ITEM 1A. RISK FACTORS

We are subject to various risks in our business operations as described below. The risks and uncertainties described below are the known risk factors we consider material. Additional risks and uncertainties not currently known, or currently deemed immaterial, may also impair our business operations. Investors should carefully consider these risks before making an investment decision.

Risks Related to Our Business

Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.

We write insurance policies that cover homeowners ~~business owners and automobile owners~~ for losses that result from, among other things, catastrophes and sinkholes. Catastrophic losses can be caused by natural events such as hurricanes, tropical storms, tornadoes, wind, hail, fires, explosions and other events. The incidence and severity of these events are inherently unpredictable. Catastrophic losses can also be caused by terrorist attacks, war, riots, political instability and other man-made events. The extent of losses from a catastrophe is a function of two factors:the total amount of the insurance company’s exposure in the area affected by the event and the severity of the event. Our homeowners policyholders are disbursed throughout the southeast United States, although the majority of our policyholders are located in Florida. Further, a substantial portion of our Florida homeowners policyholders, are located in southeastern Florida, and therefore are especially subject to adverse weather conditions such as hurricanes and tropical storms.

The occurrence of claims from catastrophic events can result in substantial volatility in our results of operations or financial condition for any fiscal quarter or ~~years~~year, as seen in ~~2018, 2017~~2020, 2019 and ~~2016.~~2018. An elevation in the values and concentrations of insured property may increase the severity of the occurrence of claims in the future. Although we attempt to manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophic events could have a material adverse effect on our results of operations or financial condition.

Florida,, ~~South Carolina~~ Louisiana and Texas, all states in which we write homeowners policies, experienced several significant hurricanes in ~~2016, 2017~~2020, 2019 and 2018, which some weather analysts believe is consistent with a period of greater hurricane activity. Exposure risk management alternatives are carefully evaluated as they may increase operating expenses and may not be successful in protecting long-term profitability. If our loss experience is more adverse than is contemplated by our loss reserves, the related increase in our loss reserves may have a material adverse effect on our results of operations in the period in which the increase occurs.

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.

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Our loss reserves are estimates and may be inadequate to cover our actual liability for losses, causing our results of operations to be adversely affected.

We maintain reserves to cover our estimated ultimate liabilities for losses and LAE. These reserves are estimates based on historical data and statistical projections of what we believe the settlement and administration of claims will cost based on facts and circumstances then known to us. Actual loss and LAE reserves, however, may vary significantly from our estimates. Factors that affect loss and LAE reserves include the estimates made on a claim-by-claim basis known as “case reserves” coupled with bulk estimates known as IBNR. Periodic estimates by management of the ultimate costs required to settle all claim files are based on our analysis of historical data and estimations of the impact of numerous factors such as:

•per-claim information;

•company and industry historical loss experience, including the impact of trends such as the ~~assignment of benefits (“AOB”)~~AOB (as described in more detail below) by insureds;

•legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes;and

•trends in general economic conditions, including the effects of inflation.

Management revises its estimates based on the results of its analysis. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. Because of the uncertainties that surround estimated loss reserves, we cannot be certain that our reserves will be adequate to cover our actual losses. If our loss and LAE reserves are less than actual losses and LAE, we will be required to increase our reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. Future loss experience, substantially in excess of our loss and LAE reserves, could substantially harm our results of operations and financial condition.

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Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance ~~fluctuates~~in each of the last two years has increased substantially and the terms have become less favorable, with the result that we may not be able to successfully alleviate risk through our reinsurance arrangements.

We have a reinsurance structure that is a combination of private reinsurance and the FHCF. Our reinsurance structure is composed of several reinsurance companies with varying levels of participation providing coverage for losses and LAE at pre-established minimum and maximum amounts. Losses incurred in connection with a catastrophic event below the minimum and above the maximum are the responsibility of FNIC, MIC and MNIC.

The availability and costs associated with the acquisition of reinsurance varies year to ~~year.~~year, with significant increases occurring in each of the last two years. We are not able to control ~~these fluctuations~~additional future availability and price increases of reinsurance, which may be significant and may limit our ability to purchase adequate coverage. In addition, when the statutory surplus of our insurance subsidiaries decreases, it decreases the maximum per-event retention allowed by our rating agency and our regulators. While a lower per-event retention has the benefit of reducing our maximum exposure to any single catastrophic event, it also further increases the cost of our reinsurance program. The recovery of increased reinsurance costs through rate increases is not immediate and cannot be presumed, as rate increases are subject to approval of the Florida ~~OIR.~~OIR or LDI.

We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of operations and financial condition.

As is common practice within the insurance industry, we transfer a portion of the risks insured under our policies to other companies through the purchase of reinsurance. This reinsurance is maintained to protect our insurance ~~subsidiary~~subsidiaries against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and other catastrophic events. Although reinsurance does not discharge our insurance ~~subsidiary~~subsidiaries from ~~its~~their respective primary ~~obligation~~obligations to pay for losses insured under the policies ~~it issues,~~they issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiary for the reinsured portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectability of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. A reinsurer’s insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on our business, results of operations and financial condition.

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Our reinsurance structure has significant risks, including the fact that the FHCF or our other reinsurers may not have available capital resources to pay their claims or that their ability to pay their claims in a timely manner may be impaired. This could result in significant financial, legal and operational challenges to our company. Therefore, in the event of a catastrophic loss, we may become dependent upon the FHCF’s and our other reinsurers’ ability to pay their claims. With respect to the FHCF, we may, in turn, be dependent upon the ability of the State Board of Administration of Florida ~~(“SBA”)~~ to issue bonds in amounts that would be required to meet its reinsurance obligations in the event of such a catastrophic loss.

We may ~~face difficulties related~~experience increased financial exposure due to changes in private excess-of-loss reinsurance market terms and conditions.

The private reinsurance market goes through what are known in the industry as “soft” and “hard” market cycles based on factors such as variations in world-wide and regional weather patterns and other natural or man-made catastrophes that produce higher or lower loss experience for the reinsurance industry. During soft market cycles, where losses have been less than expected, advantageous terms are more readily available to us, which reduces our ~~pending acquisition~~potential exposure by providing broader coverage. During a hard market cycle, where losses have been more than expected, private reinsurance markets typically tighten coverage, potentially resulting in more financial exposure to the Company. Examples of ~~the Maison Companies, which could harm our growth or operating results.~~

On February 25, 2019, we entered into an agreement to acquire the Maison Companies from PIH, which remains subject to receipt of required regulatory approvals and satisfaction of other conditions to closing.

~~If we are able to complete the acquisition of the Maison Companies, we will face the substantial risks associated with acquisitions of existing businesses. These risks~~tighter terms include, but are not limited to, the removal of cascading protection and the elimination of individual insurance carrier per-event retentions when there are multiple insurance carriers in a group.

Cascading protection provides broader coverage during years in which we experience multiple events. As the aggregate limit of the preceding layer is exhausted, the adjacent layers above drop down (cascade) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted. In the absence of cascading features, when events occur, a carrier may need to purchase supplemental coverage to backfill layers or potential gaps of coverage ("backfill coverage"), if available, and may have to do so at inopportune times, such as in the middle of hurricane season when availability is scarcer and pricing is higher. If such backfill coverage is not available, the carrier may experience gaps in reinsurance coverage. Because the existence and magnitude of potential gaps in coverage may be dependent on the ultimate catastrophe losses that emerge from preceding storms, some of which may be very recent, quantification of potential gaps can be highly uncertain. In addition, if another potential disturbance is already active at the time of binding backfill coverage, the active disturbance will generally be excluded from the newly bound coverage, which could result in gaps in the reinsurance tower with respect to the active disturbance, if it were to make landfall.

With individual insurance carrier per-event retentions, each insurance carrier has a retention that better matches its current risk appetite and surplus level. With an aggregate per-event retention for the entire group, if only one or two of the insurance carriers are involved in a given event, the larger corporate retention is split between the insurance carriers, usually resulting in a larger retention for the impacted carrier(s).

Restricted terms could also appear in the form of shortened time periods for coverage to be afforded on any one event or requiring 100% of the premium to be paid at the inception of coverage. Given these restrictions, the Company may incur or retain additional risk towards the end of hurricane season.

The reinsurance market for 2020 was a hard market, with less advantageous terms, as described above, on a portion of our July 1 through June 30, 2021 excess-of-loss reinsurance program. In addition, the Company anticipates that the reinsurance market will remain hard for 2021 such that, upon renewal, the less advantageous terms described above may be applicable to our entire excess-of-loss reinsurance program.

Contractual terms within our quota-share reinsurance treaties may limit the extent to which catastrophe losses can be ceded into the treaties, increasing the Company’s net losses retained.

Many of the Company’s quota-share reinsurance treaties include contractual terms that limit the nature or amount of catastrophe losses that can be ceded into the treaties. For example, the quota-share treaties covering FNIC’s Florida homeowners book of business exclude named storm catastrophe losses and contain caps on non-named storm losses, or exclude them altogether. In addition, the quota-share treaty covering FNIC’s non-Florida book of business includes limits on the net loss that the reinsurer can incur during the treaty year. As a result of catastrophe losses experienced during the second half of 2020, under the current terms of the applicable treaty, the Company will be limited in its ability to cede losses from Winter Storm Uri, which occurred during February 2021, or subsequent storms, into the treaty. Absent these limitations, the Company would expect to recover additional Winter Storm Uri losses pursuant to this treaty. Depending on the profitability of the business ceded into the treaty over the remainder of its term, the Company may be able to recover a portion of these losses, though not necessarily in the same period in which Winter Storm Uri occurred.

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We may experience increased financial exposure from climate change.

A body of scientific evidence indicates that climate change is occurring. Climate change, to the extent that it affects weather patterns, is likely to cause an increase in the frequency and/or the severity of catastrophic events or severe weather conditions. Our financial exposure from climate change is most notably associated with losses in connection with the occurrence of hurricanes striking Florida, Louisiana and Texas. We mitigate the risk of financial exposure from climate change by restrictive underwriting criteria, sensitivity to geographic concentrations, and reinsurance.

Restrictive underwriting criteria can include, but are not limited to, higher premiums and deductibles and more specifically excluded policy risks such as fences and screened-in enclosures. New technological advances in computer generated geographical mapping afford us an enhanced perspective as to geographic concentrations of policyholders and proximity to wind and/or flood-prone areas. Our amount of maximum reinsurance coverage is determined in part by subjecting our homeowners exposures to statistical forecasting models that are designed to quantify a catastrophic event in terms of the frequency of a storm occurring once in every “n” years. The statistical forecasting models have limitations, including the possible failure to contemplate emerging claims trends. This could include the impact of “social inflation,” where contractors and vendors extract more overages from an insurance policy than it was designed and price to provide, including the rise of “cottage industries” that are more active and aggressive than historical loss data may indicate. The potential failure of these models to capture such emerging trends, such as elevated claims litigation in Florida, gives rise to the risk that we may not ~~be able to integrate~~purchase adequate catastrophic wind coverage. Our reinsurance coverage contemplates the ~~operations, personnel, services or technologies~~effects of ~~the business acquired; the risks associated with determining adequate loss reserves for the business acquired; the potential disruption~~catastrophic events in a manner that satisfies our regulators, debtholders and our rating agency. Our amount of ~~our ongoing businesses; the diversion of management attention because of the substantial management time and resources required; the difficulty in developing or maintaining controls and procedures;~~losses retained (our deductible) and the ~~dilution~~amount of coverage purchased in connection for any single event and in aggregate for a treaty year are influenced by market capacity, pricing conditions and our ~~existing shareholders~~need for surplus preservation. There can be no assurance that our reinsurance coverage and other measures taken will be sufficient to mitigate losses resulting from ~~the issuance of shares of our common stock as part of the acquisition consideration.~~one or more catastrophic events.

Completing the integration of the Maison Companies, if the acquisition is closed, may require us to use cash resources, incur contingent liabilities, amortize intangible assets, or write-off acquisition-related expenses. We may also be faced with material liabilities not disclosed to us as part of our due diligence process. If we are not able to address these liabilities and otherwise successfully integrate the acquired business, we may not receive the intended benefits of this acquisition. As a result, our ongoing business,Our operations, financial condition and results could be adversely affected by COVID-19 and other future contagious severe health viruses.

We are exposed to the risk of natural or man-made events, such as COVID-19 or other pandemics that could cause substantial deaths, illnesses and business disruptions. We continue to closely monitor developments related to COVID-19 and its variants to assess any potential future impact on our business, which continues to be an evolving and highly uncertain situation. As a means of limiting the exposure of FNHC’s team to the spread of infectious diseases, the Company has long supported a work-from-home culture in response to business continuity concerns by establishing and supporting the expansion of the Company’s network infrastructure to include dedicated home workstations for most employees. Nevertheless, 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 may be a risk that legislative, regulatory, judicial or social influences could 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 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, including rate increases we have already implemented, require premium payment grace periods, or prevent cancellations for non-payment of premium.

•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.

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Additional localized or widespread events resulting from COVID-19 or its variants, or other infectious diseases that directly affect our workplace, insureds or reinsurers could cause a material adverse effect on our results of operations in any period and, depending on their severity, could bealso materially and adversely ~~affected. In addition, we cannot predict~~affect our ability to effectively conduct business, including our ability to write new business, and our financial condition. Therefore, additional prolonged periods of commercial disruption, reduced economic activity, high unemployment, extreme market volatility, disruptions to capital and credit markets, and other consequences of the ~~market reactions to the completion of this acquisition.~~COVID-19 pandemic, its variants or other infectious diseases could have a material adverse impact on our operations, financial condition and results.

If ~~we are unable to grow because~~ our capital must be used to pay greater than anticipated claims, instead of expanding our products or markets, our financial results may suffer.

Our ability to grow in the future will depend on our ability to expand the types of insurance products we offer and the geographic markets in which we do business, both balanced by the business risks we choose to assume and cede. ~~We believe that our company is sufficiently capitalized to operate our business as it now exists and as we currently plan to expand it.~~ Our existing sources of funds include issuance

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of equity or debt securities (although the incurrence of additional debt would require the consent of existing debt holders), possible sales of our investment securities, and our earnings from operations and investments. ~~Unexpected catastrophic~~Catastrophic events in our market areas, such as the hurricanes experienced in Florida, ~~South Carolina~~Louisiana and Texas in ~~2016, 2017~~2020, 2019 and 2018, and other catastrophic weather events, have resulted and may result in greater claims losses than anticipated, which could require us to limit or halt growth while we redeploy our capital to pay these unanticipated claims.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or our results of operations.

Various provisions of our policies, such as limitations or exclusions from coverage which have been ~~negotiated~~structured to limit our risks, may not be enforceable in the manner we intend. At the present time, we employ a variety of exclusions to our policies that limit exposure to known risks, including, but not limited to, exclusions relating to certain named liabilities ~~types of vehicles~~ and specific artisan activities. In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to decline coverage in the event of a violation of that condition. While we believe our insurance product exclusions and limitations reduce the loss exposure to us and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or that legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would adversely affect our loss experience, which could have a material adverse effect on our financial condition or results of operations.

The failure of various risk mitigation strategies utilized could have a material, adverse effect on our financial condition, results of operations or reputation in the marketplace.

We utilize a number of tactics to mitigate risk exposure within our insurance business, which include:

•Avoidance of risks that do not conform to underwriting standards;

•Risk portfolio optimization;

•Transferring portfolio risk to financially sound reinsurance companies;

•Acquiring adequate primary insurance to ensure continued operations; and

•Promoting an enterprise risk management culture.

If we fail to effectively mitigate our risk exposures, the Company could experience increased claims, losses from catastrophic events that are not reinsured and/or damage of our reputation that makes agents and reinsurers reluctant to work with us.

Trends in claims and coverage issues have had, and may continue to have, a material adverse impact on our business.

As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage emerge. These issues adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance policies may not be known for many years after a policy is issued.

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An example of an existing trend, particularly in Florida homeowners insurance, is the assignment of benefits (“AOB”) for a claim where a service provider agrees to make a repair that may be covered by an insurance policy in exchange for the policyholder’s right to sue the insurance carrier directly. The ~~assignment of the insurance benefits has~~AOB phenomenon substantially increased, and may continue to increase, our exposure to inflated claims, attorney’s fees and costs. Although legislative actions in the State of Florida to limit the effect of AOB on insurance companies ~~are being contemplated, there~~were passed in 2019, the effect of such legislation has been a shift in the volume of lawsuits from third-party/AOB suits from third party contractors and vendors, to first party suits from our policyholders instead. Another recent trend has been increased litigation regarding construction defect claims against the insureds under our commercial general liability policies written in prior years in Florida. This recent trend has resulted in low severity, high frequency claims that, although typically excluded by our policy language, nevertheless generate a high volume of litigation and related defense costs. There can be no assurances that the 2019 AOB legislation or any ~~such~~other future legislative actions for broader tort or insurance reform will become law or, if enacted, that such actions will have the effect of limiting the impact on us of ~~assignments~~“social inflation” and/or other causes of ~~benefits by insureds.~~elevated levels of lawsuits.

Our failure to comply with the covenants in our senior note indenture, including as a result of events beyond our control such as a downgrade in our financial rating, could result in an event of default, which could materially and adversely affect our financial condition and results of operations.

The indenture for our senior notes requires us to maintain certain financial ratios and to comply with various operational and other covenants, including maintenance of certain financial ratings and limitations on our ability to incur additional debt without the approval of the existing noteholders. As of the date of this Annual Report, our debt is rated ‘BBB.’If our rating were to decrease by two notches, to ‘BB+,’ the interest rate due on the senior notes would increase by 50 basis points and an additional 50 basis points for each additional notch below ‘BB+'. The terms of our senior note indenture currently prevent us from incurring additional debt, paying cash dividends or repurchasing our shares.

If there were an event of default under the indenture that was not cured or waived, the holders of the senior notes could cause all amounts outstanding with respect to the senior notes to be due and payable immediately. We cannot assure ~~you~~our shareholders that our assets or cash flow would be sufficient to fully repay the senior notes, either upon maturity or, if accelerated, upon an event of default, or that we would be able to refinance or restructure the payments on the senior notes. This would have a material adverse impact on our liquidity, financial condition and results of operations.

We may require additional capital in the future which may not be available or only available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that our capital may be insufficient to meet future operating requirements and/or cover losses, we may need to raise additional funds through financings or curtail our growth. Many factors will affect the amount and timing of our capital needs, including our growth and profitability, our claims experience, and the availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments.

If we were required to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders’ ownership could result, and in any case such securities may have rights, preferences and privileges that are senior to those of existing shareholders. If we raise additional funds by incurring debt financing, which would currently require the consent of existing debt holders, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business or pay dividends. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of operations could be materially adversely affected.

Our insurance companies are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.

Our insurance companies are subject to RBC standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of the State of Florida. The RBC standards, based upon the Risk Based Capital Model Act adopted by the NAIC, require our insurance companies to report their results of RBC calculations to state departments of insurance and the NAIC. These RBC standards provide for different levels of regulatory attention depending upon the ratio of an insurance company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its ACL RBC.

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Similarly, an increase in existing RBC requirements or minimum statutory capital requirements, such as the catastrophic risk component of RBC may require us to increase our statutory capital levels. Ratios calculated based on RBC also tend to be key criteria in the assignment of ratings by insurance rating agencies.

A reduction in our future capacity to enter new, renew, or maintain existing quota-share or excess of loss reinsurance treaties could potentially decrease the scope of options available to us in response to managing future statutory surplus needs.

Our company is dependent on reinsurance to manage our exposure to weather events. We purchase excess of loss reinsurance to satisfy requirements of our state regulators, insurance industry rating agency, debt rating agency, and debt covenants in our senior note indenture. We also purchase quota-share reinsurance, which assists us in managing the statutory surplus of our insurance subsidiaries. Our inability to maintain, renew or secure excess of loss or quota-share reinsurance at an affordable price, or at any price, could impact our ability to continue our business.

There are also practical constraints on the total percentage of a given book of business that can be ceded via quota-share reinsurance. During 2020, the quota-share cession percentage on FNIC’s Florida homeowners book of business was increased from 10% to 40%, and the cession percentage on its non-Florida homeowners book was increased from zero to 80%, actions which benefited FNIC’s statutory surplus and RBC ratio. As such, FNIC has reduced capacity to increase the level of quota-share cessions in the future. MIC and MNIC currently have no quota-share treaties in place.

A future reduction in the amount of quota-share reinsurance in place, primarily upon the expiration of the current treaties, could reduce existing statutory surplus of the impacted carrier, potentially triggering the need for a capital infusion.

To qualify as reinsurance for accounting purposes, a contract must embody substantive risk transfer, which is defined as the reasonable possibility that the reinsurer could experience a significant loss on the treaty. Contractual provisions in a treaty that excessively limit the extent or timing of the net loss that a reinsurer can experience can conceivably preclude the treaty from meeting the criteria for risk transfer, thereby disqualifying it from reinsurance accounting treatment. An assessment of risk transfer must be performed upon entry into a new treaty, as well as each time the treaty is renewed. Each of our in-force quota-share reinsurance treaties qualified for reinsurance accounting at the time of its most-recent inception. Each of these treaties has a one-year term (refer to Note 6 of the notes to our Consolidated Financial Statements in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report for further discussion of these reinsurance treaties). The Company currently expects to be able to renew each of the treaties that it determines beneficial to renew on terms that qualify for continued reinsurance accounting; however, there can be no assurance that the available marketterms of these renewals (including pricing, coverage and exclusions) will also pass risk transfer. If a treaty that we desire to renew fails to qualify for reinsurance accounting based on its then-current renewal terms, it could adversely impact that carrier’s statutory surplus, triggering the need for additional capital infusions within a short period of time.

Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

We are subject to extensive regulation in the states in which we conduct business. This regulation is generally designed to protect the interests of policyholders, as opposed to shareholders and other investors, and relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurance company’s business. Regulators may also exert influence over the loss and loss adjustment expense reserves we carry for future claims on the insurance policies we issue. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. State regulatory authorities also conduct periodic examinations into insurers’ business practices. These reviews may reveal deficiencies in our insurance operations or differences between our interpretations of regulatory requirements and those of the regulators.

The NAIC and state insurance regulators are constantly reexamining existing laws and regulations, generally focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws.

From time to time, some states in which we conduct business have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. In other situations, states in which we conduct business have considered or enacted laws that impact the competitive environment and marketplace for property and casualty insurance. In addition, in recent years the state insurance regulatory framework has come under increased federal scrutiny. Changes in federal legislation and administrative policies in several areas, including changes in financial services regulation and federal taxation, can significantly impact the insurance industry and us.

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We cannot predict with certainty the effect any enacted, proposed or future state or federal legislation or NAIC initiatives may have on the conduct of our business. Furthermore, there can be no assurance that the regulatory requirements applicable to our business will not become more stringent in the future or result in materially higher costs than current requirements. Changes in the regulation of our business may reduce our profitability, limit our growth or otherwise adversely affect our operations.

~~We may experience financial exposure from climate change.~~

A body of scientific evidence indicates that climate change may be occurring. Climate change, to the extent that it affects weather patterns, may cause an increase in the frequency and/or the severity of catastrophic events or severe weather conditions. Our financial exposure from climate change is most notably associated with losses in connection with the occurrence of hurricanes striking Florida. We mitigate the risk of financial exposure from climate change by restrictive underwriting criteria, sensitivity to geographic concentrations, and reinsurance.

Our revenues and operating performance will fluctuate due to statutorily approved assessments that support property and casualty insurance pools and associations.

We operate 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, but are not limited to, the Florida Insurance Guaranty Association (“FIGA”), Citizens, the FHCF, Texas Windstorm Insurance Association (“TWIA”) and Louisiana Citizens Property Insurance (“LCPI”).

Insurance companies currently pass these assessments on to holders of insurance policies in the form of a policy surcharge and reflect the collection of these assessments as fully earned credits to operations in the period collected. The collection of these fees, however, may adversely affect our overall marketing strategy due to the competitive landscape in Florida. As a result, the impact of possible future assessments on our balance sheet, results of operations or cash flow are indeterminable at this time.

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Our investment portfolio may suffer reduced returns, or losses, which would significantly reduce our earnings.

Like other insurance companies, we depend on income from our investment portfolio for a portion of our earnings. During the time that normally elapses between the receipt of insurance premiums and any payment of insurance claims, we invest the premiums received, together with our other available capital, primarily in debt securities and to a lesser extent in equity securities, in order to generate investment income.

Our investment portfolio ~~contains~~consists primarily of interest rate sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates. A significant increase in interest rates or decrease in credit worthiness could have a material adverse effect on our financial condition or results of operations. Declines in interest rates, such as occurred during 2020, could have an adverse effect on our investment income.

~~We are required~~ Further, if periods of net cash outflows arise, whether due to review our investment portfolio to evaluate and assess known and inherent risks associated with each investment type. We revise our evaluations and assessments as conditions change and new information becomes available. This may result in changes in an other-than-temporary impairment (“OTTI”) in our consolidated statements of income. We base our assessment of whether an OTTI has occurred on our case-by-case evaluation of the underlyingcatastrophe losses or for other reasons, ~~for the decline in fair value. Because historical trends may not be indicative of future impairments and additional impairments~~we may need to ~~be recorded~~draw down our bond portfolio, reducing the interest income we will earn in ~~the~~ future ~~no assurances can be providedthat we have accurately assessed whether any such impairment is temporary or other-than-temporary or that we have accurately recorded amounts for an OTTI in our financial statements.~~periods.

In addition, volatile and illiquid markets increase the likelihood that investment securities may not behave in historically predictable manners, resulting in fair value estimates that may be overstated compared with actual amounts that could be realized upon disposition or maturity of the security. The effects of market volatility, ~~and~~ declining economic conditions, such as a US or global economic slowdown, whether due to coronavirus, or other factors, could adversely impact the fair value or credit quality of securities in our portfolio and may have unforeseen consequences on the ~~credit quality,~~ liquidity and financial stability of the issuers of securities we hold. Such deteriorations in financial condition can occur rapidly, leaving us unable to react to such a scenario in a prudent manner consistent with our historical practices in dealing with more orderly markets. This, in turn, could adversely and negatively affect our results of operations, liquidity or financial condition.

Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.

We must accurately evaluate and pay claims that are made under our policies. Many factors affect our ability to pay claims accurately, including the training and experience of our claims representatives, the culture of our claims organization and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to pay claims accurately could lead to material litigation, undermine our reputation in the marketplace, impair our image and negatively affect our financial results.

In addition, if we are not able to handle an increasing number of claims as a result of a catastrophic event, or if we do not train new claims adjusting employees effectively or lose a significant number of experienced claims adjusting employees, our claims department’s ability to handle an increasing workload could be adversely affected. In addition to potentially requiring that growth be slowed in the affected markets, we could suffer decreased quality of claims work, which in turn could lower our operating margins.

~~Our insurance companies are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.~~

If we fail to meet the applicable RBC or minimum statutory capital requirements imposed by the laws of Florida or other states where we do business, we would be required to raise additional capital and we could be subject to further examination or corrective action imposed by state regulators, including limitations on out writing of additional business, additional state supervision, or liquidation. Similarly, an increase in existing RBC requirements or minimum statutory capital requirements, such as the catastrophic risk component of RBC may require us to increase our statutory capital levels.

~~Ratios calculated based on RBC tend to be a key criteria in the assignment of ratings by insurance rating agencies.~~

-1419-

Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance industry.

Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns characterized by periods of significant competition in pricing and underwriting terms and conditions, which is known as a “soft” insurance market, followed by periods of lessened competition and increasing premium rates, which is known as a “hard” insurance market. Although an individual insurance company’s financial performance is dependent upon its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern, with profitability generally increasing in hard markets and decreasing in soft markets. At present, on a consolidated basis, we continue to file and obtain rate increases as the current Florida property and casualty market continues to ~~harden, but remains competitive.~~harden. Elsewhere in the United States, we are experiencing ~~a stable market, but~~ increased competition. We cannot predict how long these market conditions will persist. Although we do not compete entirely on price or targeted market share, negative market conditions may impair our ability to write insurance at rates that we consider appropriate relative to the risk assumed. If we cannot write insurance at appropriate rates, our revenues and operating performance may be adversely affected.

Homeowners insurance operations outside of Florida may not be profitable.

Our insurance subsidiaries currently conduct business in a limited number of states in addition to Florida, with concentrations of business in Texas, Louisiana and South Carolina and to a lesser extent in Alabama and Mississippi. Any single catastrophic occurrence or other condition affecting losses in these states could adversely affect our operating results. We have currently slowed our expansion of admitted homeowners property and casualty programs into other states, but may continue in the future as opportunities arise. Expanding our operations to additional states present risks similar to those we currently face with our existing operations, including risks associated with the inability to market adequately priced policies, inadequate commission structures, and overpriced or unavailable catastrophe reinsurance for wind events. Additionally, we would become subject to the insurance regulators in each state and the laws and regulations designed to regulate the insurance products and operations of new and existing insurance companies under their respective authorities. As a result, there can be no guarantees that state regulators will allow us to do business in those states or, if we are approved to operate in a state, that our operations will be profitable in that state.

If we determine to expand to additional states or to expand the types of insurance products we offer, we may incur additional costs and may not obtain the necessary regulatory approvals.

~~Although we continue to exit our automobile and commercial general liability lines of insurance, we~~We may ~~determine~~decide to expand our product offerings in the future by underwriting additional insurance products and programs, and marketing them through our distribution network. Expansion of our product offerings will result in increases in expenses due to additional costs incurred in actuarial rate justifications, software and personnel. Offering additional insurance products may also require regulatory approval, further increasing our costs. Before we can write insurance in a new state, or a sell a new insurance product in a state, we must obtain a license or other approvals from the applicable state insurance regulators. These state insurance regulators may request additional information, add conditions to the license that we find unacceptable, or deny our application. This would delay or prevent us from operating in that state or offering that new product. There can be no assurance that we would be successful bringing new insurance products to our markets in a manner that is profitable.

~~New homeowners insurance operations outside of Florida may not be profitable.~~

We plan to continue the expansion of admitted homeowners property and casualty programs into other states as opportunities arise. Expanding our operations to additional states present risks similar to those we currently face with our existing operations, including risks associated with the inability to market an adequately priced policy, inadequate commission structures, and overpriced or unavailable catastrophic reinsurance for wind events. Additionally, we would become subject to the insurance regulators in each state and the laws and regulations designed to regulate the insurance products and operations of new and existing insurance companies under their respective authority. As a result, there can be no guarantees that state regulators will allow us to do business in those states or, if we are approved to operate in a state, that our operations will be profitable in that state.

Our success depends on our ability to accurately price the risks we underwrite.

