UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2019~~MARCH 31, 2020

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

FOR THE TRANSITION PERIOD FROM ___________________TO _______________________

Commission File number 000-25001

FedNat Holding Company

(Exact name of registrant as specified in its charter)


Florida						65-0248866
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification Number)

14050 N.W. 14th Street, Suite 180, Sunrise, FL						33323
(Address of principal executive offices)						(Zip Code)

800-293-2532

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	FNHC	Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ¨

Accelerated Filer

Non-accelerated Filer ¨

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of ~~November~~May 1, ~~2019,~~2020, the registrant had ~~12,869,366~~13,673,319 shares of common stock outstanding.

FEDNAT HOLDING COMPANY

TABLE OF CONTENTS



PART I: FINANCIAL INFORMATION			PAGE

ITEM 1	Financial Statements	3

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3231

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	5140

ITEM 4	Controls and Procedures	5141

PART II: OTHER INFORMATION

ITEM 1	Legal Proceedings	5342

ITEM 1A	Risk Factors	5342

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	5342

ITEM 3	Defaults upon Senior Securities	5343

ITEM 4	Mine Safety Disclosures	5343

ITEM 5	Other Information	5343

ITEM 6	Exhibits	5444

SIGNATURES			5545

-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,			March 31,		December 31,
		2019		2018			2020		2019
ASSETS	ASSETS					ASSETS
Investments:	Investments:					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 cost		4,369		5,126
Debt securities, available-for-sale, at fair value (amortized cost of $534,551 and $512,645, respectively)						Debt securities, available-for-sale, at fair value (amortized cost of $534,551 and $512,645, respectively)	$	542,835	$	526,265
Debt securities, held-to-maturity, at amortized cost, net of allowance of $2 and $0, respectively						Debt securities, held-to-maturity, at amortized cost, net of allowance of $2 and $0, respectively	4,271		4,337
Equity securities, at fair value	Equity securities, at fair value	19,014		17,758		Equity securities, at fair value	17,324		20,039
Total investments	Total investments	491,513		451,525		Total investments	564,430		550,641
Cash and cash equivalents	Cash and cash equivalents	121,418		64,423		Cash and cash equivalents	123,190		133,361
Prepaid reinsurance premiums	Prepaid reinsurance premiums	170,294		108,577		Prepaid reinsurance premiums	89,465		145,659
Premiums receivable, net of allowance of $117 and $77, respectively		39,932		29,791
Reinsurance recoverable, net		202,875		211,424
Deferred acquisition costs, net		48,539		39,436
Income taxes, net		1,056		5,220

Premiums receivable, net of allowance of $189 and $159, respectively						Premiums receivable, net of allowance of $189 and $159, respectively	38,337		41,422
Reinsurance recoverable, net of allowance of $53 and $0, respectively						Reinsurance recoverable, net of allowance of $53 and $0, respectively	261,150		209,615
Deferred acquisition costs and value of business acquired, net						Deferred acquisition costs and value of business acquired, net	57,715		56,136
Current and deferred income taxes, net						Current and deferred income taxes, net	2,358		2,552
Goodwill						Goodwill	10,997		10,997
Other assets	Other assets	25,602		14,975		Other assets	29,456		28,633
Total assets	Total assets	$	1,101,229	$	925,371	Total assets	$	1,177,098	$	1,179,016

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities	Liabilities					Liabilities
Loss and loss adjustment expense reserves	Loss and loss adjustment expense reserves	$	286,948	$	296,230	Loss and loss adjustment expense reserves	$	375,675	$	324,362
Unearned premiums	Unearned premiums	317,393		281,992		Unearned premiums	358,258		360,870
Reinsurance payable	Reinsurance payable	122,802		63,599		Reinsurance payable	63,051		102,467
Long-term debt, net of deferred financing costs of $1,518 and $596, respectively		98,482		44,404
Long-term debt, net of deferred financing costs of $1,438 and $1,478, respectively						Long-term debt, net of deferred financing costs of $1,438 and $1,478, respectively	98,562		98,522
Deferred revenue	Deferred revenue	6,239		4,585		Deferred revenue	6,770		6,856

Other liabilities	Other liabilities	31,976		19,302		Other liabilities	35,608		37,246
Total liabilities	Total liabilities	863,840		710,112		Total liabilities	937,924		930,323

Commitments and contingencies (see Note 10)
Commitments and contingencies (see Note 11)						Commitments and contingencies (see Note 11)

Shareholders' Equity	Shareholders' Equity					Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized	Preferred stock, $0.01 par value: 1,000,000 shares authorized	—		—		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, respectively		129		128
Common stock, $0.01 par value: 25,000,000 shares authorized; 13,949,971 and 14,414,821 issued and outstanding, respectively						Common stock, $0.01 par value: 25,000,000 shares authorized; 13,949,971 and 14,414,821 issued and outstanding, respectively	139		144
Additional paid-in capital	Additional paid-in capital	143,088		141,128		Additional paid-in capital	168,130		167,677
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	11,648		(3,750)		Accumulated other comprehensive income (loss)	6,253		10,281
Retained earnings	Retained earnings	82,524		77,753		Retained earnings	64,652		70,591
Total shareholders’ equity	Total shareholders’ equity	237,389		215,259		Total shareholders’ equity	239,174		248,693
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	1,101,229	$	925,371	Total liabilities and shareholders' equity	$	1,177,098	$	1,179,016

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

-3-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

໿


		Three Months Ended						Nine Months Ended							Three Months Ended
		September 30,						September 30,							March 31,
		2019		2018		2019		2018			2020		2019
Revenues:	Revenues:									Revenues:
Net premiums earned	Net premiums earned	$	87,374	$	98,493	$	268,464	$	264,159	Net premiums earned	$	105,910	$	88,784
Net investment income	Net investment income	4,068		3,137		12,037		9,058		Net investment income	3,892		3,710
Net realized and unrealized investment gains (losses)	Net realized and unrealized investment gains (losses)	794		1,760		5,050		916		Net realized and unrealized investment gains (losses)	(2,825)		2,301
Direct written policy fees	Direct written policy fees	2,514		3,796		7,308		10,685		Direct written policy fees	3,466		2,391
Other income	Other income	4,726		3,646		13,115		14,833		Other income	5,256		4,011
Total revenues	Total revenues	99,476		110,832		305,974		299,651		Total revenues	115,699		101,197

Costs and expenses:	Costs and expenses:									Costs and expenses:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	62,105		62,457		194,284		156,098		Losses and loss adjustment expenses	68,930		66,839
Commissions and other underwriting expenses	Commissions and other underwriting expenses	24,854		31,373		75,650		91,467		Commissions and other underwriting expenses	36,355		28,234
General and administrative expenses	General and administrative expenses	5,246		5,000		17,336		16,345		General and administrative expenses	6,245		6,311
Interest expense	Interest expense	1,894		1,032		8,860		3,139		Interest expense	1,915		5,051
Total costs and expenses	Total costs and expenses	94,099		99,862		296,130		267,049		Total costs and expenses	113,445		106,435

Income (loss) before income taxes	Income (loss) before income taxes	5,377		10,970		9,844		32,602		Income (loss) before income taxes	2,254		(5,238)
Income tax expense (benefit)	Income tax expense (benefit)	718		3,020		1,940		8,587		Income tax expense (benefit)	121		(1,373)
Net income (loss)	Net income (loss)	4,659		7,950		7,904		24,015		Net income (loss)	$	2,133	$	(3,865)
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	Net Income (Loss) Per Common Share									Net Income (Loss) Per Common Share
Basic	Basic	$	0.36	$	0.62	$	0.62	$	1.90	Basic	$	0.15	$	(0.30)
Diluted	Diluted	$	0.36	$	0.62	$	0.61	$	1.88	Diluted	$	0.15	$	(0.30)

Weighted Average Number of Shares of Common Stock Outstanding	Weighted Average Number of Shares of Common Stock Outstanding									Weighted Average Number of Shares of Common Stock Outstanding
Basic	Basic	12,854		12,749		12,831		12,775		Basic	14,249		12,795
Diluted	Diluted	12,897		12,870		12,880		12,866		Diluted	14,312		12,795

Dividends Declared Per Common Share	Dividends Declared Per Common Share	$	0.08	$	—	$	0.24	$	0.16	Dividends Declared Per Common Share	$	0.09	$	0.08

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

-4-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

໿


		Three Months Ended						Nine Months Ended							Three Months Ended
		September 30,						September 30,							March 31,
		2019		2018		2019		2018			2020		2019

Net income (loss)	Net income (loss)	$	4,659	$	7,950	$	7,904	$	24,015	Net income (loss)	$	2,133	$	(3,865)

Change in net unrealized gains (losses) on investments, available-for-sale, net of tax	Change in net unrealized gains (losses) on investments, available-for-sale, net of tax	2,388		(551)		15,398		(6,601)		Change in net unrealized gains (losses) on investments, available-for-sale, net of tax	(4,028)		6,888
Comprehensive income (loss)	Comprehensive income (loss)	7,047		7,399		23,302		17,414		Comprehensive income (loss)	$	(1,895)	$	3,023

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

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

-5-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

໿


													Total
													Shareholders'
													Equity
									Accumulated				Attributable to															Accumulated
				Common Stock					Additional		Other				FedNat Holding		Non-			Total				Common Stock						Additional		Other			Total
		Preferred		Issued			Paid-in		Comprehensive		Retained		Company		Controlling		Shareholders'				Preferred		Issued			Paid-in		Comprehensive		Retained			Shareholders'
		Stock		Shares	Amount		Capital		Income (Loss)		Earnings		Shareholders		Interest		Equity				Stock		Shares	Amount		Capital		Income (Loss)		Earnings			Equity
Balance as of June 30, 2019		$	—	12,849,319	$	128	$	142,486	$	9,260	$	78,911	$	230,785	$	—	$	230,785
Balance as of January 1, 2020																			Balance as of January 1, 2020		$	—	14,414,821	$	144	$	167,677	$	10,281	$	70,591		$	248,693
Cumulative effect of new accounting standards																			Cumulative effect of new accounting standards		—		—	—		—		—		(25)			(25)
Net income (loss)	Net income (loss)	—		—	—		—		—		4,659		4,659		—		4,659		Net income (loss)		—		—	—		—		—		2,133			2,133
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—	—		—		2,388		—		2,388		—		2,388		Other comprehensive income (loss)		—		—	—		—		(4,028)		—			(4,028)
Dividends declared	Dividends declared	—		—	—		—		—		(1,046)		(1,046)		—		(1,046)		Dividends declared		—		—	—		—		—		(1,302)			(1,302)

Shares issued under share-based compensation plans	Shares issued under share-based compensation plans	—		20,047	1		—		—		—		1		—		1		Shares issued under share-based compensation plans		—		58,733	—		—		—		—			—

Repurchases of common stock																			Repurchases of common stock		—		(523,583)	(5)		—		—		(6,745)			(6,750)
Share-based compensation	Share-based compensation	—		—	—		602		—		—		602		—		602		Share-based compensation		—		—	—		453		—		—			453
Balance as of September 30, 2019		$	—	12,869,366	$	129	$	143,088	$	11,648	$	82,524	$	237,389	$	—	$	237,389
Balance as of March 31, 2020																			Balance as of March 31, 2020		$	—	13,949,971	$	139	$	168,130	$	6,253	$	64,652		$	239,174


													Total
													Shareholders'
													Equity
									Accumulated				Attributable to															Accumulated
				Common Stock					Additional		Other				FedNat Holding		Non-			Total				Common Stock						Additional		Other			Total
		Preferred		Issued			Paid-in		Comprehensive		Retained		Company		Controlling		Shareholders'				Preferred		Issued			Paid-in		Comprehensive		Retained			Shareholders'
		Stock		Shares	Amount		Capital		Income (Loss)		Earnings		Shareholders		Interest		Equity				Stock		Shares	Amount		Capital		Income (Loss)		Earnings			Equity
Balance as of June 30, 2018		$	—	12,731,777	$	127	$	140,102	$	(5,350)	$	80,149	$	215,028	$	—	$	215,028
Balance as of January 1, 2019																			Balance as of January 1, 2019		$	—	12,784,444	$	128	$	141,128	$	(3,750)	$	77,753		$	215,259
Net income (loss)	Net income (loss)	—		—	—		—		—		7,950		7,950		—		7,950		Net income (loss)		—		—	—		—		—		(3,865)			(3,865)
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—	—		—		(551)		—		(551)		—		(551)		Other comprehensive income (loss)		—		—	—		—		6,888		—			6,888
Dividends declared	Dividends declared	—		—	—		—		—		2		2		—		2		Dividends declared		—		—	—		—		—		(1,041)			(1,041)

Shares issued under share-based compensation plans	Shares issued under share-based compensation plans	—		42,667	1		22		—		—		23		—		23		Shares issued under share-based compensation plans		—		51,957	—		—		—		—			—

Share-based compensation	Share-based compensation	—		—	—		484		—		—		484		—		484		Share-based compensation		—		—	—		675		—		—			675
Balance as of September 30, 2018		$	—	12,774,444	$	128	$	140,608	$	(5,901)	$	88,101	$	222,936	$	—	$	222,936
Balance as of March 31, 2019																			Balance as of March 31, 2019		$	—	12,836,401	$	128	$	141,803	$	3,138	$	72,847		$	217,916

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

-6-

~~FEDNAT HOLDING COMPANY AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)~~

~~(In thousands, except share data)~~

~~(Unaudited)~~

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, 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 1 — — — 1 — 1
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
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 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

