UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________TO _______________________
Commission File number 000-25001
FedNat Holding Company
(Exact name of registrant as specified in its charter)
Florida
(State or Other Jurisdiction of Incorporation or Organization)
14050 N.W. 14th Street, Suite 180, Sunrise, FL
(Address of principal executive offices)
65-0248866
(IRS Employer Identification Number)
33323
(Zip Code)
Title of Each Class
Registrant’s telephone number, including area code: 800-293-2532
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
FNHC
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No þ
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 ☐
Large accelerated file
Non-accelerated filer ☐
Non-accelerated file
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
The aggregate market value of the Registrant’s common stock held by non-affiliates was $168,614,834 as of June 30, 2019, computed on the basis
of the closing sale price of the Registrant’s common stock on June 28, 2019 (the last business day of the second fiscal quarter).
As of March 1, 2020, the total number of common shares outstanding of Registrant’s common stock was 14,209,773.
Certain information required by Part III of this Form 10-K will be incorporated by reference from the Registrant's definitive proxy statement or
included in an amendment on Form 10-K/A that will be filed not later than 120 days after the end of the fiscal year ended December 31, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
FEDNAT HOLDING COMPANY
TABLE OF CONTENTS
PART I
ITEM 1
BUSINESS
ITEM 1A
RISK FACTORS
ITEM 1B
UNRESOLVED STAFF COMMENTS
ITEM 2
PROPERTIES
ITEM 3
LEGAL PROCEEDINGS
ITEM 4
MINE SAFETY DISCLOSURES
PART II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6
SELECTED FINANCIAL DATA
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A
CONTROLS AND PROCEDURES
ITEM 9B
OTHER INFORMATION
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11
EXECUTIVE COMPENSATION
ITEM 12
ITEM 13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16
FORM 10-K SUMMARY
SIGNATURES
2
11
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25
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46
48
98
98
99
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104
PART I
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES
This Annual Report on Form 10-K (“Annual Report”) 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 Annual Report are not guarantees of future performance,
and we cannot assume that such statements will be realized or the forward-looking events and circumstances will occur. Factors that
might cause such a difference include, without limitation, the risks and uncertainties discussed under “Risk Factors” in this Annual
Report, and discussed from time to time in our reports filed with the Securities and Exchange Commission (“SEC”).
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 Annual Report are made only as of the date hereof. We do not
undertake and specifically 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.
In addition to providing consolidated revenues and net income (loss), in the Annual Report 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. Refer to Part II, Item 7, "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" below for a detailed reconciliation.
We exclude the after-tax (using our prevailing income tax rate) effects of the following items from GAAP net income (loss) to arrive at
adjusted operating income (loss):
• Net realized and unrealized gains (losses), including, but not limited to, gains (losses) associated with investments and early
extinguishment of debt;
Acquisition/integration and other costs and the amortization of specifically identifiable intangibles (other than value of
business acquired);
Impairment of intangibles;
Income (loss) from initial adoption of new regulations and accounting guidance; and
Income (loss) from discontinued operations.
•
•
•
•
We also exclude the pre-tax effect of the first bullet above from GAAP revenues to arrive at adjusted operating revenues.
-1-
ITEM 1. BUSINESS
GENERAL
FedNat Holding Company (“FNHC,” the “Company,” “we,” “us,” or “our”) is a regional insurance holding company that controls
substantially all aspects of the insurance underwriting, distribution and claims processes through our subsidiaries and contractual
relationships with independent agents and general agents. We, through our wholly owned subsidiaries, are authorized to underwrite,
and/or place homeowners multi-peril (“homeowners”), federal flood and other lines of insurance in Florida and other states. We
market, distribute and service our own and third-party insurers’ products and other services through a network of independent and
general agents.
FedNat Insurance Company (“FNIC”), our largest wholly-owned insurance subsidiary, is licensed as an admitted carrier to write
homeowners property and casualty insurance by the state insurance departments in Florida, Louisiana, Texas, South Carolina,
Alabama, Georgia and Mississippi.
Maison Insurance Company ("MIC"), an insurance subsidiary that we acquired on December 2, 2019 (see "Maison Acquisition" below
for more information), is licensed as an admitted carrier to write homeowners property and casualty insurance as well as wind/hail
only exposures by the state insurance departments in Louisiana, Texas and Florida.
Monarch National Insurance Company (“MNIC”), 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 and MNIC.
MNIC was founded in 2015 through a joint venture. On February 21, 2018, FNIC acquired the non-controlling interests in MNIC’s
indirect parent company, Monarch Delaware Holdings LLC (“Monarch Delaware”) from our joint venture partners (see “Monarch
National Insurance Company,” below, for more information). Maison Managers, Inc. ("MMI"), a wholly-owned subsidiary, serves as
the managing general agent for MIC. ClaimCor, LLC ("ClaimCor"), a wholly-owned subsidiary, is a claims solutions company that
processes Maison's claims.
Gross Premiums Written
Homeowners:
Florida
Louisiana
Texas
South Carolina
Alabama
Total homeowners
Personal automobile:
Texas
Georgia
Florida
Alabama
Total personal automobile
Commercial general liability
Federal flood
Gross premiums written total
□
Year Ended December 31,
2019
2018
2017
(In thousands)
$
451,856
$
458,652
$
482,039
45,043
66,429
25,172
5,841
594,341
—
(1)
—
—
(1)
(145)
36,063
22,492
17,592
4,890
539,689
5,141
3,078
384
—
8,603
5,384
16,413
14,088
$
610,608
$
567,764
$
31,312
8,491
10,803
4,110
536,755
19,324
22,479
1,265
437
43,505
11,048
12,109
603,417
□
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Acquisitions and Joint Ventures
Maison Acquisition
On December 2, 2019, the Company closed its acquisition from 1347 Property Insurance Holdings, Inc., a Delaware corporation
(“PIH”), of PIH’s insurance operations conducted through MIC, MMI and ClaimCor (collectively, “Maison Companies”). The results
of operations of the Maison Companies are included herein only from the acquisition date forward.
Refer to Note 3 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for additional information regarding the acquisition.
Monarch National Insurance Company
In March 2015, we organized MNIC and obtained its certificate of authority to write homeowners property and casualty insurance in
Florida from the Florida Office of Insurance Regulation (the “Florida OIR”). We and Crosswinds Investor Monarch LP (“Crosswinds
Investor”), a wholly-owned subsidiary of Crosswinds Holdings Inc. (“Crosswinds Holdings”), a private equity firm and asset manager,
each invested $14.0 million for a 42.4% membership interest (each holding 50.0% of the voting interests in Monarch Delaware).
Transatlantic Reinsurance Company (“TransRe”), an international property and casualty reinsurance company, invested $5.0 million
for a 15.2% non-voting membership interest in Monarch Delaware. TransRe also provided a loan represented by a six-year promissory
interest of 6.0% payable by Monarch National Holding Company
note in the principal amount of $5.0 million bearing annual
(“Monarch Holding”), the direct parent of MNIC and wholly-owned subsidiary of Monarch Delaware (together with MNIC and
Monarch Holding, the “Monarch Entities”).
On February 21, 2018, we purchased Crosswinds Investor’s 42.4% Class A membership interest and 50.0% voting interest for $12.3
million, and TransRe’s 15.2% non-voting membership interest in Monarch Delaware for $4.4 million. We also repaid the outstanding
principal balance and interest due on the $5.0 million promissory note to TransRe. Following the closing, Monarch Delaware and
Monarch Holdings were merged into MNIC. With the completion of these transactions, FNIC owns 100% of 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 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.
Executive Office
Our executive office is located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323. Our telephone number is (800) 293-2532.
Available Information
Our internet web site is www.FedNat.com for policy holders, agents and investors. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available, free of charge, through our
website as soon as reasonably practicable after we electronically file or furnish such material to the SEC. The SEC maintains an
internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
-3-
INSURANCE OPERATIONS AND RELATED SERVICES
Business Strategy
We expect that in 2020 we will advance our enterprise value through:
•
•
•
•
•
•
•
•
successfully integrating the operations of the Maison Companies into those of the Company in pursuit of geographic
diversification as well as operational and expense synergies;
focusing on our core operations, the Homeowners line of business, while managing the remaining runoff of our non-core
Automobile and commercial general liability obligations;
applying rigorous underwriting standards even if that limits growth in our Florida book of business, due to the challenging
claims environment as a result of increased litigation, and focusing our new business efforts on our non-Florida book, which
embodies a more favorable underwriting environment;
increasing rates on our policies where warranted, based on claims experience and the cost of catastrophe reinsurance,
irrespective of competitive pricing pressures within the markets where we operate;
focusing on operational efficiencies in our homeowners operations to reduce expenses in conjunction with our continued
investment in, and use of, technology;
leveraging MNIC by developing and implementing a plan to expand upon MNIC’s pricing and product offerings in 2020 to
increase market share in the risk-adjusted portion of the Florida homeowners market;
enhancing our property analytical metrics, such as an increased geographical dispersion of risks, while managing our
underwriting appetite, whether new or renewal, to ensure a balanced book of business;
continued growth in our existing non-Florida markets plus expansion of our homeowners products into other southeastern
states, with our recent entrance into Mississippi;
• maintaining our commitment to provide high quality customer service to our agents and insureds;
•
•
•
•
continued strengthening of our marketing efforts by retaining key personnel and implementing direct marketing technologies;
offering attractive incentives to our agents to place a high volume of quality business with our companies;
continuing with our comprehensive catastrophe reinsurance programs to reduce our exposure to risks; and
additional strategies that may include possible mergers, acquisitions and joint ventures or dispositions of assets.
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
Louisiana and 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 December 31, 2019,
the total homeowners policies in-force was 374,000, of which 241,000 were in Florida and 133,000 were outside of Florida. As of
December 31, 2018, the total homeowners policies in-force was 291,000, of which 247,000 were in Florida and 44,000 were outside of
Florida.
Florida
Our homeowners insurance products provide maximum dwelling coverage of approximately $3.9 million, with the aggregate maximum
policy limit being approximately $6.3 million. We currently offer dwelling coverage “A” up to $4.0 million with an aggregate total
insured value of $6.5 million. We continually review and update these limits. The approximate average premium on the policies
currently in-force is $1,940, as compared with $1,873 for 2018. The typical deductible is either $2,500 or $1,000 for non-hurricane-
related claims and generally 2% of the coverage amount for the structure for hurricane-related claims.
Premium rates charged to our homeowners insurance policyholders are continually evaluated to assure that they meet the expectation
that they are actuarially sound and produce a reasonable level of profit (neither excessive, inadequate or discriminatory). Premium
rates in Florida and other states are regulated and approved by the respective states’ office of insurance regulation. We continuously
monitor and seek appropriate adjustment to our rates in order to remain competitive and profitable.
The following are our recent approved rate actions that we have taken across our three insurance subsidiaries:
•
In 2019, FNIC applied for a reinsurance-related statewide average increase of 2.8% for Florida homeowners multiple-peril
insurance policies only, which was approved by the Florida OIR, and became effective for new polices on January 25, 2020
and is expected to become effective for renewal policies on March 15, 2020.
-4-
•
•
•
In 2018, FNIC applied for a statewide average rate increase of 4.6% for Florida homeowners multiple-peril insurance
policies, which was approved by the Florida OIR, and became effective for new and renewal policies on April 20, 2019.
In 2019, FNIC applied for a statewide average rate increase of 3.6% for Florida dwelling fire insurance policies, which was
approved by the Florida OIR, and became effective for new and renewal policies on June 1, 2019. Also in 2019, FNIC
applied for a reinsurance-related statewide average rate increase of 5.1% for Florida dwelling fire insurance policies, and
became effective for new policies on February 25, 2020 and is expected to become effective for renewal policies on April 1,
2020.
In 2019, MNIC applied for a statewide average rate increase of 14.9% for Florida homeowners multiple-peril insurance
policies, which was approved by the Florida OIR, and became effective for renewal policies on October 1, 2019.
Through MIC, we have assumed Florida policies through the state-run insurer Citizens Property Insurance Corporation ("Citizens").
Non-Florida
Our FNIC non-Florida homeowners insurance products, produced through our partnership with SageSure, provide maximum
dwelling coverage “A” up to $1.8 million, with the aggregate maximum policy limit being approximately $3.5 million. The
approximate average premium on the policies currently in-force is $1,753, as compared with $1,758 for 2018. The typical deductible
is either $2,500 or $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-
related claims.
As part of our partnership with SageSure, we entered into a profit share agreement, whereby we share 50% of net profits of this line of
business, as calculated per the terms of the agreement, subject to certain limitations. The profit share cost is reflected in commissions
and underwriting expenses on our consolidated statement of operations.
Our MIC non-Florida insurance products include homeowners insurance, manufactured home insurance and dwelling fire insurance.
MIC writes both full peril property policies as well as wind/hail only exposures.
The following are our recent approved rate actions that we have taken across FNIC and MIC:
•
•
In 2019, FNIC applied for a statewide average rate increase of 5.0% for Texas homeowners multiple-peril insurance policies,
which was approved by the Texas Department of Insurance, and became effective for new and renewal policies on October
1, 2019. Also in 2019, FNIC applied for a statewide average rate increase of 4.0% for Louisiana homeowners multiple-peril
insurance policies, which was approved by the Louisiana Department of Insurance ("LDI"), and became effective for new
and renewal policies on December 1, 2019.
In 2019, MIC applied for a statewide average rate increase of 30.5% for Texas homeowners multiple-peril insurance policies,
which was approved by the LDI, and became effective for new policies on June 1, 2019 and renewal policies on August 1,
2019.
Other 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, and Georgia. FNIC plans to file an admitted flood endorsement as an alternative to the NFIP program. MIC writes
flood insurance through a partnership with Bintech who assumes 100% of the risk, in Louisiana only.
MARKETING AND DISTRIBUTION
Our independent agents and general agents have the authority to sell and bind insurance coverage in accordance with procedures
established by FNU and MMI. FNU and MMI generally accept all coverage that falls within stated underwriting criteria. For all
policies issued, FNU and MMI also have the right, within a period that varies by state between 60 days and 120 days from a policy’s
inception, to cancel any policy, upon an advanced notice provided in accordance with statutory specific guidelines, even if the risk falls
within our underwriting criteria. We are focusing our marketing efforts on continuing to expand our distribution network while
maintaining our commitment to long-term relationships. We market our products and services throughout Florida by establishing
relationships with independent agents and general agents, and in other states, through our partnership with SageSure. There can be no
assurance, however, that we will be able to obtain the required regulatory approvals to offer additional insurance products or expand
into other states.
We believe that our integrated computer systems, which allow for rapid automated premium quotation and policy issuance by our
agents, are key elements in providing quality service to both our agents and insureds for our various lines of business.
-5-
LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
We are directly liable for loss and loss adjustment expense (“LAE”) payments under the terms of the insurance policies that are
underwritten by our insurance companies. In many cases, there may be a time lag between the occurrence and reporting of an insured
loss and our payment of that loss. As required by insurance regulations and accounting rules, we reflect the liability for the ultimate
payment of all incurred losses and LAE by establishing a liability for those unpaid losses and LAE for both reported and unreported
claims, which represent estimates of future amounts needed to pay claims and related expenses.
When a claim involving a probable loss is reported, we establish a liability for the estimated amount of our ultimate loss and LAE
payments. We based our estimate upon such factors as the type of loss,
jurisdiction of the occurrence, knowledge of the
circumstances surrounding the claim, severity of injury or damage, potential for ultimate exposure, estimate of liability on the part of
the insured, past experience with similar claims and the applicable policy provisions.
We also establish a liability on an aggregate basis to provide for incurred but not reported (“IBNR”). The estimates of the liability for
loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this
process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and
economic conditions. As experience develops and other data becomes available, these estimates are revised, as required, resulting in an
increase or decrease of the existing liability for loss and LAE reserves. Adjustments are reflected in results of operations in the period
in which they are made and the liability may deviate substantially from prior estimates.
Among our classes of insurance, the automobile and homeowners liability and claims historically tend to have longer time lapses
between the occurrence of the event, the reporting of the claim and the final settlement, than do automobile physical damage and
homeowners property claims. These liability claims often involve parties filing suit and therefore may result in litigation. By
comparison, property damage claims tend to be reported in a relatively shorter period of time and settled in a shorter time frame with
less occurrence of litigation.
REINSURANCE
Reinsurance is used to mitigate the insurance loss exposure related to certain events such as natural and man-made catastrophes,
manage overall capital adequacy and protect capital resources. We reinsure (cede) a portion of written premiums on an excess of loss
or a quota-share basis in order to limit our loss exposure. To the extent that reinsuring companies are unable to meet their obligations
assumed under these reinsurance agreements, we remain primarily liable to our policyholders.
Reinsurance markets include:
•
•
Traditional local and global reinsurance markets including those in the United States (“U.S.”), Bermuda, London and Europe,
accessed directly and through reinsurance intermediaries;
Capital markets through insurance-linked securities and collateralized reinsurance transactions, such as catastrophe bonds,
sidecars and similar vehicles; and
• Other insurers that engage in both direct and assumed reinsurance.
The form of reinsurance that we may choose from time to time will generally depend on whether we are seeking:
Proportional reinsurance, whereby we cede a specified percentage of premium and losses to reinsurers;
•
• Non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a specified
amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis; or
Facultative contracts that reinsure individual policies.
•
-6-
Significant Reinsurance Contracts
FNIC, MIC and MNIC operate primarily by underwriting and accepting risks for their direct accounts on a gross basis and reinsuring a
portion of the exposure on either an individual risk or an aggregate basis to the extent those exceed the desired retention level. We
continually evaluate the relative attractiveness of different forms of reinsurance contracts and different markets that may be used to
achieve our risk and profitability objectives. Our reinsurance contracts do not relieve FNIC, MIC, or MNIC from their direct
obligations to the insured.
While it is not always possible to reinsure every known and unknown risk to our company, an effective reinsurance program
substantially mitigates our exposure to potentially significant losses. There is a credit risk exposure with respect to ceded losses to the
extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectability of
reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. The availability and
amount of ceded premiums and losses associated with the acquisition of reinsurance will vary year to year. Our reinsurance program is
subject to approval primarily by the Florida OIR and other regulators in states where we do business, and subject to review by
Demotech, Inc. (“Demotech”). Demotech provides Financial Stability Ratings (“FSR”) for property and casualty insurance companies
throughout the United States.
We are selective in choosing reinsurers and consider numerous factors, the most important of which are the financial stability of the
reinsurer or capital specifically pledged to uphold the contract, its history of responding to claims and its overall reputation. In an
effort to minimize our exposure to the insolvency of a reinsurer, we evaluate the acceptability and review the financial condition of the
reinsurer at least annually with the assistance of our reinsurance broker. As of December 31, 2019 and 2018, we had over 70
reinsurance companies on our program which are required to have at least an “A-” or better rating by A.M. Best Company (“A.M.
Best”) or the agreement would need to be fully collateralized.
Refer to Note 6 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for further information regarding our reinsurance programs.
EMPLOYEES
As of December 31, 2019, we had 357 employees. We are not a party to any collective bargaining agreement and we have not
experienced work stoppages or strikes as a result of labor disputes. We consider relations with our employees to be satisfactory.
COMPETITION
We operate in highly competitive markets and face competition from national, regional and residual market insurance companies in the
homeowners and flood insurance markets. Our competitors include companies that market their products through agents and
companies that sell insurance directly to their customers. Large national captive writers may have certain competitive advantages over
independent agency writers,
increased loyalty of their customer base and reduced policy
acquisition costs. We compete based on underwriting criteria, pricing, our distribution network and superior service to our agents and
insureds. Although our pricing is inevitably influenced, to an extent, by that of our competitors, we believe that it is generally not in
our best interest to compete solely on price.
including increased name recognition,
In Florida, more than 40 companies compete with us in the homeowners insurance market. Three of our larger competitors are
Citizens, Universal Property and Casualty Insurance Company and Heritage Property and Casualty Insurance Company.
