  411  
201,896  3,539  92,423  3,124  294,319  6,663  
      
Debt securities, held-to-maturity:
United States government obligations and authorities229   3,113  157  3,342  158  
Corporate591   90  —  681   
International54   —  —  54   
874   3,203  157  4,077  165  
Total investments, excluding equity securities$202,770  $3,547  $95,626  $3,281  $298,396  $6,828  


- 18-
-18-



FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018
2019


  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, 2017          
Debt securities - available-for-sale:          
United States government obligations and authorities $52,368
 $517
 $19,287
 $329
 $71,655
 $846
Obligations of states and political subdivisions 32,030
 221
 5,676
 157
 37,706
 378
Corporate 109,780
 625
 6,452
 124
 116,232
 749
International 8,935
 27
 25
 
 8,960
 27
  203,113
 1,390
 31,440
 610
 234,553
 2,000
             
Equity securities 4,312
 279
 
 
 4,312
 279
             
Total investments $207,425
 $1,669
 $31,440
 $610
 $238,865
 $2,279

As of September 30, 2018,2019, the Company held a total of 1,364106 debt securities that were in an unrealized loss position, of which 19542 securities were in an unrealized loss position continuously for 12 months or more. As of December 31, 2017,2018, the Company held a total of 8661,222 debt and equity securities that were in an unrealized loss position, of which 73371 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.


The Company holds some of its debt securities as available-for-sale and as such, these securities are recorded at fair value. The Company continually monitors the difference between cost and the estimated fair value of its investments, which involves uncertainty as to whether declines in value are temporary in nature. If the decline of a particular investment is deemed temporary, the Company records the decline as an unrealized loss in shareholders’ equity. If the decline is deemed to be other than temporary, the Company will write the security’s cost-basis or amortized cost-basis down to the fair value of the investment and recognizes an OTTI loss in the Company’s consolidated statement of operations. Additionally, any portion of such decline related to debt securities that is believed to arise from factors other than credit will be recorded as a component of other comprehensive income rather than charged against income. The Company did not0t have any OTTI losses on its available-for-sale debt securities for the first nine months of 20182019 and 2017.2018.


As discussed in Note 2 above, beginning January 1, 2018, the Company’sThe Company's equity investments are measured at fair value through net income. See Note 4 of our 2017 Form 10-K for information on how the Company assessed and determined whether unrealized losses on our equity securities were other-than-temporary, which was primarily based on the duration of the decline in the fair value of such securities relative to their cost as of the balance sheet date. The Company did not have any OTTI losses on its equity securities for the first nine months of 2017.income (loss).


Collateral Deposits


Cash and cash equivalents and investments, the majority of which were debt securities, with fair values of $10.2$10.8 million and $12.9$10.3 million, were deposited with governmental authorities and into custodial bank accounts as required by law or contractual obligations as of September 30, 20182019 and December 31, 2017,2018, respectively.


- 19-


FedNat Holding Company and Subsidiaries6. REINSURANCE
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


5. 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

2017-2018 Excess of Loss Reinsurance Programs
FNIC’s 2017-2018 reinsurance programs, which cost $174.4 million, including $124.0 million for the private reinsurance for FNIC’s Florida exposure, with prepaid automatic premium reinstatement protection on all layers, along with approximately $50.4 million payable to the Florida Hurricane Catastrophe Fund (“FHCF”). The combination of private and FHCF reinsurance treaties will afford FNIC with $2.2 billion of aggregate coverage with a maximum single event coverage totaling approximately $1.5 billion, exclusive of retentions. FNIC maintained its FHCF participation at 75% for the 2017 hurricane season. FNIC’s single event pre-tax retention for a catastrophic event in Florida is $18.0 million.

FNIC’s private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective June 1, 2017 and July 1, 2017. All private layers have prepaid automatic reinstatement protection, except the FHCF supplemental layer reinsurance contract, which affords FNIC additional coverage for subsequent events. The reinsurance program includes multiple year protection with $89.0 million of new multiple year protection this year and $156.0 million of renewing multiple year protection from last year. These private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all layers attach after $25.1 million in losses for FNIC’s exposure. FNIC purchased an underlying limit of protection for $7.1 million excess of $18.0 million with prepaid automatic reinstatement protection. These treaties are with reinsurers that currently have an A.M. Best Company (“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 afford us up to an additional $21.0 million of aggregate coverage with first event coverage totaling $5.0 million and second event coverage up to $16.0 million. The Non-Florida retention is lowered to $13.0 million for the first event and $2.0 million for the second event (for hurricane losses only) on a gross basis though it is reduced to $6.5 million and $1.0 million on a net basis after taking into account the profit share agreement that FNIC has with our non-affiliated managing general underwriter that writes our Non-Florida property business. FNIC’s Non-Florida reinsurance program cost includes $1.7 million for this private reinsurance, including prepaid automatic premium reinstatement protection.

MNIC’s 2017-2018 reinsurance program, which cost $5.0 million, including $3.2 million for the private reinsurance for MNIC’s Florida exposure including prepaid automatic premium reinstatement protection on all layers, along with $1.8 million payable to FHCF. The combination of private and FHCF reinsurance treaties affords MNIC with $109.0 million of aggregate coverage with a maximum single event coverage totaling approximately $68.1 million, exclusive of retentions. MNIC maintained its FHCF participation at 75% for the 2017 hurricane season.

MNIC’s private market excess of loss treaties are effective July 1, 2017, and all private layers have prepaid automatic reinstatement protection, which affords MNIC additional coverage for subsequent events, and have a cascading feature such that substantially all layers attach at $3.4 million for MNIC’s Florida exposure. These treaties 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.


2018-2019 Excess of Loss Reinsurance Programs
With the February 21, 2018 acquisition of the minority interests of MNIC, the Company has 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 programs is estimated to cost $147.7$148.8 million. This amount includes approximately $102.5$102.7 million for the private reinsurance for the

- 20-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

Company’s exposure, including prepaid automatic premium reinstatement protection, along with approximately $45.2$46.1 million payable to the FHCF. The combination of private and FHCF reinsurance treaties affords FNIC and MNIC approximately $1.8 billion of aggregate coverage with a maximum single event coverage totaling approximately $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 affords 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
-19-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

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 current 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 last year 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 afford 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 our non-Florida property business. FNIC’s non-Florida reinsurance program cost will approximate $2.0 million for this private reinsurance, including prepaid automatic premium reinstatement protection.


The Company’s cost and amounts of reinsurance are based on management’s current analysis of exposure to catastrophic risk. The data will be subjected to exposure level analysis at various dates during the period ending December 31, 2018. This analysis of the Company’s 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 as a result of increases or decreases in the Company’s exposure level.


2019-2020 Catastrophe Excess of Loss Reinsurance Program
Given the pending acquisition of 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 provides 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 $224.4 million, of which FNIC's and MNIC's share of the cost is estimated to total $179.3 million.

The combined FNIC, MNIC and MIC private market excess of loss treaties, covering both Florida and non-Florida exposures, become 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, MNIC and MIC’s combined 2019-2020 reinsurance program is estimated to cost $224.4 million. This amount includes approximately $178.8 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic premium reinstatement protection, along with approximately $45.6 million payable to the FHCF. The combination of private and FHCF reinsurance treaties will afford 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 premium cost. The allocation methodology by which FNIC, MNIC, and MIC will determine 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 will share 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 treaties afford 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.
-20-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

FNIC’s non-Florida reinsurance program cost for the above specific coverage will approximate $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
OurFNIC'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 30% and 10% of the paid losses occurring during the terms of the treaties, until each treaty is commuted.


On July 1, 2017, FNIC bound a 10% quota-share on its Florida homeowners book of business, which excluded named storms.storms, subject to certain limitations including, but not limited to caps on losses associated with occurrences. This treaty is not subject to accounting as a retrospectively rated contract.

The existing 10% quota-share 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 will be returned to FNIC.


FNIC’sOn July 1, 2018, FNIC renewed the quota-share reinsurance program for 2018-2019, is a new 2% quota-sharetreaty on FNIC’s its Florida homeowners book of business, which became effective on July 1, 2018 on an in-force, new and renewal basis, excluding named storms.storms, which was initially set at 2%, and is subject to certain limitations including, but not limited to caps on losses associated with occurrences. 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 will be 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 initially set at 10%, which is subject to certain limitations including, but not limited to, caps on losses associated with non-named storm catastrophe losses. 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.


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


The Company’s private passenger automobile quota-share treaties are typically programs which becomebecame effective at different points in the year and cover auto policies across several states. The automobile quota-share treaties cede approximately 75% of all written premiums entered into by the Company, subject to certain limitations including, but not limited to premium and other caps.


Associated Trust Agreements
Certain reinsurance agreements require FNIC and MNIC to secure the credit, regulatory and business risk. Fully funded trust agreements securing these risks for FNIC totaled less than $0.1 million and $2.6 million as of September 30, 20182019 and December 31, 2017, respectively.2018.



-21-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 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:
໿
September 30,December 31,
20192018
(In thousands)
Reinsurance recoverable on paid losses$47,857  $45,028  
Reinsurance recoverable on unpaid losses155,018  166,396  
Reinsurance recoverable, net$202,875  $211,424  
  September 30, December 31,
  2018 2017
  (In thousands)
Reinsurance recoverable on paid losses $42,664
 $26,256
Reinsurance recoverable on unpaid losses 92,072
 98,345
Reinsurance recoverable, net $134,736
 $124,601


As of September 30, 20182019 and December 31, 2017,2018, the Company had reinsurance recoverable of $105.1$164.0 million and $88.0$183.5 million, respectively as a result of Hurricane Michael and Irma. Hurricane Irma made landfall in the United States as a Category 4 hurricane on September 10, 2017. Additionally, allAll 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.



Net Premiums Written and Net Premiums Earned


Net premiums written and net premiums earned consisted of the following:
໿
໿
Three Months EndedNine Months Ended
September 30,September 30,
2019201820192018
(In thousands)
Net Premiums Written    
Direct$159,131  $139,022  $460,534  $440,151  
Ceded(146,231) (81,023) (220,363) (177,604) 
$12,900  $57,999  $240,171  $262,547  
Net Premiums Earned    
Direct$145,546  $144,907  $425,133  $438,239  
Ceded(58,172) (46,414) (156,669) (174,080) 
$87,374  $98,493  $268,464  $264,159  

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2018 2017 2018 2017
  (In thousands)
Net Premiums Written        
Direct $139,022
 $154,782
 $440,151
 $469,525
Ceded (81,023) (146,522) (177,604) (249,248)
  $57,999
 $8,260
 $262,547
 $220,277
Net Premiums Earned  
  
  
  
Direct $144,907
 $152,779
 $438,239
 $451,320
Ceded (46,414) (72,015) (174,080) (205,342)
  $98,493
 $80,764
 $264,159
 $245,978



- 22-
-22-



FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 20182019


6.7. LOSS AND LOSS ADJUSTMENT RESERVES


The liability for loss and LAE reserves is determined on an individual-case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and incurred but not reported ("IBNR").


Activity in the liability for loss and LAE reserves is summarized as follows:


Nine Months Ended
September 30,
20192018
(In thousands)
Gross reserves, beginning-of-period$296,230  $230,515  
Less: reinsurance recoverable (1)(166,396) (98,345) 
Net reserves, beginning-of-period129,834  132,170  
  
Incurred loss, net of reinsurance, related to:  
Current year195,024  159,998  
Prior year loss development (redundancy) (2)1,238  330  
Ceded losses subject to offsetting experience account adjustments (3)(1,978) (4,230) 
Prior years(740) (3,900) 
Total incurred loss and LAE, net of reinsurance194,284  156,098  
  
Paid loss, net of reinsurance, related to:  
Current year114,790  87,960  
Prior years77,398  71,266  
Total paid loss and LAE, net of reinsurance192,188  159,226  
  
Net reserves, end-of-period131,930  129,042  
Plus: reinsurance recoverable (1)155,018  92,072  
Gross reserves, end-of-period$286,948  $221,114  
  Nine Months Ended
  September 30,
  2018 2017
  (In thousands)
Gross reserves, beginning-of-period $230,515
 $158,110
Less: reinsurance recoverable (1) (98,345) (40,412)
Net reserves, beginning-of-period 132,170
 117,698
     
Incurred loss, net of reinsurance, related to:    
Current year 159,998
 191,747
Prior year loss development (2) 330
 8,309
Ceded losses subject to offsetting experience account adjustments (3) (4,230) (11,373)
Prior years (3,900) (3,064)
Total incurred loss and LAE, net of reinsurance 156,098
 188,683
   
  
Paid loss, net of reinsurance, related to:  
  
Current year 87,960
 109,988
Prior years 71,266
 57,322
Total paid loss and LAE, net of reinsurance 159,226
 167,310
   
  
Net reserves, end-of-period 129,042
 139,071
Plus: reinsurance recoverable (1) 92,072
 322,520
Gross reserves, end-of-period $221,114
 $461,591


(1)Reinsurance recoverable in this table includes only ceded loss and LAE reserves.
(1)Reinsurance recoverable in this table includes only ceded loss and LAE reserves.
(2)Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment.
(3)Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment, such that there is no impact on pre-tax net income.

(2)Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment.
(3)Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment, such that there is no impact on pre-tax net income (loss).

The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as such estimates are subject to the outcome of future events. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple interpretations. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.


During the nine months ended September 30, 2018,2019, the Company experienced $0.3$1.2 million of unfavorable loss and LAE reserve development on prior accident years, which relates to personal automobile andconsists of adverse development in its commercial general liability and personal automobile lines of business, offset by redundancy in the homeowners line of business as a result of lower LAE expenses associated primarily with Hurricane Irma.


During the nine months ended September 30, 2017,2018, the Company experienced $8.3$0.3 million of unfavorablefavorable loss and LAE reserve development on prior accident years primarilyredundancy in our personal automobile and homeowners line of business. The automobile’s unfavorable development primarily related to the 2016 accident year from our auto program in2017. The redundancy was the stateresult of Georgia. The homeowners unfavorable developmentlower LAE expenses associated primarily related to the continued impact from assignment of benefits and related ligation costs in the state of Florida.with Hurricane Irma.


- 23-
-23-



FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018
2019



As previously disclosed, the Company entered into 30% and 10% retrospectively-rated Florida-only property quota-share treaties, which ended on July 1, 2016 and 2017, respectively.  These agreements included a profit share (experience account) provision, under which the Company will receive ceded premium adjustments at the end of the treaty to the extent there is a positive balance in the experience account.  This experience account is based on paid losses rather than incurred losses.  Due to the retrospectively-rated nature of this treaty, when the experience account is positive we cede losses under these treaties as the claims are paid with an equal and offsetting adjustment to ceded premiums (in recognition of the related change to the experience account receivable), with no impact on net income.  Conversely, when the experience account is negative, the Company cedes losses on an incurred basis with no offsetting adjustment to ceded premiums, which impacts net income. Loss development can be either favorable or unfavorable regardless of whether the experience account is in a positive or negative position.