~~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							Three Months Ended
		September 30,							March 31,
		2019		2018			2020		2019
Cash flow from operating activities:	Cash flow from operating activities:					Cash flow from operating activities:
Net income (loss)	Net income (loss)	$	7,904	$	24,015	Net income (loss)	$	2,133	$	(3,865)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:	Adjustments to reconcile net income to net cash provided by (used in) operating activities:					Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net realized and unrealized investment (gains) losses	Net realized and unrealized investment (gains) losses	(5,050)		(916)		Net realized and unrealized investment (gains) losses	2,825		(2,301)
Loss (gain) on early extinguishment of debt	Loss (gain) on early extinguishment of debt	3,575		—		Loss (gain) on early extinguishment of debt	—		3,575
Amortization of investment premium or discount, net	Amortization of investment premium or discount, net	606		1,333		Amortization of investment premium or discount, net	400		197
Depreciation and amortization	Depreciation and amortization	1,088		1,033		Depreciation and amortization	465		355
Share-based compensation	Share-based compensation	1,960		1,847		Share-based compensation	453		675
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Prepaid reinsurance premiums	Prepaid reinsurance premiums	(61,717)		1,207		Prepaid reinsurance premiums	56,194		38,719
Premiums receivable, net	Premiums receivable, net	(10,141)		12,107		Premiums receivable, net	3,085		7,107
Reinsurance recoverable, net	Reinsurance recoverable, net	8,549		(10,135)		Reinsurance recoverable, net	(51,567)		(90,498)
Deferred acquisition costs		(9,103)		(6,502)
Deferred acquisition costs and value of business acquired, net						Deferred acquisition costs and value of business acquired, net	(1,579)		(796)
Income taxes, net	Income taxes, net	(893)		9,051		Income taxes, net	1,510		(1,146)
Deferred revenue	Deferred revenue	1,654		(1,309)		Deferred revenue	(86)		(18)
Loss and loss adjustment expense reserves	Loss and loss adjustment expense reserves	(9,282)		(9,401)		Loss and loss adjustment expense reserves	51,313		77,894
Unearned premiums	Unearned premiums	35,401		1,906		Unearned premiums	(2,612)		(6,132)
Reinsurance payable	Reinsurance payable	59,203		5,060		Reinsurance payable	(39,416)		(32,200)
Other	Other	2,632		(1,038)		Other	(1,745)		1,639
Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities	26,386		28,258		Net cash provided by (used in) operating activities	21,373		(6,795)
Cash flow from investing activities:	Cash flow from investing activities:					Cash flow from investing activities:
Proceeds from sales of equity securities	Proceeds from sales of equity securities	7,461		7,407		Proceeds from sales of equity securities	2,056		1,506
Proceeds from sales of debt securities	Proceeds from sales of debt securities	123,415		153,970		Proceeds from sales of debt securities	103,118		49,174
Purchases of equity securities	Purchases of equity securities	(5,190)		(8,377)		Purchases of equity securities	(3,428)		(2,188)
Purchases of debt securities	Purchases of debt securities	(169,933)		(254,110)		Purchases of debt securities	(134,971)		(62,741)
Maturities and redemptions of debt securities	Maturities and redemptions of debt securities	29,158		86,935		Maturities and redemptions of debt securities	10,850		8,271

Purchases of property and equipment	Purchases of property and equipment	(1,562)		(1,002)		Purchases of property and equipment	(1,224)		(486)
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	(16,651)		(15,177)		Net cash provided by (used in) investing activities	(23,599)		(6,464)
Cash flow from financing activities:	Cash flow from financing activities:					Cash flow from financing activities:
Issuance of long-term debt, net of issuance costs		98,390		—
Proceeds from issuance of long-term debt, net of issuance costs						Proceeds from issuance of long-term debt, net of issuance costs	—		98,464
Payment of long-term debt and prepayment penalties	Payment of long-term debt and prepayment penalties	(48,000)		(5,000)		Payment of long-term debt and prepayment penalties	—		(48,000)
Purchase of non-controlling interest		—		(16,685)

Purchases of FedNat Holding Company common stock	Purchases of FedNat Holding Company common stock	—		(5,061)		Purchases of FedNat Holding Company common stock	(6,643)		—
Issuance of common stock for share-based awards		1		39

Dividends paid	Dividends paid	(3,131)		(3,145)		Dividends paid	(1,302)		(1,039)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	47,260		(29,852)		Net cash provided by (used in) financing activities	(7,945)		49,425
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents	56,995		(16,771)		Net increase (decrease) in cash and cash equivalents	(10,171)		36,166
Cash and cash equivalents at beginning-of-period	Cash and cash equivalents at beginning-of-period	64,423		86,228		Cash and cash equivalents at beginning-of-period	133,361		64,423
Cash and cash equivalents at end-of-period	Cash and cash equivalents at end-of-period	$	121,418	$	69,457	Cash and cash equivalents at end-of-period	$	123,190	$	100,589

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

~~-8-~~-7-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

(Continued)

໿


		Nine months ended							Three Months Ended
		September 30,							March 31,
		2019		2018			2020		2019
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid (received) during the period for interest	Cash paid (received) during the period for interest	$	4,860	$	2,983	Cash paid (received) during the period for interest	$	3,750	$	902
Cash paid (received) during the period for income taxes	Cash paid (received) during the period for income taxes	$	2,729	$	(466)	Cash paid (received) during the period for income taxes	$	(811)	$	(277)

Significant non-cash investing and financing transactions:	Significant non-cash investing and financing transactions:					Significant non-cash investing and financing transactions:
Right-of-use asset	Right-of-use asset	$	(7,860)	$	—	Right-of-use asset	$	(7,938)	$	(8,103)
Lease liability	Lease liability	$	7,860	$	—	Lease liability	$	7,938	$	8,103

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

-8-

~~-9-~~

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

~~September 30, 2019~~March 31, 2020

1. ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION

Organization

FedNat Holding Company (“FNHC,” the “Company,” “we,” “us,” or ~~"our"~~“our”) is ana regional insurance holding company that controls substantially all aspects of the insurance underwriting, distribution and claims processes through our subsidiaries and contractual relationships with independent agents and general agents. ~~The Company,~~We, through ~~its~~our 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, distributes~~We market, distribute and ~~services its~~service our own and third-party insurers’ products and other services through a network of independent and general agents.

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

Maison Insurance Company ~~(“MNIC”~~("MIC"), ~~our other~~an insurance subsidiary, is licensed as an admitted carrier to write homeowners property and casualty insurance as well as wind/hail-only exposures by the state's insurance departments in ~~Florida. Admitted carriers are bound by rate~~Louisiana, Texas 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.Florida.

~~Refer~~Monarch National Insurance Company (“MNIC”), an insurance subsidiary, is licensed as an admitted carrier to ~~Basis of Presentation~~write homeowners property and ~~Principles of Consolidation and below.~~casualty insurance in Florida.

Material Distribution Relationships

Ivantage Select Agency, Inc.

The Company is a party to an insurance agency master agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company (“Allstate”), pursuant to which the Company has been authorized by ISA to appoint Allstate agents to offer ~~the Company’s~~our FNIC homeowners insurance products to consumers in Florida. As a percentage of the total homeowners premiums we underwrote, ~~23.6%~~20.5% and ~~24.5%~~22.8% were from Allstate’s network of Florida agents, for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~For the nine months ended September 30, 2019 and 2018, 23.5% and 23.9%, respectively, of the homeowners premiums we underwrote were from Allstate's network of Florida agents.~~

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, ~~25.2%~~24.2% and ~~16.2%, respectively,~~19.6% of the Company’s premiums were underwritten by SageSure, for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~For~~As part of our partnership with SageSure, we entered into a profit share agreement, whereby we share 50% of net profits of this line of business, as calculated per the ~~nine months ended September 30, 2019 and 2018, 22.4% and 14.2%, respectively,~~terms of the ~~Company's homeowners premiums were underwritten by Sagesure.~~agreement, subject to certain limitations. The profit share cost is reflected in commissions and underwriting expenses on our consolidated statement of operations.

Basis of Presentation and Principles of Consolidation

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

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

~~-10-~~-9-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Our significant accounting policies were described in Note 2 of our ~~2018~~2019 Form 10-K. Other than the changes noted in "Recently Issued Accounting Pronouncements, Adopted" below, there have been no significant changes in our significant accounting policies for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

Accounting Estimates and Assumptions

The Company prepares the accompanying consolidated financial statements in accordance with GAAP, which requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may materially differ from those estimates.

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

Recently Issued Accounting Pronouncements, Adopted

In ~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-02,~~ ~~Leases (Topic 842). The update superseded the prior lease guidance in Topic 840,~~ ~~Leases~~ and lessees are 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. Additionally, lessees are 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 Company 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 our leases in existence as of that date. All of the Company's leases were classified as operating leases and we elected the practical expedient, therefore no adjustment to comparative prior periods presented have been made. The provisions of this ASU did not have an impact on our pattern of lease expense recognition on our consolidated statements of 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 requires enhanced disclosures for financial assets measured at amortized cost and available-for-sale debt securities to help the financial statement users better understand significant judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The ~~update is~~Company adopted the guidance effective January 1, 2020, by reflecting a cumulative effect adjustment of less than $0.1 million, after-tax, which decreased retained earnings, held-to-maturity debt securities and reinsurance recoverable.

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

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

Recently Issued Accounting Pronouncements, Not Yet Adopted

In January 2020, the FASB issued ASU 2020-1, Accounting for Equity Securities and Equity Investments, which clarifies the interaction between accounting standards related to equity securities (Topic 321), equity method investments (Topic 323), and certain derivatives (Topic 815). The update clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The update is effective for interim and annual reporting periods beginning after December 15, ~~2019,~~2021, with early adoption permitted. The Company is in the early stage of evaluating the impact that the update will have on the Company’s consolidated financial position or results of operations.

~~-11-~~-10-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

3. ACQUISITIONS

On ~~February 25,~~December 2, 2019, the Company ~~executed a definitive agreement for the~~completed its acquisition of the insurance operations of 1347 Property Insurance Holdings, Inc. ("PIH"). Specifically, the Company ~~will purchase Maison Insurance Company ("MIC"),~~purchased from PIH all of the outstanding equity of 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 provide multi-peril and ~~for other~~wind/hail only coverage to personal residential dwellings and manufactured/mobile homes in Louisiana, Texas and Florida. The acquisition enables us to increase geographic diversification of our book of business outside Florida and generate additional business with operating synergies and general ~~corporate purposes.~~and administrative expense savings.

~~In addition to~~Revenues and net income of 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~~business acquired were $15.4 million and ~~a five years agreement~~$1.7 million, respectively 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.~~three months ended March 31, 2020.

The ~~transaction, which is subject to~~following unaudited pro forma condensed consolidated statements of operations of the Company assume that the acquisition of 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. was completed on January 1, 2019:

Three

Months

Ended

March 31, 2019

(In thousands)

Revenue

118,621

Net income (loss)

(3,395)

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

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

4. FAIR VALUE

Fair Value Disclosures of Financial Instruments

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

•Level 1 - Quoted market prices (unadjusted) for identical assets or liabilities in active markets is defined as a market where transactions for the financial statement occur with sufficient frequency and volume to provide pricing information on an ongoing basis, or observable inputs.

•Level 2 - Quoted market prices for similar assets or liabilities and valuations, using models or other valuation techniques using observable market data. Significant other observable that can be corroborated by observable market data; and

•Level 3 - Instruments that use non-binding broker quotes or model driven valuations that do not have observable market data or those that are estimated based on an ownership interest to which a proportionate share of net assets is attributed.

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

~~-12-~~-11-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

The Company’s financial instruments measured at fair value on a recurring basis and the level of the fair value hierarchy of inputs used consisted of the following:


		September 30, 2019															March 31, 2020
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(In thousands)															(In thousands)
Debt securities - available-for-sale, at fair value:	Debt securities - available-for-sale, at fair value:									Debt securities - available-for-sale, at fair value:
United States government obligations and authorities	United States government obligations and authorities	$	73,590	$	100,650	$	—	$	174,240	United States government obligations and authorities	$	66,033	$	130,330	$	—	$	196,363
Obligations of states and political subdivisions	Obligations of states and political subdivisions	—		13,328		—		13,328		Obligations of states and political subdivisions	—		22,298		—		22,298
Corporate securities	Corporate securities	—		255,399		—		255,399		Corporate securities	—		293,730		—		293,730
International securities	International securities	—		25,163		—		25,163		International securities	—		30,444		—		30,444
Debt securities, at fair value	Debt securities, at fair value	73,590		394,540		—		468,130		Debt securities, at fair value	66,033		476,802		—		542,835

Equity securities, at fair value	Equity securities, at fair value	16,570		2,444		—		19,014		Equity securities, at fair value	13,720		3,604		—		17,324

Total investments, at fair value	Total investments, at fair value	$	90,160	$	396,984	$	—	$	487,144	Total investments, at fair value	$	79,753	$	480,406	$	—	$	560,159

໿


		December 31, 2018															December 31, 2019
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(In thousands)															(In thousands)
Debt securities - available-for-sale, at fair value:	Debt securities - available-for-sale, at fair value:									Debt securities - available-for-sale, at fair value:
United States government obligations and authorities	United States government obligations and authorities	$	43,918	$	83,950	$	—	$	127,868	United States government obligations and authorities	$	83,764	$	110,429	$	—	$	194,193
Obligations of states and political subdivisions	Obligations of states and political subdivisions	—		9,767		—		9,767		Obligations of states and political subdivisions	—		24,020		—		24,020
Corporate securities	Corporate securities	—		268,731		—		268,731		Corporate securities	—		278,302		—		278,302
International securities	International securities	—		22,275		—		22,275		International securities	—		29,750		—		29,750
Debt securities, at fair value	Debt securities, at fair value	43,918		384,723		—		428,641		Debt securities, at fair value	83,764		442,501		—		526,265

Equity securities, at fair value	Equity securities, at fair value	16,037		1,721		—		17,758		Equity securities, at fair value	17,361		2,678		—		20,039

Total investments, at fair value	Total investments, at fair value	$	59,955	$	386,444	$	—	$	446,399	Total investments, at fair value	$	101,125	$	445,179	$	—	$	546,304

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

Level 1 Level 2 Level 3 Total
(In thousands)
September 30, 2019 $ 3,435 $ 914 $ — $ 4,349
December 31, 2018 3,809 1,155 — 4,964


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

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

~~-13-~~-12-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

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

•United States Government Obligations and Authorities - In determining the fair value for United States government securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for United States government securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.

•Obligations of States and Political Subdivisions - In determining the fair value for state and municipal securities, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.

•Corporate and International Securities - In determining the fair value for corporate securities the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.

•Equity Securities - In determining the fair value for equity securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for equity securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.