Significant competition also emerged because of fundamental changes made to the property and casualty insurance business in Florida
in recent years which resulted in a multi-pronged approach to address the cost of residential property insurance in Florida. First, the
law increased the capacity of reinsurance that stabilized the reinsurance market to the benefit of the insurance companies writing in
Florida. Second, the law provided for rate relief to all policyholders. The law also authorized the legislatively created insurance
company, Citizens, which is free of many of the constraints on private carriers such as minimum surplus, financial ratio requirements,
income tax and reinsurance expense, to reduce its premium rates and begin competing against private insurers in the residential
property insurance market and expanded the authority of Citizens to write commercial insurance.
Adverse loss experience and increasing catastrophe reinsurance costs in recent years could potentially disrupt smaller competitors that
lack adequate scale.
-7-
REGULATION
Overview
Our current insurance operations are subject to the laws and regulations of Florida, Georgia, Louisiana, Texas, South Carolina,
Alabama and Mississippi. We are subject to employment regulations of Florida and potentially to other states in which we may seek to
conduct business in the future. The regulations cover all aspects of our business and are generally designed to protect the interests of
insurance policyholders, as opposed to the interests of shareholders. Such regulations relate to authorized lines of business, capital and
surplus requirements, allowable rates and forms, investment parameters, underwriting limitations, transactions with affiliates, dividend
limitations, changes in control, market conduct, maximum amount allowable for premium financing service charges and a variety of
other financial and non-financial components of our business. Our failure to comply with certain provisions of applicable insurance
laws and regulations could have a material adverse effect on our business, results of operations or financial condition. In addition, any
changes in such laws and regulations, including the adoption of consumer initiatives regarding rates charged for coverage, could
materially and adversely affect our operations or our ability to expand.
Most states’ laws restrict an insurer’s underwriting discretion, such as the ability to terminate policies, terminate agents or reject
insurance coverage applications, and many state regulators have the power to reduce, or to disallow, increases in premium rates. In
addition, state laws generally require that rate schedules and other information be filed with the state’s insurance regulatory authority,
either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may disapprove a rate filing
if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers,
vary by class of business, hazard covered, and size of risk. Certain states, including Florida, as discussed above, have adopted laws or
are considering proposed legislation which, among other things, limit the ability of insurance companies to effect rate increases or to
cancel, reduce or non-renew insurance coverage with respect to existing policies, particularly personal automobile insurance.
Most states require licensure or regulatory approval prior to the marketing of new insurance products. Typically, licensure review is
comprehensive and includes a review of a company’s business plan, solvency, financial projections, reinsurance, character of its
officers and directors, rates, forms and other financial and non-financial aspects of a company. The regulatory authorities may prohibit
entry into a new market by not granting a license or by withholding approval.
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 Florida OIR or Louisiana Department of Insurance ("LDI").
The Florida OIR has completed its regularly scheduled statutory examination of FNIC for the five years ended December 31, 2015, of
MNIC for the period of March 17, 2015 (inception) through December 31, 2015 and of MNIC for the year ended December 31, 2016.
The LDI has completed its regularly scheduled statutory examination of MIC for the three years ended December 31, 2014. There
were no material findings by the Florida OIR or LDI in connection with these examinations.
Various states routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As
of December 31, 2019, FNIC, MIC and MNIC held investment securities with a fair value of approximately $11.2 million, as deposits
with the state of Florida, Texas, Georgia, South Carolina, Alabama and Mississippi.
On July 1, 2019, Florida legislation to address Assignments of Benefits ("AOB") took effect. AOB is the assignment of benefits for a
claim where a service provider agrees to make a repair that may be covered by an insurance policy in exchange for the policyholder's
right to sue the insurance carrier directly. AOB has substantially increased over the last few years, leading to material adverse losses,
particularly from our Florida homeowners insurance policies, due to inflated claims, attorney's fees and costs. Provisions and
limitations in the new legislation are expected to reduce inflated claims as well as offset negative claims trends. Since AOB reform was
enacted, the Company has seen a decrease in AOB-related lawsuits. Additionally, incremental adverse non-AOB claim trends are
currently offsetting any initial favorable impact of the AOB legislation.
Insurance Holding Company Regulation
FNHC, as the parent holding company, is subject to laws governing insurance holding companies in Florida where FNIC and MNIC
are domiciled or Louisiana where MIC is domiciled. Among other things, these laws: (i) require us to file periodic information with the
Florida OIR, including information concerning our capital structure, ownership, financial condition and general business operations;
(ii) regulate certain transactions between us and our affiliates, including the amount of dividends and other distributions, the terms of
surplus notes and amounts that our affiliates can charge the holding company for services such as management fees or commissions;
and (iii) restrict the ability of any one person to acquire certain levels of our voting securities without prior regulatory approval. Any
purchaser of 10% or more of the outstanding shares of our common stock will be presumed to have acquired control of FNIC, MIC,
or MNIC and is required to file an application with the Florida OIR or LDI to obtain approval of such acquisition.
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Restrictions in Payments of Dividends by Domestic Insurance Companies
Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of
that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and
net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior
approval of the Florida OIR if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10.0% of its surplus or (b) net
income, not including realized capital gains, plus a two-year carryforward, (ii) 10.0% of surplus with dividends payable constrained to
unassigned funds minus 25.0% of unrealized capital gains or (iii) the lesser of (a) 10.0% of surplus or (b) net investment income plus a
three-year carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida OIR: (i)
if the dividend is equal to or less than the greater of: (a) 10.0% of the insurer’s surplus as regards policyholders derived from realized
net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net
capital gains derived during the immediately preceding calendar year; (ii) the insurer will have policy holder surplus equal to or
(iii) the insurer files a notice of the
exceeding 115.0% of the minimum required statutory surplus after the dividend or distribution;
dividend or distribution with the Florida OIR at least ten business days prior to the dividend payment or distribution; and (iv) the
notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer
will have at least 115.0% of required statutory surplus as to policyholders. Except as provided above, a Florida domiciled insurer may
only pay a dividend or make a distribution: (i) subject to prior approval by the Florida OIR; or (ii) 30 days after the Florida OIR has
received notice of such dividend or distribution and has not disapproved it within such time.
Under Louisiana law, a domestic insurer may not declare or pay any dividend to its stockholders unless its capital is fully paid in cash
and is unimpaired and it has a surplus beyond its capital stock and the initial minimum surplus required and all other liabilities equal to
fifteen percent of its capital stock, provided that this restriction does not apply when an insurer's paid-in capital and surplus exceeds
the minimum required by Louisiana law by one hundred percent or more. No extraordinary dividend or other extraordinary
distribution to its shareholders may be made until 30 days after the Louisiana Commissioner of Insurance has received notice of the
declaration thereof and has not within that period disapproved the payment, or has approved the payment within the thirty-day period.
An extraordinary dividend or distribution includes any dividend or distribution of cash or other property, whose fair market value
together with that of other dividends or distributions made within the preceding twelve months exceeds the lesser of
(a) 10.0%
percent of the insurer's surplus as regards policyholders as of the 31st day of December next preceding; or (b) the net income, not
including realized capital gains, for the twelve-month period ending the 31st day of December next preceding, but shall not include
pro rata distributions of any class of the insurer's own securities. In determining whether a dividend or distribution is extraordinary, an
insurer may carry forward net income from the previous two calendar years that has not already been paid out as dividends. This
carryforward shall be computed by taking the net income from the second and third preceding calendar years, not including realized
capital gains, less dividends paid in the second and immediate preceding calendar years. Notwithstanding the foregoing, an insurer
may declare an extraordinary dividend or distribution which is conditional upon regulatory approval. and the declaration shall confer
no rights upon shareholders until either the payment is approved or has not been disapproved within the 30 day period referred to
above.
No dividends were paid by FNIC or MNIC in 2019, 2018 and 2017, and none are anticipated in 2020. No dividends were paid by MIC
since the acquisition date, and none are anticipated in 2020. Although we believe that amounts required to meet our financial and
operating obligations will be available from sources other than dividends from our insurance subsidiaries, there can be no assurance in
this regard. Further, there can be no assurance that, if requested, the Florida OIR or LDI will allow any dividends to be paid by FNIC,
MIC or MNIC to FNHC, the parent company, in the future. The maximum dividends permitted by state law are not necessarily
indicative of an insurer’s actual ability to pay dividends or other distributions to a parent company, which also may be constrained by
business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer’s competitive
position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company following any dividend or distribution by it be reasonable in
relation to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries (FNU and any other affiliate) are not subject directly to the dividend and other
distribution limitations, insurance holding company regulations govern the amount that any affiliate within the holding company
structure may charge any of the insurance companies for services (e.g., management fees and commissions).
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Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to address
the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include: (i) the
creation of “market assistance plans” under which insurers are induced to provide certain coverages;
(ii) restrictions on the ability of
insurers to rescind or otherwise cancel certain policies in mid-term; (iii) advance notice requirements or limitations imposed for certain
policy non-renewals; and (iv) limitations upon or decreases in rates permitted to be charged.
National Association of Insurance Commissioners Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners (“NAIC”), established
risk-based capital (“RBC”) requirements for insurance companies that are designed to assess capital adequacy and to raise the level of
protection that statutory surplus provides for policy holders. These requirements measure four major areas of risk facing property and
casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss development and inadequate pricing; (ii) declines in
asset values arising from credit risk; (iii) other business risks from investments; and (iv) catastrophe risk. Insurers having less statutory
surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The Florida
OIR and LDI, which follows these requirements, could require FNIC, MIC or MNIC to cease operations in the event they fail to
maintain the required statutory capital.
Based upon the 2019 and 2018 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 Authorized Control Level (“ACL”), as calculated under the NAIC’s requirements, decreases. The first action level, the Company
Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below
200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing
corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if
statutory surplus falls below 150.0% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate
an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the
Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of
the ACL amount. FNIC’s ratio of statutory surplus to its ACL was 323.9% and 329.9% as of December 31, 2019 and 2018,
respectively. MNIC’s ratio of statutory surplus to its ACL was 1,128.7% and 774.4% as of December 31, 2019 and 2018, respectively.
MIC's ratio of statutory surplus to its ACL was 305.7% as of December 31, 2019.
Industry Ratings Services
Third-party rating agencies assess and rate the ability of insurers to pay their claims. The insurance industry uses financial strength
ratings to assess the financial strength and quality of insurers. Ratings are based upon criteria established by the rating agencies and
reflect evaluations of each insurer’s profitability, debt and cash levels, customer base, adequacy and soundness of reinsurance, quality
and estimated market value of assets, adequacy of reserves and management. Ratings are also based upon factors of concern to agents,
reinsurers and policyholders and are not directed toward the protection of investors, such as purchasers of our common stock.
As of December 31, 2019 and 2018, FNIC, MIC, and MNIC are rated by Demotech as “A” (“Exceptional”), which is the third of
seven ratings, and defined as “Regardless of the severity of a general economic downturn or deterioration in the insurance cycle,
insurers earning an FSR of “A” possess “Exceptional” financial stability related to maintaining surplus as regards to policyholders.”
Demotech’s ratings are based upon factors of concern to agents, reinsurers and policyholders and are not primarily directed toward the
protection of investors. Our Demotech rating could be jeopardized by factors including adverse development and various surplus
related ratio exceptions.
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ITEM 1A. RISK FACTORS
We are subject to various risks in our business operations as described below. The risks and uncertainties described below are the
known risk factors we consider material. Additional risks and uncertainties not currently known, or currently deemed immaterial, may
also impair our business operations. Investors should carefully consider these risks before making an investment decision.
Risks Related to Our Business
Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.
We write insurance policies that cover homeowners for losses that result from, among other things, catastrophes and sinkholes.
Catastrophic losses can be caused by natural events such as hurricanes, tropical storms, tornadoes, wind, hail, fires, explosions and
other events. The incidence and severity of these events are inherently unpredictable. Catastrophic losses can also be caused by
terrorist attacks, war, riots, political instability and other man-made events. The extent of losses from a catastrophe is a function of
two factors:
the total amount of the insurance company’s exposure in the area affected by the event and the severity of the event.
Our homeowners policyholders are disbursed throughout the southeast United States, although the majority of our policyholders are
located in Florida. Further, a substantial portion of our Florida homeowners policyholders, are located in southeastern Florida, and
therefore are especially subject to adverse weather conditions such as hurricanes and tropical storms.
The occurrence of claims from catastrophic events can result in substantial volatility in our results of operations or financial condition
for any fiscal quarter or years as seen in 2019, 2018 and 2017. An elevation in the values and concentrations of insured property may
increase the severity of the occurrence of claims in the future. Although we attempt to manage our exposure to such events through
the use of underwriting controls and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable and the
actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management
expectations. As a result, the occurrence of one or more catastrophic events could have a material adverse effect on our results of
operations or financial condition.
Florida, South Carolina and Texas, all states in which we write homeowners policies, experienced several significant hurricanes in 2019,
2018 and 2017, which some weather analysts believe is consistent with a period of greater hurricane activity. Exposure risk
management alternatives are carefully evaluated as they may increase operating expenses and may not be successful in protecting long-
term profitability. If our loss experience is more adverse than is contemplated by our loss reserves, the related increase in our loss
reserves may have a material adverse effect on our results of operations in the period in which the increase occurs.
Our loss reserves are estimates and may be inadequate to cover our actual liability for losses, causing our results of
operations to be adversely affected.
We maintain reserves to cover our estimated ultimate liabilities for losses and LAE. These reserves are estimates based on historical
data and statistical projections of what we believe the settlement and administration of claims will cost based on facts and
circumstances then known to us. Actual loss and LAE reserves, however, may vary significantly from our estimates. Factors that
affect loss and LAE reserves include the estimates made on a claim-by-claim basis known as “case reserves” coupled with bulk
estimates known as IBNR. Periodic estimates by management of the ultimate costs required to settle all claim files are based on our
analysis of historical data and estimations of the impact of numerous factors such as:
•
•
•
•
per-claim information;
company and industry historical loss experience, including the impact of trends such as the AOB by insureds;
legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes;
and
trends in general economic conditions, including the effects of inflation.
Management revises its estimates based on the results of its analysis. This process assumes that past experience, adjusted for the effects
of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no
precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual
redundancy or deficiency is affected by multiple factors. Because of the uncertainties that surround estimated loss reserves, we cannot
be certain that our reserves will be adequate to cover our actual losses. If our loss and LAE reserves are less than actual losses and
LAE, we will be required to increase our reserves with a corresponding reduction in our net income in the period in which the
deficiency is identified. Future loss experience, substantially in excess of our loss and LAE reserves, could substantially harm our
results of operations and financial condition.
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Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance fluctuates
and we may not be able to successfully alleviate risk through reinsurance arrangements.
We have a reinsurance structure that is a combination of private reinsurance and the FHCF. Our reinsurance structure is composed of
several reinsurance companies with varying levels of participation providing coverage for losses and LAE at pre-established minimum
and maximum amounts. Losses incurred in connection with a catastrophic event below the minimum and above the maximum are the
responsibility of FNIC, MIC and MNIC.
The availability and costs associated with the acquisition of reinsurance varies year to year. We are not able to control these
fluctuations which may be significant and may limit our ability to purchase adequate coverage. The recovery of increased reinsurance
costs through rate increases is not immediate and cannot be presumed, as rate increases are subject to approval of the Florida OIR or
LDI. We may be unable to purchase reinsurance for the liabilities we reinsure, and if we successfully purchase such reinsurance, we
may be unable to collect, which could adversely affect our business, financial condition and results of operations.
We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of
operations and financial condition.
As is common practice within the insurance industry, we transfer a portion of the risks insured under our policies to other companies
through the purchase of reinsurance. This reinsurance is maintained to protect our insurance subsidiary against the severity of losses
on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and other
catastrophic events. Although reinsurance does not discharge our insurance subsidiary from its primary obligation to pay for losses
insured under the policies it issues, reinsurance does make the assuming reinsurer liable to the insurance subsidiary for the reinsured
portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet
the obligations assumed under the reinsurance contracts. The collectability of reinsurance is subject to the solvency of the reinsurers,
interpretation of contract language and other factors. A reinsurer’s insolvency or inability to make payments under the terms of a
reinsurance contract could have a material adverse effect on our business, results of operations and financial condition.
Our reinsurance structure has significant risks, including the fact that the FHCF or our other reinsurers may not have available capital
resources to pay their claims or that their ability to pay their claims in a timely manner may be impaired. This could result in significant
financial, legal and operational challenges to our company. Therefore, in the event of a catastrophic loss, we may become dependent
upon the FHCF’s and our other reinsurers’ ability to pay their claims. With respect to the FHCF, we may, in turn, be dependent upon
the ability of the State Board of Administration of Florida (“SBA”) to issue bonds in amounts that would be required to meet its
reinsurance obligations in the event of such a catastrophic loss.
We may experience increased financial exposure from climate change.
A body of scientific evidence indicates that climate change is occurring. Climate change, to the extent that it affects weather patterns,
is likely to cause an increase in the frequency and/or the severity of catastrophic events or severe weather conditions. Our financial
exposure from climate change is most notably associated with losses in connection with the occurrence of hurricanes striking Florida,
Louisiana and Texas. We mitigate the risk of financial exposure from climate change by restrictive underwriting criteria, sensitivity to
geographic concentrations, and reinsurance.
Restrictive underwriting criteria can include, but are not limited to, higher premiums and deductibles and more specifically excluded
policy risks such as fences and screened-in enclosures. New technological advances in computer generated geographical mapping
afford us an enhanced perspective as to geographic concentrations of policyholders and proximity to flood prone areas. Our amount
of maximum reinsurance coverage is determined by subjecting our homeowners exposures to statistical forecasting models that are
designed to quantify a catastrophic event in terms of the frequency of a storm occurring once in every “n” years. If the statistical
forecasting models fail to contemplate an emerging claim trend, such as the assignment of insurance benefits in Florida, then there is
the risk we may not purchase adequate catastrophic wind coverage. Our reinsurance coverage contemplates the effects of a
catastrophic event that occurs only once every 130 years. Our amount of losses retained (our deductible) in connection with a
catastrophic event is determined by market capacity, pricing conditions and surplus preservation. There can be no assurance that our
reinsurance coverage and other measures taken will be sufficient to mitigate losses resulting from one or more catastrophic events.
Our operations could be adversely affected by contagious terminally severe health viruses.
We are exposed to the risk of natural or man-made events, such as a pandemic or other health related events that could cause a large
number of deaths, injuries or business disruptions. Significant influenza pandemics have occurred three times in the last century, but
the likelihood, timing or severity of a future pandemic cannot be predicted. A localized or widespread event that directly affects our
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workplace or customers could cause a material adverse effect on our results of operations in any period and, depending on their
severity, could also materially and adversely affect our ability to effectively conduct business, including our ability to write new
business, and our financial condition. Also, such events could harm the financial condition of our reinsurers and thereby increase the
probability of default on reinsurance recoveries. Limiting FedNat’s exposure to the spread of infectious diseases, the Company has
long supported a work from home culture in response to business continuity concerns by establishing and supporting the expansion of
the Company’s network infrastructure to include dedicated home workstations for most employees.
We may face difficulties integrating the Maison Companies, which we acquired in December 2019. Failure to effectively
integrate their operations could harm our growth or operating results.
On December 2, 2019, we completed the acquisition of the Maison Companies from PIH. We face the substantial risks associated
with acquisitions of existing businesses. These risks include, but are not limited to, the risk that we may not be able to effectively
integrate the operations, personnel, services or technologies of the business acquired; the risks associated with determining adequate
loss reserves for the business acquired; the potential disruption of our ongoing businesses; the diversion of management attention
because of the substantial management time and resources required; the difficulty in developing or maintaining controls and
procedures; and the dilution of our existing shareholders resulting from the issuance of shares of our common stock as part of the
acquisition consideration.