7.8. LONG-TERM DEBT

See Note 7 of our 2017 Form 10-K for information regarding our long-term debt.


As discussed in Note 13 above, the outstanding principal balancenet proceeds of the offering discussed in Senior Unsecured Notes below, were in part used to redeem all $45 million of the Company's Senior Unsecured Fixed Rate Notes Due 2022 and interest due on the $5.0Company's Senior Notes Due 2027. We recognized $3.6 million promissory note to TransRe was paid in full in February 2018. The associated deferred financing costs for this debt of less than $0.1 million was recognized as interest expense in our consolidated statements of operations for the threesix months ended June 30, 2019, for prepayment fees, including the write-off unamortized debt issuance costs on the repayment.

Senior Unsecured Notes

On March 31, 2018.5, 2019, the Company completed a private placement offering and issued $100.0 million in principal amount of Senior Unsecured Fixed Rate Notes due 2029 (the "Notes”), pursuant to an indenture dated as of March 5, 2019 (the “Indenture”). The Notes mature on March 15, 2029 and bear interest at a fixed rate of 7.5% per year, payable semi-annually in arrears, subject to increases in the interest rate payable in the event of a downgrade in the credit rating assigned to the Notes. The Notes are not convertible or exchangeable for any equity securities, other securities or assets of the Company or any subsidiary.


The Company may redeem the Notes under certain circumstances as set forth in the Indenture. Prior to March 15, 2024, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100.00% of the principal amount of the Notes to be redeemed, plus the “Applicable Premium,” plus accrued and unpaid interest on such Notes, if any, on the Notes redeemed, to the applicable redemption date. The “Applicable Premium” is defined in the Indenture to mean, with respect to any Note on any applicable redemption date, the greater of (1) 1.0% of the then-outstanding principal amount of such Note and (2) the excess (if any) of: (A) the present value at such redemption date of (i) the applicable redemption price of such Note at March 15, 2024 (excluding any accrued but unpaid interest), plus (ii) all required interest payments due on such Note through March 15, 2024 (excluding accrued but unpaid interest), computed using a discount rate equal to the Treasury Rate (as defined in the Indenture) on such redemption date plus 50 basis points; over (B) the then-outstanding principal amount of such Note.
8.
On and after March 15, 2024, the Company may redeem the Notes, in whole or in part, at 103.750% in 2024, 101.875% in 2025, and 100% in 2026 and thereafter, together with any accrued and unpaid interest on the Notes being redeemed to but excluding the date of redemption.

If a change in control of the Company, as defined in the Indenture, occurs, the holders of the Notes will have the right to require the Company to purchase all or a portion of their Notes at a price in cash equal to 101% of the principal amount thereof, plus any accrued but unpaid interest.

The Notes are senior unsecured obligations of the Company and will rank equally with all of the Company’s other future senior unsecured indebtedness. The Indenture includes customary covenants and events of default. Among other things, the covenants restrict the ability of the Company and its subsidiaries to incur additional indebtedness or make restricted payments, including dividends, and under certain circumstances, the Company is required to maintain certain levels of reinsurance coverage while the Notes remain outstanding, and maintain certain other financial covenants. These covenants are subject to important exceptions and qualifications set forth in the Indenture. Principal and interest on the Notes are subject to acceleration in the event of certain events of default, including automatic acceleration upon certain bankruptcy-related events.
-24-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

Long-term debt consisted of the following:
September 30,December 31,
20192018
(In thousands)
Senior unsecured fixed rate notes, due March 15, 2029, net of deferred financing costs of $1,518 and $0, respectively$98,482  $—  
Senior unsecured floating rate notes, due December 31, 2027, net of deferred financing costs of $0 and $348, respectively—  24,652  
Senior unsecured fixed rate notes, due December 31, 2022, net of deferred financing costs of $0 and $248, respectively—  19,752  
Total long-term debt, net$98,482  $44,404  

As of September 30, 2019, the Company's estimated annual aggregate amount of debt maturities includes the following:

Aggregate
Debt
For the Years Ending December 31,Maturities
(In thousands)
2019$— 
2020— 
2021— 
2022— 
2023— 
Thereafter100,000 
Total debt maturities100,000 
Less: deferred financing costs1,518 
Total debt maturities, net$98,482 

9. INCOME TAXES

The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%. The Securities and Exchange Commission and FASB previously issued guidance that allow a one-year measurement period after the enactment of the Tax Act to finalize calculations and record the related income tax effects. Subsequent to the Tax Act, we have continued to review and analyze the actual and potential impact. While we do not anticipate any significant changes to amounts currently recorded, any additional adjustments as a result of the Tax Act will be made during 2018.


Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes. The effective income tax rate was 27.5%13.4% and 37.1%27.5% for the three months ended September 30, 20182019 and 2017,2018, respectively. The effective income tax rate was 26.3%19.7% and 55.9%26.3% for the nine months ended September 30, 20182019 and 2017,2018, respectively. Differences in the effective tax and the statutory Federal income tax rate of 21% and 35% in 2018 and 2017, isare driven by state income taxes and anticipated annual permanent differences, including estimates for tax-exempt interest, dividends received deduction, executive compensation and other items.


The Company had an uncertain tax position of $0.4 million and $0.6 million as of September 30, 20182019 and December 31, 2017.2018, respectively. The Company does not have a valuation allowance on its deferred income tax asset as of September 30, 20182019 and December 31, 2017.2018.


We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated statements of operations and statements of comprehensive income (loss). For the three and nine months ended September 30, 2018 and 2017,2019, the Company did not recognize any expensesrecognized $0.2 million of benefit related to an uncertain tax position and our associated accrued interest and penalties was less than $0.1 million. For the three and nine months ended September 30, 2018, the Company did 0t recognize any expenses related to an uncertain tax position.

9.
-25-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

10. COMMITMENTS AND CONTINGENCIES


Litigation and Legal Proceedings


In the ordinary course of business, the Company is involved in various legal proceedings, specifically claims litigation.  The Company’s insurance subsidiaries participate in most of these proceedings by either defending third-party claims brought against insureds or litigating first-party coverage claims.  The Company accounts for such activity through the establishment of loss and LAE reserves.  The Company’s management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, is immaterial to the Company’s consolidated financial statements.  The Company is also occasionally involved in other legal and regulatory proceedings, some of which may assert claims for substantial amounts, making the Company party to individual actions in which extra contractual damages, punitive damages or penalties, such as claims alleging bad faith in the handling of insurance claims, are sought.


- 24-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


The Company reviews the outstanding matters, if any, on a quarterly basis.  The Company accrues for estimated losses and contingent obligations in the consolidated financial statements if and when the obligation or potential loss from any litigation, legal proceeding or claim is considered probable and the amount of the potential exposure is reasonably estimable.  The Company records such probable and estimable losses, through the establishment of legal expense reserves.  As events evolve, facts concerning litigation and contingencies become known and as additional information becomes available, the Company’s management reassesses its potential liabilities related to pending claims and litigation and may revise its previous estimates and make appropriate adjustment to the financial statements. Estimates that require judgment are subject to change and are based on management’s assessment, including the advice of legal counsel, the expected outcome of litigation and legal proceedings or other dispute resolution proceedings or the expected resolution of contingencies. The Company’s management believes that the Company’s accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on the Company’s consolidated financial statements.


Please see the Company’s Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 7, 2018, for information regardingRegarding the matter involving the Co-Existence Agreement effective as of April 30, 2013 with Federated Mutual Insurance Company.

PleaseCompany and the related arbitration (please see Note 9 of our 2018 Form 10-K for more information), the U.S. Court of Appeals for the Eighth Circuit agreed with the Company’s Form 10-Q forposition that the quarter ended June 30, 2018, filed withU.S. District Court in Minnesota did not have jurisdiction over the SEC on August 7, 2018, for information regardingCompany, vacated the settlement on May 8, 2018judgment of the Company’s action against its former chief financial officer.Minnesota court confirming the arbitration award, and ordered the Minnesota matter dismissed. The parties are in the process of completing mutual releases and the dismissal of all remaining pending proceedings.


Assessment Related Activity


The Company operates in a regulatory environment where certain entities and organizations have the authority to require us to participate in assessments. Currently these entities and organizations include: Florida Insurance Guaranty Association (“FIGA”), Citizens Property Insurance Corporation (“Citizens”), FHCF, Florida Automobile Joint Underwriters Insurance Association (“JUA”), Georgia Insurers Insolvency Pool (“GIIP”), Special Insurance Fraud Fund (“SIIF”), Fair Access to Insurance Requirements Plan (“FAIRP”), Georgia Automobile Insurance Plan (“GAIP”), Property Insurance Association of Louisiana (“PIAL”), Louisiana Automobile Insurance Plan (“LAIP”), South Carolina Property & Casualty Insurance Guaranty Association (“SCPCIGA”), Texas Property and Casualty Insurance Guaranty Association (“TPCIGA”), Texas Windstorm Insurance Association (“TWIA”), Texas Automobile Insurance Plan Association (“TAIPA”), Alabama Insurance Guaranty Association (“AIGA”), and Alabama Insurance Underwriters Association (“AIUA”). As a direct premium writer in Florida, we are required to participate in certain insurer solvency associations under Florida law, administered by FIGA.


In connection with its automobile line of business, which is currently winding down, FNIC is also required to participate in an insurance apportionment plan under Florida law, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan, which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. There were no material assessments by the JUA Plan as of December 31, 2017.2018. Future assessments by the JUA and the JUA Plan are indeterminable at this time.



-26-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

Leases


The Company is committed under an operating lease agreement for office space. FNHCspace with a nine-and-a-half-year term remaining.

The right-of-use asset is reflected in other assets and its subsidiariesthe lease facilities under a long-term lease agreement. liability is reflected in other liabilities on our consolidated balance sheets. Lease expense, net of sublease income is reflected in general and administrative expenses on our consolidated statements of operations.

Additional information about leases can be foundrelated to our operating lease agreement for office space consisted of the following:
September 30,
2019
(In thousands)
Right-of-use asset$7,860 
Accrued rent(279)
Right-of-use asset, net$7,581 
Lease liability$7,860 
Weighted-average discount rate4.71 %

Nine
Months
Ended
September 30,
2019
(In thousands)
Lease expense$779 
Sublease income(127)
Lease expense, net$652 
Net cash provided by (used in) operating activities$(440)

The interest rate implicit in Note 9our lease was not known, therefore the weighted-average discount rate above was determined by what FedNat would have had to pay to borrow the lease payments in a similar economic environment that existed at inception of our 2017 Form 10-K.lease while considering our general credit and the theoretical collateral of the office space. In the event of a change to lease term, the Company would re-evaluate all inputs and assumptions, including the discount rate.


Refer to Note 2 above for additional information regarding the implementation of new lease accounting rules on January 1, 2019.
10.


-27-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

11. SHAREHOLDERS' EQUITY


Common Stock Repurchases


The Company may repurchase shares in open market transactions in accordance with Rule 10b-18 or under Rule 10b5-1 of the Exchange Act from time to time in its discretion, based on ongoing assessments of the Company’s capital needs, the market price of its common stock and general market conditions. The amount and timing of all repurchase transactions are contingent upon market conditions, applicable legal requirements and other factors.

In March 2017, the Company’s Board of Directors authorized a program to repurchase shares of common stock of FNHC, at such times and at prices as management determined advisable, up to an aggregate of $10.0 million of common stock through March 31, 2018. This authorization was fully expended as of March 31, 2018.


- 25-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


In December 2017,2018, the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million (plus $0.8 million remaining from previous authorization which was fully expended as of March 31, 2018) of its outstanding shares of common stock through December 31, 2018. During the nine months ended September 30, 2018, the Company repurchased 326,708 shares of its common stock at a total cost of $5.1 million, which is an average price per share of $15.49.2019. As of September 30, 2018,2019, the remaining availability for future repurchases of our common stock under this program was $5.7$10.0 million.


The Company may repurchase shares in open market transactions in accordance with Rule 10b-18 or under Rule 10b5-1 of the Exchange Act from time to time in its discretion, based on ongoing assessments of the Company’s capital needs, the market price of its common stock and general market conditions. The amount and timing of all repurchase transactions are contingent upon market conditions, applicable legal requirements and other factors.

Securities Offerings


In June 2018, the Company filed with the Securities and Exchange Commission (“SEC”) on Form S-3, a shelf registration statement enabling the Company to offer and sell, from time to time, up to an aggregate of $150.0 million of securities. No securities have been offered or sold under this registration statement.


Stock Compensation Plan

In April 2012, the Company’s Board of Directors adopted, and in September 2012 the Company’s shareholders approved, the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan permits the issuance of up to 1,000,000 shares of the Company’s common stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive awards, such as stock options and restricted stocks. Officers, directors, executive management and all other employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be granted singly, in combination, or in tandem. The 2012 Plan will expire on April 5, 2022.


In June 2018, the Company filed with the SEC on Form S-8, a registration statement registering 800,000 shares of common stock reserved for issuance under the Company’s 2018 Omnibus Incentive Compensation Plan (the “2018 Plan”).  The 2018 Plan, which was approved by the Company’s shareholders at the 2018 annual meeting, is an equity compensation plan that may be used for our employees, non-employee directors, consultants and advisors.


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


Share-Based Compensation Expense


Share-based compensation arrangements include the following:
໿
 Three Months Ended Nine Months EndedThree Months EndedNine Months Ended
 September 30, September 30,September 30,September 30,
 2018 2017 2018 20172019201820192018
 (In thousands)(In thousands)
Restricted stock $484
 $866
 $1,847
 $2,279
Restricted stock$467  $512  $1,463  $1,660  
Stock options 
 
 
 
Performance stockPerformance stock135  (28) 497  187  
Total share-based compensation expense $484
 $866
 $1,847
 $2,279
Total share-based compensation expense$602  $484  $1,960  $1,847  
  
  
  
  
    
Recognized tax benefitRecognized tax benefit$137  $123  $481  $468  
Intrinsic value of options exercised $151
 $357
 $229
 $364
Intrinsic value of options exercised 151   229  
Fair value of restricted stock vested $622
 $686
 $2,098
 $2,191
Fair value of restricted stock vested$482  $622  $1,715  $2,098  


The intrinsic value of options exercised represents the difference between the stock option exercise price and the weighted average closing stock price of FNHC common stock on the exercise dates, as reported on the NASDAQ Global Market.