The results of operations and the financial condition of our insurance ~~company~~companies depend on our ability to underwrite and set premium rates accurately for a wide variety of risks. Rate adequacy is necessary to generate sufficient premiums to pay losses, LAE and underwriting expenses and to earn a profit. In order to price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully and price our products accurately is subject to a number of risks and uncertainties, some of which are outside our control, including:

•the availability of sufficient reliable data and our ability to properly analyze available data;

•the uncertainties that inherently characterize estimates and assumptions;

•our selection and application of appropriate rating and pricing techniques;

•changes in legal standards, claim settlement practices, medical care expenses and restoration costs;

•regulatory restrictions, including, without limitation regulatory approval of rates sought;and

•legislatively imposed consumer initiatives.

-20-

Consequently, we could underprice risks, which would negatively affect our profit margins, or we could overprice risks, which could reduce our sales volume and competitiveness. In either event, the profitability of our insurance ~~company~~companies could be materially and adversely affected.

-15-

Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable policies or obtain adequate reinsurance, which could limit or halt our growth and harm our business.

Third-party rating agencies assess and rate the ability of insurers to pay their claims. The insurance industry uses financial strength ratings to assess the financial strength and quality of insurers. Ratings are based on criteria established by the rating agencies and reflect evaluations of each insurer’s profitability, debt and cash levels, customer base, adequacy and soundness of reinsurance, quality and estimated market value of assets, adequacy of reserves, capital and RBC ratios, and management. Ratings are also based upon factors of concern to agents, reinsurers and policyholders and are not directed toward the protection of investors, such as purchasers of our common stock.

Our ability to compete successfully in states outside of Florida to expand our business footprint may also be negatively affected by our lack of an A.M. Best company rating of our financial strength. Although our insurance subsidiaries have a Demotech rating of “A” (Exceptional), which is generally accepted in Florida and certain other states, a rating by A.M. Best is more widely accepted outside of Florida and may cause customers and agents to prefer a policy written by an A.M. Best-rated company over a policy written by us. In addition, some mortgage companies outside of Florida may require homeowners to obtain property insurance from an insurance company with a minimum A.M. Best rating.

The withdrawal or downgrade of our ratings could limit or prevent us from writing or renewing desirable insurance policies, from competing with insurers who have higher ratings, or from obtaining adequate ~~reinsurance, or from borrowing on a line of credit or cause us to default on financial covenants contained in certain of our debt financing agreements.~~reinsurance. The withdrawal or downgrade of our ratings could have a material adverse effect on our results of operations and financial position because our insurance products might no longer be acceptable to the secondary marketplace and mortgage lenders. Furthermore, a withdrawal or downgrade of our ratings could prevent independent agents from selling and servicing our insurance products or could increase the commissions we must pay to these agents.

We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain independent and general agents, our revenues would be negatively affected.

We currently market and distribute our products and services through contractual relationships with a network of independent agents and a select number of general agents. Our independent agents are our primary source for our property and liability insurance policies. Many of our competitors also rely on independent agents. As a result, we must compete with other insurers for independent agents’ business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher commissions to their agents. If our products, pricing and commissions do not remain competitive, we may find it more difficult to attract business from independent agents to sell our products. A material reduction in the amount of our products that independent agents sell or a material reduction in the number of independent agents with whom we maintain a relationship could negatively affect our results of operations and financial condition.

We are a party to an insurance agency master agreement with ISA, an affiliate of Allstate, pursuant to which we are authorized by ISA to appoint Allstate agents to offer our homeowners ~~and commercial general liability~~ insurance products to consumers in Florida. Since that time, our homeowners premiums and the percentage of homeowners premiums attributable to Allstate agents has increased rapidly. During the years ended December 31, 2020, 2019 and 2018, ~~2017~~20.7%, 23.2% and ~~2016,~~ 23.8%~~, 23.8% and 24.1%~~, respectively, of the homeowners premiums we underwrote were from Allstate’s network of Florida ~~agents, and this~~agents. This concentration may ~~continue to increase.~~increase further. An interruption or change in our relationship with ISA could have a material adverse effect on the amount of premiums we are able to write, as well as our results of operations.

We are a party to a managing general underwriting agreement with SageSure to facilitate growth in our FNIC homeowners business outside of Florida. As a percentage of our total homeowners premiums, ~~15.0%~~25.5%, ~~10.2%~~23.1% and ~~6.9%~~15.0%, for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016,~~2018, respectively, were underwritten by SageSure. The profitability of the business we obtain outside of Florida through this agreement will depend substantially on the quality of underwriting performed by SageSure. An interruption in SageSure’s services for us, or issues with the quality of SageSure’s underwriting, could have a material adverse effect on the profitability of the business obtained through this relationship.

-21-

Certain of our agreements with agents provide that the renewal rights for policies written under those agreements belong to the agents, making it more difficult for us to maintain the policies written and the premium income generated through these relationships.

Our agreements with ISA and SageSure provide that ISA and SageSure, respectively, own the expirations of the policies underwritten under these agreements. This means that we do not have the right to solicit renewals of these policies. As a result, we may be less able to maintain the policies and the corresponding premium income from renewals of policies written by us under these agreements.

-16-

Cybersecurity breaches and other disruptions could compromise our information and expose us to loss of data or liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we store sensitive data, including our proprietary business information and personally identifiable information of our insureds and employees, on our networks. The secure processing and maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. We have also promoted the ability of our team to work remotely, particularly through the COVID-19 pandemic, which could make our systems more vulnerable to breaches. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, or stolen. Any such access, disclosure or loss of information could result in legal claims against us, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations, and damage our reputation, which could materially adversely affect our results of operations. Although we have implemented security measures to protect our systems from viruses and other intrusions by third parties, there can be no assurances that these measures will be effective. To mitigate these costs, we carry a cyber-liability insurance policy. Our insurance may not be sufficient to protect against all financial and other loss. Additionally, this policy will not cover us for security breaches, data loss, or cyber-attacks experienced by our third-party business partners who have access to our customer, agent, or employee data.

Our business could be materially and adversely affected by a security breach or other attack involving the systems of one or more of our business partners or vendors.

We conduct significant business functions and computer operations using the systems of third-party business partners and vendors, who provide software, hosting, communication, and other computer services to us. Our networks could be compromised by the errors or actions of our vendors and other business partners with legitimate access to our systems. If one of our vendors or other business partners are the subject of a security breach or cyber-attack, such breach or attack may result in improper or unauthorized access to our systems, and the loss, theft or unauthorized publication of our information or the confidential information of our customers, agents or employees, notwithstanding our substantial efforts to protect our systems and sensitive or confidential information. An unauthorized disclosure or loss of policyholder or employee information or other sensitive or confidential information, including by cyber-attack or other security breach, could cause a loss of data, give rise to remediation or other expenses, expose us to liability under federal and state laws, and subject us to litigation and investigations, which could have an adverse effect on our business, cash flows, financial condition and results of operations. While we expend significant resources on these defensive measures, there can be no assurance that we will be successful in preventing attacks or detecting and stopping them once they have begun.

We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our operations.

Our business is highly dependent upon the successful and uninterrupted functioning of our current information technology and telecommunications systems. We rely on these systems to process new and renewal business, provide customer service, make claims payments and facilitate collections and cancellations, as well as to perform actuarial and other analytical functions necessary for pricing and product development. As a result, the failure of these systems could interrupt our operations and adversely affect our financial results.

Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our business and adversely impact our financial results.

We operate in highly competitive markets and face competition from national, regional and residual market insurance companies in the homeowners ~~commercial general liability, and automobile~~ markets, many of whom are larger, have greater financial and other resources, have higher financial strength ratings and offer more diversified insurance coverage. Our competitors include companies that market their products through agents, as well as companies that sell insurance directly to their customers. Large national captive writers may have certain competitive advantages over independent agency writers, including increased name recognition, increased loyalty of their customer base and reduced policy acquisition costs. We may be forced to reduce our premiums or increase our commissions significantly to compete, which could make

-22-

us less profitable and have a material adverse effect on our business, results of operations and financial condition. If we do not meet the prices offered by our competitors, we may lose business in the short term, which could also result in a material adverse effect on our business, results of operations and financial condition.

Our executive management team is critical to the strategic direction of our company. If there were an unplanned loss of service by any of our officers our business could be harmed.

We depend, and will continue to depend, on the services of our executive management team, which includes Michael H. Braun, Chief Executive Officer and President, and others. Our success also will depend in part upon our ability to attract and retain qualified executive officers, experienced underwriting talent and other skilled employees who are knowledgeable about our business. If we were to lose the services of one or more members of our executive management team, our business could be adversely affected. Although we have employment agreements with certain of our executive officers, any unplanned loss of service could substantially harm our business.

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We have identified a material weakness in our internal controls over financial reporting, which we are in the process of remediating. As a result, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on the internal controls over financial reporting. Because we have a material weakness in our internal controls over financial reporting as described in more detail in Part II, Item 9A "Controls and Procedures" of this Annual Report, we may not detect errors on a timely basis and our financial statements may be materially misstated.

Due to our identified material weaknesses in our internal controls over financial reporting, we may not be able to comply with the requirements of Section 404 in a timely manner as currently we are unable to assert that our internal controls over financial reporting are effective; therefore, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. We could also become subject to investigations by the SEC, Nasdaq or other regulatory authorities, which could require additional financial and management resources to address.

Our reliance on insurance scoring in pricing and underwriting certain of our insurance policies may be limited by changes in applicable law, regulation or policies of regulatory authorities, which could cause our pricing and underwriting to be less effective.

We rely on insurance scoring, which combines credit scores and claims history of persons applying for insurance policies with us, in pricing and underwriting these policies. We believe that the use of this information, together with other relevant information provided to us in the application process, is important to our ability to effectively price our insurance products and determine the risks we are willing to underwrite. We also believe that we use this information in accordance with applicable law, regulations and policies. From time to time, however, the use of this information has come under review by insurance and other regulators. If the use of this information is limited or prohibited, our pricing and underwriting of our insurance policies may be less effective, with the result that our results of operations may be adversely affected.

Risks Related to an Investment in Our Shares

Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price of our common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.

The market price of our common stock has experienced, and may continue to experience, significant volatility from time to time. Such volatility may be affected by various factors and events, such as:

•our operating results, including a shortfall in operating revenue or net income from that expected by securities analysts and investors;

•recognition of large unanticipated accounting charges, such as related to a loss reserve ~~enhancement;~~strengthening;

•changes in securities analysts’ estimates of our financial performance or the financial performance of our competitors or companies in our industry generally;

~~Failure to successfully integrate~~

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•a downgrade of our Demotech rating or the ~~operations~~rating of ~~the Maison Companies into those of the Company;~~our outstanding debt;

~~Demotech downgrade;~~

•the announcement of a material event or anticipated event involving us or our industry or the markets in which we operate;

•the issuance of a significant number of shares;and

•the other risk factors described in this Annual Report, the accompanying notes and the documents incorporated by reference herein.

In recent years, the U.S. stock market has experienced extreme price and volume fluctuations, which have sometimes affected the market price of the securities issued by a particular company in a manner unrelated to the operational performance of the ~~company.~~Company. This type of market effect could impact our common stock price as well. The volatility of our common stock means that the price of our common stock may have declined substantially at such time as you may look to sell your shares of our common stock. If our share price decreases, the value of your investment could decline.

The removal of our common stock from the Russell 3000® and Russell 2000® Indexes could result in certain investors selling our shares and the market for our common stock becoming limited, with the result that the price at which you can sell your shares may decrease.

Because of the recent decline in the market prices of our common stock and the expected significant increase in the expected minimum market capitalization required for continued inclusion in the Russell 3000® and Russell 2000® Indexes, our market capitalization may no longer meet the expected minimum market capitalization required for continued inclusion in the Russell indexes. As a result, index funds, institutional investors and other investors attempting to track the composition of those indexes may be required to sell our common stock, which would adversely impact the price and frequency at which it trades.

We have authorized but unissued preferred stock, which could affect rights of holders of common stock.

Our articles of incorporation authorize the issuance of preferred stock with designations, rights and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. In addition, the preferred stock could be issued as a method of discouraging a takeover attempt. Although we do not intend to issue any preferred stock at this time, we may do so in the future.

As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and dividends to the holding company as the primary source of our income.

We are an insurance holding company whose primary assets are our subsidiaries. Our operations, and our ability to pay dividends or service our debt, are limited by the earnings of our subsidiaries and their payment of their earnings to us in the form of management fees, commissions, dividends, loans, advances or the reimbursement of expenses. These payments can be made only when our subsidiaries have adequate earnings. In addition, dividend payments made to us by our insurance subsidiaries are restricted by ~~Florida law~~the applicable state laws governing ~~the~~our insurance ~~industry.~~subsidiaries. Generally, ~~Florida law limits~~these laws limit the dividends ~~payable~~permitted to be paid by insurance companies under complicated formulas based on the ~~subsidiaries’~~companies’ available capital and earnings.

Payment of dividends in the future will depend upon our earnings and financial position and such other factors, as our board of directors deems relevant.

Our articles of incorporation, our bylaws and Florida law provide for anti-takeover provisions that could make it more difficult for a third party to acquire us.

Provisions of our articles of incorporation, our bylaws and Florida law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock, or could limit the ability of our shareholders to approve transactions that they may deem to be in their best interests.

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Future sales of our common stock by our existing shareholders in the public market, or the possibility or perception of such future sales, or sales of additional shares of common stock by us, could depress our stock price.

Investors currently known to be the beneficial owners of more than 5.0% of our common stock hold approximately ~~45%~~60% of our outstanding shares. Sales of a substantial number of shares of our common stock in the public market or otherwise by our existing shareholders, or the possibility or perception that such sales could occur, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.

At close of the acquisition of the Maison Companies, we will issue $25.5 million in shares of the Company’s common stock to PIH. The resale of these shares to be issued will be subsequently registered and will be subject to a five-year standstill agreement.

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In addition, we may issue additional shares of our common stock from time to time in the future in amounts that may be significant. The sale of substantial amounts of our common stock by us, or the perception that these sales may occur, could adversely impact our stock price. Refer to Note 3 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report for information regarding ouracquisition of the Maison Companies.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our executive ~~offices are~~office is located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 in a 64,727 square foot office facility. Our lease for this office space is scheduled to expire in October 2028.

We also lease office space located at 7861 Woodland Center Boulevard, Tampa, Florida 33614 in a 5,880 square foot office facility, which serves as the principal office space for our subsidiary, MIC. Our lease for this office space is scheduled to expire in January 2025.

Refer to Note 912 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for further information regarding our leases.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of conducting our business, we become involved in various legal actions and claims. Litigation is subject to many uncertainties and we may be unable to accurately predict the outcome of such matters, some of which could be decided unfavorably to us. Management does not believe the ultimate outcome of any pending matters of this nature would be material.

The Company is a party to a Co-Existence Agreement effective as of August 30, 2013 (the “Co-Existence Agreement”) with Federated Mutual Insurance Company (“Mutual”) pursuant to which the Company agreed to certain restrictions on its use of the word “FEDERATED” without the word “NATIONAL” when referring to FNHC and FedNat Insurance Company. In response to Mutual’s allegations that the Company’s use of the word “FED” as part of the Company’s federally registered “FEDNAT” trademark infringes on Mutual’s federal and common law trademark rights, which the Company disputed, on July 21, 2016, the Company filed a declaratory judgment action for non-infringement of trademark in the U.S. District Court for the Southern District of Florida. Specifically, the Company sought a declaration that its federally registered trademark "FEDNAT" does not infringe any alleged trademark rights of Mutual and that Mutual does not own any trademark rights to the name or mark "FED" in connection with insurance services outside of Owatonna, Minnesota. Mutual made a demand for arbitration in July 2016, and the district court referred the dispute to arbitration under the terms of the Co-Existence Agreement. On February 16, 2018, the arbitrator determined that the Company’s “FEDNAT” trademark does not infringe on Mutual’s trademarks and does not violate the Co-Existence Agreement. As a result, the Company has continued the process of re-branding the Company and certain of its subsidiaries to use the “FEDNAT” name. The arbitrator also required the Company to cease using the Federated National name within 90 days. FNHC has asserted that the artibtrator exceeded his authority by ordering a name change within 90 days. FNHC attempted, but was unable, to reach agreement with Mutual as to the timing of the name change ordered by the arbitrator. Therefore, two proceedings have been filed as a result. Mutual filed a petition to confirm the award in federal court in the District of Minnesota. The Company moved to dismiss that action on the bases that the Minnesota court does not have subject matter jurisdiction and may not exercise personal jurisdiction over FNHC. The Company also filed a motion to confirm the arbitration award in part and to vacate it in part in federal court in the Northern District of Illinois, which is where the arbitrator is located, to confirm that part of the award ruling that the Company’s “FEDNAT” trademark does not violate Mutual’s trademarks or the Co-Existence Agreement, and seeks to vacate that portion of the award that requires the Company to cease using the “Federated” in its name within 90 days on the basis that arbitrator exceeded his authority by requiring the Company to change its name in 90 days. The District Court in Minnesota affirmed the arbitration award, including the requirement for the name change in 90 days. FNHC has filed an appeal of the order to the U.S. Court of Appeals for the Eighth Circuit; the parties have completed briefing the appeal, and the Eighth Circuit has set oral argument for March 13, 2019. The Eighth Circuit will render a decision some time following oral argument. The District Court in the Northern District of Illinois has been asked to stay its proceedings pending the outcome of the Company’s appeal to the Eighth Circuit. There can be no assurances as to the ultimate outcome of this matter.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed for trading on the NASDAQ Global Market under the symbol “FNHC.”

HOLDERS

As of March ~~1, 2019,~~5, 2021, there were ~~118~~138 holders of record of our common stock. ~~We believe that the number of beneficial owners of our common stock is in excess of 2,500.~~

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table summarizes our equity compensation plans as of December 31, ~~2018.~~2020. All equity compensation plans were approved by our shareholders. We have not granted any options, warrants or rights to our shareholders outside of these equity compensation plans.

Equity Compensation Plan Information

Number of securities

remaining available for

Number of securities to

Weighted-average

future issuance under

be issued upon exercise of

exercise price of

equity compensation plans

outstanding options,

(excluding securities

warrants and rights

reflected in column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by shareholders

25,417

4.01

524,659

Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan category (a) (b) (c)
Equity compensation plans approved by shareholders 39,017
3.80
262,334

Refer to Note 1013 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information regarding our equity compensation.

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STOCK PERFORMANCE GRAPH

The following graph shows the cumulative total shareholder return on our common stock over the last five fiscal years as compared with the total returns of the NASDAQ Composite Index and the SNL Property & Casualty Insurance Index. In accordance with SEC rules, this graph includes indices that we believe are comparable and appropriate.



FedNat Holding Company

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	Period Ending							Period Ending
	12/31/2013	12/31/2014	12/31/2015	12/31/2016	12/31/2017	12/31/2018		12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019	12/31/2020
Index							Index
FedNat Holding Company	100.00	165.73	203.99	130.61	118.07	144.41	FedNat Holding Company	100.00	63.85	57.72	70.56	60.23	22.24
NASDAQ Composite	100.00	114.75	122.74	133.62	173.22	168.30	NASDAQ Composite	100.00	108.87	141.13	137.12	187.44	271.64
SNL Insurance P&C	100.00	114.85	118.80	140.21	160.30	154.12	SNL Insurance P&C	100.00	118.02	134.93	129.73	152.23	154.96

•Expected loss ratios represent management’s expectation of losses, in relation to earned premium, at the time business is written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. For certain longer-tailed reinsurance business that are typically lower frequency, high severity classes, expected loss ratios are often used for the last several accident years or underwriting years, as appropriate.

-47-

•Rate of loss cost inflation (or deflation) represents management’s expectation of the inflation associated with the costs we may incur in the future to settle claims. Expected loss cost inflation is particularly important for longer-tailed classes.

•Reported and paid loss emergence patterns represent management’s expectation of how losses will be reported and ultimately paid in the future based on the historical emergence patterns of reported and paid losses and are derived from past experience of our subsidiaries, modified for current trends. These emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value.

In the absence of sufficiently credible internally-derived historical information, each of the above actuarial assumptions may also incorporate data from the insurance industries as a whole, or peer companies writing substantially similar coverages. Data from external sources may be used to set expectations, as well as assumptions regarding loss frequency or severity relative to an exposure unit or claim, among other actuarial parameters. Assumptions regarding the application or composition of peer group or industry reserving parameters require substantial judgment.

Loss Frequency and Severity

Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described above. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic conditions or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to our insurance companies. The length of the loss reporting lag affects their ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags), as well as the amount of reserves needed for IBNR. If the actual level of loss frequency and severity is higher or lower than expected, the ultimate losses will be different than management’s estimates.

Prior Year Development

Our insurance companies continually evaluate the potential for changes, both favorable and unfavorable, in their estimates of their loss and LAE liabilities and use the results of these evaluations to adjust both recorded liabilities and underwriting criteria. With respect to liabilities for unpaid losses and LAE established in prior years, these liabilities are periodically analyzed and their expected ultimate cost adjusted, where necessary, to reflect favorable or unfavorable development in loss experience and new information, including, for certain catastrophe events, revised industry estimates of the magnitude of a catastrophe. Adjustments to previously recorded liabilities for unpaid losses and LAE, both favorable and unfavorable, are reflected in our financial results in the periods in which these adjustments are made and are referred to as prior accident year reserve development. We adjusted our prior year loss and LAE reserve estimates based on current information that differed from previous assumptions made at the time such loss and LAE reserves were previously estimated.

Refer to Note 1 and Note 69 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information regarding our losses and LAE.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date. ~~Such a change occurred in the fourth quarter of 2017.~~ Refer to Note 811 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information regarding our income taxes.

-40-

Recent Accounting Pronouncements

Refer to Note 2 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for a discussion of recent accounting pronouncements and their effect, if any, on our company.

-48-

Off-Balance Sheet Transactions

For the years ended December 31, ~~2018~~2020 and ~~2017,~~2019, we did not have any off balance sheet transactions.

ITEM 7A. 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 December 31, ~~2018,~~2020, approximately ~~94%~~99% of investments were in debt securities and cash and cash equivalents, which are considered to be either held-to-maturity or available-for-sale, based upon our estimates of required liquidity. ~~Approximately 98% of the~~Our debt securities are considered available-for-sale and are ~~marked to market.~~marked-to-market. We may in the future consider additional debt securities to be held-to-maturity and carried at amortized cost. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.

Principal cash flows and the related weighted average interest rate by expected maturity date, based upon par values, for the financial instruments sensitive to changes in interest rates, includes the following:

໿


																						Carrying
	2021			2022			2023			2024			2025			Thereafter			Total			Amount
	(Dollars in thousands)
Principal amount by expected maturity:
United States government obligations and authorities	$	9,473		$	13,345		$	6,100		$	200		$	3,850		$	4,155		$	37,123		$	38,512
Obligations of states and political subdivisions	755			3,525			1,135			995			3,605			10,940			20,955			22,264
Corporate	15,039			38,604			21,554			16,783			27,876			91,018			210,874			228,717
International	2,098			8,764			1,465			6,099			300			7,122			25,848			27,643
Collateralized mortgage obligations	3,746			7,025			46,706			32,259			30,721			39,936			160,393			171,074
Total investments	$	31,111		$	71,263		$	76,960		$	56,336		$	66,352		$	153,171		$	455,193		$	488,210

Weighted average interest rate by expected maturity:
United States government obligations and authorities	2.67		%	1.58		%	2.47		%	2.50		%	1.45		%	0.77		%	1.90		%
Obligations of states and political subdivisions	2.08		%	3.57		%	2.98		%	3.10		%	2.02		%	2.69		%	2.74		%
Corporate securities	2.54		%	2.82		%	3.32		%	3.34		%	2.82		%	3.34		%	3.11		%
International securities	2.08		%	2.07		%	4.04		%	2.25		%	2.85		%	4.07		%	2.79		%
Collateralized mortgage obligations	3.47		%	3.14		%	3.33		%	3.77		%	2.68		%	2.62		%	3.11		%
Total investments	2.65		%	2.56		%	3.26		%	3.46		%	2.63		%	3.07		%	2.98		%

-49-

Carrying
2019 2020 2021 2022 2023 Thereafter Total Amount
(Dollars in thousands)
Principal amount by expected maturity:
United States government obligations and authorities $ 1,105
$ 7,975
$ 125
$ 14,425
$ 7,360
$ 17,420
$ 48,410
$ 47,878
Obligations of states and political subdivisions 1,575
1,500
—
4,800
310
1,490
9,675
9,767
Corporate 13,298
23,309
26,150
61,818
26,323
98,941
249,839
245,264
International 2,138
3,181
3,434
5,813
1,015
7,181
22,762
22,330
Collateralized mortgage obligations 2,746
1,309
1,242
3,504
4,230
93,522
106,553
108,528
Total investments $ 20,862
$ 37,274
$ 30,951
$ 90,360
$ 39,238
$ 218,554
$ 437,239
$ 433,767

Weighted average interest rate by
  expected maturity:

United States government
  obligations and authorities
2.60 % 1.93 % 2.53 % 1.66 % 2.65 % 2.32 % 2.12 %
Obligations of states and
  political subdivisions
5.32 % 2.35 % — % 3.17 % 3.54 % 3.56 % 3.47 %
Corporate securities 4.24 % 3.12 % 3.71 % 3.28 % 3.79 % 3.78 % 3.62 %
International securities 5.61 % 3.35 % 2.91 % 3.10 % 3.41 % 4.20 % 3.70 %
Collateralized mortgage obligations 2.92 % 3.24 % 3.30 % 3.51 % 3.75 % 3.90 % 3.84 %
Total investments 4.20 % 2.86 % 3.60 % 3.02 % 3.56 % 3.73 % 3.51 %

-41-

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

-4250-

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

FedNat Holding Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of FedNat Holding Company and subsidiaries (the “Company”) as of

December 31, ~~2018~~2020 and ~~2017,~~2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, ~~2018,~~2020, and the related notes and the financial statement schedules listed in the index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, ~~2018~~2020 and ~~2017,~~2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2018,~~2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, ~~2018,~~2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March ~~7, 2019~~29, 2021 expressed an ~~unqualified~~adverse opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.


						Valuation of incurred but not reported reserves
Description of the Matter						At December 31, 2020, the Company’s reserve for losses and loss adjustment expense ("LAE") balance was $540.4 million of which a significant portion is incurred but not reported reserves (“IBNR”). The carrying amount represents management’s best estimate of the ultimate liability, which in turn is composed of the Company’s assessment of claims pending and the development of prior years’ loss liability, including liabilities based upon individual case estimates for reported losses and LAE and estimates of IBNR. As described in Note 9 of the consolidated financial statements, the establishment of loss reserves is an inherently uncertain process and there is significant uncertainty in determining management’s best estimate of the ultimate liability which is used to determine the IBNR reserves. In particular, the estimate is subject to a number of variables including loss frequency and severity, payment patterns, expected loss ratios and the weighting of the four actuarial methods used for each accident year and line of business. Auditing management’s best estimate of IBNR was complex due to the judgmental nature of the significant assumptions used in the valuation of the estimate. The significant judgment was primarily due to the sensitivity of management’s estimate to the actuarial methods applied and the assumptions used in the determination of the loss factors and ultimate costs.

-51-


How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the process to estimate the IBNR reserves. This included, among others, controls over the review and approval processes that management has in place for the methods and assumptions used in estimating the IBNR reserves. To test the IBNR reserves, our procedures included among others, the involvement of our actuarial specialists to assess the selection and the weighting of actuarial methods used by management with those methods and weightings used in prior periods and those used in the industry. Additionally, to evaluate the significant assumptions used in the actuarial methods, we compared the significant assumptions, including severity, frequency, payment patterns and expected loss ratios to factors historically used. We performed a review of historical results of the development of the loss and loss adjustment expense reserves related to prior years. We also independently calculated a range of reasonable reserve estimates and compared the range of reasonable reserve estimates to management’s recorded best estimate and performed a review of the historical results of the development of the estimate
						Reinsurance
Description of the Matter						At December 31, 2020, the Company’s reinsurance recoverable, net of allowance, was $413.0 million. As discussed in Note 6 to the consolidated financial statements, during 2020 the Company expanded its reinsurance program that provides quota share and excess of loss coverage for the risks inherent in the business written and the concentration of the Company’s exposure in certain geographies. Certain of these reinsurance arrangements are complex as they contain risk limiting provisions. To qualify as reinsurance for accounting purposes, a contract must embody substantive risk transfer, which is defined as the reasonable possibility that the reinsurer could experience a significant loss on the treaty. Auditing the reinsurance arrangements was complex due to contractual provisions in certain of the reinsurance arrangements that limit the extent or timing of the net loss that the reinsurers can experience and the judgmental nature of the significant assumptions included in the assessment to determine risk transfer.
How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the reinsurance process including, among others and controls related to assessing risk transfer.
						Our audit procedures included, among others, gaining an understanding of the terms of the reinsurance agreements with the counterparties and evaluating management’s risk transfer assessment.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2015.