Completing the integration of the Maison Companies may require us to use cash resources and incur contingent liabilities. We may
If we are not able to address these
also be faced with material liabilities not disclosed to us as part of our due diligence process.
liabilities and otherwise successfully integrate the acquired business, we may not receive the intended benefits of this acquisition. As a
result, our ongoing business, financial condition and results of operations could be materially adversely affected.
If we are unable to grow because our capital must be used to pay greater than anticipated claims, our financial results may
suffer.
Our ability to grow in the future will depend on our ability to expand the types of insurance products we offer and the geographic
markets in which we do business, both balanced by the business risks we choose to assume and cede. We believe that our company is
sufficiently capitalized to operate our business as it now exists and as we currently plan to expand it. Our existing sources of funds
include issuance of debt securities, possible sales of our investment securities, and our earnings from operations and investments.
Catastrophic events in our market areas, such as the hurricanes experienced in Florida, South Carolina and Texas in 2019, 2018 and
2017, have resulted and may result in greater claims losses than anticipated, which could require us to limit or halt growth while we
redeploy our capital to pay these unanticipated claims.
The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition
or our results of operations.
Various provisions of our policies, such as limitations or exclusions from coverage which have been negotiated to limit our risks, may
not be enforceable in the manner we intend. At the present time, we employ a variety of exclusions to our policies that limit exposure
to known risks, including, but not limited to, exclusions relating to certain named liabilities, types of vehicles and specific artisan
activities. In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to decline
coverage in the event of a violation of that condition. While we believe our insurance product exclusions and limitations reduce the
loss exposure to us and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify
or void an exclusion or that legislation could be enacted modifying or barring the use of such endorsements and limitations in a way
that would adversely affect our loss experience, which could have a material adverse effect on our financial condition or results of
operations.
The failure of various risk mitigation strategies utilized could have a material, adverse effect on our financial condition,
results of operations or reputation in the marketplace.
We utilize a number of tactics to mitigate risk exposure within our insurance business, which include:
•
•
•
•
•
Avoidance to risks that do not conform to underwriting standards;
Risk portfolio optimization;
Transferring portfolio risk to financially sound reinsurance companies;
Acquiring adequate primary insurance to ensure continued operations; and
Promoting an enterprise risk management culture.
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If we fail to mitigate our risk exposure, the Company could experience increased claims, losses from catastrophic events that are not
reinsured and a damage of our reputation that makes agents and reinsurers reluctant to work with us.
Trends in claims and coverage issues have had, and may continue to have, a material adverse impact on our business.
As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and
coverage emerge. These issues adversely affect our business by either extending coverage beyond our underwriting intent or by
increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have
issued insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance policies may not be
known for many years after a policy is issued.
An example of an existing trend, particularly in Florida homeowners insurance, is the assignment of benefits for a claim where a
service provider agrees to make a repair that may be covered by an insurance policy in exchange for the policyholder’s right to sue the
insurance carrier directly. The assignment of the insurance benefits has substantially increased, and may continue to increase, our
exposure to inflated claims, attorney’s fees and costs. Although legislative actions in the State of Florida to limit the effect of AOB on
insurance companies are being contemplated, there can be no assurances that any such legislative actions will become law or, if
enacted, that such actions will have the effect of limiting the impact on us of assignments of benefits by insureds.
Our failure to comply with the covenants in our senior note indenture, including as a result of events beyond our control,
could result in an event of default, which could materially and adversely affect our financial condition and results of
operations.
The indenture for our senior notes requires us to maintain certain financial ratios and to comply with various operational and other
covenants, including limitations on our ability to incur additional debt without the approval of the existing noteholders. If there were
an event of default under the indenture that was not cured or waived, the holders of the senior notes could cause all amounts
outstanding with respect to the senior notes to be due and payable immediately. We cannot assure you that our assets or cash flow
would be sufficient to fully repay the senior notes, either upon maturity or, if accelerated, upon an event of default, or that we would
be able to refinance or restructure the payments on the senior notes. This would have a material adverse impact on our liquidity,
financial condition and results of operations.
We may require additional capital in the future which may not be available or only available on unfavorable terms.
Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish
premium rates and reserves at levels sufficient to cover losses. To the extent that our capital may be insufficient to meet future
operating requirements and/or cover losses, we may need to raise additional funds through financings or curtail our growth. Many
factors will affect the amount and timing of our capital needs, including our growth and profitability, our claims experience, and the
availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments.
If we were required to raise additional capital, equity or debt financing may not be available at all or may be available only on terms
that are not favorable to us. In the case of equity financings, dilution to our shareholders’ ownership could result, and in any case such
securities may have rights, preferences and privileges that are senior to those of existing shareholders. If we raise additional funds by
incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific
financial ratios that may restrict our ability to operate our business or pay dividends. If we cannot obtain adequate capital on favorable
terms or at all, our business, financial condition or results of operations could be materially adversely affected.
Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.
We are subject to extensive regulation in the states in which we conduct business. This regulation is generally designed to protect the
interests of policyholders, as opposed to shareholders and other investors, and relates to authorization for lines of business, capital and
surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in
control, premium rates and a variety of other financial and non-financial components of an insurance company’s business. These
regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. State regulatory
authorities also conduct periodic examinations into insurers’ business practices. These reviews may reveal deficiencies in our insurance
operations or differences between our interpretations of regulatory requirements and those of the regulators.
The NAIC and state insurance regulators are constantly reexamining existing laws and regulations, generally focusing on modifications
to holding company regulations, interpretations of existing laws and the development of new laws.
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From time to time, some states in which we conduct business have considered or enacted laws that may alter or increase state
authority to regulate insurance companies and insurance holding companies. In other situations, states in which we conduct business
have considered or enacted laws that impact the competitive environment and marketplace for property and casualty insurance.
In
addition, in recent years the state insurance regulatory framework has come under increased federal scrutiny. Changes in federal
legislation and administrative policies in several areas, including changes in financial services regulation and federal taxation, can
significantly impact the insurance industry and us.
We cannot predict with certainty the effect any enacted, proposed or future state or federal legislation or NAIC initiatives may have on
the conduct of our business. Furthermore, there can be no assurance that the regulatory requirements applicable to our business will
not become more stringent in the future or result in materially higher costs than current requirements. Changes in the regulation of
our business may reduce our profitability, limit our growth or otherwise adversely affect our operations.
Our revenues and operating performance will fluctuate due to statutorily approved assessments that support property and
casualty insurance pools and associations.
We operate in a regulatory environment where certain entities and organizations have the authority to require us to participate in
assessments. Currently these entities and organizations include, but are not limited to, the Florida Insurance Guaranty Association
(“FIGA”), Citizens, the FHCF, Texas Windstorm Insurance Association (“TWIA”) and Louisiana Citizens Property Insurance
(“LCPI”).
Insurance companies currently pass these assessments on to holders of insurance policies in the form of a policy surcharge, and reflect
the collection of these assessments as fully earned credits to operations in the period collected. The collection of these fees, however,
may adversely affect our overall marketing strategy due to the competitive landscape in Florida. As a result, the impact of possible
future assessments on our balance sheet, results of operations or cash flow are indeterminable at this time.
Our investment portfolio may suffer reduced returns, or losses, which would significantly reduce our earnings.
Like other insurance companies, we depend on income from our investment portfolio for a portion of our earnings. During the time
that normally elapses between the receipt of insurance premiums and any payment of insurance claims, we invest the premiums
received, together with our other available capital, primarily in debt securities and to a lesser extent in equity securities, in order to
generate investment income.
Our investment portfolio contains interest rate sensitive instruments, such as bonds, which may be adversely affected by changes in
interest rates. A significant increase in interest rates or decrease in credit worthiness could have a material adverse effect on our
financial condition or results of operations. Declines in interest rates could have an adverse effect on our investment income.
We are required to review our investment portfolio to evaluate and assess known and inherent risks associated with each investment
type. We revise our evaluations and assessments as conditions change and new information becomes available. This may result in
changes in an other-than-temporary impairment (“OTTI”) in our consolidated statements of income. We base our assessment of
whether an OTTI has occurred on our case-by-case evaluation of the underlying reasons for the decline in fair value. Because
historical trends may not be indicative of future impairments and additional impairments may need to be recorded in the future, no
assurances can be provided that we have accurately assessed whether any such impairment is temporary or other-than-temporary or
that we have accurately recorded amounts for an OTTI in our financial statements.
In addition, volatile and illiquid markets increase the likelihood that investment securities may not behave in historically predictable
manners, resulting in fair value estimates that may be overstated compared with actual amounts that could be realized upon disposition
or maturity of the security. The effects of market volatility, declining economic conditions, such as a US or global economic
slowdown, whether due to coronavirus, or other factors, could adversely impact the fair value or credit quality of securities in our
portfolio and may have unforeseen consequences on the liquidity and financial stability of the issuers of securities we hold. Such
deteriorations in financial condition can occur rapidly, leaving us unable to react to such a scenario in a prudent manner consistent
with our historical practices in dealing with more orderly markets. This, in turn, could adversely and negatively affect our results of
operations, liquidity or financial condition.
Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.
We must accurately evaluate and pay claims that are made under our policies. Many factors affect our ability to pay claims accurately,
including the training and experience of our claims representatives, the culture of our claims organization and the effectiveness of our
management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and
-15-
other factors. Our failure to pay claims accurately could lead to material litigation, undermine our reputation in the marketplace,
impair our image and negatively affect our financial results.
In addition, if we are not able to handle an increasing number of claims as a result of a catastrophic event, or if we do not train new
claims adjusting employees effectively or lose a significant number of experienced claims adjusting employees, our claims department’s
ability to handle an increasing workload could be adversely affected. In addition to potentially requiring that growth be slowed in the
affected markets, we could suffer decreased quality of claims work, which in turn could lower our operating margins.
Our insurance companies are subject to minimum capital and surplus requirements, and our failure to meet these
requirements could subject us to regulatory action.
Our insurance companies are subject to RBC standards and other minimum capital and surplus requirements imposed under
applicable state laws, including the laws of the State of Florida. The RBC standards, based upon the Risk Based Capital Model Act
adopted by the NAIC, require our insurance companies to report their results of RBC calculations to state departments of insurance
and the NAIC. These RBC standards provide for different levels of regulatory attention depending upon the ratio of an insurance
company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its ACL RBC.
If we fail to meet the applicable RBC or minimum statutory capital requirements imposed by the laws of Florida or other states where
we do business, we would be required to raise additional capital and we could be subject to further examination or corrective action
imposed by state regulators, including limitations on out writing of additional business, additional state supervision, or liquidation.
Similarly, an increase in existing RBC requirements or minimum statutory capital requirements, such as the catastrophic risk
component of RBC may require us to increase our statutory capital levels.
Ratios calculated based on RBC tend to be a key criteria in the assignment of ratings by insurance rating agencies.
Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance
industry.
Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns
characterized by periods of significant competition in pricing and underwriting terms and conditions, which is known as a “soft”
insurance market, followed by periods of lessened competition and increasing premium rates, which is known as a “hard” insurance
market. Although an individual
insurance company’s financial performance is dependent upon its own specific business
characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern, with
profitability generally increasing in hard markets and decreasing in soft markets. At present, on a consolidated basis, we continue to
file and obtain rate increases as the current Florida property and casualty market continues to harden, but remains competitive.
Elsewhere in the United States, we are experiencing a stable market, but increased competition. We cannot predict how long these
market conditions will persist. Although we do not compete entirely on price or targeted market share, negative market conditions
may impair our ability to write insurance at rates that we consider appropriate relative to the risk assumed.
If we cannot write
insurance at appropriate rates, our revenues and operating performance may be adversely affected.
New homeowners insurance operations outside of Florida may not be profitable.
Our insurance subsidiaries currently conduct business in a limited number of states in addition to Florida, with concentrations of
business in South Carolina, Louisiana and Texas and to a lesser extent in Alabama and Mississippi. Any single catastrophic occurrence
or other condition affecting losses in these states could adversely affect the results of our operating results. We plan to continue the
expansion of admitted homeowners property and casualty programs into other states as opportunities arise. Expanding our operations
to additional states present risks similar to those we currently face with our existing operations, including risks associated with the
inability to market an adequately priced policy,
inadequate commission structures, and overpriced or unavailable catastrophic
reinsurance for wind events. Additionally, we would become subject to the insurance regulators in each state and the laws and
regulations designed to regulate the insurance products and operations of new and existing insurance companies under their respective
authority. As a result, there can be no guarantees that state regulators will allow us to do business in those states or, if we are approved
to operate in a state, that our operations will be profitable in that state.
If we determine to expand to additional states or to expand the types of insurance products we offer, we may incur
additional costs and may not obtain the necessary regulatory approvals.
Although we exited the automobile and commercial general liability lines of insurance, we may determine to expand our product
offerings in the future by underwriting additional insurance products and programs, and marketing them through our distribution
network. Expansion of our product offerings will result in increases in expenses due to additional costs incurred in actuarial rate
-16-
justifications, software and personnel. Offering additional insurance products may also require regulatory approval, further increasing
our costs. Before we can write insurance in a new state, or sell a new insurance product in a state, we must obtain a license or other
approvals from the applicable state insurance regulators. These state insurance regulators may request additional information, add
conditions to the license that we find unacceptable, or deny our application. This would delay or prevent us from operating in that
state or offering that new product. There can be no assurance that we would be successful bringing new insurance products to our
markets in a manner that is profitable.
Our success depends on our ability to accurately price the risks we underwrite.
The results of operations and the financial condition of our insurance company depend on our ability to underwrite and set premium
rates accurately for a wide variety of risks. Rate adequacy is necessary to generate sufficient premiums to pay losses, LAE and
underwriting expenses and to earn a profit. In order to price our products accurately, we must collect and properly analyze a
substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in
trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully
and price our products accurately is subject to a number of risks and uncertainties, some of which are outside our control, including:
•
•
•
•
•
•
the availability of sufficient reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
our selection and application of appropriate rating and pricing techniques;
changes in legal standards, claim settlement practices, medical care expenses and restoration costs;
regulatory restrictions, including, without limitation regulatory approval of rates sought; and
legislatively imposed consumer initiatives.
Consequently, we could underprice risks, which would negatively affect our profit margins, or we could overprice risks, which could
reduce our sales volume and competitiveness.
In either event, the profitability of our insurance company could be materially and
adversely affected.
Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable
policies or obtain adequate reinsurance, which could limit or halt our growth and harm our business.
Third-party rating agencies assess and rate the ability of insurers to pay their claims. The insurance industry uses financial strength
ratings to assess the financial strength and quality of insurers. Ratings are based on criteria established by the rating agencies and
reflect evaluations of each insurer’s profitability, debt and cash levels, customer base, adequacy and soundness of reinsurance, quality
and estimated market value of assets, adequacy of reserves, capital and RBC ratios, and management. Ratings are also based upon
factors of concern to agents, reinsurers and policyholders and are not directed toward the protection of investors, such as purchasers
of our common stock.
Our ability to compete successfully in states outside of Florida to expand our business footprint may also be negatively affected by our
lack of an A.M. Best company rating of our financial strength. Although our insurance subsidiaries have a Demotech rating of
“A” (Exceptional), which is generally accepted in Florida and certain other states, a rating by A.M. Best is more widely accepted
outside of Florida and may cause customers and agents to prefer a policy written by an A.M. Best-rated company over a policy written
by us.
In addition, some mortgage companies outside of Florida may require homeowners to obtain property insurance from an
insurance company with a minimum A.M. Best rating.
The withdrawal or downgrade of our ratings could limit or prevent us from writing or renewing desirable insurance policies, from
competing with insurers who have higher ratings, from obtaining adequate reinsurance, or from borrowing on a line of credit or cause
us to default on financial covenants contained in certain of our debt financing agreements. The withdrawal or downgrade of our
ratings could have a material adverse effect on our results of operations and financial position because our insurance products might
no longer be acceptable to the secondary marketplace and mortgage lenders. Furthermore, a withdrawal or downgrade of our ratings
could prevent independent agents from selling and servicing our insurance products or could increase the commissions we must pay to
these agents.
We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain
independent and general agents, our revenues would be negatively affected.
We currently market and distribute our products and services through contractual relationships with a network of independent agents
and a select number of general agents. Our independent agents are our primary source for our property and liability insurance policies.
Many of our competitors also rely on independent agents. As a result, we must compete with other insurers for independent agents’
-17-
business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher
commissions to their agents. If our products, pricing and commissions do not remain competitive, we may find it more difficult to
attract business from independent agents to sell our products. A material reduction in the amount of our products that independent
agents sell or a material reduction in the number of independent agents with whom we maintain a relationship could negatively affect
our results of operations and financial condition.
We are a party to an insurance agency master agreement with ISA, an affiliate of Allstate, pursuant to which we are authorized by ISA
to appoint Allstate agents to offer our homeowners insurance products to consumers in Florida. Since that time, our homeowners
premiums and the percentage of homeowners premiums attributable to Allstate agents has increased rapidly. During the years ended
December 31, 2019, 2018 and 2017, 23.2%, 23.8% and 23.8%, respectively, of the homeowners premiums we underwrote were from
Allstate’s network of Florida agents, and this concentration may continue to increase. An interruption or change in our relationship
with ISA could have a material adverse effect on the amount of premiums we are able to write, as well as our results of operations.
We are a party to a managing general underwriting agreement with SageSure to facilitate growth in our FNIC homeowners business
outside of Florida. As a percentage of our total homeowners premiums, 23.1%, 15.0% and 10.2%, for the years ended December 31,
2019, 2018 and 2017, respectively, were underwritten by SageSure. The profitability of the business we obtain outside of Florida
through this agreement will depend substantially on the quality of underwriting performed by SageSure. An interruption in SageSure’s
services for us, or issues with the quality of SageSure’s underwriting, could have a material adverse effect on the profitability of the
business obtained through this relationship.
Certain of our agreements with agents provide that the renewal rights for policies written under those agreements belong to
the agents, making it more difficult for us to maintain the policies written and the premium income generated through
these relationships.
Our agreements with ISA and SageSure provide that ISA and SageSure, respectively, own the expirations of the policies underwritten
under these agreements. This means that we do not have the right to solicit renewals of these policies. As a result, we may be less able
to maintain the policies and the corresponding premium income from renewals of policies written by us under these agreements.
Cybersecurity breaches and other disruptions could compromise our information and expose us to loss of data or liability,
which would cause our business and reputation to suffer.
In the ordinary course of our business, we store sensitive data,
including our proprietary business information and personally
identifiable information of our insureds and employees, on our networks. The secure processing and maintenance of this information
is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may
be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could
compromise our networks and the information stored there could be accessed, publicly disclosed, or stolen. Any such access,
disclosure or loss of information could result in legal claims against us, liability under laws that protect the privacy of personal
information, regulatory penalties, disruption to our operations, and damage our reputation, which could materially adversely affect our
results of operations. Although we have implemented security measures to protect our systems from viruses and other intrusions by
third parties, there can be no assurances that these measures will be effective. To mitigate these costs, we carry a cyber-liability
insurance policy. Our insurance may not be sufficient to protect against all financial and other loss. Additionally, this policy will not
cover us for security breaches, data loss, or cyber-attacks experienced by our third-party business partners who have access to our
customer, agent, or employee data.
Our business could be materially and adversely affected by a security breach or other attack involving the systems of one or
more of our business partners or vendors.