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

There were 0 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, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. There were 0 transfers between the fair value hierarchy levels during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

~~-14-~~-13-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

5. INVESTMENTS

Unrealized Gains and Losses

The difference between amortized cost or cost and estimated fair value and gross unrealized gains and losses, by major investment category, consisted of the following:

໿


		Amortized		Gross		Gross					Amortized		Gross		Gross
		Cost		Unrealized		Unrealized					Cost		Unrealized		Unrealized
		or Cost		Gains		Losses		Fair Value			or Cost		Gains		Losses		Fair Value
		(In thousands)															(In thousands)
September 30, 2019
March 31, 2020										March 31, 2020
Debt securities - available-for-sale:	Debt securities - available-for-sale:									Debt securities - available-for-sale:
United States government obligations and authorities	United States government obligations and authorities	$	170,400	$	3,986	$	146	$	174,240	United States government obligations and authorities	$	187,452	$	8,924	$	13	$	196,363
Obligations of states and political subdivisions	Obligations of states and political subdivisions	13,002		326		—		13,328		Obligations of states and political subdivisions	21,935		400		37		22,298
Corporate	Corporate	244,735		10,765		101		255,399		Corporate	293,927		5,745		5,942		293,730
International	International	24,561		623		21		25,163		International	31,237		324		1,117		30,444
		452,698		15,700		268		468,130			534,551		15,393		7,109		542,835

Debt securities - held-to-maturity:	Debt securities - held-to-maturity:									Debt securities - held-to-maturity:
United States government obligations and authorities	United States government obligations and authorities	3,589		18		62		3,545		United States government obligations and authorities	3,555		53		65		3,543
Corporate	Corporate	725		23		—		748		Corporate	671		7		6		672
International	International	55		1		—		56		International	45		1		—		46
		4,369		42		62		4,349			4,271		61		71		4,261
Total investments, excluding equity securities	Total investments, excluding equity securities	$	457,067	$	15,742	$	330	$	472,479	Total investments, excluding equity securities	$	538,822	$	15,454	$	7,180	$	547,096

໿


		Amortized		Gross		Gross					Amortized		Gross		Gross
		Cost		Unrealized		Unrealized					Cost		Unrealized		Unrealized
		or Cost		Gains		Losses		Fair Value			or Cost		Gains		Losses		Fair Value
		(In thousands)															(In thousands)
December 31, 2018
December 31, 2019										December 31, 2019
Debt securities - available-for-sale:	Debt securities - available-for-sale:									Debt securities - available-for-sale:
United States government obligations and authorities	United States government obligations and authorities	$	127,928	$	1,091	$	1,151	$	127,868	United States government obligations and authorities	$	191,546	$	3,073	$	426	$	194,193
Obligations of states and political subdivisions	Obligations of states and political subdivisions	9,870		27		130		9,767		Obligations of states and political subdivisions	23,748		294		22		24,020
Corporate	Corporate	273,192		510		4,971		268,731		Corporate	268,182		10,252		132		278,302
International	International	22,674		12		411		22,275		International	29,169		593		12		29,750
		433,664		1,640		6,663		428,641			512,645		14,212		592		526,265

Debt securities - held-to-maturity:	Debt securities - held-to-maturity:									Debt securities - held-to-maturity:
United States government obligations and authorities	United States government obligations and authorities	4,085		1		158		3,928		United States government obligations and authorities	3,585		12		39		3,558
Corporate	Corporate	986		2		6		982		Corporate	697		20		—		717
International	International	55		—		1		54		International	55		1		—		56
		5,126		3		165		4,964			4,337		33		39		4,331
Total investments, excluding equity securities	Total investments, excluding equity securities	$	438,790	$	1,643	$	6,828	$	433,605	Total investments, excluding equity securities	$	516,982	$	14,245	$	631	$	530,596

~~-15-~~-14-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

Net Realized and Unrealized Gains and Losses

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

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

໿


		Three Months Ended						Nine Months Ended							Three Months Ended
		September 30,						September 30,							March 31,
		2019		2018		2019		2018			2020		2019
		(In thousands)														(In thousands)
Gross realized and unrealized gains:	Gross realized and unrealized gains:									Gross realized and unrealized gains:
Debt securities	Debt securities	$	897	$	91	$	2,048	$	355	Debt securities	$	1,386	$	317
Equity securities	Equity securities	326		1,922		4,633		4,163		Equity securities	319		2,830
Total gross realized and unrealized gains	Total gross realized and unrealized gains	1,223		2,013		6,681		4,518		Total gross realized and unrealized gains	1,705		3,147

Gross realized and unrealized losses:	Gross realized and unrealized losses:									Gross realized and unrealized losses:
Debt securities	Debt securities	(4)		(253)		(524)		(2,571)		Debt securities	(148)		(400)
Equity securities	Equity securities	(425)		—		(1,107)		(1,031)		Equity securities	(4,382)		(446)
Total gross realized and unrealized losses	Total gross realized and unrealized losses	(429)		(253)		(1,631)		(3,602)		Total gross realized and unrealized losses	(4,530)		(846)
Net realized and unrealized gains (losses) on investments	Net realized and unrealized gains (losses) on investments	$	794	$	1,760	$	5,050	$	916	Net realized and unrealized gains (losses) on investments	$	(2,825)	$	2,301

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


		Three Months Ended						Nine Months Ended							Three Months Ended
		September 30,						September 30,							March 31,
		2019		2018		2019		2018			2020		2019
		(In thousands)														(In thousands)
Net realized and unrealized gains (losses)	Net realized and unrealized gains (losses)	$	(99)	$	1,922	$	3,526	$	3,132	Net realized and unrealized gains (losses)	$	(4,063)	$	2,384
Less:	Less:									Less:
Net realized and unrealized gains (losses) on securities sold	Net realized and unrealized gains (losses) on securities sold	1,012		409		394		674		Net realized and unrealized gains (losses) on securities sold	(635)		326
Net unrealized gains (losses) still held as of the end-of-period		$	(1,111)	$	1,513	$	3,132	$	2,458
Net realized and unrealized gains (losses) recognized during the period still held as of the end-of-period										Net realized and unrealized gains (losses) recognized during the period still held as of the end-of-period	$	(3,428)	$	2,058

~~-16-~~-15-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

Contractual Maturity

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

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

໿


		September 30, 2019							March 31, 2020
		Amortized					Amortized
		Cost		Fair Value			Cost		Fair Value
Securities with Maturity Dates	Securities with Maturity Dates	(In thousands)						Securities with Maturity Dates	(In thousands)
Debt securities, available-for-sale:	Debt securities, available-for-sale:					Debt securities, available-for-sale:
One year or less	One year or less	$	24,715	$	24,761	One year or less	$	33,374	$	33,413
Over one through five years	Over one through five years	152,917		157,160		Over one through five years	170,802		171,418
Over five through ten years	Over five through ten years	139,570		146,237		Over five through ten years	158,874		161,147
Over ten years	Over ten years	135,496		139,972		Over ten years	171,501		176,857
		452,698		468,130			534,551		542,835
Debt securities, held-to-maturity:	Debt securities, held-to-maturity:					Debt securities, held-to-maturity:
One year or less	One year or less	206		207		One year or less	285		286
Over one through five years	Over one through five years	3,983		3,960		Over one through five years	3,846		3,833
Over five through ten years	Over five through ten years	69		71		Over five through ten years	39		39
Over ten years	Over ten years	111		111		Over ten years	101		103
		4,369		4,349			4,271		4,261
Total	Total	$	457,067	$	472,479	Total	$	538,822	$	547,096

Net Investment Income

Net investment income consisted of the following:

໿


		Three Months Ended						Nine Months Ended							Three Months Ended
		September 30,						September 30,							March 31,
		2019		2018		2019		2018			2020		2019
		(In thousands)														(In thousands)
Interest income	Interest income	$	4,005	$	3,089	$	11,831	$	8,904	Interest income	$	3,822	$	3,657
Dividends income	Dividends income	63		48		206		154		Dividends income	70		53
Net investment income	Net investment income	$	4,068	$	3,137	$	12,037	$	9,058	Net investment income	$	3,892	$	3,710

~~-17-~~-16-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

Aging of Gross Unrealized Losses

Gross unrealized losses and related fair values for debt securities, grouped by duration of time in a continuous unrealized loss position, consisted of the following:

໿


		Less than 12 months						12 months or longer							Total							Less than 12 months						12 months or longer	Total
				Gross				Gross				Gross						Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses				Value		Losses		Value		Losses		Value		Losses
						(In thousands)																(In thousands)
September 30, 2019
March 31, 2020														March 31, 2020
Debt securities - available-for-sale:	Debt securities - available-for-sale:													Debt securities - available-for-sale:
United States government obligations and authorities	United States government obligations and authorities	$	20,948	$	115	$	6,238	$	31	$	27,186	$	146	United States government obligations and authorities		$	810	$	1	$	268	$	12	$	1,078	$	13
Obligations of states and political subdivisions	Obligations of states and political subdivisions	—		—		—		—		—		—		Obligations of states and political subdivisions		5,544		37		—		—		5,544		37
Corporate	Corporate	10,502		36		5,277		65		15,779		101		Corporate		117,591		5,754		—		188		117,591		5,942
International	International	2,202		18		1,023		3		3,225		21		International		13,330		1,079		132		38		13,462		1,117
		33,652		169		12,538		99		46,190		268				137,275		6,871		400		238		137,675		7,109

Debt securities, held-to-maturity:	Debt securities, held-to-maturity:													Debt securities, held-to-maturity:
United States government obligations and authorities	United States government obligations and authorities	100		—		2,306		62		2,406		62		United States government obligations and authorities		—		—		2,222		65		2,222		65
Corporate	Corporate	20		—		—		—		20		—		Corporate		235		6		—		—		235		6
International	International	—		—		—		—		—		—		International		—		—		—		—		—		—
		120		—		2,306		62		2,426		62				235		6		2,222		65		2,457		71
Total investments, excluding equity securities	Total investments, excluding equity securities	$	33,772	$	169	$	14,844	$	161	$	48,616	$	330	Total investments, excluding equity securities		$	137,510	$	6,877	$	2,622	$	303	$	140,132	$	7,180


		Less than 12 months						12 months or longer							Total							Less than 12 months						12 months or longer	Total
				Gross				Gross				Gross						Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses				Value		Losses		Value		Losses		Value		Losses
						(In thousands)																(In thousands)
December 31, 2018
December 31, 2019														December 31, 2019
Debt securities - available-for-sale:	Debt securities - available-for-sale:																Debt securities - available-for-sale:
United States government obligations and authorities	United States government obligations and authorities	$	22,673	$	246	$	29,727	$	905	$	52,400	$	1,151	United States government obligations and authorities		$	49,833	$	409	$	2,218	$	17	$	52,051	$	426
Obligations of states and political subdivisions	Obligations of states and political subdivisions	3,254		18		4,786		112		8,040		130		Obligations of states and political subdivisions		6,810		22		—		—		6,810		22
Corporate	Corporate	160,361		3,058		53,232		1,913		213,593		4,971		Corporate		15,872		94		7,694		38		23,566		132
International	International	15,608		217		4,678		194		20,286		411		International		3,856		10		179		2		4,035		12
		201,896		3,539		92,423		3,124		294,319		6,663				76,371		535		10,091		57		86,462		592

Debt securities, held-to-maturity:	Debt securities, held-to-maturity:													Debt securities, held-to-maturity:
United States government obligations and authorities	United States government obligations and authorities	229		1		3,113		157		3,342		158		United States government obligations and authorities		—		—		2,287		39		2,287		39
Corporate	Corporate	591		6		90		—		681		6		Corporate		—		—		—		—		—		—
International	International	54		1		—		—		54		1		International		—		—		—		—		—		—
		874		8		3,203		157		4,077		165				—		—		2,287		39		2,287		39
Total investments, excluding equity securities	Total investments, excluding equity securities	$	202,770	$	3,547	$	95,626	$	3,281	$	298,396	$	6,828	Total investments, excluding equity securities		$	76,371	$	535	$	12,378	$	96	$	88,749	$	631

~~-18-~~-17-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

As of ~~September 30, 2019,~~March 31, 2020, the Company held a total of ~~106~~522 debt securities that were in an unrealized loss position, of which 4215 securities were in an unrealized loss position continuously for 12 months or more. As of December 31, ~~2018,~~2019, the Company held a total of ~~1,222~~203 debt securities that were in an unrealized loss position, of which ~~371~~24 securities were in an unrealized loss position continuously for 12 months or more. The unrealized losses associated with these securities consisted primarily of losses related to corporate securities.

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 0t have any OTTI losses on its available-for-sale debt securities for the first nine months of 2019 and 2018.

~~The Company's equity investments are measured at fair value through net income (loss).~~

Collateral Deposits

Cash and cash equivalents and investments, the majority of which were debt securities, with fair values of ~~$10.8~~$9.5 million and ~~$10.3~~$11.2 million, were deposited with governmental authorities and into custodial bank accounts as required by law or contractual obligations as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

6. REINSURANCE

Overview

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

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

Significant Reinsurance Contracts

2018-2019 Excess of Loss Reinsurance Programs

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

The combined FNIC and MNIC private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective July 1, 2018 and all private layers have prepaid automatic reinstatement protection, which ~~affords~~afforded the Company additional coverage for subsequent events. These private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all layers attach after $20.0 million in losses for FNIC and after $3.0 million in losses for MNIC. If the

~~-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~~in 2017 on a two-year basis. FNIC also had $156.0 million of multiple year protection that expired on June 30, 2018. The overall reinsurance programs are with reinsurers that currently have an A.M. Best or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

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

-18-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

business. FNIC’s non-Florida reinsurance program cost ~~will~~included $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~~December 2, 2019 acquisition of the Maison Companies, the Company and PIH agreed to combine FNIC, MNIC, and MIC under a single reinsurance program allowing the carriers to capitalize on efficiencies, spread of risk and scale.

The combined reinsurance treaties ~~provides~~provide approximately $1.3 billion of single-event reinsurance coverage in excess of a $27 million retention for catastrophic losses on the first event (and $15 million on the second and third events), including hurricanes, and aggregate coverage of $1.9 billion, at an approximate total cost of ~~$224.4 million, of which FNIC's and MNIC's share of the cost is estimated to total $179.3~~$224.3 million.