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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

Stock Option Awards


A summary of the Company’s stock option activity includes the following:
໿
Number of SharesWeighted Average Option Exercise Price
 Number of Shares Weighted Average Option Exercise Price
Outstanding at January 1, 2018 50,351
 $3.72
Outstanding at January 1, 2019Outstanding at January 1, 201939,017  $3.80  
Granted 
 
Granted—  —  
Exercised (10,834) 3.47
Exercised(167) 2.45  
Cancelled (500) 2.45
Cancelled—  —  
Outstanding at September 30, 2018 39,017
 $3.80
Outstanding at September 30, 2019Outstanding at September 30, 201938,850  $3.80  


Restricted Stock Awards


The Company recognizes share-based compensation expense for all restricted stock awards (“RSAs”) held by the Company’s directors, executives and other key employees. For all RSA awards, excluding relative total shareholder return ("TSR"), the accounting charge is measured at the grant date as the fair value of FNHC common stock and expensed as non-cash compensation over the vesting term using the straight-line basis for service awards and over successive one-year requisite service periods for performance‑basedperformance-based awards.
Our expense for our performance awards depends on achievement of specified results; therefore, the ultimate expense can range from 0% to 250% of target. Our TSR cliff vesting awards contain performance criteria which are tied to the achievement of certain market conditions. The TSR grant date fair value was determined using a Monte Carlo simulation and, unlike the performance condition awards, the expense is not reversed if the performance condition is not met. This value is recognized as expense over the requisite service period using the straight‑linestraight-line recognition method.


During the nine months ended September 30, 20182019 and 2017,2018, the Board of Directors granted 133,060140,156 and 106,454133,060 RSAs, respectively, vesting over three or five years, to the Company’s directors, executives and other key employees.

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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018



RSA activity includes the following:
Number of SharesWeighted Average Grant Date Fair Value
Outstanding at January 1, 2019262,334  $18.78  
Granted140,156  18.03  
Vested(84,755) 20.24  
Cancelled(12,960) 18.15  
Outstanding at September 30, 2019304,775  $18.06  
  Number of Shares Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018 297,543
 $20.57
Granted 133,060
 16.31
Vested (102,071) 20.56
Cancelled (52,188) 17.93
Outstanding at September 30, 2018 276,344
 $19.02


The weighted average grant date fair value is measured using the closing price of FNHC common stock on the grant date, as reported on the NASDAQ Global Market.



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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2019

Accumulated Other Comprehensive Income (Loss)


Accumulated other comprehensive income (loss) associated with debt securities - available-for-sale consisted of the following:
໿
Three Months Ended September 30,
20192018
Before TaxIncome TaxNetBefore TaxIncome TaxNet
(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period$12,404  $(3,144) $9,260  $(7,166) $1,816  $(5,350) 
Other comprehensive income (loss) before reclassification3,921  (854) 3,067  (575) 145  (430) 
Reclassification adjustment for realized losses (gains) included in net income(893) 214  (679) (162) 41  (121) 
3,028  (640) 2,388  (737) 186  (551) 
Accumulated other comprehensive income (loss), end-of-period$15,432  $(3,784) $11,648  $(7,903) $2,002  $(5,901) 


 Three Months Ended September 30,Nine Months Ended September 30,
 2018 201720192018
 Before Tax Income Tax Net Before Tax Income Tax NetBefore TaxIncome TaxNetBefore TaxIncome TaxNet
 (In thousands)(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period $(7,166) $1,816
 $(5,350) $8,248
 $(3,166) $5,082
Accumulated other comprehensive income (loss), beginning-of-period$(5,023) $1,273  $(3,750) $2,287  $(593) $1,694  
Cumulative effect of new accounting standardsCumulative effect of new accounting standards—  —  —  (1,349) 355  (994) 
            
Other comprehensive income (loss) before reclassification (575) 145
 (430) 2,013
 (710) 1,303
Other comprehensive income (loss) before reclassification21,979  (5,431) 16,548  (10,573) 2,679  (7,894) 
Reclassification adjustment for realized losses (gains) included in net income (162) 41
 (121) (6,101) 2,353
 (3,748)Reclassification adjustment for realized losses (gains) included in net income(1,524) 374  (1,150) 1,732  (439) 1,293  
 (737) 186
 (551) (4,088) 1,643
 (2,445) 20,455  (5,057) 15,398  (8,841) 2,240  (6,601) 
Accumulated other comprehensive income (loss), end-of-period $(7,903) $2,002
 $(5,901) $4,160
 $(1,523) $2,637
Accumulated other comprehensive income (loss), end-of-period$15,432  $(3,784) $11,648  $(7,903) $2,002  $(5,901) 


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  Nine Months Ended September 30,
  2018 2017
  Before Tax Income Tax Net Before Tax Income Tax Net
  (In thousands)
Accumulated other comprehensive income (loss), beginning-of-period $2,287
 $(593) $1,694
 $3,324
 $(1,201) $2,123
Cumulative effect of new accounting standards (1,349) 355
 (994) 
 
 
             
Other comprehensive income (loss) before reclassification (10,573) 2,679
 (7,894) 9,480
 (3,656) 5,824
Reclassification adjustment for realized losses (gains) included in net income 1,732
 (439) 1,293
 (8,644) 3,334
 (5,310)
 (8,841) 2,240
 (6,601) 836
 (322) 514
Accumulated other comprehensive income (loss), end-of-period $(7,903) $2,002
 $(5,901) $4,160
 $(1,523) $2,637

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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 20182019



11.12. EARNINGS PER SHARE


Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period, including vested restricted stock awards during the period. Diluted EPS is computed by dividing net income by the weighted average number of shares outstanding, noted above, adjusted for the dilutive effect of stock options and unvested restricted stock awards.  Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed exercise of common stock options and the vesting of RSAs using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive.


The following table presents the calculation of basic and diluted EPS:
Three Months EndedNine Months Ended
September 30,September 30,
2019201820192018
(In thousands, except per share data)
Net income (loss) attributable to FedNat Holding Company shareholders$4,659  $7,950  $7,904  $24,233  
  
Weighted average number of common shares outstanding - basic12,854  12,749  12,831  12,775  
Net income (loss) per common share - basic     $0.36  $0.62  $0.62  $1.90  
  
  
Weighted average number of common shares outstanding - basic12,854  12,749  12,831  12,775  
Dilutive effect of stock compensation plans43  121  49  91  
Weighted average number of common shares outstanding - diluted12,897  12,870  12,880  12,866  
Net income (loss) per common share - diluted$0.36  $0.62  $0.61  $1.88  
  
Dividends per share$0.08  $—  $0.24  $0.16  
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2018 2017 2018 2017
  (In thousands, except per share data)
Net income (loss) attributable to FedNat Holding Company shareholders $7,950
 $(4,724) $24,233
 $1,693
   
  
  
  
Weighted average number of common shares outstanding - basic 12,749
 13,135
 12,775
 13,211
         
Net income (loss) per common share - basic      $0.62
 $(0.36) $1.90
 $0.13
   
  
  
  
   
  
  
  
Weighted average number of common shares outstanding - basic 12,749
 13,135
 12,775
 13,211
Dilutive effect of stock compensation plans 121
 
 91
 91
Weighted average number of common shares outstanding - diluted 12,870
 13,135
 12,866
 13,302
         
Net income (loss) per common share - diluted $0.62
 $(0.36) $1.88
 $0.13
   
  
  
  
Dividends per share $
 $0.08
 $0.16
 $0.24


Dividends Declared


In February 2018,January 2019, our Board of Directors declared a $0.08 per common share dividend, paidpayable in March 2019, to shareholders of record on February 14, 2019, amounting to $1.0 million.

In May 2019, our Board of Directors declared a $0.08 per common share dividend, payable in June 2018,2019, to shareholders of record on May 1, 2018,14, 2019, amounting to $1.1 million.


In June 2018,July 2019, our Board of Directors declared a $0.08 per common share dividend, payable in September 2018,2019, to shareholders of record on August 1, 2018,16, 2019, amounting to $1.0 million.


In October 2018,November 2019, our Board of Directors declared a $0.08$0.09 per common share dividend, payable in December 2018,2019, to shareholders of record on November 1, 2018,15, 2019, amounting to $1.0$1.2 million.



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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

12. VARIABLE INTEREST ENTITY

Refer to Monarch National Insurance Company in Note 1 above, for information about how we acquired 100% of Monarch Delaware; therefore, as of February 21, 2018, Monarch Delaware became a wholly-owned subsidiary instead of a VIE. Prior to February 21, 2018, FedNat Underwriters, Inc. (“FNU”) through the Managing General Agency and Claims Administration Agreement (the “Monarch MGA Agreement”) directed the activities which most significantly impact the Monarch Entities’ insurance operating company, MNIC. MNIC’s activities directed by FNU through the Monarch MGA Agreement included underwriting and claims. As a result, MNIC was a VIE prior to February 21, 2018, because the equity holders (i.e., FNHC, Crosswinds Investor and TransRe owned 42.4%, 42.4%, and 15.2%, respectively, of Monarch Delaware), as a group, lacked the characteristics of a controlling financial interest.

In addition to having power to direct the activities which most significantly impacted MNIC, FNHC had the obligation to absorb the losses and/or the right to receive benefits that potentially could be significant through its 42.4% indirect equity interests in MNIC through Monarch Delaware and Monarch National Holding Company (“Monarch Holding”).

As a result, FNHC was the primary beneficiary of MNIC, resulting in Monarch Delaware, MNIC’s indirect parent company, consolidating into our financial statements.

The carrying amounts of Monarch Delaware, which could only be used to settle obligations of Monarch Delaware, and liabilities of Monarch Delaware for which creditors did not have recourse included the following:
໿
  December 31,
  2017
  (In thousands)
Assets  
Investments:  
Debt securities, available-for-sale, at fair value $25,111
Equity securities, available-for-sale, at fair value 1,173
Total investments 26,284
Cash and cash equivalents 14,211
Reinsurance recoverable 3,323
Prepaid reinsurance premiums 2,481
Premiums receivable, net 1,184
Deferred acquisition costs 1,722
Other assets 2,322
Total assets $51,527
   
Liabilities  
Loss and loss adjustment expense reserves $6,356
Unearned premiums 8,752
Reinsurance payable 1,802
Debt, net of deferred financing costs 4,930
Other liabilities 1,825
Total liabilities $23,665

Earned premiums and loss and LAE, attributable to Monarch Delaware, from January 1, 2018 to February 21, 2018, were $2.3 million and $2.3 million, respectively. Earned premiums and loss and LAE, attributable to Monarch Delaware for the three months ended September 30, 2017 were $1.8 million and $5.4 million, respectively. Earned premiums and loss and LAE, attributable to Monarch Delaware for the nine months ended September 30, 2017 were $7.1 million and $10.2 million, respectively.

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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

13. SUBSEQUENT EVENTS


Dividends Declared


Refer to Note 1112 above for information related to our dividend declared in October 2018.November 2019.


Hurricane Michael

On October 10, 2018, Hurricane Michael made landfall in the panhandle region of Florida. The Company writes approximately 10% of the total insured values in the two Florida counties most affected by the storm, but has limited exposure in Alabama and no exposure in Georgia.

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The Company currently estimates that its aggregate gross losses as a result of Hurricane Michael will be approximately $275 million according to preliminary post landfall catastrophe model estimates. The Company believes that its losses, including both Florida and Non-Florida exposures, net of reinsurance, should not exceed its first event pre-tax retention amount of $23 million. For additional information, refer to the Company's Form 8-K dated October 15, 2018.

Quota-Share Reinsurance Program

In conjunction with the Company’s post-hurricane season capital management planning, effective October 1, 2018, FNIC has adjusted the cession percentage on its current quota share treaty, which became effective on July 1, 2018, from 2% to 10%. No other terms of the treaty were modified. This treaty covers FNIC’s Florida homeowners book of business, on an in-force, new and renewal basis, and excludes named storms. For additional information on this treaty, refer to the Company's Form 8-K dated June 29, 2018.



General information about FedNat Holding Company can be found at www.FedNat.com; however, the information that can be accessed through our website
is not part of our report. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to the Securities and Exchange Act of 1934 available free of charge on our website, as soon as reasonably practicable after they are electronically filed with the SEC.


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations


Overview


The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q (the “Form 10-Q”). In addition, please refer to our audited consolidated financial statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K for the year ended December 31, 20172018 (the “2017“2018 Form 10-K”).


Unless the context requires otherwise, as used in the remainder of this Form 10-Q, the terms “FNHC,” “Company,” “we,” “us” and “our” refer to FedNat Holding Company and its consolidated subsidiaries.


Below, in addition to providing consolidated revenues and net income (loss), we also provide adjusted operating revenues and adjusted operating income (loss) because we believe these performance measures that are not United States of America generally accepted accounting principles ("GAAP") measures allow for a better understanding of the underlying trend in our business, as the excluded items are not necessarily indicative of our operating fundamentals or performance.
Non-GAAP measures do not replace the most directly comparable GAAP measures and we have included a detailed reconciliation thereof in "Results of Operations" below.

We exclude the after-tax (using our prevailing income tax rate) effects of the following items from GAAP net income (loss) to arrive at adjusted operating income (loss):

Net realized and unrealized gains (losses), including, but not limited to, gains (losses) associated with investments and early extinguishment of debt;
Acquisition/integration and other costs and the amortization of specifically identifiable intangibles (other than value of business acquired);
Impairment of intangibles;
Income (loss) from initial adoption of new regulations and accounting guidance; and
Income (loss) from discontinued operations.

We also exclude the pre-tax effect of the first bullet above from GAAP revenues to arrive at adjusted operating revenues.

Forward-Looking Statements


This Form 10-Q or the documents that are incorporated by reference into this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act").or the Exchange Act. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “forecast,” “guidance,” “indicate,” “intend,” “may,” “might,” “outlook,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” “will,” “would,” “will be,” “will continue” or the negative thereof or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve a number of risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Management cautions that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assume that such statements will be realized or that the forward-looking events and circumstances will occur. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed under “Risk Factors” in our 20172018 Form 10-K, and discussed from time to time in our reports filed with the Securities and Exchange Commission (“SEC”).


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Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this Form 10-Q are made only as of the date hereof. We do not undertake and specifically disclaim any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.


GENERAL


The Company is an 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.   The Company,We, through itsour wholly owned subsidiaries, isare authorized to underwrite, and/or place homeowners multi-peril ("homeowners"(“homeowners”), federal flood and other lines of insurance in Florida and other states. The Company markets, distributesWe market, distribute and services itsservice 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 ownedwholly-owned insurance subsidiary, is licensed as an admitted carrier, to write specific lines of insurance by the state’s insurance departments, in Florida, Louisiana, Texas, Georgia, South Carolina and Alabama.  Monarch National Insurance Company (“MNIC”), our other wholly owned insurance subsidiary, is licensed as an admitted carrier in Florida. Admitted carriers are bound by rate and form regulations, and are strictly regulated to protect policyholders. Admitted carriers are also required to financially contribute to the state guarantee fund used to pay for losses if an insurance carrier becomes insolvent or unable to pay loss amounts due to their policyholders.


Through our wholly-owned subsidiary, FedNat Underwriters, Inc. (“FNU”), we serve as managing general agent for FNIC and MNIC. MNIC was founded in 2015 through a joint venture.

Maison Companies Acquisition

On February 21, 2018, FNIC acquired25, 2019, the interests in MNIC’s indirect parent


company, Monarch Delaware Holdings LLC (“Monarch Delaware”), from our joint venture partners (see “Joint Ventures,” below,Company executed a definitive agreement for more information).