Charlotte, North Carolina

March ~~7, 2019~~29, 2021

-4352-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

໿


	December 31,
	2020		2019
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $473,126 and $512,645, respectively)	$	488,210	$	526,265
Debt securities, held-to-maturity, at amortized cost	0		4,337
Equity securities, at fair value	3,157		20,039
Total investments	491,367		550,641
Cash and cash equivalents	102,367		133,361
Prepaid reinsurance premiums	278,272		145,659
Premiums receivable, net of allowance of $233 and $159, respectively	50,803		41,422
Reinsurance recoverable, net of allowance of $65 and $0, respectively	413,026		209,615
Deferred acquisition costs and value of business acquired, net	25,405		56,136
Current and deferred income taxes, net	35,035		2,552
Goodwill	0		10,997
Other assets	32,262		28,633
Total assets	$	1,428,537	$	1,179,016

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves	$	540,367	$	324,362
Unearned premiums	366,789		360,870
Reinsurance payable and funds withheld liabilities	202,827		102,467
Long-term debt, net of deferred financing costs of $1,317 and $1,478, respectively	98,683		98,522
Deferred revenue	7,187		6,856
Other liabilities	54,524		37,246
Total liabilities	1,270,377		930,323

Commitments and contingencies (see Note 12)

Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized	0		0
Common stock, $0.01 par value: 25,000,000 shares authorized; 13,717,908 and 14,414,821 shares issued and outstanding, respectively	137		144
Additional paid-in capital	169,298		167,677
Accumulated other comprehensive income (loss)	11,386		10,281
Retained earnings (deficit)	(22,661)		70,591


Total shareholders’ equity	158,160		248,693
Total liabilities and shareholders' equity	$	1,428,537	$	1,179,016

December 31,
2018 2017
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $433,664 and $422,300, respectively) $ 428,641
$ 423,238
Debt securities, held-to-maturity, at amortized cost 5,126
5,349
Equity securities, at fair value 17,758
15,434
Total investments (including $0 and $26,284 related to the VIE, respectively) 451,525
444,021
Cash and cash equivalents (including $0 and $14,211 related to the VIE, respectively) 64,423
86,228
Prepaid reinsurance premiums 108,577
135,492
Premiums receivable, net of allowance of $77 and $70, respectively (including $0 and $1,184 related to the VIE, respectively) 29,791
46,393
Reinsurance recoverable, net 211,424
124,601
Deferred acquisition costs, net 39,436
40,893
Income taxes, net 5,220
9,817
Property and equipment, net 4,819
4,025
Other assets (including $0 and $2,322 related to the VIE, respectively) 10,156
13,403
Total assets $ 925,371
$ 904,873

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves $ 296,230
$ 230,515
Unearned premiums 281,992
294,423
Reinsurance payable 63,599
71,944
Long-term debt, net of deferred financing costs of $596 and $749, respectively 44,404
49,251
Deferred revenue 4,585
6,222
Other liabilities 19,302
25,059
Total liabilities 710,112
677,414

Commitments and contingencies (see Note 9)

Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized —
—
Common stock, $0.01 par value: 25,000,000 shares authorized; 12,784,444 and 12,988,247 shares issued and outstanding, respectively 128
130
Additional paid-in capital 141,128
139,728
Accumulated other comprehensive income (loss) (3,750 ) 1,770
Retained earnings 77,753
70,009
Total shareholders’ equity attributable to FedNat Holding Company shareholders 215,259
211,637
Non-controlling interest —
15,822
Total shareholders’ equity 215,259
227,459
Total liabilities and shareholders' equity $ 925,371
$ 904,873

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

-4453-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)


	Year Ended December 31,
	2020		2019		2018
Revenues:
Net premiums earned	$	364,134	$	363,652	$	355,257
Net investment income	11,786		15,901		12,460
Net realized and unrealized investment gains (losses)	18,032		7,084		(4,144)
Direct written policy fees	13,970		10,200		13,366
Other income	23,941		18,124		19,154
Total revenues	431,863		414,961		396,093

Costs and expenses:
Losses and loss adjustment expenses	376,449		273,080		228,416
Commissions and other underwriting expenses	124,288		107,189		121,109
General and administrative expenses	23,420		23,203		22,183
Interest expense	7,661		10,776		4,177
Impairment of intangibles	11,699		0		0
Total costs and expenses	543,517		414,248		375,885

Income (loss) before income taxes	(111,654)		713		20,208
Income tax expense (benefit)	(33,496)		(298)		5,498
Net income (loss)	(78,158)		1,011		14,710
Net income (loss) attributable to non-controlling interest	0		0		(218)
Net income (loss) attributable to FedNat Holding Company shareholders	$	(78,158)	$	1,011	$	14,928

Net Income (Loss) Per Common Share
Basic	$	(5.64)	$	0.08	$	1.17
Diluted	(5.64)		0.08		1.16

Weighted Average Number of Shares of Common Stock Outstanding
Basic	13,846		12,977		12,775
Diluted	13,846		13,023		12,867

Dividends Declared Per Common Share	$	0.36	$	0.33	$	0.24

Year Ended December 31,
2018 2017 2016
Revenues:
Net premiums earned $ 355,257
$ 333,481
$ 261,369
Net investment income 12,460
10,254
9,063
Net realized and unrealized investment gains (losses) (4,144 ) 8,548
3,045
Direct written policy fees 13,366
17,173
16,619
Other income 19,154
22,206
17,429
Total revenues 396,093
391,662
307,525

Costs and expenses:
Losses and loss adjustment expenses 228,416
247,557
197,810
Commissions and other underwriting expenses 121,109
114,867
90,378
General and administrative expenses 22,183
19,963
17,186
Interest expense 4,177
348
348
Total costs and expenses 375,885
382,735
305,722

Income (loss) before income taxes 20,208
8,927
1,803
Income tax expense (benefit) 5,498
3,585
542
Net income (loss) 14,710
5,342
1,261
Net income (loss) attributable to non-controlling interest (218 ) (2,647 ) 246
Net income (loss) attributable to FedNat Holding Company shareholders $ 14,928
$ 7,989
$ 1,015

Net Income (Loss) Per Common Share
Basic $ 1.17
$ 0.61
$ 0.07
Diluted $ 1.16
$ 0.60
$ 0.07

Weighted Average Number of Shares of Common Stock Outstanding
Basic 12,775
13,170
13,758
Diluted 12,867
13,250
13,922

Dividends Declared Per Common Share $ 0.24
$ 0.32
$ 0.27

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

-4554-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

໿


	Year Ended December 31,
	2020		2019		2018

Net income (loss)	$	(78,158)	$	1,011	$	14,710

Change in net unrealized gains (losses) on investments, available-for-sale, net of tax	1,105		14,031		(5,444)
Comprehensive income (loss)	(77,053)		15,042		9,266

Less: comprehensive income (loss) attributable to non-controlling interest, net of tax	0		0		(447)
Comprehensive income (loss) attributable to FedNat Holding Company shareholders	$	(77,053)	$	15,042	$	9,713

Year Ended December 31,
2018 2017 2016

Net income (loss) $ 14,710
$ 5,342
$ 1,261

Change in net unrealized gains (losses) on investments, available-for-sale, net of tax (5,444 ) (429 ) (1,740 )
Comprehensive income (loss) 9,266
4,913
(479 )
��
Less: comprehensive income (loss) attributable to non-controlling interest, net of tax (447 ) (2,905 ) 550
Comprehensive income (loss) attributable to FedNat Holding Company shareholders $ 9,713
$ 7,818
$ (1,029 )

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

-4655-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTSOF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, exceptpershare data)

໿


												Total
												Shareholders'
												Equity
								Accumulated				Attributable to
			Common Stock			Additional		Other		Retained		FedNat Holding		Non-		Total
	Preferred		Issued			Paid-in		Comprehensive		Earnings		Company		Controlling		Shareholders'
	Stock		Shares	Amount		Capital		Income (Loss)		(Deficit)		Shareholders		Interest		Equity
Balance as of January 1, 2018	$	—	12,988,247	$	130	$	139,728	$	1,770	$	70,009	$	211,637	15,822		$	227,459
Cumulative effect of new accounting standards	—		—	—		—		(994)		994		—		—		0
Net income (loss)	—		—	—		—		—		14,928		14,928		(218)		14,710
Other comprehensive income (loss)	—		—	—		—		(4,221)		—		(4,221)		(229)		(4,450)
Dividends declared	—		—	—		—		—		(3,120)		(3,120)		—		(3,120)
Acquisition of non-controlling interest	—		—	—		(1,005)		(305)		—		(1,310)		(15,375)		(16,685)
Shares issued under share-based compensation plans	—		122,905	1		38		—		—		39		—		39
Repurchases of common stock	—		(326,708)	(3)		—		—		(5,058)		(5,061)		—		(5,061)
Share-based compensation	—		—	—		2,367		—		—		2,367		—		2,367
Balance as of December 31, 2018	—		12,784,444	128		141,128		(3,750)		77,753		215,259		0		215,259

Net income (loss)	—		—	—		—		—		1,011		1,011		—		1,011
Other comprehensive income (loss)	—		—	—		—		14,031		—		14,031		—		14,031
Dividends declared	—		—	—		—		—		(4,309)		(4,309)		—		(4,309)
Shares issued for acquisition	—		1,773,102	18		24,373		—		—		24,391		—		24,391
Shares issued under share-based compensation plans	—		94,922	1		—		—		—		1		—		1
Repurchases of common stock	—		(237,647)	(3)		—		—		(3,864)		(3,867)		—		(3,867)
Share-based compensation	—		—	—		2,176		—		—		2,176		—		2,176
Balance as of December 31, 2019	—		14,414,821	144		167,677		10,281		70,591		248,693		0		248,693
Net income (loss)	—		—	—		—		—		(78,158)		(78,158)		—		(78,158)
Other comprehensive income (loss)	—		—	—		—		1,105		—		1,105		—		1,105
Dividends declared	—		—	—		—		—		(5,077)		(5,077)		—		(5,077)

Cumulative effect of new accounting standards	—		—	—		—		—		(25)		(25)		—		(25)
Shares issued under share-based compensation plans	—		103,322	1		41		—		—		42		—		42
Repurchases of common stock	—		(800,235)	(8)		—		—		(9,992)		(10,000)		—		(10,000)
Share-based compensation	—		—	—		1,580		—		—		1,580		—		1,580
Balance as of December 31, 2020	—		13,717,908	$	137	$	169,298	$	11,386	$	(22,661)	$	158,160	$	0	$	158,160

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, 2016 $ —
13,798,773
$ 138
$ 131,998
$ 3,985
$ 91,859
$ 227,980
18,177
$ 246,157
Net income (loss) —
—
—
—
—
1,015
1,015
246
1,261
Other comprehensive income (loss) —
—
—
—
(2,044 ) —
(2,044 ) 304
(1,740 )
Dividends —
—
—
—
—
(4,677 ) (4,677 ) —
(4,677 )
Shares issued under share-based compensation plans —
299,165
—
361
—
—
361
—
361
Tax benefits from share-based compensation awards —
—
—
589
—
—
589
—
589
Repurchases of common stock (624,818 ) (4 ) —
—
(11,313 ) (11,317 ) —
(11,317 )
Share-based compensation —
—
—
3,831
—
—
3,831
—
3,831
Balance as of December 31, 2016 —
13,473,120
134
136,779
1,941
76,884
215,738
18,727
234,465
Net income (loss) —
—
—
—
—
7,989
7,989
(2,647 ) 5,342
Other comprehensive income (loss) —
—
—
—
(171 ) —
(171 ) (258 ) (429 )
Dividends —
—
—
—
—
(4,251 ) (4,251 ) —
(4,251 )
Shares issued under share-based compensation plans —
169,647
—
103
—
—
103
—
103
Repurchases of common stock —
(654,520 ) (4 ) —
—
(10,613 ) (10,617 ) —
(10,617 )
Share-based compensation —
—
—
2,846
—
—
2,846
—
2,846
Balance as of December 31, 2017 —
12,988,247
130
139,728
1,770
70,009
211,637
15,822
227,459
Cumulative effect of new accounting standards —
—
—
—
(994 ) 994
—
—
—
Net income (loss) —
—
—
—
—
14,928
14,928
(218 ) 14,710
Other comprehensive income (loss) —
—
—
—
(4,221 ) —
(4,221 ) (229 ) (4,450 )
Dividends declared —
—
—
—
—
(3,120 ) (3,120 ) —
(3,120 )
Acquisition of non-controlling interest —
—
—
(1,005 ) (305 ) —
(1,310 ) (15,375 ) (16,685 )
Shares issued under share-based compensation plans —
122,905
1
38
—
—
39
—
39
Repurchases of common stock —
(326,708 ) (3 ) —
—
(5,058 ) (5,061 ) —
(5,061 )
Share-based compensation —
—
—
2,367
—
—
2,367
—
2,367
Balance as of December 31, 2018 $ —
12,784,444
$ 128
$ 141,128
$ (3,750 ) $ 77,753
$ 215,259
$ —
$ 215,259

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

-56-

-47-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Year Ended December 31,										Year Ended December 31,
	2018			2017			2016				2020		2019		2018
Cash flow from operating activities:										Cash flow from operating activities:
Net income (loss)	$	14,710		$	5,342		$	1,261		Net income (loss)	$	(78,158)	$	1,011	$	14,710
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:										Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net realized and unrealized investment (gains) losses	4,144			(8,548		)	(3,045		)	Net realized and unrealized investment (gains) losses	(18,032)		(7,084)		4,144
Impairment of intangibles										Impairment of intangibles	11,699		0		0
Loss (gain) on early extinguishment of debt										Loss (gain) on early extinguishment of debt	0		3,575		0
Amortization of investment premium or discount, net	1,546			3,909			5,346			Amortization of investment premium or discount, net	3,740		916		1,546
Depreciation and amortization	1,385			1,166			869			Depreciation and amortization	1,904		1,477		1,385
Share-based compensation	2,367			2,846			4,420			Share-based compensation	1,580		2,176		2,367
Tax impact related to share-based compensation	(44		)	(193		)	—
Changes in operating assets and liabilities:										Changes in operating assets and liabilities:
Prepaid reinsurance premiums	26,915			21,440			24,908			Prepaid reinsurance premiums	(132,613)		(11,803)		26,915
Premiums receivable, net	16,602			8,461			(16,260		)	Premiums receivable, net	(9,381)		(8,654)		16,602
Reinsurance recoverable, net	(86,823		)	(76,738		)	(35,149		)	Reinsurance recoverable, net	(203,443)		9,412		(86,823)
Deferred acquisition costs	1,457			999			(24,226		)
Income taxes, net	6,153			4,596			(16,485		)
Deferred acquisition costs and value of business acquired, net										Deferred acquisition costs and value of business acquired, net	30,731		(7,979)		1,457
Current and deferred income taxes, net										Current and deferred income taxes, net	(32,835)		(3,723)		6,109
Deferred revenue	(1,637		)	(612		)	1,074			Deferred revenue	331		756		(1,637)
Loss and loss adjustment expense reserves	65,715			72,405			60,404			Loss and loss adjustment expense reserves	216,005		11,472		65,715
Unearned premiums	(12,431		)	401			40,062			Unearned premiums	5,919		28,365		(12,431)
Reinsurance payable	(8,345		)	(7,210		)	18,085
Reinsurance payable and funds withheld liabilities										Reinsurance payable and funds withheld liabilities	100,360		14,797		(8,345)
Other	(1,444		)	(15,158		)	8,486			Other	10,285		602		(1,444)
Net cash provided by (used in) operating activities	30,270			13,106			69,750			Net cash provided by (used in) operating activities	(91,908)		35,316		30,270
Cash flow from investing activities:										Cash flow from investing activities:
Proceeds from sales of equity securities	10,639			57,125			30,621			Proceeds from sales of equity securities	22,050		9,203		10,639
Proceeds from sales of debt securities	228,777			249,584			198,676			Proceeds from sales of debt securities	556,463		164,196		228,777
Purchases of equity securities	(13,542		)	(35,811		)	(16,716		)	Purchases of equity securities	(4,727)		(6,565)		(13,542)
Purchases of debt securities	(337,776		)	(339,667		)	(325,397		)	Purchases of debt securities	(580,876)		(228,132)		(337,776)
Maturities and redemptions of debt securities	92,744			38,038			81,812			Maturities and redemptions of debt securities	86,814		43,925		92,744
Payment for acquisition, net of cash acquired										Payment for acquisition, net of cash acquired	0		10,402		0
Purchases of property and equipment	(2,026		)	(976		)	(2,147		)	Purchases of property and equipment	(3,357)		(2,040)		(2,026)
Net cash provided by (used in) investing activities	(21,184		)	(31,707		)	(33,151		)	Net cash provided by (used in) investing activities	76,367		(9,011)		(21,184)
Cash flow from financing activities:										Cash flow from financing activities:
Proceeds from issuance of long-term debt	—			45,000			—
Payment of long-term debt	(5,000		)	—			—
Proceeds from issuance of long-term debt, net of issuance costs										Proceeds from issuance of long-term debt, net of issuance costs	0		98,390		0
Payment of long-term debt and prepayment penalties										Payment of long-term debt and prepayment penalties	0		(48,000)		(5,000)
Purchase of non-controlling interest	(16,685		)	—			—			Purchase of non-controlling interest	0		0		(16,685)
Purchases of FedNat Holding Company common stock	(5,061		)	(10,616		)	(11,317		)	Purchases of FedNat Holding Company common stock	(10,418)		(3,449)		(5,061)
Issuance of common stock for share-based awards	39			103			361			Issuance of common stock for share-based awards	42		1		39
Tax impact related to share-based compensation	—			—			589
Dividends paid	(4,184		)	(4,251		)	(4,677		)	Dividends paid	(5,077)		(4,309)		(4,184)
Net cash provided by (used in) financing activities	(30,891		)	30,236			(15,044		)	Net cash provided by (used in) financing activities	(15,453)		42,633		(30,891)
Net increase (decrease) in cash and cash equivalents	(21,805		)	11,635			21,555			Net increase (decrease) in cash and cash equivalents	(30,994)		68,938		(21,805)
Cash and cash equivalents at beginning-of-period	86,228			74,593			53,038			Cash and cash equivalents at beginning-of-period	133,361		64,423		86,228
Cash and cash equivalents at end-of-period	$	64,423		$	86,228		$	74,593		Cash and cash equivalents at end-of-period	$	102,367	$	133,361	$	64,423

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

-4857-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(CONTINUED)

(In thousands)

໿


	Year Ended December 31,
	2020		2019		2018
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for interest	$	7,500	$	4,860	$	4,266
Cash paid (received) during the period for income taxes	(635)		3,504		(1,104)

Significant non-cash investing and financing transactions:
Right-of-use asset	(7,430)		(8,096)		0
Lease liability	7,430		8,096		0

Year Ended December 31,
2018 2017 2016
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for interest $ 4,266
$ 308
$ 313
Cash paid (received) during the period for income taxes $ (1,104 ) $ (354 ) $ 14,360

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

-58-

-49-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, ~~2018~~2020

1. ORGANIZATION, CONSOLIDATION AND BASIS OF ~~PREPARATION~~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”), 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 ~~Alabama. Monarch National~~Mississippi.

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.

Monarch National Insurance Company

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

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

~~Refer to Basis of Presentation and Principles of Consolidation and Note 17 below.~~

Material Distribution Relationships

Ivantage Select Agency, Inc.

The Company is a party to an insurance agency master agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company (“Allstate”), pursuant to which the Company has been authorized by ISA to appoint Allstate agents to offer ~~the Company’s~~our FNIC homeowners insurance products to consumers in Florida. As a percentage of the total homeowners premiums we underwrote, ~~23.8%~~20.7%, ~~23.8%~~23.2% and ~~24.1%~~23.8%, were from Allstate’s network of Florida agents, for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016,~~2018, respectively.

-50-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

SageSure Insurance Managers, LLC

The Company is a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) to ~~underwrite~~facilitate growth in our FNIC homeowners business outside of Florida. As a percentage of the total homeowners premiums, ~~15.0%,10.2%~~25.5%, 23.1% and ~~6.9% respectively,~~15.0% of the Company’s premiums were underwritten by SageSure, for the years ended December 31, 2020, 2019, and 2018, ~~2017, and 2016~~ respectively. As part of our partnership with SageSure, previously we entered into a profit share agreement, whereby we shared 50% of net profits of this line of business through June 30, 2020, as calculated per the terms of the agreement, subject to certain limitations, which included limits on the net losses that SageSure could realize. The limit was based on the amount of inception to date profits within the profit share agreement. In addition, refer to Note 6 for information regarding a fully collateralized quota-share treaty on this book of business that became effective July 1, 2020.

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

-59-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

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.

AsWe completed our acquisition of ~~December 31, 2017,~~MNIC in ~~connection with~~February 2018 by acquiring the ~~investment~~membership interests in MNIC’s indirect parent, Monarch Delaware the Company had determined that the Company possessed the power to direct the activities of the VIE that most significantly impact its economic performance and the Company was the primary beneficiary of the VIE.Holdings LLC (“Monarch Delaware”), held by our joint venture partners. As such, the Company consolidated Monarch Delaware in its consolidated financial statements. ~~Refer to~~ ~~Monarch National Insurance Company~~ ~~above, related to our 100% ownership of Monarch Delaware that became effective on February 21, 2018.~~ In accordance with the accounting standard on consolidation, a primary beneficiary that acquires additional ownership of the previously controlled and consolidated subsidiaries is accounted for as an equity transaction and re-measurement of assets and liabilities of previously controlled and consolidated subsidiaries is not permitted. As a result, we accounted for this transaction by eliminating the carrying value of the non-controlling interest to reflect our 100% ownership interest in MNIC as of February 21, 2018. The difference between the consideration paid and the amount by which the non-controlling interest was eliminated has been recognized in additional paid-in capital. Following the closing, Monarch Delaware and Monarch Holdings were merged into MNIC. ~~Refer to Note 14 below for additional information regarding the VIE.~~

-51-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

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 ~~and~~ 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.

Business Combinations

We use the acquisition method of accounting for all business combination transactions, and accordingly, recognize the fair values of assets acquired, liabilities assumed and any non-controlling interests in our consolidated financial statements. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information becomes available relative to the fair values as of the acquisition date. The consolidated financial statements include the results of operations of any acquired company since the acquisition date.

Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or pay to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Our nonperformance or credit risk is considered in determining the fair value of liabilities. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.

Refer to Note 34 below for additional information regarding fair value.

Investments

Investments consist of debt and equity securities. Debt securities consist of securities with an initial fixed maturity of more than three months, including corporate bonds, municipal bonds and United States government bonds. Equity securities generally consist of securities that represent ownership interests in an enterprise. The Company determines the appropriate classification of investments in debt and equity securities at the acquisition date and re-evaluates the classification at each balance sheet date.

-60-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Held-to-maturity debt securities are recorded at the amortized cost, reflecting the ability and intent to hold the securities to maturity. All other debt securities are classified as available-for-sale and recorded at fair value. Unrealized gains and losses during the year, net of the related tax effect applicable to available-for-sale, ~~and periods prior to January 1, 2018 for equity securities,~~ are excluded from income and reflected in other comprehensive income (loss)~~, and the cumulative effect is reported~~ as a separate component of ~~shareholders’ equity until realized. If~~shareholders' equity. Prior to January 1, 2020, if a decline in fair value iswas deemed to be other-than-temporary, the investment iswas written down to its fair value and the amount of the write-down is recorded as an other-than-temporary impairment ~~(“OTTI”~~("OTTI") loss on the statement of operations. As the result of the adoption of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument ("ASU 2016-13") beginning on January 1, 2020, we instead record an allowance for credit loss. Refer to Note 7 below for additional information regarding allowances for credit loss. Any portion of ~~such~~the market decline related to debt securities that is believed to arise from factors other than credit is recorded as a component of other comprehensive income (loss) rather than against income. ~~As a result of the adoption of Accounting Standards Update (“ASU”) 2016-01,~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities~~ ~~(“ASU 2016-01”) beginning on January 1, 2018 equity~~Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are measured at fair value with changes in fair value recognized in net ~~income. Refer to Note 2 below for additional information related to ASU 2016-01.~~income (loss).

When we invest in certain companies, such as limited partnerships and limited liability companies, and if we determine we are not the primary beneficiary, we account for them using the equity method to determine the carry value, which is included in other assets on our Consolidated Balance Sheets. Our maximum exposure to loss is limited to the capital we invest.

Net realized gains and losses on investments are determined in accordance with the specific identification method.

Net investment income consists primarily of interest income from debt securities, cash and cash equivalents, including any premium amortization or discount accretion and dividend income from equity securities; less expenses related to investments.

-52-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

Refer to Note 45 below for additional information regarding investments.

Cash and Cash Equivalents

Cash and cash equivalents consist of all deposit or deposit in transit balances with a bank that are available for withdrawal. The Company considers all highly liquid investments with an original maturity of three months or less at the date of the purchase to be cash equivalents.

Premiums and Unearned Premiums

The Company recognizes premiums as revenue on a pro-rata basis over the term of the insurance policy.

Unearned premiums represent the portion of gross premiums written, related to the unexpired terms of such coverage.

Premium receivable balances, which include any outstanding receivable from the SageSure profit sharing agreement, are reported net of an allowance for estimated uncollectible premium amounts. Such allowance is based upon an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the insured and other relevant factors. Amounts deemed to be uncollectible are written off against the allowance. Refer to Note 7 below for additional information regarding allowances for credit loss.

Reinsurance

Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring loss exposures does not relieve a ceding entity from its obligations to policyholders and cedants. Reinsurance recoverables (including amounts related to claims incurred but not reported) and ceded unearned premiums are reported as assets. To minimize exposure to losses from a reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of the reinsurer, the collectability of the reinsurance recoverables is evaluated (and where appropriate, whether an allowance for estimated uncollectible reinsurance recoverables is to be established) based upon a number of other factors. Such factors include the amounts outstanding, length of collection periods, disputes, any collateral or letters of credit held and other relevant factors. To the extent that an allowance for uncollectible reinsurance recoverable is established, amounts deemed to be uncollectible are written off against the allowance for estimated uncollectible reinsurance recoverables. ~~As of~~ Refer to Note 7 below for additional information regarding allowances for credit loss.

-61-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, ~~2018 and 2017, the Company did have any allowances for uncollectible reinsurance recoverables.~~2020

Ceded premiums written are recorded in accordance with applicable terms of the various reinsurance contracts and ceded premiums earned are charged against revenue over the period of the various reinsurance contracts. This also generally applies to reinstatement premiums paid to a reinsurer, which arise when contractually-specified ceded loss triggers have been breached.

Ceded commissions reduce commissions ~~brokerage~~ and other underwriting expenses and ceded losses incurred reduce net losses and LAE incurred over the applicable periods of the various reinsurance contracts with third party reinsurers. If premiums or commissions are subject to adjustment (for example, retrospectively-rated or experience-rated), the Company records adjustments to the premiums or ceding commission ~~revenue~~ in the period that changes in the estimated losses are determined.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business and consistent with the terms of the underlying reinsurance contract. Reinsurance payable and funds withheld liabilities represents the unpaid reinsurance premiums or reinstatement premiums due to reinsurers, or in the case of certain reinsurance agreements amounts withheld as collateral by us.

Refer to Note 6 below for additional information regarding reinsurance.

Deferred Acquisition Costs and Value of Business Acquired

Deferred acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts. The Company defers incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such deferred acquisition costs generally include agent or broker commissions, referral fees, premium taxes, medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable.

The Company also defers a portion of the employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling.

-53-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

The acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally twelve months for homeowners ~~and commercial general liability policies and six months for automobile~~ policies. ~~It is~~Deferred acquisition cost balances are grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the recoverability of deferred acquisition costs. The Company assesses the recoverability of deferred acquisition costs on an annual basis or more frequently if circumstances indicate impairment may have occurred.

~~Property~~Value of business acquired ("VOBA") is an asset that reflects the estimated fair value of in-force contracts in an acquisition and ~~Equipment~~represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in-force at the acquisition date. VOBA is amortized over the period in which the related premiums written are earned, generally twelve months or less for property insurance business. VOBA amortization is reported within commissions and other underwriting expenses on our consolidated statements of operations. VOBA is reviewed to ensure that the unamortized portion does not exceed the expected recoverable amount as of October 1 and more frequently if circumstances indicate impairment may have occurred.

Goodwill

We recognize the excess of the purchase price, plus the fair value of any non-controlling interest in the acquiree, over the fair value of identifiable net assets acquired at the acquisition date as goodwill. Goodwill is not amortized but is reviewed for impairment annually as of October 1 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We perform a quantitative goodwill impairment test where the fair value of the reporting unit is determined and compared to the carrying value of the reporting unit. If the fair value of the reporting unit is greater than the reporting unit’s carrying value, then the carrying value of the reporting unit is deemed to be recoverable. If the carrying value of the reporting unit is greater than the reporting unit’s fair value, goodwill is impaired and written down to the reporting unit’s fair value; and a charge is reported in impairment of intangibles on our consolidated statements of operations. Refer to Note 8 below for additional information regarding goodwill.

-62-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Other Assets

Other assets consist primarily of identifiable intangible assets, property and equipment owned, right-of-use assets for our long-term leases, receivables resulting from sales of securities that had not yet settled as of the balance sheet date and prepaid expenses.

Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using a straight-line method over the estimated useful lives, ranging from 53 to 15 years. Repairs and maintenance are charged to expense as incurred.

The Company accounts for internal-use software development costs in accordance with accounting guidelines which state that software costs, including internal payroll costs, incurred in connection with the development or acquisition of software for internal use is charged to expense as incurred until the project enters the application development phase. Costs incurred in the application development phase are capitalized and are depreciated using the straight-line method over an estimated useful life of 3 years, beginning when the software is ready for use.

We recognize the estimated fair value of identifiable intangibles such as trade names and non-compete agreements acquired through a business combination at the acquisition date. Identifiable intangible assets are amortized on a straight-line basis over their identified useful life, if applicable. The carrying values of identifiable intangible assets are reviewed at least annually for indicators of impairment in value that are other-than-temporary, including unexpected or adverse changes in the following: the economic or competitive environments in which the company operates; profitability analysis; cash flow analysis; and the fair value of the relevant business operation. If there is an indication of impairment, then the discounted cash flow method would be used to measure the impairment, and the carrying value would be adjusted as necessary and reported in impairment of intangibles on our consolidated statements of operations. Refer to Note 8 below for additional information regarding identifiable intangible assets.

Direct Written Policy Fees

Policy fees represent a non-refundable application fee for insurance coverage. These policy fees are deferred over the related policy term in a manner consistent with how the related premiums are earned.

Other Income

Other income represents brokerage, commission related income from the Company’s agency operations, fees generated from the exited personal automobile line of business as well as recognition of equity method investment results. Brokerage income is recognized over the term of the reinsurance period, typically one year. Commission income from agency operations are recognized up-front upon policy inception. ~~The fees associated with the personal automobile line of business are recognized ratably over the related policy term, generally six months.~~ In applying the equity method, the Company records its initial investment at cost, and subsequently increases or decreases the carrying amount of the investment by its proportionate share of the net earnings or losses with any dividends or distributions received are recorded as a decrease in the carrying value of the investment.

Losses and Loss Adjustment Expenses

The reserves for losses and LAE represent management’s best estimate of the ultimate cost of all reported and unreported losses incurred through the balance sheet date. Such liabilities are determined based upon the Company’s assessment of claims pending and the development of prior years’ loss liability, including liabilities based upon individual case estimates for reported losses and LAE and estimates of such amounts that are incurred but not yet reported (“("IBNR”). Changes in the estimated liability are charged or credited to operations as the losses and LAE are settled.

The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, the Company review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in the results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

Refer to Note 9 below for additional information regarding reserves for losses and LAE.

-5463-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

Long-Term Debt, Net of Deferred Financing Costs

The Company records long-term debt, net in the consolidated balance sheets at carrying value.

The Company incurs specific incremental costs, other than those paid to lenders, in connection with the issuance of the Company’s debt instruments. These deferred financing costs include loan origination costs, issue costs and other direct costs payable to third parties and are recorded as a direct deduction from the carrying value of the associated debt liability in the consolidated balance sheets, when the debt liability is recorded. The Company amortizes the deferred financing costs as interest expense over the term of the related debt using the effective interest method in the consolidated statements of operations.

Refer to Note 10 below for additional information regarding long-term debt.

Income Taxes

The Company applies the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date.The Company will establish a valuation allowance if management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established and the amount of such allowances.

The Company’s management makes assumptions, estimates and judgments, which are subject to change, in accounting for income taxes. The Company’s management also considers events and transactions on an on-going basis and the laws enacted as of the Company’s reporting date. The U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law on December 22, 2017, and the effect of changes in federal tax law and applicable statutory rates is recorded in the consolidated financial statements in the period of enactment. As such, the Tax Act affected the Company’s deferred income tax provision in the consolidated statement of operations for the year ended December 31, 2017 and the deferred income tax assets and liabilities balances in the consolidated balance sheet as of December 31, 2017. Both the current and deferred income tax provisions are affected for 2018.

