UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2021~~MARCH 31, 2022

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

FOR THE TRANSITION PERIOD FROM ___________________TO _______________________

Commission File number 000-25001

FedNat Holding Company

(Exact name of registrant as specified in its charter)


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

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

800-293-2532

(Registrant’s telephone number, including area code)

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


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

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

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

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

Large Accelerated Filer ¨

Accelerated Filer

Non-accelerated Filer ¨

Smaller reporting company

☑

Emerging growth company

☐

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

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

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

As of ~~November 1, 2021,~~May 2, 2022, the registrant had ~~17,446,930~~17,519,237 shares of common stock outstanding.

FEDNAT HOLDING COMPANY

TABLE OF CONTENTS



PART I: FINANCIAL INFORMATION		PAGE

ITEM 1	Financial Statements	1

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3129

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	5042

ITEM 4	Controls and Procedures	5043

PART II: OTHER INFORMATION

ITEM 1	Legal Proceedings	5244

ITEM 1A	Risk Factors	5244

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	5344

ITEM 3	Defaults upon Senior Securities	5344

ITEM 4	Mine Safety Disclosures	5344

ITEM 5	Other Information	5444

ITEM 6	Exhibits	5545

SIGNATURES		5746

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)


		September 30,		December 31,			March 31,		December 31,
		2021		2020			2022		2021
ASSETS	ASSETS					ASSETS
Investments:	Investments:					Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $343,619 and $473,126, respectively)		$	349,299	$	488,210
Debt securities, available-for-sale, at fair value (amortized cost of $269,100 and $324,861, respectively)						Debt securities, available-for-sale, at fair value (amortized cost of $269,100 and $324,861, respectively)	$	270,217	$	327,532

Equity securities, at fair value	Equity securities, at fair value	5,965		3,157		Equity securities, at fair value	5,348		5,905
Total investments	Total investments	355,264		491,367		Total investments	275,565		333,437
Cash and cash equivalents	Cash and cash equivalents	166,860		102,367		Cash and cash equivalents	87,358		83,526
Prepaid reinsurance premiums	Prepaid reinsurance premiums	320,929		278,272		Prepaid reinsurance premiums	162,463		242,537
Premiums receivable, net of allowance of $190 and $233, respectively		50,018		50,803
Reinsurance recoverable, net of allowance of $531 and $65, respectively		959,263		413,026
Premiums receivable, net of allowance of $133 and $125, respectively						Premiums receivable, net of allowance of $133 and $125, respectively	33,089		41,174
Reinsurance recoverable, net of allowance of $109 and $249, respectively						Reinsurance recoverable, net of allowance of $109 and $249, respectively	581,921		613,203
Deferred acquisition costs, net	Deferred acquisition costs, net	18,977		25,405		Deferred acquisition costs, net	16,438		18,829
Current and deferred income taxes, net	Current and deferred income taxes, net	29,776		35,035		Current and deferred income taxes, net	13,446		30,014

Other assets	Other assets	37,686		32,262		Other assets	31,681		49,950
Total assets	Total assets	$	1,938,773	$	1,428,537	Total assets	$	1,201,961	$	1,412,670

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities	Liabilities					Liabilities
Loss and loss adjustment expense reserves	Loss and loss adjustment expense reserves	$	1,037,537	$	540,367	Loss and loss adjustment expense reserves	$	661,595	$	738,794
Unearned premiums	Unearned premiums	358,435		366,789		Unearned premiums	316,312		342,747
Reinsurance payable and funds withheld liabilities	Reinsurance payable and funds withheld liabilities	306,679		202,827		Reinsurance payable and funds withheld liabilities	46,535		102,748
Long-term debt, net of deferred financing costs of $2,224 and $1,317, respectively		118,776		98,683
Long-term debt, net of deferred financing costs of $2,094 and $2,195, respectively						Long-term debt, net of deferred financing costs of $2,094 and $2,195, respectively	118,906		118,805
Deferred revenue	Deferred revenue	6,211		7,187		Deferred revenue	4,162		5,240

Other liabilities	Other liabilities	39,912		54,524		Other liabilities	40,312		44,950
Total liabilities	Total liabilities	1,867,550		1,270,377		Total liabilities	1,187,822		1,353,284

Commitments and contingencies (see Note 10)	Commitments and contingencies (see Note 10)	0		0		Commitments and contingencies (see Note 10)	0		0

Shareholders' Equity	Shareholders' Equity					Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized	Preferred stock, $0.01 par value: 1,000,000 shares authorized	—		—		Preferred stock, $0.01 par value: 1,000,000 shares authorized	—		—
Common stock, $0.01 par value: 50,000,000 shares authorized; 17,446,930 and 13,717,908 issued and outstanding, respectively		174		137
Common stock, $0.01 par value: 50,000,000 shares authorized; 17,519,237 and 17,446,930 issued and outstanding, respectively						Common stock, $0.01 par value: 50,000,000 shares authorized; 17,519,237 and 17,446,930 issued and outstanding, respectively	175		174
Additional paid-in capital	Additional paid-in capital	185,799		169,298		Additional paid-in capital	186,202		186,007
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	2,442		11,386		Accumulated other comprehensive income (loss)	(2,563)		(1,034)
Retained earnings (deficit)	Retained earnings (deficit)	(117,192)		(22,661)		Retained earnings (deficit)	(169,675)		(125,761)
Total shareholders’ equity	Total shareholders’ equity	71,223		158,160		Total shareholders’ equity	14,139		59,386
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	1,938,773	$	1,428,537	Total liabilities and shareholders' equity	$	1,201,961	$	1,412,670

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

-1-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30,				September 30,					March 31,
		2021		2020		2021		2020			2022		2021
Revenues:	Revenues:									Revenues:
Net premiums earned	Net premiums earned	$	53,929	$	83,546	$	129,155	$	300,934	Net premiums earned	$	45,985	$	39,745
Net investment income	Net investment income	1,685		2,404		5,092		9,637		Net investment income	1,264		1,674
Net realized and unrealized gains (losses)	Net realized and unrealized gains (losses)	1,273		1,324		10,949		8,882		Net realized and unrealized gains (losses)	(15,053)		92
Direct written policy fees	Direct written policy fees	3,179		3,603		9,730		10,662		Direct written policy fees	2,613		3,315
Other income	Other income	6,658		6,439		23,584		16,919		Other income	7,426		7,922
Total revenues	Total revenues	66,724		97,316		178,510		347,034		Total revenues	42,235		52,748

Costs and expenses:	Costs and expenses:									Costs and expenses:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	59,644		99,016		185,090		297,862		Losses and loss adjustment expenses	58,783		48,016
Commissions and other underwriting expenses	Commissions and other underwriting expenses	23,591		24,580		61,977		90,205		Commissions and other underwriting expenses	19,107		21,031
General and administrative expenses	General and administrative expenses	5,974		5,333		17,854		17,241		General and administrative expenses	6,997		6,066
Interest expense	Interest expense	2,296		1,915		6,451		5,745		Interest expense	2,300		1,926
Total costs and expenses	Total costs and expenses	91,505		130,844		271,372		411,053		Total costs and expenses	87,187		77,039

Income (loss) before income taxes	Income (loss) before income taxes	(24,781)		(33,528)		(92,862)		(64,019)		Income (loss) before income taxes	(44,952)		(24,291)
Income tax expense (benefit)	Income tax expense (benefit)	—		(12,783)		1,669		(23,928)		Income tax expense (benefit)	(1,038)		(4,910)
Net income (loss)	Net income (loss)	$	(24,781)	$	(20,745)	$	(94,531)	$	(40,091)	Net income (loss)	$	(43,914)	$	(19,381)


Net Income (Loss) Per Common Share	Net Income (Loss) Per Common Share									Net Income (Loss) Per Common Share
Basic	Basic	$	(1.42)	$	(1.51)	$	(5.76)	$	(2.89)	Basic	$	(2.51)	$	(1.35)
Diluted	Diluted	(1.42)		(1.51)		(5.76)		(2.89)		Diluted	(2.51)		(1.35)

Weighted Average Number of Shares of Common Stock Outstanding	Weighted Average Number of Shares of Common Stock Outstanding									Weighted Average Number of Shares of Common Stock Outstanding
Basic	Basic	17,445		13,708		16,417		13,890		Basic	17,462		14,395
Diluted	Diluted	17,445		13,708		16,417		13,890		Diluted	17,462		14,395

Dividends Declared Per Common Share	Dividends Declared Per Common Share	$	—	$	0.09	$	—	$	0.27	Dividends Declared Per Common Share	$	—	$	—

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

-2-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30,				September 30,					March 31,
		2021		2020		2021		2020			2022		2021

Net income (loss)	Net income (loss)	$	(24,781)	$	(20,745)	$	(94,531)	$	(40,091)	Net income (loss)	$	(43,914)	$	(19,381)

Change in net unrealized gains (losses) on investments, available-for-sale, net of tax	Change in net unrealized gains (losses) on investments, available-for-sale, net of tax	(2,631)		1,373		(8,944)		5,482		Change in net unrealized gains (losses) on investments, available-for-sale, net of tax	(1,529)		(7,200)
Comprehensive income (loss)	Comprehensive income (loss)	$	(27,412)	$	(19,372)	$	(103,475)	$	(34,609)	Comprehensive income (loss)	$	(45,443)	$	(26,581)

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

-3-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)


									Accumulated														Accumulated
				Common Stock			Additional		Other		Retained		Total					Common Stock			Additional		Other		Retained		Total
		Preferred		Issued			Paid-in		Comprehensive		Earnings		Shareholders'			Preferred		Issued			Paid-in		Comprehensive		Earnings		Shareholders'
		Stock		Shares	Amount		Capital		Income (Loss)		(Deficit)		Equity			Stock		Shares	Amount		Capital		Income (Loss)		(Deficit)		Equity
Balance as of July 1, 2021		$	—	17,442,845	$	174	$	185,578	$	5,073	$	(92,411)	$	98,414
Balance as of January 1, 2022															Balance as of January 1, 2022	$	—	17,446,930	$	174	$	186,007	$	(1,034)	$	(125,761)	$	59,386

Net income (loss)	Net income (loss)	—		—	—		—		—		(24,781)		(24,781)		Net income (loss)	—		—	—		—		—		(43,914)		(43,914)
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—	—		—		(2,631)		—		(2,631)		Other comprehensive income (loss)	—		—	—		—		(1,529)		—		(1,529)

Shares issued under share-based compensation plans	Shares issued under share-based compensation plans	—		4,085	—		10		—		—		10		Shares issued under share-based compensation plans	—		72,307	1		(1)		—		—		—

Share-based compensation	Share-based compensation	—		—	—		211		—		—		211		Share-based compensation	—		—	—		196		—		—		196
Balance as of September 30, 2021		$	—	17,446,930	$	174	$	185,799	$	2,442	$	(117,192)	$	71,223
Balance as of March 31, 2022															Balance as of March 31, 2022	$	—	17,519,237	$	175	$	186,202	$	(2,563)	$	(169,675)	$	14,139


									Accumulated														Accumulated
				Common Stock			Additional		Other		Retained		Total					Common Stock			Additional		Other		Retained		Total
		Preferred		Issued			Paid-in		Comprehensive		Earnings		Shareholders'			Preferred		Issued			Paid-in		Comprehensive		Earnings		Shareholders'
		Stock		Shares	Amount		Capital		Income (Loss)		(Deficit)		Equity			Stock		Shares	Amount		Capital		Income (Loss)		(Deficit)		Equity
Balance as of July 1, 2020		$	—	13,703,175	$	137	$	168,485	$	14,390	$	38,668	$	221,680
Balance as of January 1, 2021															Balance as of January 1, 2021	$	—	13,717,908	$	137	$	169,298	$	11,386	$	(22,661)	$	158,160

Net income (loss)	Net income (loss)	—		—	—		—		—		(20,745)		(20,745)		Net income (loss)	—		—	—		—		—		(19,381)		(19,381)
Other comprehensive income (loss)	Other comprehensive income (loss)	—		—	—		—		1,373		—		1,373		Other comprehensive income (loss)	—		—	—		—		(7,200)		—		(7,200)
Dividends declared		—		—	—		—		—		(1,259)		(1,259)

Issuance of common stock															Issuance of common stock	—		3,500,000	35		15,087		—		—		15,122
Shares issued under share-based compensation plans	Shares issued under share-based compensation plans	—		14,350	—		41		—		—		41		Shares issued under share-based compensation plans	—		95,553	1		—		—		—		1

Share-based compensation	Share-based compensation	—		—	—		386		—		—		386		Share-based compensation	—		—	—		407		—		—		407
Balance as of September 30, 2020		$	—	13,717,525	$	137	$	168,912	$	15,763	$	16,664	$	201,476
Balance as of March 31, 2021															Balance as of March 31, 2021	$	—	17,313,461	$	173	$	184,792	$	4,186	$	(42,042)	$	147,109

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

-4-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

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

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

~~(Unaudited)~~

Accumulated
Common Stock Additional Other Retained Total
Preferred Issued Paid-in Comprehensive Earnings Shareholders'
Stock Shares Amount Capital Income (Loss) (Deficit) Equity
Balance as of January 1, 2021 $ — 13,717,908 $ 137 $ 169,298 $ 11,386 $ (22,661) $ 158,160
Net income (loss) — — — — — (94,531) (94,531)
Other comprehensive income (loss) — — — — (8,944) — (8,944)
Issuance of common stock — 3,600,650 36 15,535 — — 15,571
Shares issued under share-based compensation plans — 128,372 1 10 — — 11
Share-based compensation — — — 956 — — 956
Balance as of September 30, 2021 $ — 17,446,930 $ 174 $ 185,799 $ 2,442 $ (117,192) $ 71,223

Accumulated
Common Stock Additional Other Retained Total
Preferred Issued Paid-in Comprehensive Earnings Shareholders'
Stock Shares Amount Capital Income (Loss) (Deficit) Equity
Balance as of January 1, 2020 $ — 14,414,821 $ 144 $ 167,677 $ 10,281 $ 70,591 $ 248,693
Cumulative effect of new accounting standards — — — — — (25) (25)
Net income (loss) — — — — — (40,091) (40,091)
Other comprehensive income (loss) — — — — 5,482 — 5,482
Dividends declared — — — — — (3,819) (3,819)
Shares issued under share-based compensation plans — 102,939 1 41 — — 42
Repurchases of common stock — (800,235) (8) — — (9,992) (10,000)
Share-based compensation — — — 1,194 — — 1,194
Balance as of September 30, 2020 $ — 13,717,525 $ 137 $ 168,912 $ 15,763 $ 16,664 $ 201,476

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

-5-

~~FEDNAT HOLDING COMPANY AND SUBSIDIARIES~~

~~CONSOLIDATED~~ STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


		Nine Months Ended					Three Months Ended
		September 30,					March 31,
		2021		2020			2022		2021
Cash flow from operating activities:	Cash flow from operating activities:					Cash flow from operating activities:
Net income (loss)	Net income (loss)	$	(94,531)	$	(40,091)	Net income (loss)	$	(43,914)	$	(19,381)
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:					Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net realized and unrealized (gains) losses	Net realized and unrealized (gains) losses	(10,949)		(8,882)		Net realized and unrealized (gains) losses	15,053		(92)

Amortization of investment premium or discount, net	Amortization of investment premium or discount, net	2,986		2,353		Amortization of investment premium or discount, net	510		1,256
Depreciation and amortization	Depreciation and amortization	1,447		1,427		Depreciation and amortization	413		460
Share-based compensation	Share-based compensation	956		1,194		Share-based compensation	196		407
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Prepaid reinsurance premiums	Prepaid reinsurance premiums	(42,657)		(140,469)		Prepaid reinsurance premiums	80,074		61,204
Premiums receivable, net	Premiums receivable, net	785		(11,331)		Premiums receivable, net	8,085		10,041
Reinsurance recoverable, net	Reinsurance recoverable, net	(546,236)		(242,611)		Reinsurance recoverable, net	31,282		(51,038)
Deferred acquisition costs, net	Deferred acquisition costs, net	6,428		4,979		Deferred acquisition costs, net	2,391		1,429
Current and deferred income taxes, net	Current and deferred income taxes, net	5,283		(23,322)		Current and deferred income taxes, net	16,592		(1,291)
Deferred revenue	Deferred revenue	(976)		(61)		Deferred revenue	(1,078)		(278)
Loss and loss adjustment expense reserves	Loss and loss adjustment expense reserves	497,170		229,618		Loss and loss adjustment expense reserves	(77,199)		(53,654)
Unearned premiums	Unearned premiums	(8,354)		19,504		Unearned premiums	(26,435)		(4,794)
Reinsurance payable and funds withheld liabilities	Reinsurance payable and funds withheld liabilities	103,852		128,520		Reinsurance payable and funds withheld liabilities	(56,213)		(50,561)
Other	Other	(5,906)		400		Other	13,219		(3,853)
Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities	(90,702)		(78,772)		Net cash provided by (used in) operating activities	(37,024)		(110,145)
Cash flow from investing activities:	Cash flow from investing activities:					Cash flow from investing activities:
Proceeds from sales of equity securities		—		11,441

Proceeds from sales of debt securities	Proceeds from sales of debt securities	205,932		346,890		Proceeds from sales of debt securities	56,161		87,007
Purchases of equity securities		(2,745)		(4,727)

Purchases of debt securities	Purchases of debt securities	(145,117)		(402,894)		Purchases of debt securities	(27,385)		(56,148)
Maturities and redemptions of debt securities	Maturities and redemptions of debt securities	62,907		60,767		Maturities and redemptions of debt securities	12,130		31,383

Purchases of property and equipment	Purchases of property and equipment	(1,236)		(2,585)		Purchases of property and equipment	(50)		(174)
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	119,741		8,892		Net cash provided by (used in) investing activities	40,856		62,068
Cash flow from financing activities:	Cash flow from financing activities:					Cash flow from financing activities:
Proceeds from issuance of long-term debt, net of issuance costs		19,872		—

Purchases of FedNat Holding Company common stock		—		(10,418)

Issuance of common stock	Issuance of common stock	15,571		—		Issuance of common stock	—		15,403
Issuance of common stock for share-based awards	Issuance of common stock for share-based awards	11		42		Issuance of common stock for share-based awards	—		1
Dividends paid		—		(3,819)

Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	35,454		(14,195)		Net cash provided by (used in) financing activities	—		15,404
Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents	64,493		(84,075)		Net increase (decrease) in cash and cash equivalents	3,832		(32,673)
Cash and cash equivalents at beginning-of-period	Cash and cash equivalents at beginning-of-period	102,367		133,361		Cash and cash equivalents at beginning-of-period	83,526		102,367
Cash and cash equivalents at end-of-period	Cash and cash equivalents at end-of-period	$	166,860	$	49,286	Cash and cash equivalents at end-of-period	$	87,358	$	69,694

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

-65-

FEDNAT HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

(Unaudited)

(Continued)


		Nine Months Ended					Three Months Ended
		September 30,					March 31,
		2021		2020			2022		2021
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid (received) during the period for interest	Cash paid (received) during the period for interest	$	7,625	$	7,500	Cash paid (received) during the period for interest	$	3,875	$	3,750
Cash paid (received) during the period for income taxes	Cash paid (received) during the period for income taxes	(3,603)		(598)		Cash paid (received) during the period for income taxes	(17,782)		(3,618)

Significant non-cash investing and financing transactions:	Significant non-cash investing and financing transactions:					Significant non-cash investing and financing transactions:
Right-of-use asset	Right-of-use asset	(6,885)		(7,605)		Right-of-use asset	(6,497)		(7,250)
Lease liability	Lease liability	6,885		7,605		Lease liability	6,497		7,250

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

-76-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

~~September 30, 2021~~March 31, 2022

1. ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION

Organization

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

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

Maison Insurance Company ("MIC"), an insurance subsidiary, is licensed as an admitted carrier to write homeowners property and casualty insurance as well as wind/hail-only exposures by the state's insurance departments in Louisiana, Texas and Florida. In November 2021, the Company made the decision to commence an orderly runoff of ~~Maison’s~~MIC’s insurance operations.

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

Material Distribution Relationships

Ivantage Select Agency, Inc.