Joint Ventures

Monarch National Insurance Company

We completed ourthe acquisition of MNIC in February 2018 by acquiring the membership interests in MNIC’s indirect parent, Monarch Delaware Holdings LLC (“Monarch Delaware”), held by our joint venture partners.  Our joint venture partners were Crosswinds Investor Monarch LP (“Crosswinds Investor”), a wholly owned subsidiaryinsurance operations of Crosswinds1347 Property Insurance Holdings, Inc. (“Crosswinds Holdings”("PIH"). Specifically, the Company will purchase Maison Insurance Company ("MIC"), a private equity firmMaison Managers, Inc., and asset manager, and Transatlantic Reinsurance Company (“TransRe”), an international property and casualty reinsurance company. We purchasedClaimCor LLC (collectively, the 42.4% Class A membership interest in Monarch Delaware held by Crosswinds Investor for $12.3"Maison Companies"). The purchase price is $51.0 million, and the 15.2% non-voting membership interest in Monarch Delaware held by TransRe for $4.4 million. We also repaid the outstanding principal balance and interest due on the $5.0 million promissory note to TransRe. MNIC was organized in March 2015 and writes homeowners property and casualty insurance in Florida. 

Crosswinds AUM LLC, a subsidiary of Crosswinds Holdings, serves as an investment consultant to FNHC through December 31, 2018 for a quarterly fee of $75,000.  In addition, subsidiaries of Crosswinds Holdings and TransRe each have a right of first refusal through December 31, 2018 to participate in our catastrophe excess of loss reinsurance program, at market rates and terms, up to a placement of $10.0which includes $25.5 million in reinsurance limit in the aggregate from Crosswinds Holdingscash and up to a placement of $10.0$25.5 million in reinsurance limitshares of the Company’s common stock. Additionally, in excessconnection with the pending acquisition, on March 5, 2019, the Company closed on an offering of its placement on$100 million of Senior Unsecured Notes due 2029, which bear interest at the annual rate of 7.5% (the "2029 Notes"). The cash from the offering was used in part to retire the full $45.0 million of outstanding debt (thereby lowering our current catastrophe excessoverall cost of loss reinsurance program from TransRe. TransRe does currently participate inborrowing) and will be used to purchase the reinsurance program.Maison Companies and for other general corporate purposes.


Please referRefer to Notes 1 and 12 toNote 3 of the notes to theour Consolidated Financial Statements included herein, and to our 2017 Form 10-K for additional information regarding the accountingpending acquisition, including regulatory and consolidation of this joint venture.other necessary approval and the potential timing thereof.


Southeast Catastrophe Consulting Company, LLCMaterial Distribution Relationships


The Company owns 33% of Southeast Catastrophe Consulting Company, LLC (“SECCC”), based in Mobile, Alabama. The Company hasWe are a party to an insurance agency master agreement with SECCCIvantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company (“Allstate”), pursuant to which we have been authorized by ISA to appoint Allstate agents to offer our homeowners and commercial general liability insurance products to consumers in Florida.

We are a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) in which it provides claims adjusting services forthey underwrite our FNIC and MNIC, primarily in the eventhomeowners business outside of catastrophes such as Hurricanes Irma, Matthew and Michael.Florida. 


Overview of Insurance Lines of Business


Homeowners’ Property and Casualty Insurance
FNIC and MNIC underwrite homeowners’homeowners insurance in Florida and FNIC also underwrites insurance in Alabama, Texas, Louisiana and South Carolina. Homeowners’Homeowners insurance generally protects an owner of real and personal property against covered causes of loss to that property. The Florida homeowners’ policies in-force totaled 249,222 and 272,346 asAs of September 30, 20182019, the total homeowners policies in-force was 315,000, of which 237,000 were in Florida and 78,000 were outside of Florida. As of December 31, 2017, respectively.2018, the total homeowners policies in-force was 291,000, of which 247,000 were in Florida and 44,000 were outside of Florida.


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Florida
Our homeowners’homeowners insurance products provide maximum dwelling coverage in the amount of approximately $3.5$3.6 million, with the aggregate maximum policy limit being approximately $6.3 million. We currently offer dwelling coverage “A” up to $4.0 million with an aggregate total insured value of $6.5 million. We continually review and update these subject limits. The typical deductible is either $2,500 or $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims.


Premium rates charged to our homeowners’homeowners insurance policyholders are continually evaluated to ensureassure that they meet the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive, inadequate or discriminatory). Premium rates in Florida and other states are regulated and approved by the respective states’ office of insurance regulation.  We continuously monitor and seek appropriate adjustment to our rates in order to remain competitive and profitable.


In 2017, FNIC applied for a statewide average rate increase of 6.5% for Florida homeowners multiple-peril insurance policies only, which was subsequently increased and approved by the Florida OIR to a statewide average rate increase of 10.0% and became effective for new and renewal policies on August 1, 2017.

Also, in 2017, MNIC applied for a statewide average rate increase of 2.0% for Florida homeowners multiple-peril insurance policies, which was approved by the Florida OIR and became effective for new and renewal policies on October 1, 2017.



On October 8, 2018, Florida Governor Rick Scott issued an Executive Order, which immediately declared a state of emergency for certain counties in the expected path of Hurricane Michael.  As provided for under state statute, the Commissioner of Florida’s OIR issued an executive order suspending the filing of approvals for rate changes by insurance companies until January 7, 2019.  On October 12, 2018, FNIC applied for a statewide average rate increase of 3.6%4.6% for Florida homeowners multiple-perilmulti-peril insurance policies, proposed to becomewhich was approved by the Florida OIR, which became effective March 1, 2019, pending regulatory approval.for new and renewal policies on April 20, 2019.


Non-Florida
Our non-Florida homeowners insurance products, produced through our partnership with SageSure, provide maximum dwelling coverage of approximately“A” up to $1.8 million, with the aggregate maximum policy limit being approximately $3.5$3.6 million. We currently offer dwelling coverage “A” up to $2.0 million with an aggregate total insured value of $3.5 million. The approximate average premium on the policies currently in-force is $1,803.  The typical deductible is either $2,500 or $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims. 

As part of our partnership with SageSure, Insurance Managers, LLC ("SageSure") receiveswe entered into a 50% 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 other underwriting expenses on our non-Florida homeowners insurance products. See Note 1consolidated statements of the notes to our Consolidated Financial Statements for information about our general underwriting agreement with SageSure.operations.


Other Insurance Lines of Business
Personal Automobile -On December 19, 2017, we announced our decision to undergo an orderly withdrawal from this line of business and began the appropriate steps. As of July 31, 2018, withdrawal plans in all applicable states have received regulatory approval. Effective August 1, 2018, a novation agreement was executed with a third party transferring the Texas automobile book to another insurance carrier. The unearned premium reserve on the in-force business and the claims handling responsibility for losses relating to the Texas auto business after July 31, 2018 were transferred to the third party. We expect our personal automobile line of business to materially cease by the fourth quarter of 2018. We provided nonstandard personal automobile insurance principally to insureds that were unable to obtain standard insurance coverage due to factors such as driving record, age, vehicle type or other, including market conditions. FNIC offered this line of business as an admitted carrier in Florida, Texas, Georgia and Alabama, and marketed the insurance through licensed general agents in their respective territories.

Commercial General Liability - On March 13, 2018, we announced our decision to undergo an orderly withdrawal from this line of business and began the appropriate steps. Withdrawal plans in all applicable states have received regulatory approval. We underwrote for approximately 380 classes of skilled craft workers (excluding home-builders and developers) and mercantile trades (such as owners, landlords and tenants). The limits of liability ranged from $100,000 per occurrence with a $200,000 policy aggregate to $1.0 million per occurrence with a $2.0 million policy aggregate. We marketed the commercial general liability insurance products through independent agents and a limited number of unaffiliated general agencies.

Flood - FNIC writes flood insurance through the National Flood Insurance Program (“NFIP”). We write the policiespolicy for the NFIP, which assumes 100% of the flood risk while we retain a commission for our services.service. FNIC offers this line of business in Florida, Louisiana, Texas, South Carolina and Alabama. FNIC plans to file for an admitted flood endorsement as an alternative to the NFIP program.


See the discussion in Item 1: “Business” in our 20172018 Form 10-K, for additional information with respect to our business.


Regulation


All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. We may be the subject of additional special examinations or analysis. These examinations or analysis may result in one or more corrective orders being issued by any regulatory agency, but primarily by the Florida OIR. The Florida OIR has completed its regularly scheduled statutory examination of FNIC for the five years ended December 31, 2015, of MNIC for the period of March 17, 2015 (inception) through December 31, 2015, and of MNIC for the yearyears ended December 31, 2017 and 2016. There were no material findings by the Florida OIR in connection with these examinations. Additionally, the Florida OIR has initiated a statutory examination of MNIC for the year ended December 31, 2017.





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RESULTS OF OPERATIONS


Operating Results Overview - Three Months Ended September 30, 20182019 Compared with Three Months Ended September 30, 20172018


The following overview does not address all of the matters covered in the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to our shareholders or the investing public. This overview should be read in conjunction with the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations herein and in our 20172018 Form 10-K.


The following table sets forth results of operations for the periods presented:
Three Months Ended
September 30,
2019% Change2018
(Dollars in thousands)
Revenues:   
Gross premiums written$159,131  14.5 %$139,022  
Gross premiums earned145,546  0.4 %144,907  
Ceded premiums(58,172) 25.3 %(46,414) 
Net premiums earned87,374  (11.3)%98,493  
Net investment income4,068  29.7 %3,137  
Net realized and unrealized investment gains (losses)794  (54.9)%1,760  
Direct written policy fees2,514  (33.8)%3,796  
Other income4,726  29.6 %3,646  
Total revenues99,476  (10.2)%110,832  
   
Costs and expenses:   
Losses and loss adjustment expenses62,105  (0.6)%62,457  
Commissions and other underwriting expenses24,854  (20.8)%31,373  
General and administrative expenses5,246  4.9 %5,000  
Interest expense1,894  83.5 %1,032  
Total costs and expenses94,099  (5.8)%99,862  
   
Income (loss) before income taxes5,377  (51.0)%10,970  
Income tax expense (benefit)718  (76.2)%3,020  
Net income (loss)$4,659  (41.4)%$7,950  
   
Ratios to net premiums earned:   
Net loss ratio71.1 % 63.4 %
Net expense ratio34.4 % 36.9 %
Combined ratio105.5 % 100.3 %

(1)Net loss ratio is calculated as losses and loss adjustment expenses ("LAE") divided by net premiums earned.
(2)Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.
(3)Combined ratio is calculated as the sum of losses and LAE and all operating expenses less interest expense divided by net premiums earned.




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  Three Months Ended
  September 30,
  2018 % Change 2017
  (Dollars in thousands)
Revenues:      
Gross premiums written $139,022
 (10.2)% $154,782
Gross premiums earned 144,907
 (5.2)% 152,779
Ceded premiums (46,414) (35.5)% (72,015)
Net premiums earned 98,493
 22.0 % 80,764
Net investment income 3,137
 20.5 % 2,603
Net realized and unrealized investment gains (losses) 1,760
 (71.2)% 6,101
Direct written policy fees 3,796
 (7.4)% 4,098
Other income 3,646
 (28.9)% 5,131
Total revenues 110,832
 12.3 % 98,697
   
    
Costs and expenses:  
    
Losses and loss adjustment expenses 62,457
 (17.1)% 75,367
Commissions and other underwriting expenses 31,373
 10.5 % 28,386
General and administrative expenses 5,000
 (0.8)% 5,042
Interest expense 1,032
 1,174.1 % 81
Total costs and expenses 99,862
 (8.3)% 108,876
   
    
Income (loss) before income taxes 10,970
 (207.8)% (10,179)
Income tax expense (benefit) 3,020
 (179.9)% (3,781)
Net income (loss) 7,950
 (224.3)% (6,398)
Net income (loss) attributable to non-controlling interest 
 (100.0)% (1,674)
Net income (loss) attributable to FNHC shareholders $7,950
 (268.3)% $(4,724)
   
  
  
Ratios to net premiums earned:  
  
  
Net loss ratio 63.4%  
 93.3%
Net expense ratio 36.9%  
 41.4%
Combined ratio 100.3%  
 134.7%
The following table sets forth a reconciliation of GAAP to non-GAAP measures:


(1)Net loss ratio is calculated as losses and LAE divided by net premiums earned.
(2)Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.
(3)Combined ratio is calculated as the sum of losses and LAE and all operating expenses less interest expense divided by net premiums earned.

As of or For the Three Months Ended September 30,
20192018
HomeownersAutomobileOtherConsolidatedHomeownersAutomobileOtherConsolidated
(Dollars in thousands) 
Revenue
Total revenues$93,735  $ $5,737  $99,476  $100,616  $2,332  $7,884  $110,832  
Less:
Net realized and unrealized investment gains (losses)—  —  794  794  —  —  1,760  1,760  
Adjusted operating revenues$93,735  $ $4,943  $98,682  $100,616  $2,332  $6,124  $109,072  
Net Income (Loss)
Net income (loss)$3,398  $(613) $1,874  $4,659  $8,158  $(1,416) $1,208  $7,950  
Less:
Net realized and unrealized investment gains (losses)—  —  634  634  —  —  1,314  1,314  
Acquisition and other costs(187) (5) (46) (238) (609) (37) (78) (724) 
Gain (loss) on early extinguishment of debt—  —  (29) (29) —  —  —  —  
Adjusted operating income (loss)$3,585  $(608) $1,315  $4,292  $8,767  $(1,379) $(28) $7,360  
Income tax rate assumed for reconciling items above18.26 %18.26 %18.26 %18.26 %25.35 %25.35 %25.35 %25.35 %

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The table below summarizes our unaudited results of operations by line of business for the periods presented. Although we conduct our operations under a single reportable segment, we have provided line of business information as we believe it is useful to our shareholders and the investing public. “Homeowners” line of business consists of our homeowners and fire property and casualty


insurance business. “Automobile” line of business consists of our nonstandard personal automobile insurance business. “Other” line of business primarily consists of our commercial general liability and federal flood businesses, along with corporate and investment operations. Certain percentages are not considered meaningful ("NCM").
Three Months Ended September 30,
20192018
HomeownersAutomobileOtherConsolidatedHomeownersAutomobileOtherConsolidated
(Dollars in thousands)
Revenues:        
Gross premiums written$154,131  $—  $5,000  $159,131  $136,503  $(3,041) $5,560  $139,022  
Gross premiums earned141,493  —  4,053  145,546  136,587  2,766  5,554  144,907  
Ceded premiums(54,207) —  (3,965) (58,172) (40,782) (2,091) (3,541) (46,414) 
Net premiums earned87,286  —  88  87,374  95,805  675  2,013  98,493  
Net investment income—  —  4,068  4,068  —  —  3,137  3,137  
Net realized and unrealized investment gains (losses)—  —  794  794  —  —  1,760  1,760  
Direct written policy fees2,453  —  61  2,514  2,198  1,466  132  3,796  
Other income3,996   726  4,726  2,613  191  842  3,646  
Total revenues93,735   5,737  99,476  100,616  2,332  7,884  110,832  
         