Refer to Note 811 below for further information regarding income taxes.

Share-Based Compensation

We expense the fair value of stock awards included in our stock incentive compensation plans. The Company grants awards and amortizes them on a straight-line over the vesting term using the straight-line basis for service awards and over successive one-year requisite service periods for performance based awards. For all restricted stock awards (“RSAs”), excluding grants based on relative total shareholder return ("TSR"), the fair value is determined based on the closing market price on the date of grant. ~~The~~For grants based on TSR, grant date fair value ~~are~~is determined using a Monte Carlo simulation and, unlike the performance condition awards, the expense is not reversed if the performance condition is not met. Non-employee directors are treated as employees for accounting purposes. The non-cash share-based compensation expense is reflected in commissions and other underwriting and general and administrative expense on our Consolidated Statements of Operations and is recognized as an increase to additional paid-in capital on our Consolidated Balance Sheets.

Basic and Diluted Net Income (Loss) per Share

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares, while diluted net income per share is computed by dividing net income available to common shareholders by the weighted average number of such common shares and dilutive share equivalents result from the assumed exercise of employee stock options and vesting of restricted common stock and are calculated using the treasury stock method.

Recently Issued Accounting Pronouncements, Adopted

In ~~May 2014,~~January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU ~~2014-09,~~ ~~Revenue from Contracts with Customers~~ (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The update replaces all general and most industry specific revenue recognition guidance (excluding insurance) currently prescribed by GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a promised good or service to customers in an amount that reflects that consideration to which the entity expects to be entitled in exchange for that good or service. The Company adopted this update and the other related revenue standard clarifications and technical guidance

-55-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

effective January 1, 2018, using the modified retrospective approach. The Company completed the analysis of its non-insurance revenues and has concluded that the implementation did not have any impact on the Company’s consolidated financial condition or results of operations.

~~In January 2016, the FASB issued ASU~~ 2016-01, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.Most notably, the combined new guidance required equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair

-64-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

value recognized in net income. The Company adopted the guidance effective January 1, 2018, by reflecting a cumulative adjustment, which increased retained earnings (deficit) and decreased accumulated other comprehensive income (loss) by $1.0 million. This adjustment represented the level of net unrealized gains and losses associated with our equity investments with readily determinable market values as of January 1, 2018. The adoption also resulted in the recognition of $(1.2) million in our consolidated statements of operations and statements of comprehensive income (loss), which represented the change in net unrealized gains and losses on our equity securities for 2018. This new guidance increases our earnings volatility compared to the prior accounting rules.

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

~~Recently Issued Accounting Pronouncements, Not Yet Adopted~~

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update superseded the prior lease guidance in Topic 840, Leases and lessees were required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. ~~Concurrently,~~Additionally, lessees 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 ~~has been adopted~~ effective January 1, 2019, ~~and we expect to reflect approximately an $6~~by reflecting a $6.1 million right-of-use asset, after-tax, and $6$6.1 million lease liability, after-tax, on our ~~March 31, 2019~~ 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 ~~will be~~have been made. ~~There will be no significant difference in~~The provisions of this ASU did not have an impact on our pattern of lease expense recognition on our consolidated statements of ~~operations, under this ASU.~~operations. Refer to Note 12 below for additional information regarding leases.

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 ~~require~~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~~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 (deficit), held-to-maturity debt securities and reinsurance recoverable. Refer to Note 7 for additional information regarding allowances for credit loss.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminated the requirement to perform Step 2 of the goodwill impairment test in favor of only applying a quantitative test (referred to in previous guidance as Step 1). As part of the quantitative test, the fair value of the reporting unit is ~~effective for interim~~compared with its carrying value, and ~~annual~~an impairment charge is recognized when the carrying value exceeds the reporting ~~periods beginning after December 15, 2019, with early adoption permitted.~~unit’s fair value. An entity still has the option to first perform a qualitative assessment of an individual reporting unit to determine if the quantitative assessment is necessary. The Company ~~is in~~adopted the ~~early stage of evaluating the impact that the update will have on the Company’s consolidated financial position or results of operations.~~guidance effective January 1, 2020. Refer to Note 8 for information regarding our goodwill impairment assessment.

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

-65-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

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.

3. ACQUISITION

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

The purchase price was $51.0 million, which includes $25.5 million in cash and shares of the Company’s common stock equal to $25.5 million, which amounted to 1,773,102 shares of the Company's common stock. The number of shares was determined by the closing price of 20 trading days immediately preceding the closing date, December 2, 2019. The resale of these shares was registered and are subject to a standstill agreement. We recognized the fair value of the shares as of the acquisition date, net of issuance costs, by increasing shareholders' equity by $24.4 million

In addition to the purchase price, PIH received five-year right of first refusal to provide reinsurance of up to 7.5% of any layer in FNHC’s catastrophe reinsurance program. PIH 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.

Subsequent to the effective acquisition date, the revenues and net income of the business acquired were $4.4 million and $1.4 million, respectively, for the year ended December 31, 2019. We recognized $1.3 million of acquisition-related costs, pre-tax, for the twelve months ended December 31, 2019. These costs are included in the general and administrative expenses line item of the consolidated statement of operations. We also capitalized $0.5 million in application development costs to property and equipment included in the other asset line item on the consolidated balance sheet.

-5666-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

The acquisition date fair values of certain assets and liabilities, including VOBA and intangible assets, were not adjusted during the one year following the December 2, 2019 acquisition date. The following presents (in thousands) the acquisition date fair values of the net assets acquired related to the Maison Companies as of December 2, 2019:


	Fair
	Value
Assets:
Debt securities, available-for-sale	$	56,929
Cash and cash equivalents	35,968
Prepaid reinsurance premium	25,279
Premiums receivable	2,977
Reinsurance recoverable	7,603
Deferred acquisition costs and value of business acquired, net	8,721
Other assets	3,507
Total assets acquired	140,984

Liabilities:
Loss and adjustment expense reserves	16,660
Unearned premiums	50,513
Reinsurance payable	24,071
Income taxes, net	1,778
Deferred revenue	1,515
Other liabilities	7,487
Total liabilities assumed	102,024

Net specifically identifiable assets acquired	38,960
Goodwill	10,997
Net assets acquired	$	49,957

All the gross contractual amounts of acquired receivables have been fully collected.

The entire $8.7 million acquired VOBA balance was fully amortized as of December 31, 2020.

The goodwill recorded as part of the acquisition included the expected synergies and other benefits that resulted from the acquisition including reinsurance savings and reduction in operating and general and administrative expenses. Refer to Note 8 below for additional information regarding goodwill and identifiable intangible assets.

-67-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Pro Forma Financial Information

The following unaudited pro forma condensed consolidated statements of operations of the Company assume that the acquisition of the Maison Companies was completed on January 1, 2018:


	Year Ended December 31,
	2019		2018
	(In thousands)
Revenue	$	471,438	$	454,469
Net income (loss)	(9,025)		17,432

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 in 2018, instead of 2019.

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.~~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.

-68-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 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:


	December 31, 2018									December 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:
United States government obligations and authorities	$	43,918	$	83,950	$	—	$	127,868	United States government obligations and authorities	$	38,511	$	133,264	$	0	$	171,775
Obligations of states and political subdivisions	—		9,767		—		9,767		Obligations of states and political subdivisions	0		22,264		0		22,264
Corporate securities	—		268,731		—		268,731		Corporate securities	0		266,528		0		266,528
International securities	—		22,275		—		22,275		International securities	0		27,643		0		27,643
Debt securities, at fair value	43,918		384,723		—		428,641		Debt securities, at fair value	38,511		449,699		0		488,210

Equity securities, at fair value	16,037		1,721		—		17,758		Equity securities, at fair value	1,881		1,276		0		3,157

Total investments, at fair value	$	59,955	$	386,444	$	—	$	446,399	Total investments, at fair value	$	40,392	$	450,975	$	0	$	491,367


	December 31, 2017									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:
United States government obligations and authorities	$	51,219	$	46,918	$	—	$	98,137	United States government obligations and authorities	$	83,764	$	110,429	$	0	$	194,193
Obligations of states and political subdivisions	—		66,266		—		66,266		Obligations of states and political subdivisions	0		24,020		0		24,020
Corporate securities	—		240,919		—		240,919		Corporate securities	0		278,302		0		278,302
International securities	—		17,916		—		17,916		International securities	0		29,750		0		29,750
Debt securities, at fair value	51,219		372,019		—		423,238		Debt securities, at fair value	83,764		442,501		0		526,265

Equity securities, at fair value	15,434		—		—		15,434		Equity securities, at fair value	17,361		2,678		0		20,039

Total investments, at fair value	$	66,653	$	372,019	$	—	$	438,672	Total investments, at fair value	$	101,125	$	445,179	$	0	$	546,304

-57-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

Held-to-maturity debt securities reported on the consolidated balance sheets at amortized cost and disclosed at fair value below (and in Note 4)5) and the level of fair value hierarchy of inputs used consisted of the following:


	Level 1		Level 2		Level 3		Total
	(In thousands)
December 31, 2020	$	0	$	0	$	0	$	0
December 31, 2019	3,453		878		0		4,331

Level 1 Level 2 Level 3 Total
(In thousands)
December 31, 2018 $ 3,809
$ 1,155
$ —
$ 4,964
December 31, 2017 3,936
1,338
—
5,274

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.

-69-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 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 December 31, ~~2018~~2020 and ~~2017.~~2019. Additionally, we did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, ~~2018 or 2017,~~2020 and 2019, and we noted no significant changes in our valuation methodologies between those periods.

~~The~~There were no changes to the Company's valuation methodology and the Company is not aware of any events or circumstances that would have a significant adverse effect on the carrying value of its assets and liabilities measured at fair value as of December 31, ~~2018~~2020 and ~~2017.~~2019. There were no0 transfers between the fair value hierarchy levels during the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016.~~2018.

-58-

~~FedNat Holding Company and Subsidiaries~~5. INVESTMENTS

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

~~December 31, 2018~~

~~4. INVESTMENTS~~

Unrealized Gains and Losses

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

໿


	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized
	or Cost		Gains		Losses		Fair Value
	(In thousands)
December 31, 2020
Debt securities - available-for-sale:
United States government obligations and authorities	$	169,947	$	1,866	$	38	$	171,775
Obligations of states and political subdivisions	21,560		704		0		22,264
Corporate	254,618		11,989		79		266,528
International	27,001		659		17		27,643
	$	473,126	$	15,218	$	134	$	488,210

-70-

Amortized Gross Gross
Cost Unrealized Unrealized
or Cost Gains Losses Fair Value
(In thousands)
December 31, 2018
Debt securities - available-for-sale:
United States government obligations and authorities $ 127,928
$ 1,091
$ 1,151
$ 127,868
Obligations of states and political subdivisions 9,870
27
130
9,767
Corporate 273,192
510
4,971
268,731
International 22,674
12
411
22,275
433,664
1,640
6,663
428,641

Debt securities - held-to-maturity:
United States government obligations and authorities 4,085
1
158
3,928
Corporate 986
2
6
982
International 55
—
1
54
5,126
3
165
4,964
Total investments, excluding equity securities (1) $ 438,790
$ 1,643
$ 6,828
$ 433,605


~~(1)~~	~~As a result of the adoption of ASU 2016-01 on January 1, 2018 (see additional details in Note~~ 2 ~~above) for our equity securities we now recongnize changes in unrealized gains or losses within our statements of operations; therefore they are not included as of~~ ~~December 31, 2018~~.

Amortized Gross Gross
Cost Unrealized Unrealized
or Cost Gains Losses Fair Value
(In thousands)
December 31, 2017
Debt securities - available-for-sale:
United States government obligations and authorities $ 98,739
$ 244
$ 846
$ 98,137
Obligations of states and political subdivisions 66,319
325
378
66,266
Corporate 239,435
2,233
749
240,919
International 17,807
136
27
17,916
422,300
2,938
2,000
423,238

Debt securities - held-to-maturity:
United States government obligations and authorities $ 4,160
$ 9
$ 106
$ 4,063
Corporate 1,123
21
—
1,144
International 66
1
—
67
5,349
31
106
5,274
Equity securities 14,085
1,628
279
15,434
Total investments $ 441,734
$ 4,597
$ 2,385
$ 443,946

-59-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020


	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized
	or Cost		Gains		Losses		Fair Value
	(In thousands)
December 31, 2019
Debt securities - available-for-sale:
United States government obligations and authorities	$	191,546	$	3,073	$	426	$	194,193
Obligations of states and political subdivisions	23,748		294		22		24,020
Corporate	268,182		10,252		132		278,302
International	29,169		593		12		29,750
	512,645		14,212		592		526,265

Debt securities - held-to-maturity:
United States government obligations and authorities	3,585		12		39		3,558
Corporate	697		20		0		717
International	55		1		0		56
	4,337		33		39		4,331
Total investments, excluding equity securities	$	516,982	$	14,245	$	631	$	530,596

Net Realized and Unrealized Gains and Losses

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

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

໿


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Gross realized and unrealized gains:
Debt securities	$	20,470	$	2,829	$	423
Equity securities	8,587		5,928		2,374
Total gross realized and unrealized gains	29,057		8,757		2,797

Gross realized and unrealized losses:
Debt securities	(2,879)		(664)		(3,990)
Equity securities	(8,146)		(1,009)		(2,951)
Total gross realized and unrealized losses	(11,025)		(1,673)		(6,941)
Net realized and unrealized gains (losses) on investments	$	18,032	$	7,084	$	(4,144)

-71-

Year Ended December 31,
2018 2017 2016
(In thousands)
Gross realized and unrealized gains:
Debt securities $ 423
$ 1,814
$ 3,208
Equity securities 2,374
9,944
4,264
Total gross realized and unrealized gains 2,797
11,758
7,472

Gross realized and unrealized losses:
Debt securities (3,990 ) (1,671 ) (1,614 )
Equity securities (2,951 ) (1,539 ) (2,813 )
Total gross realized and unrealized losses (6,941 ) (3,210 ) (4,427 )
Net realized and unrealized gains (losses) on investments $ (4,144 ) $ 8,548
$ 3,045

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

The above line item, net realized and unrealized gains (losses) on investments, includes ~~$(1.2) million of net unrealized~~the following equity securities gains (losses) ~~on equity securities for the year ended December 31, 2018.~~recognized in earnings:


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Net gains (losses) on equity securities:
Realized	$	4,555	$	803	$	591
Unrealized	(4,114)		4,116		(1,168)
	441		4,919		(577)
Less:
Net realized and unrealized gains (losses) on securities sold	309		672		732
Net unrealized gains (losses) still held as of the end-of-period	$	132	$	4,247	$	(1,309)

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:


	December 31, 2020
	Amortized
	Cost		Fair Value
	(In thousands)
Securities with Maturity Dates
Debt securities, available-for-sale:
One year or less	$	21,454	$	21,573
Over one through five years	137,378		142,457
Over five through ten years	144,296		149,674
Over ten years	169,998		174,506
Total	$	473,126	$	488,210

Net Investment Income

Net investment income consisted of the following:


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Interest income	$	11,563	$	15,605	$	12,253
Dividends income	223		296		207
Net investment income	$	11,786	$	15,901	$	12,460

-72-

December 31, 2018
Amortized
Cost Fair Value
(In thousands)
Securities with Maturity Dates
Debt securities, available-for-sale:
One year or less $ 20,349
$ 20,285
Over one through five years 194,166
192,491
Over five through ten years 216,543
213,427
Over ten years 2,606
2,438
433,664
428,641
Debt securities, held-to-maturity:
One year or less 650
650
Over one through five years 4,088
3,935
Over five through ten years 388
379
5,126
4,964
Total $ 438,790
$ 433,605

-60-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

~~Net Investment Income~~

~~Net investment income consisted of the following:~~ ໿

Year Ended December 31,
2018 2017 2016
(In thousands)
Interest income $ 12,253
$ 9,776
$ 7,920
Dividends income 207
478
1,143
Net investment income $ 12,460
$ 10,254
$ 9,063

Aging of Gross Unrealized Losses

Gross unrealized losses and related fair values for debt securities, ~~(and equity securities as of December 31, 2017),~~ grouped by duration of time in a continuous unrealized loss position, consisted of the following:


	Less than 12 months				12 months or longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
					(In thousands)
December 31, 2020
Debt securities - available-for-sale:
United States government obligations and authorities	$	25,521	$	38	$	0	$	0	$	25,521	$	38

Corporate	7,989		79		0		0		7,989		79
International	2,175		16		132		1		2,307		17
	$	35,685	$	133	$	132	$	1	$	35,817	$	134

Less than 12 months 12 months or longer Total
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
(In thousands)
December 31, 2018
Debt securities - available-for-sale:
United States government obligations and authorities $ 22,673
$ 246
$ 29,727
$ 905
$ 52,400
$ 1,151
Obligations of states and political subdivisions 3,254
18
4,786
112
8,040
130
Corporate 160,361
3,058
53,232
1,913
213,593
4,971
International 15,608
217
4,678
194
20,286
411
201,896
3,539
92,423
3,124
294,319
6,663

Debt securities, held-to-maturity:
United States government obligations and authorities 229
1
3,113
157
3,342
158
Corporate 591
6
90
—
681
6
International 54
1
—
—
54
1
874
8
3,203
157
4,077
165

$ 202,770
$ 3,547
$ 95,626
$ 3,281
$ 298,396
$ 6,828


	Less than 12 months				12 months or longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
					(In thousands)
December 31, 2019
Debt securities - available-for-sale:
United States government obligations and authorities	$	49,833	$	409	$	2,218	$	17	$	52,051	$	426
Obligations of states and political subdivisions	6,810		22		0		0		6,810		22
Corporate	15,872		94		7,694		38		23,566		132
International	3,856		10		179		2		4,035		12
	76,371		535		10,091		57		86,462		592

Debt securities, held-to-maturity:
United States government obligations and authorities	0		0		2,287		39		2,287		39



	0		0		2,287		39		2,287		39
Total investments, excluding equity securities	$	76,371	$	535	$	12,378	$	96	$	88,749	$	631

-61-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

Less than 12 months 12 months or longer Total
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
(In thousands)
December 31, 2017
Debt securities - available-for-sale:
United States government obligations and authorities $ 52,368
$ 517
$ 19,287
$ 329
$ 71,655
$ 846
Obligations of states and political subdivisions 32,030
221
5,676
157
37,706
378
Corporate 109,780
625
6,452
124
116,232
749
International 8,935
27
25
—
8,960
27
203,113
1,390
31,440
610
234,553
2,000

Debt securities, held-to-maturity:
United States government obligations and authorities 523
4
2,730
102
3,253
106
Corporate 211
—
—
—
211
—
734
4
2,730
102
3,464
106

Equity securities 4,312
279
—
—
4,312
279

$ 208,159
$ 1,673
$ 34,170
$ 712
$ 242,329
$ 2,385

As of December 31, ~~2018,~~2020, the Company held a total of ~~1,222~~47 debt securities that were in an unrealized loss position, of which ~~371~~2 securities were in an unrealized loss position continuously for 12 months or more. As of December 31, ~~2017,~~2019, the Company held a total of ~~804~~203 debt ~~and equity~~ securities that were in an unrealized loss position, of which 8124 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 andid not have any 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.

As discussed in Note 2 above, beginning January 1, 2018, the Company’s equity investments are measured at fair value through net income. Prior to January 1, 2018, the Company’s assessment of equity securities initially involved an evaluation of all securities that are in an unrealized loss position, regardless of the duration or severity of the loss, as of the applicable balance sheet date. Such initial review consisted primarily of assessing whether: (i) there had been a negative credit or news event with respect to the issuer that could indicate the existence of an OTTI; and (ii) the Company had the ability and intent to hold an equity security for a period of time sufficient to allow for an anticipated recovery (generally considered to be one year from the balance sheet date).

To the extent that an equity security in an unrealized loss position is not impaired based on the initial review described previously, the Company then evaluates such equity security by considering qualitative and quantitative factors. These factors include but are not limited to facts and circumstances specific to individual securities, asset classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had been less than cost, the severity of the decline in fair value below cost, industry outlook and the Company’s ability and intent to hold each position until its forecasted recovery.

~~The determination that unrealized~~ losses on ~~such~~its available-for-sale securities were other-than-temporary was primarily based on the duration of the decline in the fair value of such securities relative to their cost as of the balance sheet date. OTTI losses were $0.0 million, $0.0 million and $0.3 million for the years ended December 31, 2020, 2019 and 2018, ~~2017 and 2016,~~ respectively. Refer to Note 7 below for information regarding allowances for credit loss.

-62-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

Collateral Deposits

Cash and cash equivalents and investments, the majority of which ~~are~~were debt securities, with fair values of ~~$10.3~~$11.5 million and ~~$12.9~~$11.2 million ~~as of December 31, 2018 and 2017, respectively,~~ were deposited with governmental authorities and into custodial bank accounts as required by law or contractual ~~obligations.~~obligations, as of December 31, 2020 and 2019, respectively.

-73-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Reclassification of Held-to-Maturity Securities to Available-for-Sale

The Company sold held-to-maturity securities with a carrying value of $70 thousand and realized a loss of less than $1 thousand during the second quarter of 2020 due to credit concerns for certain securities. The Company, as of the date of the aforementioned sales, reclassified its remaining held-to-maturity securities to available-for-sale. The held-to-maturity securities transferred had an amortized cost of $4.2 million and fair value of $4.3 million and resulted in $58 thousand of unrealized gains, pre-tax, recognized in other comprehensive income (loss) in the year ended December 31, 2020.

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

Significant Reinsurance Contracts

~~2017-2018~~2019-2020 Catastrophe Excess of Loss Reinsurance ~~Programs~~Program

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

FNIC’s private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective June 1, 2017 and July 1, 2017. All private layers have prepaid automatic reinstatement protection, except the FHCF supplemental layer reinsurance contract, which afforded FNIC additional coverage for subsequent events. The reinsurance program included multiple year protection with $89.0 million of new multiple year protection this year and $156.0 million of renewed multiple year protection from last year. These private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all layers attached after $25.1 million in losses for FNIC’s exposure. FNIC purchased an underlying limit of protection for $7.1 million excess of $18.0 million with prepaid automatic reinstatement protection. These treaties are with reinsurers that had an A.M. Best Company (“A.M. Best”) or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

FNIC’s non-Florida excess of loss reinsurance treaties affords us up to an additional $21.0 million of aggregate coverage with first event coverage totaling $5.0 million and second event coverage up to $16.0 million. The Non-Florida retention is lowered to $13.0 million for the first event and $2.0 million for the second event (for hurricane losses only) on a gross basis though it is reduced to $6.5 million and $1.0 million on a net basis after taking into account the profit share agreement that FNIC has with our non-affiliated managing general underwriter that writes our Non-Florida property business. FNIC’s Non-Florida reinsurance program cost included $1.7 million for this private reinsurance, including prepaid automatic premium reinstatement protection.

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

MNIC’s private market excess of loss treaties became effective July 1, 2017, and all private layers have prepaid automatic reinstatement protection, which affords MNIC additional coverage for subsequent events, and have a cascading feature such that substantially all layers attach at $3.4 million for MNIC’s Florida exposure. These treaties are with reinsurers that had an A.M. Best or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

-63-

~~FedNat Holding Company and Subsidiaries~~

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

December ~~31, 2018~~

~~2018-2019 Excess of Loss Reinsurance Programs~~

~~With the February 21, 2018~~2, 2019 acquisition of the ~~minority interests of MNIC,~~Maison Companies, the Company ~~has combined both~~and PIH agreed to combine FNIC, MIC and MNIC under a single reinsurance program allowing the ~~Company~~carriers to capitalize on efficiencies, spread of risk and scale. ~~FNIC and MNIC’s~~

The combined 2018-2019 reinsurance programs is estimated to cost $148.8 million. This amount includes approximately $102.7 million for the private reinsurance for the Company’s exposure, including prepaid automatic premium reinstatement protection, along with approximately $46.1 million payable to the FHCF. The combination of private and FHCF reinsurance treaties ~~affords FNIC and MNIC approximately $1.8 billion of aggregate coverage with a maximum single event coverage totaling~~provide approximately $1.3 billion ~~exclusive~~ of ~~retentions. Both FNIC and MNIC maintained their FHCF participation at 75% for the 2018 hurricane season. FNIC’s single event pre-tax~~single-event reinsurance coverage in excess of a $27 million retention for a catastrophic losses on the first event ~~in Florida is $20.0~~(and $15 million ~~up slightly from~~on the ~~2017-2018 reinsurance program~~second and ~~MNIC’s single event pre-tax retention for a catastrophic event is $3.0 million, down slightly from the 2017-2018 reinsurance program.~~third events), including hurricanes, and aggregate coverage of $1.9 billion, at an approximate total cost of $224.3 million.

The combined FNIC, MIC and MNIC private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective July 1, ~~2018~~2019 and all private layers have prepaid automatic reinstatement protection, which affords the ~~Company~~carriers additional coverage for subsequent events. ~~These~~This private market excess of loss ~~treaties~~treaty structure breaks coverage into layers, with a cascading feature such that substantially all layers attach after ~~$20.0~~$20 million in losses for FNIC, ~~and after $3.0~~$2 million in losses for ~~MNIC.~~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. Given current market conditions, FNIC has elected not to purchase any multiple year protection and terminated the second year of the $89.0 million of multiple year protection that FNIC purchased last year on a two-year basis. FNIC also had $156.0 million of multiple year protection that expired on June 30, 2018. The overall reinsurance ~~programs are~~program is with reinsurers that currently have an A.M. Best Company or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

As indicated above, FNIC, MIC and MNIC’s combined 2019-2020 reinsurance program is estimated to cost $224.3 million. This amount includes approximately $178.5 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic premium reinstatement protection, along with approximately $45.8 million payable to the FHCF. The combination of private and FHCF reinsurance treaties affords FNIC, MIC and MNIC 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, MIC and MNIC determines their share of the premium and distribution of reinsurance recoveries under the combined reinsurance tower is based on catastrophe loss modeling of the separate books of business. Each carrier shares the combined program cost in proportion to its contribution to the total expected loss in each reinsurance layer. Each carrier's reinsurance recoveries will be based on that carrier's contributing share of a given event's total loss. Both FNIC and MNIC maintained their FHCF participation at 75% for the 2019 hurricane season, and MIC increased its FHCF participation to 90%.

FNIC’s non-Florida excess of loss reinsurance ~~treaties afford~~treaty affords us an additional ~~$23.0~~$18 million of ~~aggregate~~ coverage ~~with first event coverage totaling $5.0 million and~~for a second event, ~~coverage totaling $18.0 million, with the incremental $13.0 million of second event coverage applying~~which applies to hurricane losses only. The ~~end~~ result is a non-Florida retention of ~~$15.0~~$20 million for FNIC for the first event and ~~$2.0~~$2 million for the second

-74-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

event, ~~though~~although these retentions are reduced to ~~$7.5~~$10 million and ~~$1.0~~$1 million after taking into account the ~~profit sharing~~profit-sharing agreement that FNIC has with the ~~nonaffiliated~~non-affiliated managing general underwriter that writes ~~our~~FNIC’s non-Florida property business. FNIC’s non-Florida reinsurance program cost ~~will approximate $2.0~~for the above specific coverage approximates $1.8 million for this private ~~reinsurance, including prepaid automatic premium reinstatement protection.~~reinsurance.

The ~~Company’s~~insurance carriers’ cost and amounts of reinsurance are based on ~~management’s~~ current analysis of exposure to catastrophic risk. The data ~~will be~~is subjected to exposure level analysis at various dates ~~during the period ending~~through December 31, ~~2018.~~2019. This analysis of the ~~Company’s~~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.

2020-2021 Catastrophe Excess of Loss Reinsurance Program

The Company’s excess of loss catastrophe reinsurance program for 2020-2021 (the “Program”), which covers the Company and its wholly-owned insurance subsidiaries, FNIC, MIC and MNIC was renewed effective July 1, 2020. FNIC, MIC and MNIC are collectively referred to herein as the “carriers”. The Program provides up to approximately $1.3 billion of single-event reinsurance coverage in excess of up to a $31 million retention for catastrophic losses, including hurricanes, and aggregate coverage up to $1.9 billion, at an approximate total cost of $286.0 million, subject to adjustments based on actual exposure ~~level.~~or premium of policies at different points in time in the coming months. The Company will retain 100% of the first $25 million retention on each event plus up to an additional $6 million in retention on the first event by retaining an approximate 9.1% co-participation of the next $70 million of limit after the first $25 million. More specifically, the Program includes up to approximately $1.3 billion in aggregate private reinsurance for coverage in all states in which the Company operates, of which up to approximately $650 million is limited to any one event, plus an additional $650 million of reinsurance provided by the Florida Hurricane Catastrophe Fund (“FHCF”), that responds on both a per occurrence and in the aggregate basis, and which coverage is exclusive to the state of Florida.

The private layers of the Program, covering both Florida and non-Florida exposures have prepaid automatic reinstatement protection, which affords the carriers additional coverage for subsequent events. The private reinsurance market continued to harden this year due to a number of factors, including issues unique to the U.S. coastal catastrophe reinsurance marketplace generally and the Florida market specifically. These factors resulted in more restrictive terms by some of our individual reinsurers. The change in terms from the prior year’s program includes some portion of the program having a single aggregate retention for our carriers taken as a whole, versus each carrier’s own individual retention, plus some portions of the program not “cascading”, which provides less broad coverage for multiple event scenarios generating gaps in coverage that need to be filled with additional post renewal reinsurance protection or be retained net by the Company. As of December 31, 2020, the overall reinsurance Program was placed with reinsurers with an A.M. Best Company or Standard & Poor’s rating of “A-” or better, or that have fully collateralized their maximum potential obligations in dedicated trusts. For the purpose of debt covenant compliance, if any reinsurer on the program is not collateralized or has a rating lower than “A-” by A.M. Best Company or Standard & Poor’s then the Company treats that reinsurer’s participation as if it was part of the Company’s net retention. Refer to "Part II, Item 1A., Risk Factors” for more information.

The total Program cost includes approximately $238.2 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic reinstatement premium protection, along with approximately $47.8 million payable to the FHCF. The combination of private and FHCF reinsurance treaties will afford the carriers up to approximately $1.9 billion of aggregate coverage within Florida and $1.3 billion in states outside Florida with a maximum single event coverage totaling up to approximately $1.3 billion within Florida and approximately $650 million outside Florida, exclusive of retentions.

Each carrier will share the combined program cost in proportion to its contribution to the total expected loss in each reinsurance layer. Each carrier’s reinsurance recoveries will be based on that carrier’s contributing share of a given event’s total loss and each carrier will be responsible for its portion of the Program’s $25 million per event retention ($31 million for the first event only) based on a specific allocation formula. Both FNIC and MNIC increased their FHCF participation to 90% for the 2020 hurricane season, and MIC maintained its FHCF participation at 90%.