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

As indicated above, FNIC, ~~MNIC~~MIC and ~~MIC’s~~MNIC's combined 2019-2020 reinsurance program is estimated to cost ~~$224.4~~$224.3 million. This amount includes approximately ~~$178.8~~$178.9 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic premium reinstatement protection, along with approximately ~~$45.6~~$45.9 million payable to the FHCF. The combination of private and FHCF reinsurance treaties ~~will afford~~affords FNIC, MNIC, and MIC approximately $1.9 billion of aggregate coverage with a maximum single event coverage totaling approximately $1.3 billion, exclusive of retentions. Each carrier will pay directly its allocated portion of the aggregate reinsurance ceded premium cost. The allocation methodology by which FNIC, MNIC, and MIC ~~will determine~~determines their share of the premium and distribution of reinsurance recoveries under the combined reinsurance tower is based on catastrophe loss modeling of the separate books of business. Each carrier ~~will share~~shares the combined program cost in proportion to its contribution to the total expected loss in each reinsurance layer. Each carrier's reinsurance recoveries will be based on that carrier's contributing share of a given event's total loss. Both FNIC and MNIC maintained their FHCF participation at 75% for the 2019 hurricane season, and MIC increased its FHCF participation to 90%.

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

~~-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~~approximates $1.8 million for this private reinsurance.

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

Quota-Share Reinsurance Programs

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

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

-19-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

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

On July 1, 2018, FNIC renewed the quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal basis, excluding named storms, which was initially set at a 2%, cession and is subject to certain ~~limitations including, but not limited to caps on losses associated with occurrences.~~limitations. In addition, this quota-share allowed FNIC to prospectively increase or decrease the cession percentage up to three times during the term of the agreement. Effective October 1, 2018, FNIC elected to increase the cession percentage from 2% to 10% on an in-force, new and renewal basis.

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

On July 1, 2019, FNIC renewed the quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal basis, excluding named storms, which was ~~initially~~ set at a 10%~~, which~~ cession and is subject to certain ~~limitations including, but not limited to, caps on losses associated with non-named storm catastrophe losses.~~limitations. In addition, this quota-share allows FNIC the flexibility to prospectively increase or decrease the cession percentage up to three times during the term of the agreement.

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

Associated Trust Agreements

Certain reinsurance agreements require FNIC ~~and MNIC~~ to secure the credit, regulatory and business risk. Fully funded trust agreements securing these risks totaled less than $0.1 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

~~-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,			March 31,		December 31,
		2019		2018			2020		2019
		(In thousands)							(In thousands)
Reinsurance recoverable on paid losses	Reinsurance recoverable on paid losses	$	47,857	$	45,028	Reinsurance recoverable on paid losses	$	48,544	$	45,186
Reinsurance recoverable on unpaid losses	Reinsurance recoverable on unpaid losses	155,018		166,396		Reinsurance recoverable on unpaid losses	212,606		164,429
Reinsurance recoverable, net	Reinsurance recoverable, net	$	202,875	$	211,424	Reinsurance recoverable, net	$	261,150	$	209,615

As of ~~September 30, 2019~~March 31, 2020, and December 31, ~~2018,~~2019, the Company had reinsurance recoverable of ~~$164.0~~$210.5 million and ~~$183.5~~$163.7 million, respectively as a result of ~~Hurricane~~Hurricanes Michael and Irma. All reinsurers in our excess-of-loss reinsurance programs have an A.M. Best or Standard & Poor’s rating of “A-“ or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

-20-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

Net Premiums Written and Net Premiums Earned

Net premiums written and net premiums earned consisted of the following:

໿


		Three Months Ended						Nine Months Ended							Three Months Ended
		September 30,						September 30,							March 31,
		2019		2018		2019		2018			2020		2019
		(In thousands)														(In thousands)
Net Premiums Written	Net Premiums Written									Net Premiums Written
Direct	Direct	$	159,131	$	139,022	$	460,534	$	440,151	Direct	$	172,962	$	132,233
Ceded	Ceded	(146,231)		(81,023)		(220,363)		(177,604)		Ceded	(13,766)		(11,793)
		$	12,900	$	57,999	$	240,171	$	262,547		$	159,196	$	120,440
Net Premiums Earned	Net Premiums Earned									Net Premiums Earned
Direct	Direct	$	145,546	$	144,907	$	425,133	$	438,239	Direct	$	175,574	$	138,367
Ceded	Ceded	(58,172)		(46,414)		(156,669)		(174,080)		Ceded	(69,664)		(49,583)
		$	87,374	$	98,493	$	268,464	$	264,159		$	105,910	$	88,784

7. ALLOWANCES FOR CREDIT LOSS

Overview

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

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


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

(1)Refer to Note 2 above for information about our adoption of ASU 2016-13 on January 1, 2020.

(2)Reflected in commissions and other underwriting expenses on the consolidated statements of comprehensive income (loss).

Accrued investment income is included in other assets on the consolidated balance sheet. We immediately write-off accrued investment income if it becomes uncollectible, therefore we do not measure or record an allowance for credit losses.

-21-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

Investments

Our investment policy is established by the Board of Directors’ Investment Committee and is reviewed on a regular basis. This policy currently 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. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.

Our investment portfolio has inherent risks because it contains volatility associated with market pricing and interest rate sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates or credit worthiness. The effects of market volatility, declining economic conditions, such as a U.S. or global economic slowdown, whether due to COVID-19, or other factors, could adversely impact the credit quality of securities in our portfolio and may have unforeseen consequences on the liquidity and financial stability of the issuers of securities we hold.

Our debt securities portfolio includes securities that:

•Are explicitly guaranteed by a sovereign entity that can print its own currency;

•The currency is routinely held by central banks, used in international commerce and commonly viewed as a reserve currency; and

•Have experienced a consistent high credit rating by rating agencies and a long history with no credit losses.

We believe if these governments were to technically default it is reasonable to assume an expectation of immaterial losses, even in the current strained market conditions. Refer to Note 5 above for the balances of these sovereign debt securities, which are reported in the following investment categories:

•United States government obligations and authorities;

•Obligations of states and political subdivisions; and

•International.

For our debt securities, available-for-sale, the fact that a security’s fair value is below its amortized cost is not a decisive indicator of credit loss. In many cases, a security’s fair value may decline due to factors that are unrelated to the issuer’s ability to pay. For this reason, we consider the extent to which fair value is below amortized cost in determining whether a credit-related loss exists. The Company also considers the credit quality rating of the security, with a special emphasis on securities downgraded below investment grade. A comparison is made between the present value of expected future cash flows for a security and its amortized cost. If the present value of future expected cash flows is less than amortized cost, a credit loss is presumed to exist and an allowance for credit losses is established. Management may conclude that a qualitative analysis is sufficient to support its conclusion that the present value of the expected cash flows equals or exceeds a security’s amortized cost. As a result of this review, management concluded that there were no credit-related impairments of our available-for-sale securities as of January 1, 2020, and March 31, 2020. Management does not intend to sell available-for-sale securities in an unrealized loss position, and it is not “more likely than not” that the Company will be required to sell these securities before a recovery in their value to their amortized cost basis occurs.

Our equity investments are measured at fair value through net income (loss), therefore they do not require an allowance for credit loss.

We measure and record our valuation allowances for credit losses on our held-to-maturity corporate securities assets by multiplying the probability the asset would default within a given timeframe (“PD”) by the percentage of the asset not expected to be collected upon default, or loss given default (“LGD”), and multiplying that percentage by the amortized cost of the asset. We use market observable data for our PD and LGD assumptions.

-22-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

7.Premiums Receivable

We do have collectability risk, but our homeowners policy terms are one year or less and our policyholders are dispersed throughout the southeast United States, although the majority of our policyholders are located in Florida.

We write-off premiums receivable if the individual policy becomes uncollectible. Because collectively our premiums receivable share similar risk characteristics, we pool them to measure our valuation allowance for credit losses using an aging method approach. This method applies historical loss rates to levels of delinquency for our policy terms that are one year or less. Based upon historical collectability, adjusted for current and future economic conditions, we have measured and recorded our valuation allowances for premiums receivable.

The aging of our premiums receivable and associated allowance for credit loss as of March 31, 2020 was as follows:


			Days Past Due
	Current		1-29		30-59		60-89		90 plus		0	Total
			(In thousands)
Amortized cost	$	35,822	$	2,507	$	29	$	9	$	159		$	38,526
Allowance for credit loss	—		(26)		(1)		(3)		(159)			(189)
Net	$	35,822	$	2,481	$	28	$	6	$	—		$	38,337

Reinsurance Recoverable

Refer to Note 6 above for details of our efforts to minimize our exposure to losses from a reinsurer’s inability to pay.

We measure and record our valuation allowances for credit losses on our reinsurance recoverables asset by multiplying the PD by the LGD and multiplying the result by the amortized cost of the asset. We use market observable data for our PD and LGD assumptions, and in cases where we are unable to observe LGD, we assume it is 100%.

-23-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

8. 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							Three Months Ended
		September 30,							March 31,
		2019		2018			2020		2019
		(In thousands)							(In thousands)
Gross reserves, beginning-of-period	Gross reserves, beginning-of-period	$	296,230	$	230,515	Gross reserves, beginning-of-period	$	324,362	$	296,230
Less: reinsurance recoverable (1)	Less: reinsurance recoverable (1)	(166,396)		(98,345)		Less: reinsurance recoverable (1)	(164,429)		(166,396)
Net reserves, beginning-of-period	Net reserves, beginning-of-period	129,834		132,170		Net reserves, beginning-of-period	159,933		129,834

Incurred loss, net of reinsurance, related to:	Incurred loss, net of reinsurance, related to:					Incurred loss, net of reinsurance, related to:
Current year	Current year	195,024		159,998		Current year	69,365		67,048
Prior year loss development (redundancy) (2)	Prior year loss development (redundancy) (2)	1,238		330		Prior year loss development (redundancy) (2)	(117)		721
Ceded losses subject to offsetting experience account adjustments (3)	Ceded losses subject to offsetting experience account adjustments (3)	(1,978)		(4,230)		Ceded losses subject to offsetting experience account adjustments (3)	(295)		(930)
Prior years	Prior years	(740)		(3,900)		Prior years	(412)		(209)
Amortization of acquisition fair value adjustment						Amortization of acquisition fair value adjustment	(23)		—
Total incurred loss and LAE, net of reinsurance	Total incurred loss and LAE, net of reinsurance	194,284		156,098		Total incurred loss and LAE, net of reinsurance	68,930		66,839

Paid loss, net of reinsurance, related to:	Paid loss, net of reinsurance, related to:					Paid loss, net of reinsurance, related to:
Current year	Current year	114,790		87,960		Current year	13,371		14,868
Prior years	Prior years	77,398		71,266		Prior years	52,423		41,974
Total paid loss and LAE, net of reinsurance	Total paid loss and LAE, net of reinsurance	192,188		159,226		Total paid loss and LAE, net of reinsurance	65,794		56,842

Net reserves, end-of-period	Net reserves, end-of-period	131,930		129,042		Net reserves, end-of-period	163,069		139,831
Plus: reinsurance recoverable (1)	Plus: reinsurance recoverable (1)	155,018		92,072		Plus: reinsurance recoverable (1)	212,606		234,293
Gross reserves, end-of-period	Gross reserves, end-of-period	$	286,948	$	221,114	Gross reserves, end-of-period	$	375,675	$	374,124

(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 (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~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company experienced ~~$1.2~~$0.1 million of ~~unfavorable~~favorable loss and LAE reserve development on prior accident years, which consists 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.~~Irma, mostly offset by adverse development in its commercial general liability line of business.

During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Company experienced ~~$0.3~~$0.7 million of favorable loss and LAE reserve redundancy in accident year 2017. The redundancy was the result of lower LAE expenses associated primarily with Hurricane Irma.

~~-23-~~-24-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2019~~March 31, 2020

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.

8.9. LONG-TERM DEBT

~~As discussed in~~Refer to Note ~~3 above, the net proceeds~~8 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 the Company's Senior Notes Due 2027. We recognized $3.6 million as interest expense in our ~~consolidated statements of operations~~2019 Form 10-K for ~~the six months ended June 30, 2019, for prepayment fees, including the write-off unamortized debt issuance costs on the repayment.~~information regarding our long-term debt.

~~Senior Unsecured Notes~~10. INCOME TAXES

OnIn response to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act, or “CARES Act,” was signed into law on March ~~5, 2019,~~27, 2020. The CARES Act contains several relief provisions for corporations and lifts certain deduction limitations originally imposed by the Tax Cut and Jobs Act. The CARES Act, among other things, includes temporary changes regarding the prior and future utilization of net operating losses (“NOL”), temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes and the creation of certain refundable employee retention credits. The Company has been evaluating the various provisions of the CARES Act. As described below, 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 increasesdid utilize the NOL provision in the ~~interest rate payable in the event~~first quarter 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.

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,
2019 2018
(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~~	—
~~Thereafter~~	~~100,000~~
~~Total debt maturities~~	~~100,000~~
~~Less: deferred financing costs~~	~~1,518~~
~~Total debt maturities, net~~	$	~~98,482~~

~~9. INCOME TAXES~~2020.

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 ~~13.4%~~5.4% and ~~27.5%~~26.2% for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively. The effective income tax rate was 19.7% and 26.3% for the nine months ended September 30, 2019 and 2018,~~ respectively. Differences in the effective tax and the statutory Federal income tax rate of 21% are driven by state income taxes and anticipated annual permanent differences, including estimates for tax-exempt interest, dividends received deduction, and executive compensation ~~and other items.~~as well as NOL carrybacks from the impact of the CARES Act.

The Company had an uncertain tax position of $0.4 million ~~and $0.6 million~~ as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, respectively.~~2019. The Company does not have a valuation allowance on its deferred income tax asset as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

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,~~March 31, 2020 and 2019, the Company recognized ~~$0.2 million of~~0 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.~~

~~-25-~~

~~FedNat Holding Company and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Continued)~~

~~September 30, 2019~~

~~10.~~11. 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.

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

-25-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

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.

Regarding the matter involving the Co-Existence Agreement effective as of April 30, 2013 with Federated Mutual Insurance Company 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 position that the U.S. District Court in Minnesota did not have jurisdiction over the Company, vacated the judgment of the 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 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.~~the applicable laws in the states in which we do business.

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, ~~2018.~~2019. 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 anvarious operating lease ~~agreement~~agreements for office ~~space with a nine-and-a-half-year term remaining.~~space.