The Company is a party to an insurance agency master agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company (“Allstate”), pursuant to which the Company has been authorized by ISA to appoint Allstate agents to offer our FNIC homeowners insurance products to consumers in Florida. As a percentage of the total homeowners premiums we underwrote, ~~19.3%~~17.4% and ~~20.9%~~19.6% were from Allstate’s network of Florida agents, for the three months ended ~~September 30,~~March 31, 2022 and 2021, and 2020, respectively. As a percentage of the total homeowners premiums we underwrote, 19.6% and 20.9% were from Allstate’s network of Florida agents, for the nine months ended September 30, 2021 and 2020, respectively.

SageSure Insurance Managers, LLC

The Company is a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) to facilitate ~~growth in~~ our FNIC homeowners business outside of Florida. As a percentage of the total homeowners premiums, ~~26.3%~~11.7% and ~~26.2%~~24.5% of the Company’s premiums were underwritten by SageSure, for the three months ended ~~September 30,~~March 31, 2022 and 2021, and 2020, respectively. As a percentage of the total homeowners premiums, 26.5% and 26.0% of the Company’s premiums were underwritten by SageSure, for the nine months ended September 30, 2021 and 2020, 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 5 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.

-8-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

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

-7-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

variable interests in a VIE to determine whether the Company has a controlling financial interest and would therefore be considered the primary beneficiary of the VIE. If the Company determines it is the primary beneficiary of a VIE, the Company consolidates the assets and liabilities of the VIE in its consolidated financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Our significant accounting policies were described in Note 2 of our ~~2020~~2021 Form 10-K. ~~Other than the update discussed below, there~~There have been no significant changes in our significant accounting policies for the ~~nine~~three months ended September 30, 2021. During the first six months of 2021, we purchased additional reinsurance limit excess of loss catastrophe reinsurance program for 2020-2021, which we determined had an embedded derivative. Refer to Notes 3 and 5 below for information regarding this embedded derivative.March 31, 2022.

~~When we enter~~Going Concern

The Company recently received notification from Demotech that FNIC’s “A” (“Exceptional”) rating has been downgraded to “S” (“Substantial”). MNIC’s “A” rating was reaffirmed. The Company believes that the downgrade of FNIC’s Demotech rating will adversely impact the Company's ability to obtain excess-of-loss reinsurance for coverage beginning July 1, 2022. Absent such coverage, the Company will not be in compliance with requirements communicated by the Office of Insurance Regulation of the state of Florida regarding such coverage, which could ultimately result in the Company being placed into ~~contracts containing embedded derivative instruments~~receivership. Additionally, being placed into receivership and/or failing to obtain excess-of-loss reinsurance each represent potential defaults under our debt indentures that ~~possess economic characteristics~~could result in acceleration of repayment of our debt. In addition, in May 2022, Egan Jones’ rating on the Company’s outstanding senior notes expired such that our notes are not ~~clearly~~currently rated. The lack of a rating, if not remediated within 30 days from receipt of notice as provided in the note indentures, has the potential to result in an Event of Default under the note indentures. Such conditions raise substantial doubt regarding the Company’s ability to continue as a going concern. After exploring strategic alternatives in an effort to increase its capital resources to support its insurance carriers and ~~closely related~~preserve value for the Company’s stakeholders, the Company developed an action plan, which has been submitted to the ~~economic characteristics~~Office of Insurance Regulation of the ~~host,~~state of Florida (“OIR”). A portion of the action plan has been approved by the OIR, and ~~a separate instrument with~~consists of the ~~same terms would qualify~~mid-term cancellation, effective June 29, 2022, of approximately 68,200 Florida policies currently in force on FNIC, MNIC and MIC, as requested by the Company. Furthermore, the Company has ceased writing new business from May 16, 2022 through June 30, 2022. Additional portions of the plan continue to be subject to approval by the OIR and regulatory authorities in other states, including mid-term cancellations in non-Florida states, as well as reinsurance and capital raising options; however, there can be no assurance that we will be able to execute on all or any of the strategic alternatives, successfully raise additional capital or obtain excess-of-loss reinsurance. These financial statements do not include any adjustments relating to the recoverability and classification of assets, carrying amounts or the amount and classification of liabilities that may be required should the Company be unable to continue as a ~~derivative instrument, we bifurcate~~going concern. However, due to the ~~embedded derivative~~need to refund approximately $126.0 million of unearned premiums to policyholders impacted by the mid-term cancellations, the Company will need to liquidate a substantial portion of its portfolio of fixed income securities. Because management can no longer assert that it has the intent and ability to hold such securities to a forecasted recovery of their fair value, the Company recognized an impairment loss of $12.6 million. Total shareholders’ equity was not impacted by such charge; however, the Company’s net loss for three months ended March 31, 2022 worsened and other comprehensive income improved by $12.6 million in offsetting amounts. Aside from the host for measurement purposes. The embedded derivative is carried at fair value on our consolidated balance sheets and changes in fair value are recognized in net realized and unrealized gain (loss) on our consolidated statements of operations as they occur. The fair valueimpacts previously discussed, the Company has not yet completed an analysis to determine the impact of the ~~embedded derivative is measured based upon~~action plan on the ~~best estimates~~financial statements including assessing the recoverability of ~~current settlement values, using present value~~deferred acquisition costs, as a result of ~~projected cash flows.~~the aforementioned refund of unearned premiums to policyholders.

Accounting Estimates and Assumptions

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

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

-8-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

Recently Issued Accounting Pronouncements, Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ~~2019-12,~~ ~~Simplifying the Accounting for Income Taxes,~~ which removes certain exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740. The guidance also clarifies and amends existing guidance to improve consistent application. The Company adopted the guidance effective January 1, 2021, which did not have a material 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~~ Accounting Standards Update ("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~~Company adopted the guidance effective ~~for interim and annual reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is in the early stage of evaluating the~~January 1, 2022, which did not have any impact ~~that the update will have~~ on the Company’s consolidated financial ~~position or~~condition, results of ~~operations.~~operations, or disclosures.

In August 2020, the FASB issued ASU 2020-6, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("("ASU 2020-6"), which simplifies an issuer's accounting for convertible instruments by eliminating two of the three models in the current guidance that requires separate accounting for certain embedded conversion features. The new guidance simplifies the settlement

-9-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

assessment that entities are required to perform to determine whether a contract qualifies for equity classification. ASU 2020-6 requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement (if the effect is more dilutive) for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This new guidance requires disclosures about events that occur during the reporting period and cause conversion contingencies to be met and about the fair value of convertible debt at the instrument level, among other things. ~~ASU 2020-6 is effective for interim and annual reporting periods beginning after December 15, 2021, with early adoption permitted.~~ The Company ~~is in~~adopted the ~~early stage of evaluating the~~guidance effective January 1, 2022, which did not have any impact ~~that the update will have~~ on the ~~Company's~~Company’s consolidated financial ~~position~~condition or results of operations.

3. FAIR VALUE

Fair Value Disclosures of Financial Instruments

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

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

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

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

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

-9-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

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


		September 30, 2021									March 31, 2022
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(In thousands)									(In thousands)
Debt securities - available-for-sale, at fair value:	Debt securities - available-for-sale, at fair value:									Debt securities - available-for-sale, at fair value:
United States government obligations and authorities	United States government obligations and authorities	$	39,660	$	55,469	$	—	$	95,129	United States government obligations and authorities	$	41,125	$	41,304	$	—	$	82,429
Obligations of states and political subdivisions	Obligations of states and political subdivisions	—		20,456		—		20,456		Obligations of states and political subdivisions	(1)		15,579		—		15,578
Corporate securities	Corporate securities	—		202,922		—		202,922		Corporate securities	—		149,608		—		149,608
International securities	International securities	—		30,792		—		30,792		International securities	—		22,602		—		22,602
Debt securities, at fair value	Debt securities, at fair value	39,660		309,639		—		349,299		Debt securities, at fair value	41,124		229,093		—		270,217

Equity securities, at fair value	Equity securities, at fair value	2,697		3,268		—		5,965		Equity securities, at fair value	1,652		3,696		—		5,348

Total investments, at fair value	Total investments, at fair value	$	42,357	$	312,907	$	—	$	355,264	Total investments, at fair value	$	42,776	$	232,789	$	—	$	275,565

Other assets - embedded derivative, at fair value	Other assets - embedded derivative, at fair value	$	—	$	—	$	10,725	$	10,725	Other assets - embedded derivative, at fair value	$	—	$	—	$	10,448	$	10,448

-10-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~


		December 31, 2020									December 31, 2021
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(In thousands)									(In thousands)
Debt securities - available-for-sale, at fair value:	Debt securities - available-for-sale, at fair value:									Debt securities - available-for-sale, at fair value:
United States government obligations and authorities	United States government obligations and authorities	$	38,511	$	133,264	$	—	$	171,775	United States government obligations and authorities	$	41,125	$	49,567	$	—	$	90,692
Obligations of states and political subdivisions	Obligations of states and political subdivisions	—		22,264		—		22,264		Obligations of states and political subdivisions	—		19,278		—		19,278
Corporate securities	Corporate securities	—		266,528		—		266,528		Corporate securities	—		188,980		—		188,980
International securities	International securities	—		27,643		—		27,643		International securities	901		27,681		—		28,582
Debt securities, at fair value	Debt securities, at fair value	38,511		449,699		—		488,210		Debt securities, at fair value	42,026		285,506		—		327,532

Equity securities, at fair value	Equity securities, at fair value	1,881		1,276		—		3,157		Equity securities, at fair value	1,879		4,026		—		5,905

Total investments, at fair value	Total investments, at fair value	$	40,392	$	450,975	$	—	$	491,367	Total investments, at fair value	$	43,905	$	289,532	$	—	$	333,437

Other assets - embedded derivative, at fair value										Other assets - embedded derivative, at fair value	$	—	$	—	$	10,725	$	10,725

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.

~~During the first six months~~As of ~~2021,~~March 31, 2022, we ~~purchased additional~~have an embedded derivative, associated with a reinsurance limit for our 2020-2021 excess of loss catastrophe reinsurance program, ~~which we determined had an embedded derivative. As of September 30, 2021, this embedded derivative is~~ carried at ~~$10.7~~$10.4 million included in other assets on our consolidated balance sheets. ~~For the nine months ended September 30, 2021, the Company recognized $9.4 million in realized and unrealized gain (loss) related to this item on our consolidated statements of operations. Also, there~~There is no contractual maturity ~~date. There is~~date and no collateral posted for this embedded derivative; however, the related contract is with excess-of-loss reinsurers that have an S&P A rating or are collateralized.

-10-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

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.

•Other Assets Embedded Derivative – In determining the fair value of the embedded derivative in Level 3, the Company uses the best estimates of current settlement values, using present value of projected cash flows. The assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market participant and include assumptions for the non-performance risk, which is added to the discount rates used in determining the fair value from the net cash flows and

-11-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

reflects the credit risk of either our counter-party for our assets or us for our liabilities of not fulfilling the obligations of an underlying amounts due to us or amounts we owe. Changes in the fair value of ~~these~~this embedded ~~derivatives result~~derivative results primarily from changes in market conditions or the credit risk associated with ~~us or~~ our counterparties.

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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Additionally, we did not have any assets or liabilities measured at fair value on a nonrecurring basis as of ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020,~~2021, and we noted no significant changes in our valuation methodologies between those periods.

Our long-term debt is a financial instrument and we disclose its fair value in Note 8. The fair value of long-term debt is based on quoted market prices. The inputs used to measure the fair value of long-term debt are classified as Level 2 within the fair value hierarchy.

There were 0 changes to the Company’s valuation methodology and the Company is not aware of any events or circumstances that would have a significant adverse effect on the carrying value of its assets and liabilities measured at fair value as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. There were 0 transfers between the fair value hierarchy levels during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

-11-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

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					Amortized		Gross		Gross
		Cost		Unrealized		Unrealized					Cost		Unrealized		Unrealized
		or Cost		Gains		Losses		Fair Value			or Cost		Gains		Losses		Fair Value
		(In thousands)									(In thousands)
September 30, 2021
March 31, 2022										March 31, 2022
Debt securities - available-for-sale:	Debt securities - available-for-sale:									Debt securities - available-for-sale:
United States government obligations and authorities	United States government obligations and authorities	$	94,569	$	1,019	$	459	$	95,129	United States government obligations and authorities	$	82,328	$	101	$	—	$	82,429
Obligations of states and political subdivisions	Obligations of states and political subdivisions	19,970		554		68		20,456		Obligations of states and political subdivisions	15,547		31		—		15,578
Corporate	Corporate	198,574		5,679		1,331		202,922		Corporate	148,648		960		—		149,608
International	International	30,506		373		87		30,792		International	22,577		25		—		22,602
		$	343,619	$	7,625	$	1,945	$	349,299		$	269,100	$	1,117	$	—	$	270,217


		Amortized		Gross		Gross					Amortized		Gross		Gross
		Cost		Unrealized		Unrealized					Cost		Unrealized		Unrealized
		or Cost		Gains		Losses		Fair Value			or Cost		Gains		Losses		Fair Value
		(In thousands)									(In thousands)
December 31, 2020
December 31, 2021										December 31, 2021
Debt securities - available-for-sale:	Debt securities - available-for-sale:									Debt securities - available-for-sale:
United States government obligations and authorities	United States government obligations and authorities	$	169,947	$	1,866	$	38	$	171,775	United States government obligations and authorities	$	90,750	$	625	$	683	$	90,692
Obligations of states and political subdivisions	Obligations of states and political subdivisions	21,560		704		—		22,264		Obligations of states and political subdivisions	19,031		391		144		19,278
Corporate	Corporate	254,618		11,989		79		266,528		Corporate	186,489		4,413		1,922		188,980
International	International	27,001		659		17		27,643		International	28,591		212		221		28,582
		$	473,126	$	15,218	$	134	$	488,210		$	324,861	$	5,641	$	2,970	$	327,532

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:

-12-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

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


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30,				September 30,					March 31,
		2021		2020		2021		2020			2022		2021
		(In thousands)									(In thousands)
Gross realized and unrealized gains:	Gross realized and unrealized gains:									Gross realized and unrealized gains:
Debt securities	Debt securities	$	1,590	$	919	$	2,758	$	11,708	Debt securities	$	185	$	864
Equity securities	Equity securities	(32)		1,361		81		3,566		Equity securities	—		1
Total gross realized and unrealized gains	Total gross realized and unrealized gains	1,558		2,280		2,839		15,274		Total gross realized and unrealized gains	185		865

Gross realized and unrealized losses:	Gross realized and unrealized losses:									Gross realized and unrealized losses:
Debt securities	Debt securities	(275)		(121)		(1,297)		(2,608)		Debt securities	(14,681)		(720)
Equity securities	Equity securities	(10)		(835)		(18)		(3,784)		Equity securities	(557)		(53)
Total gross realized and unrealized losses	Total gross realized and unrealized losses	(285)		(956)		(1,315)		(6,392)		Total gross realized and unrealized losses	(15,238)		(773)
Net realized and unrealized gains (losses) on investments	Net realized and unrealized gains (losses) on investments	$	1,273	$	1,324	$	1,524	$	8,882	Net realized and unrealized gains (losses) on investments	$	(15,053)	$	92

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


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30,				September 30,					March 31,
		2021		2020		2021		2020			2022		2021
		(In thousands)									(In thousands)
Net gains (losses) on equity securities:	Net gains (losses) on equity securities:									Net gains (losses) on equity securities:
Realized	Realized	$	—	$	222	$	—	$	(585)	Realized	$	—	$	—
Unrealized	Unrealized	(42)		304		63		367		Unrealized	(557)		(52)
		(42)		526		63		(218)			(557)		(52)
Less:	Less:									Less:
Net realized and unrealized gains (losses) on securities sold	Net realized and unrealized gains (losses) on securities sold	—		2,635		—		2,053		Net realized and unrealized gains (losses) on securities sold	—		—
Net unrealized gains (losses) still held as of the end-of-period	Net unrealized gains (losses) still held as of the end-of-period	$	(42)	$	(2,109)	$	63	$	(2,271)	Net unrealized gains (losses) still held as of the end-of-period	$	(557)	$	(52)

-13-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

Contractual Maturity

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

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

September 30, 2021
Amortized
Cost Fair Value
Securities with Maturity Dates (In thousands)
Debt securities, available-for-sale:
One year or less $ 24,729 $ 25,274
Over one through five years 93,795 96,141
Over five through ten years 123,677 124,403
Over ten years 101,418 103,481
Total $ 343,619 $ 349,299

~~Net Investment Income~~

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

Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In thousands)
Interest income $ 1,632 $ 2,374 $ 4,975 $ 9,445
Dividends income 53 30 117 192
Net investment income $ 1,685 $ 2,404 $ 5,092 $ 9,637


	March 31, 2022
	Amortized
	Cost		Fair Value
Securities with Maturity Dates	(In thousands)
Debt securities, available-for-sale:
One year or less	$	21,657	$	21,720
Over one through five years	63,760		63,966
Over five through ten years	104,947		105,536
Over ten years	78,737		78,995







Total	$	269,100	$	270,217

-1413-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

Net Investment Income

Net investment income consisted of the following:


	Three Months Ended
	March 31,
	2022		2021
	(In thousands)
Interest income	$	1,214	$	1,650
Dividends income	50		24
Net investment income	$	1,264	$	1,674

Aging of Gross Unrealized Losses

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

Less than 12 months 12 months or longer Total
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
(In thousands)
September 30, 2021
Debt securities - available-for-sale:
United States government obligations and authorities $ 31,430 $ 451 $ 660 $ 8 $ 32,090 $ 459
Obligations of states and political subdivisions 6,141 68 — — 6,141 68
Corporate 68,698 1,331 4 — 68,702 1,331
International 8,276 87 — — 8,276 87
$ 114,545 $ 1,937 $ 664 $ 8 $ 115,209 $ 1,945


		Less than 12 months				12 months or longer				Total					Less than 12 months				12 months or longer				Total
				Gross				Gross				Gross					Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses			Value		Losses		Value		Losses		Value		Losses
						(In thousands)													(In thousands)
December 31, 2020
December 31, 2021														December 31, 2021
Debt securities - available-for-sale:	Debt securities - available-for-sale:													Debt securities - available-for-sale:
United States government obligations and authorities	United States government obligations and authorities	$	25,521	$	38	$	—	$	—	$	25,521	$	38	United States government obligations and authorities	$	46,038	$	672	$	881	$	11	$	46,919	$	683

Obligations of states and political subdivisions														Obligations of states and political subdivisions	7,322		144		—		—		7,322		144
Corporate	Corporate	7,989		79		—		—		7,989		79		Corporate	86,423		1,875		860		47		87,283		1,922
International	International	2,175		16		132		1		2,307		17		International	15,345		221		—		—		15,345		221
		$	35,685	$	133	$	132	$	1	$	35,817	$	134		$	155,128	$	2,912	$	1,741	$	58	$	156,869	$	2,970

As of ~~September 30,~~December 31, 2021, the Company held a total of ~~281~~351 debt securities that were in an unrealized loss position, of which 4 securities were in an unrealized loss position continuously for 12 months or more. As of December 31, 2020, the Company held a total of 47 debt securities that were in an unrealized loss position, of which 25 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. Refer to Note 6 below for information regarding the assessment of allowances for credit losses.

Collateral Deposits

Cash and cash equivalents and investments, the majority of which were debt securities, with fair values of ~~$9.4~~$11.4 million and ~~$11.5~~$9.3 million, were deposited with governmental authorities and into custodial bank accounts as required by law or contractual obligations, as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

~~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 $0 and $58 thousand of unrealized gains, pre-tax, recognized in other comprehensive income in the three and nine months ended September 30, 2020.