Costs and expenses:        
Losses and loss adjustment expenses60,708  742  655  62,105  56,856  2,609  2,992  62,457  
Commissions and other underwriting expenses24,109  —  745  24,854  28,647  1,545  1,181  31,373  
General and administrative expenses4,484  50  712  5,246  4,187  75  738  5,000  
Interest expense—  —  1,894  1,894  —  —  1,032  1,032  
Total costs and expenses89,301  792  4,006  94,099  89,690  4,229  5,943  99,862  

        
Income (loss) before income taxes4,434  (788) 1,731  5,377  10,926  (1,897) 1,941  10,970  
Income tax expense (benefit)1,036  (175) (143) 718  2,768  (481) 733  3,020  
Net income (loss)$3,398  $(613) $1,874  $4,659  $8,158  $(1,416) $1,208  $7,950  
         
Ratios to net premiums earned:        
Net loss ratio69.6 %NCM  744.3 %71.1 %59.3 %386.5 %148.6 %63.4 %
Net expense ratio32.7 %34.4 %34.3 %36.9 %
Combined ratio102.3 %105.5 %93.6 %100.3 %

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 Three Months Ended September 30,
 2018 2017
 Homeowners Automobile Other Consolidated Homeowners Automobile Other Consolidated
 (Dollars in thousands)
Revenues:               
Gross premiums written$136,503
 $(3,041) $5,560
 $139,022
 $141,409
 $7,176
 $6,197
 $154,782
Gross premiums earned136,587
 2,766
 5,554
 144,907
 133,505
 13,525
 5,749
 152,779
Ceded premiums(40,782) (2,091) (3,541) (46,414) (61,239) (7,877) (2,899) (72,015)
Net premiums earned95,805
 675
 2,013
 98,493
 72,266
 5,648
 2,850
 80,764
Net investment income
 
 3,137
 3,137
 
 
 2,603
 2,603
Net realized and unrealized investment gains (losses)
 
 1,760
 1,760
 
 
 6,101
 6,101
Direct written policy fees2,198
 1,466
 132
 3,796
 2,204
 1,742
 152
 4,098
Other income2,613
 191
 842
 3,646
 3,183
 752
 1,196
 5,131
Total revenues100,616
 2,332
 7,884
 110,832
 77,653
 8,142
 12,902
 98,697
                
Costs and expenses:               
Losses and loss adjustment expenses56,856
 2,609
 2,992
 62,457
 65,600
 7,013
 2,754
 75,367
Commissions and other underwriting expenses28,647
 1,545
 1,181
 31,373
 24,184
 2,978
 1,224
 28,386
General and administrative expenses4,187
 75
 738
 5,000
 3,915
 150
 977
 5,042
Interest expense
 
 1,032
 1,032
 81
 
 
 81
Total costs and expenses89,690
 4,229
 5,943
 99,862
 93,780
 10,141
 4,955
 108,876
                
Income (loss) before income taxes10,926
 (1,897) 1,941
 10,970
 (16,127) (1,999) 7,947
 (10,179)
Income tax expense (benefit)2,768
 (481) 733
 3,020
 (6,221) (771) 3,211
 (3,781)
Net income (loss)8,158
 (1,416) 1,208
 7,950
 (9,906) (1,228) 4,736
 (6,398)
Net income (loss) attributable to non-controlling interest
 
 
 
 (1,674) 
 
 (1,674)
Net income (loss) attributable to FNHC shareholders$8,158
 $(1,416) $1,208
 $7,950
 $(8,232) $(1,228) $4,736
 $(4,724)
                
Ratios to net premiums earned:               
Net loss ratio59.3% 386.5% 148.6% 63.4% 90.8% 124.2% 96.6% 93.3%
Net expense ratio34.3%     36.9% 38.9%     41.4%
Combined ratio93.6%     100.3% 129.7%     134.7%




Revenue


Total revenue increased $12.1decreased $11.3 million or 12.3%10.2%, to $99.5 million for the three months ended September 30, 2019, compared with $110.8 million for the three months ended September 30, 2018, compared with $98.7 million for the three months ended September 30, 2017.2018. The increasedecrease was primarily driven by lowerhigher ceded premiums due to decreasedincreased reinsurance spend, a decline in Automobile direct written policy fees and lower investment gains, partially offset by a declineincreases in gross premiums earned, net investment income and lower recognized investment gains,other income, all of which isare discussed below.


Gross Premiums Written


The following table sets forth the gross premiums written for the periods presented:
໿
Three Months Ended
September 30,
20192018
(In thousands)
Gross premiums written:  
Homeowners Florida$115,341  $114,441  
Homeowners non-Florida38,790  22,062  
Automobile—  (3,041) 
Commercial general liability(19) 1,435  
Federal flood5,019  4,125  
Total gross premiums written$159,131  $139,022  
  Three Months Ended
  September 30,
  2018 2017
  (In thousands)
Gross premiums written:    
Homeowners Florida $114,441
 $126,211
Homeowners non-Florida 22,062
 15,198
Automobile (3,041) 7,176
Commercial general liability 1,435
 2,546
Federal flood 4,125
 3,651
Total gross premiums written $139,022
 $154,782


Gross premiums written premiums decreased $15.8increased $20.1 million, or 10.2%14.5%, to $139.0$159.1 million in the quarter, compared with $154.8$139.0 million for the same three-month period last year. The decrease inGross premiums written isincreased due to the result of declining premiumsgrowth in the non-core businesses we are exiting, Automobilehomeowners non-Florida and commercial general liability, as well as a decline in homeowners Florida. Our homeowners non-Florida business continues to show exceptional growth year over year, especially in the statesstate of Texas, and Louisiana.

The lower premiums in Automobile were due to our decision to select specific types and amounts of premiums to be underwritten with consideration and focus on profitability. Automobile was not profitable throughout the 2017 year and we announced in December 2017 that we were taking the appropriate steps, including the completion of all required regulatory filings and approvals, to withdraw from Automobile. The novation transaction, discussed above in Overview of Insurance Lines of Business - Personal Automobile, led to negative gross premium for Automobile due to the reversal of unearned premium. The increase in the homeowners non-Florida gross premiums written was due to the expansion of our operations outside of Florida, allowingwhich has allowed us to leverage our infrastructure and diversify insurance risk. Our homeowners Florida FNIC premiums grew $2.2 million or 2% this quarter as compared to last year, which represents the first quarter showing premium growth since the third quarter of 2017. Overall, Homeowners grew 12.9%.


Gross Premiums Earned


The following table sets forth the gross premiums earned for the periods presented:
Three Months Ended
September 30,
20192018
(In thousands)
Gross premiums earned:  
Homeowners Florida$113,062  $118,603  
Homeowners non-Florida28,431  17,984  
Automobile—  2,766  
Commercial general liability157  2,122  
Federal flood3,896  3,432  
Total gross premiums earned$145,546  $144,907  
  Three Months Ended
  September 30,
  2018 2017
  (In thousands)
Gross premiums earned:    
Homeowners Florida $118,603
 $121,771
Homeowners non-Florida 17,984
 11,734
Automobile 2,766
 13,525
Commercial general liability 2,122
 3,005
Federal flood 3,432
 2,744
Total gross premiums earned $144,907
 $152,779


Gross premiums earned decreased $7.9increased $0.6 million, or 5.2%0.4%, to $145.5 million for the three months ended September 30, 2019, as compared to $144.9 million for the three months ended September 30, 2018, as compared to $152.8 million for2018. The higher gross earned premiums was driven by a 3.6% increase in earned premiums in Homeowners, partially offset by the three months ended September 30, 2017. The results are a reflection of our decision to exit the Automobile and commercial general liability lines and were partially offset by a 2.3% increase in earned premiums in Homeowners. Additionally, in homeowners Florida, our 10.0% rate increase, effective August 1, 2017, has earned out and homeowners non-Florida continues to grow on an earned basis.lines.


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Ceded Premiums Earned


Ceded premiums decreased $25.6increased $11.8 million, or 35.5%25.3%, to $46.4$58.2 million in the quarter, compared to $72.0$46.4 million the same three-month period last year. The decreaseincrease was primarily driven by lower$8.1 million higher excess of loss reinsurance spend of $10.0in Homeowners, as the new program became effective July 1, 2019 at a higher rate on-line than the program in the previous year and $6.1 million and loweringfrom the homeowners Florida quota share frombeing set at 10% in the third quarter of 2019 as compared to 2%, a $6.7 in the prior year period. These items were offset by $2.1 million impact, as well as lower grossceded premiums earned in Automobile during the period.as we have exited that line of business.


Net Investment Income


Net investment income increased $0.5$1.0 million, or 20.5%29.7%, to $4.1 million during the three months ended September 30, 2019, as compared to $3.1 million during the three months ended September 30, 2018, as compared to $2.6 million during the three months ended September 30, 2017.2018. The increase in net investmentwas due to fixed income was primarilyportfolio growth, partly due to the growth in our fixed income portfolio including a re-allocationnet proceeds of $30 million of equity investments into fixed income securities during the third quarter of 2017. The increase was also dueoffering (refer to Notes 3 and 8 to the Consolidated Financial Statements included herein, for additional information) and the improvement in the yield on our fixed income portfolio as a result of rising interest rates during 2018 as well as from portfolio repositioning during the first quarter of 2018, particularly the sale of tax-free municipal bonds, the proceeds of which were reinvested in taxable municipal and corporate fixed income securities with higher coupon rates.repositioning.


Net Realizedrealized and Unrealized Investment Gains (Losses)


Net realized and unrealized investment gains (losses) were $1.8decreased $1.0 million, to $0.8 million for the three months ended September 30, 2018,2019, compared to $6.1$1.8 million in the prior year period. During the third quarter of 2018, weWe recognized $(0.6) million and $1.6 million in unrealized investment gains for equity securities.  Our prior year investment gains were driven by a decision to re-deploy approximately $30.6 million of equities into fixed-income securities during the third quarter of 2017 in order to reduce the Company’s exposure to the equity markets.

As discussed in Note 2 of the notes to our Consolidated Financial Statements, effective January 1, 2018, we began recording all unrealized gains (losses) for equity securities throughduring these respective periods.  Our current and prior year net realized gains are associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions in the income statement insteadnormal course of through other comprehensive income. This new accounting for equity securities creates volatility in our earnings compared tomanaging the prior accounting rules.portfolio.


Direct Written Policy Fees


Direct written policy fees decreased by $0.3$1.3 million, or 7.4%33.8%, to $3.8$2.5 million for the three months ended September 30, 2018,2019, compared with $4.1$3.8 million in the same period in 2017.2018. The decrease in direct written policy fees is correlated to lower number of policies in-force in Automobile and commercial general liability due to our decision to exit these lines, as discussed earlier, offset by accelerating the recognition of policy fee incomehigher fees from the policies which were novatedhomeowners non-Florida as we continue to a third party during the third quarter of 2018.grow.


Other Income


Other income included the following for the periods presented:
໿
 Three Months EndedThree Months Ended
 September 30,September 30,
 2018 % Change 20172019% Change2018
 (In thousands)(In thousands)
Other income:      Other income:   
Commission income $856
 (47.3)% $1,623
Commission income$726  (15.2)%$856  
Brokerage 2,190
 (19.6)% 2,723
Brokerage3,582  63.6 %2,190  
Partnership income (loss) 124
 (49.8)% 247
Financing revenue 476
 (11.5)% 538
Financing and other revenueFinancing and other revenue418  (30.3)%600  
Total other income $3,646
 (28.9)% $5,131
Total other income$4,726  29.6 %$3,646  


The decreaseincrease in other income was due to lower commission and brokerage revenue. Commission income decreased as a result of lower Automobile fee incomeprimarily driven by the reduction in premiums earnedhigher brokerage revenue, partially offset by lower financing and to a lesser extent, lower fee income from other areas of the business.commission income. The brokerage revenue decreaseincrease is the result of lowerhigher excess of loss reinsurance spend effective July 1, 2018,from the reinsurance programs in place during the third quarter of 2019 as discussed under "Ceded Premiums Earned" above.compared to the third quarter of 2018. The year over year decreases in financing and commission income were driven by lower Automobile fee income from our exit of this line of business.



-39-



Expenses


Losses and Loss Adjustment Expenses


Losses and loss adjustment expenses (“LAE”) decreased $12.9$0.4 million, or 17.1%0.6%, to $62.5$62.1 million for the three months ended September 30, 2018,2019, compared with $75.4$62.5 million for the same three-month period last year. The net loss ratio decreased 29.9increased 7.7 percentage points, to 63.4%71.1% in the current quarter, as compared to 93.3%63.4% in the third quarter of 2017.2018.  The lowerhigher ratio was primarily the result of the decreaseincrease in reinsurance spend, which reduces the net losses from severe weather ($6.1 million inearned premium denominator of the loss ratio calculation. The third quarter of 2018, impacts2019 included $11.0 million of losses, related to catastrophe losses from Hurricane Dorian, Hurricane Barry and Tropical Storm Imelda ($8.0 million of these losses relate to non-Florida, which is subject to a 50% profit-sharing agreement, as discussed earlier), compared to the prior year quarter which included $6.1 million of catastrophe losses arising from Hurricane Florence and Tropical Storm Gordon, as compared to $26.9 millionGordon. The remaining variance is driven by lower losses in the prior year quarter impacts of Hurricane Irmain Automobile and Hurricane Harvey)commercial general liability lines as we exit those lines and the decreasehigher ceded losses from homeowners Florida quota share in the size of Automobile ($4.4 million lower losses, including adverse development) driven byquarter due to the closure of poor performing programs.  These decreases werehigher percentage (as discussed earlier), partially offset by $7.5 million of lower cededincreased losses related to Homeowners quota share treatieshigher gross premiums earned in the third quarter of 2018 as compared to the third quarter of 2017.Homeowners.


Commissions and Other Underwriting Expenses


The following table sets forth the commissions and other underwriting expenses for the periods presented:
Three Months Ended
September 30,
20192018
(In thousands)
Commissions and other underwriting expenses:
Homeowners Florida$13,187  $14,258  
All others6,610  4,866  
Ceding commissions(3,203) (689) 
Total commissions16,594  18,435  
Automobile—  1,466  
Homeowners non-Florida902  571  
Total fees902  2,037  
Salaries and wages2,696  3,147  
Other underwriting expenses4,662  7,754  
Total commissions and other underwriting expenses$24,854  $31,373  
  Three Months Ended
  September 30,
  2018 2017
  (In thousands)
Commissions and other underwriting expenses:    
Homeowners Florida $14,258
 $14,707
All others 4,866
 5,853
Ceding commissions (689) (5,457)
Total commissions 18,435
 15,103
     
Automobile 1,466
 1,742
Homeowners non-Florida 571
 371
Total fees 2,037
 2,113
     
Salaries and wages 3,147
 3,958
Other underwriting expenses 7,754
 7,212
Total commissions and other underwriting expenses $31,373
 $28,386


Commissions and other underwriting expenses increased $3.0decreased $6.5 million, or 10.5%20.8%, to $24.9 million for the three months ended September 30, 2019, compared with $31.4 million for the three months ended September 30, 2018,2018. The decrease was driven by higher ceding commissions from homeowners Florida quota share in the quarter due to the higher percentage (as discussed earlier), lower Automobile fees due to reduced premiums earned, and a reduction in other underwriting expenses as there was a benefit in the non-Florida profit share calculation this quarter as a direct result of $8.0 million of non-Florida weather-related losses (as previously discussed in the Losses and Loss Adjustment Expenses section), resulting in a $4.0 million reduction. These decreases were partially offset by higher homeowners acquisition related costs as a result of premium growth across periods.