We conduct significant business functions and computer operations using the systems of third-party business partners and vendors,
who provide software, hosting, communication, and other computer services to us. Our networks could be compromised by the errors
or actions of our vendors and other business partners with legitimate access to our systems. If one of our vendors or other business
partners are the subject of a security breach or cyber-attack, such breach or attack may result in improper or unauthorized access to
our systems, and the loss, theft or unauthorized publication of our information or the confidential information of our customers,
agents or employees, notwithstanding our substantial efforts to protect our systems and sensitive or confidential information. An
unauthorized disclosure or loss of policyholder or employee information or other sensitive or confidential information, including by
cyber-attack or other security breach, could cause a loss of data, give rise to remediation or other expenses, expose us to liability under
federal and state laws, and subject us to litigation and investigations, which could have an adverse effect on our business, cash flows,
financial condition and results of operations. While we expend significant resources on these defensive measures, there can be no
assurance that we will be successful in preventing attacks or detecting and stopping them once they have begun.
-18-
We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our
operations.
Our business is highly dependent upon the successful and uninterrupted functioning of our current information technology and
telecommunications systems. We rely on these systems to process new and renewal business, provide customer service, make claims
payments and facilitate collections and cancellations, as well as to perform actuarial and other analytical functions necessary for pricing
and product development. As a result, the failure of these systems could interrupt our operations and adversely affect our financial
results.
Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our
business and adversely impact our financial results.
We operate in highly competitive markets and face competition from national, regional and residual market insurance companies in the
homeowners markets, many of whom are larger, have greater financial and other resources, have higher financial strength ratings and
offer more diversified insurance coverage. Our competitors include companies that market their products through agents, as well as
companies that sell insurance directly to their customers. Large national captive writers may have certain competitive advantages over
independent agency writers,
increased loyalty of their customer base and reduced policy
acquisition costs. We may be forced to reduce our premiums or increase our commissions significantly to compete, which could make
us less profitable and have a material adverse effect on our business, results of operations and financial condition. If we do not meet
the prices offered by our competitors, we may lose business in the short term, which could also result in a material adverse effect on
our business, results of operations and financial condition.
including increased name recognition,
Our executive management team is critical to the strategic direction of our company. If there were an unplanned loss of
service by any of our officers our business could be harmed.
We depend, and will continue to depend, on the services of our executive management team, which includes Michael H. Braun, Chief
Executive Officer and President, and others. Our success also will depend in part upon our ability to attract and retain qualified
executive officers, experienced underwriting talent and other skilled employees who are knowledgeable about our business. If we were
to lose the services of one or more members of our executive management team, our business could be adversely affected. Although
we have employment agreements with certain of our executive officers, any unplanned loss of service could substantially harm our
business.
If we are unable to maintain effective internal controls over financial reporting, investors may lose confidence in the
accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in
such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our
internal controls over financial reporting and provide a management report on the internal controls over financial reporting. If we have
a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial
statements may be materially misstated.
If in the future we identify material weaknesses in our internal controls over financial reporting, are unable to comply with the
requirements of Section 404 in a timely manner or are unable to assert that our internal controls over financial reporting are effective,
investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock
could be negatively affected. We could also become subject to investigations by the SEC, Nasdaq or other regulatory authorities, which
could require additional financial and management resources to address.
Our reliance on insurance scoring in pricing and underwriting certain of our insurance policies may be limited by changes
in applicable law, regulation or policies of regulatory authorities, which could cause our pricing and underwriting to be less
effective.
We rely on insurance scoring, which combines credit scores and claims history of persons applying for insurance policies with us, in
pricing and underwriting these policies. We believe that the use of this information, together with other relevant information provided
to us in the application process, is important to our ability to effectively price our insurance products and determine the risks we are
willing to underwrite. We also believe that we use this information in accordance with applicable law, regulations and policies. From
time to time, however, the use of this information has come under review by insurance and other regulators.
If the use of this
information is limited or prohibited, our pricing and underwriting of our insurance policies may be less effective, with the result that
our results of operations may be adversely affected.
-19-
Risks Related to an Investment in Our Shares
Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price of our
common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.
The market price of our common stock has experienced, and may continue to experience, significant volatility from time to time. Such
volatility may be affected by various factors and events, such as:
•
•
•
our operating results, including a shortfall in operating revenue or net income from that expected by securities analysts and
investors;
recognition of large unanticipated accounting charges, such as related to a loss reserve enhancement;
changes in securities analysts’ estimates of our financial performance or the financial performance of our competitors or
companies in our industry generally;
Failure to successfully integrate the operations of the Maison Companies into those of the Company;
•
• Demotech downgrade;
•
•
•
the announcement of a material event or anticipated event involving us or our industry or the markets in which we operate;
the issuance of a significant number of shares; and
the other risk factors described in this Annual Report, the accompanying notes and the documents incorporated by reference
herein.
In recent years, the U.S. stock market has experienced extreme price and volume fluctuations, which have sometimes affected the
market price of the securities issued by a particular company in a manner unrelated to the operational performance of the Company.
This type of market effect could impact our common stock price as well. The volatility of our common stock means that the price of
our common stock may have declined substantially at such time as you may look to sell your shares of our common stock. If our
share price decreases, the value of your investment could decline.
We have authorized but unissued preferred stock, which could affect rights of holders of common stock.
Our articles of incorporation authorize the issuance of preferred stock with designations, rights and preferences determined from time
to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred
stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the
holders of common stock. In addition, the preferred stock could be issued as a method of discouraging a takeover attempt. Although
we do not intend to issue any preferred stock at this time, we may do so in the future.
As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and
dividends to the holding company as the primary source of our income.
We are an insurance holding company whose primary assets are our subsidiaries. Our operations, and our ability to pay dividends or
service our debt, are limited by the earnings of our subsidiaries and their payment of their earnings to us in the form of management
fees, commissions, dividends, loans, advances or the reimbursement of expenses. These payments can be made only when our
subsidiaries have adequate earnings. In addition, dividend payments made to us by our insurance subsidiaries are restricted by Florida
law governing the insurance industry. Generally, Florida law limits the dividends payable by insurance companies under complicated
formulas based on the subsidiaries’ available capital and earnings.
Payment of dividends in the future will depend upon our earnings and financial position and such other factors, as our board of
directors deems relevant.
Future sales of our common stock by our existing shareholders in the public market, or the possibility or perception of such
future sales, or sales of additional shares of common stock by us, could depress our stock price.
Investors currently known to be the beneficial owners of more than 5.0% of our common stock hold approximately 45% of our
outstanding shares. This includes PIH, which received 1,773,102 shares in the closing of our acquisition of the Maison Companies.
The resale of PIH's shares has been registered, but is subject to certain limitations under our standstill agreement with PIH. Sales of a
substantial number of shares of our common stock in the public market or otherwise by our existing shareholders, or the possibility
or perception that such sales could occur, could depress the market price of our common stock and impair our ability to raise capital
through the sale of additional equity securities. In addition, we may issue additional shares of our common stock from time to time in
the future in amounts that may be significant. The sale of substantial amounts of our common stock by us, or the perception that these
-20-
sales may occur, could adversely impact our stock price. Refer to Note 3 of the notes to our Consolidated Financial Statements set
forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report for information regarding our acquisition
of the Maison Companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive office is located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 in a 64,727 square foot office facility. Our
lease for this office space is scheduled to expire in October 2028.
We also lease office space located at 7861 Woodland Center Boulevard, Tampa, Florida 33614 in a 5,880 square foot office facility,
which serves as the principal office space for our subsidiary, Maison. Our lease for this office space is scheduled to expire in January
2025.
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 this Annual Report, for further information regarding our leases.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting our business, we become involved in various legal actions and claims. Litigation is subject to
many uncertainties and we may be unable to accurately predict the outcome of such matters, some of which could be decided
unfavorably to us. Management does not believe the ultimate outcome of any pending matters of this nature would be material.
Regarding the matter involving the Co-Existence Agreement effective as of August 30, 2013 with Federated Mutual Insurance
Company ("Mutual") and the related arbitration, the Company and Mutual have exchanged releases and all remaining pending
proceedings have been resolved by an agreed order entered by the U.S. District Court for the Northern District of Illinois on
November 22, 2019.
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 this Annual Report, for further information regarding our legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
-21-
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed for trading on the NASDAQ Global Market under the symbol “FNHC.”
HOLDERS
As of March 1, 2020, there were 102 holders of record of our common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes our equity compensation plans as of December 31, 2019. All equity compensation plans were
approved by our shareholders. We have not granted any options, warrants or rights to our shareholders outside of these equity
compensation plans.
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities to
Weighted-average
future issuance under
be issued upon exercise of
exercise price of
equity compensation plans
outstanding options,
outstanding options,
(excluding securities
warrants and rights
warrants and rights
reflected in column (a))
Plan category
(a)
(b)
(c)
Equity compensation plans approved by shareholders
38,850
3.80
689,890
Refer to Note 11 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for additional information regarding our equity compensation.
-22-
STOCK PERFORMANCE GRAPH
The following graph shows the cumulative total shareholder return on our common stock over the last five fiscal years as compared
with the total returns of the NASDAQ Composite Index and the SNL Property & Casualty Insurance Index. In accordance with SEC
rules, this graph includes indices that we believe are comparable and appropriate.
FedNat Holding Company
Index
FedNat Holding Company
NASDAQ Composite
SNL Insurance P&C
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
Period Ending
100.00
100.00
100.00
123.08
106.96
103.44
78.81
116.45
122.08
71.24
150.96
139.58
87.13
146.67
134.19
74.37
200.49
157.47
Returns are based on the change in year-end to year-end price. The graph assumes $100 was invested on December 31, 2014 in our
common stock, the NASDAQ Composite Index and the SNL Property & Casualty Insurance Index and that all dividends were
reinvested. Past performance is not necessarily an indicator of future results.
Our filings with the SEC may incorporate information by reference, including this Annual Report. Unless we specifically state
otherwise, the information under this heading “Stock Performance Graph” shall not be deemed to be “soliciting materials” and shall
not be deemed to be “filed” with the SEC or incorporated by reference into any of our filings under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934.
-23-
RECENT SALES OF UNREGISTERED SECURITIES
On December 2, 2019, we issued 1,773,102 shares of common stock to PIH as part of the consideration we paid for the Maison
Companies. These shares were issued pursuant to the exemption from registration set forth in Section 4(a)(2) of the Securities Act of
1933, as amended.
-24-
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes
thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth elsewhere in this
Annual Report.
Statement of Operations Data
Revenues:
Net premiums earned
Net investment income
Net realized and unrealized investment gains (losses)
Direct written policy fees
Other income
Total revenues
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to non-controlling interest
Net income (loss) attributable to FedNat Holding
Company shareholders
Net income (loss) per share attributable to FedNat
Holding Company shareholders
Basic
Diluted
Dividends
□
Balance Sheet Data
Cash and invested assets
Total assets
Loss and loss adjustment expense reserves
Total liabilities
Total shareholders' equity
Book value per share, excluding non-controlling interest
Year Ended December 31,
2019
2018
2017
2016
2015
(In thousands, except per share data)
$
363,652
$
355,257
$
333,481
$
261,369
$
213,020
15,901
7,084
10,200
18,124
12,460
(4,144)
13,366
19,154
10,254
8,548
17,173
22,206
9,063
3,045
16,619
17,429
7,226
3,616
9,740
9,869
414,961
396,093
391,662
307,525
243,471
273,080
107,189
23,203
10,776
414,248
713
(298)
1,011
—
228,416
121,109
22,183
4,177
375,885
20,208
5,498
14,710
(218)
247,557
114,867
19,963
348
382,735
8,927
3,585
5,342
(2,647)
197,810
112,710
90,378
17,186
348
52,862
14,698
256
305,722
180,526
1,803
542
1,261
246
62,945
24,089
38,856
(445)
1,011
$
14,928
$
7,989
$
1,015
$
39,301
$
0.08
0.08
0.33
$
1.17
1.16
0.24
$
0.61
0.60
0.32
$
0.07
0.07
0.27
2.86
2.81
0.18
$
$
December 31,
2019
2018
2017
2016
2015
(In thousands, except per share data)
$
684,002
$
515,948
$
530,249
$
484,275
$
1,179,016
324,362
930,323
248,693
17.25
925,371
296,230
710,112
215,259
16.84
904,873
230,515
677,414
227,459
16.29
815,390
158,110
580,925
234,465
16.01
437,369
701,373
97,706
455,216
246,157
16.52
-25-
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Operating Results Overview — Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table sets forth results of operations for the periods presented:
□
$
Revenues:
Gross premiums written
Gross premiums earned
Ceded premiums
Net premiums earned
Net investment income
Net realized and unrealized investment gains (losses)
Direct written policy fees
Other income
Total revenues
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to non-controlling interest
Net income (loss) attributable to FNHC shareholders
$
Ratios to net premiums earned:
Net loss ratio
Net expense ratio
Combined ratio
Year Ended December 31,
2019
% Change
2018
(Dollars in thousands)
610,608
582,334
(218,682)
363,652
15,901
7,084
10,200
18,124
414,961
273,080
107,189
23,203
10,776
414,248
713
(298)
1,011
—
1,011
75.1 %
35.9 %
111.0 %
7.5 % $
0.4 %
(2.7)%
2.4 %
27.6 %
(270.9)%
(23.7)%
(5.4)%
4.8 %
19.6 %
(11.5)%
4.6 %
158.0 %
10.2 %
(96.5)%
(105.4)%
(93.1)%
(100.0)%
(93.2)% $
567,764
580,020
(224,763)
355,257
12,460
(4,144)
13,366
19,154
396,093
228,416
121,109
22,183
4,177
375,885
20,208
5,498
14,710
(218)
14,928
64.3 %
40.3 %
104.6 %
(1) Net loss ratio is calculated as losses and loss adjustment expenses divided by net premiums earned.
(2) Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.
(3) Combined ratio is calculated as the sum of losses and loss adjustment expenses and all operating expenses less interest
expense divided by net premiums earned.
-26-
The following table sets forth a reconciliation of GAAP to non-GAAP measures:
Year Ended December 31,
2019
2018
Homeowners
Automobile
Other
Consolidated
Homeowners
Automobile
Other
Consolidated
(Dollars in thousands)
$
387,300
$
28
$
27,633
$
414,961
$
364,752
$
10,128
$
21,213
$
396,093
Revenue
Total revenues
Less:
$
$
Net realized and unrealized investment
gains (losses)
Adjusted operating revenues
Net Income (Loss)
Net income (loss)
Less:
Net realized and unrealized investment
gains (losses)
Acquisition and other costs
Acquisition of identifiable intangibles
Gain (loss) on early extinguishment of
debt
—
387,300
$
—
28
7,084
7,084
—
—
(4,144)
(4,144)
$
20,549
$
407,877
$
364,752
$
10,128
$
25,357
$
400,237
5,665
$
(4,040)
$
(614)
$
1,011
$
22,175
$
(5,648)
$
(1,599)
$
14,928
—
(237)
(10)
—
—
(5)
—
—
5,347
(1,025)
—
5,347
(1,267)
(10)
(2,698)
(2,698)
—
(1,488)
—
—
—
(70)
—
—
(3,094)
(410)
—
—
(3,094)
(1,968)
—
—
Adjusted operating income (loss)
$
5,912
$
(4,035)
$
(2,238)
$
(361)
$
23,663
$
(5,578)
$
1,905
$
19,990
Income tax rate assumed for reconciling
items above
24.522 %
24.522 %
24.522 %
24.522 %
25.345 %
25.345 %
25.345 %
25.345 %
The following table summarizes our results of operations by line of business for the periods presented. Although we conduct our
operations under a single reportable segment, we have provided line of business information as we believe it is useful to our
shareholders and the investing public. “Homeowners” line of business consists of our homeowners and fire property and casualty
insurance business. “Automobile” line of business consists of our nonstandard personal automobile insurance business. “Other” line
of business primarily consists of our commercial general liability and federal flood businesses, along with corporate and investment
operations.
-27-
Losses and loss adjustment expenses
257,297
5,128
10,655
273,080
206,062
Year Ended December 31,
2019
2018
Homeowners
Automobile
Other
Consolidated
Homeowners
Automobile
Other
Consolidated
(Dollars in thousands)
$
594,341
$
(1)
$
16,268
$
610,608
$
539,689
$
8,603
$
19,472
$
565,566
(203,383)
362,183
—
—
9,915
15,202
387,300
26
(20)
6
—
—
3
19
28
16,742
(15,279)
1,463
15,901
7,084
282
2,903
27,633
582,334
(218,682)
363,652
15,901
7,084
10,200
18,124
414,961
539,692
(197,445)
342,247
—
—
8,484
14,021
364,752
51
200
—
5,379
(5,351)
(1,311)
(4,040)
3,067
4,185
10,776
28,683
(1,050)
(436)
(614)
107,189
23,203
10,776
414,248
713
(298)
1,011
111,103
18,079
100
335,344
29,408
7,451
21,957
104,071
18,818
—
380,186
7,114
1,449
5,665
—
18,402
(13,744)
4,658
—
—
4,322
1,148
10,128
11,617
5,751
325
—
17,693
(7,565)
(1,917)
(5,648)
21,926
(13,574)
8,352
12,460
(4,144)
560
3,985
21,213
567,764
580,020
(224,763)
355,257
12,460
(4,144)
13,366
19,154
396,093
10,737
228,416
4,255
3,779
4,077
22,848
(1,635)
(36)
(1,599)
121,109
22,183
4,177
375,885
20,208
5,498
14,710
—
—
—
(218)
—
—
(218)
$
5,665
$
(4,040)
$
(614)
$
1,011
$
22,175
$
(5,648)
$
(1,599)
$
14,928
71.0 %
34.0 %
105.0 %
NCM
NCM
75.1 %
35.9 %
111.0 %
60.2 %
37.8 %
98.0 %
249.4 %
128.6 %
64.3 %
40.3 %
104.6 %
Revenues:
Gross premiums written
Gross premiums earned
Ceded premiums
Net premiums earned
Net investment income
Net realized and unrealized investment
gains (losses)
Direct written policy fees
Other income
Total revenues
Costs and expenses:
Commissions and other underwriting
expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to non-
controlling interest
Net income (loss) attributable
to FNHC shareholders
Ratios to net premiums earned:
Net loss ratio
Net expense ratio
Combined ratio
Revenue
Total revenue increased $18.9 million, or 4.8%, to $415.0 million for the year ended December 31, 2019, as compared to $396.1
million for the year ended December 31, 2018. The increase was primarily driven by higher net premiums growth from Homeowners
and higher net investment gains offset by lower net premiums earned in Automobile and commercial general liability, all of which are
discussed below.
-28-
Gross Premiums Written
The following table sets forth the gross premiums written for the periods presented:
Gross premiums written:
Homeowners Florida
Homeowners non-Florida
Automobile
Commercial general liability
Federal flood
Total gross premiums written
Year Ended December 31,
2019
2018
(In thousands)
$
451,856
$
142,485
(1)
(145)
16,413
$
610,608
$
458,652
81,037
8,603
5,384
14,088
567,764
Gross premiums written increased $42.8 million, or 7.5%, to $610.6 million for the year ended December 31, 2019, as compared to
$567.8 million for the year ended December 31, 2018. Gross premiums written increased primarily due to the growth in homeowners
non-Florida, including $6.6 million from Maison, partially offset by the decline in the non-core lines we are exiting, Automobile and
commercial general liability, as well as a decline in homeowners Florida. Our homeowners non-Florida business continues to show
exceptional growth year over year, especially in the state of Texas, and now with Maison's book of business, will allow us to leverage
our infrastructure and diversify insurance risk. Overall, Homeowners grew 10.1%.