-15-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

5. REINSURANCE

Overview

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

The Company is selective in choosing reinsurers and considers numerous factors, the most important of which is the financial stability of the reinsurer or capital specifically pledged to uphold the contract, its history of responding to claims and its overall

-14-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

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

2020-2021 Catastrophe Excess of Loss Reinsurance Program

The Company’s excess of loss catastrophe reinsurance program for 2020-2021 (the “2020-2021 Program”), which covers the Company and its wholly-owned insurance subsidiaries, FNIC, MIC and MNIC became effective July 1, 2020 through June 30, 2021. FNIC, MIC, and MNIC are collectively referred to herein as the “carriers”. The 2020-2021 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 ~~$310.6~~$305.9 million, subject to adjustments based on actual exposure 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 2020-2021 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 2020-2021 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 ~~September 30, 2021,~~March 31, 2022, the 2020-2021 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 2020-2021 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 I, Item 1A., Risk Factors” of our ~~2020~~2021 Form 10-K for more information.

The total 2020-2021 Program cost includes approximately ~~$262.8~~$258.3 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic reinstatement premium protection, along with approximately ~~$47.8~~$47.6 million payable to the FHCF. The combination of private and FHCF reinsurance treaties affords 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 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 and each carrier will be responsible for its portion of the 2020-2021 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%.

-16-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

In addition, the Company purchased subsequent event reinsurance coverage that has a lower retention than the first event. Under the 2020-2021 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 may be reduced 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 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

-15-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

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 terminated 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 all 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 an aggregate excess of loss agreement on its MIC book of business through the end of the calendar year. This new agreement provides reinsurance coverage on non-named storms, of 65% of $15 million excess of $10 million with a $0.85 million occurrence deductible and a $4.15 million occurrence limit at an approximate cost of $2.3 million.

Subsequent to a significant loss event in February 2021, the Company purchased $50 million of additional reinsurance limit to provide further protection for any future events through May 31, 2021. The additional protection was secured in 2 layers for an approximate cost of $13 million with the lowest layer responding at a retention level of $10 million. This additional limit contained overlapping coverage on certain portions of this purchase, resulting in the determination that the additional coverage contained an embedded derivative. While the economic substance is similar to as a typical reinsurance recovery, the embedded derivative is carried at fair value on our consolidated balance sheets and changes in fair value are recognized in net realized and unrealized gain (loss) on our consolidated statements of operations as they occur. Refer to Notes 2 and 3 for further information.

Lastly, the Company secured additional reinsurance limit of 50% of $70 million excess of $25 million, at an approximate cost of $2.8 million, which were recognized as ceded premium over the period from June 1, 2021 through June 30, 2021. This limit is available for events occurring during this period for all carriers and all states.

The carriers’ cost and amounts of reinsurance are based on current analysis of exposure to catastrophic risk. Most of 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.

2021-2022 Catastrophe Excess of Loss Reinsurance Program

The Company’s excess of loss catastrophe reinsurance program for 2021-2022 (the “2021-2022 Program”), which covers the Company and its wholly-owned insurance subsidiaries, FNIC, MIC and MNIC became effective July 1, 2021. The 2021-2022 Program provides the carriers up to approximately $1.4 billion of single event reinsurance coverage in excess of up to a $18.25 million pre-tax retention for certain catastrophic losses, including hurricanes, and aggregate coverage up to $2.25 billion, at an approximate total cost of ~~$276.1~~$274.1 million, subject to adjustments based on actual exposure or premium of policies at different points in time in the coming months.

Due to non-Florida exposures becoming a larger portion of the overall book of business, the Company broadened its approach to its reinsurance purchases for this treaty year by separating the program into two reinsurance towers. The first tower includes all exposures for FNIC Florida, MIC in all states and MNIC and includes ground up first event limit protection up to approximately $982 million (“Primary Tower”), subject to a maximum first-event retention of $10 million. The second tower provides ground up first event limit up to $450 million for all FNIC’s non-Florida business produced by its managing general underwriter partner

-17-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

(“ (“FNIC SageSure Tower”), subject to a first-event retention of $8.25 million. The $18.25 million combined towers maximum retention is a reduction in the first event retention of approximately 41% compared to up to $31 million in last year’s program. The combination of these separate towers provides the Company with an increase in aggregate catastrophe reinsurance protection of approximately ~~$333~~$345 million compared to the previous treaty year original purchase. More specifically, the 2021-2022 Program includes up to approximately $2.25 billion in aggregate reinsurance across all states in which the Company operates, including ~~$511~~$504 million of reinsurance provided by the Florida Hurricane Catastrophe Fund (“FHCF”). Up to approximately ~~$979~~$972 million is available for a first event within Florida, including $468 million of private coverage plus the FHCF coverage. Up to approximately $910 million of coverage is available for a first event outside of Florida, including the $468 million of private coverage from the Primary Tower, which is available to cover catastrophe losses in MIC’s book of business located in Louisiana and Texas. FHCF coverage responds on both a per occurrence and aggregate basis, and is exclusive to the state of Florida. Additionally, the 2021-2022 Program provides $831 million of private reinsurance across the combined towers for second and subsequent events, subject to individual retentions within each tower and the aggregate limit. All layers above a $30 million attachment point have prepaid automatic reinstatement protection, which affords the carriers additional coverage for subsequent events without additional cost.

-16-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

Most of the privately placed layers of the 2021-2022 Program are effective July 1, 2021, with certain agreements effective for June 2021. The portion of the 2021-2022 Program placed with private reinsurers is with partners that as of ~~September 30, 2021~~March 31, 2022 had 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 2021-2022 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 I, Item 1A., Risk Factors” of our ~~2020~~2021 Form 10-K for more information.

The private reinsurance market continued to harden this year due to a number of factors, including the elevated number of catastrophic events impacting U.S. coastal areas in recent years. These factors have resulted in more restrictive terms for the current and upcoming reinsurance treaty year. The change in terms includes a further reduction in the availability of cascading coverage, which automatically “drops-down” coverage for subsequent events and prevents gaps in reinsurance protection when multiple events occur during the same treaty year. In addition, there was limited open market capacity available for lower layer attachment points on an “all perils” basis. As a result, a vast majority of the first layer for the Primary Tower ($20 million excess of $10 million), which includes one automatic reinstatement, covers “all perils” only through November 30, 2021, after which coverage includes only named storms such as tropical depressions, tropical storms and hurricanes, and excludes tornado or hail events. The first layer in the FNIC SageSure Tower ($22 million excess of $8 million) provides both per occurrence and aggregate protection and was placed with Anchor Re, an affiliate of SageSure (the non-affiliated managing general underwriter that writes FNIC’s non-Florida property business) on a fully-collateralized basis. In addition, ~~40%~~66% of the reinstatement premium protection ($712 million) for the layer that attaches above $30 million of the FNIC SageSure Tower provides protection on an “all perils” basis whereas the remaining ~~60%~~34% ($116 million) provides protection following only a hurricane.

As indicated above, the carriers’ combined 2021-2022 Program is estimated to cost ~~$276.1~~$274.1 million, consisting of $204.8 million for the Primary Tower and ~~$71.3~~$69.4 million for FNIC SageSure Tower after consideration of ~~an estimated 16%~~19% downward premium adjustment resulting from the September 30, 2021 exposure adjustment, driven by our exposure management initiatives. This amount includes approximately ~~$239.8~~$237.9 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic premium reinstatement protection, along with approximately ~~$36.3~~$36.2 million, within the Primary Tower, payable to the FHCF. All carriers maintained their 90% FHCF participation for the ~~upcoming~~ wind season. In the Primary Tower, each carrier will share the combined 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 2021-2022 Program’s per event retention based on a specific allocation formula.

In addition to the coverage stated above, under the FNIC SageSure Tower, the Company purchased additional protection that lowers the second event named-storm retention, inclusive of co-participation, to approximately $9.75 million, with certain limitations as described below. For a third event, the named storm retention would be approximately $17.3 million. More specifically, this additional coverage consists of 75% of $27 million of coverage for a second event and 47% of $27 million of coverage for a third event, which applies to named storm losses only. These retentions may be reduced after taking into account the 80% quota-share agreement that ~~FNIC has~~was in place with Anchor ~~Re. Whether such catastrophe losses can be ceded into this treaty will be dependent on capacity to do so pursuant~~Re up through December 31, 2021, which is discussed further below in "FNIC Homeowners non-Florida".

As discussed above, the lower layers of each tower of the 2021-2022 reinsurance program exclude severe convective storm coverage (tornado and hail) after December 1, 2021, resulting in approximately $30 million of single event exposure to the ~~loss caps in that~~Company under each tower, subject to potential coverage under certain quota-share ~~treaty.~~reinsurance treaties.

The carriers’ cost and amounts of reinsurance are based on current analysis of exposure to catastrophic risk. The data iswas subjected to exposure level analysis at various dates through December 31, 2021. 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.

-18-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

Quota-Share Reinsurance Programs

FNIC Homeowners Florida

On July 1, 2020, FNIC renewed ~~the~~its quota-share treaty with Swiss Re, which was initially set at 10%, on its Florida homeowners book of business, on an in-force, new and renewal basis, excluding named storms and subject to certain limitations. Effective October 1, 2020, ~~FNIC and Swiss Re agreed to increase~~this treaty increased the cession percentage ~~on this treaty~~ from 10% to 20% on an in-force, new and renewal basis.

-17-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

On November 15, 2020, FNIC entered into a 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.

On December 31, 2020, FNIC entered into ~~an additional~~a 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 and is subject to certain limitations.

On July 1, 2021, FNIC renewed its 20% quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal basis, excluding named storms and subject to certain limitations. In addition, this quota-share allows FNIC the flexibility to prospectively increase (we are currently at the maximum) or decrease the cession percentage up to three times during the term of the agreement.

On November 15, 2021, FNIC renewed its 10% quota-share treaty through November 15, 2022 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.

On December 31, 2021, FNIC entered into a new 7.5% quota-share reinsurance treaty through December 31, 2022 on its Florida homeowners book of business on a new and renewal basis. This treaty excludes named storms and is subject to certain limitations. FNIC elected to runoff the expiring 10% participation through the policies natural expirations.

FNIC Homeowners non-Florida

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 provided 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 was 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 was 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 and Anchor Re agreed to increase the cession percentage in this treaty from 50% to 80%, effective December 1, 2020 on in-force, new and renewal basis.

Effective January 31, 2021, the Company terminated its existing 80% quota-share reinsurance treaty with Anchor Re and commuted the agreement. In April 2021, the Company received $7.2 million from Anchor Re as settlement of the commutation. Immediately after the commutation, the Company entered into an 80% quota-share treaty with Anchor Re on February 1, 2021 on an in-force, new and renewal basis, which covers the thirteen month period through February 28, 2022, subject to certain limitations, which include limits on the net losses that Anchor Re can realize during the treaty year. ~~As of September 30,~~

Effective December 31, 2021, the ~~net loss limit has been reached, and any catastrophe cessions will be dependent on future profits in the related book of business through the end of the~~Company terminated its existing 80% quota-share reinsurance treaty ~~period. This agreement provides an allowance to purchase reinsurance coverage above the aforementioned limits. In addition,~~with Anchor Re ~~has~~and commuted the ~~right to commute~~agreement. Immediately after the commutation, the Company entered into a 100% quota-share treaty ~~if the overall net loss limit has been reached, which would require~~with Anchor Re on December 31, 2021 on an in-force, new and renewal basis, which covers the six month period through June 30, 2022, subject to ~~fund~~certain limitations which include limits on the net ~~loss ceded into the treaty. If the commutation were to occur, we would negotiate the terms such~~losses that Anchor Re ~~would cover the losses incurred to date under~~can realize during the treaty ~~and the Company would cease the ceding of premiums and~~year. The new treaty excludes catastrophe losses, ~~for the remaining term. The treaty arrangement~~involves a funded trust and is fully collateralized through Anchor Re. The Company recorded a pre-tax loss of $2.5 million in the fourth quarter of 2021 related to the settlement of the managing general underwriting and profit share agreements with SageSure through December 31, 2021.

Associated Trust Agreements

Certain reinsurance agreements require FNIC to secure the credit, regulatory and business risk. Fully funded trust agreements securing these risks totaled less than $0.1 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

-1918-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

Reinsurance Recoverable, Net

Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated with the reinsurance placement and presented on the consolidated balance sheet as reinsurance recoverable. Reinsurance recoverable, net consisted of the following:


		September 30,		December 31,			March 31,		December 31,
		2021		2020			2022		2021
		(In thousands)					(In thousands)
Reinsurance recoverable on paid losses	Reinsurance recoverable on paid losses	$	118,917	$	54,898	Reinsurance recoverable on paid losses	$	100,499	$	59,096
Reinsurance recoverable on unpaid losses	Reinsurance recoverable on unpaid losses	840,877		358,193		Reinsurance recoverable on unpaid losses	481,531		554,356
Allowance for credit loss	Allowance for credit loss	(531)		(65)		Allowance for credit loss	(109)		(249)
Reinsurance recoverable, net	Reinsurance recoverable, net	$	959,263	$	413,026	Reinsurance recoverable, net	$	581,921	$	613,203

As of ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, the Company had reinsurance recoverable of ~~$766.5~~$480.0 million (as a result of Hurricanes Ida, Laura, Irma, Sally as well as April 2021 Storms) and $504.8 million (as a result of Hurricanes Ida, Irma, ~~Michael and~~ Laura, ~~as well as~~ April 2021 ~~Storms)~~Storms and ~~$304.3 million (as a result of Hurricanes Irma, Laura, Sally, Michael and Delta).~~ Hurricane ~~Ida made landfall in Louisiana on August 29, 2021 as a Category 4 hurricane impacting Louisiana and other states.~~Sally), respectively. April 2021 Storms were a collection of severe weather events impacting Texas, Florida, Louisiana and other states over a ~~six day~~six-day period starting approximately April 10, 2021.

Refer to Note 6 below for information regarding the assessment and amounts of allowances for credit losses.

Net Premiums Written and Net Premiums Earned

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


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30,				September 30,					March 31,
		2021		2020		2021		2020			2022		2021
		(In thousands)									(In thousands)
Net Premiums Written	Net Premiums Written									Net Premiums Written
Direct	Direct	$	157,003	$	180,152	$	527,495	$	558,492	Direct	$	137,892	$	174,207
Ceded	Ceded	(265,554)		(304,751)		(460,637)		(379,268)		Ceded	(38,269)		(78,149)
		$	(108,551)	$	(124,599)	$	66,858	$	179,224		$	99,623	$	96,058
Net Premiums Earned	Net Premiums Earned									Net Premiums Earned
Direct	Direct	$	178,368	$	183,518	$	535,848	$	538,988	Direct	$	164,328	$	179,002
Ceded	Ceded	(124,439)		(99,972)		(406,693)		(238,054)		Ceded	(118,343)		(139,257)
		$	53,929	$	83,546	$	129,155	$	300,934		$	45,985	$	39,745

6. 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.

-2019-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

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

Reinsurance
Premiums Recoverable,
Receivable Net Total
(In thousands)
Balance as of December 31, 2020 $ 233 $ 65 $ 298
Credit loss expense (recovery) (1) (43) 466 423
Balance as of September 30, 2021 $ 190 $ 531 $ 721



			Reinsurance
	Premiums		Recoverable,
	Receivable		Net		Total
	(In thousands)
Balance as of December 31, 2021	$	125	$	249	$	374

Credit loss expense (recovery) (1)	8		(140)		(132)
Balance as of March 31, 2022	$	133	$	109	$	242

(1)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.

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.~~losses. Refer to Note 4 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 ~~September 30,~~March 31, 2022 and December 31, 2021. Management ~~does not intend to sell~~

-2120-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

does not have any current intent 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.

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


				Days Past Due														Days Past Due
		Current		1-29		30-59		60-89		90 plus		0	Total			Current		1-29		30-59		60-89		90 plus		Total
September 30, 2021				(In thousands)
March 31, 2022															March 31, 2022			(In thousands)
Amortized cost	Amortized cost	$	48,275	$	1,467	$	276	$	37	$	153		$	50,208	Amortized cost	$	31,001	$	1,914	$	168	$	63	$	76	$	33,222
Allowance for credit loss	Allowance for credit loss	—		(13)		(13)		(11)		(153)			(190)		Allowance for credit loss	—		(21)		(15)		(21)		(76)		(133)
Net	Net	$	48,275	$	1,454	$	263	$	26	$	—		$	50,018	Net	$	31,001	$	1,893	$	153	$	42	$	—	$	33,089


				Days Past Due														Days Past Due
		Current		1-29		30-59		60-89		90 plus		0	Total			Current		1-29		30-59		60-89		90 plus		Total
December 31, 2020				(In thousands)
December 31, 2021															December 31, 2021			(In thousands)
Amortized cost	Amortized cost	$	46,376	$	4,253	$	159	$	94	$	154		$	51,036	Amortized cost	$	39,287	$	1,670	$	233	$	16	$	93	$	41,299
Allowance for credit loss	Allowance for credit loss	—		(43)		(8)		(28)		(154)			(233)		Allowance for credit loss	—		(15)		(12)		(5)		(93)		(125)
Net	Net	$	46,376	$	4,210	$	151	$	66	$	—		$	50,803	Net	$	39,287	$	1,655	$	221	$	11	$	—	$	41,174

Reinsurance Recoverable

Refer to Note 5 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%.

-2221-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

7. LOSS AND LOSS ADJUSTMENT RESERVES

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

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


		Nine Months Ended					Three Months Ended
		September 30,					March 31,
		2021		2020			2022		2021
		(In thousands)					(In thousands)
Gross reserves, beginning-of-period	Gross reserves, beginning-of-period	$	540,367	$	324,362	Gross reserves, beginning-of-period	$	738,794	$	540,367
Less: reinsurance recoverable (1)	Less: reinsurance recoverable (1)	(358,128)		(164,429)		Less: reinsurance recoverable (1)	(554,107)		(358,128)
Net reserves, beginning-of-period	Net reserves, beginning-of-period	182,239		159,933		Net reserves, beginning-of-period	184,687		182,239

Incurred loss, net of reinsurance, related to:	Incurred loss, net of reinsurance, related to:					Incurred loss, net of reinsurance, related to:
Current year	Current year	183,307		291,741		Current year	55,312		47,493
Prior year loss development (redundancy) (2)	Prior year loss development (redundancy) (2)	1,863		6,912		Prior year loss development (redundancy) (2)	3,472		624
Ceded losses subject to offsetting experience account adjustments (3)	Ceded losses subject to offsetting experience account adjustments (3)	(68)		(744)		Ceded losses subject to offsetting experience account adjustments (3)	—		(96)
Prior years	Prior years	1,795		6,168		Prior years	3,472		528
Amortization of acquisition fair value adjustment	Amortization of acquisition fair value adjustment	(12)		(47)		Amortization of acquisition fair value adjustment	(1)		(5)
Total incurred loss and LAE, net of reinsurance	Total incurred loss and LAE, net of reinsurance	185,090		297,862		Total incurred loss and LAE, net of reinsurance	58,783		48,016

Paid loss, net of reinsurance, related to:	Paid loss, net of reinsurance, related to:					Paid loss, net of reinsurance, related to:
Current year	Current year	60,476		143,106		Current year	4,407		24,669
Prior years	Prior years	109,662		109,930		Prior years	58,890		46,813
Total paid loss and LAE, net of reinsurance	Total paid loss and LAE, net of reinsurance	170,138		253,036		Total paid loss and LAE, net of reinsurance	63,297		71,482

Net reserves, end-of-period	Net reserves, end-of-period	197,191		204,759		Net reserves, end-of-period	180,173		158,773
Plus: reinsurance recoverable (1)	Plus: reinsurance recoverable (1)	840,346		349,221		Plus: reinsurance recoverable (1)	481,422		327,940
Gross reserves, end-of-period	Gross reserves, end-of-period	$	1,037,537	$	553,980	Gross reserves, end-of-period	$	661,595	$	486,713

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

(2)Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment.

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

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

During the ~~nine~~three months ended ~~September 30,~~March 31, 2022, the Company experienced $3.5 million of net unfavorable loss and LAE reserve development from its homeowners line of business primarily driven by increased losses from Hurricane Laura.

During the three months ended March 31, 2021, the Company experienced ~~$1.9~~$0.6 million of unfavorable loss and LAE reserve development on prior accident years, primarily in its non-Florida homeowners line of business as a result of higher than expected development from accident year 2020.