The net expense ratio decreased 2.5 percentage points to 34.4% in the third quarter of 2019, as compared with $28.4to 36.9% in the third quarter of 2018. Refer to the discussion above for more information.

General and Administrative Expenses

General and administrative expenses increased $0.2 million by 4.9% to $5.2 million for the three months ended September 30, 2017. The increase is made up of lower ceding commissions as a result of homeowners Florida quota share percentage being reduced from 10%2019 compared to 2% and higher homeowners non-Florida commission costs due to higher premiums earned. These items are offset by lower salaries and wages from the impact of our headcount reduction initiatives.

During the third quarter of 2018, we also incurred $0.9$5 million of severance and other related costs associated with headcount reduction initiatives. Some of these costs are included in each of the expense lines, except interest expense.

The net expense ratio decreased 4.5 percentage points to 36.9% in the third quarter of 2018,2018. The increase was the result of higher professional fees and other costs as compared to 41.4% in the third quarter of 2017. The decrease in the ratio is primarily relatedprior year.


-40-


Interest Expense

Interest expense increased $0.9 million to the lower reinsurance spend during the quarter driving higher net premiums earned. Refer to the discussion above for more information.

General and Administrative Expenses

General and administrative expenses remained relatively flat at $5.0$1.9 million for the three months ended September 30, 20182019, compared with $1.0 million in the prior year period due to an increase in the outstanding debt. Refer to Note 3 and 2017.8 of the notes to our Consolidated Financial Statements included herein, for information regarding new debt issued and debt retirement that occurred in March 2019.


Income Taxes


Interest Expense

Interest expense increased $0.9Income taxes (benefits) decreased $2.3 million, to $1.0$0.7 million for the three months ended September 30, 2018,2019, compared with $0.1 million in the prior year period. The increase in interest expense is the result of the Company issuing $45.0 million of senior notes, late in December 2017. During the third quarter of 2017, the Company only had $5.0 million of debt on its balance sheet.

Income Taxes

Income taxes increased $6.8 million, to $3.0 million for the three months ended September 30, 2018, compared with a tax (benefit) of $(3.8) million for the three months ended September 30, 2017.2018. The increasedecrease in income tax expense is predominantly the result of higher taxablelower income during the current quarter as compared to the third quarter of 2017, offset by the decrease2018. Additionally, in the federal corporatequarter, we recognized a benefit of $0.4 million relating to an election to carry back capital losses and a benefit of $0.2 million relating to a reduction in the uncertain tax position reserve. Lastly, the State of Florida announced a reduction in its state income tax rate from 35%5.5% to 21%4.5%, effective January 1, 2018.2019, which represented a benefit in the quarter. This new tax rate will be in place until at least December 31, 2021.
໿


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Operating Results Overview - Nine Months Ended September 30, 20182019 Compared with Nine Months Ended September 30, 20172018


The following overview does not address all of the matters covered in the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to our shareholders or the investing public. This overview should be read in conjunction with the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations herein and in our 20172018 Form 10-K.


The following table sets forth results of operations for the periods presented:
Nine Months Ended
September 30,
2019% Change2018
(Dollars in thousands)
Revenues:   
Gross premiums written$460,534  4.6 %$440,151  
Gross premiums earned425,133  (3.0)%438,239  
Ceded premiums(156,669) (10.0)%(174,080) 
Net premiums earned268,464  1.6 %264,159  
Net investment income12,037  32.9 %9,058  
Net realized and unrealized investment gains (losses)5,050  451.3 %916  
Direct written policy fees7,308  (31.6)%10,685  
Other income13,115  (11.6)%14,833  
Total revenues305,974  2.1 %299,651  
Costs and expenses:
Losses and loss adjustment expenses194,284  24.5 %156,098  
Commissions and other underwriting expenses75,650  (17.3)%91,467  
General and administrative expenses17,336  6.1 %16,345  
Interest expense8,860  182.3 %3,139  
Total costs and expenses296,130  10.9 %267,049  
Income (loss) before income taxes9,844  (69.8)%32,602  
Income tax expense (benefit)1,940  (77.4)%8,587  
Net income (loss)7,904  (67.1)%24,015  
Net income (loss) attributable to non-controlling interest—  (100.0)%(218) 
Net income (loss) attributable to FNHC shareholders$7,904  (67.4)%$24,233  
   
Ratios to net premiums earned:   
Net loss ratio72.4 %59.1 %
Net expense ratio34.6 %40.8 %
Combined ratio107.0 %99.9 %

(1)Net loss ratio is calculated as losses and LAE divided by net premiums earned.
(2)Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.
(3)Combined ratio is calculated as the sum of losses and LAE and all operating expenses less interest expense divided by net premiums earned.


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  Nine Months Ended
  September 30,
  2018 % Change 2017
  (Dollars in thousands)
Revenues:      
Gross premiums written $440,151
 (6.3)% $469,525
Gross premiums earned 438,239
 (2.9)% 451,320
Ceded premiums (174,080) (15.2)% (205,342)
Net premiums earned 264,159
 7.4 % 245,978
Net investment income 9,058
 21.1 % 7,481
Net realized and unrealized investment gains (losses) 916
 (89.4)% 8,644
Direct written policy fees 10,685
 (21.5)% 13,617
Other income 14,833
 4.5 % 14,190
Total revenues 299,651
 3.4 % 289,910
       
Costs and expenses:      
Losses and loss adjustment expenses 156,098
 (17.3)% 188,683
Commissions and other underwriting expenses 91,467
 5.3 % 86,883
General and administrative expenses 16,345
 10.9 % 14,737
Interest expense 3,139
 1,170.9 % 247
Total costs and expenses 267,049
 (8.1)% 290,550
       
Income (loss) before income taxes 32,602
 (5,194.1)% (640)
Income tax expense (benefit) 8,587
 (2,498.6)% (358)
Net income (loss) 24,015
 (8,616.0)% (282)
Net income (loss) attributable to non-controlling interest (218) (89.0)% (1,975)
Net income (loss) attributable to FNHC shareholders $24,233
 1,331.4 % $1,693
   
  
  
Ratios to net premiums earned:  
  
  
Net loss ratio 59.1%   76.7%
Net expense ratio 40.8%   41.3%
Combined ratio 99.9%   118.0%


(1)Net loss ratio is calculated as losses and LAE divided by net premiums earned.
(2)Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.
(3)Combined ratio is calculated as the sum of losses and LAE and all operating expenses less interest expense divided by net premiums earned.

The following table belowsets forth a reconciliation of GAAP to non-GAAP measures:

As of or For the Nine Months Ended September 30,
20192018
HomeownersAutomobileOtherConsolidatedHomeownersAutomobileOtherConsolidated
(Dollars in thousands) 
Revenue
Total revenues$284,685  $27  $21,262  $305,974  $269,395  $9,839  $20,417  $299,651  
Less:
Net realized and unrealized investment gains (losses)—  —  5,050  5,050  —  —  916  916  
Adjusted operating revenues$284,685  $27  $16,212  $300,924  $269,395  $9,839  $19,501  $298,735  
Net Income (Loss)
Net income (loss)$7,981  $(2,241) $2,164  $7,904  $23,529  $(1,668) $2,372  $24,233  
Less:
Net realized and unrealized investment gains (losses)—  —  3,812  3,812  —  —  684  684  
Acquisition and other costs(237) (5) (532) (774) (1,183) (69) (126) (1,378) 
Gain (loss) on early extinguishment of debt—  —  (2,698) (2,698) —  —  —  —  
Adjusted operating income (loss)$8,218  $(2,236) $1,582  $7,564  $24,712  $(1,599) $1,814  $24,927  
Income tax rate assumed for reconciling items above24.52 %24.52 %24.52 %24.52 %25.35 %25.35 %25.35 %25.35 %


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The following table summarizes our unaudited results of operations by line of business for the periods presented.presented:



Nine Months Ended September 30,
20192018
HomeownersAutomobileOtherConsolidatedHomeownersAutomobileOtherConsolidated
(Dollars in thousands)
Revenues:
Gross premiums written$447,642  $(1) $12,893  $460,534  $414,914  $8,628  $16,609  $440,151  
Gross premiums earned412,409  26  12,698  425,133  403,579  17,876  16,784  438,239  
Ceded premiums(145,438) (20) (11,211) (156,669) (150,722) (13,350) (10,008) (174,080) 
Net premiums earned266,971   1,487  268,464  252,857  4,526  6,776  264,159  
Net investment income—  —  12,037  12,037  —  —  9,058  9,058  
Net realized and unrealized investment gains (losses)—  —  5,050  5,050  —  —  916  916  
Direct written policy fees7,082   223  7,308  5,978  4,229  478  10,685  
Other income10,632  18  2,465  13,115  10,560  1,084  3,189  14,833  
Total revenues284,685  27  21,262  305,974  269,395  9,839  20,417  299,651  
         
Costs and expenses:
Losses and loss adjustment expenses186,520  2,794  4,970  194,284  141,428  6,777  7,893  156,098  
Commissions and other underwriting expenses73,272  51  2,327  75,650  83,284  5,021  3,162  91,467  
General and administrative expenses14,320  150  2,866  17,336  13,361  275  2,709  16,345  
Interest expense—  —  8,860  8,860  100  —  3,039  3,139  
Total costs and expenses274,112  2,995  19,023  296,130  238,173  12,073  16,803  267,049  
Income (loss) before income taxes10,573  (2,968) 2,239  9,844  31,222  (2,234) 3,614  32,602  
Income tax expense (benefit)2,592  (727) 75  1,940  7,911  (566) 1,242  8,587  
Net income (loss)7,981  (2,241) 2,164  7,904  23,311  (1,668) 2,372  24,015  
Net income (loss) attributable to non-controlling interest—  —  —  —  (218) —  —  (218) 
Net income (loss) attributable to FNHC shareholders$7,981  $(2,241) $2,164  $7,904  $23,529  $(1,668) $2,372  $24,233  
         
Ratios to net premiums earned:
Net loss ratio69.9 %NCM  NCM  72.4 %55.9 %149.7 %116.5 %59.1 %
Net expense ratio32.8 %34.6 %38.3 %40.8 %
Combined ratio102.7 %107.0 %94.2 %99.9 %

-44-

 Nine Months Ended September 30,
 2018 2017
 Homeowners Automobile Other Consolidated Homeowners Automobile Other Consolidated
 (Dollars in thousands)
Revenues:               
Gross premiums written$414,914
 $8,628
 $16,609
 $440,151
 $414,256
 $37,089
 $18,180
 $469,525
Gross premiums earned403,579
 17,876
 16,784
 438,239
 390,211
 43,932
 17,177
 451,320
Ceded premiums(150,722) (13,350) (10,008) (174,080) (172,391) (24,629) (8,322) (205,342)
Net premiums earned252,857
 4,526
 6,776
 264,159
 217,820
 19,303
 8,855
 245,978
Net investment income
 
 9,058
 9,058
 
 
 7,481
 7,481
Net realized and unrealized investment gains (losses)
 
 916
 916
 
 
 8,644
 8,644
Direct written policy fees5,978
 4,229
 478
 10,685
 6,501
 6,652
 464
 13,617
Other income10,560
 1,084
 3,189
 14,833
 8,705
 2,661
 2,824
 14,190
Total revenues269,395
 9,839
 20,417
 299,651
 233,026
 28,616
 28,268
 289,910
                
Costs and expenses:               
Losses and loss adjustment expenses141,428
 6,777
 7,893
 156,098
 159,497
 25,119
 4,067
 188,683
Commissions and other underwriting expenses83,284
 5,021
 3,162
 91,467
 72,073
 11,091
 3,719
 86,883
General and administrative expenses13,361
 275
 2,709
 16,345
 11,288
 500
 2,949
 14,737
Interest expense100
 
 3,039
 3,139
 247
 
 
 247
Total costs and expenses238,173
 12,073
 16,803
 267,049
 243,105
 36,710
 10,735
 290,550
                
Income (loss) before income taxes31,222
 (2,234) 3,614
 32,602
 (10,079) (8,094) 17,533
 (640)
Income tax expense (benefit)7,911
 (566) 1,242
 8,587
 (3,886) (3,123) 6,651
 (358)
Net income (loss)23,311
 (1,668) 2,372
 24,015
 (6,193) (4,971) 10,882
 (282)
Net income (loss) attributable to non-controlling interest(218) 
 
 (218) (1,975) 
 
 (1,975)
Net income (loss) attributable to FNHC shareholders$23,529
 $(1,668) $2,372
 $24,233
 $(4,218) $(4,971) $10,882
 $1,693
                
Ratios to net premiums earned:               
Net loss ratio55.9% 149.7% 116.5% 59.1% 73.2% 130.1% 45.9% 76.7%
Net expense ratio38.3%     40.8% 38.3%     41.3%
Combined ratio94.2%     99.9% 111.5%     118.0%




Revenue


Total revenue increased $9.8$6.3 million, or 3.4%2.1%, to $306.0 million for the nine months ended September 30, 2019, compared with $299.7 million for the nine months ended September 30, 2018, compared with $289.9 million for the nine months ended September 30, 2017.2018. The increase was primarily driven by lower cededhigher net premiums from Homeowners due to decreasedgross premiums growth and lower reinsurance spend partially offset by lower recognized investment gains and declines in direct written policy fees and other income,revenue from Automobile as we exit the business, all of which isare discussed below.


Gross Premiums Written


The following table sets forth the gross premiums written for the periods presented:
໿
Nine Months Ended
September 30,
20192018
(In thousands)
Gross premiums written:  
Homeowners Florida$347,320  $355,818  
Homeowners non-Florida100,322  59,096  
Automobile(1) 8,628  
Commercial general liability(121) 5,519  
Federal flood13,014  11,090  
Total gross premiums written$460,534  $440,151  
  Nine Months Ended
  September 30,
  2018 2017
  (In thousands)
Gross premiums written:    
Homeowners Florida $355,818
 $373,875
Homeowners non-Florida 59,096
 40,381
Automobile 8,628
 37,089
Commercial general liability 5,519
 8,768
Federal flood 11,090
 9,412
Total gross premiums written $440,151
 $469,525


Gross written premiums decreased $29.3increased $20.3 million, or 6.3%4.6%, to $460.5 million for the nine months ended September 30, 2019, compared with $440.2 million for the nine months ended September 30, 2018, compared with $469.5 million for the nine months ended September 30, 2017.2018. Gross premiums written decreasedincreased primarily due to the declinegrowth in Automobile and homeowners Floridanon-Florida, partially offset by the growthdecline in the non-core businesses we are exiting, Automobile and commercial general liability, as well as a decline in homeowners non-Florida.