The right-of-use asset is reflected in other assets and the lease 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 related to our operating lease agreement for office space consisted of the following:


	~~September 30,~~March 31,
	~~2019~~2020
	(In thousands)
Right-of-use asset	$	~~7,860~~7,938
Accrued rent	~~(279)~~(216)
Right-of-use asset, net	$	~~7,581~~7,722

Lease liability	$	~~7,860~~7,938

~~Weighted-average~~Weighted average discount rate	~~4.71~~4.70		%
Weighted average remaining years of lease term	8.4


	~~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)~~

-26-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020


	Three Months Ended
	March 31,
	2020		2019
	(In thousands)
Lease expense	$	280	$	260
Sublease income	(155)		—
Lease expense, net	$	125	$	260

Net cash provided by (used in) operating activities	$	(89)	$	(137)

The interest ~~rate~~rates implicit in our ~~lease was~~leases were 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 ~~lease~~leases 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.~~

~~-27-~~

~~FedNat Holding Company and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Continued)~~

~~September 30, 2019~~

~~11.~~12. 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 December ~~2018,~~2019, the Company’s Board of Directors authorized ~~an additional~~a share repurchase program under which the Company may repurchase up to $10.0 million of its outstanding shares of common stock from January 1, 2020 through December 31, ~~2019.~~2020. In March 2020, the Company’s Board of Directors authorized an additional $10.0 million increase to the share repurchase program. This increased authorization will allow the Company to purchase up to $20 million of shares outstanding through December 31, 2020. During the three months ended March 31, 2020, the Company repurchased 523,583 shares of its common stock at a total cost of $6.8 million, which is an average price per share of $12.89. As of ~~September 30, 2019,~~March 31, 2020, the remaining availability for future repurchases of our common stock under this program was ~~$10.0~~$13.2 million.

~~The Company may repurchase shares in open market transactions in accordance with Rule 10b-18 or under Rule 10b5-1~~ As of the ~~Exchange Act from time to time in its discretion, based on ongoing assessments~~filing of this report, the ~~Company’s capital needs, the market price~~remaining availability of ~~its~~our 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.~~under this program was $10.0 million.

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~~

-27-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

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.

Share-Based Compensation Expense

Share-based compensation arrangements include the following:

໿


		Three Months Ended						Nine Months Ended							Three Months Ended
		September 30,						September 30,							March 31,
		2019		2018		2019		2018			2020		2019
		(In thousands)														(In thousands)
Restricted stock	Restricted stock	$	467	$	512	$	1,463	$	1,660	Restricted stock	$	353	$	494
Performance stock	Performance stock	135		(28)		497		187		Performance stock	100		181
Total share-based compensation expense	Total share-based compensation expense	$	602	$	484	$	1,960	$	1,847	Total share-based compensation expense	$	453	$	675

Recognized tax benefit	Recognized tax benefit	$	137	$	123	$	481	$	468	Recognized tax benefit	$	111	$	171
Intrinsic value of options exercised	Intrinsic value of options exercised	2		151		2		229		Intrinsic value of options exercised	2		—
Fair value of restricted stock vested	Fair value of restricted stock vested	$	482	$	622	$	1,715	$	2,098	Fair value of restricted stock vested	1,032		927

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.

~~-28-~~

~~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 Shares	Weighted Average Option Exercise Price			Number of Shares	Weighted Average Option Exercise Price
Outstanding at January 1, 2019		39,017	$	3.80
Outstanding at January 1, 2020					Outstanding at January 1, 2020	38,850	$	3.80
Granted	Granted	—	—		Granted	—	—
Exercised	Exercised	(167)	2.45		Exercised	(100)	3.30
Cancelled	Cancelled	—	—		Cancelled	—	—
Outstanding at September 30, 2019		38,850	$	3.80
Outstanding at March 31, 2020					Outstanding at March 31, 2020	38,750	$	3.81

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 grants based on total 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-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~~TSR-based 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-line recognition method.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Board of Directors granted ~~140,156~~210,272 and ~~133,060~~140,156 RSAs, respectively, vesting over three or five years, to the Company’s directors, executives and other key employees.

-28-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

RSA activity includes the following:


		Number of Shares	Weighted Average Grant Date Fair Value			Number of Shares	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019		262,334	$	18.78
Outstanding at January 1, 2020					Outstanding at January 1, 2020	255,345	$	17.82
Granted	Granted	140,156	18.03		Granted	210,272	11.82
Vested	Vested	(84,755)	20.24		Vested	(58,633)	17.59
Cancelled	Cancelled	(12,960)	18.15		Cancelled	(15,990)	18.24
Outstanding at September 30, 2019		304,775	$	18.06
Outstanding at March 31, 2020					Outstanding at March 31, 2020	390,994	$	14.62

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.

~~-29-~~

~~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,																							Three Months Ended March 31,
		2019										2018											2020				2019
		Before Tax		Income Tax		Net		Before Tax		Income Tax		Net			Before Tax		Income Tax		Net		Before Tax		Income Tax		Net
		(In thousands)																							(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period	Accumulated other comprehensive income (loss), beginning-of-period	$	12,404	$	(3,144)	$	9,260	$	(7,166)	$	1,816	$	(5,350)	Accumulated other comprehensive income (loss), beginning-of-period	$	13,621	$	(3,340)	$	10,281	$	(5,023)	$	1,273	$	(3,750)

Other comprehensive income (loss) before reclassification	Other comprehensive income (loss) before reclassification	3,921		(854)		3,067		(575)		145		(430)		Other comprehensive income (loss) before reclassification	(4,098)		1,004		(3,094)		11,528		(2,922)		8,606
Reclassification adjustment for realized losses (gains) included in net income	Reclassification adjustment for realized losses (gains) included in net income	(893)		214		(679)		(162)		41		(121)		Reclassification adjustment for realized losses (gains) included in net income	(1,238)		304		(934)		(2,301)		583		(1,718)
		3,028		(640)		2,388		(737)		186		(551)			(5,336)		1,308		(4,028)		9,227		(2,339)		6,888
Accumulated other comprehensive income (loss), end-of-period	Accumulated other comprehensive income (loss), end-of-period	$	15,432	$	(3,784)	$	11,648	$	(7,903)	$	2,002	$	(5,901)	Accumulated other comprehensive income (loss), end-of-period	$	8,285	$	(2,032)	$	6,253	$	4,204	$	(1,066)	$	3,138

Nine Months Ended September 30,
2019 2018
Before Tax Income Tax Net Before Tax Income Tax Net
(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period $ (5,023) $ 1,273 $ (3,750) $ 2,287 $ (593) $ 1,694
Cumulative effect of new accounting standards — — — (1,349) 355 (994)
Other comprehensive income (loss) before reclassification 21,979 (5,431) 16,548 (10,573) 2,679 (7,894)
Reclassification adjustment for realized losses (gains) included in net income (1,524) 374 (1,150) 1,732 (439) 1,293
20,455 (5,057) 15,398 (8,841) 2,240 (6,601)
Accumulated other comprehensive income (loss), end-of-period $ 15,432 $ (3,784) $ 11,648 $ (7,903) $ 2,002 $ (5,901)

~~-30-~~

~~FedNat Holding Company and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Continued)~~

~~September 30, 2019~~

~~12.~~13. 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.

-29-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2020

The following table presents the calculation of basic and diluted EPS:


		Three Months Ended						Nine Months Ended							Three Months Ended
		September 30,						September 30,							March 31,
		2019		2018		2019		2018			2020		2019
		(In thousands, except per share data)														(In thousands, except per share data)
Net income (loss) attributable to FedNat Holding Company shareholders	Net income (loss) attributable to FedNat Holding Company shareholders	$	4,659	$	7,950	$	7,904	$	24,233	Net income (loss) attributable to FedNat Holding Company shareholders	$	2,133	$	(3,865)

Weighted average number of common shares outstanding - basic	Weighted average number of common shares outstanding - basic	12,854		12,749		12,831		12,775		Weighted average number of common shares outstanding - basic	14,249		12,795

Net income (loss) per common share - basic	Net income (loss) per common share - basic	$	0.36	$	0.62	$	0.62	$	1.90	Net income (loss) per common share - basic	$	0.15	$	(0.30)


Weighted average number of common shares outstanding - basic	Weighted average number of common shares outstanding - basic	12,854		12,749		12,831		12,775		Weighted average number of common shares outstanding - basic	14,249		12,795
Dilutive effect of stock compensation plans	Dilutive effect of stock compensation plans	43		121		49		91		Dilutive effect of stock compensation plans	63		—
Weighted average number of common shares outstanding - diluted	Weighted average number of common shares outstanding - diluted	12,897		12,870		12,880		12,866		Weighted average number of common shares outstanding - diluted	14,312		12,795

Net income (loss) per common share - diluted	Net income (loss) per common share - diluted	$	0.36	$	0.62	$	0.61	$	1.88	Net income (loss) per common share - diluted	$	0.15	$	(0.30)

Dividends per share	Dividends per share	$	0.08	$	—	$	0.24	$	0.16	Dividends per share	$	0.09	$	0.08

Dividends Declared

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

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

~~In November 2019,~~2020, our Board of Directors declared a $0.09 per common share dividend, payable in ~~December 2019,~~March 2020, to shareholders of record on ~~November 15, 2019,~~February 14, 2020, amounting to ~~$1.2~~$1.3 million.

In April 2020, our Board of Directors declared a $0.09 per common share dividend, payable in June 2020, to shareholders of record on May 15, 2020, amounting to $1.3 million.

~~13.~~

14. SUBSEQUENT EVENTS

Dividends Declared

Refer to Note 1213 above for information related to our dividend declared in ~~November 2019.~~April 2020.

Severe Weather Events

In the month of April 2020, 5 catastrophe events were cataloged by Property Claim Services in the states in which the Company writes property business. These events consisted of hail and wind related storms in the states of Texas, Louisiana, Florida and other states. As of the date of this report, we have 1,417 reported claims and $15.2 million gross incurred losses across all of our states that we do business in and across all three insurance carriers for these five severe weather events. Additionally, $6.3 million of the total $15.2 million gross incurred losses are from FNIC’s non-Florida business, which will be subject to a 50% profit-sharing arrangement with the non-affiliated managing general underwriter that writes this business.

Due to the recency of these events, the Company has not yet produced an estimate on the full financial impact of these severe weather events. An elevated level of severe weather events is not uncommon in the southeast United States during the second quarter.

The Company’s catastrophic reinsurance protection in place through June 30, 2020 provides coverage on each event if covered gross losses thereon exceed $20 million for FNIC’s Florida and/or non-Florida business. The retention amounts are $5 million and $3 million for MIC and MNIC’s businesses, respectively.

~~-31-~~-30-

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, ~~2018~~2019 (the ~~“2018~~“2019 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, 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 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 ~~2018~~2019 Form 10-K, and discussed from time to time in our other reports filed with the Securities and Exchange Commission (“SEC”)., including this Form 10-Q.

~~-32-~~-31-

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

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

Maison Insurance Company ("MIC"), an insurance subsidiary that we acquired on December 2, 2019 (see "Maison Acquisition" below for more information), is licensed as an admitted carrier to write homeowners property and casualty insurance as well as wind/hail only exposures by the state insurance departments in Louisiana, Texas and Florida.

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

~~Maison Companies Acquisition~~

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. ("MMI"), ~~and~~a wholly-owned subsidiary, serves as the managing general agent for MIC. ClaimCor, LLC ~~(collectively, the "Maison Companies"~~("ClaimCor")~~. The purchase price~~, a wholly-owned subsidiary, is $51.0 million, which includes $25.5 million in cash and $25.5 million in shares of the Company’s common stock. 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% (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 overall cost of borrowing) and will be used to purchase the Maison Companies and for other general corporate purposes.

Refer to Note 3 of the notes to our Consolidated Financial Statements included herein, for additional information regarding the pending acquisition, including regulatory and other necessary approval and the potential timing thereof.a claims solutions company that processes Maison's claims.

Material Distribution Relationships

We are a party to an insurance agency master agreement with Ivantage 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 FNIC 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 they underwrite our FNIC homeowners business outside of Florida.

Overview of Insurance Lines of Business

~~Homeowners’~~Homeowners Property and Casualty Insurance

FNIC, MIC and MNIC underwrite homeowners insurance in Florida and FNIC also underwrites insurance in Alabama, Texas, Louisiana, South Carolina and ~~South Carolina.~~Mississippi and MIC in Louisiana and Texas. Homeowners insurance generally protects an owner of real and personal property against covered causes of loss to that property. As of ~~September 30, 2019,~~March 31, 2020, the total homeowners policies in-force was ~~315,000,~~380,000, of which ~~237,000~~240,000 were in Florida and ~~78,000~~140,000 were outside of Florida. As of December 31, ~~2018,~~2019, the total homeowners policies in-force was ~~291,000,~~374,000, of which ~~247,000~~241,000 were in Florida and ~~44,000~~133,000 were outside of Florida.

~~-33-~~

Florida

Our homeowners insurance products provide maximum dwelling coverage of approximately $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 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 insurance policyholders are continually evaluated to assure 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 2018, FNIC applied for a statewide average rate increase of 4.6% for~~Through MIC, we have assumed Florida ~~homeowners multi-peril insurance~~ policies ~~which was approved by~~through the ~~Florida OIR, which became effective for new and renewal policies on April 20, 2019.~~state-run insurer Citizens Property Insurance Corporation ("Citizens").

-32-

Non-Florida

Our non-Florida FNIC homeowners insurance products, produced through our partnership with SageSure, provide maximum dwelling coverage “A” up to $1.8 million, with the aggregate maximum policy limit being approximately $3.6 million. 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, we entered into a profit share agreement, whereby we share 50% of net profits of this line of business, as calculated per the terms of the agreement, subject to certain limitations. The profit share cost is reflected in commissions and other underwriting expenses on our consolidated statements of operations.

Our MIC non-Florida insurance products include homeowners insurance, manufactured home insurance and dwelling fire insurance. MIC writes both full peril property policies as well as wind/hail only exposures.

Other Insurance Lines of Business

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

See the discussion in Item 1: “Business” in our ~~2018~~2019 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.~~OIR or Louisiana Department of Insurance ("LDI"). 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 year ended December 31, 2016. The LDI has completed its regularly scheduled statutory examination of MIC for the three years ended December 31, ~~2017 and 2016.~~2014. There were no material findings by the Florida OIR or LDI in connection with these examinations.