During the nine months ended September 30, 2020, the Company experienced $6.9 million of unfavorable loss and LAE reserve development on prior accident years in its Florida homeowners and commercial general liability lines of business, offset by redundancy in the homeowners line of business as a result of lower LAE associated with several catastrophe events.

-2322-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

The Company entered into 30% and 10% retrospectively-rated Florida-only property quota-share treaties, which ended on July 1, 2016 and 2017, respectively. These agreements included a profit share (experience account) provision, under which the Company will receive ceded premium adjustments at the end of the treaty to the extent there is a positive balance in the experience account. This experience account is based on paid losses rather than incurred losses. Due to the retrospectively-rated nature of this treaty, when the experience account is positive we cede losses under these treaties as the claims are paid with an equal and offsetting adjustment to ceded premiums (in recognition of the related change to the experience account receivable), with no impact on net income. Conversely, when the experience account is negative, the Company cedes losses on an incurred basis with no offsetting adjustment to ceded premiums, which impacts net income. Loss development can be either favorable or unfavorable regardless of whether the experience account is in a positive or negative position. Effective February 28, 2021, the Company commuted the 30% agreement and subsequently received $11.2 million as settlement.

8. LONG-TERM DEBT

~~Long-term~~In May 2022, Egan Jones’ rating on the Company’s outstanding senior notes expired such that our notes are not currently rated. The lack of a rating, if not remediated within 30 days from receipt of notice as provided in the note indentures, has the potential to result in an Event of Default under the note indentures. The Company intends to use its best efforts to secure such a rating as soon as reasonably practicable. If the Company fails to secure such a rating, such condition, represents a potential default under our debt ~~consisted~~indentures that could result in acceleration of repayment of our debt. If the ~~following:~~Company fails to secure such a rating, is placed into receivership or fails to obtain excess-of-loss reinsurance, such conditions, if not timely cured, could result in acceleration of repayment of our debt. The Company does not have adequate liquidity to repay this debt without replacement borrowings, which may not be available.

September 30, December 31,
2021 2020
(In thousands)
Senior unsecured fixed rate notes, due March 15, 2029, net of deferred financing costs of $1,211 and $1,317, respectively $ 98,789 $ 98,683
Convertible senior unsecured fixed rate notes, due April 19, 2026, net of deferred financing costs of $1,013 19,987 —
Total long-term debt, net $ 118,776 $ 98,683

AsThe fair values of ~~September 30, 2021,~~ the ~~Company’s estimated annual aggregate amount of debt maturities includes the following (and assumes the holders of the convertible debt do not convert into shares of the Company’s common stock):~~


	~~Aggregate~~
	~~Debt~~
~~For the Years Ending December 31,~~	~~Maturities~~
	~~(In thousands)~~
~~2021~~	$	—
~~2022~~	—
~~2023~~	—
~~2024~~	—
~~2025~~	—
~~Thereafter~~	~~121,000~~
~~Total debt maturities~~	~~121,000~~
~~Less deferred financing costs~~	~~2,224~~
~~Total debt maturities, net~~	$	~~118,776~~

~~Convertible Senior Unsecured Notes due 2026~~

~~On April 20, 2021, the Company closed an offering and issued $21.0 million in aggregate principal amount of~~ Convertible Senior Unsecured Notes due 2026 ~~(the “2026 Notes”) pursuant to an indenture dated~~were $22.5 million and $22.1 million as of ~~April 19,~~March 31, 2022 and December 31, 2021, (the "2021 Indenture"). This offering is part of an authorization by the Company’s Board of Directors to offer and issue from time to time up to $35.0 million of 2026 Notes under the 2021 Indenture.respectively. The ~~2026 Notes are not redeemable at the option~~fair values of the ~~Company, mature on April 19, 2026~~Senior Unsecured Fixed Rate Notes due 2029 were $102.8 million and ~~bear interest at a fixed rate~~$106.5 million as of ~~5.0% per year, payable semi-annually in cash.~~March 31, 2022 and December 31, 2021, respectively. Refer to Note 3 for additional information.

-24-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

The 2026 Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 166.6667 shares per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of $6.00 per share of our common stock, an approximately 33% premium to the closing price of the Company's common stock on April 19, 2021. The conversion rate is subject to adjustment upon the occurrence of certain pro rata capital events, such as stock splits or dividends. The 2026 Notes are convertible at the option of the holder at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2026 Notes. The Company classified the 2026 Notes as a liability under long-term debt in our consolidated balance sheets.

If a change in control of the Company, as defined in the 2021 Indenture, occurs, the holders of the 2026 Notes will have the right to require the Company to purchase all or a portion of their 2026 Notes at a price in cash equal to 101% of the principal amount thereof, plus any accrued but unpaid interest to, but excluding, the date of purchase.

The 2026 Notes are senior unsecured obligations of the Company and rank equally with the Senior Unsecured Notes due 2029 ("2029 Notes") and other future senior unsecured indebtedness of the Company. The 2021 Indenture includes customary covenants and events of default. Among other things, the covenants restrict the ability of the Company and its subsidiaries to incur additional indebtedness or make restricted payments, including dividends, require the Company to maintain certain levels of reinsurance coverage while the 2026 Notes remain outstanding, and maintain certain financial covenants. These covenants are subject to important exceptions and qualifications set forth in the 2021 Indenture. Principal and interest on the 2026 Notes are subject to acceleration in the event of certain events of default, including automatic acceleration upon certain bankruptcy-related events.

~~Senior Unsecured Notes due 2029~~

The Company also currently has outstanding $100 million 2029 Notes, which at issuance bore interest at the annual rate of 7.50%. In connection with the amendment of the indenture covenants to increase the maximum debt-to-capital ratio applicable to the incurrence of debt to 60% and decreasing the maximum debt-to-capital ratio applicable to restricted payments, including cash dividends on our common stock, to 20%, the interest rate was increased by 0.25% to 7.75% per annum beginning March 15, 2021. Refer to Note 10 of ~~the notes to~~ our ~~Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of the 2020~~2021 Form 10-K for additional information regarding our ~~2029 Notes.~~long-term debt.

9. INCOME TAXES

Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes. The effective income tax rate was ~~0.0%~~2.3% and ~~38.1%~~20.2% for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively. The effective income tax rate was (1.8)% and 37.4% for the nine months ended September 30, 2021 and 2020,~~ respectively. Differences in the effective tax and the statutory Federal income tax rate of 21% are driven by state income taxes ~~changes in valuation allowance~~ and anticipated annual permanent differences, including estimates for tax-exempt interest, dividends received deduction, executive compensation as well as the net operating loss ("NOL") provision and ~~executive compensation.~~change in the valuation allowance in the current year.

The application of GAAP requires us to evaluate the recoverability of our net deferred income tax assets, including those associated with ~~net operating loss ("NOL")~~NOL carryforwards, and establish a valuation allowance, if necessary, to reduce our deferred income tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred income tax assets and liabilities; taxable income in prior carryback years, if any; future reversals of existing temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused. Realization is never assured and based on available information, including the financial performance of the Company, ~~during the second quarter of 2021, we~~and determined that it was more likely than not that the net deferred income tax asset would not be realized. Therefore, ~~during the first nine months~~as of March 31, 2022 and December 31, 2021, we have established ana full valuation allowance and no deferred income tax ~~valuation allowance~~were reflected in net income (loss) for the three months ended March 31, 2022. For additional information, refer to Note 11 of ~~$25.6 million with a corresponding charge to income of $21.9 million and a decrease of $3.7 million to accumulated other comprehensive income (loss).~~our 2021 Form 10-K.

The Company had an uncertain tax position of $0.2 million and $0.2 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The Company has a valuation allowance of ~~$28.6~~$26.0 million and ~~$3.0~~$30.5 million on its deferred income tax asset as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated statements of operations and statements of comprehensive income (loss). For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company

-25-

~~FedNat Holding Company and Subsidiaries~~

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

~~September 30, 2021~~

recognized no benefit related to an uncertain tax position and our associated accrued interest and penalties was less than $0.1 million.

-23-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

March 31, 2022

10. COMMITMENTS AND CONTINGENCIES

Litigation and Legal Proceedings

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

The Company reviews the outstanding matters, if any, on a quarterly basis. The Company accrues for estimated losses and contingent obligations in the consolidated financial statements if and when the obligation or potential loss from any litigation, legal proceeding or claim is considered probable and the amount of the potential exposure is reasonably estimable. The Company records such probable and estimable losses through the establishment of legal expense reserves. As events evolve, facts concerning litigation and contingencies become known and as additional information becomes available, the Company’s management reassesses its potential liabilities related to pending claims and litigation and may revise its previous estimates and make appropriate adjustment to the financial statements. Estimates that require judgment are subject to change and are based on management’s assessment, including the advice of legal counsel, the expected outcome of litigation and legal proceedings or other dispute resolution proceedings or the expected resolution of contingencies. The Company’s management believes that the Company’s accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on the Company’s consolidated financial statements. In April 2022, the Company received a written demand for arbitration from one of the reinsurers (“the reinsurer”) included in the Company’s excess-of-loss reinsurance program. The reinsurer asserts that the Company has misapplied certain provisions of the treaty for purposes of determining catastrophe weather losses in excess of the Company’s single-event retention. The Company strongly believes its ceded losses have been determined in accordance with the provisions of the treaties; however, the ultimate resolution of this matter could result in the Company retaining up to $14.5 million of additional net catastrophe losses related to the reinsurer in question. Because the Company does not deem any loss as probable or estimable, no amount has been accrued related to the matter as of the date of this filing.

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, Georgia Insurers Insolvency Pool (“GIIP”), Special Insurance Fraud Fund (“SIIF”), Fair Access to Insurance Requirements Plan (“FAIRP”), Property Insurance Association of Louisiana (“PIAL”), South Carolina Property & Casualty Insurance Guaranty Association (“SCPCIGA”), Texas Property and Casualty Insurance Guaranty Association (“TPCIGA”), Texas Windstorm Insurance Association (“TWIA”), Alabama Insurance Guaranty Association (“AIGA”), and Alabama Insurance Underwriters Association (“AIUA”). As a direct premium writer, we are required to participate in certain insurer solvency associations under the applicable laws in the states in 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, ~~2020.~~2021. Future assessments by the JUA and the JUA Plan are indeterminable at this time.

Leases

The Company is committed under various operating lease agreements for office space.

-2624-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

~~Leases~~

~~The Company is committed under various operating lease agreements for office space.~~

The right-of-use asset is reflected in other assets and the lease liability is reflected in other liabilities on our consolidated balance sheets. Lease expense, net of sublease income is reflected in general and administrative expenses on our consolidated statements of operations.

Additional information related to our operating lease agreement for office space consisted of the following:


		As of							As of
		September 30,			December 31,				March 31,			December 31,
		2021			2020				2022			2021
		(In thousands)							(In thousands)
Right-of-use asset	Right-of-use asset	$	6,885		$	7,430		Right-of-use asset	$	6,497		$	6,693
Accrued rent	Accrued rent	(472)			(259)			Accrued rent	(488)			(482)
Right-of-use asset, net	Right-of-use asset, net	$	6,413		$	7,171		Right-of-use asset, net	$	6,009		$	6,211

Lease liability	Lease liability	$	6,885		$	7,430		Lease liability	$	6,497		$	6,693

Weighted average discount rate	Weighted average discount rate	4.70		%	4.70		%	Weighted average discount rate	4.70		%	4.70		%
Weighted average remaining years of lease term	Weighted average remaining years of lease term	6.9			7.7			Weighted average remaining years of lease term	6.5			6.7


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30,				September 30,					March 31,
		2021		2020		2021		2020			2022		2021
		(In thousands)									(In thousands)
Lease expense	Lease expense	$	280	$	280	$	839	$	839	Lease expense	$	280	$	280
Sublease income	Sublease income	(29)		(34)		(250)		(303)		Sublease income	(72)		(109)
Lease expense, net	Lease expense, net	$	251	$	246	$	589	$	536	Lease expense, net	$	208	$	171

Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities	$	(236)	$	(223)	$	(545)	$	(456)	Net cash provided by (used in) operating activities	$	(201)	$	(156)

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.

11. SHAREHOLDERS' EQUITY

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. On March 15, 2021, the Company closed an underwritten public offering of 3,500,000 shares of its common stock at a price of $4.75 per share for gross proceeds of $16.6 million. The offering generated net proceeds to the Company of approximately $15.1 million, after deducting the underwriter’s discount and offering expenses payable by the Company. In April 2021, the Company sold an additional 100,650 shares upon partial exercise of the underwriter's overallotment option and received net proceeds of $0.4 million.

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FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

Share-Based Compensation Expense

Share-based compensation arrangements include the following:


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30,				September 30,					March 31,
		2021		2020		2021		2020			2022		2021
		(In thousands)									(In thousands)
Restricted stock	Restricted stock	$	211	$	344	$	871	$	1,066	Restricted stock	$	196	$	322
Performance stock	Performance stock	—		42		85		128		Performance stock	—		85
Total share-based compensation expense	Total share-based compensation expense	$	211	$	386	$	956	$	1,194	Total share-based compensation expense	$	196	$	407

Recognized tax benefit	Recognized tax benefit	$	—	$	95	$	—	$	293	Recognized tax benefit	$	—	$	85
Intrinsic value of options exercised	Intrinsic value of options exercised	2		106		2		110		Intrinsic value of options exercised	—		—
Fair value of restricted stock vested	Fair value of restricted stock vested	—		19		1,700		1,659		Fair value of restricted stock vested	837		1,442

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

Stock Option Awards

As of ~~September 30, 2021,~~March 31, 2022, the Company had outstanding stock options exercisable for ~~20,332~~19,832 shares of common stock at a weighted average exercise price of $4.40 per share. During the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, no stock options were granted, ~~4,085 were~~ exercised ~~and 1,000 were~~or canceled.

Restricted Stock Awards

The Company recognizes share-based compensation expense for all restricted stock awards (“RSAs”) held by the Company’s directors, executives and other key employees. For all RSA awards the accounting charge is measured at the grant date as the fair value of FNHC common stock and expensed as non-cash compensation over the vesting term using the straight-line basis for service awards and over successive one-year requisite service periods for performance-based awards. Our expense for our performance awards depends on achievement of specified results; therefore, the ultimate expense can range from 0% to 250% of target.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Board of Directors granted ~~171,576~~0 and ~~210,272~~171,576 RSAs, respectively, vesting over three or five years, to the Company’s directors, executives and other key employees. These RSA grants include performance-based RSAs, which reflect the number of shares that would vest based on achieving the "Target" level of performance (as opposed to "Threshold" or "Maximum" performance levels). The actual number of performance-based RSAs that will vest depend on the Company's achievement of specified performance criteria in the future.

RSA activity includes the following:


		Number of Shares	Weighted Average Grant Date Fair Value			Number of Shares	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2021		375,728	$	14.32
Outstanding at January 1, 2022					Outstanding at January 1, 2022	343,683	$	9.98
Granted	Granted	171,576	4.63		Granted	—	—
Vested	Vested	(124,287)	13.68		Vested	(72,307)	11.57
Cancelled	Cancelled	(63,468)	15.06		Cancelled	(54,647)	10.13
Outstanding at September 30, 2021		359,549	$	9.79
Outstanding at March 31, 2022					Outstanding at March 31, 2022	216,729	$	9.41

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

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FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

Accumulated Other Comprehensive Income (Loss)

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

Three Months Ended September 30,
2021 2020
Before Tax Income Tax Net Before Tax Income Tax Net
(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period $ 8,737 $ (3,664) $ 5,073 $ 19,065 $ (4,675) $ 14,390
Other comprehensive income (loss) before reclassification (1,304) — (1,304) 2,618 (642) 1,976
Reclassification adjustment for realized losses (gains) included in net income (1,315) (12) (1,327) (798) 195 (603)
(2,619) (12) (2,631) 1,820 (447) 1,373
Accumulated other comprehensive income (loss), end-of-period $ 6,118 $ (3,676) $ 2,442 $ 20,885 $ (5,122) $ 15,763


		Nine Months Ended September 30,													Three Months Ended March 31,
		2021						2020							2022						2021
		Before Tax		Income Tax		Net		Before Tax		Income Tax		Net			Before Tax		Income Tax		Net		Before Tax		Income Tax		Net
		(In thousands)													(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period	Accumulated other comprehensive income (loss), beginning-of-period	$	15,086	$	(3,700)	$	11,386	$	13,621	$	(3,340)	$	10,281	Accumulated other comprehensive income (loss), beginning-of-period	$	2,671	$	(3,705)	$	(1,034)	$	15,086	$	(3,700)	$	11,386
Other comprehensive income (loss) due to debt securities - held to maturity reclassified to available-for-sale		—		—		—		(58)		14		(44)

Other comprehensive income (loss) before reclassification	Other comprehensive income (loss) before reclassification	(7,507)		—		(7,507)		16,422		(4,027)		12,395		Other comprehensive income (loss) before reclassification	(16,050)		—		(16,050)		(9,397)		2,306		(7,091)
Reclassification adjustment for realized losses (gains) included in net income	Reclassification adjustment for realized losses (gains) included in net income	(1,461)		24		(1,437)		(9,100)		2,231		(6,869)		Reclassification adjustment for realized losses (gains) included in net income	14,496		25		14,521		(144)		35		(109)
		(8,968)		24		(8,944)		7,264		(1,782)		5,482			(1,554)		25		(1,529)		(9,541)		2,341		(7,200)
Accumulated other comprehensive income (loss), end-of-period	Accumulated other comprehensive income (loss), end-of-period	$	6,118	$	(3,676)	$	2,442	$	20,885	$	(5,122)	$	15,763	Accumulated other comprehensive income (loss), end-of-period	$	1,117	$	(3,680)	$	(2,563)	$	5,545	$	(1,359)	$	4,186

12. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income (loss) 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 ~~after adding back the after-tax interest expense on our 2026 Notes,~~(loss) by the weighted average number of shares outstanding, noted above, adjusted for the dilutive effect of ~~our 2026 Notes,~~ 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 conversion ~~into shares~~ of convertible long-term debt (if not antidilutive, the ~~Company’s~~associated interest expense reflected in net income (loss) available to common ~~stock for our 2026 Notes,~~shareholders, would be excluded as well), 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 presents the calculation of basic and diluted EPS:


	Three Months Ended
	March 31,
	2022		2021
	(In thousands, except per share data)
Net income (loss) attributable to FedNat Holding Company shareholders	$	(43,914)	$	(19,381)

Weighted average number of common shares outstanding - basic	17,462		14,395

Net income (loss) per common share - basic	$	(2.51)	$	(1.35)


Weighted average number of common shares outstanding - basic	17,462		14,395
Dilutive effect of convertible debt	—		—
Dilutive effect of stock compensation plans	—		—
Weighted average number of common shares outstanding - diluted	17,462		14,395

Net income (loss) per common share - diluted	$	(2.51)	$	(1.35)

Dividends per share	$	—	$	—

-2927-

FedNat Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September 30, 2021~~March 31, 2022

~~The following table presents the calculation of basic and diluted EPS:~~
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In thousands, except per share data)
Net income (loss) attributable to FedNat Holding Company shareholders $ (24,781) $ (20,745) $ (94,531) $ (40,091)

Weighted average number of common shares outstanding - basic 17,445 13,708 16,417 13,890
Net income (loss) per common share - basic $ (1.42) $ (1.51) $ (5.76) $ (2.89)

Weighted average number of common shares outstanding - basic 17,445 13,708 16,417 13,890
Dilutive effect of convertible debt — — — —
Dilutive effect of stock compensation plans — — — —
Weighted average number of common shares outstanding - diluted 17,445 13,708 16,417 13,890
Net income (loss) per common share - diluted $ (1.42) $ (1.51) $ (5.76) $ (2.89)

Dividends per share $ — $ 0.09 $ — $ 0.27

For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, we excluded (in thousands) dilutive shares of 3,500 ~~and 2,110~~ from our weighted average number of common shares outstanding - diluted above because their inclusion, as well as retaining the associated interest expense of $0.3 million currently reflected in net income (loss) available to common shareholders for the EPS numerator, would have been antidilutive.