The lower premiums in Automobile were dueFlorida. Our homeowners non-Florida business continues to our decision to select specific types and amounts of premiums to be underwritten with consideration and focus on profitability. Automobile was not profitable throughout the 2017show exceptional growth year and we announced in December 2017 that we were taking the appropriate steps, including the completion of all required regulatory filings and approvals, to withdraw from Automobile. The third party transaction, discussed above in Overview of Insurance Lines of Business - Personal Automobile, led to negative gross premium for Automobile due to the reversal of unearned premium. The increaseover year, especially in the homeowners non-Florida gross premiums written was due to the expansionstate of our operations outside of Florida,Texas, which is allowing us to leverage our infrastructure and diversify insurance risk. Additionally, homeowners Florida written premiums in the first nine months of 2018 includes the effect of the rate increase of 10.0%, that became effective on August 1, 2017.Overall, Homeowners grew 7.9%.


Gross Premiums Earned


The following table sets forth the gross premiums earned for the periods presented:
Nine Months Ended
September 30,
20192018
(In thousands)
Gross premiums earned:  
Homeowners Florida$338,481  $356,507  
Homeowners non-Florida73,928  47,072  
Automobile26  17,876  
Commercial general liability1,693  7,144  
Federal flood11,005  9,640  
Total gross premiums earned$425,133  $438,239  
  Nine Months Ended
  September 30,
  2018 2017
  (In thousands)
Gross premiums earned:    
Homeowners Florida $356,507
 $359,147
Homeowners non-Florida 47,072
 31,064
Automobile 17,876
 43,932
Commercial general liability 7,144
 9,339
Federal flood 9,640
 7,838
Total gross premiums earned $438,239
 $451,320


Gross premiums earned decreased $13.1 million, or 2.9%3.0%, to $425.1 million for the nine months ended September 30, 2019, as compared to $438.2 million for the nine months ended September 30, 2018, as compared to $451.3 million for the nine months ended September 30, 2017.2018. The results are a reflection of our decision to exit the Automobile and commercial general liability lines, as discussed earlier, and were partially offset by a 3.4%2.2% increase in earned premiums in Homeowners. Additionally, in homeowners Florida, our August 1, 2017 10.0% rate increase is now fully reflected in our earned premiums, and our homeowners non-Florida continues to grow on an earned basis.




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Ceded Premiums Earned


Ceded premiums decreased $31.2$17.4 million, or 15.2%10.0%, to $156.7 million for the nine months ended September 30, 2019, compared to $174.1 million for the nine months ended September 30, 2018, compared to $205.3 million for the nine months ended September 30, 2017.2018. The decrease was primarily driven by lower excess of loss reinsurance spend in Homeowners and lower ceded premiums in Automobile as we have exited that line of $8.6 million and lowering the homeowners Florida quota share from 10% to 2% during the third quarter of 2018, a $6.7 million impact, as well as lower gross premiums earned during the period in Automobile.business.


Net Investment Income


Net investment income increased $1.6$2.9 million, or 21.1%32.9%, to $12.0 million during the nine months ended September 30, 2019, compared to $9.1 million during the nine months ended September 30, 2018, compared to $7.5 million during the nine months ended September 30, 2017.2018. The increase in net investment income was primarily due to the growth in our fixed income portfolio including a re-allocation of $30 million of equity investments into fixed income securities during the third quarter of 2017. The increase was also due togrowth and the improvement in the yield on our fixed income portfolio as a result of rising interest rates during 2018 and from portfolio repositioning during the first quarter of 2018, particularly the sale of tax-free municipal bonds, the proceeds of which were reinvested in taxable municipal and corporate fixed income securities with higher coupon rates.repositioning.


Net Realized and Unrealized Investment Gains (Losses)


Net realized and unrealized investment gains (losses) were $0.9$5.1 million for the nine months ended September 30, 2018,2019, compared to $8.6$0.9 million in the prior year period.  During the first nine months of 2018, weWe recognized $3.0 million and $2.6 million in unrealized investment gains for equity securities.  These unrealizedsecurities during these respective periods.  Our current year net realized gains were more than offset by $1.7 million inand prior year net realized losses are primarily due to the decision to liquidate and transfer certain bond positions, including positions related to tax-free municipal securities. This liquidation was done to reduce exposure in certain bond types as well as consolidate our investment strategy between MNIC's investment securities and the rest of the Company's investment securities, which resulted in us selling out of certain bond and equity positions. We also experienced losses associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions, a typical practice each and every quarter. Our prior year investment gains were driven by anet realized losses also resulted from our decision to re-deploy approximately $30.6 million of equities into fixed-incomeliquidate certain bond positions, including positions related to tax-free municipal securities during the thirdfirst quarter of 2017 in order to reduce the Company’s exposure to the equity markets.2018.

As discussed in Note 2 of the notes to our Consolidated Financial Statements, effective January 1, 2018, we began recording all unrealized gains (losses) for equity securities through the income statement instead of through other comprehensive income. This new accounting for equity securities creates volatility in our earnings compared to the prior accounting rules.


Direct Written Policy Fees


Direct written policy fees decreased by $2.9$3.4 million, or 21.5%31.6%, to $10.7$7.3 million for the nine months ended September 30, 2018,2019, compared with $13.6$10.7 million induring the same period in 2017.nine months ended September 30, 2018. The decrease in direct written policy fees is correlated to the lower number of policies in-force in Automobile offset by accelerating the recognition of policy fee income from the policies which were novateddue to a third party during the third quarter of 2018. Additionally, further impacting the variance is the fact that Automobile policies have a higher policy fee amount per premium dollar and generate policy fees twice per year (with six month policies)our decision to exit this line, as compared with Homeowners policies.discussed earlier.


Other Income


Other income included the following for the periods presented:


໿
 Nine Months EndedNine Months Ended
 September 30,September 30,
 2018 % Change 20172019% Change2018
 (In thousands)(In thousands)
Other income:      Other income:   
Commission income $3,827
 (23.6)% $5,008
Commission income$2,466  (35.6)%$3,827  
Brokerage 9,274
 27.2 % 7,291
Brokerage9,408  1.4 %9,274  
Partnership income (loss) 255
 21.4 % 210
Financing revenue 1,477
 (12.1)% 1,681
Financing and other revenueFinancing and other revenue1,241  (28.3)%1,732  
Total other income $14,833
 4.5 % $14,190
Total other income$13,115  (11.6)%$14,833  




The increasedecrease in other income was due to higher brokeragedriven by lower commission income and financing revenue, which is the result of an increase in the amount of our homeowners reinsurance placed, the type of reinsurance purchased and the commissions paid on these reinsurance agreements in place during the nine months ended September 30, 2018 as compared to during the same period in 2017. The increase was partially offset by a lowerhigher brokerage revenue. The year over year decreases in commission income which is the result ofwere driven by lower Automobile fee income driven byfrom the reduction in premiums earned and, to a lesslesser extent, lower fee income from other areas of the business.


-46-


Expenses


Losses and Loss Adjustment Expenses


Losses and loss adjustment expenses (“LAE”) decreased $32.6LAE increased $38.2 million, or 17.3%24.5%, to $156.1$194.3 million for the nine months ended September 30, 2018,2019, compared with $188.7$156.1 million for the same period last year. Homeowners losses increased $45.0 million during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, slightly offset by $6.0 million of decreases in Automobile and commercial general liability as we exit these lines, across the same period.
The net loss ratio decreased 17.6increased 13.3 percentage points, to 72.4% in the first nine months of 2019, as compared to 59.1% in the first nine months of 2018. The higher ratio was primarily the result of $46.7 million of losses, net in 2019 from severe weather events in Florida and other states ($23.5 million of the 2019 losses relates to non-Florida, which is subject to a 50% profit-sharing agreement, as discussed earlier). Severe weather in 2018 amounted to $7.8 million. The remaining variance is the result of higher losses from higher gross premiums in 2019 as compared to 76.7% in the first nine months of 2017. The lower ratio was the result of the decrease in the lower net losses from severe weather ($7.8 million in the nine months ended September 30, 2018, impacts of Hurricane Florence and Tropical Storm Gordon, as compared to $34.5 million in the prior year period, impacts of Hurricane Irma and Hurricane Harvey), the continued earn-out of our homeowners Florida August 1, 2017 10% rate increase and the decrease in the size of Automobile ($18.3 million lower losses, including adverse development) driven by the closure of poor performing programs.  These decreases were partially offset by $11.7 million of lower ceded losses related to Homeowners quota share treaties in the nine months ended September 30, 2018 as compared to the same period in 2017.2018.


Commissions and Other Underwriting Expenses


The following table sets forth the commissions and other underwriting expenses for the periods presented:


Nine Months Ended
September 30,
20192018
(In thousands)
Commissions and other underwriting expenses:
Homeowners Florida$39,810  $42,796  
All others17,796  14,488  
Ceding commissions(8,893) (8,777) 
Total commissions and other fees48,713  48,507  
Automobile 4,229  
Homeowners non-Florida2,337  1,354  
Total fees2,340  5,583  
Salaries and wages9,090  11,282  
Other underwriting expenses15,507  26,095  
Total commissions and other underwriting expenses$75,650  $91,467  
  Nine Months Ended
  September 30,
  2018 2017
  (In thousands)
Commissions and other underwriting expenses:    
Homeowners Florida $42,796
 $43,171
All others 14,488
 17,150
Ceding commissions (8,777) (14,511)
Total commissions and other fees 48,507
 45,810
     
Automobile 4,229
 6,653
Homeowners non-Florida 1,354
 983
Total fees 5,583
 7,636
     
Salaries and wages 11,282
 11,361
Other underwriting expenses 26,095
 22,076
Total commissions and other underwriting expenses $91,467
 $86,883


Commissions and other underwriting expenses increased $4.6decreased $15.8 million, or 5.3%17.3%, to $75.7 million for the nine months ended September 30, 2019, compared with $91.5 million for the nine months ended September 30, 2018,2018. The decrease is the result of a significant reduction in other underwriting expenses as there was a benefit in the non-Florida profit share calculation in the nine months as a direct result of $23.5 million of non-Florida weather related losses (as previously discussed in the Losses and Loss Adjustment Expenses section), resulting in a $11.8 million reduction.

Additionally, the lower Automobile fees and lower homeowners Florida commissions are driven by the corresponding change in premiums earned across periods. The decline in salaries and wages is due in part to our continued focus on operational efficiencies. These items are partially offset by an increase in homeowners non-Florida commissions and fees as a result of higher premiums earned across periods.

The net expense ratio decreased 6.2 percentage points to 34.6% in the first nine months of 2019, as compared with $86.9to 40.8% in the first nine months of 2018. The decrease in the ratio is attributable to the lower non-Florida profit share expense and other expense reductions as well as the lower reinsurance spend during the nine months driving higher net premiums earned. Refer to the discussion above for more information.

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General and Administrative Expenses

General and administrative expenses increased $1.0 million, or 6.1%, to $17.3 million for the nine months ended September 30, 2017.2019, compared with $16.3 million in the prior year period. The increase was due primarily to higher costs related to the homeowners non-Florida 50% profit share provision as a result of higher profitability in the first nine months of 2018 as comparedprofessional fees, including due diligence costs relating to the first nine monthspending acquisition of 2017. The higher profitability is the direct result of continued earned premium growth, together with good loss experience in these states. The additional costs were offset by lower acquisition related costs from Automobile driven by the lower gross premiums earned during the first nine months of 2018Maison Companies, as compared with the first nine months of 2017.previously discussed earlier.


During the first nine months of 2018, we also incurred $1.8Interest Expense

Interest expense increased $5.8 million of severance and other related costs associated with our decision to exit our Automobile and headcount reduction initiatives. Some of these costs are included in each of the expense lines, except interest expense.



The net expense ratio decreased 0.5 percentage points to 40.8% in the first nine months of 2018, as compared to 41.3% in the first nine months of 2017. The increase in the ratio is related to higher homeowners non-Florida profit share costs, higher severance costs, higher professional fees offset by lower acquisition costs from Automobile. Refer to the discussions above for more information.

General and Administrative Expenses

General and administrative expenses increased $1.6 million, or 10.9%, to $16.3$8.9 million for the nine months ended September 30, 2018,2019, compared with $14.7$3.1 million in the prior year period. Theperiod due to the $3.6 million of prepayment fees, including the write-off of remaining debt issuance costs, and an increase in general and administrative expenses was primarily due to higher legal and professional fees, including audit, tax and actuarial fees, as well as higher payroll coststhe outstanding debt as a result of severance related costs, as noted above.our first quarter 2019 borrowing. Refer to Note 3 and 8 of the notes to our Consolidated Financial Statements included herein, for information regarding new debt issued and debt retirement that occurred in March 2019.


Interest ExpenseIncome Taxes


Interest expense increased $2.9Income taxes decreased $6.7 million, to $3.1$1.9 million for the nine months ended September 30, 2018,2019, compared with $0.2 million in the prior year period. The increase in interesta tax expense is the result of the Company issuing $45.0 million of senior notes, late in December 2017. During the first nine months of 2017, the Company only had $5.0 million of debt on its balance sheet.

Income Taxes

Income taxes increased $9.0 million, to $8.6 million for the nine months ended September 30, 2018, compared with a tax expense of $0.4 million for the nine months ended September 30, 2017.2018. The increasedecrease in income tax expense is the result of higher taxablelower income during the nine months ended September 30, 2018, as2019, compared to the nine months ended September 30, 2017, offset by the decreasecorresponding period in 2018. Additionally, in 2019, we recognized a benefit of $0.4 million relating to an election to carry back capital losses and a benefit of $0.2 million relating to a reduction in the federal corporateuncertain tax position reserve. Lastly, the State of Florida announced a reduction in its state income tax rate effective from 35% to 21%, effective January 1, 2018.  2019, as discussed earlier.







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LIQUIDITY AND CAPITAL RESOURCES


Overview


Our primary sources of funds are netgross written premiums, investment income, commission income and fee income.  Our primary uses of funds are the payment of claims, catastrophe and other reinsurance premiums and operating expenses.  As of September 30, 2018,2019, the Company held $448.9$491.5 million in investments. Cash and cash equivalents decreased $16.8increased $57.0 million, to $69.5$121.4 million as of September 30, 2018,2019, compared with $86.2$64.4 million as of December 31, 2017. Contributing2018, as discussed below, primarily due to this decrease was a $16.7the net proceeds of our March 2019 debt offering, after redemption of our legacy $45 million payment related to FNIC's acquisition of the interest in MNIC's indirect parent company (see "General -- Joint Ventures," above for more information) and the $5.0 million payment in full of the promissory note to TransRe.principal amount. Total shareholders’ equity decreased $4.6increased $22.1 million, to $222.9$237.4 million as of September 30, 2018,2019, compared with $227.5$215.3 million as of December 31, 2017.  Contributing2018 due primarily to this decrease was the $16.7 million non-controlling interest buyout transaction discussed above.unrealized gains on our bond portfolio and net income.