In addition, the Company purchased subsequent event reinsurance coverage that has a lower retention than the first event. Under the Program, FNIC’s non-Florida book of business as written by SageSure has excess of loss reinsurance treaties which afford this specific book of business additional protection through an additional $16 million of coverage for a second event, which applies to hurricane losses only. This additional reinsurance coverage is specific to FNIC's non-Florida business and does not afford coverage to MIC's non-Florida business. The result is a retention of approximately $18 million for FNIC's book with SageSure for the first event and approximately $2 million for the second event, although these retentions are reduced to approximately $9 million and approximately $1 million after taking into account the quota-share reinsurance agreement that FNIC has with Anchor Re, Inc. ("Anchor Re"). Furthermore, for Florida only losses, the carriers purchased second and third event coverage of 71.5% of $15 million excess of $10 million that reduces the second and third event retention for the carriers, from $25 million to $14.3 million per event, on a

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FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

combined basis, which could be reduced further by an additional 28.5% placed on a parametric basis with an Excess and Surplus lines carrier that will provide coverage for the second and third Florida hurricane loss, if the first event loss criteria has been satisfied to the carriers after the inception of treaty. The amount of recovery with the parametric product is based on the magnitude of the hurricane and the proximity of the individual insured risk to the hurricane path. This coverage terminates on May 31, 2021.

Furthermore, on September 3, 2020, the Company secured $39.2 million of reinsurance limit at an approximate cost of $11.2 million. This limit is available for Hurricane Delta and any subsequent events that occur during the remainder of the current treaty year. In addition, on October 13, 2020, the Company secured 50% of $10 million excess of $8 million of reinsurance limit at an approximate cost of $875 thousand to lower its retention and further protect FNIC’s non-Florida book of business written by SageSure. This limit was available for any named storm event during the remainder of 2020. On November 4, 2020, the Company secured an additional $13.5 million of reinsurance limit at an approximate cost of $2.0 million. This limit was available for any subsequent events that occurred for the remainder of 2020, except for Hurricane Eta.

Effective January 1, 2021, the Company entered into a new aggregate excess of loss agreement on its MIC book of business. This new agreement provides reinsurance coverage on non-named storms, of 65% of $15 million excess of $10 million with a $0.9 million occurrence deductible and a $4.2 million occurrence limit at an approximate cost of $2.3 million.

The 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, 2020. This analysis of the carriers’ exposure levels 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 ~~were~~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.

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

~~FNIC’s~~On July 1, 2018, FNIC renewed the quota-share ~~reinsurance program for 2018-2019, is a new~~ treaty on ~~FNIC’s~~ its Florida homeowners book of business, ~~which became effective on July 1, 2018~~ on an in-force, new and renewal basis, excluding named storms, ~~and~~which was initially set at a 2%. cession, and is subject to certain limitations. In addition, this quota-share allowed FNIC to prospectively increase or decrease the cession percentage up to three times during the term of the agreement. Effective October 1, 2018, FNIC elected to increase the cession percentage from 2% to 10% on an in-force, new and renewal basis. The treaty expired on July 1, 2019 on a cut-off basis, meaning that the reinsurer will not be liable (under this agreement) for losses as a result of occurrences taking place after the date of termination, and the unearned premium previously ceded was returned to FNIC.

On July 1, 2019, FNIC renewed the quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal basis, excluding named storms, which was set at a 10% cession and is subject to certain limitations. In addition, this quota-share allows FNIC the flexibility to prospectively increase or decrease the cession percentage up to three times during the term of the agreement. The treaty expired on July 1, 2020 on a cut-off basis, meaning that the reinsurer will not be liable (under this agreement) for losses as a result of occurrences taking place after the date of termination, and the unearned premium previously ceded was returned to FNIC.

On July 1, 2020, FNIC renewed the quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal basis, excluding named storms, which was set at a 10% cession and is subject to certain limitations. In addition, this quota-share allows FNIC the flexibility to prospectively increase or decrease the cession percentage up to three times during the term of the agreement.

-6476-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

On July 1, 2020, FNIC entered into a quota-share treaty on its non-Florida homeowners book of business with Anchor Re, an Arizona captive reinsurance entity that is an affiliate of SageSure. The treaty provides 50% quota-share reinsurance protection on claims incurred subsequent to July 1, 2020 on in-force, new and renewal business through June 30, 2021, subject to certain limitations, which include limits on the net losses that Anchor Re can realize during the treaty year. The treaty arrangement is fully collateralized through Anchor Re. The financial economics of this treaty substantially mirror the 50% profit-sharing arrangement that was previously in place. Thus, this treaty is not expected to have any impact on the pre-tax operating results of the Company, though the components of the combined ratio will be affected by the ceding of premiums, claims and commissions. On November 3, 2020, FNIC, with the agreement of Anchor Re, increased its cession percentage in this treaty from 50% to 80%, effective December 1, 2020, on claims incurred subsequent to December 1, 2020 on in-force, new and renewal basis.

~~the agreement.~~

Effective October 1, ~~2018,~~2020, FNIC, ~~elected to increase~~with the agreement of Swiss Re, increased its cession percentage on this treaty from 2%10% to ~~10%~~20% on an in-force, new and renewal basis. This treaty excludes named storms and includes a cap on non-named storm catastrophe losses (as discussed above).

The Company’s private passenger automobile quota-share treaties are typically programs which become effective at different points in the year and cover auto policies across several states. The automobile quota-share treaties cede approximately 75% of all written premiumsEffective November 15, 2020, FNIC entered into ~~by the Company,~~a new 10% quota-share reinsurance treaty through November 15, 2021 on its Florida homeowners book of business on an in-force, new and renewal basis. This treaty excludes all catastrophe losses and provides coverage only on attritional losses and is subject to certain ~~limitations including,~~limitations.

Effective December 31, 2020, FNIC entered into an additional new 10% quota-share reinsurance treaty through December 31, 2021 on its Florida homeowners book of business on an in-force, new and renewal basis. This treaty excludes named storms, but ~~not limited~~otherwise contains no caps with respect to ~~premium and other caps.~~non-named storm catastrophe losses.

As a result of these three actions, the Company now has 40% quota-share coverage in place through June 30, 2021, at which point 20% of this coverage will be up for renewal. It is the Company’s current intent to seek such renewal.

Associated Trust Agreements

Certain reinsurance agreements require FNIC ~~and MNIC~~ to secure the credit, regulatory and business risk. Fully funded trust agreements securing these risks ~~for FNIC~~ totaled less than $0.1 million ~~and $2.6 million~~ as of December 31, ~~2018~~2020 and ~~December 31, 2017, respectively.~~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 ~~recoverables.~~recoverable. Reinsurance recoverable, net consisted of the following:


	December 31,
	2020		2019
	(In thousands)
Reinsurance recoverable on paid losses	$	54,898	$	45,186
Reinsurance recoverable on unpaid losses	358,193		164,429
Allowance for credit loss	(65)		0
Reinsurance recoverable, net	$	413,026	$	209,615

December 31,
2018 2017
(In thousands)
Reinsurance recoverable on paid losses $ 45,028
$ 26,256
Reinsurance recoverable on unpaid losses 166,396
98,345
Reinsurance recoverable, net $ 211,424
$ 124,601

As of December 31, ~~2018~~2020 and ~~2017,~~2019, the Company had reinsurance ~~recoverables~~recoverable of ~~$183.5~~$304.3 million (as a result of ~~Hurricane~~Hurricanes Irma, Laura, Sally, Michael and ~~Irma)~~Delta) and ~~$88.0~~$163.7 million (as a result of Hurricanes Irma and Michael). Hurricane ~~Irma), respectively. Hurricane Michael~~Delta made landfall in Louisiana on October 9, 2020 as a Category 2 hurricane impacting both Texas and Louisiana. Hurricane Sally made landfall in Alabama on September 16, 2020 as a Category 2 hurricane impacting both Alabama and the Florida ~~Panhandle~~panhandle. Hurricane Laura made landfall in Louisiana on August 27, 2020 as a Category 4 Hurricane on October 10, 2018. 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.hurricane impacting both Louisiana and eastern Texas.

-77-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Net Premiums Written and Net Premiums Earned

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

໿


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Net Premiums Written
Direct	$	726,885	$	610,608	$	567,764
Ceded	(490,262)		(232,729)		(202,732)
	$	236,623	$	377,879	$	365,032

Net Premiums Earned
Direct	$	720,967	$	582,334	$	580,020
Ceded	(356,833)		(218,682)		(224,763)
	$	364,134	$	363,652	$	355,257

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	$	0	$	159	$	0	$	159
Cumulative effect of new accounting standard (1)	1		0		32		33
Credit loss expense (recovery) (2)	(1)		74		33		106
Balance as of December 31, 2020	$	0	$	233	$	65	$	298

(1)Refer to Note 2 above 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.

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.

-78-

Year Ended December 31,
2018 2017 2016
(In thousands)
Net Premiums Written
Direct $ 567,764
$ 603,417
$ 605,485
Ceded (202,732 ) (260,524 ) (285,986 )
$ 365,032
$ 342,893
$ 319,499

Net Premiums Earned
Direct $ 580,020
$ 603,193
$ 565,423
Ceded (224,763 ) (269,712 ) (304,054 )
$ 355,257
$ 333,481
$ 261,369

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FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

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 loss 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 December 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.

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.

-79-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

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


			Days Past Due
	Current		1-29		30-59		60-89		90 plus		Total
	(In thousands)
Amortized cost	$	46,376	$	4,253	$	159	$	94	$	154	$	51,036
Allowance for credit loss	0		(43)		(8)		(28)		(154)		(233)
Net	$	46,376	$	4,210	$	151	$	66	$	0	$	50,803

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 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 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%.

8. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

The changes in carrying amount of goodwill were as follows:


	Gross		Accumulated
	Goodwill		Impairment						Net
	as of		as of		Acquisition				Goodwill
	Beginning-		Beginning-		Accounting				as of End-
	of-Year		of-Year		Adjustments		Impairment		of-Year
	(In thousands)
For the year ended December 31,:
2019	$	0	$	0	$	10,997	$	0	$	10,997
2020	10,997		0		0		(10,997)		0

Related to our annual quantitative goodwill impairment assessment performed on October 1, our reporting unit is defined as consolidated FNHC. The fair value of the reporting unit, which we consider a Level 3 fair value estimate, is comprised of the value of in-force (i.e., existing) business and the value of new business. Specifically, new business is representative of cash flows and profitability associated with policies or contracts we expect to issue in the future, reflecting our forecasts of volume and product mix over a 10-year period. To determine the value of in-force and new business, we use a discounted cash flows technique that applies a discount rate reflecting the market expected, weighted-average rate of return adjusted for the risk factors associated with our operations to the projected future cash flow for our reporting unit.

Coinciding with the preparation of the financial statements for the year ended December 31, 2020, the Company’s annual goodwill impairment testing has resulted in the conclusion that the goodwill intangible asset established in conjunction with the acquisition of the Maison Companies in December 2019 is impaired. Therefore, during the fourth quarter of 2020, we recorded a non-cash impairment charge of $11.0 million, against which there is no tax offset, representing the write-off of the full amount of our goodwill asset. The Company’s impairment analysis considered the earnings and share price of the Company and comparable companies, as well as projected cash flows. Continued adverse storm activity, higher excess of loss catastrophe reinsurance costs and the continued unfavorable claims environment in the state of Florida reduced the previously modeled fair value of the Company. These impacts, along with other information relevant to the estimated fair value of the Company, including the trading price of our shares, resulted in the impairment conclusion.

-80-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

The gross carrying amounts and accumulated amortization for each major specifically identifiable intangible asset class were as follows:



	December 31, 2020				December 31, 2019				Weighted-
	Gross				Gross				Average-
	Carrying		Accumulated		Carrying		Accumulated		Amortization
	Amount		Amortization		Amount		Amortization		Period
	(In thousands)
Trade name (1)	$	1,100	$	—	$	1,800	$	—	0
Non-compete agreements (2)	300		162		300		13		2
Insurance licenses (3)	180		—		182		—		0
Total	$	1,580	$	162	$	2,282	$	13

(1)This intangible has an indefinite useful life. We recorded impairment of $0.7 million in the year ended December 31, 2020, due primarily to a higher discount rate, which lowered the fair value.

(2)Will become fully amortized during the year ended December 31, 2021.

(3)This intangible has an indefinite useful life. We recorded impairment of $2 thousand for the year ended December 31, 2020, due primarily to a higher discount rate, which lowered the fair value.

9. 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 IBNR.

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

໿


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

Net reserves from the Maison Companies acquisition	0		11,825		0

Incurred loss, net of reinsurance, related to:
Current year	358,952		262,118		231,133
Prior year loss development (redundancy) (2)	18,367		13,460		2,166
Ceded losses subject to offsetting experience account adjustments (3)	(816)		(2,489)		(4,883)
Prior years	17,551		10,971		(2,717)
Amortization of acquisition fair value adjustment	(54)		(9)		0
Total incurred loss and LAE, net of reinsurance	376,449		273,080		228,416

Paid loss, net of reinsurance, related to:
Current year	253,344		173,313		155,462
Prior years	100,799		81,493		75,290
Total paid loss and LAE, net of reinsurance	354,143		254,806		230,752

Net reserves, end-of-period	182,239		159,933		129,834
Plus: reinsurance recoverable (1)	358,128		164,429		166,396
Gross reserves, end-of-period	$	540,367	$	324,362	$	296,230

(1)Reinsurance recoverable in this table includes only ceded loss and LAE reserves.

-81-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Year Ended December 31,
2018 2017 2016
(In thousands)
Gross reserves, beginning-of-period $ 230,515
$ 158,110
$ 97,706
Less: reinsurance recoverable (1) (98,345 ) (40,412 ) (7,496 )
Net reserves, beginning-of-period 132,170
117,698
90,210

Incurred loss, net of reinsurance, related to:
Current year 231,133
245,545
201,704
Prior year loss development (2) 2,166
13,926
13,156
Ceded losses subject to offsetting experience account adjustments (3) (4,883 ) (11,914 ) (17,050 )
Prior years (2,717 ) 2,012
(3,894 )
Total incurred loss and LAE, net of reinsurance 228,416
247,557
197,810

Paid loss, net of reinsurance, related to:
Current year 155,462
160,945
123,364
Prior years 75,290
72,140
46,958
Total paid loss and LAE, net of reinsurance 230,752
233,085
170,322

Net reserves, end-of-period 129,834
132,170
117,698
Plus: reinsurance recoverable (1) 166,396
98,345
40,412
Gross reserves, end-of-period $ 296,230
$ 230,515
$ 158,110
(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).


~~(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 year ended December 31, 2020, the Company experienced $18.4 million of net unfavorable loss and LAE reserve development on prior accident years, primarily in its commercial general liability line of business as a result of higher than expected late reported claims across a number of accident years during 2020.

During the year ended December 31, 2019, the Company experienced $13.5 million of net unfavorable loss and LAE reserve development on prior accident years, primarily in its personal automobile and commercial general liability lines of business. The development in commercial general liability was driven by late reported claims as well as large losses that drove up the overall severity metrics. Additionally, the unfavorable automobile development primarily related to 2017 accident year from our auto programs in the states of Georgia and Texas, and was driven by claims reopening and higher severity.

During the year ended December 31, 2018, the Company experienced $2.2 million of unfavorable loss and LAE reserve development on prior accident years in its personal automobile and commercial general liability lines of businesses, partially offset by redundancy in the homeowners line of business as a result of lower LAE expenses primarily associated with Hurricane Irma.

~~During the year ended December 31, 2017, the Company experienced $13.9 million of~~net unfavorable loss and LAE reserve development on prior accident years, primarily driven by net development in our personal automobile ~~and~~line of business, partially offset by net redundancy in our homeowners line of business. The ~~automobile’s~~ unfavorable development on automobile primarily related to the 2016 accident year ~~from our auto program~~ in the state of Georgia. The favorable net redundancy on homeowners ~~unfavorable development~~was primarily ~~related to the~~driven by lower LAE expenses associated with Hurricane Irma, partially offset by continued adverse impact from assignment of benefits ~~("AOB"~~(“AOB”) and related ~~ligation~~litigation costs in the state of Florida.

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

-66-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

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.

Beginning in 2017, for purposes of the total incurred loss, net of reinsurance line within this disclosure, the Company has classified paid losses related to these retrospectively rated quota-share treaties which were ceded during the indicated year but relating to a prior accident year in a separate line. The related amounts in the previous year have been adjusted to conform to this presentation. Prior to 2017, these amounts were included in the current year incurred line item in the table above. Total amounts of incurred losses presented for 2016 remain unchanged.

During the year ended December 31, 2016, the Company experienced unfavorable loss and LAE reserve development on prior accident years primarily in its all other peril homeowners coverage in Florida. In the first half of 2016, the Company began to experience a new and higher level of AOB claims both in frequency and severity in our homeowners business in Florida, which caused adverse experience on the loss activity in accident years 2015 and 2016. This increased level of AOB claims was the significant driver in the Company’s decision to increase the Company’s 2015 accident year reserves related to the Company’s homeowners Florida policies.

AOB is a legal construct that allows a third party to step into the shoes of the insured and is then paid directly by an insurance company for services rendered on behalf of the insured for a covered loss. Absent an AOB, the insured would pay the third party and those costs would be reimbursed by the insurance company to the insured. AOB is commonly used when a homeowner experiences a water loss, for example a leaky pipe, an overflow from a sink, or a damaged appliance, and contacts a contractor or water remediation company.

Misuse of this legal construct has led to contractors over inflating costs of claims and/or submitting improper claims, causing insurance companies to have to either pay the overinflated claim, fight the claim in court, or both. In all cases, AOB claims cost the insurance company, on average, more than five times the cost to settle non-AOB claims, which has been a primary driver the increase to our overall loss and loss adjustment in comparison to historical severity averages.

-82-

Although the concept of AOB had been around for several years prior to 2016, the Company had a relatively low level of AOB claims in the accident years prior to 2016 and the related adverse impact of AOB claims had a marginal impact on the Company’s overall loss experience. Given the nature of AOB claims, it is difficult to identify the number of outstanding or expected AOB claims as the third parties may not step into the shoes of the insured or may not identify itself to the Company until later on in the claim processing cycle. This delay in identifying AOB claims creates a challenge in estimating the Company’s loss reserves, as capturing the incremental costs to settle AOB claims as part of the Company’s calculation of estimated loss reserves at the end of the year.

~~Accordingly, the challenge described above together with the change in the Company’s historical trend on AOB claims were the main drivers of the prior year development in 2016.~~

-67-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

The following tables provide incurred losses and ~~ALAE~~allocated LAE ("ALAE") and cumulative paid losses and ALAE, net of reinsurance, for the prior 10 accident years, and the total of IBNR reserves plus expected development on reported claims and the cumulative number of reported claims (in thousands, except number of reported claims), as of the most recent reporting period, by the Company’s significant lines of business, which are homeowners, commercial general liability and automobile.


																					IBNR & Expected		Cumulative
	Homeowners Incurred Losses and ALAE, Net of Reinsurance																				Development on		Number of
	For the Years Ended December 31,																				Reported Claims		Reported Claims (1)
	(Unaudited)
Accident Year	2011		2012		2013		2014		2015		2016		2017		2018		2019		2020		2020		2020
2011	$	20,492	$	21,344	$	23,007	$	23,932	$	24,582	$	25,957	$	26,143	$	26,394	$	26,394	$	26,375	$	12	2,428
2012			23,032		23,301		24,186		24,468		25,889		26,356		26,836		26,951		26,984		85		2,694
2013					43,807		42,021		35,834		35,859		37,185		37,880		37,978		38,088		15		3,431
2014							64,312		63,300		61,770		62,206		61,817		62,043		62,535		378		7,606
2015									99,497		92,411		95,129		94,760		94,703		96,144		1,522		13,038
2016											171,264		162,043		158,764		157,880		156,316		1,394		22,614
2017													202,844		192,769		188,548		179,327		47,728		67,165
2018															210,158		213,128		216,570		20,849		35,817
2019																	257,644		261,541		23,909		19,661
2020																			342,119		236,080		35,117
																	Total		$	1,405,999

(1)The cumulative number of reported claims is measured by individual claimant at a coverage level.

-83-

IBNR & Expected Cumulative
Homeowners Incurred Losses and ALAE, Net of Reinsurance Development on Number of
For the Years Ended December 31, Reported Claims Reported Claims (1)
(Unaudited)
Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 2018
2009 $ 26,228
$ 25,618
$ 25,955
$ 26,482
$ 27,015
$ 27,041
$ 27,119
$ 27,163
$ 27,173
$ 27,159
$ 141
$ 2,334
2010 24,825
25,056
26,151
27,895
28,968
29,407
29,945
30,459
30,602
30
2,391
2011 20,492
21,344
23,007
23,932
24,582
25,957
26,143
26,394
25
2,428
2012 23,032
23,301
24,186
24,468
25,889
26,356
26,836
38
2,691
2013 43,807
42,021
35,834
35,859
37,185
37,880
139
3,427
2014 64,312
63,300
61,770
62,206
61,817
636
7,621
2015 99,497
92,411
95,129
94,760
2,232
13,137
2016 171,264
162,043
158,764
11,832
23,982
2017 202,844
192,769
62,363
62,200
2018 210,158
91,887
28,532
Total $ 867,139


~~(1)~~	~~The cumulative number of reported claims is measured by individual claimant at a coverage level.~~

-68-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020



	Homeowners Cumulative Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2011		2012		2013		2014		2015		2016		2017		2018		2019		2020
2011	$	11,119	$	19,250	$	21,323	$	22,723	$	24,047	$	25,580	$	25,982	$	26,287	$	26,340	$	26,342
2012			13,693		20,728		23,120		23,923		25,186		26,113		26,777		26,861		26,901
2013					19,986		31,606		33,867		35,123		35,803		37,473		37,688		37,915
2014							37,033		53,831		57,891		59,722		60,555		61,441		61,692
2015									52,214		79,359		86,647		90,415		92,327		93,405
2016											102,556		142,716		148,274		152,258		153,997
2017													135,589		176,580		179,327		178,013
2018															141,173		194,160		206,133
2019																	157,768		236,090
2020																			236,197
																			$	1,256,685


All outstanding liabilities for unpaid claims and ALAE prior to 2011, net of reinsurance																			0
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance																			$	149,314

Homeowners Cumulative Paid Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2009 $ 15,047
$ 23,095
$ 24,657
$ 26,007
$ 26,462
$ 26,831
$ 26,927
$ 26,982
$ 27,049
$ 27,015
2010 14,052
21,350
24,730
26,886
27,984
29,092
29,739
30,376
30,449
2011 11,119
19,250
21,323
22,723
24,047
25,580
25,982
26,287
2012
13,693
20,728
23,120
23,923
25,186
26,113
26,777
2013 19,986
31,606
33,867
35,123
35,803
37,473
2014
37,033
53,831
57,891
59,722
60,555
2015 52,214
79,359
86,647
90,415
2016
102,556
142,716
148,274
2017

135,589
176,580
2018 141,173
$ 764,998

All outstanding liabilities for unpaid claims and ALAE prior to 2009, net of reinsurance 138
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance $ 102,279

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for homeowners policies, as of December 31, ~~2018:~~2020:


	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Homeowners	62.0	%	25.6	%	4.6	%	1.9	%	1.8	%	2.3	%	1.0	%	0.6	%	0.2	%	0	%

-84-

Average Annual Payout of Losses and ALAE, Net of Reinsurance
(Unaudited)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Homeowners 57.8 % 23.5 % 5.7 % 3.8 % 2.5 % 3.5 % 1.5 % 1.1 % 0.2 % — %

-69-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020


																					IBNR & Expected		Cumulative
	Commercial General Liability Incurred Losses and ALAE, Net of Reinsurance																				Development on		Number of
	For the Years Ended December 31,																				Reported Claims		Reported Claims
	(Unaudited)
Accident Year	2011		2012		2013		2014		2015		2016		2017		2018		2019		2020		2020		2020
2011	$	6,436	$	5,854	$	4,749	$	4,603	$	4,760	$	5,409	$	6,254	$	6,828	$	7,817	$	9,394	$	1,572	1,367
2012			5,279		4,952		4,801		4,700		4,658		4,346		4,509		5,109		6,431		1,209		817
2013					7,095		5,069		5,221		5,502		5,704		5,580		5,984		7,588		1,245		759
2014							7,475		7,709		6,384		6,620		6,348		6,697		9,028		1,549		1,016
2015									8,082		7,008		6,020		5,377		7,947		9,141		2,043		877
2016											10,727		5,809		6,561		8,502		12,267		3,086		845
2017													8,289		7,853		6,558		8,519		3,369		639
2018															6,553		6,233		7,280		4,281		420
2019																	1,604		2,535		1,826		114
2020																			37		0		6
																	Total		$	72,220


	Commercial General Liability Cumulative Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2011		2012		2013		2014		2015		2016		2017		2018		2019		2020
2011	$	764	$	2,763	$	3,366	$	3,673	$	4,246	$	4,866	$	5,831	$	6,349	$	7,365	$	7,693
2012			871		1,714		2,632		3,342		3,686		3,841		4,098		4,521		4,790
2013					882		2,233		3,366		3,867		4,606		5,033		5,467		5,847
2014							717		2,593		3,855		4,375		5,130		6,270		6,901
2015									798		2,296		3,249		3,827		5,866		6,566
2016											1,515		3,657		5,088		6,606		8,382
2017													1,592		2,478		3,293		4,225
2018															963		1,554		2,604
2019																	147		424
2020																			5
																	Total		$	47,437

All outstanding liabilities for unpaid claims and ALAE prior to 2011, net of reinsurance																			3,545
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance																			$	28,328

-85-

IBNR & Expected Cumulative
Commercial General Liability Incurred Losses and ALAE, Net of Reinsurance Development on Number of
For the Years Ended December 31, Reported Claims Reported Claims
(Unaudited)
Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 2018
2009 $ 13,297
$ 12,397
$ 12,220
$ 11,943
$ 9,270
$ 10,192
$ 10,466
$ 11,081
$ 11,621
$ 12,872
$ 5
$ 988
2010 8,552
7,582
7,474
7,045
7,535
7,597
7,645
7,809
8,252
72
691
2011 6,436
5,854
4,749
4,603
4,760
5,409
6,254
6,828
63
1,058
2012 5,279
4,952
4,801
4,700
4,658
4,346
4,509
121
538
2013 7,095
5,069
5,221
5,502
5,704
5,580
219
573
2014 7,475
7,709
6,384
6,620
6,348
161
673
2015 8,082
7,008
6,020
5,377
215
713
2016 10,727
5,809
6,561
402
695
2017 8,289
7,853
4,634
530
2018 6,553
5,254
313
Total $ 70,733

Commercial General Liability Cumulative Paid Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2009 $ 2,253
$ 4,236
$ 6,466
$ 7,384
$ 8,046
$ 8,593
$ 10,130
$ 10,454
$ 11,308
$ 12,377
2010
1,187
2,279
3,855
5,553
6,363
7,238
7,382
7,631
7,918
2011

764
2,763
3,366
3,673
4,246
4,866
5,831
6,349
2012

871
1,714
2,632
3,342
3,686
3,841
4,098
2013
882
2,233
3,366
3,867
4,606
5,033
2014

717
2,593
3,855
4,375
5,130
2015
798
2,296
3,249
3,827
2016

1,515
3,657
5,088
2017

1,592
2,478
2018
963
Total $ 53,261

All outstanding liabilities for unpaid claims and ALAE prior to 2009, net of reinsurance 1,416
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance $ 18,888

-70-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for commercial general liability policies, as of December 31, ~~2018:~~2020:


	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Commercial general liability	10.2	%	14.1	%	10.4	%	7.2	%	10.3	%	6.5	%	6.3	%	5.0	%	7.2	%	4.7	%


																					IBNR & Expected		Cumulative
	Automobile Incurred Losses and ALAE, Net of Reinsurance																				Development on		Number of
	For the Years Ended December 31,																				Reported Claims		Reported Claims
	(Unaudited)
Accident Year	2011		2012		2013		2014		2015		2016		2017		2018		2019		2020		2020		2020
2011	$	3,580	$	3,350	$	2,954	$	2,912	$	2,762	$	2,848	$	2,796	$	2,756	$	2,762	$	2,760	$	0	789
2012			1,735		1,741		1,717		1,424		1,455		1,491		1,448		1,444		1,448		4		824
2013					1,517		1,863		1,826		1,829		2,161		2,123		2,127		2,127		6		3,471
2014							2,038		3,213		3,551		4,315		4,379		4,417		4,413		4		6,019
2015									3,045		2,882		2,781		2,878		2,915		2,944		14		6,553
2016											13,414		20,205		24,346		25,918		25,923		251		67,655
2017													20,411		22,472		24,579		24,669		740		52,885
2018															3,513		4,623		4,439		887		9,604
2019																	(3)		0		2		101
2020																			0		0		1
																	Total		$	68,723

-86-

Average Annual Payout of Losses and ALAE, Net of Reinsurance
(Unaudited)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Commercial general liability 14.1 % 18.5 % 18.5 % 9.1 % 7.6 % 6.0 % 7.7 % 3.4 % 4.7 % 9.6 %

IBNR & Expected Cumulative
Automobile Incurred Losses and ALAE, Net of Reinsurance Development on Number of
For the Years Ended December 31, Reported Claims Reported Claims
(Unaudited)
Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 2018
2009 $ 272
$ 267
$ 259
$ 264
$ 258
$ 243
$ 243
$ 243
$ 243
$ 242
$ —
$ 57
2010 2,823
2,963
3,111
3,088
3,044
3,035
3,059
3,041
3,042
—
969
2011 3,580
3,350
2,954
2,912
2,762
2,848
2,796
2,756
—
789
2012 1,735
1,741
1,717
1,424
1,455
1,491
1,448
2
822
2013 1,517
1,863
1,826
1,829
2,161
2,123
9
3,468
2014 2,038
3,213
3,551
4,315
4,379
14
6,006
2015 3,045
2,882
2,781
2,878
62
6,498
2016 13,414
20,205
24,346
482
45,423
2017 20,411
22,472
2,222
31,169
2018 3,513
2,230
6,241
Total $ 67,199

-71-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020



	Automobile Cumulative Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2011		2012		2013		2014		2015		2016		2017		2018		2019		2020
2011	$	1,417	$	2,381	$	2,562	$	2,644	$	2,726	$	2,755	$	2,755	$	2,755	$	2,755	$	2,755
2012			867		1,293		1,333		1,384		1,393		1,430		1,444		1,447		1,449
2013					907		1,609		1,906		2,069		2,109		2,112		2,116		2,116
2014							1,455		3,120		3,678		4,122		4,291		4,383		4,396
2015									1,393		2,293		2,670		2,807		2,890		2,897
2016											8,084		17,258		23,053		25,582		26,132
2017													12,821		20,762		23,860		24,468
2018															2,331		3,626		3,137
2019																	(5)		0
2020																			0
																	Total		$	67,350

All outstanding liabilities for unpaid claims and ALAE prior to 2011, net of reinsurance																			15
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance																			$	1,388

Automobile Cumulative Paid Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
Accident Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2009 $ 61
$ 218
$ 220
$ 225
$ 241
$ 243
$ 243
$ 243
$ 243
$ 242
2010
1,713
2,482
2,715
2,863
2,942
2,978
2,984
3,035
3,037
2011

1,417
2,381
2,562
2,644
2,726
2,755
2,755
2,755
2012

867
1,293
1,333
1,384
1,393
1,430
1,444
2013
907
1,609
1,906
2,069
2,109
2,112
2014

1,455
3,120
3,678
4,122
4,291
2015
1,393
2,293
2,670
2,807
2016

8,084
17,258
23,053
2017

12,821
20,762
2018
2,331
Total $ 62,834

All outstanding liabilities for unpaid claims and ALAE prior to 2009, net of reinsurance 9
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance $ 4,374

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for automobile policies, as of December 31, ~~2018:~~2020:


	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Automobile	42.3	%	33.5	%	14.2	%	6.2	%	2.3	%	1.2	%	0.3	%	0	%	0	%	0	%

-87-

Average Annual Payout of Losses and ALAE, Net of Reinsurance
(Unaudited)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Automobile 41.7 % 32.2 % 16.4 % 5.5 % 2.5 % 1.0 % 0.2 % 0.5 % — % — %

-72-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in the consolidated balance sheets is as follows:


	December 31,
	2020		2019
	(In thousands)
Liabilities for unpaid losses and ALAE:
Homeowners	$	149,314	$	137,168
Commercial general liability	28,328		17,014
Automobile	1,388		2,142
Flood	0		0
Total liabilities for unpaid losses and ALAE, net of reinsurance	179,030		156,324

Reinsurance recoverables:
Homeowners	353,741		160,578
Commercial general liability	0		500
Automobile	1,424		3,228
Flood	2,963		123
Total reinsurance recoverables	358,128		164,429

Unallocated loss adjustment expenses	3,209		3,609
Gross liability for unpaid losses and LAE	$	540,367	$	324,362

December 31,
2018 2017
(In thousands)
Liabilities for unpaid losses and ALAE:
Homeowners $ 102,279
$ 99,650
Commercial general liability 18,888
17,111
Automobile 4,374
11,030
Flood —
—
Total liabilities for unpaid losses and ALAE, net of reinsurance 125,541
127,791

Reinsurance recoverables:
Homeowners 158,043
81,852
Commercial general liability —
—
Automobile 8,275
15,360
Flood 78
1,133
Total reinsurance recoverables 166,396
98,345

Unallocated loss adjustment expenses 4,293
4,379
Gross liability for unpaid losses and LAE $ 296,230
$ 230,515

Management establishes a liability on an aggregate basis to provide for the estimated IBNR. The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

Various actuarial methods are utilized to determine the reserves that are booked to our financial statements. Weightings of tests and methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures and time elements. On an overall basis, changes to methods and/or assumptions underlying reserve estimations and selections as of December 31, ~~2018~~2020 and ~~2017,~~2019, were not considered ~~material.~~material, except for our commercial general liability line of business. For this line of business, we updated our actuarial assumptions to reflect the new, emerging trend relating to the increased level of new claims being reported related to construction defects, as the new development patterns are different than the historical patterns.

IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff. Various standard actuarial tests are applied to subsets of the business at a line of business and coverage basis. Included in the analyses are the following:

•Reported Loss Development Method: A reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels;

•Paid Development Method: A paid loss development pattern is calculated based on historical paid loss development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year, as appropriate, to ultimate levels;

•Expected Loss Ratio Method: Expected loss ratios are applied to premiums earned, based on historical company experience, or historical insurance industry results when company experience is deemed not to be sufficient; and

•Bornhuetter-Ferguson Method: The results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method.

-88-

໿

-73-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

7.10. LONG-TERM DEBT

Long-term debt consisted of the following:


	December 31,
	2020		2019
	(In thousands)
Senior unsecured fixed rate notes, due March 15, 2029, net of deferred financing costs of $1,317 and $1,478, respectively	$	98,683	$	98,522
Total long-term debt, net	$	98,683	$	98,522

December 31,
2018 2017
(In thousands)
Senior unsecured floating rate notes, due December 31, 2027, net of deferred financing costs of $348 and $377, respectively $ 24,652
$ 24,623
Senior unsecured fixed rate notes, due December 31, 2022, net of deferred financing costs of $248 and $302, respectively 19,752
19,698
Debt from consolidated VIE, due March 17, 2021, net of deferred financing costs of $0 and $70, respectively —
4,930
Total long-term debt, net $ 44,404
$ 49,251

As of December 31, 2020, the Company’s estimated annual aggregate amount of debt maturities includes the following:


	Aggregate
	Debt
For the Years Ending December 31,	Maturities
	(In thousands)
2021	$	0
2022	0
2023	0
2024	0
2025	0
Thereafter	100,000
Total debt maturities	100,000
Less: deferred financing costs	1,317
Total debt maturities, net	$	98,683

Senior Unsecured Notes

On ~~December 28, 2017,~~March 5, 2019, the Company completed a private placement offering and issued ~~$25.0~~$100.0 million in principal amount of Senior Unsecured ~~Floating~~Fixed Rate Notes due ~~2027~~2029 (the ~~“2027 Notes”~~"Notes"), pursuant to an indenture dated as of ~~December 28, 2017~~March 5, 2029 (the ~~“Indenture”), as supplemented by a supplemental indenture dated as of December 28, 2017 (“Supplemental Indenture No. 1”~~"Indenture").The ~~2027~~ Notes mature on March 15, 2029 and bear interest at a fixed rate of 7.5% per year, payable ~~quarterly~~semi-annually in arrears, ~~at 7% above three-month LIBOR, on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2018. Principal will be payable~~subject to increases in ~~full at maturity on December 31, 2027. The~~the interest rate payable in the event of a downgrade below "BBB-" 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. A portion of the cash from the offering was used to redeem all $45.0 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 for the year ended 2019, for prepayment fees, including the write-off unamortized debt issuance costs on the ~~2027~~repayment.

The Company may redeem the Notes ~~will increase to 8% above the three-month LIBOR during the occurrence of~~under certain ~~events~~circumstances as ~~defined~~set forth in the ~~Indenture (generally, non-compliance with certain covenants for more than 60 days, or~~Indenture. Prior to March 15, 2024, the ~~occurrence of an event of default). The 2027~~Company may redeem the Notes, ~~may be redeemed~~ in whole or in part, at a redemption price ~~in cash~~ equal to ~~102%~~100.00% of the principal amount ~~thereof,~~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 inon the ~~first two years after issuance, 101%~~Notes being redeemed to but excluding the date of ~~the principal amount thereof, plus any accrued~~redemption.

-89-

FedNat Holding Company and ~~unpaid interest, in the third through fifth years after issuance, and at 100% of the principal amount thereof, plus any accrued and unpaid interest, after the fifth year after issuance.~~Subsidiaries

Notes to Consolidated Statements (Continued)

On December 29, 2017, the Company closed an additional tranche of $20.0 million of Senior Unsecured Fixed Rate Notes due 2022 (the “2022 Notes”), pursuant to the Indenture, as supplemented by a supplemental indenture dated as of December 29, 2017 (“Supplemental Indenture No. 2”). The 2022 Notes bear interest payable quarterly in arrears at 8.375%, on March 31, June 30, September 30 and December 31, of each year, commencing on March 31, 2018. The interest rate payable on the 2022 Notes will increase by an additional 50 basis points for each notch downgrade of the Company below “BBB” by Egan Jones Rating Company or successor rating agency. Principal on the 2022 Notes will be payable in full at maturity on December 31, 2022. The 2022 Notes may not be early-redeemed by the Company.2020

If a change in control of the Company, as defined in the Indenture, occurs, the holders of the ~~2027 Notes and 2022~~ Notes will have the right to require the Company to purchase all or a portion of their ~~notes~~Notes at a price in cash equal to ~~102%~~101% of the principal amount thereof, plus any accrued but unpaid interest.

The ~~2027 Notes and 2022~~ 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 ~~as supplemented by Supplemental Indenture No. 1 and Supplemental Indenture No. 2,~~ includes customary covenants and events of default. Among other things, the ~~covenants: (a)~~covenants restrict the ability of the Company and its subsidiaries to incur additional indebtedness or make restricted payments, including dividends, and under certain ~~circumstances; (b) limit~~circumstances, the Company ~~and its subsidiaries from creating, incurring or assuming liens other than permitted liens as defined in the indenture; (c) require the Company~~is required to maintain certain levels of reinsurance coverage while the ~~notes~~Notes remain ~~outstanding;~~outstanding, and ~~(d)~~ maintain certain other financial covenants.

~~During~~ These covenants are subject to important exceptions and qualifications set forth in the ~~first quarter~~Indenture. Principal and interest on the Notes are subject to acceleration in the event of ~~2019,~~certain events of default, including automatic acceleration upon certain bankruptcy-related events. The Company's debt to capital ratio exceeds 35%, therefore the Company ~~will be retiring~~is precluded from incurring additional debt, repurchasing shares of our common stock or paying common stock dividends. No acceleration of the ~~2027 and 2022 Notes, in connection with~~related debt is mandated due to the ~~offering~~fact that catastrophic weather events drove the ratio over 35% rather than specific actions taken by the Company. The Company's actual debt to capital ratio as of ~~$100 million~~December 31, 2020 was approximately 38.4%.

11. INCOME TAXES

The components of ~~Senior Unsecured Notes due 2029, which bear interest at~~income tax expense (benefit) include the ~~annual rate of 7.5%. Refer to Note 17 below for additional information.~~following:


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Federal:
Current	$	(29,449)	$	(982)	$	5,162
Deferred	(3,494)		567		(751)
Federal income tax expense (benefit)	(32,943)		(415)		4,411
State:
Current	(403)		241		1,383
Deferred	(150)		(124)		(296)
State income tax expense (benefit)	(553)		117		1,087
Total income tax expense (benefit)	$	(33,496)	$	(298)	$	5,498

-7490-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

~~Other Long-Term Debt~~

As discussed in Note 1 above, the outstanding principal balance of $5.0 million promissory note to TransRe was paid in full in February 2018. The associated deferred financing costs for this debt of less than $0.1 million was recognized as interest expense in our consolidated statement of operations for the three months ended March 31, 2018.

~~As of December 31, 2018, 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 20,000
2023 —
Thereafter 25,000
Total debt maturities 45,000
Less: deferred financing costs 596
Total debt maturities, net $ 44,404

~~8. INCOME TAXES~~

~~The components of income tax expense include the following:~~

໿

Year Ended December 31,
2018 2017 2016
(In thousands)
Federal:
Current $ 5,162
$ 2,431
$ 5,076
Deferred (751 ) 810
(4,714 )
Federal income tax expense (benefit) 4,411
3,241
362
State:
Current 1,383
494
674
Deferred (296 ) (150 ) (494 )
State income tax expense (benefit) 1,087
344
180
Total income tax expense (benefit) $ 5,498
$ 3,585
$ 542

-75-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

The actual income tax expense (benefit) differs from the “expected” income tax expense (benefit) (computed by applying the combined applicable effective federal and state tax rates to income before income tax expense) as follows:

໿


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Computed expected tax expense provision, at federal rate	$	(23,447)	$	150	$	4,244
State tax, net of federal tax benefit	(3,157)		(122)		761
Tax-exempt interest	(5)		(3)		(134)
Income subject to dividends-received deduction	(26)		(34)		(13)
Goodwill impairment	2,309		0		0
Return to provision	(3,407)		(307)		158

Executive compensation	41		230		436
Meals and entertainment	13		43		28
Uncertain tax position	(179)		(203)		0
Rate difference on NOL carryback	(8,785)		(113)		0
Change in valuation allowance	2,968		0		0
Other	179		61		18
Total income tax expense (benefit)	$	(33,496)	$	(298)	$	5,498

Year Ended December 31,
2018 2017 2016
(In thousands)
Computed expected tax expense provision, at federal rate $ 4,244
$ 3,124
$ 631
State tax, net of federal tax benefit 761
187
50
Tax-exempt interest (134 ) (429 ) (571 )
Income subject to dividends-received deduction (13 ) (76 ) (219 )
Return to provision 158
329
145
Rate changes —
297
—
Executive compensation 436
185
382
Meals and entertainment 28
76
130
Other 18
(108 ) (6 )
Total income tax expense (benefit) $ 5,498
$ 3,585
$ 542

In response to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act contains several relief provisions for corporations and lifts certain deduction limitations originally imposed by the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) signed into law on December 22, 2017. 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 utilized the NOL provision in the current year.

Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes. For the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016,~~2018, the effective income tax rate was ~~27.2%~~30.0%, ~~40.2%~~(41.8)% and ~~30.1%~~27.2%, respectively. Differences in the effective ~~income~~ tax ~~from~~and the statutory Federal income tax rate of 21% in 2020, 2019 and 2018, ~~and 35% in 2017 and 2016, is~~are driven by state income taxes and anticipated annual permanent differences, including estimates for tax-exempt interest, dividends received deduction, executive compensation ~~and other items.~~as well as the NOL provision in the current year, as discussed above.

The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%. In connection with the Company’s analysisAs of ~~the impact of the Tax Act, the Company recorded a discrete provisional net tax expense of $0.3 million for the year ended~~ December 31, ~~2017. This estimated net expense primarily consists~~2020, we had NOL carryforwards for Federal tax purposes of ~~the U.S. federal rate reduction from 35% to 21% applied to the net deferred~~$11.1 million. As of December 31, 2020, we had NOL carryforwards for state tax ~~asset. During 2018, the impact~~purposes of ~~the Tax Legislation was~~$73.0 million expiring between 2037 and 2040 and $12.0 million that do not ~~adjusted from the Company's preliminary estimates.~~expire. The ~~accounting for~~amount and timing of realizing these NOL carryforwards depend on future taxable income and limitations imposed by tax ~~effects of the Tax Legislation has been completed.~~laws.

The Company ~~does not have~~has a valuation allowance of $3.0 million and $0 on its deferred income tax asset as of December 31, ~~2018~~2020 and ~~2017.~~2019, respectively.

~~The Company recognizes income tax expense, including~~We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated statements of operations and ~~consolidated~~ statements of comprehensive income (loss). A reconciliation of these uncertain tax positions was as follows:


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Balance at January 1	$	382	$	585	$	585
Increases/(decreases) for uncertain tax positions taken during the prior years	(179)		(203)		0
Balance at December 31	$	203	$	382	$	585

-91-

Year Ended December 31,
2018 2017 2016
(In thousands)
Balance at January 1 $ 585
$ 585
$ 203
Increases (decreases) for tax positions taken during the current year —
—
382
$ 585
$ 585
$ 585

-76-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s ~~net~~ deferred income tax asset (liability), net include the following:

໿


	As of December 31,
	2020		2019
	(In thousands)
Deferred income tax assets:
Unearned premiums	$	5,611	$	10,232
Unpaid losses and loss adjustment expenses	581		1,596
Accrued expenses	236		216
Net operating loss carryforwards	5,350		2,095

Share-based compensation	232		161

Depreciation and amortization	412		0
Lease liability	1,783		1,655
Other	69		23
Gross deferred income tax assets	14,274		15,978
Valuation allowance	(2,968)		0
Total deferred income tax assets	11,306		15,978

Deferred income tax liabilities:
Deferred acquisition costs and other	(6,387)		(12,703)
Depreciation and amortization	0		(1,679)
Unrealized gains on investment securities	(2,865)		(3,270)
Lease asset	(1,783)		(1,655)
Other	(213)		(257)
Total deferred income tax liabilities	(11,248)		(19,564)

Deferred income tax asset (liability), net	$	58	$	(3,586)

Year Ended December 31,
2018 2017
(In thousands)
Deferred income tax assets:
Unearned premiums $ 9,977
$ 9,543
Unpaid losses and loss adjustment expenses 958
1,050
Accrued expenses 832
689
Net operating loss carryforwards 1,714
1,567
Deferred revenue 236
—
Share-based compensation 255
255
Unrealized gains on investment securities 1,254
—
Other 21
123
Total deferred income tax assets 15,247
13,227

Deferred income tax liabilities:
Deferred acquisition costs (11,198 ) (11,742 )
Depreciation and amortization (577 ) (548 )
Unrealized gains on investment securities —
(600 )
Other (273 ) (30 )
Total deferred income tax liabilities (12,048 ) (12,920 )

Deferred income tax asset (liability), net $ 3,199
$ 307

The deferred income tax asset (liability), net along with income tax receivable, net is included in current and deferred income taxes, net on our Consolidated Balance Sheets.

The Company files a federal income tax return and various state and local tax returns. The Company’s consolidated federal and state income tax returns for 2015 and 2017 - ~~2017~~2019 are open for review by the Internal Revenue Service and other state taxing authorities.

9.12. 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 and contingencies become known and as additional information becomes available, the Company’s management reassesses its potential

-92-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

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.

-77-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

~~The Company is a party to a~~Regarding the matter involving the Co-Existence Agreement effective as of August 30, 2013 ~~(the “Co-Existence Agreement”)~~ with Federated Mutual Insurance Company ~~(“Mutual”~~("Mutual") ~~pursuant to which~~and the related arbitration (please see Note 9 of our 2018 Form 10-K for more information), the Company and Mutual have exchanged releases and all remaining pending proceedings have been resolved by an agreed to certain restrictions on its use of the word “FEDERATED” without the word “NATIONAL” when referring to FNHC and FedNat Insurance Company. In response to Mutual’s allegations that the Company’s use of the word “FED” as part of the Company’s federally registered “FEDNAT” trademark infringes on Mutual’s federal and common law trademark rights, which the Company disputed, on July 21, 2016, the Company filed a declaratory judgment action for non-infringement of trademark inorder entered by the U.S. District Court for the Southern District of Florida. Specifically, the Company sought a declaration that its federally registered trademark "FEDNAT" does not infringe any alleged trademark rights of Mutual and that Mutual does not own any trademark rights to the name or mark "FED" in connection with insurance services outside of Owatonna, Minnesota. Mutual made a demand for arbitration in July 2016, and the district court referred the dispute to arbitration under the terms of the Co-Existence Agreement. On February 16, 2018, the arbitrator determined that the Company’s “FEDNAT” trademark does not infringe on Mutual’s trademarks and does not violate the Co-Existence Agreement. As a result, the Company has continued the process of re-branding the Company and certain of its subsidiaries to use the “FEDNAT” name. The arbitrator also required the Company to cease using the Federated National name within 90 days. FNHC has asserted that the artibtrator exceeded his authority by ordering a name change within 90 days. FNHC attempted, but was unable, to reach agreement with Mutual as to the timing of the name change ordered by the arbitrator. Therefore, two proceedings have been filed as a result. Mutual filed a petition to confirm the award in federal court in the District of Minnesota. The Company moved to dismiss that action on the bases that the Minnesota court does not have subject matter jurisdiction and may not exercise personal jurisdiction over FNHC. The Company also filed a motion to confirm the arbitration award in part and to vacate it in part in federal court in the Northern District of Illinois which is where the arbitrator is located, to confirm that part of the award ruling that the Company’s “FEDNAT” trademark does not violate Mutual’s trademarks or the Co-Existence Agreement, and seeks to vacate that portion of the award that requires the Company to cease using the “Federated” in its name within 90 days on the basis that arbitrator exceeded his authority by requiring the Company to change its name in 90 days. The District Court in Minnesota affirmed the arbitration award, including the requirement for the name change in 90 days. FNHC has filed an appeal of the order to the U.S. Court of Appeals for the Eighth Circuit; the parties have completed briefing the appeal, and the Eighth Circuit has set oral argument for March 13,November 22, 2019. The Eighth Circuit will render a decision some time following oral argument. The District Court in the Northern District of Illinois has been asked to stay its proceedings pending the outcome of the Company’s appeal to the Eighth Circuit. There can be no assurances as to the ultimate outcome of this matter.

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 which we do business. One form of assessment requires us to collect the assessment from our policyholders and then remit the collected amounts to the assessing entity, which does not have any impact on our financial results. We are also subject to assessments that require us to pay the full amount of the assessment to the assessing entity and then we are permitted to make rate filings to allow us to recoup the amount of the assessment from our policyholders over time.

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.~~2020. Future assessments by the JUA and the JUA Plan are indeterminable at this time.

-78-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

Leases

The Company is committed under various operating lease agreements for office space. FNHC and its subsidiaries lease certain facilities, furniture and equipment under long-term lease agreements. Rental expense for the years ended December 31, 2020, 2019 and 2018 ~~2017~~was $1.1 million, $1.0 million and ~~2016 was~~ $0.7 million, ~~$0.6 million and $0.6 million,~~ respectively.

Future minimum lease payments under these agreements are as follows:

໿


	Aggregate
	Minimum
Year Ended December 31,	Lease Payments
	(In thousands)
2021	$	1,066
2022	1,098
2023	1,131
2024	1,164
2025	1,115
Thereafter	3,318
Total	$	8,892

-93-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Aggregate
Minimum
Year Ended December 31, Lease Payments
(In thousands)
2019 $ 802
2020 955
2021 984
2022 1,013
2023 1,043
Thereafter 5,500
Total $ 10,297
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:



	December 31,
	2020			2019
	(In thousands)
Right-of-use asset	$	7,430		$	8,096
Accrued rent	(259)			(317)
Right-of-use asset, net	$	7,171		$	7,779

Lease liability	$	7,430		$	8,096

Weighted average discount rate	4.70		%	4.70		%
Weighted average remaining years of lease term	7.7			8.7

~~10.~~


	Year Ended December 31,
	2020		2019
	(In thousands)
Lease expense	$	1,118	$	1,046
Sublease income	(466)		(229)
Lease expense, net	$	652	$	817

Net cash provided by (used in) operating activities	$	(555)	$	(573)

The interest rates implicit in our 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 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.

13. SHAREHOLDERS’ EQUITY

Common Stock Repurchases

The Company ~~may repurchase~~has previously repurchased shares of its common stock in open market transactions ~~in accordance~~complying with ~~Rule~~Rules 10b-18 orand 10b5-1 under ~~Rule 10b5-1 of~~ the Exchange ~~Act from time to time in its discretion,~~Act. These repurchases were based on ~~ongoing~~ assessments of the Company’s capital needs at the time, the market ~~price~~prices of ~~its~~the Company’s common stock, and general market conditions. The amount and timing of ~~all repurchase transactions are contingent upon~~such repurchases were subject to market conditions, applicable legal requirements and other factors. At the present time, the Company is prohibited from undertaking any share repurchases under the terms of its senior note indenture.

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

In December 2017, the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million (plus $0.8 million remaining from previous authorization which was fully expended as of March 31, 2018) of its outstanding shares of common stock through December 31, 2018. ~~During the year ended December 31, 2018, the Company repurchased 326,708 shares of its common stock at a total cost of $5.1 million, which is an average price per share of $15.49.~~ The unused portion of this authorization expired on December 31, 2018.

In December 2018, the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million of its outstanding shares of common stock through December 31, 2019. ~~As of~~ During the year ended

-94-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, ~~2018,~~2020

December 31, 2019, the ~~remaining availability for future repurchases~~Company repurchased 237,647shares of ~~our~~its common stock at a total cost of $3.9 million, which is an average price per share of $16.27. The unused portion of this authorization expired on December 31, 2019.

In December 2019, the Company's Board of Directors authorized a new share repurchase program under which the Company may repurchase up to $10 million of its outstanding shares of common stock from January 1, 2020 through December 31, 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 allowed the Company to purchase up to $20 million of shares outstanding through December 31, 2020. During the year ended December 31, 2020, the Company repurchased 800,235 shares of its common stock at a total cost of $10.0 million, which is an average price per share of $12.50. The unused portion of this ~~program was $10.0 million.~~authorization expired on December 31, 2020.

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. NoRefer to Note 18 for information on securities ~~have been offered or~~that were recently sold under this registration statement.

Stock Compensation Plan

In April 2012, the Company’s Board of Directors adopted, and in September 2012 the Company’s shareholders approved, the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan permits the issuance of up to 1,000,000 shares of the Company’s common stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive awards, such

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~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

as stock options and restricted stocks. Officers, directors, executive management and all other employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be granted singly, in combination, or in tandem.

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 ~~replaces the 2012 Plan, and~~ 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:

໿


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Restricted stock	$	1,409	$	1,841	$	2,134
Performance stock	171		335		233
Total share-based compensation expense	$	1,580	$	2,176	$	2,367

Recognized tax benefit	$	634	$	534	$	600
Intrinsic value of options exercised	110		2		229
Fair value of restricted stock vested	1,659		1,977		2,360

Year Ended December 31,
2018 2017 2016
(In thousands)
Restricted stock $ 2,134
$ 2,639
$ 3,831
Performance stock 233
207
—
Total share-based compensation expense $ 2,367
$ 2,846
$ 3,831

Recognized tax benefit $ 600
$ 1,098
$ 1,478
Intrinsic value of options exercised $ 229
$ 371
$ 1,373
Fair value of restricted stock vested $ 2,360
$ 2,328
$ 4,150

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

The unamortized share-based compensation expense is $3.4 million as of December 31, ~~2018,~~2020, which will be recognized over the remaining weighted average vesting period of approximately ~~1.41~~1.96 years.

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FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Stock Option Awards

A summary of the Company’s stock option activity includes the following:


		Weighted
		Average
	Number of	Option
	Shares	Exercise Price
Outstanding at January 1, 2018	50,351	$	3.72
Granted	0	0
Exercised	(10,834)	3.47
Cancelled	(500)	2.45
Outstanding at December 31, 2018	39,017	3.80
Granted	0	0
Exercised	(167)	2.45
Cancelled	0	0
Outstanding at December 31, 2019	38,850	3.80
Granted	0	0
Exercised	(13,433)	3.16
Cancelled	0	0
Outstanding at December 31, 2020	25,417	$	4.01

Weighted
Average
Number of Option
Shares Exercise Price
Outstanding at January 1, 2016 174,633
$ 3.79
Granted —
—
Exercised (94,249 ) 3.85
Cancelled (900 ) 4.40
Outstanding at December 31, 2016 79,484
3.70
Granted —
—
Exercised (29,133 ) 3.68
Cancelled —
—
Outstanding at December 31, 2017 50,351
3.72
Granted —
—
Exercised (10,834 ) 3.47
Cancelled (500 ) 2.45
Outstanding at December 31, 2018 39,017
$ 3.80

໿

-80-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

Stock options outstanding and exercisable in a select price range is as follows:

Options Outstanding and Exercisable

Weighted Average

Remaining

Shares Outstanding

Contractual Life

Weighted Average

Aggregate

Shares Outstanding

Contractual Life

Weighted Average

Aggregate

Range of Exercise Price

and Exercisable

(years)

Exercise Price

Intrinsic Value

Range of Exercise Price

and Exercisable

(years)

Exercise Price

Intrinsic Value

$2.45 - $4.40

39,017

2.89

$3.80

628,993

$2.45 - $4.40

25,417

1.14

$4.01

48,546

Restricted Stock Awards

The Company recognizes share-based compensation expense for all ~~restricted stock awards (“RSAs”)~~RSAs held by the Company’s directors, executives and other key employees. For all ~~RSAs,~~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~~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~~straight-line recognition method.

During the years ended December 31, ~~2018~~2020 and ~~2017,~~2019, the Board of Directors granted ~~133,060~~210,272 and ~~106,454~~140,156 RSAs, respectively, vesting over three or five years, to the Company’s directors, executives and other key employees.

~~RSAs~~

-96-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

RSA activity includes the following:

໿


		Weighted
		Average
	Number of	Grant Date
	Shares	Fair Value
Outstanding at January 1, 2018	297,543	$	20.54
Granted	133,060	16.31
Vested	(112,071)	21.06
Cancelled	(56,198)	17.87
Outstanding at December 31, 2018	262,334	18.78
Granted	140,156	18.03
Vested	(94,755)	20.87
Cancelled	(52,390)	17.66
Outstanding at December 31, 2019	255,345	17.82
Granted	210,272	11.82
Vested	(89,889)	18.46
Cancelled	0	0
Outstanding at December 31, 2020	375,728	$	14.32

Weighted
Average
Number of Grant Date
Shares Fair Value
Outstanding at January 1, 2016 418,807
$ 20.14
Granted 128,472
19.16
Vested (204,916 ) 20.25
Cancelled (5,160 ) 20.58
Outstanding at December 31, 2016 337,203
19.69
Granted 106,454
17.95
Vested (140,514 ) 16.57
Cancelled (5,600 ) 19.80
Outstanding at December 31, 2017 297,543
20.54
Granted 133,060
16.31
Vested (112,071 ) 21.06
Cancelled (56,198 ) 17.87
Outstanding at December 31, 2018 262,334
$ 18.78

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.

-81-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) associated with debt securities - available-for-sale consisted of the following:


	Year Ended December 31,
	2020						2019
	Before Tax		Income Tax		Net		Before Tax		Income Tax		Net
	(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period	$	13,621	$	(3,340)	$	10,281	$	(5,023)	$	1,273	$	(3,750)
Other comprehensive income (loss) due to debt securities - held to maturity reclassified to available-for-sale	(58)		14		(44)		0		0		0

Other comprehensive income (loss) before reclassification	19,114		(4,688)		14,426		20,809		(5,144)		15,665
Reclassification adjustment for realized losses (gains) included in net income	(17,591)		4,314		(13,277)		(2,165)		531		(1,634)
	1,523		(374)		1,149		18,644		(4,613)		14,031
Accumulated other comprehensive income (loss), end-of-period	$	15,086	$	(3,700)	$	11,386	$	13,621	$	(3,340)	$	10,281

Year Ended December 31,
2018 2017

Before
Tax

Income
Tax
Net
Before
Tax

Income
Tax
Net
(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period $ 2,287
$ (593 ) $ 1,694
$ 3,324
$ (1,201 ) $ 2,123
Cumulative effect of new accounting standards (1,349 ) 355
(994 ) —
—
—

Other comprehensive income (loss) before reclassification (8,747 ) 2,217
(6,530 ) 7,511
(2,640 ) 4,871
Reclassification adjustment for realized losses (gains) included in net income 2,786
(706 ) 2,080
(8,548 ) 3,248
(5,300 )
(5,961 ) 1,511
(4,450 ) (1,037 ) 608
(429 )
Accumulated other comprehensive income (loss), end-of-period $ (5,023 ) $ 1,273
$ (3,750 ) $ 2,287
$ (593 ) $ 1,694

-97-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

~~11.~~December 31, 2020

14. EMPLOYEE BENEFIT PLAN

The Company sponsors a profit sharing plan under Section 401(K) of the Internal Revenue Code, which is a defined contribution plan that allows employees to defer compensation through contributions to the 401(K) Plan. This plan covers substantially all employees who meet specified service requirements and includes a 100% match up to the first 6% of an employee’s salary, not to exceed statutory limits. Additionally, the Company may make additional profit-sharing contributions.