13. SUBSEQUENT EVENTS

Refer to Note 2 above for information related to a portion of the Company's action plan having been approved by the OIR, which consists of a substantial reduction to the size of the Company’s Florida books of business via the execution of mid-term cancellations effective June 29, 2022, of approximately 68,200 Florida policies currently in force on FNIC, MNIC and MIC, as requested by the Company.

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

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

Overview

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q (the “Form 10-Q”). In addition, please refer to our audited consolidated financial statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (the ~~“2020~~“2021 Form 10-K”).

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

Below, in addition to providing consolidated revenues and net income (loss), we also provide adjusted operating revenues and adjusted operating income (loss) because we believe these performance measures that are not United States of America generally accepted accounting principles ("GAAP") measures allow for a better understanding of the underlying trend in our business, as the excluded items are not necessarily indicative of our operating fundamentals or performance.

Non-GAAP measures do not replace the most directly comparable GAAP measures and we have included a detailed reconciliation thereof in "Results of Operations" below.

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

•Net realized and unrealized investment gains (losses);

•Gains (losses) associated with early extinguishment of debt;

•Merger and acquisition, integration and other strategic costs, and the amortization of specifically identifiable intangibles (other than value of business acquired);

•Impairment of intangibles;

•Income (loss) from initial adoption of new regulations and accounting guidance; and

•Income (loss) from discontinued operations.

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

Forward-Looking Statements

This Form 10-Q or the documents that are incorporated by reference into this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “forecast,” “guidance,” “indicate,” “intend,” “may,” “might,” “outlook,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” “will,” “would,” “will be,” “will continue” or the negative thereof or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve a number of risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Management cautions that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assume that such statements will be realized, or the forward-looking events and circumstances will occur. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed under Item 1. Business – “Going Concern” and Item 1A. “Risk Factors” in our ~~2020~~2021 Form 10-K, and discussed from time to time in our other reports filed with the Securities and Exchange Commission (“SEC”), including this Form 10-Q.

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

GENERAL

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

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

Maison Insurance Company ("MIC" or "Maison"), an insurance subsidiary, ~~that we acquired in December 2019,~~ is licensed as an admitted carrier to write homeowners property and casualty insurance as well as wind/hail only exposures by the state insurance departments in Louisiana, Texas and Florida. Refer to Overview of Insurance Lines of Business - Non-Florida below for information regarding the Company's plan to execute an orderly runoff of MIC’s insurance operations.

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

Through our wholly-owned subsidiary, FedNat Underwriters, Inc. (“FNU”), we serve as managing general agent for FNIC, MIC and MNIC. ClaimCor, LLC ("ClaimCor"), a wholly-owned subsidiary, is a claims solutions company that processes claims for ~~Maison~~FNIC, MIC and ~~FNIC.~~MNIC.

Material Distribution Relationships

We are a party to an insurance agency master agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company (“Allstate”), pursuant to which we have been authorized by ISA to appoint Allstate agents to offer our FNIC homeowners insurance products to consumers in Florida.

We are a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) in which they underwrite our FNIC homeowners business outside of Florida. Refer to Overview of Insurance Lines of Business - Non-Florida below for information regarding the Company's plan to execute an orderly runoff of ~~FNIC non-Florida’s~~ insurance ~~operations.~~policies in our non-Florida market.

Going Concern

Refer to in "Part 1, Item 1, Business” and "Part I, Item 1A., Risk Factors” of our 2021 Form 10-K and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources” of this Form 10-Q for information with respect to the Company's going concern status.

Overview of Insurance Lines of Business

Homeowners Property and Casualty Insurance

FNIC, MIC and MNIC underwrite homeowners insurance in Florida and FNIC and MIC also underwrites homeowners insurance ~~in Alabama, Texas, Louisiana, South Carolina and Mississippi and MIC~~ in Louisiana and ~~Texas.~~Texas, while FNIC also underwrites homeowners in South Carolina, Alabama and Mississippi. Homeowners insurance generally protects an owner of real and personal property against covered causes of loss to that property. As of ~~September 30, 2021,~~March 31, 2022, the total homeowners policies in-force was ~~301,000,~~248,000, of which ~~168,000~~152,000 were in Florida and ~~133,000~~96,000 were outside of Florida. As of December 31, ~~2020,~~2021, the total homeowners policies in-force was ~~361,000,~~280,000, of which ~~207,000~~160,000 were in Florida and ~~154,000~~120,000 were outside of Florida. Refer to Overview of Insurance Lines of Business - Non-Florida below for information regarding the Company's plan to execute an orderly runoff of our ~~non-Florida’s~~non-Florida insurance operations.

Florida

Our homeowners insurance products provide maximum dwelling coverage of approximately $3.6 million, with the aggregate maximum policy limit being approximately $6.3 million. We currently offer dwelling coverage “A” up to $4.0 million with an

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aggregate total insured value of $6.5 million. We continually review and update these limits. The typical deductible is either $2,500 or $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims.

Premium rates charged to our homeowners insurance policyholders are continually evaluated to assure that they meet the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive, inadequate or discriminatory).

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Premium rates in Florida and other states are regulated and approved by the respective states’ office of insurance regulation. We continuously monitor and seek appropriate adjustment to our rates in order to remain competitive and profitable.

Through MIC, we have assumed Florida policies through the state-run insurer Citizens Property Insurance Corporation ("Citizens").

The following are our recent approved rate actions that we have taken across our three insurance subsidiaries:

•In 2020, FNIC received approval from the Florida Office of Insurance Regulations ("OIR") for a statewide-average rate increase of 6.7% for Florida homeowners multiple-peril insurance policies, which became effective for new policies on February 8, 2021 and for renewal policies on March 30, 2021.

•In 2020, FNIC received OIR approval for a statewide-average rate increase of 8.3% for Florida dwelling fire insurance policies, which became effective for new policies on February 2, 2021 and for renewal policies on March 30, 2021.

•In 2020, MIC received OIR approval for a statewide-average rate increase of 15.0% for Florida manufactured home insurance policies, which became effective for new policies on March 10, 2021.

•In 2021, FNIC received OIR approval for a statewide-average rate increase of 9.0% for Florida homeowners multiple-peril insurance policies, which became effective for new policies on March 1, 2021 and for renewal policies on April 15, 2021.

•In 2021, MIC received OIR approval for a statewide-average rate increase of 14.8% for Florida takeout wind only policies, which became effective on August 1, 2021.

•In 2021, MIC filed for a statewide-average rate increase of 14.9% for Florida manufactured home insurance policies, which became effective for new and renewal policies on August 15, 2021.

•In 2021, FNIC received approval from the OIR for a statewide-average rate increase of 0.9% for Florida homeowners multiple-peril insurance policies, which became effective for new policies on September 1, 2021 and for renewal policies on October 15, 2021.

•In 2021, FNIC received approval from the OIR for a statewide-average rate increase of 5.7% for Florida homeowners multiple-peril insurance policies, which became effective for new policies on October 15, 2021 and for renewal policies on November 22, 2021.

•In 2021, FNIC received OIR approval for a statewide-average rate increase of 6.7% for Florida dwelling fire insurance policies, which became effective for new policies on October 15, 2021 and for renewal policies on November 22, 2021.

•In 2021, MIC received OIR approval for a statewide-average rate increase of 14.9% for Florida takeout wind only policies, which became effective on December 25, 2021.

•In 2021, MIC received OIR approval for a statewide-average rate increase of 14.9% for Florida voluntary wind only policies, which became effective on February 7, 2022.

•In 2022, FNIC received approval from the OIR for a statewide-average rate increase of 6.0% for Florida homeowners multiple-peril insurance policies, which became effective for new policies on January 15, 2022 and for renewal policies on March 3, 2022.

•In 2022, FNIC received OIR approval for a statewide-average rate increase of 8.9% for Florida dwelling fire insurance policies, which became effective for new policies on January 15, 2022 and for renewal policies on March 3, 2022.

•Other rate filings have been filed with the OIR and are pending approval.

Non-Florida

Our FNIC non-Florida ~~FNIC~~ homeowners insurance products, ~~which have been~~ produced through our ~~agreement~~partnership with SageSure, provide maximum dwelling coverage “A” up to $1.8 million, with the aggregate maximum policy limit being approximately $3.6 million. The typical deductible is either $2,500 or $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims.

Effective ~~December~~July 1, 2020, FNIC entered into a ~~80%~~ quota-share treaty with Anchor Re, ~~a wholly-owned~~Inc. ("Anchor Re"), an Arizona captive ~~reinsurance subsidiary~~that is an affiliate of SageSure, the non-affiliated managing general underwriter that writes FNIC’s non-Florida homeowners business. The treaty provided 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. The treaty was fully collateralized through Anchor Re.

On November 3, 2020, FNIC 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. Effective January 31, 2021, the Company

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terminated its ~~existing~~then-existing quota-share reinsurance treaty with Anchor Re and commuted the agreement. Immediately after the commutation, the Company entered into an 80% quota-share treaty with Anchor Re on February 1, 2021 on an in-force, new and renewal basis, which ~~covers~~covered the thirteen month period through February 28, 2022, subject to certain limitations. The treaty arrangement was fully collateralized through Anchor Re.

Effective December 31, 2021, the Company terminated its existing 80% quota-share reinsurance treaty with Anchor Re and commuted the agreement. Immediately after the commutation, the Company entered into a 100% quota-share treaty with Anchor Re on December 31, 2021 on an in-force, new and renewal basis, which covers the six month period through June 30, 2022, subject to certain limitations which include limits on the net losses that Anchor Re can realize during the treaty year. The new treaty excludes catastrophe losses, involves a funded trust and is fully collateralized through Anchor Re.

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

The following are our recent approved rate actions that we have taken across our insurance subsidiaries that do business outside of Florida:

•In 2021, FNIC applied for a statewide-average rate increase of 8.4.% for Mississippi homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on January 17, 2022 and for renewal policies on March 1, 2022.

•In 2021, MIC applied for a statewide-average rate increase of 24.6% for Louisiana voluntary dwelling insurance policies, which was approved by the respective regulatory agency and became effect for new policies on March 15, 2021 and for renewal policies on April 15, 2021.

•In 2021, FNIC applied for a statewide-average rate increase of 5.0% for Alabama homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on April 1, 2021 and for renewal policies on May 1, 2021.

•In 2021, FNIC applied for a statewide-average rate increase of 6.9% for South Carolina homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on April 1, 2021 and for renewal policies on May 1, 2021.

•In 2021, FNIC applied for a statewide-average rate increase of 9.0% for Texas homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on April 8, 2021 and for renewal policies on May 1, 2021.

•In 2021, FNIC applied for a statewide-average rate increase of 9.5% for Texas homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on August 16, 2021 for renewal policies on November 1, 2021.

•In 2021, FNIC applied for a statewide-average rate increase of 15.0% for Texas homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on November 1, 2021 and for renewal policies on December 16, 2021.

•In 2021, MIC applied for a statewide-average rate increase of 11.1% for Louisiana homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on May 15, 2021 and for renewal policies on July 1, 2021.

•In 2021, MIC applied for a statewide-average rate increase of 11.0% for Louisiana takeout insurance policies, which was approved by the respective regulatory agency and became effective for new and renewal policies on July 1, 2021.

•In 2021, FNIC applied for a statewide-average rate increase of 11.0% for Louisiana homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new and renewal policies on July 1, 2021. In 2021, MIC applied for a statewide-average rate increase of 25.7% for Texas voluntary wind only insurance policies, which was effective for new and renewal policies on July 15, 2021.

•In 2021, MIC applied for a statewide-average rate increase of 9.5% for Texas takeout wind only insurance policies, which was effective for new and renewal policies on July 15, 2021.

•In 2021, MIC applied for a statewide-average rate increase of 22.6% for Texas manufactured home insurance policies, which was effective for new and renewal policies on August 15, 2021.

•In 2021, FNIC applied for a statewide-average rate increase of 15.0% for Louisiana homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on October 25, 2021 and for renewal policies on ~~July~~December 1, 2021.

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•In 2021, MIC applied for a statewide-average rate increase of 19.0% for Louisiana takeout insurance policies, which was approved by the respective regulatory agency and became effective for new and renewal policies on November 25, 2021.

•~~Rate~~In 2021, MIC applied for a statewide-average rate increase of 8.6% for Louisiana manufactured home insurance policies, which was approved by the respective regulatory agency and became effective for new and renewal policies on November 25, 2021.

•In 2021, MIC applied for a statewide-average rate increase of 23.1% for Texas homeowners insurance policies, which was effective for new policies on December 1, 2021 and effective for renewal policies on January 1, 2022.

•In 2021, MIC applied for a statewide-average rate increase of 18.9% for Louisiana homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new and renewal policies on December 3, 2021.

•In 2021, FNIC applied for a statewide-average rate increase of 20.0% for South Carolina homeowners insurance policies, which was approved by the respective regulatory agency and became effective for new policies on April 1, 2022 and for renewal policies on May 1, 2022.

•Additional rate filings have been applied for by FNIC and MIC ~~outside of Florida~~ and are pending to be approved by the respective ~~regulators.~~regulatory agency.

In November 2021, the Company announced its plan to re-focus its operations on the Florida market, which has been the Company’s historical focus. In conjunction with this shift in strategy, the Company ~~intends to commence~~commenced an orderly runoff of ~~Maison’s~~MIC’s insurance operations. In that regard, ~~Maison will be filing~~MIC filed appropriate documentation with its insurance regulators in Louisiana, Florida and Texas concerning ~~Maison’s~~MIC’s withdrawal plan. ~~This withdrawal plan is subject to regulatory review periods of 60 days in Texas, and 45 days in Florida (except that no action can be taken in Florida in furtherance of the withdrawal for 90 days~~

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~~following submission of the withdrawal plan). Subject to such review, we expect to begin~~We began non-renewing ~~Maison’s~~MIC’s Louisiana policies as on their anniversary dates ~~beginning~~ in January 2022. ~~Nonrenewal~~Non-renewal of ~~Maison’s~~MIC’s Texas policies ~~is expected to begin~~began in ~~February~~March 2022, and the ~~nonrenewal~~non-renewal of ~~Maison’s~~MIC’s Florida policies is expected to begin in ~~June~~July 2022. With respect to FNIC’s Texas and Louisiana books, the Company and SageSure (the third-party MGU that ~~wrote~~underwrote the business and owns the renewal rights thereof) ~~expect to begin~~began transferring policies onto an alternative SageSure insurance carrier partners ~~of SageSure~~ in December 2021, by virtue of making ~~an offer~~offers of coverage to FNIC policyholders. FNIC policies in South Carolina, Alabama and Mississippi ~~will~~are expected to continue to be renewed by FNIC ~~until such time as SageSure's~~up through June 30, 2022. SageSure has begun offering renewals in Texas and Louisiana from alternative SageSure insurance carrier partners ~~obtain~~and we expect they will do the ~~necessary licensing~~same in ~~those states.~~South Carolina, Alabama and Mississippi by July 2022. Non-renewals of FNIC's policies produced by SageSure began April 30, 2022 for Texas and Louisiana and subject to regulatory approvals of our withdrawal plans will begin May 31, 2022 for Alabama and Mississippi, and June 30, 2022 in South Carolina. The ~~rollover~~non-renewal of all existing policies ~~are~~is governed by the appropriate regulatory requirements of each state in which the property insured by the policy is located. In conjunction with the 100% quota-share treaty and the in-process transfer of the book discussed above, effective February 1, 2022, claims handling for the SageSure book was transferred to an affiliate of SageSure.

Other ~~Insurance~~ Lines of Business

Flood: FNIC writes flood insurance through the National Flood Insurance Program (“NFIP”). We write the policy for the NFIP, which assumes 100% of the flood risk while we retain a commission for our service. FNIC offers this line of business in Florida, Louisiana, Texas, Alabama, South Carolina and Mississippi. FNIC plans to file an admitted flood endorsement as an alternative to the NFIP program. Until December 2021, MIC ~~writes~~wrote flood insurance through a partnership with Bintech Partners, Inc. who assumes 100% of the risk, in Louisiana only.

See the discussion in Item 1: “Business” in our ~~2020~~2021 Form 10-K, for additional information with respect to our business.

Regulation

All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. We may be the subject of additional special examinations or analysis. These examinations or analysis may result in one or more corrective orders being issued by the OIR or Louisiana Department of Insurance ("LDI"), our primary regulators.

~~COVID-19 Impact~~

Refer to ~~in "Part 1, Item 1, Business”~~“Item 2. Management’s Discussion and ~~"Part I, Item 1A., Risk Factors”~~Analysis of ~~our 2020 Form 10-K~~Financial Condition and Results of Operations, Liquidity and Capital Resources” for ~~information~~discussion of OIR consent orders and the Company’s action plans with respect ~~to the Company's response to COVID-19's impact to our business.~~thereto.

-3433-

RESULTS OF OPERATIONS

Operating Results Overview - Three Months Ended ~~September 30, 2021~~March 31, 2022 Compared with Three Months Ended ~~September 30, 2020~~March 31, 2021

The following overview does not address all of the matters covered in the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to our shareholders or the investing public. This overview should be read in conjunction with the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations herein and in our ~~2020~~2021 Form 10-K.

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


		Three Months Ended									Three Months Ended
		September 30,									March 31,
		2021			% Change		2020				2022			% Change		2021
		(Dollars in thousands)									(Dollars in thousands)
Revenues:	Revenues:									Revenues:
Gross premiums written	Gross premiums written	$	157,003		(12.8)	%	$	180,152		Gross premiums written	$	137,892		(20.8)	%	$	174,207
Gross premiums earned	Gross premiums earned	178,368			(2.8)	%	183,518			Gross premiums earned	164,328			(8.2)	%	179,002
Ceded premiums	Ceded premiums	(124,439)			24.5	%	(99,972)			Ceded premiums	(118,343)			(15.0)	%	(139,257)
Net premiums earned	Net premiums earned	53,929			(35.4)	%	83,546			Net premiums earned	45,985			15.7	%	39,745
Net investment income	Net investment income	1,685			(29.9)	%	2,404			Net investment income	1,264			(24.5)	%	1,674
Net realized and unrealized gains (losses)	Net realized and unrealized gains (losses)	1,273			(3.9)	%	1,324			Net realized and unrealized gains (losses)	(15,053)			NCM		92
Direct written policy fees	Direct written policy fees	3,179			(11.8)	%	3,603			Direct written policy fees	2,613			(21.2)	%	3,315
Other income	Other income	6,658			3.4	%	6,439			Other income	7,426			(6.3)	%	7,922
Total revenues	Total revenues	66,724			(31.4)	%	97,316			Total revenues	42,235			(19.9)	%	52,748

Costs and expenses:	Costs and expenses:									Costs and expenses:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	59,644			(39.8)	%	99,016			Losses and loss adjustment expenses	58,783			22.4	%	48,016
Commissions and other underwriting expenses	Commissions and other underwriting expenses	23,591			(4.0)	%	24,580			Commissions and other underwriting expenses	19,107			(9.1)	%	21,031
General and administrative expenses	General and administrative expenses	5,974			12.0	%	5,333			General and administrative expenses	6,997			15.3	%	6,066
Interest expense	Interest expense	2,296			19.9	%	1,915			Interest expense	2,300			19.4	%	1,926
Total costs and expenses	Total costs and expenses	91,505			(30.1)	%	130,844			Total costs and expenses	87,187			13.2	%	77,039

Income (loss) before income taxes	Income (loss) before income taxes	(24,781)			(26.1)	%	(33,528)			Income (loss) before income taxes	(44,952)			85.1	%	(24,291)
Income tax expense (benefit)	Income tax expense (benefit)	—			(100.0)	%	(12,783)			Income tax expense (benefit)	(1,038)			(78.9)	%	(4,910)
Net income (loss)	Net income (loss)	$	(24,781)		19.5	%	$	(20,745)		Net income (loss)	$	(43,914)		126.6	%	$	(19,381)


Ratios to net premiums earned:	Ratios to net premiums earned:									Ratios to net premiums earned:
Net loss ratio	Net loss ratio	110.6		%			118.5		%	Net loss ratio	127.8		%			120.8		%
Net expense ratio	Net expense ratio	54.8		%			35.8		%	Net expense ratio	56.8		%			68.2		%
Combined ratio	Combined ratio	165.4		%			154.3		%	Combined ratio	184.6		%			189.0		%

(1)Net loss ratio is calculated as losses and loss adjustment expenses ("LAE") divided by net premiums earned.