Gross Premiums Earned
The following table sets forth the gross premiums earned for the periods presented:
Gross premiums earned:
Homeowners Florida
Homeowners non-Florida
Automobile
Commercial general liability
Federal flood
Total gross premiums earned
Year Ended December 31,
2019
2018
(In thousands)
$
$
452,730
$
473,121
112,836
26
1,669
15,073
66,571
18,402
8,794
13,132
582,334
$
580,020
Gross premiums earned increased $2.3 million, or 0.4%, to $582.3 million for the year ended December 31, 2019, as compared to
$580.0 million for the year ended December 31, 2018. Gross premiums earned increased primarily due to a 4.8% increase in earned
premiums in Homeowners, which includes $7.9 million from Maison, partially offset by our decision to exit the Automobile and
commercial general liability lines.
-29-
Ceded Premiums Earned
Ceded premiums earned decreased $6.1 million, or 2.7%, to $218.7 million for the year ended December 31, 2019, as compared to
$224.8 million for the year ended December 31, 2018. The decrease was primarily driven by lower ceded premiums in Automobile as
we have exited that line of business, partially offset by higher excess of loss reinsurance spend in Homeowners.
Net Investment Income
Net investment income increased $3.4 million, or 27.6%, to $15.9 million for the year ended December 31, 2019, as compared to $12.5
million for the year ended December 31, 2018. The increase was due to fixed income portfolio growth and the improvement in the
yield as a result of rising interest rates during 2018 and from portfolio repositioning.
Net Realized and Unrealized Investment Gains (Losses)
Net realized and unrealized investment gains (losses) increased $11.2 million, to $7.1 million for the year ended December 31, 2019, as
compared to $(4.1) million for the year ended December 31, 2018. We recognized $4.1 million and $(1.2) million in unrealized
investment gains (losses) for equity securities during these respective periods. Our current year net realized gains and prior year net
realized losses are primarily associated with our portfolio managers, under our control, moving out of positions due to both macro and
micro conditions, a typical practice each and every quarter. Our prior year net realized losses also resulted from our decision to
liquidate certain bond positions, including positions related to tax-free municipal securities during the first quarter of 2018.
Direct Written Policy Fees
Direct written policy fees decreased by $3.2 million, or 23.7%, to $10.2 million for the year ended December 31, 2019, as compared to
$13.4 million for the year ended December 31, 2018. The decrease in direct written policy fees is correlated to our decision to exit the
Automobile line, as discussed earlier.
Other Income
Other income decreased $1.1 million, or 5.4%, to $18.1 million for the year ended December 31, 2019, as compared to $19.2 million
for the year ended December 31, 2018. Other income included the following for the periods presented:
□
Other income:
Commission income
Brokerage
Financing and other revenue
Total other income
2019
Year Ended December 31,
% Change
(Dollars in thousands)
2018
$
$
2,904
13,577
1,643
18,124
(37.5)% $
10.3 %
(25.3)%
(5.4)% $
4,649
12,305
2,200
19,154
The decrease in other income was driven by lower commission income and financing revenue, partially offset by higher brokerage
revenue. The year over year decreases in commission income were driven by lower Automobile fee income from the reduction in
premiums earned and, to a lesser extent, lower fee income from other areas of the business. The brokerage revenue increase is the
result of higher excess of loss reinsurance spend from the reinsurance programs in place during 2019 as compared to 2018.
Expenses
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses ("LAE") increased $44.7 million, or 19.6%, to $273.1 million for the year ended December 31,
2019, as compared to $228.4 million for the year ended December 31, 2018. Homeowners losses increased $51.2 million during the
year ended December 31, 2019 as compared to the year ended December 31, 2018, slightly offset by $6.5 million of decreases in
Automobile and commercial general liability as we exit these lines, across the same period.
The net loss ratio increased 10.8 percentage points, to 75.1% in 2019, as compared to 64.3% in 2018. The higher ratio was primarily
the result of $52.7 million of net losses from 2019 severe weather events in Florida and other states (of which $26.5 million relates to
-30-
non-Florida losses and is subject to a 50% profit-sharing agreement, as discussed earlier), as compared to $31.5 million from 2018
severe weather events. Additionally, we incurred approximately $10 million of additional losses in 2019 as compared to 2018 as a
result of higher gross premiums earned. We, also, strengthened current accident year reserves in 2019, primarily in Florida in response
to higher severity trends from AOB and the overall litigation environment in Florida. Lastly, in 2019, we had approximately $12.8
million of adverse prior year reserve development, in our non-core lines, as we exit these lines.
Commissions and Other Underwriting Expenses
The following table sets forth the commissions and other underwriting expenses for the periods presented:
□
Year Ended December 31,
2019
2018
(In thousands)
Commissions and other underwriting expenses:
Homeowners Florida
All others
Ceding commissions
Total commissions
Automobile
Homeowners non-Florida
Total fees
Salaries and wages
Other underwriting expenses
$
52,962
$
25,491
(12,128)
66,325
3
3,365
3,368
12,114
25,382
Total commissions and other underwriting expenses
$
107,189
$
56,693
19,948
(12,743)
63,898
4,322
2,147
6,469
14,279
36,463
121,109
Commissions and other underwriting expenses decreased $13.9 million, or 11.5%, to $107.2 million for the year ended December 31,
2019, as compared to $121.1 million for the year ended December 31, 2018. The decrease is the result of lower profit share costs
recorded within the other underwriting expenses account. As noted above, we have a 50% profit share agreement with our managing
general underwriter on FNIC's non-Florida business, whereby we split 50% of the profits. Accordingly, in 2019, non-Florida incurred
higher losses from severe weather events (as previously discussed in the Losses and Loss Adjustment Expenses section), resulting in a
$13.3 million reduction.
Additionally, the lower Automobile fees and lower homeowners Florida commissions are driven by the corresponding change in
premiums earned across periods. The decline in salaries and wages is due in part to our continued focus on operational efficiencies.
These items are partially offset by an increase in homeowners non-Florida commissions and fees as a result of higher premiums earned
across periods.
The net expense ratio decreased 4.4 percentage points to 35.9% in 2019, as compared to 40.3% in 2018. The decrease in the ratio is
attributable to the lower non-Florida profit share expense and other expense reductions. Refer to the discussion above for more
information.
General and Administrative Expenses
General and administrative expenses increased $1.0 million, or 4.6%, to $23.2 million for the year ended December 31, 2019, as
compared to $22.2 million for the year ended December 31, 2018. The increase was primarily the result of higher professional fees,
including deal costs and due diligence costs relating to the acquisition of the Maison Companies, as previously discussed.
-31-
Interest Expense
Interest expense increased $6.6 million to $10.8 million for the year ended December 31, 2019, as compared to $4.2 million for the
year ended December 31, 2018. The increase in interest expense is the result of $3.6 million of prepayment fees, including the write-off
of remaining debt issuance costs, and an increase in the outstanding debt as a result of our first quarter 2019 borrowing. Refer to Note
3 and 8 of the notes to our Consolidated Financial Statements included herein, for information regarding new debt issued and debt
retirement that occurred in March 2019.
Income Taxes
Income tax expense (benefit) decreased $5.8 million, or 105.4%, to $(0.3) million for the year ended December 31, 2019, as compared
to $5.5 million for the year ended December 31, 2018. The decrease in income tax expense is the result of lower income during 2019,
compared to 2018. Additionally, in 2019, we recognized a benefit of $0.4 million relating to an election to carry back capital losses and
a benefit of $0.2 million relating to a reduction in the uncertain tax position reserve. Lastly, the State of Florida announced a reduction
in its state income tax rate effective from January 1, 2019, as discussed earlier.
-32-
Operating Results Overview — Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table sets forth selected results of operations for the periods presented:
$
Revenues:
Gross premiums written
Gross premiums earned
Ceded premiums
Net premiums earned
Net investment income
Net realized and unrealized investment gains (losses)
Direct written policy fees
Other income
Total revenues
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to non-controlling interest
Net income (loss) attributable to FNHC shareholders
$
Ratios to net premiums earned:
Net loss ratio
Net expense ratio
Combined ratio
Year Ended December 31,
2018
% Change
2017
(Dollars in thousands)
567,764
580,020
(224,763)
355,257
12,460
(4,144)
13,366
19,154
396,093
228,416
121,109
22,183
4,177
375,885
20,208
5,498
14,710
(218)
14,928
64.3 %
40.3 %
104.6 %
(5.9)% $
(3.8)%
(16.7)%
6.5 %
21.5 %
(148.5)%
(22.2)%
(13.7)%
1.1 %
(7.7)%
5.4 %
11.1 %
1,100.3 %
(1.8)%
126.4 %
53.4 %
175.4 %
(91.8)%
86.9 % $
603,417
603,193
(269,712)
333,481
10,254
8,548
17,173
22,206
391,662
247,557
114,867
19,963
348
382,735
8,927
3,585
5,342
(2,647)
7,989
74.2 %
40.5 %
114.7 %
-33-
The following table sets forth a reconciliation of GAAP to non-GAAP measures:
Year Ended December 31,
2018
2017
Homeowners
Automobile
Other
Consolidated
Homeowners
Automobile
Other
Consolidated
(Dollars in thousands)
$
364,752
$
10,128
$
21,213
$
396,093
$
320,632
$
34,765
$
36,265
$
391,662
Revenue
Total revenues
Less:
—
—
(4,144)
(4,144)
—
—
8,548
8,548
364,752
$
10,128
$
25,357
$
400,237
$
320,632
$
34,765
$
27,717
$
383,114
22,175
$
(5,648)
$
(1,599)
$
14,928
$
3,215
$
(7,132)
$
11,906
$
7,989
Net realized and unrealized investment
gains (losses)
Adjusted operating revenues
Net Income (Loss)
Net income (loss)
Less:
Net realized and unrealized investment
gains (losses)
Acquisition and other costs
$
$
Adjusted operating income (loss)
$
23,663
$
(5,578)
$
1,905
$
19,990
$
3,215
$
(7,132)
$
6,655
$
—
(1,488)
—
(70)
(3,094)
(410)
(3,094)
(1,968)
—
—
—
—
5,251
—
5,251
—
2,738
Income tax rate assumed for reconciling
items above
25.345 %
25.345 %
25.345 %
25.345 %
38.575 %
38.575 %
38.575 %
38.575 %
Year Ended December 31,
2018
2017
Homeowners
Automobile
Other
Consolidated
Homeowners
Automobile
Other
Consolidated
(Dollars in thousands)
$
539,689
$
8,603
$
19,472
$
567,764
$
536,755
$
43,505
$
23,157
$
539,692
(197,445)
342,247
—
—
8,484
14,021
364,752
206,062
111,103
18,079
100
335,344
29,408
7,451
21,957
18,402
(13,744)
4,658
—
—
4,322
1,148
10,128
11,617
5,751
325
—
17,693
(7,565)
(1,917)
(5,648)
21,926
(13,574)
8,352
12,460
(4,144)
560
3,985
21,213
580,020
(224,763)
355,257
12,460
(4,144)
13,366
19,154
396,093
525,524
(227,269)
298,255
—
—
8,715
13,662
320,632
10,737
228,416
206,842
4,255
3,779
4,077
22,848
(1,635)
(36)
(1,599)
121,109
22,183
4,177
375,885
20,208
5,498
14,710
97,111
15,403
348
319,704
928
360
568
54,679
(31,037)
23,642
—
—
7,846
3,277
34,765
32,752
12,976
650
—
22,990
(11,406)
11,584
10,254
8,548
612
5,267
36,265
7,963
4,780
3,910
—
46,378
16,653
(11,613)
(4,481)
(7,132)
19,612
7,706
11,906
603,417
603,193
(269,712)
333,481
10,254
8,548
17,173
22,206
391,662
247,557
114,867
19,963
348
382,735
8,927
3,585
5,342
(218)
—
—
(218)
(2,647)
—
—
(2,647)
$
22,175
$
(5,648)
$
(1,599)
$
14,928
$
3,215
$
(7,132)
$
11,906
$
7,989
249.4 %
128.6 %
60.2 %
37.8 %
98.0 %
64.3 %
40.3 %
104.6 %
69.4 %
37.7 %
107.1 %
138.5 %
68.7 %
74.2 %
40.5 %
114.7 %
Revenues:
Gross premiums written
Gross premiums earned
Ceded premiums
Net premiums earned
Net investment income
Net realized and unrealized investment
gains (losses)
Direct written policy fees
Other income
Total revenues
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting
expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to non-
controlling interest
Net income (loss) attributable
to FNHC shareholders
Ratios to net premiums earned:
Net loss ratio
Net expense ratio
Combined ratio
-34-
Revenue
Total revenue increased $4.4 million, or 1.1%, to $396.1 million for the year ended December 31, 2018, as compared to $391.7 million
for the year ended December 31, 2017. The increase was primarily driven by lower ceded premiums due to decreased reinsurance
spend, partially offset by lower gross premiums earned and recognized losses on our investments, all of which is discussed below.
Gross Premiums Written
The following table sets forth the gross premiums written for the periods presented:
□
Gross premiums written:
Homeowners Florida
Homeowners non-Florida
Automobile
Commercial general liability
Federal flood
Total gross premiums written
Year Ended December 31,
2018
2017
(In thousands)
$
$
458,652
$
482,039
81,037
8,603
5,384
14,088
54,716
43,505
11,048
12,109
567,764
$
603,417
Gross premiums written decreased $35.6 million, or 5.9%, to $567.8 million for the year ended December 31, 2018, as compared to
$603.4 million for the year ended December 31, 2017. Gross premiums written decreased primarily due to the decline in Automobile
and homeowners Florida offset by the growth in homeowners non-Florida.
The lower premiums in Automobile was due to our decision to select specific types and amounts of premiums to be underwritten with
consideration and focus on profitability. Automobile was not profitable throughout the 2017 year and we announced in December
2017 that we were taking the appropriate steps, including the completion of all required regulatory filings and approvals, to withdraw
from Automobile. Effective August 1, 2018, a novation agreement was executed with a third party transferring the Texas automobile
book to another insurance carrier. The unearned premium reserve on the in-force business and the claims handling responsibility for
losses relating to the Texas auto business after July 31, 2018 were transferred to the third party. Our gross premiums written in
Automobile in the fourth quarter of 2018 was insignificant. The increase in the homeowners non-Florida gross premiums written was
due to the expansion of our operations outside of Florida, allowing us to leverage our infrastructure and diversify insurance risk.
Additionally, homeowners Florida written premiums in 2018 includes the effect of the rate increase of 10.0%, that became effective on
August 1, 2017.
Gross Premiums Earned
The following table sets forth the gross premiums earned for the periods presented:
Gross premiums earned:
Homeowners Florida
Homeowners non-Florida
Automobile
Commercial general liability
Federal flood
Total gross premiums earned
Year Ended December 31,
2018
2017
(In thousands)
$
$
473,121
$
481,541
66,571
18,402
8,794
13,132
43,983
54,679
12,216
10,774
580,020
$
603,193
Gross premiums earned decreased $23.2 million, or 3.8%, to $580.0 million for the year ended December 31, 2018, as compared to
$603.2 million for the year ended December 31, 2017. The results are a reflection of our decision to exit the Automobile and
commercial general liability lines, as discussed earlier, and were partially offset by a 3.4% increase in earned premiums in Homeowners.
Additionally, in homeowners Florida, our August 1, 2017 10.0% rate increase is fully reflected in earned premiums as of the end of the
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third quarter of 2018, representing approximately $30 million of incremental premiums earned in 2018 (from 2017) and our
homeowners non-Florida continues to grow on an earned basis.
Ceded Premiums Earned
Ceded premiums earned decreased $44.9 million, or 16.7%, to $224.8 million for the year ended December 31, 2018, as compared to
$269.7 million for the year ended December 31, 2017. The decrease was primarily driven by lower excess of loss reinsurance spend of
$15.1 million and lower ceding from our homeowners Florida quota-share from 10% to 2% during the third quarter of 2018, a $14.7
million impact, as well as lower gross premiums earned in Automobile during the current period as a result of lower premiums earned,
as mentioned earlier.
Net Investment Income
Net investment income increased $2.2 million, or 21.5%, to $12.5 million for the year ended December 31, 2018, as compared to $10.3
million for the year ended December 31, 2017. The increase in net investment income was primarily due to the growth in our fixed
income portfolio including a re-allocation of $30 million of equity investments into fixed income securities during the third quarter of
2017. The increase was also due to the improvement in the yield on our fixed income portfolio as a result of portfolio repositioning
during the first quarter of 2017, particularly the sale of tax-free municipal bonds, the proceeds of which were reinvested in taxable
municipal and corporate fixed income securities with higher coupon rates.
Net Realized and Unrealized Investment Gains (Losses)
Net realized and unrealized investment gains (losses) declined $12.6 million, to $(4.1) million for the year ended December 31, 2018, as
compared to $8.5 million for the year ended December 31, 2017. During the year ended December 31, 2018, we recognized $1.2
million in unrealized investment losses for equity securities and $2.9 million in net realized losses primarily due to the decision to
liquidate certain bond positions, including positions related to tax-free municipal securities. This liquidation was done to reduce
exposure in certain bond types as well as consolidate our investment strategy between MNIC's investment securities and the rest of the
Company's investment securities, which resulted in us selling out of certain bond and equity positions. We also experienced losses
associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions, a typical
practice each and every quarter. Our prior year investment gains of $8.5 million were driven by a decision to re-deploy approximately
$30.6 million of equities into fixed-income securities during the third quarter of 2017 in order to reduce the Company’s exposure to
the equity markets.
As discussed in Note 2 of the notes to our Consolidated Financial Statements, effective January 1, 2018, we began recording all
unrealized gains (losses) for equity securities through the income statement instead of through other comprehensive income. This
accounting for equity securities creates volatility in our earnings compared to the prior accounting rules.
Direct Written Policy Fees
Direct written policy fees decreased by $3.8 million, or 22.2%, to $13.4 million for the year ended December 31, 2018, as compared to
$17.2 million for the year ended December 31, 2017. The decrease in direct written policy fees is correlated to the lower number of
policies in-force in Automobile. Additionally, further impacting the decline is the fact that Automobile policies have a higher policy fee
amount per premium dollar and generate policy fees twice per year (with six month policies) as compared with Homeowners policies.
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Other Income
Other income decreased $3.0 million, or 13.7%, to $19.2 million for the year ended December 31, 2018, as compared to $22.2 million
for the year ended December 31, 2017. Other income included the following for the periods presented:
□
Other income:
Commission income
Brokerage
Financing and other revenue
Total other income
Year Ended December 31,
2018
% Change
2017
(Dollars in thousands)
$
$
4,649
12,305
2,200
19,154
(25.3)% $
4.4 %
(47.6)%
(13.7)% $
6,227
11,781
4,198
22,206
The decline in other income was driven by lower commission income and financing and other revenue partially offset by higher
brokerage revenue. The year over year decreases were driven by lower fee income from Automobile and other fees across the business.
The lower fee income from Automobile was due to the reduction in premiums earned for the year ended December 31, 2018, as
compared to December 31, 2017.
Expenses
Losses and Loss Adjustment Expenses
Losses and LAE decreased $19.2 million, or 7.7%, to $228.4 million for the year ended December 31, 2018, as compared to $247.6
million for the year ended December 31, 2017. The lower loss ratio was the result of the decrease in the size of Automobile ($21.2
million lower losses, including adverse development) driven by exiting the line of business.
The expense was also impacted from severe weather ($31.5 million in the year ended December 31, 2018, impacts of Hurricane
Michael, Hurricane Florence and Tropical Storm Gordon, as compared to $30.4 million in the year December 31, 2017, impacts of
Hurricane Irma and Hurricane Harvey).