For the years ended December 31, ~~2018~~2020, 2019 and ~~2017,~~2018, the Company made no0 additional profit-sharing contribution.

The Company’s total contributions to the 401(K) Plan were ~~$1.0~~$1.2 million, ~~$0.8~~$0.9 million and ~~$0.9~~$1.0 million for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016,~~2018, respectively.

~~12.~~15. RELATED PARTY TRANSACTIONS

Bruce F. Simberg, the Company’s Chairman of the Board, is a partner of the Hollywood, Florida law firm of Conroy Simberg, which specializes in insurance defense and coverage matters. The Company paid legal fees to Conroy Simberg for services rendered in the amount of $0, $0 and $0.1 million for the years ended December 31, 2018, 2017 and 2016, respectively. The firm has handled only a limited number of matters for the Company. Mr. Simberg has not been personally involved in any of the legal matters handled by the firm for the Company and he received ~~de minimis~~ direct personal benefit from the fees paid to the firm by the Company. The firm is no longer working any current cases for the Company and we do not, at this time, anticipate retaining the firm for future matters.

Related to an equity method investment in Southeast Catastrophe Consulting Company, LLC, based in Mobile, Alabama, the Company recorded pre-tax claims adjustment service fees and other expenses of $6.7 million ~~$17.0 million, and $3.1 million~~ for the ~~years~~year ended December 31, ~~2018, 2017 and 2016, respectively.~~2018. Additionally, the Company recognized other income in the consolidated statements of operations, of $2.2 million, $0.3 million, ~~$2.0~~$0.3 million ~~and $0.2 million, respectively.~~

-82-

~~FedNat Holding Company and Subsidiaries~~

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

for the years ended December 31, 2020, 2019 and 2018, respectively.

~~13.~~16. EARNINGS PER SHARE

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

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


	Year Ended December 31,
	2020		2019		2018
	(In thousands, except per share data)
Net income (loss) attributable to FedNat Holding Company shareholders	$	(78,158)	$	1,011	$	14,928

Weighted average number of common shares outstanding - basic	13,846		12,977		12,775

Net income (loss) per common share - basic	($5.64)		$0.08		$1.17


Weighted average number of common shares outstanding - basic	13,846		12,977		12,775
Dilutive effect of stock compensation plans	0		46		92
Weighted average number of common shares outstanding - diluted	13,846		13,023		12,867

Net income (loss) per common share - diluted	$	(5.64)	$	0.08	$	1.16

Dividends per share	$	0.36	$	0.33	$	0.24

-98-

Year Ended December 31,
2018 2017 2016
(In thousands, except per share data)
Net income (loss) attributable to FedNat Holding Company shareholders $ 14,928
$ 7,989
$ 1,015

Weighted average number of common shares outstanding - basic 12,775
13,170
13,758

Net income (loss) per common share - basic
$1.17

$0.61

$0.07

Weighted average number of common shares outstanding - basic 12,775
13,170
13,758
Dilutive effect of stock compensation plans 92
80
164
Weighted average number of common shares outstanding - diluted 12,867
13,250
13,922

Net income (loss) per common share - diluted $ 1.16
$ 0.60
$ 0.07

Dividends per share $ 0.24
$ 0.32
$ 0.27

~~Dividends Declared~~

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

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

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

~~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.~~

~~14. VARIABLE INTEREST ENTITY~~

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

-83-

FedNat Holding Company and Subsidiaries

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

December 31, ~~2018~~2020

Dividends Declared

to February 21, 2018, because the equity holders (i.e., FNHC, Crosswinds Investor and TransRe owned 42.4%, 42.4%, and 15.2%, respectively, of Monarch Delaware), as a group, lacked the characteristics of a controlling financial interest.

In ~~addition~~February 2020, our Board of Directors declared a $0.09 per common share dividend, payable in March 2020, to ~~having power~~shareholders of record on February 14, 2020. amounting to ~~direct the activities which most significantly impacted MNIC, FNHC had the obligation~~$1.3 million.

In April 2020, our Board of Directors declared a $0.09 per common share dividend, payable in June 2020, to ~~absorb the losses and/or the right~~shareholders of record on May 15, 2020, amounting to ~~receive benefits that potentially could be significant through its 42.4% indirect equity interests~~$1.3 million.

In July 2020, our Board of Directors declared a $0.09 per common share dividend, payable in ~~MNIC through Monarch Delaware and Monarch National Holding Company (collectively “Monarch Holding”).~~September 2020, to shareholders of record on August 14, 2020, amounting to $1.2 million.

AsIn November 2020, our Board of Directors declared a ~~result, FNHC was the primary beneficiary~~$0.09 per common share dividend, payable in December 2020, to shareholders of ~~MNIC, resulting in Monarch Delaware, MNIC’s indirect parent company, consolidating into our financial statements.~~record on November 16, 2020, amounting to $1.3 million.

The carrying amounts of Monarch Delaware, which could only be used to settle obligations of Monarch Delaware, and liabilities of Monarch Delaware for which creditors did not have recourse included the following:

December 31,
2017
Assets
Investments:
Debt securities, available-for-sale, at fair value $ 25,111
Equity securities, available-for-sale, at fair value 1,173
Total investments 26,284
Cash and cash equivalents 14,211
Reinsurance recoverable 3,323
Prepaid reinsurance premiums 2,481
Premiums receivable, net 1,184
Deferred acquisition costs 1,722
Other assets 2,322
Total assets $ 51,527

Liabilities
Loss and loss adjustment expense reserves $ 6,356
Unearned premiums 8,752
Reinsurance payable 1,802
Debt, net of deferred financing costs 4,930
Other liabilities 1,825
Total liabilities $ 23,665

Earned premiums and losses and LAE, attributable to Monarch Delaware, from January 1, 2018 to February 21, 2018, were $2.3 million and $2.3 million, respectively. Earned premiums and losses and LAE, attributable to Monarch Delaware, were $9.4 million and $12.5 million, and $4.7 million and $2.9 million, for the years ended December 31, 2017 and 2016, respectively.

The $6.4 million net cash outflows generated by Monarch Delaware are reflected in cash flows in the consolidated statements from January 1, 2018 to February 21, 2018. Cash flows used in operating activities by Monarch Delaware were $3.8 million for the year ended December 31, 2017, as compared to cash flows provided by operating activities of $6.8 million for the year ended December 31, 2016.

-84-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

~~15.~~17. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS

The Company’s insurance companies are subject to regulations and standards of the Florida ~~OIR.~~Office of Insurance Regulation (the "Florida OIR") and Louisiana Department of Insurance (the "LDI"). These standards require that insurance companies prepare statutory-basis financial statements in accordance with the National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual. The Company did not use any prescribed or permitted statutory accounting practices that differed from the NAIC’s statutory accounting practices as of December 31, ~~2018.~~2020.

The Company’s insurance companies are required to report their risk-based capital (“RBC”) each December 31. Failure to maintain an adequate RBC could subject the Company to regulatory action and could restrict the payment of dividends. As of December 31, ~~2018,~~2020, the RBC levels of the Company’s insurance companies did not subject them to any regulatory action.

Additionally, Florida Statutes require the Company’s Florida domiciled insurance companies to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid to the parent company. These standards require dividends to be paid only from statutory unassigned surplus. The maximum dividend that may be paid by the Company’s insurance companies to their parent company, without prior regulatory approval is limited to the lesser of statutory net income from operations of the preceding calendar year, not including realized capital gains, plus a 2 years ~~years~~ carryforward or ~~10.0%~~10% of statutory unassigned surplus as of the preceding year end. A dividend may also be taken without prior regulatory approval if (a) the dividend is equal to or less than the greater of (i) ~~10.0%~~10% of the insurer’s surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains; or (ii) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year; (b) the insurer will have surplus as to policyholders equal to or exceeding 115 percent of the minimum required statutory surplus as to policyholders after the dividend or distribution is made; and (c) the insurer has filed notice with the Florida OIR at least 10 business days prior to the dividend payment or distribution, or such shorter period of time as approved by the Florida OIR on a case-by-case basis. These dividends are referred to as “ordinary dividends.” However, if a dividend, together with other dividends paid within the preceding 12 months, exceeds this statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval before such dividend can be paid.

With respect to the Company's Louisiana domiciled insurer, Louisiana law restricts a domestic insurer from declaring and paying any dividends to its stockholders unless its capital is fully paid in cash and is unimpaired and it has a surplus beyond its capital stock and the initial minimum surplus required and all other liabilities equal to 15 percent of its capital stock, provided that this restriction shall not apply when an insurer's paid-in capital and surplus exceeds the minimum required by Louisiana law by 100 percent or more. No extraordinary dividend or other extraordinary distribution to its shareholders may be made until 30 days after the commissioner of insurance has received notice of the declaration thereof and has not within that period disapproved the payment, or has approved the payment within the thirty-day period. An extraordinary dividend or distribution includes any dividend or distribution of cash or other property, whose fair market value together with that of other dividends or distributions made within the preceding twelve months exceeds the lesser of (a) 10% percent of the insurer's surplus as regards policyholders as of the 31st day of December next preceding; or (b) the net income, not including realized capital gains, for the twelve-month period ending the 31st day of December next preceding, but shall not include pro rata distributions of any class of the insurer's own securities. In determining whether a dividend or distribution is extraordinary, an insurer may carry forward net income from the previous two calendar years that has not already been paid out as dividends. This carryforward shall be computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and immediate preceding calendar years.

-99-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Statements (Continued)

December 31, 2020

Notwithstanding the foregoing, an insurer may declare an extraordinary dividend or distribution which is conditional upon regulatory approval. and the declaration shall confer no rights upon shareholders until either the payment is approved or has not been disapproved within the 30-day period referred to above. As noted above, authorization to issue dividends from the insurance companies is based on achieving certain financial results and regulatory approvals. Due to the financial results, we have neither applied for regulatory approval nor are we authorized to issue dividends from the insurance carriers at this time.

As of December 31, ~~2018~~2020 and ~~2017,~~2019, on a combined statutory basis, the capital and surplus of the Company’s insurance companies was ~~$161.7~~$145.2 million and ~~$188.0~~$192.5 million, respectively. Combined statutory operational results of the Company’s insurance companies was a net ~~income~~loss of ~~$2.9~~$57.5 million, net loss of ~~$19.6~~$36.8 million and net ~~loss~~income of ~~$37.0~~$2.9 million for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016,~~2018, respectively. Statutory capital and surplus exceeds amounts necessary to satisfy regulatory requirements.

~~16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)~~

~~A summary of the Company’s unaudited quarterly results of operations includes the following:~~

First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
2018
Net premiums earned $ 82,109
$ 83,557
$ 98,493
$ 91,098
Total revenue $ 93,077
$ 95,742
$ 110,832
$ 96,442
Losses and loss adjustment expenses $ 46,071
$ 47,570
$ 62,457
$ 72,318
Total costs and expenses $ 83,461
$ 83,726
$ 99,862
$ 108,836
Net income (loss) attributable to FedNat Holding Company shareholders $ 7,463
$ 8,820
$ 7,950
$ (9,305 )
Net income (loss) per share - basic $ 0.58
$ 0.69
$ 0.62
$ (0.73 )

-85-

~~FedNat Holding Company and Subsidiaries~~

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

~~December 31, 2018~~

First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
2017
Net premiums earned $ 81,660
$ 83,554
$ 80,764
$ 87,503
Total revenue $ 93,054
$ 98,159
$ 98,697
$ 101,752
Losses and loss adjustment expenses $ 56,899
$ 56,417
$ 75,367
$ 58,874
Total costs and expenses $ 89,170
$ 92,504
$ 108,876
$ 92,185
Net income (loss) attributable to FedNat Holding Company shareholders $ 2,422
$ 3,995
$ (4,724 ) $ 6,296
Net income (loss) per share - basic $ 0.18
$ 0.30
$ (0.36 ) $ 0.48

~~17.~~18. SUBSEQUENT EVENTS

~~Dividends Declared~~Rate Increases

~~Refer to Note 13 above~~The Company applied for ~~information related to our dividend declared~~and was approved by the LDI for a state-wide average rate increase of 9.9% for FNIC's Louisiana homeowners multiple-peril insurance policies, which became effective for new and renewal policies in January ~~2019.~~2021.

~~Florida Statewide Average Rate Increase~~The Company applied for and was approved by the Texas Department of Insurance for a state-wide average rate increase of 12.3% for MIC's Texas homeowners multiple-peril insurance policies, which became effective for new and renewal policies in February 2021.

The Company applied for and was approved by the Florida ~~Office of Insurance Regulation~~OIR for a ~~statewide~~state-wide average rate increase of ~~4.6%~~6.7% for Florida homeowners multiple-peril insurance policies, which is expected to become effective for new and renewal policies onin March 2021.

The Company applied for a "use and file" rate filing with the Florida OIR to implement a state-wide average increase of 7.0% for Florida homeowners multiple-peril insurance policies and 6.0% for dwelling fire insurance policies, which is expected to become effective for new and renewal policies in April ~~20, 2019.~~2021. The revised rates are not deemed approved or final until so affirmed by the Florida OIR, at their discretion.

~~Maison Acquisition~~Reinsurance

Effective January 1, 2021, the Company secured a new aggregate excess of loss reinsurance for calendar year 2021 for MIC, which provides non-named storm coverage of 65% of $15 million excess of $10 million with a $0.9 million occurrence deductible and a $4.2 million occurrence limit at an approximate annual cost of $2.3 million. Refer to Note 6 above for further information.

Effective March 1, 2021, the Company secured additional reinsurance limit of 50% of $70 million excess of $25 million and 100% of $15 million excess of $10 million at an approximate cost of $13 million. This limit is available for any subsequent events through May 31, 2021 for all carriers and all states, with a portion excluding named storms.

Winter Storm Uri

On approximately February ~~25, 2019,~~13, 2021, Winter Storm Uri ("Uri") hit the Southern Plains causing heavy residential damage in Texas, primarily associated with freezing temperatures causing widespread instances of burst water pipes. The Company expects to incur claims in excess of its aggregate reinsurance retention, which is approximately $23 million for this event. In addition, the Company ~~executed~~has a ~~definitive agreement~~co-participation within its reinsurance tower which arose in early February 2021 when, in conjunction with year end 2020 financial reporting, we strengthened ultimate loss and LAE reserves for the ~~acquisition of the insurance operations of 1347 Property Insurance Holdings, Inc. ("PIH"). Specifically,~~five hurricane events that occurred in 2020. Due to this increase in hurricane reserves, the Company ~~will purchase Maison Insurance Company, Maison Managers, Inc., and ClaimCor LLC (collectively, the "Maison Companies"). The purchase price is $51.0~~has a co-participation of approximately $18 million in excess of $61 million, which ~~includes $25.5~~results from the portion of our reinsurance program that does not embody the cascading feature where unused limit drops down for subsequent events. Combined with the $23 million ~~in cash and $25.5 million in shares of~~retention, the ~~Company’s common stock. The resale of the shares~~Company's total exposure to Uri including reinstatement premium is currently estimated to be ~~issued will be subsequently registered and will be subject to a five-year standstill agreement. Additionally, in connection with the pending acquisition, on~~$41 million, pre-tax, before anticipated quota share recoveries.

Capital Raise

On March ~~5, 2019,~~15, 2021, the Company closed on an underwritten public offering of ~~$100 million~~3,500,000 shares of ~~Senior Unsecured Notes due 2029, which bear interest~~its common stock at ~~the annual rate~~a price of ~~7.5%.~~$4.75 per share for gross proceeds of $16.6 million. The ~~cash from the~~ offering ~~will be used to purchase the Maison Companies, retire the full $45.0 million of outstanding debt (thereby lowering our overall cost of borrowing) and other general corporate purposes.~~

~~The transaction, which is subject~~generates net proceeds to the ~~approval~~Company of approximately $15.2 million, after deducting the ~~shareholders of PIH, regulatory approvals~~underwriter’s discount and ~~customary closing conditions, is expected to close in~~estimated offering expenses payable by the latter part of the second quarter of 2019. The Purchase Agreement includes a 30 day "go-shop" period, which permits PIH's Board and advisors to actively initiate, solicit, encourage, and potentially enter negotiations with parties that make alternative purchase agreement proposals. PIH will have the right to terminate the Purchase Agreement to enter into a superior proposal subject to the terms and conditions of the Purchase Agreement. There can be no assurance that this 30 day "go-shop" will not result in a superior proposal.

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

Closing of the transaction is subject to the Maison Companies having consolidated GAAP net book value of at least $42 million as of closing and satisfaction of other customary closing conditions, including insurance regulatory approvals in Louisiana and Florida and the affirmative vote of PIH stockholders. Certain PIH stockholders have agreed to vote in favor of the transaction.

Company.

-86100-

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

FedNat Holding Company

Opinion on Internal Control over Financial Reporting

We have audited FedNat Holding Company and subsidiaries’ internal control over financial reporting as of December 31, ~~2018,~~2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, FedNat Holding Company and subsidiaries (the Company) has not maintained ~~in all material respects,~~ effective internal control over financial reporting as ofoff December 31, ~~2018,~~2020, based on the COSO criteria.

A material weakness is a deficiency, or combination of deficiencies, in internal control 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. The following material weakness has been identified and included in management’s assessment. Management has identified certain design and operating effectiveness deficiencies in the Company’s internal controls, which when evaluated collectively, aggregated to a material weakness in internal control. The deficiencies in the Company’s internal controls included deficiencies related to management’s controls over the calculation of reinsurance related balances and a profit share arrangement with the same third party.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, ~~2018~~2020 and ~~2017,~~2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, ~~2018,~~2020, and the related notes and the financial statement schedules listed in the index at Item 1515. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and this report does not affect our report dated March ~~7, 2019~~29, 2021 which expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Charlotte, North Carolina

March ~~7, 2019~~29, 2021

-87101-

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. 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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, ~~2018.~~2020.

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

Management’s Report on Internal Control over Financial Reporting

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

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. The Company’s management, with the oversight of the Audit Committee of our Board of Directors, concluded that the deficiency described below rises to the level of a material weakness, as it had the potential to allow for a material dollar amount of misstatement to our financial statements being made without being detected.

Based on the results of this evaluation, our management has concluded that our internal control over financial reporting was not effective as of December 31, ~~2018~~2020 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. ~~We reviewed~~Management has identified certain design and operating effectiveness deficiencies in the ~~results~~Company’s internal controls, which when evaluated collectively, aggregated to a material weakness in internal control. The deficiencies in the Company’s internal controls included deficiencies related to management’s controls over the calculation of ~~management’s assessment~~reinsurance related balances and a profit share arrangement with the ~~Company’s Audit Committee.~~same third party. Our independent registered public accounting firm that audited the consolidated financial statements ~~include~~included in this Annual Report, Ernst & Young LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting which appears in Part II, Item 8, “Financial Statements and Supplementary Data” included in this Annual Report.

Changes in Internal Control over Financial Reporting

~~There~~To remediate the material weakness, we are implementing additional reconciliation procedures and enhancing and strengthening our documentation and review procedures relating to unique, new, changing or unusual transactions. While management believes the implementation of the additional reconciliation procedures and other controls along with plans to add to staffing will remediate this item, the material weakness cannot be considered remediated until the applicable controls operate for a sufficient period of time and

-102-

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 the fiscal year 2021.

Except as noted above, there were no changes in our internal control over financial reporting that occurred during the year ended December 31, ~~2018~~2020 that has materially affected, or is ~~reasonably~~reasonable 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.

-88-

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is incorporated herein by reference to the applicable information in the Proxy Statement for our ~~2019~~2021 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference to the applicable information in the Proxy Statement for our ~~2019~~2021 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated herein by reference to the applicable information in our Proxy Statement for our ~~2019~~2021 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated herein by reference to the applicable information in the Proxy Statement for the ~~2019~~2021 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 is incorporated herein by reference to the applicable information in the Proxy Statement for the ~~2019~~2021 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.

-103-

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K




			(a)			The following documents are filed as part of this report.




			(1)			Financial Statements




						The following consolidated financial statements of the Company and the reports of independent auditors thereon are filed with this report:




						Independent Auditor’s Reports




						Consolidated Balance Sheets as of December 31, ~~2018~~2020 and ~~2017~~2019




						Consolidated Statements of Operations for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016.~~2018.




						Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016.~~2018.

-89-




						Consolidated Statements of Shareholders’ Equity for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016.~~2018.




						Consolidated Statements of Cash Flows for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016.~~2018.




						Notes to Consolidated Financial Statements for the years ended December 31, ~~2018, 2017~~2020, 2019 and ~~2016.~~2018.




			(2)			Financial Statement Schedules.




						The following are included herein under Item 8, Financial Statements and Supplementary Data:




						Schedule II, Condensed Financial Information of Registrant




						Schedule V, Valuation and Qualifying Accounts

-104-




						Schedule VI, Supplemental Information Concerning Insurance Operations




			(3)			Exhibits.

~~EXHIBIT INDEX~~

໿

-105-

Exhibit Number Exhibit Description Incorporated by Reference
Filed
Herewith
Form Exhibit Filing Date

2.1
Equity Purchase Agreement dated as of February 25, 2019 among FedNat Holding Company, 1347 Property Insurance Holdings, Inc., Maison Managers, Inc., and Maison Insurance Company, and Claimcor, LLC
8-K 2.1 February 26, 2019

3.1
Second Restated Articles of Incorporation of FedNat Holding Company
10-Q 3.1 November 7, 2018

3.2
Second Amended and Restated Bylaws of FedNat Holding Company
10-Q 3.2 November 7, 2018

4.1
Specimen of Common Stock Certificate

SB-2
File No. 333-63623
4.1 October 27, 1998

4.2
Indenture dated December 28, 2017 by and among Federated National Holding Company, The Bank of New York Mellon, as Trustee, The Bank of New York Mellon, London Branch, as Paying Agent, and the Bank of New York Mellon SA/NV, Luxembourg Branch, as Registrar
8-K 4.1 January 3, 2018

-90-

EXHIBIT INDEX

Exhibit Number

Exhibit Description

Incorporated by Reference

Filed
Herewith

Form

Exhibit

Filing Date

3.1

Second Restated Articles of Incorporation of FedNat Holding Company

10-Q

3.1

November 7, 2018

3.2

Second Amended and Restated Bylaws of FedNat Holding Company

10-Q

3.2

November 7, 2018

4.1

Description of Registrant's Securities

4.2

Indenture dated March 5, 2019 between FedNat Holding Company and The Bank of New York Mellon, as Trustee, Paying Agent, and Registrar

8-K

4.1

March 6, 2019

4.3

First Supplemental Indenture by and between FedNat Holding Company and The Bank of New York Mellon, as trustee

8-K

4.1

March 5, 2020

4.4

Form of 7.50% Senior Unsecured Note due 2029 of FedNat Holding Company

S-4

4.5

January 16, 2020

10.1*

FHCF Supplement Layer Reinsurance Contract effective June 1, 2020 between FedNat Insurance Company and subscribing reinsurers

10-Q

10.1

May 6, 2020

10.2*

Form of Reimbursement Contract effective June 1, 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; Monarch National Insurance Company; and Maison Insurance Company

10-Q

10.2

May 6, 2020

10.3*

Non-Florida Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and between FedNat Insurance Company and subscribing reinsurers

10-Q

10.1

November 9, 2020

10.4*

Non-Reinstatable Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.2

November 9, 2020

10.5*

Third-Fifth Cascading Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.3

November 9, 2020

10.6*

Fourth Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.4

November 9, 2020

10.7*

First, Second and Fifth Cascading Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.5

November 9, 2020

10.8*

Private Single Retention Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.6

November 9, 2020

10.9*

Second-Fifth Cascading Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.7

November 9, 2020

-106-

4.3
Supplemental Indenture No. 1 dated as of December 28, 2017, regarding Senior Unsecured Floating Rate Notes due 2027
8-K 4.2 January 3, 2018

4.4
Supplemental Indenture No. 2 dated as of December 29, 2017, regarding Senior Unsecured Floating Rate Notes due 2022
8-K 4.3 January 3, 2018

4.5
Senior Unsecured Floating Rate Note due 2027
8-K 4.4 January 3, 2018

4.6
Senior Unsecured Floating Rate Note due 2022
8-K 4.5 January 3, 2018

4.7
Indenture dated March 5, 2019 between FedNat Holding Company and The Bank of New York Mellon, as Trustee, Paying Agent, and Registrar
8-K 4.1 March 6, 2019

4.8 Form of Rule 144A Senior Unsecured Note due 2029 (included in Exhibit 4.7) 8-K 4.2 March 6, 2019

4.9 Form of IAI Senior Unsecured Note due 2029 (included in Exhibit 4.7) 8-K 4.3 March 6, 2019

10.1*
Multi-Year Excess Catastrophe Reinsurance Contract, effective July 1, 2017, between Federated National Insurance Company and subscribing reinsurers
10-Q 10.2 November 9, 2017

10.2*
FHCF Supplement Layer Reinsurance Contract, effective June 1, 2018, between FedNat Insurance Company and subscribing reinsurers
10-Q 10.1 November 7, 2018

10.3*
Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2018, between FedNat Insurance Company and subscribing reinsurers
10-Q 10.2 November 7, 2018

10.4*
Non-Florida Reinstatement Premium Protection Reinsurance Contract, effective July 1, 2018, between FedNat Insurance Company and subscribing reinsurers
10-Q 10.3 November 7, 2018

10.5*
Reinstatement Premium Protection Reinsurance Contract, effective July 1, 2018, between FedNat Insurance Company and subscribing reinsurers
10-Q 10.4 November 7, 2018

10.6*
Excess Catastrophe Reinsurance Contract, effective July 1, 2018, between FedNat Insurance Company and subscribing reinsurers
10-Q 10.5 November 7, 2018

10.7*
Net Quota Share Reinsurance Agreement, effective July 1, 2018, between FedNat Insurance Company and Swiss Reinsurance America Corporation
10-Q 10.6 November 7, 2018

10.8
Reimbursement Contract between Federated National Insurance Company and The State Board of Administration of Florida (SBA) as administrator of the Florida Hurricane Catastrophe Fund (FHCF), effective June 1, 2018
10-Q 10.1 May 8, 2018

10.9
Reimbursement Contract between Monarch National Insurance Company and The State Board of Administration of Florida (SBA) as administrator of the Florida Hurricane Catastrophe Fund (FHCF), effective June 1, 2018
10-Q 10.2 May 8, 2018

10.10*
Administrator Agreement, effective July 1, 2013, between Federated National Insurance Company and SageSure Insurance Managers LLC, as amended
10-Q 10.9 November 9, 2017

-91-

10.10*

Third-Fifth Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.8

November 9, 2020

10.11*

Second-Fifth Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.9

November 9, 2020

10.12*

Third-Fifth Cascading Reinstatement Premium Protection Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.10

November 9, 2020

10.13*

First-Third Cascading Reinstatement Premium Protection Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.11

November 9, 2020

10.14*

Second Single Retention Reinstatement Premium Protection Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.12

November 9, 2020

10.15*

Second Reinstatement Premium Protection Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.13

November 9, 2020

10.16*

First Reinstatement Premium Protection Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.14

November 9, 2020

10.17*

Private Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.15

November 9, 2020

10.18*

Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.16

November 9, 2020

10.19*

Reinstatement Premium Protection Reinsurance Contract effective July 1, 2020, by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.17

November 9, 2020

10.20*

Private Second-Fifth Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.18

November 9, 2020

10.21*

Non-Florida Second Event Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2020 by and between FedNat Insurance Company and subscribing reinsurers

10-Q

10.19

November 9, 2020

10.22*

First-Third Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.20

November 9, 2020

10.23*

Second-Fourth Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch national Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.21

November 9, 2020

10.24*

Private Third-Fifth Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.22

November 9, 2020

-107-

10.11
Insurance Agency Master Agreement dated February 4, 2013 between Ivantage Select Agency, Inc. and Federated National Underwriters, Inc.
10-Q 10.5 November 6, 2013

10.12
First Amendment to Insurance Agency Master Agreement dated February 12, 2013 between Ivantage Select Agency, Inc. and Federated National Underwriters, Inc.
10-Q 10.6 November 6, 2013

10.13
Second Amendment to Insurance Agency Master Agreement dated February 12, 2013 between Ivantage Select Agency, Inc. and Federated National Underwriters, Inc.
10-Q 10.6 May 11, 2015

10.14+
Confidential Information, Non-Solicitation and Non-Competition Agreement dated as of April 17, 2017 between the Company and Ronald Jordan
10-Q 10.3 May 10, 2017

10.15+
Change of Control Agreement dated as of April 17, 2017 between the Company and Ronald Jordan
10-Q 10.4 May 10, 2017

10.16+
Bonus Agreement dated as of January 11, 2016 between Federated National Holding Company and Erick Fernandez
10-K 10.30 March 16, 2017

10.17+
Bonus Agreement dated as of January 1, 2017 between Federated National Holding Company and Erick Fernandez
10-Q 10.5 May 10, 2017

10.18+
Form of Restricted Stock Grant Summary of the Company (Time-Based Vesting)
8-K 99.2 January 14, 2019

10.19+
Form of Restricted Stock Grant Summary Agreement of the Company (Performance-Based Vesting)
8-K 99.3 January 14, 2019

10.20+
Form of Indemnification Agreement between the Company and its directors and executive officers
10-K 10.14 March 17, 2008

10.21+
Form of Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement between the Company and certain employees of the Company
8-K 10.1 August 7, 2013

10.22+
Second Amended and Restated Employment Agreement dated January 18, 2012 between the Company and Michael H. Braun
8-K 10.1 January 20, 2012

10.23+
Amendment to Employment Agreement and Restrictive Covenant Agreement effective as of March 17, 2015 between Monarch Delaware Holdings LLC and Michael H. Braun
10-Q 10.3 May 11, 2015

10.24+
Non-Competition, Non-Disclosure and Non-Solicitation Agreement effective as of March 17, 2015 between Monarch Delaware Holdings LLC and Michael H. Braun
10-Q 10.4 May 11, 2015

10.25+
Employment Agreement dated January 8, 2019 between the Company and Ronald A. Jordan
8-K 99.1 January 14, 2019

10.26+
Change of Control Agreement dated as of May 2, 2016 between Federated National Holding Company and Erick Fernandez
10-K 10.31 March 16, 2017

10.27
Form of Voting Agreement dated as of February 25, 2019 between FedNat Holding Company and the stockholders of PIH party thereto
8-K 10.1 February 26, 2019

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10.25*

First-Third Single Retention Cascading Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.23

November 9, 2020

10.26*

Second and Third Event Excess Catastrophe Reinsurance Contract effective July 1, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.24

November 9, 2020

10.27*

Supplemental Excess Catastrophe Reinsurance Contract effective July 28, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.25

November 9, 2020

10.28*

Main Supplemental Excess Catastrophe Reinsurance Contract effective September 3, 2020 by and among FedNat Insurance Company, Monarch National insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.26

November 9, 2020

10.29*

Supplemental Excess Catastrophe Reinsurance Contract effective September 3, 2020 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.27

November 9, 2020

10.30*

Private Supplemental Excess Catastrophe Reinsurance Contract effective September 3, 2020 by and between FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers

10-Q

10.28

November 9, 2020

10.31*

Net Quota Share Reinsurance Agreement effective July 1, 2020 by and between FedNat Insurance Company and Swiss Reinsurance America Corporation

10-Q

10.29

November 9, 2020

10.32*

Non-Florida Property Quota Share Reinsurance Contract effective July 1, 2020 by and between FedNat Insurance Company and SageSure Anchor Re, Inc

10-Q

10.30

November 9, 2020

10.32.A*

Addendum 1, effective December 1, 2020, to Non-Florida Property Quota Share Reinsurance Contract effective July 1, 2020 by and between FedNat Insurance Company and SageSure Anchor Re, Inc.