(2)Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.

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

-3534-

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


		Three Months Ended							Three Months Ended
		September 30,							March 31,
		2021			2020				2022			2021
		(Dollars in thousands)							(Dollars in thousands)
Revenue	Revenue							Revenue
Total revenues	Total revenues	$	66,724		$	97,316		Total revenues	$	42,235		$	52,748
Less:	Less:							Less:
Net realized and unrealized investment gains (losses)	Net realized and unrealized investment gains (losses)	1,273			1,324			Net realized and unrealized investment gains (losses)	(15,053)			92
Adjusted operating revenues	Adjusted operating revenues	$	65,451		$	95,992		Adjusted operating revenues	$	57,288		$	52,656

Net Income (Loss)	Net Income (Loss)							Net Income (Loss)
Net income (loss)	Net income (loss)	$	(24,781)		$	(20,745)		Net income (loss)	$	(43,914)		$	(19,381)
Less:	Less:							Less:
Net realized and unrealized investment gains (losses)	Net realized and unrealized investment gains (losses)	1,273			793			Net realized and unrealized investment gains (losses)	(15,053)			73
Acquisition and strategic costs	Acquisition and strategic costs	(9)			(15)			Acquisition and strategic costs	—			(9)
Amortization of identifiable intangibles	Amortization of identifiable intangibles	(38)			(22)			Amortization of identifiable intangibles	—			(30)

Adjusted operating income (loss)	Adjusted operating income (loss)	$	(26,007)		$	(21,501)		Adjusted operating income (loss)	$	(28,861)		$	(19,415)

Income tax rate assumed for reconciling items above	Income tax rate assumed for reconciling items above	—		%	40.10		%	Income tax rate assumed for reconciling items above	—		%	21.00		%

Our first quarter of 2022 reported results on May 9, 2022, did not include an impairment loss of $12.6 million, which is included above. This impairment loss was precipitated by the OIR approval of the mid-term cancellation pursuant to the Company’s action plan, which occurred on May 13, 2022. Total shareholders’ equity was not impacted by such charge; however, the Company’s net loss for three months ended March 31, 2022 worsened and other comprehensive income improved by $12.6 million in offsetting amounts. Refer to Note 2 of the notes to our Consolidated Financial Statements for additional information.

Revenue

Total revenue decreased ~~$30.6~~$10.5 million or ~~31.4%~~19.9%, to ~~$66.7~~$42.2 million for the three months ended ~~September 30, 2021,~~March 31, 2022, compared with ~~$97.3~~$52.7 million for the three months ended ~~September 30, 2020.~~March 31, 2021. The decrease was driven primarily by ~~increases~~lower net realized gains, gross premiums, direct written policy fees, net investment income and other income, partially offset by a decrease in ceded premiums, ~~from incremental quota-share agreements and lower gross premiums earned,~~all of which are discussed in further detail below.

Gross Premiums Written

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


		Three Months Ended					Three Months Ended
		September 30,					March 31,
		2021		2020			2022		2021
		(In thousands)					(In thousands)
Gross premiums written:	Gross premiums written:					Gross premiums written:
Homeowners Florida	Homeowners Florida	$	91,370	$	106,101	Homeowners Florida	$	116,159	$	111,969
Homeowners non-Florida	Homeowners non-Florida	59,660		68,447		Homeowners non-Florida	17,317		57,909
Federal flood	Federal flood	5,993		5,660		Federal flood	4,481		4,389
Non-core (1)	Non-core (1)	(20)		(56)		Non-core (1)	(65)		(60)
Total gross premiums written	Total gross premiums written	$	157,003	$	180,152	Total gross premiums written	$	137,892	$	174,207

(1)Reflects exited lines of business.

Gross premiums written decreased ~~$23.2~~$36.3 million, or ~~12.8%~~20.8%, to ~~$157.0~~$137.9 million in the quarter compared with ~~$180.2~~$174.2 million for the same three-month period last year, ~~which was~~ driven by a reduction in our policies-in-force and exposure ~~across all~~in non-Florida states, as a result of ~~our rigorous exposure management in response to the challenging litigation environment, partially offset by rate actions that we have taken across our insurance subsidiaries.~~

-3635-

the orderly runoff of MIC and the transfer-upon-renewal of FNIC’s non-Florida business to alternative insurance carrier partners of SageSure.

Gross Premiums Earned

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


		Three Months Ended					Three Months Ended
		September 30,					March 31,
		2021		2020			2022		2021
		(In thousands)					(In thousands)
Gross premiums earned:	Gross premiums earned:					Gross premiums earned:
Homeowners Florida	Homeowners Florida	$	108,193	$	115,346	Homeowners Florida	$	105,138	$	109,426
Homeowners non-Florida	Homeowners non-Florida	65,017		63,759		Homeowners non-Florida	53,939		64,923
Federal flood	Federal flood	5,178		4,469		Federal flood	5,316		4,713
Non-core (1)	Non-core (1)	(20)		(56)		Non-core (1)	(65)		(60)
Total gross premiums earned	Total gross premiums earned	$	178,368	$	183,518	Total gross premiums earned	$	164,328	$	179,002

(1)Reflects exited lines of business.

Gross premiums earned decreased ~~$5.1~~$14.7 million, or ~~2.8%~~8.2%, to ~~$178.4~~$164.3 million for the three months ended ~~September 30, 2021,~~March 31, 2022, as compared to ~~$183.5~~$179.0 million for the three months ended ~~September 30, 2020. The lower~~March 31, 2021, driven primarily by the same reasons as the decrease in gross premiums ~~earned was primarily driven by the exposure management~~written, discussed ~~earlier.~~above.

Ceded Premiums Earned

Ceded premiums earned ~~increased $24.4~~decreased $21.0 million, or ~~24.5%~~15.0%, to ~~$124.4~~$118.3 million in the quarter, compared to ~~$100.0~~$139.3 million in the same three-month period last year. The ~~increase~~decrease was driven by approximately ~~$26~~$15 million lower catastrophe reinsurance spend due to additional purchases of supplemental coverage in the 2020-2021 catastrophe excess of loss reinsurance program to backfill layers and gaps in coverage stemming from the non-cascading portion of our reinsurance tower, following the six retention catastrophe events that occurred during that treaty year. Additionally, there was approximately $6 million of ~~higher~~lower quota-share ceded premiums: $20 million related to new and incremental treaties for FNIC's Florida book of business and $6 million related to the quota-share treaty for FNIC's non-Florida book of business cession percentage increasing to 80% from 50% during the fourth quarter of 2020. The increase to ceded premium ~~earned~~ associated with ~~the aforementioned quota-share treaties is~~lower gross premiums earned discussed above which was largely offset by corresponding ~~reductions~~increases in net loss and LAE, and commission and other underwriting expenses when comparing the periods. Refer to Note 5 of the notes to our Consolidated Financial Statements for additional information regarding these quota-share treaties.

Net Investment Income

Net investment income decreased ~~$0.7~~$0.4 million, or ~~29.9%~~24.5%, to $1.3 million during the three months ended March 31, 2022, as compared to $1.7 million during the three months ended ~~September 30, 2021, as compared to $2.4 million during the three months ended September 30, 2020.~~March 31, 2021. This decrease was driven by a smaller fixed income portfolio as ~~well as a decline in the associated yield as a result of declining interest rates during the last year. Related to the former,~~ we have been impacted by several catastrophes, hail and wind-related severe weather ~~events. As a result, sales~~events and private reinsurers have raised the cost of ~~our portfolio of fixed income securities was a significant source of liquidity over the last year.~~their coverages.

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

Net realized and unrealized gains (losses) ~~remained relatively flat at $1.3~~decreased $15.2 million, to $(15.1) million for the three months ended ~~September 30, 2021,~~March 31, 2022, compared to $0.1 million the prior year period. Refer to Note 2 of the notes to our Consolidated Financial Statements for information about the Company recognition of an impairment loss of $(12.6) million. We also recognized $(0.6) million and less than $(0.1) ~~million and $0.3~~ million in unrealized investment gains (losses) for equity securities during these respective periods. Our current and prior year net realized investment gains on sales are primarily associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions, a typical practice ~~each and every quarter.~~in most quarters.

Direct Written Policy Fees

Direct written policy fees decreased ~~$0.4~~$0.7 million, or ~~11.8%~~21.2%, to ~~$3.2~~$2.6 million for the three months ended ~~September 30, 2021,~~March 31, 2022, compared with ~~$3.6~~$3.3 million for the three months ended ~~September 30, 2020.~~March 31, 2021. The decrease is primarily driven by ~~lower policy fees due to~~ a reduction in our policies in-force ~~and exposure~~ in the state of Florida, as a result of our rigorous exposure management in response to the challenging litigation ~~environment.~~

environment and the orderly exit of the non-Florida business.

-3736-

Other Income

Other income included the following for the periods presented:


		Three Months Ended							Three Months Ended
		September 30,							March 31,
		2021		% Change		2020			2022		% Change		2021
		(Dollars in thousands)							(Dollars in thousands)
Other income:	Other income:							Other income:
Commission income	Commission income	$	968	12.4	%	$	861	Commission income	$	1,280	35.7	%	$	943
Brokerage	Brokerage	5,319		2.7	%	5,181		Brokerage	5,796		(11.8)	%	6,575
Financing and other revenue	Financing and other revenue	371		(6.5)	%	397		Financing and other revenue	350		(13.4)	%	404
Total other income	Total other income	$	6,658	3.4	%	$	6,439	Total other income	$	7,426	(6.3)	%	$	7,922

The ~~increase~~decrease in other income was primarily driven by ~~higher~~lower brokerage revenue. The brokerage revenue ~~increase~~decrease is the result of ~~higher~~lower excess of loss reinsurance spend from the reinsurance programs in place, including reinstatement premiums and/or additional purchases, during ~~the third~~first quarter of ~~2021~~2022 as compared to the ~~third~~first quarter of ~~2020.~~2021.

Expenses

Losses and LAE

Losses and LAE incurred, net of reinsurance, included the following for the periods presented:


		Three Months Ended									Three Months Ended
		September 30,									March 31,
		2021				2020					2022				2021
				Net Loss				Net Loss					Net Loss				Net Loss
		Amount		Ratio		Amount		Ratio			Amount		Ratio		Amount		Ratio
		(In thousands)									(In thousands)
Current accident year, excluding catastrophes:	Current accident year, excluding catastrophes:									Current accident year, excluding catastrophes:
Homeowners	Homeowners	$	38,671	71.7	%	$	61,396	73.5	%	Homeowners	$	26,063	56.7	%	$	34,395	86.4	%
Non-core (1)	Non-core (1)	—		—	%	—		—	%	Non-core (1)	—		—	%	—		—	%
Total current accident year, excluding catastrophes	Total current accident year, excluding catastrophes	38,671		71.7	%	61,396		73.5	%	Total current accident year, excluding catastrophes	26,063		56.7	%	34,395		86.4	%
Current year catastrophes (2):	Current year catastrophes (2):									Current year catastrophes (2):
Florida	Florida	14,648		27.2	%	21,268		25.4	%	Florida	19,219		41.8	%	166		0.4	%
Texas	Texas	4,700		8.7	%	1,885		2.3	%	Texas	6,458		14.0	%	10,396		26.2	%
Louisiana	Louisiana	286		0.5	%	15,111		18.1	%	Louisiana	2,670		5.8	%	2,531		6.4	%
Other states	Other states	696		1.3	%	—		—	%	Other states	901		2.0	%	—		—	%
Total current year catastrophes	Total current year catastrophes	20,330		37.7	%	38,264		45.8	%	Total current year catastrophes	29,248		63.6	%	13,093		33.0	%
Prior year loss development (redundancy):	Prior year loss development (redundancy):									Prior year loss development (redundancy):
Homeowners	Homeowners	648		1.2	%	(1,100)		(1.3)	%	Homeowners	3,543		7.7	%	624		1.6	%
Non-core (1)	Non-core (1)	(5)		—	%	672		0.8	%	Non-core (1)	(71)		(0.2)	%	—		—	%
Ceded losses subject to offsetting experience account adjustments (3)	Ceded losses subject to offsetting experience account adjustments (3)	—		—	%	(216)		(0.3)	%	Ceded losses subject to offsetting experience account adjustments (3)	—		—	%	(96)		(0.2)	%
Total prior year loss development (redundancy)	Total prior year loss development (redundancy)	643		1.2	%	(644)		(0.8)	%	Total prior year loss development (redundancy)	3,472		7.5	%	528		1.4	%
Total net losses and LAE	Total net losses and LAE	$	59,644	110.6	%	$	99,016	118.5	%	Total net losses and LAE	$	58,783	127.8	%	$	48,016	120.8	%

(1)Reflects exited lines of business.

(2)Includes Property Claims Services ~~(“PCS”~~("PCS") weather events and other events impacting multiple insureds for which the Company's insurance carriers established catastrophe event codes, net of the benefit of claims handling services. These catastrophe events are typically wind, hail and tornado related weather events. Any individual catastrophe event with gross losses greater than $20 million, on a pre-tax basis, are considered significant and specifically addressed in the commentary below. ~~Also includes net catastrophe losses from current or prior quarter events, net of claims handling services, which~~

-38-

~~were adjusted in the specific period noted above.~~ Excludes any catastrophe related activity recorded in other financial statement ~~accounts,~~line items, outside of loss and loss adjustment expenses.

-37-

(3)Reflects homeowners 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).

Losses and LAE ~~decreased $39.4~~increased $10.8 million, or ~~39.8%~~22.4%, to ~~$59.6~~$58.8 million for the three months ended ~~September 30, 2021,~~March 31, 2022, compared to ~~$99.0~~$48.0 million for ~~2020 driven by higher ceded losses under quota-share reinsurance treaties and lower net catastrophe losses.~~2021. The net loss ratio ~~decreased 7.9~~increased 7.0 percentage points, to ~~110.6%~~127.8% in the current quarter, as compared to ~~118.5%~~120.8% in the ~~third~~first quarter of ~~2020.~~2021. The ~~lower~~higher loss expense and corresponding ratio ~~was~~were primarily ~~the result of higher ceded losses, as discussed earlier, and lower~~driven by larger net catastrophe losses and prior year development as well as lower ceded losses under quota-share reinsurance treaties attributable to lower gross premiums earned, partially offset by ~~higher ceded premiums earned,~~lower gross attritional losses in the ~~denominator on the net loss ratio calculation.~~ current quarter. Refer to Gross Premiums Earned above for additional information.

The current quarter included approximately ~~$20.3~~$29.2 million of catastrophe losses, net of reinsurance and claims handling fee income, driven primarily by ~~Hurricane Ida~~eleven notable events (including one wildfire) that impacted Florida, Texas, Louisiana and South Carolina. Approximately $10 million of these net catastrophe losses are related to books of business that the Company is in the process of running off, including FNIC's non-Florida book as well as ~~other severe weather events,~~MIC’s book of business. In addition, the Company recorded approximately $2 million of net adverse reserve development in the quarter related to Hurricane Laura, which ~~together impacted~~hit Louisiana ~~Florida and Texas.~~in August 2020. By comparison, the ~~third~~first quarter of ~~2020~~2021 catastrophe net losses were ~~$38.3~~$13.1 million, net of reinsurance, primarily by Winter Storm Uri, which ~~included Hurricanes Laura and Sally as well as other severe weather events. Additionally, higher ceded losses through our quota-share treaties and lower attritional losses~~caused heavy residential damage in ~~FNIC's Florida book~~Texas, primarily associated with freezing temperatures causing widespread instances of ~~business drove lower current accident year losses, excluding catastrophes, compared to the prior year.~~burst water pipes.

Commissions and Other Underwriting Expenses

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


		Three Months Ended					Three Months Ended
		September 30,					March 31,
		2021		2020			2022		2021
		(In thousands)					(In thousands)
Commissions and other underwriting expenses:	Commissions and other underwriting expenses:					Commissions and other underwriting expenses:
Homeowners Florida	Homeowners Florida	$	12,539	$	13,736	Homeowners Florida	$	10,682	$	12,399
All others	All others	13,108		13,337		All others	13,233		11,691
Ceding commissions	Ceding commissions	(16,546)		(7,909)		Ceding commissions	(18,051)		(19,460)
Total commissions	Total commissions	9,101		19,164		Total commissions	5,864		4,630

Fees	Fees	1,271		1,358		Fees	993		1,335
Salaries and wages	Salaries and wages	3,124		3,351		Salaries and wages	2,511		3,572
Other underwriting expenses	Other underwriting expenses	10,095		707		Other underwriting expenses	9,739		11,494
Total commissions and other underwriting expenses	Total commissions and other underwriting expenses	$	23,591	$	24,580	Total commissions and other underwriting expenses	$	19,107	$	21,031

Commissions and other underwriting expenses decreased ~~$1.0~~$1.9 million, or ~~4.0%~~9.1%, to ~~$23.6~~$19.1 million for the three months ended ~~September 30, 2021,~~March 31, 2022, compared with ~~$24.6~~$21.0 million for the three months ended ~~September 30, 2020.~~March 31, 2021. This decrease was due to ~~higher~~lower acquisition and underwriting expenses due to lower policies-in-force, offset by lower ceding ~~commissions~~commission as a result of higher catastrophe costs, which has the ~~incremental quota-share treaties~~affect of reducing the ceded commissions in FNIC's Florida and non-Florida books of business. Refer to Ceded Premium Earned above for additional information. The higher ceding commission was partially offset by an increase in other underwriting expenses, which was the ~~result of prior period expense being reduced by the benefit from the 50% profit-sharing agreement, as FNIC's non-Florida business experienced high weather losses in prior period.~~quarter.

The net expense ratio ~~increased 19.0~~decreased 11.4 percentage points to ~~54.8%~~56.8% in the ~~third~~first quarter of ~~2021,~~2022, as compared to ~~35.8%~~68.2% in the ~~third~~first quarter of ~~2020~~2021 due primarily to higher ceded reinsurance premiums in ~~2021.~~2021 Our gross expense ratio was ~~25.9%~~26.9% during the three months ended ~~September 30, 2021,~~March 31, 2022, as compared to ~~20.6%~~26.0% during the three months ended ~~September 30, 2020, demonstrating~~March 31, 2021, due primarily to inflation, partially offset by the Company's continued focus on expense control.

General and Administrative Expenses

General and administrative expenses increased ~~$0.7~~$0.9 million, or ~~12.0%~~15.3%, to ~~$6.0~~$7.0 million for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$5.3~~$6.1 million in the ~~third~~first quarter of ~~2020.~~

2021, due primarily to investments in employees, which are critical to accomplishing our corporate goals, including providing service to our insureds.

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Interest Expense

Interest expense increased $0.4 million, or ~~19.9%~~19.4%, to $2.3 million for the three months ended ~~September 30, 2021~~March 31, 2022 compared to $1.9 million for the three months ended ~~September 30, 2020.~~March 31, 2021. The increase was primarily attributable to debt issued on April 20, 2021. Refer to Note 810 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of our 2021 Form 10-K, for ~~information related to changes to our existing debt and new debt issuance, which will increase interest expense during the remainder of 2021 as compared to 2020.~~additional information.