Commissions and Other Underwriting Expenses
The following table sets forth commissions and other underwriting expenses for the periods presented:
Year Ended December 31,
2018
2017
(In thousands)
Commissions and other underwriting expenses:
Homeowners Florida
All others
Ceding commissions
Total commissions and other fees
Automobile
Homeowners non-Florida
Total fees
Salaries and wages
Other underwriting expenses
$
56,693
$
19,948
(12,743)
63,898
4,322
2,147
6,469
14,279
36,463
Total commissions and other underwriting expenses
$
121,109
$
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57,151
20,135
(16,299)
60,987
7,847
1,223
9,070
14,521
30,289
114,867
Commissions and other underwriting expenses increased $6.2 million, or 5.4%, to $121.1 million for the year ended December 31,
2018, as compared to $114.9 million for the year ended December 31, 2017. The increase was primarily due to higher costs related to
the homeowners non-Florida 50% profit share provision (which is recorded within the other underwriting expenses line) as a result of
higher profitability in the year ended December 31, 2018 as compared to the year ended December 31, 2017. The higher profitability is
the direct result of continued earned premium growth, together with good loss experience in these states. Additionally, we recognized
higher homeowners non-Florida commission expense as a result of higher premium earned in 2018. The additional costs were partially
offset by lower acquisition related costs from Automobile driven by the lower gross premiums earned during 2018 as compared with
2017.
General and Administrative Expenses
General and administrative expenses increased $2.2 million, or 11.1%, to $22.2 million for the year ended December 31, 2018, as
compared to $20.0 million for the year ended December 31, 2017. The increase in general and administrative expenses was primarily
due to higher legal and professional fees, including audit, tax and actuarial fees, as well as higher payroll costs as a result of severance
related costs. The higher legal and professional fees was partially driven by due diligence costs related to the acquisition of the Maison
Companies, as previously announced on February 25, 2019 and further discussed earlier in this Form 10-K.
Interest Expense
Interest expense increased $3.9 million, or 1,100.3%, to $4.2 million for the year ended December 31, 2018, as compared to $0.3
million for the year ended December 31, 2017. The increase in interest expense is the result of the Company issuing $45.0 million of
senior notes, late in December 2017.
Income Taxes
Income taxes increased $1.9 million, or 53.4%, to $5.5 million for the year ended December 31, 2018, as compared to $3.6 million for
the year ended December 31, 2017. The increase in income tax expense is the result of higher taxable income during the year ended
December 31, 2018, as compared to the year ended December 31, 2017, partially offset by the decrease in the federal corporate tax
rate from 35% to 21%, effective January 1, 2018. Refer to Note 9 of the notes to our Consolidated Financial Statements set forth in
Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information on federal income tax
reform.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of funds are gross written premiums, investment income, commission income and fee income. Our primary uses
of funds are the payment of claims, catastrophe and other reinsurance premiums and operating expenses. As of December 31, 2019,
we had $133.4 million in cash and cash equivalents and $550.6 million in investments. As of December 31, 2018, we had $64.4 million
in cash and cash equivalents and $451.5 million in investments. Total shareholders’ equity increased $33.4 million, to $248.7 million as
of December 31, 2019, as compared to $215.3 million as of December 31, 2018, due primarily to shares issued for the acquisition of
the Maison Companies and unrealized gains on our bond portfolio.
Historically, we have met our liquidity requirements primarily through cash generated from operations. On March 5, 2019, the
Company closed on an offering of $100 million of Senior Unsecured Notes due 2029, which bear interest at the annual rate of 7.5%.
The net proceeds of the offering were in part used to redeem all $45 million of the Company's Senior Unsecured Fixed Rate Notes
due 2022 and the Company's Senior Notes due 2027. Additionally, the remaining cash from the offering was used to purchase the
Maison Companies and for other general corporate purposes, including potential repurchases of shares of our common stock and
managing the capital needs of our subsidiaries. Refer to Notes 3 and 8 of the notes to our Consolidated Financial Statements set forth
in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information regarding the 2029
Notes as well as the acquisition of the Maison Companies.
Among other things, the 2029 Notes contain customary covenants that limit the Company's ability to enter into certain operational
and financial transactions, including, but not limited to incurring additional debt above certain thresholds. The Company's actual debt
to capital ratio as of December 31, 2019 was approximately 28%.
Statutory Capital and Surplus of our Insurance Subsidiaries
As described more fully in Part I, Item 1. Business, Regulation of this Annual Report, our insurance operations are subject to the laws
and regulations of the states in which we operate. The Florida OIR and their regulatory counterparts in other states utilize the NAIC
RBC requirements, and the resulting RBC ratio, as a key metric in the exercise of their regulatory oversight. The RBC ratio is a
measure of the sufficiency of an insurer’s statutory capital and surplus. In addition, the RBC ratio is used by insurance industry ratings
services in the determination of the financial strength ratings (i.e. claims paying ability) they assign to insurance companies. As of
December 31, 2019, FNIC’s statutory surplus, which includes MNIC, was $141.8 million. As of December 31, 2019, MIC’s, statutory
surplus was $50.7 million.
Based upon the 2019, 2018 and 2017 statutory financial statements for FNIC, MIC and MNIC, statutory surplus exceeded the
regulatory action levels established by the NAIC’s RBC requirements.
Based on RBC requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to
its ACL, as calculated under the NAIC’s requirements, decreases. The first action level, the Company Action Level, requires an insurer
to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The
second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the
insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of
the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the
aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level,
which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC’s
ratio of statutory surplus to its ACL was 323.9% and 329.9% as of December 31, 2019 and 2018, respectively. MNIC’s ratio of
statutory surplus to its ACL was 1,128.7% and 774.4% as of December 31, 2019 and 2018, respectively. MIC’s ratio of statutory
surplus to its ACL was 305.7% as of December 31, 2019.
Cash Flows Discussion
We believe that existing cash and investment balances, when combined with anticipated cash flows and the proceeds of our debt
offering as described above, will be adequate to meet our expected liquidity needs in both the short-term and the reasonably
foreseeable future. We believe the combined balances will be sufficient to meet our ongoing operating requirements and anticipated
cash needs, and satisfy the covenants in our senior notes. Future growth strategies may require additional external financing and we
may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us
on favorable terms, or at all, or that any such financing would not negatively impact our results of operations. We expect to continue
declaring and paying dividends at comparable levels, subject to our future liquidity needs and reserve requirements.
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Subject to our compliance with capital requirements as described above, we may consider various opportunities to deploy our capital,
including repurchases of our common stock if such repurchases represent a more favorable use of available capital.
Operating Activities
Net cash provided by operating activities increased to $35.3 million for the year ended December 31, 2019 from $30.3 million for the
year ended December 31, 2018. This increase reflects higher premiums collected, partially offset by higher expenses paid, including
those related to net losses and loss adjustment expenses in the year ended December 31, 2019, as compared to prior year.
Net cash provided by operating activities increased to $30.3 million for the year ended December 31, 2018 from $13.1 million for the
year ended December 31, 2017. This increase primarily reflects higher net premiums collected and lower net loss and loss adjustment
expenses paid for the year ended December 2018, as compared to prior year.
Investing Activities
Net cash used in investing activities was $9.0 million for the year ended December 31, 2019, as compared to $21.2 million for the year
ended December 31, 2018. The change was due to lower purchases of debt securities of $228.1 million for the year ended December
31, 2019, as compared to $337.8 million for the year ended December 31, 2018 and net cash acquired from the acquisition of the
Maison Companies of $10.4 million in 2019. This was partially offset by lower proceeds from sales of debt securities of $164.2 million
in the current year, as compared to $228.8 million in the prior year and lower maturities and redemptions of debt securities of $43.9
million for the year ended December 31, 2019, as compared to $92.7 million for the year ended December 31, 2018.
Net cash used in investing activities was $21.2 million for the year ended December 31, 2018, as compared to $31.7 million for the year
ended December 31, 2017, representing net growth in our investment portfolio each year. The change was due to higher maturities
and redemptions of debt securities of $92.7 million for the year ended December 31, 2018, as compared to $38.0 million the year
ended December 31, 2017, and lower purchases of debt securities of $337.8 million for the year ended December 31, 2018, as
compared to $339.7 million for the prior year. These changes were partially offset by lower proceeds from sales of equity securities of
$10.6 million for the year ended December 31, 2018, as compared to $57.1 million for the year ended December 31, 2017.
Financing Activities
Net cash provided by financing activities was $42.6 million for the year ended December 31, 2019, as compared to net cash used of
$30.9 million for the year ended December 31, 2018. The change was primarily due to proceeds from issuance of long-term debt of
$98.4 million for the year ended December 31, 2019 and the purchase of non-controlling interest of $16.7 million in the prior year.
These changes were partially offset by payment of long-term debt of $48.0 million for the year ended December 31, 2019, as compared
to payment of $5.0 million in the prior year.
Net cash used by financing activities was $30.9 million for the year ended December 31, 2018, as compared to net cash provided of
$30.2 million for the year ended December 31, 2017. The change was due payment of long-term debt of $5 million for the year ended
December 31, 2018, as compared to proceeds of $45.0 million in the prior year, and the purchase of our non-controlling interest of
$16.7 million for the year ended December 31, 2018. These changes were partially offset by lower repurchases of common stock
during 2018 compared to 2017.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP, which requires
the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and LAE.
Insurance premiums are established before we know the amount of losses and LAE and the extent to which inflation may affect such
expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to
charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation may also
affect the market value of our investment portfolio and the investment rate of return. Any future economic changes that result in
prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred losses and LAE and thereby
materially adversely affect future liability requirements.
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CONTRACTUAL OBLIGATIONS
The table sets forth a summary of long-term contractual obligations as of December 31, 2019, and includes amounts that represent
estimates of gross undiscounted amounts payable over time, as follows:
Loss and loss adjustment expense reserves (1)
Long-term debt (2)
Operating leases
Total long-term contractual obligations
Payments Due By Period
Less
than
1 Year
Total
1 - 3
Years
3 - 5
Years
(In thousands)
More
than
5 Years
$
$
324,362
$
191,373
$
97,309
$
19,462
$
100,000
9,920
—
1,028
—
2,164
—
2,295
16,218
100,000
4,433
434,282
$
192,401
$
99,473
$
21,757
$
120,651
(1) Loss and loss adjustment expense reserves do not have contractual maturity dates; however, based on historical payment
patterns, the amount presented is our estimate of the expected timing of these payments. The timing of payments is subject
to significant uncertainty. We maintain a portfolio of marketable investments with varying maturities and a substantial
amount of cash and cash equivalents intended to provide adequate cash flows for such payments.
(2) Represents the principal amounts of debt only. See Note 8 of the notes to our Consolidated Financial Statements set forth in
Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report for additional information.
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; (vi) goodwill and other
intangible assets; (vii) reserve for loss and losses adjustment expenses; and (viii) income taxes. The accounting estimates require the
use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs
from the assumptions used, our financial condition, results of operations, and cash flows would be affected.
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal
market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market
prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be
appropriate under the circumstances to determine the value that would be received to sell an asset or pay to transfer a liability in an
orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and
not acting under duress. Our nonperformance or credit risk is considered in determining the fair value of liabilities. Considerable
judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value
presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Investments
Investments consist of debt and equity securities. Debt securities consist of securities with an initial fixed maturity of more than three
months, including corporate bonds, municipal bonds and United States government bonds. Equity securities generally consist of
securities that represent ownership interests in an enterprise. The Company determines the appropriate classification of investments in
debt and equity securities at the acquisition date and re-evaluates the classification at each balance sheet date.
Held-to-maturity debt securities are recorded at the amortized cost, reflecting the ability and intent to hold the securities to maturity.
All other debt securities are classified as available-for-sale and recorded at fair value. Unrealized gains and losses during the year, net
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of the related tax effect applicable to available-for-sale and periods prior to January 1, 2018 for equity securities, are excluded from
income and reflected in other comprehensive income (loss), and the cumulative effect is reported as a separate component of
shareholders’ equity until realized. If a decline in fair value is deemed to be other-than-temporary, the investment is written down to
its fair value and the amount of the write-down is recorded as an OTTI loss on the statement of operations. Any portion of such
decline related to debt securities that is believed to arise from factors other than credit is recorded as a component of other
comprehensive income rather than against income. As a result of the adoption of Accounting Standards Update (“ASU”) 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) beginning on January 1, 2018 equity investments
(except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are measured
at fair value with changes in fair value recognized in net income.
When we invest in certain companies, such as limited partnerships and limited liability companies, and if we determine we are not the
primary beneficiary, we account for them using the equity method to determine the carry value, which is included in other assets on
our Consolidated Balance Sheets. Our maximum exposure to loss is limited to the capital we invest.
Net realized gains and losses on investments are determined in accordance with the specific identification method.
Net investment income consists primarily of interest income from debt securities, cash and cash equivalents, including any premium
amortization or discount accretion and dividend income from equity securities; less expenses related to investments.
Premiums and Unearned Premiums
We recognize premiums as revenue on a pro-rata basis over the term of an insurance policy. Assumed reinsurance premiums written
and earned are based on reports received from ceding companies for pro-rata treaty contracts and are generally recorded as written
based on contract terms for excess-of-loss and quota-share contracts. Premiums are earned ratably over the terms of the related
coverage.
Unearned premiums and ceded unearned premiums represent the portion of gross premiums written and ceded premiums written,
respectively, relating to the unexpired terms of such coverage.
Premium receivable balances are reported net of an allowance for estimated uncollectible premium amounts. Such allowance is based
upon an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the insured and other relevant
factors. Amounts deemed to be uncollectible are written off against the allowance.
Reinsurance
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring loss exposures does
not relieve a ceding entity from its obligations to policyholders and cedants. Reinsurance recoverables (including amounts related to
claims incurred but not reported) and ceded unearned premiums are reported as assets. To minimize exposure to losses from a
reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and
periodically thereafter. In addition to considering the financial condition of the reinsurer, the collectability of the reinsurance
recoverables is evaluated (and where appropriate, whether an allowance for estimated uncollectible reinsurance recoverables is to be
established) based upon a number of other factors. Such factors include the amounts outstanding, length of collection periods,
disputes, any collateral or letters of credit held and other relevant factors.
Ceded premiums written are recorded in accordance with applicable terms of the various reinsurance contracts and ceded premiums
earned are charged against revenue over the period of the various reinsurance contracts. This also generally applies to reinstatement
premiums paid to a reinsurer, which arise when contractually-specified ceded loss triggers have been breached. Ceded commissions
reduce commissions, brokerage and other underwriting expenses and ceded losses incurred reduce net losses and LAE incurred over
the applicable periods of the various reinsurance contracts with third party reinsurers. If premiums or commissions are subject to
adjustment (for example, retrospectively-rated or experience-rated), the estimated ultimate premium or commission is recognized over
the period of the contract.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured
business and consistent with the terms of the underlying reinsurance contract.
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Deferred Acquisition Costs and Value of Business Acquired
Deferred acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or
renewal of existing insurance contracts. We defer incremental costs that result directly from, and are essential to, the acquisition or
renewal of an insurance contract. Such deferred acquisition costs generally include agent or broker commissions, referral fees,
premium taxes, medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or
renewed. Each cost is analyzed to assess whether it is fully deferrable.
We also defer a portion of the employee total compensation and payroll-related fringe benefits directly related to time spent
performing specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy issuance
and processing, and sales force contract selling.
The acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally 12
months.
It is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for
profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is
anticipated in assessing the recoverability of deferred acquisition costs. We assess the recoverability of deferred acquisition costs on an
annual basis or more frequently if circumstances indicate impairment may have occurred.
Value of business acquired (‘VOBA”) is an asset that reflects the estimated fair value of in-force contracts in an acquisition and
represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in-
force at the acquisition date. VOBA is amortized over the period in which the related premiums written are earned, generally twelve
months or less for property insurance business. VOBA amortization is reported within commissions and other underwriting expenses
on our consolidated statements of operations. VOBA is reviewed to ensure that the unamortized portion does not exceed the expected
recoverable amount as of October 1, each year, and more frequently if circumstances indicate impairment may have occurred.
Refer to Note 3 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report for information regarding VOBA from the acquisition during the fourth quarter of 2019.
Goodwill and Other Intangible Assets
Goodwill and identifiable intangible assets with indefinite lives are not amortized but are reviewed for impairment annually as of
October 1 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value below
its associated carrying value. Identifiable intangibles that do not have indefinite lives are amortized on a straight-line basis over their
estimated useful lives.
When we perform a quantitative goodwill impairment test, the fair value of the reporting unit is determined and compared to its
carrying value. If the carrying value of the reporting unit is greater than the reporting unit’s fair value, goodwill is impaired and written
down to the reporting unit’s fair value; and a charge is reported in impairment of intangibles on our consolidated statements of
operations. The fair value of our reporting unit is comprised of the value of in-force (i.e., existing) business and the value of new
business. To determine the value of in-force and new business, we use a discounted cash flows technique that applies a discount rate
reflecting the market expected, weighted-average rate of return adjusted for the risk factors associated with operations to the projected
future cash flow for our reporting unit.
For identifiable intangible assets, if there is an indication of impairment, then the discounted cash flow method would be used to
measure the impairment, and the carrying value would be adjusted as necessary.
We apply significant judgment when determining the estimated fair values discussed above. Factors that can influence these values
include any items that can directly or indirectly affect future production levels, profitability and cash flows. Examples of unfavorable
changes to assumptions or factors that could result in future impairment include, but are not limited to, the following:
Lower expectations for future production levels or future profitability;
•
• Higher discount rates;
•
Customer acceptance, capital market,
legislative, regulatory or tax changes that affect the cost of, or demand for, our
products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including
changes to statutory reserve requirements or changes to RBC requirements; and
Valuations of significant mergers or acquisitions of companies or blocks of business that would provide relevant market-
based inputs for our impairment assessment that could support less favorable conclusions regarding the estimated fair value
of our reporting unit.
•
-43-
Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future
developments.
Refer to Note 3 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for our goodwill and identifiable intangible assets acquired during the fourth quarter of
2019.
Losses and Loss Adjustment Expenses
Overview
The estimation of the liability for unpaid losses and LAE is inherently difficult and subjective, especially in view of changing legal and
economic environments that impact the development of loss reserves, and therefore, quantitative techniques frequently have to be
supplemented by subjective considerations and managerial judgment. In addition, trends that have affected development of liabilities
in the past may not necessarily occur or affect liability development to the same degree in the future.
Each of our insurance companies establishes reserves on its balance sheet for unpaid losses and LAE related to its property and
casualty insurance and related reinsurance contracts. As of any balance sheet date, there are claims that have not yet been reported,
and some claims may not be reported for many years after the date a loss occurs. As a result of this historical pattern, the liability for
unpaid losses and LAE includes significant estimates for IBNR claims. Additionally, reported claims are in various stages of the
settlement process. Each claim is settled individually based upon its merits, and certain claims may take years to settle, especially if
legal action is involved. As a result, the liabilities for unpaid losses and LAE include significant judgments, assumptions and estimates
made by management relating to the actual ultimate losses that will arise from the claims. Due to the inherent uncertainties in the
process of establishing these liabilities, the actual ultimate loss from a claim is likely to differ, perhaps materially, from the liability
initially recorded.
The time period between the occurrence of a loss and the time it is settled is referred to as the “claim tail.” In general, actuarial
judgments for shorter-tailed lines of business generally have much less of an effect on the determination of the loss reserve amount
than when those same judgments are made regarding longer-tailed lines of business. Reported losses for the shorter-tailed classes,
such as property and certain marine, aviation and energy classes, generally reach the ultimate level of incurred losses in a relatively
short period of time. Rather than having to rely on actuarial assumptions for many accident years, these assumptions are generally
only relevant for the more recent accident years.
The process of recording quarterly and annual liabilities for unpaid losses and LAE for short-tail lines is primarily focused on
maintaining an appropriate reserve level for reported claims and IBNR. Specifically, we assess the reserve adequacy of IBNR in light
of such factors as the current levels of reserves for reported claims and expectations with respect to reporting lags, catastrophe events,
historical data, legal developments, and economic conditions, including the effects of inflation.