Historically, we have met our liquidity requirements primarily through cash generated from operations. In December 2017, we received proceedsOn March 5, 2019, the Company closed on an offering of $25.0$100 million principal amount of Senior Unsecured Floating Rate Notes due 2027 (the “2027 Notes”), pursuant to an indenture dated as2029, which bear interest at the annual rate of December 28, 2017 (the “Indenture”), as supplemented by a supplemental indenture dated as of December 28, 2017. We also received in December 20177.5%. The net proceeds of $20.0the offering were in part used to redeem all $45 million of the Company's Senior Unsecured Fixed Rate Notes due 2022 (the “2022 Notes”), pursuant toand the Indenture, as supplemented by a supplemental indenture dated as of December 29, 2017. A portion ofCompany's Senior Notes due 2027. Additionally, the proceedsremaining cash from the 2027 Notesoffering will be used to purchase the Maison Companies and 2022 Notes was used on February 28, 2018 to infuse capital into FNIC. Refer to Note 17for other general corporate purposes, including potential repurchases of the notes to our Consolidated Financial Statements in our 2017 Form 10-K for additional information regarding the capital infusion. The remaining proceeds are available to repurchase shares of our common stock and for general corporate purposes, including managing the capital needs of our subsidiaries. Refer to Notes 3 and 8 to the notes to the Consolidated Financial Statements included herein, for additional information regarding the 2029 Notes as well as the pending acquisition of the Maison Companies.


Among other things, the Indenture limits2029 Notes contain customary covenants that limit the Company's ability to incurenter into certain operational and financial transactions, including, but not limited to incurring additional debt without the approval of the existing noteholders. The supplemental indentures limit the Company's debt to equity ratio to 35%.above certain thresholds. The Company's actual debt to equitycapital ratio as of September 30, 20182019 was approximately 20%29%.


Statutory Capital and Surplus of Our Insurance Subsidiaries


See “ItemAs described more fully in Part I, Item 1. Description of Business—Business, Regulation of our 20172018 Form 10-K, for discussion of the Company’s insurance operations and relatedare subject to the laws and regulations of the states in which we operate.  The Florida OIR and theirits regulatory counterparts in other states utilize the National Association of Insurance Commissions (“NAIC”) risk-based capital (“RBC”) requirements, and the resulting RBC ratio, as a key metric in the exercise of their regulatory oversight.  The RBC ratio is a measure of the sufficiency of an insurer’s statutory capital and surplus.  In addition, the RBC ratio is used by insurance industry ratings services in the determination of the financial strength ratings (i.e., claims paying ability) they assign to insurance companies.  As of September 30, 2019 and December 31, 2017,2018, FNIC’s statutory surplus was $162.2$150.9 million and $161.7 million, respectively.  

Based on RBC requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its RBC ratio was 301.9%ACL, as calculated under the NAIC’s requirements, decreases.  The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount.  The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC’s and MNIC's ratios of statutory surplus to ACL were 329.9% and 774.4%, respectively, as of September 30, 2018, our statutory capital of FNIC was $162.1 million.  As a result of the Company's $23.0 million pre-tax net loss on Hurricane Michael, recorded in the fourth quarter, the Company is evaluating capital management alternatives to ensure FNIC’s year end 2018 statutory surplus and RBC ratio are at levels necessary to meet the expectations of our regulators and of Demotech, our insurance industry ratings service. Options under consideration include capital infusions to FNIC from existing holding company liquidity or other alternatives as may be approved by the Company's Board of Directors. One such action has already been taken. As described under Note 5 of the notes to our Consolidated Financial Statements, FNIC’s current period quota-share treaty incepted with a 2% ceding percentage, and included terms enabling FNIC to increase its ceding percentage during the term of the treaty. On November 6, 2018, the Company announced that it had increased its ceding percentage under this treaty from 2% to 10% effective October 1,December 31, 2018.


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Cash Flows Discussion


We believe that existing cash and investment balances, when combined with anticipated cash flows and the proceeds of our debt offering as described above, will be adequate to meet our expected liquidity needs in both the short-term and the reasonably foreseeable future. We believe the combined balances will be sufficient to meet our ongoing operating requirements and anticipated cash needs, and satisfy the covenants in our senior notes. Future growth strategies may require additional external financing and we may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us on favorable terms, or at all, or that any such financing would not negatively impact our results of operations. We expect to continue declaring and paying dividends at comparable levels, subject to our future liquidity needs and reserve requirements.


Subject to our compliance with capital requirements as described above, we may consider various opportunities to deploy our capital, including repurchases of our common stock if such repurchases represent a more favorable use of available capital.




Operating Activities


Net cash provided by operating activities decreased to $28.3$26.4 million in the nine months ended September 30, 2018 from $42.32019 compared to $28.3 million in the same period in 2017.2018. This decrease reflects higher expenses paid, excludingincluding those related to losses and loss adjustment expenses, and lowerpartially offset by higher net premiums collected, in the first nine months of 20182019 as compared to the corresponding period in 2017.2018. 


Investing Activities


Net cash used in investing activities of $16.7 million in the nine months ended September 30, 2019 reflected purchases of debt and equity investment securities of $175.1 million, partly offset by sales, maturities and redemptions of our debt and equity investment securities of $160.0 million. Net cash used in investing activities of $15.2 million in the nine months ended September 30, 2018 reflected purchases of debt and equity investment securities of $262.5 million, partly offset by sales, maturities and redemptions of our debt and equity investment securities of $248.3 million. Net cash used in investing activities of $22.8 million in the nine months ended September 30, 2017 reflected purchases of debt and equity investment securities of $303.3 million, partly offset by sales, maturities and redemptions of our debt and equity investment securities of $280.8 million.


Financing Activities


Net cash used inprovided by financing activities for the nine months ended September 30, 20182019 of $47.3 million primarily reflects issuance of long-term debt, net of issuance costs, of $98.4 million, partly offset by payment of long-term debt of $48.0 million. Net cash used in financing activities of $29.9 million for the nine months ended September 30, 2018 primarily reflects the purchase of our non-controlling interest of $16.7 million, payment of long-term debt of $5.0 million, and repurchase of our common stock of $5.1 million. Net cash used in financing activities of $12.5 million for the nine months ended September 30, 2017 primarily reflects repurchases of our common stock of $9.4 million and dividend payments of $3.2 million.


Impact of Inflation and Changing Prices


The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and LAE.


Insurance premiums are established before we know the amount of losses and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation may also affect the market value of our investment portfolio and the investment rate of return. Any future economic changes that result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred losses and LAE and thereby materially adversely affect future liability requirements.


Critical Accounting Policies


We prepare our consolidated financial statements in accordance with GAAP, which requires us 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.


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We believe our most critical accounting estimates inherent in the preparation of our financial statements are: (i) fair value measurements of our investments; (ii) accounting for investments; (iii) premium and unearned premium calculation; (iv) reinsurance contracts; (v) the recoverability of deferred acquisition costs; (vi) reserve for loss and losses adjustment expenses; and (vii) income taxes. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations, and cash flows would be affected.


There have been no significant changes to our critical accounting estimates during the nine months ended September 30, 2018.2019.  Refer to Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” included in our 20172018 Form 10-K for a more complete description of our critical accounting estimates.



Item 3.  Quantitative and Qualitative Disclosures about Market Risk


Our investment objective is to maximize total rate of return after federal income taxes while maintaining liquidity and minimizing risk. Our current investment policy limits investment in non-investment-grade debt securities (including high-yield bonds), and limits total investments in preferred stock, common stock and mortgage notes receivable. We also comply with applicable laws and regulations that further restrict the type, quality and concentration of our investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities and real estate mortgages.


Our investment policy is established by the Board of Directors' Investment Committee and is reviewed on a regular basis. Pursuant to this investment policy, as of September 30, 2018,2019, approximately 96%97% of investments were in debt securities and cash and cash equivalents, which are considered to be either held-until-maturity or available-for-sale, based upon our estimates of required liquidity. Approximately 99% of the debt securities are considered available-for-sale and are marked to market. We may in the future consider additional debt securities to be held-to-maturity securities, which are carried at amortized cost. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.


There have been no material changes to the Company’s exposures to market risks since December 31, 2017.2018. Please refer to the 20172018 Form 10-K for a complete discussion of the Company’s exposures to market risks.


Item 4.  Controls and Procedures


Evaluation of Disclosure Controls and Procedures


We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.


As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, due to the control matter discussed below in “Changes in Internal Control over Financial Reporting”, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2018.2019.


Notwithstanding the identified material weakness, we believe the consolidated financial statements included in this Form 10-Q fairly represent in all material respects the financial condition, results of operations and cash flows of the Company for the periods presented.


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Changes in Internal Control over Financial Reporting


ThereRecently, as part of a substantially completed investigation, the Company identified a control deficiency resulting primarily from inadequate managerial review by a subset of our claims team around processing of follow-on payments on closed claims of less than $30 thousand. In the course of investigating this matter, we identified fifteen inappropriate payments totaling approximately $0.3 million, which occurred between June and October 2019. As a result of our substantially completed investigation, we concluded that no other inappropriate payments occurred. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. While this deficiency did not result in a material misstatement of the Company’s financial statements, the Company’s management, with the oversight of the Audit Committee of our Board of Directors, concluded that this deficiency rises to the level of a material weakness, as it had the potential to allow for a material dollar amount of inappropriate claim payments to be made without being detected.

To remediate the material weakness, we are strengthening the level and scope of managerial review of claim payment controls related primarily to follow-on payments on closed claims of less than $30 thousand as well as enhancing compensating controls around access and authority limits. Additionally, we are improving the segregation of responsibilities across the claim payment process, which will add additional layers of management review. The material weakness cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed by the end of fiscal year 2019.

Except as noted above, there were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Limitations on Effectiveness


Our management and our audit committee do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control gaps and instances of fraud have been detected. These inherent limitations include the realities that judgments and decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.

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Part II: OTHER INFORMATION


Item 1.  Legal Proceedings

Please see the Company’s Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 7, 2018, for information regarding the matter involving Federated Mutual Insurance Company.


Please see the Company’s Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 7, 2018, for information regarding the settlement on May 8, 2018 of the Company’s action against its former chief financial officer.


Refer to Note 910 to our Consolidated Financial Statements set forth in Part I, “Financial Statements” for further information about legal proceedings.


Item 1A.  Risk Factors


There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of the Company’s 20172018 Form 10-K.  Please refer to that section for disclosures regarding what we believe are the most significant risks and uncertainties related to our business.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds


(c) Issuer Purchases of Equity Securities. The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended September 30, 2019 by or on behalf of FNHC:
໿
(c)
Issuer Purchases
Total Number of Equity Securities. The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended September 30, 2018 by or on behalf of FNHC. All purchases were made in the open market in accordance with Rule 10b-18 or under Rule 10b5-1 of the Exchange Act.Approximate Dollar
໿
      Total Number of Approximate Dollar
  Total Number Average Shares Purchased Value of Shares That
  of Shares Price Paid as Part of Publicly May Yet Be Purchased
  Repurchased Per Share Announced Plans 
Under the Plans (1)
July 2018 
 $
 
 $5,719,920
August 2018 
 
 
 5,719,920
September 2018 
 
 
 5,719,920

໿
Total NumberAverageShares PurchasedValue of Shares That
(1)of SharesPrice Paidas Part of PubliclyMay Yet Be Purchased
RepurchasedPer ShareAnnounced Plans
In December 2017,Under the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million (plus $0.8 million remaining from previous authorization) of its outstanding shares of common stock through December 31, 2018. As of September 30, 2018, the remaining availability for future repurchases of our common stock was $5.7 million.Plans(1)
July 2019— $— — $10,000,000 
August 2019— — — 10,000,000 
September 2019— — — 10,000,000 

໿


(1)In December 2018, the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million of its outstanding shares of common stock through December 31, 2019. As of September 30, 2019, the remaining availability for future repurchases of our common stock was $10.0 million. Any such purchases would be made in the open market in accordance with Rule 10b-18 or under Rule 10b5-1 of the Exchange Act.

໿



Item 3.  Defaults upon Senior Securities


None.


Item 4.  Mine Safety Disclosures


Not applicable.


Item 5.  Other Information


Company Articles of Incorporation and BylawsNot applicable.

The Company’s Board approved, effective November 7, 2018, a restatement to the Company’s articles of incorporation and a restatement and amendment to the Company’s bylaws, each of which combine into single documents the various amendments approved by the Board in 2016 and 2017 as part of the Company’s corporate governance update, as follows:

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--Second Restated Articles of Incorporation-This reflects a compilation of the various amendments to the articles since the last restatement in 1998.


--Second Amended and Restated Bylaws-The Second Restatement includes the amendments from 2016 and 2017 previously approved by the Board.  Two additional amendments were approved by the Board (and which do not require shareholder approval):

Article II, Section 1 was amended to authorize holding an annual meeting by remote communication as permitted by the Florida statutes.  A corresponding change was also made to Article II, Section 3.

Article IV, Section 1 was amended to clarify that the office of “Chief Executive Officer” is a standing office of the Company. Other references in the bylaws to “President” were changed to “Chief Executive Officer” where appropriate.

The Second Restated Articles of Incorporation and the Second Amended and Rested Bylaws are included as Exhibit 3.1 and Exhibit 3.2, respectively, to this Form 10-Q, and the foregoing descriptions are qualified by reference to the full text of the exhibits.




Item 6.  Exhibits
Exhibit No.Description
3.110.1
3.2
10.1
10.2
10.3
10.4
10.210.5
10.310.6
10.4
10.510.7
10.610.8
10.9
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document*****
101.SCHXBRL Taxonomy Extension Schema Document*****
101.CALXBRL Taxonomy Extension Calculation Linkbase Document*****
101.LABXBRL Taxonomy Extension Label Linkbase Document*****
101.PREXBRL Taxonomy Extension Presentation Linkbase Document*****
________________________
* Filed herewith. Certain identified information has been omitted from this exhibit in accordance with and as permitted by Item 601(b)(10)(iv) of Regulation S-K.
** ThisIncorporated by reference to the comparable exhibit which is filed herewith, is subject to a confidential treatment requestincluded in the Current Report on Form 8-K filed with the SEC.SEC on August 12, 2019.
*** Incorporated by reference to the comparable exhibit included in the Current Report on Form 8-K filed with the SEC on August 13, 2019.
**** Filed herewith.
***** In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of Exchange Act, except as shall be expressly set forth by specific reference in such filing.





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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


FEDNAT HOLDING COMPANY
By:/s/ Michael H. Braun
Michael H. Braun, Chief Executive Officer
(Principal Executive Officer)
/s/ Ronald Jordan
Ronald Jordan, Chief Financial Officer
(Principal Financial Officer)


Date: November 7, 201812, 2019



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