10.33*

Quota Share Reinsurance Contract effective December 31, 2020 by and between FedNat Insurance Company and subscribing reinsurers

10.34*

Administrator Agreement, effective July 1, 2013, between Federated National Insurance Company and SageSure Insurance Managers LLC, as amended

10-K

10.9

March 6, 2020

10.34.A*

Sixth Amendment, entered into November 4, 2020, to Administrator Agreement, effective July 1, 2013, between Federated National Insurance Company and SageSure Insurance Managers LLC, as amended

10.35

Administrative Services Agreement dated November 1, 2015 between FedNat Underwriters Inc. and SageSure Insurance Managers LLC

10-K

10.10

March 6, 2020

10.36.A

Insurance Agency Master Agreement dated February 4, 2013 between Ivantage Select Agency, Inc. and Federated National Underwriters, Inc.

10-Q

10.5

November 6, 2013

10.36.B

First Amendment to Insurance Agency Master Agreement dated February 12, 2013 between Ivantage Select Agency, Inc. and Federated National Underwriters, Inc.

10-Q

10.6

November 6, 2013

10.36.C

Second Amendment to Insurance Agency Master Agreement dated February 12, 2013 between Ivantage Select Agency, Inc. and Federated National Underwriters, Inc.

10-Q

10.6

May 11, 2015

10.36.D*

Third Amendment to Insurance Agency Master Agreement dated August 10, 2018 between Ivantage Select Agency, Inc. and FedNat Underwriters, Inc.

10-K

10.14

March 6, 2020

-108-

10.28

Form of Note Purchase Agreement dated February 25, 2019 between FedNat Holding Company and the Purchasers of Senior Unsecured Notes due 2029

8-K

10.2

February 26, 2019

10.29

Form of Registration Rights Agreement dated March 5, 2019 between FedNat Holding Company and the Note Purchasers

8-K

10.1

March 6, 2019

10.30

Letter Agreement dated February 25, 2019 among FedNat Holding Company, Athene Annuity & Life Assurance Company and Athene Annuity and Life Company

8-K/A

10.1

March 6, 2019

10.37+

Confidential Information, Non-Solicitation and Non-Competition Agreement dated as of April 17, 2017 between the Company and Ronald Jordan

10-Q

10.3

May 10, 2017

10.38+

Confidential Information, Non-Solicitation and Non-Competition Agreement dated as of August 22, 2020 between the Company and Patrick McCahill

10-Q

10.32

November 9, 2020

10.39+

2018 Omnibus Incentive Compensation Plan

DEF 14A

Annex B

April 13, 2018

10.40+

Form of Restricted Stock Grant Summary of the Company (Time-Based Vesting)

8-K

99.2

January 14, 2019

10.41+

Form of Restricted Stock Grant Summary Agreement of the Company (Performance-Based Vesting)

8-K

99.3

January 14, 2019

10.42+

Form of Indemnification Agreement between the Company and its directors and executive officers

10-K

10.14

March 17, 2008

10.43+

Form of Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement between the Company and certain employees of the Company

8-K

10.1

August 7, 2013

10.44+

Second Amended and Restated Employment Agreement dated January 18, 2012 between the Company and Michael H. Braun

8-K

10.1

January 20, 2012

10.45+

Amendment to Employment Agreement and Restrictive Covenant Agreement effective as of March 17, 2015 between Monarch Delaware Holdings LLC and Michael H. Braun

10-Q

10.3

May 11, 2015

10.46+

Non-Competition, Non-Disclosure and Non-Solicitation Agreement effective as of March 17, 2015 between Monarch Delaware Holdings LLC and Michael H. Braun

10-Q

10.4

May 11, 2015

10.47.A+

Employment Agreement dated January 8, 2019 between the Company and Ronald A. Jordan

8-K

99.1

January 14, 2019

10.47.B+

First Amendment dated November 4, 2020 to Employment Agreement dated January 8, 2019 between the Company and Ronald A. Jordan

10.48+

Employment Agreement dated August 22, 2020 between the Company and Patrick McCahill

10-Q

10.31

November 9, 2020

10.49

Standstill Agreement dated December 2, 2019 between FedNat Holding Company and 1347 Property Insurance Holdings, Inc.

8-K

10.2

December 2, 2019

10.50

Reinsurance Capacity Right of First Refusal Agreement dated December 2, 2019 between FedNat Holding Company and 1347 Property Insurance Holdings, Inc.

8-K

10.3

December 2, 2019

10.51

Investment Advisory Agreement dated December 2, 2019 between Fundamental Global Advisors LLC and FedNat Holding Company

8-K

10.4

December 2, 2019

10.52

Consent Order dated August 7, 2019 among the Florida Office of Insurance Regulation, FedNat Holding Company, 1347 Property Insurance Holdings, Inc., and Maison Insurance Company.

8-K

10.1

August 13, 2019

10.53

Consent Agreement dated August 9, 2019 among the Louisiana Department of Insurance, FedNat Holding Company and Maison Insurance Company.

8-K

10.2

August 13, 2019

21.1

Subsidiaries of the Company

21.1

Subsidiaries of the Company

23.1

Consent of Independent Registered Public Accounting Firm

23.1

Consent of Independent Registered Public Accounting Firm

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

101.INS**

XBRL Instance Document.

101.INS**

Inline 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.

-109-

101.SCH**

Inline XBRL Taxonomy Extension Schema Document.

101.CAL**

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

____________________

+ Indicates a Management Compensation Plan or Arrangement

* Portions of this exhibit have been omitted ~~pursuant to a confidential treatment request granted~~from this exhibit in accordance with and as permitted by ~~the SEC.~~Item 601(b)(10)(iv) of Regulation S-K.

** 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 or Exchange Act, except as shall be expressly set forth by specific reference in such filing.

-110-

-93-

Index to Financial Statement Schedules



			PAGE
			~~PAGE~~

Schedule II Condensed Financial Information of Registrant			96113
Schedule V Valuation and Qualifying Accounts			~~100~~117
Schedule VI Supplemental Information Concerning Insurance Operations			~~101~~118

ITEM 16. FORM 10-K SUMMARY

Not applicable.

-94111-

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K report to be signed on its behalf by the undersigned, thereto duly authorized.



			FEDNAT HOLDING COMPANY

			By:			/s/ Michael H. Braun
						Michael H. Braun, Chief Executive Officer
						(Principal Executive Officer)

Date: March ~~7, 2019~~29, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.


Signature			Title	Date

/s/ Michael H. Braun			Chief Executive Officer, President and Director	March 29, 2021
Michael H. Braun			(Principal Executive Officer)

/s/ Ronald A. Jordan			Chief Financial Officer	March 29, 2021
Ronald A. Jordan			(Principal Financial Officer)

/s/ Erick A. Fernandez			Chief Accounting Officer	March 29, 2021
Erick A. Fernandez			(Principal Accounting Officer)

/s/ Bruce F. Simberg			Chairman of the Board and Director	March 29, 2021
Bruce F. Simberg

/s/ Jenifer G. Kimbrough			Director	March 29, 2021
Jenifer G. Kimbrough

/s/ Thomas A. Rogers			Director	March 29, 2021
Thomas A. Rogers

/s/ William G. Stewart			Director	March 29, 2021
William G. Stewart

/s/ Richard W. Wilcox, Jr.			Director	March 29, 2021
Richard W. Wilcox, Jr.

/s/ Roberta N. Young			Director	March 29, 2021
Roberta N. Young

/s/ David W. Michelson			Director	March 29, 2021
David W. Michelson

~~Signature~~/s/ David K. Patterson			~~Title~~Director	~~Date~~March 29, 2021
David K. Patterson
~~/s/ Michael H. Braun~~	~~Chief Executive Officer, President and Director~~	~~March 7, 2019~~
~~Michael H. Braun~~	~~(Principal Executive Officer)~~


~~/s/ Ronald A. Jordan~~	~~Chief Financial Officer~~	~~March 7, 2019~~
~~Ronald A. Jordan~~	~~(Principal Financial Officer)~~


~~/s/ Erick A. Fernandez~~	~~Chief Accounting Officer~~	~~March 7, 2019~~
~~Erick A. Fernandez~~	~~(Principal Accounting Officer)~~


~~/s/ Bruce F. Simberg~~	~~Chairman of the Board and Director~~	~~March 7, 2019~~
~~Bruce F. Simberg~~


~~/s/ Jenifer G. Kimbrough~~	~~Director~~	~~March 7, 2019~~
~~Jenifer G. Kimbrough~~


~~/s/ Thomas A. Rogers~~	~~Director~~	~~March 7, 2019~~
~~Thomas A. Rogers~~


~~/s/ William G. Stewart~~	~~Director~~	~~March 7, 2019~~
~~William G. Stewart~~


~~/s/ Richard W. Wilcox, Jr.~~	~~Director~~	~~March 7, 2019~~
~~Richard W. Wilcox, Jr.~~


~~/s/ Roberta N. Young~~	~~Director~~	~~March 7, 2019~~
~~Roberta N. Young~~

-95112-

Schedule II – Condensed Financial Information of Registrant

Condensed Balance Sheets

FEDNAT HOLDING COMPANY (Parent Company Only)

December 31, ~~2018~~2020 and ~~2017~~2019

໿


	December 31,
	2020		2019
	(In thousands)
ASSETS
Investments in subsidiaries (1)	$	225,568	$	268,767
Investment securities, available-for-sale, at fair value	20,646		24,951
Equity securities, at fair value	1,881		1,751
Cash and cash equivalents	18,170		21,031
Deferred income taxes, net	868		1,940
Income taxes receivable	7,969		13,850
Note receivable and accrued interest to subsidiary (1)	19,517		18,107
Right-of-use assets	7,108		7,716
Other assets	1,991		2,878
Total assets	$	303,718	$	360,991

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Due to subsidiaries, net (1)	$	31,686	$	1,779
Long-term debt	98,683		98,522
Lease liabilities	7,108		7,716
Other liabilities	8,081		4,281
Total liabilities	145,558		112,298

Shareholders' Equity
Preferred stock	0		0
Common stock	137		144
Additional paid-in capital	169,298		167,677
Accumulated other comprehensive income (loss)	11,386		10,281
Retained earnings (deficit)	(22,661)		70,591
Total shareholders’ equity	158,160		248,693
Total liabilities and shareholders' equity	$	303,718	$	360,991

December 31,
2018 2017
(In thousands)
ASSETS
Investments in subsidiaries $ 224,951
$ 220,901
Investment securities, available-for-sale, at fair value 19,431
15,826
Equity securities, at fair value 1,490
—
Cash and cash equivalents 4,109
46,717
Deferred income taxes, net 786
415
Income taxes receivable 9,885
7,700
Other assets 2,436
1,938
Total assets $ 263,088
$ 293,497

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Due to subsidiaries $ 987
$ 19,624
Long-term debt 44,404
44,321
Other liabilities 2,438
2,093
Total liabilities 47,829
66,038

Shareholders' Equity
Preferred stock —
—
Common stock 128
130
Additional paid-in capital 141,128
139,728
Accumulated other comprehensive income (loss) (3,750 ) 1,770
Retained earnings 77,753
70,009
Total shareholders’ equity attributable to FedNat Holding Company shareholders 215,259
211,637
Non-controlling interest —
15,822
Total shareholders’ equity 215,259
227,459
Total liabilities and shareholders' equity $ 263,088
$ 293,497

(1)Eliminated in consolidation.

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

-96113-

Schedule II – Condensed Financial Information of Registrant (Continued)

Condensed Statements of Earnings

FEDNAT HOLDING COMPANY (Parent Company Only)

໿


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Revenues:
Management fees (1)	$	2,660	$	2,160	$	2,608
Interest from subsidiaries (1)	1,410		107		0
Net investment income	477		1,757		843
Net realized and unrealized investment gains (losses)	972		448		(765)
Equity in income (loss) of consolidated subsidiaries	(94,363)		20,909		30,895
Total revenue	(88,844)		25,381		33,581

Costs and expenses:
General and administrative expenses	15,149		13,892		9,296
Interest expense	7,661		10,776		4,077
Total costs and expenses	22,810		24,668		13,373

Income (loss) before income taxes	(111,654)		713		20,208
Income tax expense (benefit)	(33,496)		(298)		5,498
Net income (loss)	(78,158)		1,011		14,710
Net income (loss) attributable to non-controlling interest	0		0		(218)
Net income (loss) attributable to FedNat Holding Company shareholders	$	(78,158)	$	1,011	$	14,928

Year Ended December 31,
2018 2017 2016
(In thousands)
Revenues:
Management fees $ 2,608
$ 2,611
$ 2,492
Net investment income 843
501
623
Net realized and unrealized investment gains (losses) (765 ) —
—
Equity in income of consolidated subsidiaries 30,895
16,902
8,550
Total revenue 33,581
20,014
11,665

Costs and expenses:
General and administrative expenses 9,296
11,087
9,862
Interest expense 4,077
—
—
Total costs and expenses 13,373
11,087
9,862

Income (loss) before income taxes 20,208
8,927
1,803
Income tax expense (benefit) 5,498
3,585
542
Net income (loss) 14,710
5,342
1,261
Net income (loss) attributable to non-contolling interest (218 ) (2,647 ) 246
Net income (loss) attributable to FedNat Holding Company shareholders $ 14,928
$ 7,989
$ 1,015

(1)Eliminated in consolidation.

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

-97114-

Schedule II – Condensed Financial Information of Registrant (Continued)

Condensed Statements of Cash Flows

FEDNAT HOLDING COMPANY (Parent Company Only)

໿


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Cash flow from operating activities:
Net income (loss)	$	(78,158)	$	1,011	$	14,710
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net realized and unrealized investment (gains) losses	(972)		(448)		765
Equity in undistributed income (loss) of consolidated subsidiaries (1)	94,363		(20,909)		(30,895)
Amortization of investment premium or discount, depreciation and amortization	430		369		141
Loss (gain) on early extinguishment of debt	0		3,575		0
Share-based compensation	790		1,050		1,183
Changes in operating assets and liabilities:
Income taxes, net	6,900		(5,379)		(2,371)
Due to subsidiaries, net (1)	(21,891)		3,044		(9,317)
Other, net	3,564		998		1,497
Net cash provided by (used in) operating activities	5,026		(16,689)		(24,287)
Cash flow from investing activities:
Capital contributions to consolidated subsidiaries (1)	(11,000)		0		(30,000)
Sales, maturities and redemptions of investments securities	31,300		11,276		54,543
Purchases of investment securities	(25,089)		(15,617)		(61,009)
Payment for acquisition	0		(25,566)		0
Issuance of note receivable to subsidiary (1)	0		(18,000)		0
Purchases of property and equipment	(21)		(289)		(639)
Net cash provided by (used in) investing activities	(4,810)		(48,196)		(37,105)
Cash flow from financing activities:
Proceeds from issuance of long-term debt, net of issuance costs	0		98,390		0
Payment of long-term debt and prepayment penalties	0		(48,000)		0
Issuance of common stock for share-based awards	42		1		39
Purchases of FedNat Holding Company common stock	(10,418)		(3,449)		(5,061)
Dividends from consolidated subsidiaries	12,376		39,174		27,990
Dividends paid	(5,077)		(4,309)		(4,184)
Net cash provided by (used in) financing activities	(3,077)		81,807		18,784
Net increase (decrease) in cash and cash equivalents	(2,861)		16,922		(42,608)
Cash and cash equivalents at beginning of period	21,031		4,109		46,717
Cash and cash equivalents at end of period	$	18,170	$	21,031	$	4,109

Year Ended December 31,
2018 2017 2016
(In thousands)
Cash flow from operating activities:
Net income (loss) $ 14,710
$ 5,342
$ 1,261
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net realized and unrealized investment (gains) losses 765
—
—
Equity in undistributed income of consolidated subsidiaries (30,895 ) (16,902 ) (10,691 )
Amortization of investment premium or discount, depreciation and amortization 141
88
73
Share-based compensation 1,183
2,846
4,420
Changes in operating assets and liabilities:
Deferred income taxes, net of other comprehensive (loss) income (230 ) (2,057 ) 2,127
Income taxes, net (2,141 ) 6,411
2,978
Due to subsidiaries (9,317 ) 20,468
23,574
Other, net 1,497
1,450
3,786
Net cash provided by (used in) operating activities (24,287 ) 17,646
27,528
Cash flow from investing activities:
Capital contributions to consolidated subsidiaries (30,000 ) (25,000 ) —
Sales, maturities and redemptions of investments securities 54,543
42,979
76,928
Purchases of investment securities (61,009 ) (26,828 ) (83,724 )
Purchases of property and equipment (639 ) (102 ) (299 )
Net cash provided by (used in) investing activities (37,105 ) (8,951 ) (7,095 )
Cash flow from financing activities:
Proceeds from issuance of long-term debt —
45,000
—
Tax impact related to share-based compensation —
—
589
Issuance of common stock for share-based awards 39
103
361
Purchases of FedNat Holding Company common stock (5,061 ) (10,616 ) (11,317 )
Dividends from consolidated subsidiaries 27,990
—
—
Dividends paid (4,184 ) (4,251 ) (4,677 )
Net cash provided by (used in) financing activities 18,784
30,236
(15,044 )
Net increase (decrease) in cash and cash equivalents (42,608 ) 38,931
5,389
Cash and cash equivalents at beginning of period 46,717
7,786
2,397
Cash and cash equivalents at end of period $ 4,109
$ 46,717
$ 7,786

(1)Eliminated in consolidation.

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

-98115-

Schedule II – Condensed Financial Information of Registrant (Continued)

Note to Condensed Financial Statements

FEDNAT HOLDING COMPANY (Parent Company Only)

(1) ORGANIZATION AND BASIS OF PRESENTATION

FedNat Holding Company (“FNHC”), the Parent Company, is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents.

The accompanying condensed financial statements include the activity of the Parent Company and on an equity basis, its consolidated subsidiaries. Accordingly, these condensed financial statements have been presented for the parent company only. These condensed financial statements should be read in conjunction with the consolidated financial statements and related notes of FNHC and subsidiaries set forth in Part II, Item 8 Financial Statements and Supplemental Data of this Annual Report.

In applying the equity method to our consolidated subsidiaries, we record the investment at cost and subsequently adjust for additional capital contributions, distributions and proportionate share of earnings or losses.

-116-

-99-

Schedule V – Valuation and Qualifying Accounts

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

໿


				Charged to
		Balance at		Costs and				Balance at
Year	Description	January 1,		Expenses		Deductions		December 31,
		(in thousands)
2020	Allowance for uncollectible reinsurance recoverable	$	0	$	65	$	0	$	65
	Allowance for uncollectible premiums receivable	$	159	$	74	$	0	$	233
2019	Allowance for uncollectible reinsurance recoverable	$	0	$	0	$	0	$	0
	Allowance for uncollectible premiums receivable	$	77	$	82	$	0	$	159
2018	Allowance for uncollectible reinsurance recoverable	$	0	$	0	$	0	$	0
	Allowance for uncollectible premiums receivable	$	70	$	7	$	0	$	77

-117-

Charged to
Balance at Costs and Balance at
Year Description January 1, Expenses Deductions December 31,
(in thousands)
2018 Allowance for uncollectible reinsurance recoverable $ —
$ —
$ —
$ —
Allowance for uncollectible premiums receivable $ 70
$ 7
$ —
$ 77
2017 Allowance for uncollectible reinsurance recoverable $ —
$ —
$ —
$ —
Allowance for uncollectible premiums receivable $ 55
$ 15
$ —
$ 70
2016 Allowance for uncollectible reinsurance recoverable $ —
$ —
$ —
$ —
Allowance for uncollectible premiums receivable $ 302
$ (219 ) $ (28 ) $ 55

-~~100~~-

Schedule VI – Supplemental Information Concerning Insurance Operations

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

໿


		December 31,						Year Ended December 31,
				Loss and								Claim and Claim
				Loss								Adjustment Expenses				Amortization		Paid Claims
		Deferred		Adjustment						Net		Incurred Related to				of Deferred		and Claim		Net
		Acquisition		Expense		Unearned		Earned		Investment		Current		Prior		Acquisition		Adjustment		Premiums
Year	Line of Business	Cost		Reserves		Premiums		Premiums		Income		Year		Year		Costs		Expenses		Written
		(In thousands)
2020	Property and Casualty Insurance	$	25,405	$	540,367	$	366,789	$	364,134	$	11,786	$	358,898	$	17,551	$	121,524	$	354,143	$	236,623
2019	Property and Casualty Insurance	$	56,136	$	324,362	$	360,870	$	363,652	$	15,901	$	262,109	$	10,971	$	96,885	$	254,806	$	377,879
2018	Property and Casualty Insurance	$	39,436	$	296,230	$	281,992	$	355,257	$	12,460	$	231,133	$	(2,717)	$	97,873	$	230,752	$	365,032

-118-

December 31, Year Ended December 31,
Loss and Claim and Claim
Loss Adjustment Expenses Amortization Paid Claims
Deferred Adjustment Net Incurred Related to of Deferred and Claim Net
Acquisition Expense Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Year Line of Business Cost Reserves Premiums Premiums Income Year Year Costs Expenses Written
(In thousands)
2018 Property and Casualty Insurance $ 39,436
$ 296,230
$ 281,992
$ 355,257
$ 12,460
$ 231,133
$ (2,717 ) $ 97,873
$ 230,752
$ 365,032
2017 Property and Casualty Insurance $ 40,893
$ 230,515
$ 294,423
$ 333,481
$ 10,254
$ 245,545
$ 2,012
$ 87,310
$ 233,085
$ 342,893
2016 Property and Casualty Insurance $ 41,892
$ 158,110
$ 294,022
$ 261,369
$ 9,063
$ 201,704
$ (3,894 ) $ 57,452
$ 170,322
$ 319,499

-~~101~~-



Florida						65-0248866
(State or Other Jurisdiction of Incorporation or Organization)						(IRS Employer Identification Number)

14050 N.W. 14th14th Street, Suite 180, Sunrise, FL						33323
(Address of principal executive offices)						(Zip Code)



	Registrant’s telephone number, including area code: ~~800-293-2532~~800-293-2532
	Securities registered pursuant to Section 12(b) of the ~~Exchange~~ Act:
Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	FNHC	NASDAQ Global Market



Large accelerated filer ☐	Accelerated filer þ☑
~~Non‑accelerated~~Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐	~~(Do not check if a smaller reporting company)~~


	Year Ended December 31,
	2020		2019		2018
	(In thousands)
Gross Premiums Written
Homeowners:
Florida	$	444,576	$	451,856	$	458,652
Louisiana	93,331		45,043		36,063
Texas	127,005		66,429		22,492
South Carolina	35,261		25,172		17,592
Alabama	7,676		5,841		4,890
Mississippi	261		—		—
Total homeowners	708,110		594,341		539,689

Personal automobile:
Texas	—		—		5,141
Georgia	—		(1)		3,078
Florida	—		—		384
Total personal automobile	—		(1)		8,603

Commercial general liability	(247)		(145)		5,384

Federal flood	19,022		16,413		14,088
Gross premiums written total	$	726,885	$	610,608	$	567,764



	Year Ended December 31,
	2018		2017		2016
	(In thousands)
Gross Premiums Written
Homeowners:
Florida	$	458,652	$	482,039	$	477,489
Louisiana	36,063		31,312		25,385
Texas	22,492		8,491		—
South Carolina	17,592		10,803		6,531
Alabama	4,890		4,110		3,332
Total homeowners	539,689		536,755		512,737

Personal automobile:
Texas	5,141		19,324		34,239
Georgia	3,078		22,479		31,831
Florida	384		1,265		1,745
Alabama	—		437		1,664
Total personal automobile	8,603		43,505		69,479

Commercial general liability	5,384		11,048		13,256

Federal flood	14,088		12,109		10,013
Gross premiums written total	$	567,764	$	603,417	$	605,485


PART I

ITEM 1	BUSINESS	12

ITEM 1A	RISK FACTORS	1011

ITEM 1B	UNRESOLVED STAFF COMMENTS	1925

ITEM 2	PROPERTIES	1925

ITEM 3	LEGAL PROCEEDINGS	1925

ITEM 4	MINE SAFETY DISCLOSURES	1925

PART II

ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	2025

ITEM 6	SELECTED FINANCIAL DATA	2227

ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2329

ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	4149

ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	4250

ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	88102

ITEM 9A	CONTROLS AND PROCEDURES	88102

ITEM 9B	OTHER INFORMATION	89103

PART III

ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	89103

ITEM 11	EXECUTIVE COMPENSATION	89103

ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	89103

ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	89103

ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES	89103

PART IV

ITEM 15	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	89104

ITEM 16	FORM 10-K SUMMARY	94111

SIGNATURES


	Year Ended December 31,
	2020			% Change		2019
	(Dollars in thousands)
Revenues:
Gross premiums written	$	726,885		19.0	%	$	610,608
Gross premiums earned	720,967			23.8	%	582,334
Ceded premiums	(356,833)			63.2	%	(218,682)
Net premiums earned	364,134			0.1	%	363,652
Net investment income	11,786			(25.9)	%	15,901
Net realized and unrealized investment gains (losses)	18,032			154.5	%	7,084
Direct written policy fees	13,970			37.0	%	10,200
Other income	23,941			32.1	%	18,124
Total revenues	431,863			4.1	%	414,961

Costs and expenses:
Losses and loss adjustment expenses	376,449			37.9	%	273,080
Commissions and other underwriting expenses	124,288			16.0	%	107,189
General and administrative expenses	23,420			0.9	%	23,203
Interest expense	7,661			(28.9)	%	10,776
Impairment of intangibles	11,699			NCM		—
Total costs and expenses	543,517			31.2	%	414,248

Income (loss) before income taxes	(111,654)			NCM		713
Income tax expense (benefit)	(33,496)			NCM		(298)
Net income (loss)	$	(78,158)		NCM		$	1,011



Ratios to net premiums earned:
Net loss ratio	103.4		%			75.1		%
Net expense ratio	40.5		%			35.9		%
Combined ratio	143.9		%			111.0		%


~~(1)~~	~~Net loss ratio is calculated as losses and loss adjustment expenses 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 loss adjustment expenses and all operating expenses less interest expense divided by net premiums earned.~~


	Payments Due By Period
			Less						More
			than		1 - 3		3 - 5		than
	Total		1 Year		Years		Years		5 Years
	(In thousands)
Loss and loss adjustment expense reserves (1)	$	540,367	$	318,817	$	162,110	$	32,422	$	27,018
Long-term debt (2)	100,000		—		—		—		100,000
Operating leases	8,892		1,066		2,229		2,279		3,318
Total long-term contractual obligations	$	649,259	$	319,883	$	164,339	$	34,701	$	130,336



	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(In thousands, except per share data)
2018
Net premiums earned	$	82,109	$	83,557	$	98,493	$	91,098
Total revenue	$	93,077	$	95,742	$	110,832	$	96,442
Losses and loss adjustment expenses	$	46,071	$	47,570	$	62,457	$	72,318
Total costs and expenses	$	83,461	$	83,726	$	99,862	$	108,836
Net income (loss) attributable to FedNat Holding Company shareholders	$	7,463	$	8,820	$	7,950	$	(9,305	)
Net income (loss) per share - basic	$	0.58	$	0.69	$	0.62	$	(0.73	)



4.3	Supplemental Indenture No. 1 dated as of December 28, 2017, regarding Senior Unsecured Floating Rate Notes due 2027	8-K	4.2	January 3, 2018

4.4	Supplemental Indenture No. 2 dated as of December 29, 2017, regarding Senior Unsecured Floating Rate Notes due 2022	8-K	4.3	January 3, 2018

4.5	Senior Unsecured Floating Rate Note due 2027	8-K	4.4	January 3, 2018

4.6	Senior Unsecured Floating Rate Note due 2022	8-K	4.5	January 3, 2018

4.7	Indenture dated March 5, 2019 between FedNat Holding Company and The Bank of New York Mellon, as Trustee, Paying Agent, and Registrar	8-K	4.1	March 6, 2019

4.8	Form of Rule 144A Senior Unsecured Note due 2029 (included in Exhibit 4.7)	8-K	4.2	March 6, 2019

4.9	Form of IAI Senior Unsecured Note due 2029 (included in Exhibit 4.7)	8-K	4.3	March 6, 2019

10.1*	Multi-Year Excess Catastrophe Reinsurance Contract, effective July 1, 2017, between Federated National Insurance Company and subscribing reinsurers	10-Q	10.2	November 9, 2017

10.2*	FHCF Supplement Layer Reinsurance Contract, effective June 1, 2018, between FedNat Insurance Company and subscribing reinsurers	10-Q	10.1	November 7, 2018

10.3*	Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2018, between FedNat Insurance Company and subscribing reinsurers	10-Q	10.2	November 7, 2018

10.4*	Non-Florida Reinstatement Premium Protection Reinsurance Contract, effective July 1, 2018, between FedNat Insurance Company and subscribing reinsurers	10-Q	10.3	November 7, 2018

10.5*	Reinstatement Premium Protection Reinsurance Contract, effective July 1, 2018, between FedNat Insurance Company and subscribing reinsurers	10-Q	10.4	November 7, 2018

10.6*	Excess Catastrophe Reinsurance Contract, effective July 1, 2018, between FedNat Insurance Company and subscribing reinsurers	10-Q	10.5	November 7, 2018

10.7*	Net Quota Share Reinsurance Agreement, effective July 1, 2018, between FedNat Insurance Company and Swiss Reinsurance America Corporation	10-Q	10.6	November 7, 2018

10.8	Reimbursement Contract between Federated National Insurance Company and The State Board of Administration of Florida (SBA) as administrator of the Florida Hurricane Catastrophe Fund (FHCF), effective June 1, 2018	10-Q	10.1	May 8, 2018

10.9	Reimbursement Contract between Monarch National Insurance Company and The State Board of Administration of Florida (SBA) as administrator of the Florida Hurricane Catastrophe Fund (FHCF), effective June 1, 2018	10-Q	10.2	May 8, 2018

10.10*	Administrator Agreement, effective July 1, 2013, between Federated National Insurance Company and SageSure Insurance Managers LLC, as amended	10-Q	10.9	November 9, 2017



~~PART I~~