Standard actuarial methodologies employed to estimate ultimate losses incorporate the inherent lag from the time claims occur to
when they are reported to an insurer and if applicable, to when an insurer reports the claims to a reinsurer. Certain actuarial
methodologies may be more appropriate than others in instances where this lag may not be consistent from period to period.
Consequently, additional actuarial judgment is employed in the selection of methodologies to best incorporate the potential impact of
this situation.
Our insurance companies provide coverage on both a claims-made and occurrence basis. Claims-made policies generally require that
claims occur and be reported during the coverage period of the policy. Occurrence policies allow claims which occur during a policy’s
coverage period to be reported after the coverage period, and as a result, these claims can have a very long claim tail, occasionally
extending for decades. Casualty claims can have a very long claim tail, in certain situations extending for many years. In addition,
casualty claims are more susceptible to litigation and the legal environment and can be significantly affected by changing contract
interpretations, all of which contribute to extending the claim tail. For long-tail casualty lines of business, estimating the ultimate
liabilities for unpaid losses and LAE is a more complex process and depends on a number of factors, including the line and volume of
the business involved. For these reasons, our insurance companies will generally use actuarial projections in setting reserves for all
casualty lines of business.
In conformity with GAAP, our insurance companies are not permitted to establish reserves for catastrophe losses that have not
occurred. Therefore, losses related to a significant catastrophe, or accumulation of catastrophes, in any reporting period could have a
material adverse effect on our results of operations and financial condition during that period.
-44-
We believe that the reserves for unpaid losses and LAE established by our insurance companies are adequate as of December 31, 2019;
however, additional reserves, which could have a material impact upon our financial condition, results of operations and cash flows,
may be necessary in the future.
Methodologies and Assumptions
Our insurance companies use a variety of techniques that employ significant judgments and assumptions to establish the liabilities for
unpaid losses and LAE recorded at the balance sheet date. These techniques include detailed statistical analyses of past claims
reporting, settlement activity, claims frequency, internal loss experience, changes in pricing or coverages and severity data when
sufficient information exists to lend statistical credibility to the analyses. More subjective techniques are used when statistical data is
insufficient or unavailable. These liabilities also reflect implicit or explicit assumptions regarding the potential effects of future
inflation, judicial decisions, changes in laws and recent trends in such factors, as well as a number of actuarial assumptions that vary
across our reinsurance and insurance subsidiaries and across lines of business. This data is analyzed by line of business, coverage,
accident year or underwriting year and reinsurance contract type, as appropriate.
Our loss reserve review processes use actuarial methods that vary by operating subsidiary and line of business and produce point
estimates for each class of business. The actuarial methods used include the following methods:
•
•
•
•
Reported Loss Development Method: A reported loss development pattern is calculated based on historical loss development data,
and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or
underwriting year, as appropriate, to ultimate levels;
Paid Development Method: A paid loss development pattern is calculated based on historical paid loss development data, and
this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year,
as appropriate, to ultimate levels;
Expected Loss Ratio Method: Expected loss ratios are applied to premiums earned, based on historical company experience, or
historical insurance industry results when company experience is deemed not to be sufficient; and
Bornhuetter-Ferguson Method: The results from the Expected Loss Ratio Method are essentially blended with either the
Reported Loss Development Method or the Paid Development Method.
The primary actuarial assumptions used by insurance companies include the following:
•
•
•
Expected loss ratios represent management’s expectation of losses, in relation to earned premium, at the time business is
written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss
reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are
generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in
the type of risks underwritten. For certain longer-tailed reinsurance business that are typically lower frequency, high severity
classes, expected loss ratios are often used for the last several accident years or underwriting years, as appropriate.
Rate of loss cost inflation (or deflation) represents management’s expectation of the inflation associated with the costs we may
incur in the future to settle claims. Expected loss cost inflation is particularly important for longer-tailed classes.
Reported and paid loss emergence patterns represent management’s expectation of how losses will be reported and ultimately
paid in the future based on the historical emergence patterns of reported and paid losses and are derived from past
experience of our subsidiaries, modified for current trends. These emergence patterns are used to project current reported or
paid loss amounts to their ultimate settlement value.
In the absence of sufficiently credible internally-derived historical information, each of the above actuarial assumptions may also
incorporate data from the insurance industries as a whole, or peer companies writing substantially similar coverages. Data from
external sources may be used to set expectations, as well as assumptions regarding loss frequency or severity relative to an exposure
unit or claim, among other actuarial parameters. Assumptions regarding the application or composition of peer group or industry
reserving parameters require substantial judgment.
Loss Frequency and Severity
Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described above. Loss
frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of
claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic
conditions or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial
interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time
-45-
between the occurrence of a loss and the date the loss is reported to our insurance companies. The length of the loss reporting lag
affects their ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags), as
well as the amount of reserves needed for IBNR. If the actual level of loss frequency and severity is higher or lower than expected, the
ultimate losses will be different than management’s estimates.
Prior Year Development
Our insurance companies continually evaluate the potential for changes, both favorable and unfavorable, in their estimates of their loss
and LAE liabilities and use the results of these evaluations to adjust both recorded liabilities and underwriting criteria. With respect to
liabilities for unpaid losses and LAE established in prior years, these liabilities are periodically analyzed and their expected ultimate cost
adjusted, where necessary, to reflect favorable or unfavorable development in loss experience and new information, including, for
certain catastrophe events, revised industry estimates of the magnitude of a catastrophe. Adjustments to previously recorded liabilities
for unpaid losses and LAE, both favorable and unfavorable, are reflected in our financial results in the periods in which these
adjustments are made and are referred to as prior accident year reserve development. We adjusted our prior year loss and LAE reserve
estimates based on current information that differed from previous assumptions made at the time such loss and LAE reserves were
previously estimated.
Refer to Note 1 and Note 7 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements
and Supplementary Data of this Annual Report, for additional information regarding our losses and LAE.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or
expense in the period that includes the enactment date. Such a change occurred in the fourth quarter of 2017. Refer to Note 9 of the
notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this
Annual Report, for additional information regarding our income taxes.
Recent Accounting Pronouncements
Refer to Note 2 of the notes to our Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report, for a discussion of recent accounting pronouncements and their effect, if any, on our
company.
Off-Balance Sheet Transactions
For the years ended December 31, 2019 and 2018, we did not have any off balance sheet transactions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment objective is to maximize total rate of return after federal income taxes while maintaining liquidity and minimizing risk.
Our current investment policy limits investment in non-investment-grade debt securities (including high-yield bonds), and limits total
investments in preferred stock, common stock and mortgage notes receivable. We also comply with applicable laws and regulations
that further restrict the type, quality and concentration of our investments. In general, these laws and regulations permit investments,
within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and
common equity securities and real estate mortgages.
Our investment policy is established by the Board of Directors’ Investment Committee and is reviewed on a regular basis. Pursuant to
this investment policy, as of December 31, 2019, approximately 96% of investments were in debt securities and cash and cash
equivalents, which are considered to be either held-to-maturity or available-for-sale, based upon our estimates of required liquidity.
Approximately 99% of the debt securities are considered available-for-sale and are marked to market. We may in the future consider
additional debt securities to be held-to-maturity and carried at amortized cost. We do not use any swaps, options, futures or forward
contracts to hedge or enhance our investment portfolio.
-46-
Principal cash flows and the related weighted average interest rate by expected maturity date, based upon par values, for the financial
instruments sensitive to changes in interest rates, includes the following:
□
2020
2021
2022
2023
2024
Thereafter
Total
(Dollars in thousands)
Carrying
Amount
Principal amount by expected maturity:
United States government obligations and
authorities
$
7,216
$
10,772
$
15,074
$
2,760
$
22,786
$
29,207
$
87,815
$
89,308
Obligations of states and political
subdivisions
Corporate
International
Collateralized mortgage obligations
1,950
21,002
5,117
1,757
2,325
32,714
5,422
4,519
6,034
46,323
9,487
10,007
1,164
24,585
1,365
42,717
2,965
26,518
3,007
14,903
8,740
80,233
4,581
66,944
23,178
231,375
28,979
140,847
24,020
240,176
29,806
147,292
Total investments
$
37,042
$
55,752
$
86,925
$
72,591
$
70,179
$
189,705
$
512,194
$
530,602
Weighted average interest rate by
expected maturity:
United States government
obligations and authorities
Obligations of states and
political subdivisions
Corporate securities
International securities
Collateralized mortgage obligations
Total investments
2.08 %
2.30 %
1.68 %
2.26 %
2.50 %
2.00 %
2.12 %
2.31 %
3.27 %
2.79 %
3.09 %
2.91 %
2.85 %
3.13 %
2.70 %
3.53 %
2.95 %
3.09 %
3.12 %
3.14 %
3.04 %
2.86 %
2.98 %
3.64 %
3.68 %
4.06 %
3.82 %
2.41 %
3.70 %
3.83 %
3.73 %
3.27 %
3.29 %
3.69 %
4.08 %
3.54 %
3.37 %
2.98 %
3.45 %
3.24 %
3.68 %
3.25 %
-47-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations For the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Shareholders’ Equity For the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows For the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
PAGE
49
50
51
52
53
54
56
-48-
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
FedNat Holding Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FedNat Holding Company and subsidiaries (the “Company”) as of
the related consolidated statements of operations, comprehensive income (loss), changes in
December 31, 2019 and 2018,
shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the
financial statement schedules listed in the index at Item 15 (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company at
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report dated March 6, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2015.
Charlotte, North Carolina
March 6, 2020
-49-
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
□
December 31,
2019
2018
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $512,645 and $433,664, respectively)
$
526,265
$
Debt securities, held-to-maturity, at amortized cost
Equity securities, at fair value
Total investments
Cash and cash equivalents
Prepaid reinsurance premiums
Premiums receivable, net of allowance of $159 and $77, respectively
Reinsurance recoverable, net
Deferred acquisition costs and value of business acquired, net
Income taxes, net
Goodwill
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves
Unearned premiums
Reinsurance payable
Long-term debt, net of deferred financing costs of $1,478 and $596, respectively
Deferred revenue
Other liabilities
Total liabilities
Commitments and contingencies (see Note 10)
Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized
Common stock, $0.01 par value: 25,000,000 shares authorized; 14,414,821 and 12,784,444 shares issued and
outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders’ equity
$
$
4,337
20,039
550,641
133,361
145,659
41,422
209,615
56,136
2,552
10,997
28,633
1,179,016
$
324,362
$
360,870
102,467
98,522
6,856
37,246
930,323
—
144
167,677
10,281
70,591
248,693
Total liabilities and shareholders' equity
$
1,179,016
$
The accompanying notes are an integral part of the consolidated financial statements.
428,641
5,126
17,758
451,525
64,423
108,577
29,791
211,424
39,436
5,220
—
14,975
925,371
296,230
281,992
63,599
44,404
4,585
19,302
710,112
—
128
141,128
(3,750)
77,753
215,259
925,371
-50-
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Year Ended December 31,
2019
2018
2017
$
363,652
$
355,257
$
333,481
15,901
7,084
10,200
18,124
414,961
273,080
107,189
23,203
10,776
414,248
713
(298)
1,011
—
12,460
(4,144)
13,366
19,154
396,093
228,416
121,109
22,183
4,177
375,885
20,208
5,498
14,710
(218)
1,011
$
14,928
$
10,254
8,548
17,173
22,206
391,662
247,557
114,867
19,963
348
382,735
8,927
3,585
5,342
(2,647)
7,989
0.08
0.08
$
$
1.17
1.16
$
$
0.61
0.60
12,977
13,023
12,775
12,867
13,170
13,250
0.33
$
0.24
$
0.32
Revenues:
Net premiums earned
Net investment income
Net realized and unrealized investment gains (losses)
Direct written policy fees
Other income
Total revenues
Costs and expenses:
Losses and loss adjustment expenses
Commissions and other underwriting expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to non-controlling interest
Net income (loss) attributable to FedNat Holding Company shareholders
Net Income (Loss) Per Common Share
Basic
Diluted
Weighted Average Number of Shares of Common Stock Outstanding
Basic
Diluted
Dividends Declared Per Common Share
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
-51-
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
□
Year Ended December 31,
2019
2018
2017
Net income (loss)
$
1,011
$
14,710
$
5,342
Change in net unrealized gains (losses) on investments, available-for-sale, net of tax
Comprehensive income (loss)
Less: comprehensive income (loss) attributable to non-controlling interest, net of tax
14,031
15,042
—
Comprehensive income (loss) attributable to FedNat Holding Company shareholders
$
15,042
$
(5,444)
9,266
(447)
9,713
$
(429)
4,913
(2,905)
7,818
The accompanying notes are an integral part of the consolidated financial statements.
-52-
□
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except per share data)
Preferred
Stock
$
Balance as of January 1, 2017
Net income (loss)
Other comprehensive income (loss)
Dividends declared
Shares issued under share-based compensation plans
Repurchases of common stock
Share-based compensation
Balance as of December 31, 2017
Cumulative effect of new accounting standards
Net income (loss)
Other comprehensive income (loss)
Dividends declared
Acquisition of non-controlling interest
Shares issued under share-based compensation plans
Repurchases of common stock
Share-based compensation
Balance as of December 31, 2018
Net income (loss)
Other comprehensive income (loss)
Dividends declared
Shares issued for acquisition
Shares issued under share-based compensation plans
Repurchases of common stock
Share-based compensation
Balance as of December 31, 2019
$
Accumulated
Total
Shareholders'
Equity
Attributable to
Common Stock
Additional
Other
FedNat Holding
Non-
Total
Issued
Shares
Amount
Paid-in
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Company
Controlling
Shareholders'
Shareholders
Interest
Equity
13,473,120
$
134
$
136,779
$
1,941
$
76,884
$
215,738
18,727
$
234,465
—
—
—
169,647
(654,520)
—
12,988,247
—
—
—
—
—
122,905
(326,708)
—
12,784,444
—
—
—
1,773,102
94,922
(237,647)
—
—
—
—
—
(4)
—
130
—
—
—
—
—
1
(3)
—
128
—
—
—
18
1
(3)
—
—
—
—
103
—
2,846
139,728
—
—
—
—
(1,005)
38
—
2,367
141,128
—
—
—
24,373
—
—
2,176
—
(171)
—
—
—
—
1,770
(994)
—
(4,221)
—
(305)
—
—
—
(3,750)
—
14,031
—
—
—
—
—
7,989
—
(4,251)
—
(10,613)
—
70,009
994
14,928
—
(3,120)
—
—
(5,058)
—
77,753
1,011
—
(4,309)
—
—
(3,864)
—
7,989
(171)
(4,251)
103
(10,617)
2,846
211,637
—
14,928
(4,221)
(3,120)
(1,310)
39
(5,061)
2,367
215,259
1,011
14,031
(4,309)
24,391
1
(3,867)
2,176
(2,647)
(258)
—
—
—
—
15,822
—
(218)
(229)
—
(15,375)
—
—
—
—
—
—
—
—
—
—
—
5,342
(429)
(4,251)
103
(10,617)
2,846
227,459
—
14,710
(4,450)
(3,120)
(16,685)
39
(5,061)
2,367
215,259
1,011
14,031
(4,309)
24,391
1
(3,867)
2,176
14,414,821
$
144
$
167,677
$
10,281
$
70,591
$
248,693
$
— $
248,693
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of the consolidated financial statements.
-53-
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flow from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Year Ended December 31,
2019
2018
2017
$
1,011
$
14,710
$
5,342
Net realized and unrealized investment (gains) losses
Loss (gain) on early extinguishment of debt
Amortization of investment premium or discount, net
Depreciation and amortization
Share-based compensation
Changes in operating assets and liabilities:
Prepaid reinsurance premiums
Premiums receivable, net
Reinsurance recoverable, net
Deferred acquisition costs and value of business acquired, net
Income taxes, net
Deferred revenue
Loss and loss adjustment expense reserves
Unearned premiums
Reinsurance payable
Other
Net cash provided by (used in) operating activities
Cash flow from investing activities:
Proceeds from sales of debt securities
Proceeds from sales of equity securities
Maturities and redemptions of debt securities
Purchases of debt securities
Purchases of equity securities
Payment for acquisition, net of cash acquired
Purchases of property and equipment
Net cash provided by (used in) investing activities
Cash flow from financing activities:
Proceeds from issuance of long-term debt, net of issuance costs
Payment of long-term debt and prepayment penalties
Purchase of non-controlling interest
Purchases of FedNat Holding Company common stock
Issuance of common stock for share-based awards
Dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning-of-period
(7,084)
3,575
916
1,477
2,176
(11,803)
(8,654)
9,412
(7,979)
(3,723)
756
11,472
28,365
14,797
602
35,316
164,196
9,203
43,925
(228,132)
(6,565)
10,402
(2,040)
(9,011)
98,390
(48,000)
—
(3,449)
1
(4,309)
42,633
68,938
64,423
4,144
—
1,546
1,385
2,367
26,915
16,602
(86,823)
1,457
6,109
(1,637)
65,715
(12,431)
(8,345)
(1,444)
30,270
228,777
10,639
92,744
(337,776)
(13,542)
—
(2,026)
(21,184)
—
(5,000)
(16,685)
(5,061)
39
(4,184)
(30,891)
(21,805)
86,228
Cash and cash equivalents at end-of-period
$
133,361
$
64,423
$
The accompanying notes are an integral part of the consolidated financial statements.
-54-
(8,548)
—
3,909
1,166
2,846
21,440
8,461
(76,738)
999
4,403
(612)
72,405
401
(7,210)
(15,158)
13,106
249,584
57,125
38,038
(339,667)
(35,811)
—
(976)
(31,707)
45,000
—
—
(10,616)
103
(4,251)
30,236
11,635
74,593
86,228
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
□
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for interest
Cash paid (received) during the period for income taxes
Significant non-cash investing and financing transactions:
Right-of-use asset
Lease liability
The accompanying notes are an integral part of the consolidated financial statements.
Year Ended December 31,
2019
2018
2017
$
$
$
$
4,860
3,504
$
$
4,266
$
(1,104) $
(8,096) $
8,096
$
— $
— $
308
(354)
—
—
-55-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
1. ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION
Organization
FedNat Holding Company (“FNHC,” the “Company,” “we,” “us,” or “our”) is a regional insurance holding company that controls
substantially all aspects of the insurance underwriting, distribution and claims processes through our subsidiaries and contractual
relationships with independent agents and general agents. We, through our wholly-owned subsidiaries, are authorized to underwrite,
and/or place homeowners multi-peril (“homeowners”), federal flood and other lines of insurance in Florida and other states. We
market, distribute and service our own and third-party insurers’ products and other services through a network of independent and
general agents.
FedNat Insurance Company (“FNIC”), our largest wholly-owned insurance subsidiary, is licensed as an admitted carrier to write
homeowners property and casualty insurance by the state’s insurance departments in Florida, Louisiana, Texas, Georgia, South
Carolina, Alabama and Mississippi.
Maison Insurance Company ("MIC"), an insurance subsidiary, is licensed as an admitted carrier to write homeowners property and
casualty insurance as well as wind/hail-only exposures by the state's insurance departments in Louisiana, Texas and Florida.
Monarch National Insurance Company (“MNIC”), an insurance subsidiary, is licensed as an admitted carrier to write homeowners
property and casualty insurance in Florida.
Material Distribution Relationships
Ivantage Select Agency, Inc.