COVID-19 Impact

To slow and limit the COVID-19 outbreak and protect individuals and the health care systems worldwide, local and Federal governments have taken containment actions, including travel restrictions, testing, contact tracing and lockdowns. Companies have required working from home and in many cases laid off employees. These factors among others have caused global financial markets to experience extreme volatility and disruptions to capital and credit markets. In advance of government mandates, we implemented procedures to help reduce the spread of the outbreak, including having most of our employees work remotely, that are intended to prioritize the safety and health of our employees. In addition, we remained focused on the needs of our insureds and independent agents and fulfilling regulatory requirements and guidelines. During the first quarter of 2020, we did not see a material impact of COVID-19 to our operations, financial condition and results. We cannot at this time determine the comprehensive effect of the outbreak for the remainder of 2020. We currently believe, however, that we have limited, if any, exposure to the pandemic based on our product offerings and contractual coverages, although possible actions that our regulators or other governmental or judicial entities may take may materially adversely impact our coverages in both a retrospective and go-forward manner. We continue our focus on maintaining the safety, security and health of all our stakeholders, including policyholders, employees, partner agents, vendors and shareholders, and monitoring the impacts of the pandemic on our operations, financial condition and results. Based on the Company's already existing business continuity plan, which we have implemented to address local catastrophes events, and based on our financial condition and anticipated operating cash flows, we currently expect to continue to meet our working capital and operating expenditure requirements, even if there is further economic downturn from the pandemic.

Please refer to “Part II, Item 1A., Risk Factors” for more information.

~~-34-~~-33-

RESULTS OF OPERATIONS

Operating Results Overview - Three Months Ended ~~September 30, 2019~~March 31, 2020 Compared with Three Months Ended ~~September 30, 2018~~March 31, 2019

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 ~~2018~~2019 Form 10-K.

The following table sets forth results of operations for the periods presented:


		Three Months Ended														Three Months Ended
		September 30,														March 31,
		2019			% Change		2018				2020			% Change		2019
		(Dollars in thousands)														(Dollars in thousands)
Revenues:	Revenues:									Revenues:
Gross premiums written	Gross premiums written	$	159,131		14.5	%	$	139,022		Gross premiums written	$	172,962		30.8	%	$	132,233
Gross premiums earned	Gross premiums earned	145,546			0.4	%	144,907			Gross premiums earned	175,574			26.9	%	138,367
Ceded premiums	Ceded premiums	(58,172)			25.3	%	(46,414)			Ceded premiums	(69,664)			40.5	%	(49,583)
Net premiums earned	Net premiums earned	87,374			(11.3)	%	98,493			Net premiums earned	105,910			19.3	%	88,784
Net investment income	Net investment income	4,068			29.7	%	3,137			Net investment income	3,892			4.9	%	3,710
Net realized and unrealized investment gains (losses)	Net realized and unrealized investment gains (losses)	794			(54.9)	%	1,760			Net realized and unrealized investment gains (losses)	(2,825)			(222.8)	%	2,301
Direct written policy fees	Direct written policy fees	2,514			(33.8)	%	3,796			Direct written policy fees	3,466			45.0	%	2,391
Other income	Other income	4,726			29.6	%	3,646			Other income	5,256			31.0	%	4,011
Total revenues	Total revenues	99,476			(10.2)	%	110,832			Total revenues	115,699			14.3	%	101,197

Costs and expenses:	Costs and expenses:									Costs and expenses:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	62,105			(0.6)	%	62,457			Losses and loss adjustment expenses	68,930			3.1	%	66,839
Commissions and other underwriting expenses	Commissions and other underwriting expenses	24,854			(20.8)	%	31,373			Commissions and other underwriting expenses	36,355			28.8	%	28,234
General and administrative expenses	General and administrative expenses	5,246			4.9	%	5,000			General and administrative expenses	6,245			(1.0)	%	6,311
Interest expense	Interest expense	1,894			83.5	%	1,032			Interest expense	1,915			(62.1)	%	5,051
Total costs and expenses	Total costs and expenses	94,099			(5.8)	%	99,862			Total costs and expenses	113,445			6.6	%	106,435

Income (loss) before income taxes	Income (loss) before income taxes	5,377			(51.0)	%	10,970			Income (loss) before income taxes	2,254			(143.0)	%	(5,238)
Income tax expense (benefit)	Income tax expense (benefit)	718			(76.2)	%	3,020			Income tax expense (benefit)	121			(108.8)	%	(1,373)
Net income (loss)	Net income (loss)	$	4,659		(41.4)	%	$	7,950		Net income (loss)	$	2,133		(155.2)	%	$	(3,865)


Ratios to net premiums earned:	Ratios to net premiums earned:									Ratios to net premiums earned:
Net loss ratio	Net loss ratio	71.1		%			63.4		%	Net loss ratio	65.1		%			75.3		%
Net expense ratio	Net expense ratio	34.4		%			36.9		%	Net expense ratio	40.2		%			38.9		%
Combined ratio	Combined ratio	105.5		%			100.3		%	Combined ratio	105.3		%			114.2		%

(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~~loss adjustment expenses and all operating expenses less interest expense divided by net premiums earned.

~~-35-~~-34-

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


		As of or For the Three Months Ended September 30,
		2019																					2018										Three Months Ended
		Homeowners			Automobile			Other			Consolidated			Homeowners			Automobile			Other			Consolidated				2020			2019
											(Dollars in thousands)																			(Dollars in thousands)
Revenue	Revenue																									Revenue
Total revenues	Total revenues	$	93,735		$	4		$	5,737		$	99,476		$	100,616		$	2,332		$	7,884		$	110,832		Total revenues	$	115,699		$	101,197
Less:	Less:																									Less:
Net realized and unrealized investment gains (losses)	Net realized and unrealized investment gains (losses)	—			—			794			794			—			—			1,760			1,760			Net realized and unrealized investment gains (losses)	(2,825)			2,301
Adjusted operating revenues	Adjusted operating revenues	$	93,735		$	4		$	4,943		$	98,682		$	100,616		$	2,332		$	6,124		$	109,072		Adjusted operating revenues	$	118,524		$	98,896

Net Income (Loss)	Net Income (Loss)																									Net Income (Loss)
Net income (loss)	Net income (loss)	$	3,398		$	(613)		$	1,874		$	4,659		$	8,158		$	(1,416)		$	1,208		$	7,950		Net income (loss)	$	2,133		$	(3,865)
Less:	Less:																									Less:
Net realized and unrealized investment gains (losses)	Net realized and unrealized investment gains (losses)	—			—			634			634			—			—			1,314			1,314			Net realized and unrealized investment gains (losses)	(2,132)			1,718
Acquisition and other costs	Acquisition and other costs	(187)			(5)			(46)			(238)			(609)			(37)			(78)			(724)			Acquisition and other costs	(27)			(520)
Amortization of identifiable intangibles																										Amortization of identifiable intangibles	(28)			—
Gain (loss) on early extinguishment of debt	Gain (loss) on early extinguishment of debt	—			—			(29)			(29)			—			—			—			—			Gain (loss) on early extinguishment of debt	—			(2,669)
Adjusted operating income (loss)	Adjusted operating income (loss)	$	3,585		$	(608)		$	1,315		$	4,292		$	8,767		$	(1,379)		$	(28)		$	7,360		Adjusted operating income (loss)	$	4,320		$	(2,394)

Income tax rate assumed for reconciling items above	Income tax rate assumed for reconciling items above	18.26		%	18.26		%	18.26		%	18.26		%	25.35		%	25.35		%	25.35		%	25.35		%	Income tax rate assumed for reconciling items above	24.52		%	25.35		%

~~-36-~~

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,
2019 2018
Homeowners Automobile Other Consolidated Homeowners Automobile Other Consolidated
(Dollars in thousands)
Revenues:
Gross premiums written $ 154,131 $ — $ 5,000 $ 159,131 $ 136,503 $ (3,041) $ 5,560 $ 139,022
Gross premiums earned 141,493 — 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 earned 87,286 — 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 fees 2,453 — 61 2,514 2,198 1,466 132 3,796
Other income 3,996 4 726 4,726 2,613 191 842 3,646
Total revenues 93,735 4 5,737 99,476 100,616 2,332 7,884 110,832

Costs and expenses:
Losses and loss adjustment expenses 60,708 742 655 62,105 56,856 2,609 2,992 62,457
Commissions and other underwriting expenses 24,109 — 745 24,854 28,647 1,545 1,181 31,373
General and administrative expenses 4,484 50 712 5,246 4,187 75 738 5,000
Interest expense — — 1,894 1,894 — — 1,032 1,032
Total costs and expenses 89,301 792 4,006 94,099 89,690 4,229 5,943 99,862

Income (loss) before income taxes 4,434 (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 ratio 69.6 % NCM 744.3 % 71.1 % 59.3 % 386.5 % 148.6 % 63.4 %
Net expense ratio 32.7 % 34.4 % 34.3 % 36.9 %
Combined ratio 102.3 % 105.5 % 93.6 % 100.3 %

~~-37-~~

Revenue

Total revenue ~~decreased $11.3~~increased $14.5 million or ~~10.2%~~14.3%, to ~~$99.5~~$115.7 million for the three months ended ~~September 30, 2019,~~March 31, 2020, compared with ~~$110.8~~$101.2 million for the three months ended ~~September 30, 2018.~~March 31, 2019. The ~~decrease~~increase was ~~primarily~~ driven by ~~higher ceded~~net premiums ~~due to increased reinsurance spend, a decline in Automobile direct written policy fees and lower investment gains,~~growth, including the effect of the acquisition of Maison, partially offset by ~~increases in gross premiums earned,~~ net investment ~~income and other income,~~losses, all of which are discussed below.

Gross Premiums Written

The following table sets forth the gross premiums written for the periods presented:

໿


		Three Months Ended							Three Months Ended
		September 30,							March 31,
		2019		2018			2020		2019
		(In thousands)							(In thousands)
Gross premiums written:	Gross premiums written:					Gross premiums written:
Homeowners Florida	Homeowners Florida	$	115,341	$	114,441	Homeowners Florida	$	111,547	$	103,963
Homeowners non-Florida	Homeowners non-Florida	38,790		22,062		Homeowners non-Florida	57,942		25,320
Automobile		—		(3,041)
Commercial general liability		(19)		1,435
Federal flood	Federal flood	5,019		4,125		Federal flood	3,660		3,004
Non-core						Non-core	(187)		(54)
Total gross premiums written	Total gross premiums written	$	159,131	$	139,022	Total gross premiums written	$	172,962	$	132,233

Gross premiums written increased ~~$20.1~~$40.8 million, or ~~14.5%~~30.8%, to ~~$159.1~~$173.0 million in the quarter compared with ~~$139.0~~$132.2 million for the same three-month period last year. Gross premiums written increased due to ~~the~~organic non-Florida growth, ~~in homeowners non-Florida~~ and ~~Florida.~~$17.6 million from Maison, 96% of which was non-Florida. Our ~~homeowners~~organic non-Florida business continues to show exceptional growth year over year, especially in the state of Texas, which 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%~~31.1%.

-35-

Gross Premiums Earned

The following table sets forth the gross premiums earned for the periods presented:


		Three Months Ended							Three Months Ended
		September 30,							March 31,
		2019		2018			2020		2019
		(In thousands)							(In thousands)
Gross premiums earned:	Gross premiums earned:					Gross premiums earned:
Homeowners Florida	Homeowners Florida	$	113,062	$	118,603	Homeowners Florida	$	116,100	$	112,672
Homeowners non-Florida	Homeowners non-Florida	28,431		17,984		Homeowners non-Florida	55,525		21,170
Automobile		—		2,766
Commercial general liability		157		2,122
Federal flood	Federal flood	3,896		3,432		Federal flood	4,136		3,467
Non-core						Non-core	(187)		1,058
Total gross premiums earned	Total gross premiums earned	$	145,546	$	144,907	Total gross premiums earned	$	175,574	$	138,367

Gross premiums earned increased ~~$0.6~~$37.2 million, or ~~0.4%~~26.9%, to ~~$145.5~~$175.6 million for the three months ended ~~September 30, 2019,~~March 31, 2020, as compared to ~~$144.9~~$138.4 million for the three months ended ~~September 30, 2018.~~March 31, 2019. The higher gross premiums earned ~~premiums~~ was primarily driven by ~~a 3.6% increase in earned premiums in Homeowners, partially offset by~~continued non-Florida growth, including $19.8 million from the ~~results~~acquisition of ~~our decision to exit the Automobile and commercial general liability lines.~~Maison.

~~-38-~~

Ceded Premiums Earned

Ceded premiums earned increased ~~$11.8~~$20.1 million, or ~~25.3%~~40.5%, to ~~$58.2~~$69.7 million in the quarter, compared to ~~$46.4~~$49.6 million in the same three-month period last year. The increase was driven by ~~$8.1 million~~ higher gross earned premiums, including Maison, as well as an increase in our excess of loss reinsurance spend in 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 from the homeowners Florida quota share being set at 10% in the third quarter of 2019 as compared to 2% in the prior year period. These items were offset by $2.1 million lower ceded premiums in Automobile as we have exited that line of business.spend.

Net Investment Income

Net investment income increased ~~$1.0~~$0.2 million, or ~~29.7%~~4.9%, to ~~$4.1~~$3.9 million during the three months ended ~~September 30, 2019,~~March 31, 2020, as compared to ~~$3.1~~$3.7 million during the three months ended ~~September 30, 2018.~~March 31, 2019. The increase was primarily due to fixed income portfolio growth ~~partly due to~~from the net proceeds of the offering (refer to Notes 3 and 8 to the Consolidated Financial Statements included herein, for additional information) and the improvement in the yield as a result of rising interest rates during 2018 as well as from portfolio repositioning.Maison acquisition.

Net realized and Unrealized Investment Gains (Losses)

Net realized and unrealized investment gains (losses) decreased ~~$1.0~~$5.1 million, to ~~$0.8~~$(2.8) million for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to ~~$1.8~~$2.3 million in the prior year period. We recognized ~~$(0.6)~~$(3.3) million and ~~$1.6~~$2.3 million in unrealized investment gains (losses) for equity securities during these respective periods. ~~Our~~The unrealized losses for the current ~~and prior~~ year ~~net realized gains are associated with our portfolio managers, under our control, moving out of positions~~was due to ~~both macro~~market volatility and ~~micro~~declining economic conditions ~~in the normal course of managing the portfolio.~~resulting from COVID-19.