Income Taxes

Income tax expense (benefit) ~~increased $12.8~~decreased $3.9 million, to ~~$0.0~~$(1.0) million for the three months ended ~~September 30, 2021,~~March 31, 2022, compared to ~~$(12.8)~~$(4.9) million for the three months ended ~~September 30, 2020.~~March 31, 2021. Refer to Note 9 of the notes to our Consolidated Financial Statements for information related to ~~the increase in~~ our valuation allowance ~~for the three months ended September 30, 2021 and our effective income tax rate.~~

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~~Operating Results Overview - Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020~~

~~The following table sets forth results of operations for the periods presented:~~
Nine Months Ended
September 30,
2021 % Change 2020
(Dollars in thousands)
Revenues:
Gross premiums written $ 527,495 (5.6) % $ 558,492
Gross premiums earned 535,848 (0.6) % 538,988
Ceded premiums (406,693) 70.8 % (238,054)
Net premiums earned 129,155 (57.1) % 300,934
Net investment income 5,092 (47.2) % 9,637
Net realized and unrealized gains (losses) 10,949 23.3 % 8,882
Direct written policy fees 9,730 (8.7) % 10,662
Other income 23,584 39.4 % 16,919
Total revenues 178,510 (48.6) % 347,034
Costs and expenses:
Losses and LAE 185,090 (37.9) % 297,862
Commissions and other underwriting expenses 61,977 (31.3) % 90,205
General and administrative expenses 17,854 3.6 % 17,241
Interest expense 6,451 12.3 % 5,745
Total costs and expenses 271,372 (34.0) % 411,053
Income (loss) before income taxes (92,862) 45.1 % (64,019)
Income tax expense (benefit) 1,669 (107.0) % (23,928)
Net income (loss) $ (94,531) 135.8 % $ (40,091)

Ratios to net premiums earned:
Net loss ratio 143.3 % 99.0 %
Net expense ratio 61.8 % 35.7 %
Combined ratio 205.1 % 134.7 %

~~(1)Net loss ratio is calculated as losses and LAE divided by net premiums earned.~~

~~(2)Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.~~

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

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

Nine Months Ended
September 30,
2021 2020
(Dollars in thousands)
Revenue
Total revenues $ 178,510 $ 347,034
Less:
Net realized and unrealized investment gains (losses) 1,524 8,882
Adjusted operating revenues $ 176,986 $ 338,152
Net Income (Loss)
Net income (loss) $ (94,531) $ (40,091)
Less:
Net realized and unrealized investment gains (losses) 1,524 5,320
Acquisition and strategic costs (26) (41)
Amortization of identifiable intangibles (113) (67)
Adjusted operating income (loss) $ (95,916) $ (45,303)
Income tax rate assumed for reconciling items above — % 40.10 %

~~Revenue~~

Total revenue decreased $168.5 million, or 48.6%, to $178.5 million for the nine months ended September 30, 2021, compared with $347.0 million for the nine months ended September 30, 2020. The decrease was driven primarily by increases in ceded premiums from incremental quota-share agreements and higher catastrophe reinsurance costs, as well as lower net investment income, slightly offset by higher other income, all of which are discussed in further detail below.

~~Gross Premiums Written~~

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

Nine Months Ended
September 30,
2021 2020
(In thousands)
Gross premiums written:
Homeowners Florida $ 320,613 $ 339,799
Homeowners non-Florida 190,148 203,897
Federal flood 16,874 14,967
Non-core (1) (140) (171)
Total gross premiums written $ 527,495 $ 558,492

~~(1)Reflects exited lines of business.~~

Gross premiums written decreased $31.0 million, or 5.6%, to $527.5 million for the nine months ended September 30, 2021, compared with $558.5 million for the nine months ended September 30, 2020, which was driven by a reduction in our policies-in-force and exposure across all states, as a result of our rigorous exposure management in response to the challenging litigation environment, partially offset by rate actions that we have taken across our insurance subsidiaries.

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~~Gross Premiums Earned~~

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

Nine Months Ended
September 30,
2021 2020
(In thousands)
Gross premiums earned:
Homeowners Florida $ 326,956 $ 347,237
Homeowners non-Florida 194,160 179,071
Federal flood 14,872 12,851
Non-core (1) (140) (171)
Total gross premiums earned $ 535,848 $ 538,988

~~(1)Reflects exited lines of business.~~

~~Gross premiums earned decreased $3.2 million, or 0.6%, to $535.8 million for the nine months ended September 30, 2021, as compared to $539.0 million for the nine months ended September 30, 2020.~~

~~Ceded Premiums Earned~~

Ceded premiums increased $168.6 million, or 70.8%, to $406.7 million for the nine months ended September 30, 2021, compared to $238.1 million for the nine months ended September 30, 2020. The increase was driven by approximately $114 million of higher quota-share ceded premium: $60 million related to new and incremental quota-share treaties for FNIC's Florida book of business and $54 million related to the 80% quota-share treaty for FNIC's non-Florida book of business. Additionally, there was approximately $51 million higher catastrophe reinsurance spend, driven by higher rate-on-line prices in the 2020-2021 catastrophe excess of loss reinsurance program as well as additional purchases of supplemental coverage to backfill layers and gaps in coverage stemming from the non-cascading portion of our reinsurance tower, following the six retention catastrophe events that have occurred since July 1, 2020. This increase to ceded premium earned associated with the aforementioned quota-share treaties is largely offset by corresponding reductions in loss and LAE, and commission and other underwriting expenses when comparing the periods. Refer to Note 5 of the notes to our Consolidated Financial Statements for additional information regarding these quota-share treaties.

~~Net Investment Income~~

Net investment income decreased $4.5 million, or 47.2%, to $5.1 million during the nine months ended September 30, 2021, compared to $9.6 million during the nine months ended September 30, 2020. This decrease was driven by a smaller fixed income portfolio as well as a decline in the associated yield as a result of declining interest rates during the last year. Related to the former, we have been impacted by several catastrophes, hail and wind-related severe weather events and private reinsurers have raised the cost of their coverages. As a result, sales of our portfolio of fixed income securities was a significant source of liquidity over the last year.

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

Net realized and unrealized gains (losses) were $10.9 million for the nine months ended September 30, 2021, compared to $8.9 million in the prior year period. We recognized $0.1 million and $0.4 million in unrealized investment gains (losses) for equity securities during these respective periods. Our current and prior year net realized investment gains are primarily associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions, a typical practice each and every quarter. Furthermore, to mitigate the potential COVID-19 related adverse impact on the financial stability of the issuers of securities we hold, certain positions were liquidated during 2020.

During the first six months of 2021, we purchased additional reinsurance limit for our excess of loss catastrophe reinsurance program for 2020-2021, which we determined had an embedded derivative. For the nine months ended September 30, 2021, the Company recognized $9.4 million in realized and unrealized embedded derivative gains. Refer to Notes 2, 3 and 5 of the notes to our Consolidated Financial Statements for further information related to our embedded derivative.

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~~Direct Written Policy Fees~~

Direct written policy fees decreased by $1.0 million, or 8.7%, to $9.7 million for the nine months ended September 30, 2021, compared with $10.7 million during the nine months ended September 30, 2020. The decrease is primarily driven by lower policy fees due to a reduction in our policies in-force and exposure in Florida, as a result of our rigorous exposure management in response to the challenging litigation environment.

~~Other Income~~

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

Nine Months Ended
September 30,
2021 % Change 2020
(In thousands)
Other income:
Commission income $ 3,084 24.2 % $ 2,484
Brokerage 19,368 47.0 % 13,173
Financing and other revenue 1,132 (10.3) % 1,262
Total other income $ 23,584 39.4 % $ 16,919

The increase in other income was primarily driven by higher brokerage revenue. The brokerage revenue increase is the result of higher excess of loss reinsurance spend from the reinsurance programs in place, including reinstatement premiums and/or additional purchases, during the first nine months of 2021 as compared to the first nine months of 2020.

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~~Expenses~~

~~Losses and LAE~~

~~Loss and LAE incurred, net of reinsurance, included the following for the periods presented:~~

Nine Months Ended
September 30,
2021 2020
Net Loss Net Loss
Amount Ratio Amount Ratio
(In thousands)
Current accident year, excluding catastrophes:
Homeowners $ 105,252 81.5 % $ 183,768 61.1 %
Non-core (1) — — % — — %
Total current accident year, excluding catastrophes 105,252 81.5 % 183,768 61.1 %
Current year catastrophes (2):
Florida 20,546 15.9 % 47,963 15.9 %
Texas 48,174 37.4 % 26,672 8.9 %
Louisiana 7,268 5.6 % 31,551 10.5 %
Other states 2,055 1.6 % 1,740 0.6 %
Total current year catastrophes 78,043 60.5 % 107,926 35.9 %
Prior year loss development (redundancy):
Homeowners 1,868 1.4 % 4,355 1.4 %
Non-core (1) (5) — % 2,557 0.8 %
Ceded losses subject to offsetting experience account adjustments (3) (68) (0.1) % (744) (0.2) %
Total prior year loss development (redundancy) 1,795 1.3 % 6,168 2.0 %
Total net losses and LAE $ 185,090 143.3 % $ 297,862 99.0 %

~~(1)Reflects exited lines of business.~~

~~(2)~~Includes PCS weather events and other events impacting multiple insureds for which the Company's insurance carriers established catastrophe event codes, net of the benefit of claims handling services. These catastrophe events are typically wind, hail and tornado related weather events. Any individual catastrophe event with gross losses greater than $20 million, on a pre-tax basis, are considered significant and specifically addressed in the commentary below. Also includes net catastrophe losses from current or prior quarter events, net of claims handling services, which were adjusted in the specific period noted above. Excludes any catastrophe related activity recorded in other financial statement accounts, outside of loss and loss adjustment expenses.

~~(3)Reflects homeowners 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).~~

Losses and LAE decreased $112.8 million, or 37.9%, to $185.1 million for the nine months ended September 30, 2021, compared with $297.9 million for the same period last year driven by higher ceded losses under quota-share reinsurance treaties and lower net catastrophe losses. The net loss ratio increased 44.3 percentage points, to 143.3% in the first nine months of 2021, as compared to 99.0% in the first nine months of 2020. The higher loss ratio was primarily the result of higher ceded premiums, as discussed earlier, which reduces net earned premiums, the denominator on the net loss ratio calculation.

The first nine months of 2021, net losses were driven by approximately $78.0 million of net catastrophe losses, net of reinsurance and claims handling fee income, which was partially offset by $10.7 million of income recognized within realized and unrealized gains in our consolidated statement of operations (refer to Notes 2, 3 and 5 for further information). The first nine months of 2021 weather events were driven by Hurricane Ida, Winter Storm Uri as well as a number of convective storm and hail events impacting Louisiana, Florida and Texas. The net catastrophe losses were adversely impacted by having reached the net loss limit contained in the FNIC non-Florida quota-share treaty, which reduced the amount of net losses that we were able to cede in the current period. Prospective catastrophe cessions into this treaty will be dependent on future profits in the related book of business through the end

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~~of the treaty period.~~The first nine months of 2020, net losses were driven by net catastrophe losses of $107.9 million and prior period reserve strengthening of $6.9 million. Additionally, higher ceded losses through our quota-share treaties and lower attritional losses in FNIC's Florida book of business drove lower current accident year losses, excluding catastrophes, compared to the prior year.

~~Commissions and Other Underwriting Expenses~~

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

Nine Months Ended
September 30,
2021 2020
(In thousands)
Commissions and other underwriting expenses:
Homeowners Florida $ 36,963 $ 41,181
All others 36,318 37,789
Ceding commissions (55,991) (13,969)
Total commissions 17,290 65,001
Fees 3,839 3,694
Salaries and wages 9,759 10,068
Other underwriting expenses 31,089 11,442
Total commissions and other underwriting expenses $ 61,977 $ 90,205

Commissions and other underwriting expenses decreased $28.2 million, or 31.3%, to $62.0 million for the nine months ended September 30, 2021, compared with $90.2 million for the nine months ended September 30, 2020. This decrease was primarily due to a higher ceding commission driven primarily by the new quota-share treaties in FNIC's Florida and non-Florida books of business. Refer to Ceded Premium Earned above for additional information. The higher ceding commission was partially offset by an increase in other underwriting expenses, which was the result of prior period expense being reduced by the benefit from the 50% profit-sharing agreement, as FNIC's non-Florida business experienced high weather losses in prior period.

The net expense ratio increased 26.1 percentage points to 61.8% in the first nine months of 2021, as compared to 35.7% in the first nine months of 2020 due primarily to higher ceded reinsurance premiums in 2021. Our gross expense ratio was 25.3% during the nine months ended September 30, 2021 and 2020, demonstrating the company's continued focus on expense control.

~~General and Administrative Expenses~~

~~General and administrative expenses increased $0.7 million or 3.6% to $17.9 million for the nine months ended September 30, 2021 compared to $17.2 million for the nine months ended 2020.~~

~~Interest Expense~~

Interest expense increased $0.8 million to $6.5 million for the nine months ended September 30, 2021, compared with $5.7 million in the prior year period. Refer to Note 8 of the notes to our Consolidated Financial Statements for information related to changes to our existing debt and new debt issuance, which will increase interest expense during the remainder of 2021 as compared to 2020.

~~Income Taxes~~

Income tax expense (benefit) increased $25.6 million, to $1.7 million for the nine months ended September 30, 2021, compared to $(23.9) million for the nine months ended September 30, 2020. Refer to Note 9 of the notes to our Consolidated Financial Statements for information related to the increase in our valuation allowance for the nine months ended September 30, 2021 and our effective income tax rate.

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Consolidated Company Outlook – Potential Changes in Financial Trends

~~As discussed under Overview~~See “Item 2. Management’s Discussion and Analysis of ~~Insurance Lines~~Financial Condition and Results of ~~Business – Non-Florida above,~~Operations, Liquidity and Capital Resources,” for discussion of the action plan the Company ~~intends~~has submitted to ~~re-focus its operations on its Florida homeowners business. The orderly runoff of MIC~~the OIR. If approved and implemented the ~~transfer-upon-renewal of FNIC’s non-Florida business to alternative insurance carrier partners of SageSure~~plan would materially impact forward-looking expectations with respect to financial trends. Such impacts with respect to the ~~Company non-Florida~~Company's business include, but are not limited to:

•Declines in ~~gross~~net written and gross earned premiums;

•Declines in loss and loss adjustment expenses as well as in commissions and other underwriting expenses;

•Declines in exposure to catastrophe weather losses;

•Declines in the expected cost of excess of loss reinsurance coverages over the runoff period; and

•Reduced need or potential need for surplus infusions into FNIC and MIC, and corresponding reductions in the Company’s overall capital needs.

Overall, the Company anticipates lower consolidated earnings. However, if catastrophe losses were to continue at the elevated levels ~~experience~~experienced in the past ~~eighteen~~twenty one months, it is expected that the reduction of our Florida book of business and the orderly exit of the non-Florida business will have proven beneficial to the Company’s earnings over the runoff period.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of funds are gross written premiums, ceding of claims payments pursuant to reinsurance treaties, investment income, commission income and fee income. Our primary uses of funds are the payment of claims, catastrophe and other reinsurance premiums and operating expenses. As of ~~September 30,~~March 31, 2022, on a consolidated basis, the Company held $87.4 million in cash and cash equivalents and $275.6 million in investments. As of December 31, 2021, on a consolidated basis, the Company held ~~$166.9~~$83.5 million in cash and cash equivalents and ~~$355.3 million in investments. As of December 31, 2020, on a consolidated basis, the Company held $102.4 million in cash and cash equivalents and $491.4~~$333.4 million in investments. Total shareholders’ equity decreased ~~$87.0~~$45.3 million, to ~~$71.2~~$14.1 million as of ~~September 30, 2021,~~March 31, 2022, compared with ~~$158.2~~$59.4 million as of December 31, ~~2020~~2021 due primarily to a net loss and unrealized losses on our bond portfolio. The Company believes it has adequate holding company liquidity to accommodate its potential second quarter catastrophe losses, and to maintain regulatory minimum RBC ratios throughout 2022.

As described in Going Concern in “Part I, Item I. Business, Insurance Operations and Related Services” of our 2021 Form 10-K, the Company believes there is substantial doubt regarding its ability to continue as a going concern. Demotech currently rates FNIC “S” and MNIC “A”. The Company believes FNIC’s Demotech rating will adversely impact our ability to obtain excess-of-loss reinsurance for coverage beginning July 1, 2022. Absent such coverage, the Company will not be in compliance with requirements communicated by the Office of Insurance Regulation of the state of Florida regarding such coverage, which could ultimately result in the Company being placed into receivership. The Company has submitted a proposed action plan to the OIR. A portion of the action plan has been approved by the OIR, and consists of the mid-term cancellation, effective June 29, 2022, of approximately 68,200 Florida policies currently in force on FNIC, MNIC and Maison, as requested by the Company. Such cancellations will require the refund of approximately $126 million of unearned premium to the impacted policyholders and result in the Company becoming much smaller, with significantly fewer policies in force. The refund of these unearned premiums will require the liquidation of a substantial portion of our insurance carriers’ portfolios of fixed income securities. Because of this near-term liquidity need, unrealized losses on our investment portfolio ~~partially offset~~have been recognized as realized losses for the three months ended March 31, 2022.

Additional portions of the Company's action plan continue to be subject to approval by ~~issuance~~the OIR and regulatory authorities in other states, including mid-term cancellations in non-Florida states, as well as reinsurance and capital raising options. More specifically, the Company is seeking to fully exit all non-Florida states as of ~~common stock.~~an approved date. Concurrently, the Company is seeking additional capital investments into the holding company or directly into an insurance carrier, specifically MNIC. The Company’s requests

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would bring its overall book of business to a more manageable size, consistent with its capital position and increase the likelihood of success with multiple stakeholders, including its regulators, rating agency, shareholders and its remaining policyholders. The proposed action plan would be expected to enable the Company to obtain excess-of-loss reinsurance on a smaller, Florida-only book of business. There can be no assurance such approvals will be obtained or that these plans can be effectively implemented.

The Company has outstanding $100 million of 2029 Notes ("2029 Notes"), which ~~at issuance bore~~bear interest at the annual rate of ~~7.50%~~7.75%. ~~In connection with the amendment of~~The 2029 Notes mature on March 15, 2029 and the indenture covenants ~~to increase the~~allow for a maximum debt-to-capital ratio applicable to the incurrence of debt to 60% and ~~decreasing the~~a maximum debt-to-capital ratio applicable to restricted payments, including cash dividends on our common stock, to 20%, the interest rate was increased by 0.25% to 7.75% per annum beginning March 15, 2021. Refer to Note 10 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of the 2020 Form 10-K, for additional information regarding the 2029 Notes..

The Company has outstanding $21 million of Convertible Senior Unsecured Notes due 2026 ("2026 Notes"), which bear interest at the annual rate of 5.0%. The 2026 Notes are convertible in part or in whole at the option of the holders at any time until the close of business on the second trading day prior to the maturity date on April 19, 2026 ("Maturity Date") into shares of the Company’s common stock at an initial conversion rate of 166.6667 shares of the Company’s common stock per $1,000 principal amount of the 2026 Notes (equivalent to an initial conversion price of $6.00 per share), subject to customary adjustments in certain circumstances. The Company will not have the right to redeem the 2026 Notes prior to the Maturity Date. Holders of the 2026 Notes may require the Company to purchase their 2026 Notes upon a change of control at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of purchase.

Refer to Note 10 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of the 2021 Form 10-K, for additional information regarding the 2029 Notes and 2026 Notes.

In May 2022, due primarily to the delay in the filing of the Company’s Form 10-K for the year ended December 31, 2021, Egan Jones’ rating on the Company’s outstanding senior notes expired such that our notes are not currently rated. The lack of a rating, if not remediated within 30 days from receipt of notice as provided in the note indentures, has the potential to result in an Event of Default under the note indentures. The Company intends to use its best efforts to secure such a rating as soon as reasonably practicable. If the Company fails to secure such a rating, is placed into receivership or fails to obtain excess-of-loss reinsurance, such conditions, if not timely cured, could result in acceleration of repayment of our debt. The Company does not have adequate liquidity to repay this debt without replacement borrowings, which may not be available. We cannot provide any assurance that we will be able to comply with certain covenants in our senior note indentures or to make satisfactory alternative arrangements in the event we cannot do so.

The Company's actual debt to capital ratio as of ~~September 30, 2021~~March 31, 2022 was approximately ~~62.5%~~89.4%.

On March 15, 2021, the Company closed an underwritten public offering of 3,500,000 shares of its common stock at a price of $4.75 per share for gross proceeds of $16.6 million. The offering generated net proceeds to the Company of approximately $15.1 million, after deducting the underwriter’s discount and offering expenses payable by the Company. In April 2021, the Company sold an additional 100,650 shares upon the partial exercise of the underwriter's overallotment option and received net proceeds of $0.4 million. This offering, the offering of 2026 Notes and changes to our 2029 Notes, are part of our ongoing execution of the strategic review process initiated by the Company’s Board of Directors announced in November 2020.