Direct Written Policy Fees

Direct written policy fees ~~decreased by $1.3~~increased $1.1 million, or ~~33.8%~~45.0%, to ~~$2.5~~$3.5 million for the three months ended ~~September 30, 2019,~~March 31, 2020, compared with ~~$3.8~~$2.4 million infor the ~~same period in 2018.~~three months ended March 31, 2019. The ~~decrease in direct written policy~~increase is primarily driven by the fees ~~is correlated~~associated with Maison’s premiums and, 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 higher fees from homeowners~~a lesser extent, organic non-Florida ~~as we continue to grow.~~growth.

-36-

Other Income

Other income included the following for the periods presented:

໿


		Three Months Ended											Three Months Ended
		September 30,											March 31,
		2019		% Change		2018			2020		% Change		2019
		(In thousands)											(Dollars in thousands)
Other income:	Other income:							Other income:
Commission income	Commission income	$	726	(15.2)	%	$	856	Commission income	$	785	71.4	%	$	458
Brokerage	Brokerage	3,582		63.6	%	2,190		Brokerage	4,037		28.8	%	3,134
Financing and other revenue	Financing and other revenue	418		(30.3)	%	600		Financing and other revenue	434		3.6	%	419
Total other income	Total other income	$	4,726	29.6	%	$	3,646	Total other income	$	5,256	31.0	%	$	4,011

The increase in other income was primarily driven by higher brokerage ~~revenue, partially offset by lower financing and commission income.~~revenue. The brokerage revenue increase is the result of higher excess of loss reinsurance spend from the reinsurance programs in place during the ~~third~~first quarter of ~~2019~~2020 as compared to the ~~third~~first 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.~~2019.

~~-39-~~

Expenses

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses (“LAE”) ~~decreased $0.4~~increased $2.1 million, or ~~0.6%~~3.1%, to ~~$62.1~~$68.9 million for the three months ended ~~September 30, 2019,~~March 31, 2020, compared with ~~$62.5~~$66.8 million for the same three-month period last year. The net loss ratio ~~increased 7.7~~decreased 10.2 percentage points, to ~~71.1%~~65.1% in the current quarter, as compared to ~~63.4%~~75.3% in the ~~third~~first quarter of ~~2018.~~2019. The ~~higher~~lower loss ratio was primarily the result of lower weather-related net losses when comparing the ~~increase in~~periods, as 2020 included $10.4 million, net of reinsurance ~~spend,~~(of which, ~~reduces the net earned premium denominator of the loss ratio calculation. The third quarter of 2019 included $11.0~~$3.5 million ofwere from FNIC's non-Florida 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 isare subject to a 50% profit-sharing ~~agreement, as discussed earlier), compared to~~agreement) and 2019 included $19.0 million from the prior year quarter which included $6.1 million of catastrophe losses arising from Hurricane Florence and Tropical Storm Gordon. The remaining variance is driven by lower losses in the quarter in Automobile and commercial general liability lines as we exit those lines and higher ceded losses from homeownersBrevard County, Florida ~~quota share in the quarter due to the higher percentage (as discussed earlier), partially offset by increased losses related to~~hail storm. Additionally, higher gross premiums earned ~~in 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,
2019 2018
(In thousands)
Commissions and other underwriting expenses:
Homeowners Florida $ 13,187 $ 14,258
All others 6,610 4,866
Ceding commissions (3,203) (689)
Total commissions 16,594 18,435
Automobile — 1,466
Homeowners non-Florida 902 571
Total fees 902 2,037
Salaries and wages 2,696 3,147
Other underwriting expenses 4,662 7,754
Total commissions and other underwriting expenses $ 24,854 $ 31,373

Commissions and other underwriting expenses decreased $6.5 million, or 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. 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 $8.0volume drove approximately $10.0 million of ~~non-Florida weather-related~~higher 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 to ~~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, 2019 compared to $5 million in the third quarter of 2018. The increase was the result of higher professional fees and other costs as compared to the prior year.

~~-40-~~

~~Interest Expense~~

Interest expense increased $0.9 million to $1.9 million for the three months ended September 30, 2019, compared with $1.0 million in the prior year period due to an increase in the outstanding debt. 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.

~~Income Taxes~~

Income taxes (benefits) decreased $2.3 million, to $0.7 million for the three months ended September 30, 2019, compared to $3.0 million for the three months ended September 30, 2018. The decrease in income tax expense is predominantly the result of lower income during the current quarter as compared to the third quarter of 2018. Additionally, in the quarter, 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 5.5% to 4.5%, effective January 1, 2019, which represented a benefit in the quarter. This new tax rate will be in place until at least December 31, 2021.

~~-41-~~

~~Operating Results Overview - Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018~~

~~The following table sets forth results of operations for the periods presented:~~

Nine Months Ended
September 30,
2019 % Change 2018
(Dollars in thousands)
Revenues:
Gross premiums written $ 460,534 4.6 % $ 440,151
Gross premiums earned 425,133 (3.0) % 438,239
Ceded premiums (156,669) (10.0) % (174,080)
Net premiums earned 268,464 1.6 % 264,159
Net investment income 12,037 32.9 % 9,058
Net realized and unrealized investment gains (losses) 5,050 451.3 % 916
Direct written policy fees 7,308 (31.6) % 10,685
Other income 13,115 (11.6) % 14,833
Total revenues 305,974 2.1 % 299,651
Costs and expenses:
Losses and loss adjustment expenses 194,284 24.5 % 156,098
Commissions and other underwriting expenses 75,650 (17.3) % 91,467
General and administrative expenses 17,336 6.1 % 16,345
Interest expense 8,860 182.3 % 3,139
Total costs and expenses 296,130 10.9 % 267,049
Income (loss) before income taxes 9,844 (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 ratio 72.4 % 59.1 %
Net expense ratio 34.6 % 40.8 %
Combined ratio 107.0 % 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.~~

~~-42-~~

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

As of or For the Nine Months Ended September 30,
2019 2018
Homeowners Automobile Other Consolidated Homeowners Automobile Other Consolidated
(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 above 24.52 % 24.52 % 24.52 % 24.52 % 25.35 % 25.35 % 25.35 % 25.35 %

~~-43-~~

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

Nine Months Ended September 30,
2019 2018
Homeowners Automobile Other Consolidated Homeowners Automobile Other Consolidated
(Dollars in thousands)
Revenues:
Gross premiums written $ 447,642 $ (1) $ 12,893 $ 460,534 $ 414,914 $ 8,628 $ 16,609 $ 440,151
Gross premiums earned 412,409 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 earned 266,971 6 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 fees 7,082 3 223 7,308 5,978 4,229 478 10,685
Other income 10,632 18 2,465 13,115 10,560 1,084 3,189 14,833
Total revenues 284,685 27 21,262 305,974 269,395 9,839 20,417 299,651

Costs and expenses:
Losses and loss adjustment expenses 186,520 2,794 4,970 194,284 141,428 6,777 7,893 156,098
Commissions and other underwriting expenses 73,272 51 2,327 75,650 83,284 5,021 3,162 91,467
General and administrative expenses 14,320 150 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 expenses 274,112 2,995 19,023 296,130 238,173 12,073 16,803 267,049
Income (loss) before income taxes 10,573 (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 ratio 69.9 % NCM NCM 72.4 % 55.9 % 149.7 % 116.5 % 59.1 %
Net expense ratio 32.8 % 34.6 % 38.3 % 40.8 %
Combined ratio 102.7 % 107.0 % 94.2 % 99.9 %

~~-44-~~

~~Revenue~~

Total revenue increased $6.3 million, or 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. The increase was primarily driven by higher net premiums from Homeowners due to gross premiums growth and lower reinsurance spend offset by lower revenue from Automobile as we exit the business, all of which are discussed below.

~~Gross Premiums Written~~

~~The following table sets forth the gross premiums written for the periods presented:~~

໿

Nine Months Ended
September 30,
2019 2018
(In thousands)
Gross premiums written:
Homeowners Florida $ 347,320 $ 355,818
Homeowners non-Florida 100,322 59,096
Automobile (1) 8,628
Commercial general liability (121) 5,519
Federal flood 13,014 11,090
Total gross premiums written $ 460,534 $ 440,151

Gross written premiums increased $20.3 million, or 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. Gross premiums written increased primarily due to the growth in homeowners non-Florida, partially offset by the decline in the non-core businesses we are exiting, Automobile 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 state of Texas, which is allowing us to leverage our infrastructure and diversify insurance risk. 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,
2019 2018
(In thousands)
Gross premiums earned:
Homeowners Florida $ 338,481 $ 356,507
Homeowners non-Florida 73,928 47,072
Automobile 26 17,876
Commercial general liability 1,693 7,144
Federal flood 11,005 9,640
Total gross premiums earned $ 425,133 $ 438,239

Gross premiums earned decreased $13.1 million, or 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. The results are a reflection of our decision to exit the Automobile and commercial general liability lines, partially offset by a 2.2% increase in earned premiums in Homeowners.

~~-45-~~

~~Ceded Premiums Earned~~

Ceded premiums decreased $17.4 million, or 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. 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 business.

~~Net Investment Income~~

Net investment income increased $2.9 million, or 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. The increase was due to fixed income portfolio growth and the improvement in the yield as a result of rising interest rates during 2018 and from portfolio repositioning.

~~Net Realized and Unrealized Investment Gains (Losses)~~

Net realized and unrealized investment gains (losses) were $5.1 million for the nine months ended September 30, 2019, compared to $0.9 million in the prior year period. We recognized $3.0 million and $2.6 million in unrealized investment gains for equity securities during these respective periods. Our current year net realized gains and prior year net realized losses are primarily 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 net realized losses also resulted from our decision to liquidate certain bond positions, including positions related to tax-free municipal securities during the first quarter of 2018.

~~Direct Written Policy Fees~~

Direct written policy fees decreased by $3.4 million, or 31.6%, to $7.3 million for the nine months ended September 30, 2019, compared with $10.7 million during the nine months ended September 30, 2018. The decrease in direct written policy fees is correlated to lower number of policies in-force in Automobile due to our decision to exit this line, as discussed earlier.

~~Other Income~~

~~Other income included the following for the periods presented:~~

໿

Nine Months Ended
September 30,
2019 % Change 2018
(In thousands)
Other income:
Commission income $ 2,466 (35.6) % $ 3,827
Brokerage 9,408 1.4 % 9,274
Financing and other revenue 1,241 (28.3) % 1,732
Total other income $ 13,115 (11.6) % $ 14,833

The decrease in other income was driven by lower commission income and financing revenue, partially offset by higher brokerage revenue. The year over year decreases in commission income were driven by lower Automobile fee income from the reduction in premiums earned and, to a lesser extent, lower fee income from other areas of the business.

~~-46-~~

~~Expenses~~

~~Losses and Loss Adjustment Expenses~~

Losses and LAE increased $38.2 million, or 24.5%, to $194.3 million for the nine months ended September 30, 2019, compared with $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 increased 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 2018.

Commissions and Other Underwriting Expenses

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


		Nine Months Ended							Three Months Ended
		September 30,							March 31,
		2019		2018			2020		2019
		(In thousands)							(In thousands)
Commissions and other underwriting expenses:	Commissions and other underwriting expenses:					Commissions and other underwriting expenses:
Homeowners Florida	Homeowners Florida	$	39,810	$	42,796	Homeowners Florida	$	13,827	$	13,222
All others	All others	17,796		14,488		All others	11,618		5,267
Ceding commissions	Ceding commissions	(8,893)		(8,777)		Ceding commissions	(2,899)		(2,784)
Total commissions and other fees		48,713		48,507
Total commissions						Total commissions	22,546		15,705

Automobile		3		4,229
Homeowners non-Florida		2,337		1,354
Total fees		2,340		5,583

Fees						Fees	1,114		679
Salaries and wages	Salaries and wages	9,090		11,282		Salaries and wages	3,598		3,322
Other underwriting expenses	Other underwriting expenses	15,507		26,095		Other underwriting expenses	9,097		8,528
Total commissions and other underwriting expenses	Total commissions and other underwriting expenses	$	75,650	$	91,467	Total commissions and other underwriting expenses	$	36,355	$	28,234

Commissions and other underwriting expenses ~~decreased $15.8~~increased $8.2 million, or ~~17.3%~~28.8%, to ~~$75.7~~$36.4 million for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared with ~~$91.5~~$28.2 million for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. The ~~decrease is the~~increase was driven by higher non-Florida acquisition related costs as a result of premium growth. As noted above, we have a ~~significant reduction~~50% profit-sharing agreement with our managing general underwriter on FNIC's non-Florida business, therefore profitable growth in this business resulted in the increase in other underwriting ~~expenses as there~~expenses. This increase was ~~a benefit in the~~partially offset by higher non-Florida ~~profit share calculation in the nine months as a direct result of $23.5 million of non-Florida~~incurred losses from severe weather ~~related losses (as~~events

-37-

(as previously discussed in the Losses and Loss Adjustment Expenses section), in the first quarter of 2020, resulting in a ~~$11.8~~$1.8 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 resultreduction of ~~higher premiums earned across periods.~~expenses.

The net expense ratio ~~decreased 6.2~~increased 1.3 percentage points to ~~34.6%~~40.2% in the first ~~nine months~~quarter of ~~2019,~~2020, as compared to ~~40.8%~~38.9% in the first ~~nine months~~quarter of ~~2018. The decrease in the ratio is attributable~~2019 primarily due to ~~the lower non-Florida profit share expense and other expense reductions as well as the lower~~higher catastrophe reinsurance ~~spend during the nine months driving higher~~costs reducing net ~~premiums earned.~~earned premium. Refer to the discussion above for more information.

~~-47-~~

General and Administrative Expenses

General and administrative expenses ~~increased $1.0~~decreased $0.1 million ~~or 6.1%,~~by 1.0% to ~~$17.3~~$6.2 million for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020 compared ~~with $16.3~~to $6.3 million in the ~~prior year period.~~first quarter of 2019. The ~~increase~~decrease was ~~primarily~~ the result of ~~higher~~lower professional fees ~~including due diligence~~and other costs ~~relating~~as compared to the ~~pending acquisition of Maison Companies, as previously discussed earlier.~~prior year.

Interest Expense

Interest expense ~~increased $5.8~~decreased $3.2 million to ~~$8.9~~$1.9 million for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared with ~~$3.1~~$5.1 million in the prior year period, ~~due to the~~which included $3.6 million of prepayment fees, including the write-off of remaining debt issuance ~~costs, and an increase in~~costs. This decline was partially offset by the fact that our March 2019 debt offering was only outstanding ~~debt as~~for a ~~result~~portion of ~~our~~the 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.

Income Taxes

Income taxes ~~decreased $6.7~~(benefits) increased $1.5 million, to ~~$1.9~~$0.1 million for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared ~~with a tax expense of $8.6~~to $(1.4) million for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. The ~~decrease~~increase in income tax expense is predominantly the result of ~~lower~~higher income during the ~~nine months ended September 30, 2019,~~current quarter as compared to the ~~corresponding period in 2018. Additionally, in~~first quarter of 2019. The increase was partially offset by the fact during the third quarter of 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 uncertain tax position reserve. Lastly,~~ the State of Florida announced a reduction in its state income tax rate from 5.5% to 4.5%, effective ~~from~~ January 1, ~~2019, as discussed earlier.~~2019. This new tax rate will be in place until at least December 31, 2021.

Severe Weather Events Experienced in April 2020

The Company’s strategy over the past few years has been, and continues to be, to write more property insurance business beyond its home state of Florida. This strategy exposes the company to more active weather losses primarily during the second quarter of each year as a result of tornado and hail activity that is more prevalent during the second quarter in multiple states in which we operate including Texas, Louisiana, South Carolina, Alabama and Mississippi.

~~-48-~~

Refer to Note 14 of the notes to our Consolidated Financial Statements for information regarding of severe weather events the Company experienced in the month of April 2020.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of funds are gross 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, 2019,~~March 31, 2020, the Company held ~~$491.5~~$564.4 million in investments. Cash and cash equivalents ~~increased $57.0~~decreased $10.2 million, to ~~$121.4~~$123.2 million as of ~~September 30, 2019,~~March 31, 2020, compared with ~~$64.4~~$133.4 million as of December 31, ~~2018, as discussed below, primarily due to the net proceeds of our March 2019 debt offering, after redemption of our legacy $45 million principal amount.~~2019. Total shareholders’ equity ~~increased $22.1~~decreased $9.5 million, to ~~$237.4~~$239.2 million as of ~~September 30, 2019,~~March 31, 2020, compared with ~~$215.3~~$248.7 million as of December 31, ~~2018~~2019 due primarily to repurchases of common stock and unrealized ~~gains~~losses on our bond portfolio, ~~and~~partially offset by net income.

Historically, we have met our liquidity requirements primarily through cash generated from operations. 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%. The net proceeds of the offering were in part used to redeem all $45 million of the Company's Senior Unsecured Fixed Rate Notes due 2022 and the Company's Senior Notes due 2027. Additionally, the remaining cash from the offering ~~will be~~was used to purchase the Maison Companies and for other general corporate purposes, including ~~potential~~ repurchases of shares of our common stock and managing the capital needs of our subsidiaries. Refer to Notes 3 and 8 toof the notes to ~~the~~our Consolidated Financial Statements ~~included herein,~~set forth in Part II, Item 8. Financial Statements and Supplementary Data of the 2019 Form 10-K, for additional information regarding the 2029 Notes as well as the ~~pending~~ acquisition of the Maison Companies.

-38-

Among other things, the 2029 Notes contain customary covenants that limit the Company's ability to enter into certain operational and financial transactions, including, but not limited to incurring additional debt above certain thresholds. The Company's actual debt to capital ratio as of ~~September 30, 2019~~March 31, 2020 was approximately 29%.

Statutory Capital and Surplus of ~~Our~~our Insurance Subsidiaries

As described more fully in Part I, Item 1. Business, Regulation of our ~~2018~~2019 Form 10-K, the Company’s insurance operations are subject to the laws and regulations of the states in which we operate. The Florida OIR and ~~its~~their 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~~March 31, 2020 and December 31, ~~2018,~~2019, FNIC’s statutory surplus, which includes MNIC was ~~$150.9~~$134.1 million and ~~$161.7~~$141.8 million, respectively. As of March 31, 2020 and December 31, 2019, MIC’s statutory surplus was $52.5 million and $50.7 million, respectively.

Based upon the 2019 statutory financial statements for FNIC, MIC and MNIC, statutory surplus exceeded the regulatory action levels established by the NAIC’s RBC requirements.

Based on RBC requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its 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~~FNIC, MNIC and ~~MNIC's~~MIC had ratios of statutory surplus to its ACL ~~were 329.9%~~of 323.9%, 1,128.7% and ~~774.4%~~305.7%, respectively, as of December 31, ~~2018.~~2019.

~~-49-~~

Cash Flows Discussion

We currently 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. Please see "COVID-19 Impact" above for a discussion of the potential impact of the COVID-19 pandemic on us. We currently 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~~increased to ~~$26.4~~$21.4 million in the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$28.3~~net cash used of $6.8 million in the same period in ~~2018.~~2019. This ~~decrease~~increase reflects higher net premiums collected, partially offset by higher expenses paid, including those related to commissions and underwriting expenses and losses and loss adjustment expenses, ~~partially offset by higher net premiums collected,~~ in the first ~~nine~~three months of ~~2019~~2020 as compared to the corresponding period in ~~2018.~~2019.

Investing Activities

Net cash used in investing activities of ~~$16.7~~$23.6 million in the ~~nine~~three months ended ~~September 30,~~March 31, 2020 reflected purchases of debt and equity investment securities of $138.4 million, partially offset by sales, maturities and redemptions of our debt and equity investment securities of $116.0 million. Net cash used in investing activities of $6.5 million in the three months ended March 31, 2019 reflected purchases of debt and equity investment securities of ~~$175.1~~$64.9 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$59.0 million.

-39-

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2020 of $7.9 million primarily reflects repurchases of FedNat Holding Company common stock of $6.6 million and dividends paid of $1.3 million. Net cash provided by financing activities of $49.4 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 ~~of $47.3 million~~ primarily reflects issuance of long-term debt, net of issuance costs, of ~~$98.4~~$98.5 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 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.

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~~conformity with ~~GAAP,~~accounting principles generally accepted in the United States ("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.

~~-50-~~

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 amount and recoverability of deferred acquisition ~~costs;~~costs and value of business acquired; (vi) goodwill and other intangible assets; (vii) reserve for loss and losses adjustment expenses; and ~~(vii)~~(viii) income taxes. The accounting estimates 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~~three months ended ~~September 30, 2019.~~March 31, 2020. Refer to Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” included in our ~~2018~~2019 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, 2019,~~March 31, 2020, approximately 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, ~~2018.~~2019. Please refer to the ~~2018~~2019 Form 10-K for a complete discussion of the Company’s exposures to market risks.

-40-

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, 2019.~~March 31, 2020.

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.

~~-51-~~

Changes in Internal Control over Financial Reporting

Recently, 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~~There were no changes in our internal control over financial reporting that occurred during the three months ended ~~September 30, 2019~~March 31, 2020 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.

~~-52-~~-41-

Part II: OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 1011 to our Consolidated Financial Statements set forth in Part I, “Financial Statements” for information about legal proceedings.

Item 1A. Risk Factors

Our operations, financial condition and results could be adversely affected by COVID-19.

We continue to closely monitor developments related to COVID-19 to assess any potential impact on our business. Because this is an evolving and highly uncertain situation (including possible actions that our regulators or other governmental or judicial entities may take in both a retrospective and go-forward manner) it is not possible at this time to provide an estimate of potential insurance, reinsurance, or investment exposure or any other indirect effects the pandemic may have on our results of operations, financial condition or liquidity. However, material disruptions to the Company caused by the pandemic could include:

•Although we believe that our product offerings and contractual coverages limit our exposure to claims related to COVID-19, there is a risk that legislative, regulatory, judicial or social influences may extend coverage beyond our contractual obligations or may result in an increase in the frequency or severity of claims beyond expected levels.

•Volatile and illiquid financial global financial markets resulting from the outbreak may adversely impact the fair value or credit quality of securities in our investment portfolio.

•Reduced liquidity, higher operating costs and strained profitability from legislative, regulatory or judicial actions may result in denials of rate increases, require premium payment grace periods, prevent cancellations for non-payment of premium, or require us to cover losses for excluded coverages.

•A decline in demand for our product offerings or declining ability or willingness of our policy holders to pay premiums may reduce our revenues.

•We may require additional liquidity at a time when our cost of capital increases and/or access to capital is hampered.

•Social distancing impedes observing certain claims on-site and, in some cases, may adversely impact our ability to properly assess certain claims.

•The economic effects adversely impacting the liquidity and financial stability of our reinsurers may cause an increase in our reinsurance costs and/or counterparty risk with resulting write-offs of reinsurance recoverables.

•Market volatility and declining economic conditions adversely impacting the liquidity and financial stability of the issuers of securities we hold may result in realized losses.

•Our ability to maintain relationships with key vendors, and those vendors’ willingness or ability to perform services for us as expected, may be adversely impacted.

•We may experience cyber security losses due to our employees working remotely.

Therefore, a prolonged period of commercial disruption, reduced economic activity, high unemployment, extreme market volatility, disruptions to capital and credit markets, and other consequences of the COVID-19 pandemic could have a material adverse impact on our operations, financial condition and results.

As a property and casualty insurer, we may be impacted by different severe weather events at different times of the year.

Our homeowners business is impacted by catastrophic and other severe weather events, which may cause our operating results and financial condition to vary significantly from one period to the next. The incidence and severity of weather conditions are largely unpredictable, although certain types of events are more likely to occur during particular times of year. For example, hurricane season in the Atlantic and Caribbean oceans and in the Gulf of Mexico is from June 1st to November 30th of each year, with the peak occurrence of storms typically from mid-August to late October. By comparison, severe storms resulting in hail and tornados are more likely to occur in the spring in the states in which we operate. The nature of spring storms also tends to result in multiple occurrences, none of which would typically exceed our catastrophe reinsurance retention on an individual basis. There is generally an increase in the frequency and severity of claims when severe weather conditions occur.

There have been no other material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of the Company’s ~~2018~~2019 Form 10-K. Please refer to that section for those additional disclosures regarding what we believe are the most significant risks and uncertainties related to our business.

-42-

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~~March 31, 2020 by or on behalf of FNHC:

໿

~~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 2019~~

—

~~10,000,000~~

~~August 2019~~

—

~~10,000,000~~

~~September 2019~~

—

~~10,000,000~~


				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)
January 2020	105,102	$	15.98	105,102	$	8,320,010
February 2020	100,046	15.18		100,046	6,801,534
March 2020	318,435	11.15		318,435	13,249,952

໿

(1)In December ~~2018,~~2019, the Company’s Board of Directors authorized ~~an additional~~a share repurchase program under which the Company may repurchase up to $10.0 million of its outstanding shares of common stock from January 1, 2020 through December 31, ~~2019.~~2020. In March 2020, the Company’s Board of Directors authorized an additional $10.0 million increase to the share repurchase program. As of ~~September 30, 2019,~~March 31, 2020, the remaining availability for future repurchases of our common stock was ~~$10.0~~$13.2 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

Not applicable.

-43-

~~-53-~~

Item 6. Exhibits


Exhibit No.			Description
10.1			~~Private Placement Excess Catastrophe~~FHCF Supplement Layer Reinsurance Contract effective ~~July~~June 1, ~~2019 among~~2020 between FedNat ~~Insurance Company, Monarch National Insurance Company, Maison~~ Insurance Company and subscribing reinsurers*
10.2			~~Excess Catastrophe Reinsurance~~Form of Reimbursement Contract effective ~~July~~June 1, ~~2019 among~~2020 between the State Board of Administration of the State of Florida, as administrator of the Florida Hurricane Catastrophe Fund, and each of FedNat Insurance ~~Company,~~Company; Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.3~~			Second and Third Event Excess Catastrophe Reinsurance Contract effective July 1, 2019 among FedNat Insurance Company, Monarch National Insurance Company and subscribing reinsurers*
~~10.4~~			Net Quota Share Reinsurance Agreement effective July 1, 2019 between FedNat Insurance Company and Swiss Reinsurance America Corporation*
~~10.5~~			Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2019 between FedNat Insurance Company and subscribing reinsurers*
~~10.6~~			Reinstatement Premium Protection Reinsurance Contract effective July 1, 2019 among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.7~~			Cooperation Agreement dated August 9, 2019, by and between FedNat Holding Company and Capital Returns Management, LLC**
~~10.8~~			~~Consent Order dated August 7, 2019 among the Florida Office of Insurance Regulation, FedNat Holding Company, 1347 Property Insurance Holdings, Inc.,~~Company; and Maison Insurance Company***
~~10.9~~			Consent Agreement dated August 9, 2019 among the Louisiana Department of Insurance, FedNat Holding Company and Maison Insurance Company***
31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley ActAct **
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley ActAct **
32.1			Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley ActAct **
32.2			Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley ActAct **
101.INS			XBRL Instance Document*****
101.SCH			XBRL Taxonomy Extension Schema Document*****
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document*****
101.LAB			XBRL Taxonomy Extension Label Linkbase Document*****
101.PRE			XBRL 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.

** ~~Incorporated by reference to the comparable exhibit included in the Current Report on Form 8-K filed with the 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.

-44-

~~-54-~~

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 12, 2019~~May 6, 2020

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	Nine Months Ended September 30,
	2019										2018
	Before Tax		Income Tax		Net		Before Tax		Income Tax		Net
	(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period	$	(5,023)	$	1,273	$	(3,750)	$	2,287	$	(593)	$	1,694
Cumulative effect of new accounting standards	—		—		—		(1,349)		355		(994)

Other comprehensive income (loss) before reclassification	21,979		(5,431)		16,548		(10,573)		2,679		(7,894)
Reclassification adjustment for realized losses (gains) included in net income	(1,524)		374		(1,150)		1,732		(439)		1,293
	20,455		(5,057)		15,398		(8,841)		2,240		(6,601)
Accumulated other comprehensive income (loss), end-of-period	$	15,432	$	(3,784)	$	11,648	$	(7,903)	$	2,002	$	(5,901)