Historically, we have met our liquidity requirements primarily through cash generated from operations. Beginning in 2020, property and casualty businesses, including FNHC’s insurance carriers, have been materially adversely impacted by multiple catastrophes, hail, and wind-related severe weather events and private reinsurers have tightened coverage provisions and raised the cost of their coverages. As a result, sales of our portfolio of fixed income securities was a significant source of liquidity for the Company. Quota-share reinsurance

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treaties are another liquidity management tool, via the ceding commission the Company receives upon inception and the related reduction to statutory surplus requirements. New quota-share treaties entered or increased were responsive to these purposes, as well as to reduce the Company's exposure to non-named storm catastrophes. Certain of the Company’s quota-share treaties contain provisions that give the reinsurer the option to terminate the treaty in the event that our Demotech rating is downgraded or that we are placed into receivership. The termination of any of our quota-share treaties would place additional strain on our statutory surplus.

Management continually monitors and adjusts its liquidity and capital plans for FNHC and its subsidiaries in light of the aforementioned challenges to ensure that we have adequate liquidity and capital. The Company's Board and management continue to explore all options to strengthen the Company's capital position. ~~Additional weather-related~~Management is pursuing various financing alternatives to augment our capital and liquidity, including possible equity or debt financings (consistent with our indentures) and possible sales of non-core assets. Continuing occurrences of severe weather events and ~~actions by reinsurers could adversely affect~~ the ~~Company’s~~current significant economic uncertainty and volatility in the credit and capital markets may impair our ability to ~~access sources of liquidity. There can be no assurances that the Company will~~raise additional capital. We may not be able to ~~obtain~~raise sufficient additional capital ~~on satisfactory terms, if at all.~~to support the Company's action plan, and our other efforts to improve our profitability may not succeed.

Statutory Capital and Surplus of our Insurance Subsidiaries

As described more fully in Part I, Item 1. Business, Regulation of our ~~2020~~2021 Form 10-K, the Company’s insurance operations are subject to the laws and regulations of the states in which we operate. The OIR and their regulatory counterparts in other states utilize the National Association of Insurance Commissions (“NAIC”) risk-based capital (“RBC”) requirements, and the resulting RBC ratio, as a key metric in the exercise of their regulatory oversight. The RBC ratio is a measure of the sufficiency of an insurer’s statutory capital and surplus. In addition, the RBC ratio is used by insurance industry ratings services in the determination of the financial strength ratings (i.e., claims paying ability) they assign to insurance companies. Our rating agency for our insurance carriers,

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Demotech, Inc. requires a minimum RBC ratio of 300%, among other metrics, for a carrier to maintain ~~the "A" rating that our insurance companies currently have.~~a Demotech rating. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, FNIC’s statutory surplus, which includes MNIC, was ~~$90.9~~$73.2 million and ~~$105.9~~$99.4 million, respectively. In addition, FNIC's surplus includes a surplus note receivable due from MIC, carried at $17.3 million as of March 31, 2022, which matures in December 2022. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, MIC’s statutory surplus was ~~$19.3~~$30.2 million and ~~$39.3~~$30.8 million, respectively. ~~FNIC's September 30, 2021 surplus reflects a surplus infusion of $20 million in November 2021 with, effective date as of September 30, 2021, as approved by the Florida regulator.~~ In conjunction with the Company’s November 2021 decision to re-focus on its Florida homeowners business as discussed under Overview of Insurance Lines of Business – Non-Florida above in "Part I, Item 1. Business, Insurance Operations and Related Services" of this Annual Report, the Company ~~intends to execute~~is in the process of executing an orderly runoff of MIC’s business. ~~Consequently, no surplus infusion was made to MIC as of September 30, 2021.~~ The Company remains committed to maintaining statutory surplus in MIC that satisfies minimum regulatory requirements through the runoff period. As a result of the Company’s decision to support ~~Maison~~MIC to the level of minimum regulatory capital but not to a 300% RBC level, Demotech has withdrawn its rating of ~~Maison.~~MIC. The ratings of FNIC and MNIC remain in place at “S” and “A”, respectively, and are independent of this action. Adjusted for the intercompany impacts of the surplus note referenced above, the combined statutory surplus of our insurance carriers is approximately $86.1 million.

As of ~~September 30, 2021,~~March 31, 2022, the Company has approximately ~~$60~~$47 million of liquidity in its holding company and non-regulated subsidiaries (collectively referred to "holding company liquidity")~~, including $30 million of cash and investments,~~ that is available for general corporate purposes, including supporting the capital requirements of its insurance subsidiaries. This figure was reduced by $20 million in November 2021 as a result of the surplus infusion described above. As a result, the Company has approximately $40 million of holding company liquidity heading into the fourth quarter of 2021.

~~Based upon the 2020 statutory financial statements for FNIC, MIC and MNIC, statutory surplus exceeded the regulatory action levels established by the NAIC’s RBC requirements.~~

Based on RBC requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its ACL, as calculated under the NAIC’s requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below ~~70.0%~~70% of the ACL amount. Based upon the 2021 statutory financial statements for FNIC, MIC and MNIC, statutory surplus exceeded the regulatory action levels established by the NAIC’s RBC requirements. FNIC, MIC and MNIC had ratios of statutory surplus to its ACL of ~~303%~~313%, ~~736%~~305% and ~~348%~~1,152%, respectively, as of December 31, ~~2020.~~2021.

As described above, the Company intends to maintain no less than the minimum required regulatory capital within FNIC and MIC, but does not intend to maintain a 300% RBC ratio. The Company will continue to closely coordinate with all applicable state insurance departments with respect to its plan of operation throughout the runoff period.

Refer to "Part I, Item 1A., Risk Factors” of our ~~2020~~2021 Form 10-K for more information on how over time, additional weather-related events and actions by reinsurers, including loss limitations in reinsurance treaties and our ability to renew existing reinsurance treaties, could adversely affect the Company’s ability to maintain a 300% RBC ratio in ~~FNIC~~MNIC (which is critical to maintaining a Demotech rating and ~~MNIC~~to the Company's proposed action plan) and minimum required regulatory capital in FNIC and MIC or FNHC's ability to contribute necessary capital. In addition, because of the valuation allowance on the Company’s ~~NOL~~ deferred tax assets, the insurance carriers will not benefit from immediate tax benefits of any future quarterly losses they incur. As such, any surplus infusions required will be ~~large~~larger than they would have been if our net deferred tax assets were deemed fully realizable.

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Cash Flows Discussion

We currently believe that existing cash and investment balances, when combined with anticipated cash flows, will be adequate to meet our expected liquidity needs in both the short-term and the reasonably foreseeable future, including maintaining regulatory minimum capital levels in our insurance carriers. However, our ability to maintain 300% RBC levels in ~~FNIC and~~ MNIC (which is critical to maintaining a Demotech rating) may be dependent on our ability to raise additional capital in the future. There can be no guarantee additional capital will be available to the Company, if needed. Future strategies and catastrophe events would require additional external financing and we may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us on favorable terms, or at all, or that the terms of any such financing would not negatively impact our results of operations.

Operating Activities

Net cash provided by (used in) operating activities was ~~$(90.7)~~$(37.0) million in the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$(78.8)~~$(110.1) million in the same period in ~~2020.~~2021. This ~~decrease~~change primarily reflects ~~higher~~lower reinsurance spend ~~partially offset by~~and lower expenses from losses and LAE, primarily from reinsurance ~~recoveries.~~recoveries, partially offset by lower gross premiums.

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Investing Activities

Net cash provided by (used in) investing activities was ~~$119.7~~$40.9 million in the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, as compared to ~~$8.9~~$62.1 million in the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. The change primarily reflects lower purchases of debt and equity investment securities of ~~$147.9~~$27.4 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, as compared to ~~$407.6~~$56.1 million for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, partially offset by lower sales, maturities and redemptions of our debt and equity investment securities of ~~$268.8~~$68.3 million in ~~2021~~2022 as compared to ~~$419.1~~$118.4 million in ~~2020.~~2021.

Financing Activities

Net cash provided by (used in) financing activities for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 of ~~$35.5~~$0.0 million as compared to ~~$(14.2)~~$15.4 million for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. The change primarily reflects no proceeds from ~~issuance of long-term debt of $20.0 million and~~the issuance of shares of our common stock ~~of $15.6 million~~ in ~~our 2021 public offering~~2022 as compared to ~~repurchases of $10.4 million of FedNat Holding Company common stock and payment of dividends of $3.8~~$15.4 million in ~~2020.~~2021.

Impact of Inflation and Changing Prices

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

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

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"), which requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may materially differ from those estimates.

We believe our most critical accounting estimates inherent in the preparation of our financial statements are: (i) fair value measurements of our investments; (ii) accounting for investments; (iii) premium and unearned premium calculation; (iv) reinsurance contracts; (v) the amount and recoverability of deferred acquisition ~~costs and value of business acquired;~~costs; (vi) ~~goodwill and other intangible assets; (vii)~~ reserve for loss and losses adjustment expenses; and ~~(viii)~~(vii) income taxes. The accounting estimates require the

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use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations, and cash flows would be affected.

There have been no significant changes to our critical accounting estimates during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. Refer to Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” included in our ~~2020~~2021 Form 10-K for a more complete description of our critical accounting estimates.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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Our investment policy is established by the Board of Directors' Investment Committee and is reviewed on a regular basis. Pursuant to this investment policy, as of ~~September 30, 2021,~~March 31, 2022, approximately 99% of investments were in debt securities and cash and cash equivalents, which are considered to be available-for-sale, based upon our estimates of required liquidity. Approximately 100% of the debt securities are considered available-for-sale and are marked-to-market. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.

Refer to "Part I, Item 1A., Risk Factors” of our ~~2020~~2021 Form 10-K for a discussion of the Company’s exposures to market risks.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ~~not~~ effective as of ~~September 30, 2021.~~March 31, 2022.

~~Notwithstanding the identified material weakness disclosed in our 2020 Form 10-K, which has not yet been remediated, we~~We believe the consolidated financial statements included in this Form 10-Q fairly represent in all material respects the financial condition, results of operations and cash flows of the Company for the periods presented.

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 in the 2020 Form 10-K rose 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 concluded that internal control over financial reporting was not effective as of December 31, 2020 or September 30, 2021, due to remediation of the year-end material weakness not yet being completed, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. As of December 31, 2020, management 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.

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Changes in Internal Control over Financial Reporting

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 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.

There were no changes in our internal control over financial reporting that occurred during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 that has materially affected, or is 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.

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Part II: OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 10 to our Consolidated Financial Statements set forth in Part I, “Financial Statements” for information about legal proceedings.

Item 1A. Risk Factors

~~We have determined to refocus our operations on the Florida homeowners market, which could have consequences that materially adversely impact our results of operations.~~

We have determined to refocus our operations on writing Florida homeowners policies by, among other things, allowing our policies outside of Florida to run off. This process requires us to comply with applicable regulatory requirements when non-renewing our non-Florida policies at their expiration dates. As a result, the run-off of our non-Florida business will occur over a period of approximately 18 months during which policies will remain in effect until their expiration dates. The run-off of our non-Florida business may have consequences that could materially impact our financial condition and results of operations, such as the following:

•Our policies outside of Florida will remain in effect until their individual expiration dates, which means that we may have losses relating to weather events and other insured events in those markets until the policies expire.

•Our focus on writing policies only in Florida means that catastrophic weather events that impact Florida, such as hurricanes, tornados and hail events, may have a more severe adverse impact on us because of our more limited geographic footprint.

•~~As a result of our Florida-only focus, we may experience higher reinsurance costs or less reinsurance availability because of concerns by reinsurers about our lack of geographic diversity.~~

•Our decision to wind-down our business outside of Florida could cause agents to stop recommending us to their clients inside of Florida and could cause Florida homeowners seeking insurance to decide to move existing policies or not to obtain new policies from us.

•~~We may need to reduce our workforce as a result of the wind-down of our non-Florida operations, which may adversely impact our ability to retain our remaining employees.~~

•Non-Florida policies may leave the Company quicker than expected which could reduce our available earned premium to pay for certain expenses including ceded excess of loss reinsurance, which was priced based on the Company’s in-force exposure as of September 30, 2021 for the treaty year ending June 30, 2022 and thereby increase our expense ratios.

•Reputational risk with our investors, reinsurers, staff, agents, vendors and others with whom we interact and compete in our marketplace, which may impact our ability to compete in the competitive marketplace.

•The Company may be limited in its ability to exit these policies based on regulatory requirements including limitations on cancellations of policies that have recently had a claim, or based on limited ability by SageSure to move these policies to other insurance carriers based on the availability of similar coverages at competitive prices within the markets that we operate.

We may require additional capital to support our operations and for our insurance subsidiaries’ minimum capital and surplus requirements, 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, establish premium rates and reserves at levels sufficient to cover losses, and manage our claims resolution processes. Many factors will affect the amount and timing of our capital needs, including our claims experience, the availability of reinsurance, market disruptions, and regulatory and other unforeseeable developments. In addition, our insurance companies are subject to RBC standards and other minimum capital and surplus requirements imposed under applicable state laws. To the extent that our capital may be insufficient to meet future operating requirements, minimum statutory requirements and the minimum capital expectations of the rating agency that provides Financial Stability Ratings for our insurance subsidiaries, we may need to raise additional funds through financings or further curtail our growth.

As discussed elsewhere in this Form 10-Q, we have determined to run-off our non-Florida business and, concurrently with that determination, have determined to maintain Maison’s capital at the minimum statutory level but not to the 300% RBC level. Although FNIC and MNIC currently have capital at the 300% RBC level, they may nevertheless require additional capital in the future. 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 may require the consent of existing debt holders, the terms of any such debt may involve significant cash payment obligations as well as covenants and specific financial ratios that restrict our ability to operate our

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business. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition, results of operations, and ability to continue as a going concern could be materially adversely affected. In addition, if we fail to meet the applicable RBC or minimum statutory capital requirements imposed by the laws of Florida or other states in which we currently have policies, and are unable to obtain additional capital when needed, we could be subject to corrective action imposed by state regulators, including limitations on out writing of additional business, additional state supervision, or liquidation.

~~We may experience increased financial exposure due to changes in private excess-of-loss reinsurance pricing 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 capital availability and expected returns within the reinsurance industry and variations in world-wide and regional weather patterns and other natural or man-made catastrophes that produce higher or lower loss experience than expected for the reinsurance industry. During soft market cycles, where losses have been less than expected, more favorable pricing, terms and conditions are more readily available to us, which reduces our potential exposure by providing broader coverage and at better pricing. During a hard market cycle, when less capital is available, higher returns are expected or where prior losses have been more than expected, private reinsurance markets typically increase pricing and tighten coverage, potentially resulting in more financial exposure to the Company. Certain hard markets can lead to the absence of certain types of reinsurance capacity at any reasonable price. Examples of tighter terms include, but are not limited to, the exclusion of coverage for certain types of weather events, removal of cascading protection and elimination of individual insurance carrier per-event retentions when there are multiple insurance carriers in a group. The reinsurance market for our 2021-2022 reinsurance program was a hard market, with less favorable terms, as described above, on a portion of our July 1, 2021 through June 30, 2022 property catastrophe excess-of-loss reinsurance program. In particular, portions of our 2021-2022 programexclude coverage for severe convective storms after hurricane season. We may determine to purchase additional coverage for such storms, but the Company anticipates that the reinsurance market will remain hard such that additional coverage may not be available or may be on terms, including premiums, unfavorable to us.

~~Our failure to continue to meet Nasdaq’s continued listing standards, including its newly adopted board diversity rule, could have an adverse impact on our stock price.~~

Our shares are currently listed for trading on the Nasdaq Global Market. Remaining listed for trading on Nasdaq requires us to remain compliant with Nasdaq’s current continued listing requirements, which include maintaining minimum levels of shareholders’ equity, assets and revenues (depending on the compliance standard being used to demonstrate compliance), and other quantitative standards such as minimum market value of publicly held shares, $1.00 minimum closing bid price, and number of market makers. In addition, Nasdaq has proposed, and the SEC has approved, requiring Nasdaq-listed companies to disclose board-level diversity statistics using a standard matrix beginning with the 2022 proxy statement, and to have or explain why they do not have at least two diverse directors beginning August 7, 2023. Although we currently meet the Nasdaq continued listing requirements, there can be no assurances that we will continue to do so in the future.

~~The valuation allowance for our deferred tax asset we established in the second quarter of 2021 because our recent losses may not be recoverable if we do not achieve net income.~~

Because of our recent losses, we established a valuation allowance in the second quarter of 2021 against the entire amount of the deferred tax asset we had been reflecting on our balance sheet as required by GAAP. We will be able to recover the deferred tax asset over time if we achieve taxable income, as to which there can be no assurances. In addition, our financial condition and results of operations, including of our insurance subsidiaries under statutory accounting principles, may be adversely affected by the lack of tax offsets against operating losses until we achieve adequate levels of taxable income.

There have been no ~~other~~ material changes from the risk factors previously disclosed in “Part I, Item 1A-Risk Factors,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Refer to that section for disclosures regarding what we believe are the most significant risks and uncertainties related to our business.

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

(a) None.

Item 3. Defaults upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits


Exhibit No.			Description
~~10.1~~			First-Third Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.2~~			Main Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.3~~			Main Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.4~~			Third-Fourth Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.5~~			Cascading Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.6~~			Fourth-Fifth Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.7~~			Second-Fifth Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.8~~			Third and Fifth Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.9~~			Main Sixth Layer Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.10~~			Fourth-Fifth Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.11~~			Second Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.12~~			Third Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.13~~			Private Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.14~~			Main Sixth Layer Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.15~~			Private Sixth Layer Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.16~~			Main Top Layer Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.17~~			Excess Catastrophe Reinsurance Contract effective July 1, 2021, by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.18~~			Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.19~~			Sixth Layer Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.20~~			Sixth Layer Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.21~~			First Excess Catastrophe Reinsurance Contract effective June 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.22~~			Private Top Layer Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
~~10.23~~			Top Layer Excess Catastrophe Reinsurance Contract effective July 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*

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~~10.24~~			Main Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.25~~			First-Third Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.26~~			Private Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers *
~~10.27~~			Main Non-Florida Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.28~~			Main Fourth Layer Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.29~~			Underlying Layer Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective June 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.30~~			Main Fourth Layer Non-Florida Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.31~~			First Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.32~~			Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.33~~			Non-Florida Reinstatement Premium Protection Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.34~~			Non-Florida Second Event Property Catastrophe Excess of Loss Reinsurance Contract effective July 1, 2021 by and between FedNat Insurance Company and subscribing reinsurers*
~~10.35~~			Net Quota Share Reinsurance Agreement effective July 1, 2021 by and between FedNat Insurance Company and Swiss Reinsurance America Corporation*
~~10.36~~			Excess Catastrophe Reinsurance One-Month Extension Contract effective June 1, 2021 by and among FedNat Insurance Company, Monarch National Insurance Company, Maison Insurance Company and subscribing reinsurers*
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**
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**
101.INS			Inline XBRL Instance Document
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)

________________________

* Filed herewith. ~~Certain identified information has been omitted from this exhibit in accordance with and as permitted by Item 601(b)(10)(iv) of Regulation S-K.~~

** Filed herewith.

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SIGNATURES

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


			FEDNAT HOLDING COMPANY

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

						/s/ Ronald Jordan
						Ronald Jordan, Chief Financial Officer
						(Principal Financial Officer)

Date: ~~November 9, 2021~~

May 18, 2022

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	Three Months Ended September 30,
	2021						2020
	Before Tax		Income Tax		Net		Before Tax		Income Tax		Net
	(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period	$	8,737	$	(3,664)	$	5,073	$	19,065	$	(4,675)	$	14,390

Other comprehensive income (loss) before reclassification	(1,304)		—		(1,304)		2,618		(642)		1,976
Reclassification adjustment for realized losses (gains) included in net income	(1,315)		(12)		(1,327)		(798)		195		(603)
	(2,619)		(12)		(2,631)		1,820		(447)		1,373
Accumulated other comprehensive income (loss), end-of-period	$	6,118	$	(3,676)	$	2,442	$	20,885	$	(5,122)	$	15,763