The Company is a party to an insurance agency master agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate
Insurance Company (“Allstate”), pursuant to which the Company has been authorized by ISA to appoint Allstate agents to offer the
Company’s homeowners insurance products to consumers in Florida. As a percentage of the total homeowners premiums we
underwrote, 23.2%, 23.8% and 23.8%, were from Allstate’s network of Florida agents, for the years ended December 31, 2019, 2018
and 2017, 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, 23.1%,
15.0% and 10.2% respectively, of the Company’s premiums were underwritten by SageSure, for the years ended December 31,
2019, 2018, and 2017 respectively. As part of our partnership with SageSure, we entered into a profit share agreement, whereby we
share 50% of net profits of this line of business, as calculated per the terms of the agreement, subject to certain limitations. The profit
share cost is reflected in commissions and underwriting expenses on our consolidated statement of operations.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States (“GAAP”). The consolidated financial statements include the accounts of FNHC and its wholly-owned
subsidiaries and all entities in which the Company has a controlling financial interest and any variable interest entity (“VIE”) of which
the Company is the primary beneficiary. The Company’s management believes the consolidated financial statements reflect all material
adjustments, including normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash
flows of the Company for the periods presented. All significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company identifies a VIE as an entity that does not have sufficient equity to finance its own activities without additional financial
support or where the equity investors lack certain characteristics of a controlling financial
interest. The Company assesses its
contractual, ownership or other interests in a VIE to determine if the Company’s interest participates in the variability the VIE was
designed to absorb and pass onto variable interest holders. The Company performs an ongoing qualitative assessment of its variable
interests in a VIE to determine whether the Company has a controlling financial interest and would therefore be considered the
primary beneficiary of the VIE. If the Company determines it is the primary beneficiary of a VIE, the Company consolidates the
assets and liabilities of the VIE in its consolidated financial statements.
-56-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
We completed our acquisition of MNIC in February 2018 by acquiring the membership interests in MNIC’s indirect parent, Monarch
Delaware Holdings LLC (“Monarch Delaware”), held by our joint venture partners. As such, the Company consolidated Monarch
Delaware in its consolidated financial statements. In accordance with the accounting standard on consolidation, a primary beneficiary
that acquires additional ownership of the previously controlled and consolidated subsidiaries is accounted for as an equity transaction
and re-measurement of assets and liabilities of previously controlled and consolidated subsidiaries is not permitted. As a result, we
accounted for this transaction by eliminating the carrying value of the non-controlling interest to reflect our 100% ownership interest
in MNIC as of February 21, 2018. The difference between the consideration paid and the amount by which the non-controlling
interest was eliminated has been recognized in additional paid-in capital. Following the closing, Monarch Delaware and Monarch
Holdings were merged into MNIC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Accounting Estimates and Assumptions
The Company prepares the accompanying consolidated financial statements in accordance with GAAP, which requires management to
make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying
notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results may materially differ from those estimates.
Similar to other property and casualty insurers, the Company’s liability for loss and loss and adjustment expenses ("LAE") reserves,
although supported by actuarial projections and other data, is ultimately based on management’s reasoned expectations of future
events. Although considerable variability is inherent in these estimates, the Company believes that the liability and LAE reserve is
adequate. The Company reviews and evaluates its estimates and assumptions regularly and makes adjustments, reflected in current
operations, as necessary, on an ongoing basis.
Business Combinations
We use the acquisition method of accounting for all business combination transactions, and accordingly, recognize the fair values of
assets acquired, liabilities assumed and any non-controlling interests in our consolidated financial statements. The allocation of fair
values may be subject to adjustment after the initial allocation for up to a one-year period as more information becomes available
relative to the fair values as of the acquisition date. The consolidated financial statements include the results of operations of any
acquired company since the acquisition date.
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal
market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market
prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be
appropriate under the circumstances to determine the value that would be received to sell an asset or pay to transfer a liability in an
orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and
not acting under duress. Our nonperformance or credit risk is considered in determining the fair value of liabilities. Considerable
judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value
presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Refer to Note 4 below for additional information regarding fair value.
Investments
Investments consist of debt and equity securities. Debt securities consist of securities with an initial fixed maturity of more than three
months, including corporate bonds, municipal bonds and United States government bonds. Equity securities generally consist of
securities that represent ownership interests in an enterprise. The Company determines the appropriate classification of investments in
debt and equity securities at the acquisition date and re-evaluates the classification at each balance sheet date.
Held-to-maturity debt securities are recorded at the amortized cost, reflecting the ability and intent to hold the securities to maturity.
All other debt securities are classified as available-for-sale and recorded at fair value. Unrealized gains and losses during the year, net
of the related tax effect applicable to available-for-sale and periods prior to January 1, 2018 for equity securities, are excluded from
-57-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
income and reflected in other comprehensive income (loss), and the cumulative effect is reported as a separate component of
shareholders’ equity until realized. If a decline in fair value is deemed to be other-than-temporary, the investment is written down to
its fair value and the amount of the write-down is recorded as an other-than-temporary impairment (“OTTI”) loss on the statement of
operations. Any portion of such decline related to debt securities that is believed to arise from factors other than credit is recorded as
a component of other comprehensive income rather than against income. As a result of the adoption of Accounting Standards
Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) beginning on January 1,
2018 equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of
the investee) are measured at fair value with changes in fair value recognized in net income. Refer to Note 2 below for additional
information related to ASU 2016-01.
When we invest in certain companies, such as limited partnerships and limited liability companies, and if we determine we are not the
primary beneficiary, we account for them using the equity method to determine the carry value, which is included in other assets on
our Consolidated Balance Sheets. Our maximum exposure to loss is limited to the capital we invest.
Net realized gains and losses on investments are determined in accordance with the specific identification method.
Net investment income consists primarily of interest income from debt securities, cash and cash equivalents, including any premium
amortization or discount accretion and dividend income from equity securities; less expenses related to investments.
Refer to Note 5 below for additional information regarding investments.
Cash and Cash Equivalents
Cash and cash equivalents consist of all deposit or deposit in transit balances with a bank that are available for withdrawal. The
Company considers all highly liquid investments with an original maturity of three months or less at the date of the purchase to be
cash equivalents.
Premiums and Unearned Premiums
The Company recognizes premiums as revenue on a pro-rata basis over the term of the insurance policy.
Unearned premiums represent the portion of gross premiums written, related to the unexpired terms of such coverage.
Premium receivable balances are reported net of an allowance for estimated uncollectible premium amounts. Such allowance is based
upon an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the insured and other relevant
factors. Amounts deemed to be uncollectible are written off against the allowance.
Reinsurance
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring loss exposures does
not relieve a ceding entity from its obligations to policyholders and cedants. Reinsurance recoverables (including amounts related to
claims incurred but not reported) and ceded unearned premiums are reported as assets. To minimize exposure to losses from a
reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and
periodically thereafter. In addition to considering the financial condition of the reinsurer, the collectability of the reinsurance
recoverables is evaluated (and where appropriate, whether an allowance for estimated uncollectible reinsurance recoverables is to be
established) based upon a number of other factors. Such factors include the amounts outstanding, length of collection periods,
disputes, any collateral or letters of credit held and other relevant factors. To the extent that an allowance for uncollectible reinsurance
recoverable is established, amounts deemed to be uncollectible are written off against the allowance for estimated uncollectible
reinsurance recoverables. As of December 31, 2019 and 2018, the Company did not have any allowances for uncollectible reinsurance
recoverables.
Ceded premiums written are recorded in accordance with applicable terms of the various reinsurance contracts and ceded premiums
earned are charged against revenue over the period of the various reinsurance contracts. This also generally applies to reinstatement
premiums paid to a reinsurer, which arise when contractually-specified ceded loss triggers have been breached.
-58-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Ceded commissions reduce commissions and other underwriting expenses and ceded losses incurred reduce net losses and LAE
incurred over the applicable periods of the various reinsurance contracts with third party reinsurers. If premiums or commissions are
subject to adjustment (for example, retrospectively-rated or experience-rated), the Company records adjustments to the premiums or
ceding commission in the period that changes in the estimated losses are determined.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured
business and consistent with the terms of the underlying reinsurance contract.
Deferred Acquisition Costs and Value of Business Acquired
Deferred acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or
renewal of existing insurance contracts. The Company defers incremental costs that result directly from, and are essential to, the
acquisition or renewal of an insurance contract. Such deferred acquisition costs generally include agent or broker commissions,
referral fees, premium taxes, medical and inspection fees that would not have been incurred if the insurance contract had not been
acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable.
The Company also defers a portion of the employee total compensation and payroll-related fringe benefits directly related to time
spent performing specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy
issuance and processing, and sales force contract selling.
The acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally twelve
months for homeowners and commercial general liability policies and six months for automobile policies. It is grouped consistent
with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for
recoverability based on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the
recoverability of deferred acquisition costs. The Company assesses the recoverability of deferred acquisition costs on an annual basis
or more frequently if circumstances indicate impairment may have occurred.
Value of business acquired ("VOBA") is an asset that reflects the estimated fair value of in-force contracts in an acquisition and
represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in-
force at the acquisition date. VOBA is amortized over the period in which the related premiums written are earned, generally twelve
months or less for property insurance business. VOBA amortization is reported within commissions and other underwriting expenses
on our consolidated statements of operations. VOBA is reviewed to ensure that the unamortized portion does not exceed the expected
recoverable amount as of October 1 and more frequently if circumstances indicate impairment may have occurred.
Refer to Note 3 below for information regarding VOBA from the acquisition during the fourth quarter of 2019.
Goodwill
We recognize the excess of the purchase price, plus the fair value of any non-controlling interest in the acquiree, over the fair value of
identifiable net assets acquired at the acquisition date as goodwill. Goodwill is not amortized but is reviewed for impairment annually
as of October 1 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value
of a reporting unit below its carrying value. We perform a quantitative goodwill impairment test where the fair value of the reporting
unit is determined and compared to the carrying value of the reporting unit. If the fair value of the reporting unit is greater than the
reporting unit’s carrying value, then the carrying value of the reporting unit is deemed to be recoverable. If the carrying value of the
reporting unit is greater than the reporting unit’s fair value, goodwill is impaired and written down to the reporting unit’s fair value;
and a charge is reported in impairment of intangibles on our consolidated statements of operations.
Refer to Note 3 below for information regarding goodwill acquired during the fourth quarter of 2019.
Other Assets
Other assets consist primarily of identifiable intangible assets, property and equipment owned, right-of-use assets for our long-term
leases, receivables resulting from sales of securities that had not yet settled as of the balance sheet date and prepaid expenses.
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using a straight-
line method over the estimated useful lives, ranging from 3 to 15 years. Repairs and maintenance are charged to expense as incurred.
-59-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
The Company accounts for internal-use software development costs in accordance with accounting guidelines which state that
software costs, including internal payroll costs, incurred in connection with the development or acquisition of software for internal use
is charged to expense as incurred until the project enters the application development phase. Costs incurred in the application
development phase are capitalized and are depreciated using the straight-line method over an estimated useful life of 3 years, beginning
when the software is ready for use.
We recognize the estimated fair value of identifiable intangibles such as trade names and non-compete agreements acquired through a
business combination at the acquisition date. Identifiable intangible assets are amortized on a straight-line basis over their identified
useful life, if applicable. The carrying values of identifiable intangible assets are reviewed at least annually for indicators of impairment
in value that are other-than-temporary, including unexpected or adverse changes in the following: the economic or competitive
environments in which the company operates; profitability analysis; cash flow analysis; and the fair value of the relevant business
operation. If there is an indication of impairment, then the discounted cash flow method would be used to measure the impairment,
and the carrying value would be adjusted as necessary and reported in impairment of intangibles on our consolidated statements of
operations.
Refer to Note 3 below for information regarding identifiable intangible assets acquired during the fourth quarter of 2019.
Direct Written Policy Fees
Policy fees represent a non-refundable application fee for insurance coverage. These policy fees are deferred over the related policy
term in a manner consistent with how the related premiums are earned.
Other Income
Other income represents brokerage, commission related income from the Company’s agency operations, fees generated from the
personal automobile line of business as well as recognition of equity method investment results. Brokerage income is recognized over
the term of the reinsurance period, typically one year. Commission income from agency operations are recognized up-front upon
policy inception. The fees associated with the personal automobile line of business are recognized ratably over the related policy term,
generally six months. In applying the equity method, the Company records its initial investment at cost, and subsequently increases or
decreases the carrying amount of the investment by its proportionate share of the net earnings or losses with any dividends or
distributions received are recorded as a decrease in the carrying value of the investment.
Losses and Loss Adjustment Expenses
The reserves for losses and LAE represent management’s best estimate of the ultimate cost of all reported and unreported losses
incurred through the balance sheet date. Such liabilities are determined based upon the Company’s assessment of claims pending and
the development of prior years’ loss liability, including liabilities based upon individual case estimates for reported losses and LAE and
estimates of such amounts that are incurred but not yet reported ("IBNR”). Changes in the estimated liability are charged or credited
to operations as the losses and LAE are settled.
The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are
continually reviewed. As part of this process, the Company review historical data and consider various factors, including known and
anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these
estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are
reflected in the results of operations in the period in which they are made and the liabilities may deviate substantially from prior
estimates.
Long-Term Debt, Net of Deferred Financing Costs
The Company records long-term debt, net in the consolidated balance sheets at carrying value.
The Company incurs specific incremental costs, other than those paid to lenders, in connection with the issuance of the Company’s
debt instruments. These deferred financing costs include loan origination costs, issue costs and other direct costs payable to third
parties and are recorded as a direct deduction from the carrying value of the associated debt liability in the consolidated balance sheets,
-60-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
when the debt liability is recorded. The Company amortizes the deferred financing costs as interest expense over the term of the
related debt using the effective interest method in the consolidated statements of operations.
Income Taxes
The Company applies the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
or expense in the period that includes the enactment date. The Company will establish a valuation allowance if management
determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized.
Significant judgment is required in determining whether valuation allowances should be established and the amount of such
allowances.
The Company’s management makes assumptions, estimates and judgments, which are subject to change, in accounting for income
taxes. The Company’s management also considers events and transactions on an on-going basis and the laws enacted as of the
Company’s reporting date. The U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law on December 22, 2017, and
the effect of changes in federal tax law and applicable statutory rates is recorded in the consolidated financial statements in the period
of enactment. As such, the Tax Act affected the Company’s deferred income tax provision in the consolidated statement of
operations for the year ended December 31, 2017 and the deferred income tax assets and liabilities balances in the consolidated
balance sheet as of December 31, 2017. Both the current and deferred income tax provisions are affected for 2019 and 2018. Refer to
Note 9 below for further information regarding income taxes.
Share-Based Compensation
We expense the fair value of stock awards included in our stock incentive compensation plans. The Company grants awards and
amortizes them on a straight-line over the vesting term using the straight-line basis for service awards and over successive one-year
requisite service periods for performance based awards. For all restricted stock awards (“RSAs”), excluding grants based on relative
total shareholder return ("TSR"), the fair value is determined based on the closing market price on the date of grant. For grants based
on TSR, grant date fair value is determined using a Monte Carlo simulation and, unlike the performance condition awards, the expense
is not reversed if the performance condition is not met. Non-employee directors are treated as employees for accounting purposes.
The non-cash share-based compensation expense is reflected in commissions and other underwriting and general and administrative
expense on our Consolidated Statements of Operations and is recognized as an increase to additional paid-in capital on our
Consolidated Balance Sheets.
Basic and Diluted Net Income (Loss) per Share
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of
common shares, while diluted net income per share is computed by dividing net income available to common shareholders by the
weighted average number of such common shares and dilutive share equivalents result from the assumed exercise of employee stock
options and vesting of restricted common stock and are calculated using the treasury stock method.
Recently Issued Accounting Pronouncements, Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASU
2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of
promised goods or services to customers. The update replaces all general and most industry specific revenue recognition guidance
(excluding insurance) currently prescribed by GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of
a promised good or service to customers in an amount that reflects that consideration to which the entity expects to be entitled in
exchange for that good or service. The Company adopted this update and the other related revenue standard clarifications and
technical guidance effective January 1, 2018, using the modified retrospective approach. The Company completed the analysis of its
non-insurance revenues and has concluded that the implementation did not have any impact on the Company’s consolidated financial
condition or results of operations.
-61-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
In January 2016, the FASB issued ASU 2016-01, which addresses certain aspects of recognition, measurement, presentation and
disclosure of financial instruments. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial
Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Most notably, the combined new
guidance required equity investments (except those accounted for under the equity method of accounting or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Company adopted
the guidance effective January 1, 2018, by reflecting a cumulative adjustment, which increased retained earnings and decreased
accumulated other comprehensive income by $1.0 million. This adjustment represented the level of net unrealized gains and losses
associated with our equity investments with readily determinable market values as of January 1, 2018. The adoption also resulted in
the recognition of $(1.2) million in our consolidated statements of operations and statements of comprehensive income (loss), which
represented the change in net unrealized gains and losses on our equity securities for 2018. This new guidance increases our earnings
volatility compared to the prior accounting rules.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income. The update allowed a reclassification from accumulated other comprehensive income
to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act of 2017 ("Tax Act"). Guidance had previously
required the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the
accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited
directly to accumulated other comprehensive income. The Company adopted the guidance effective January 1, 2018, by reflecting a
cumulative effect adjustment to retained earnings with an off-setting adjustment to accumulated other comprehensive income for less
than $0.1 million.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update superseded the prior lease guidance in Topic 840,
Leases and lessees were required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s
obligation to make lease payments arising from a lease, measured on a discounted basis. Additionally, lessees are required to recognize
a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
The Company adopted the guidance effective January 1, 2019, by reflecting a $6.1 million right-of-use asset, after-tax, and $6.1 million
lease liability, after-tax, on our consolidated balance sheets for our leases in existence as of that date. All of the Company's leases were
classified as operating leases and we elected the practical expedient, therefore no adjustment to comparative prior periods presented
have been made. The provisions of this ASU did not have an impact on our pattern of lease expense recognition on our consolidated
statements of operations.
Refer to Note 10 below for additional information regarding leases.
Recently Issued Accounting Pronouncements, Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which significantly changes the measurement of credit losses for most financial assets and certain other instruments that are
not measured at fair value through net income. The update requires entities to record allowances for available-for-sale debt securities
rather than reduce the carrying amount, as currently performed under the other-than-temporary impairment ("OTTI") model. The
update also requires enhanced disclosures for financial assets measured at amortized cost and available-for-sale debt securities to help
the financial statement users better understand significant judgments used in estimating credit losses, as well as the credit quality and
underwriting standards of an entity’s portfolio. The Company will adopt the guidance effective January 1, 2020, by reflecting a
cumulative effect adjustment, which decreased retained earnings, held-to-maturity debt securities and reinsurance recoverable by
immaterial amounts. This new guidance increases our earnings volatility compared to the prior accounting rules.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 requires a customer in a
cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards
Codification 350-40 to determine which implementation costs to defer and recognize as an asset. The Company completed the
analysis and has concluded that the implementation did not have any impact on the Company’s consolidated financial condition or
results of operations.
-62-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
3. ACQUISITIONS
On December 2, 2019, the Company completed its acquisition of the insurance operations of 1347 Property Insurance Holdings, Inc.
("PIH"). Specifically, the Company purchased from PIH all of the outstanding equity of MIC, Maison Managers, Inc., and ClaimCor
LLC (collectively, the "Maison Companies"). The Maison Companies provide multi-peril and wind/hail only coverage to personal
residential dwellings and manufactured/mobile homes in Louisiana, Texas and Florida. The acquisition enables us to increase
geographic diversification of our book of business outside Florida and generate additional business with operating synergies and
general and administrative expense savings.
The purchase price was $51.0 million, which includes $25.5 million in cash and shares of the Company’s common stock equal to
$25.5 million, which amounted to 1,773,102 shares of the Company's common stock. The number of shares was determined by the
closing price of 20 trading days immediately preceding the closing date, December 2, 2019. The resale of these shares was registered
and are subject to a standstill agreement. We recognized the fair value of the shares as of the acquisition date, net of issuance costs, by
increasing shareholders' equity by $24.4 million
In addition to the purchase price, PIH received five-year right of first refusal to provide reinsurance of up to 7.5% of any layer in
FedNat’s catastrophe reinsurance program. PIH also agreed to a non-compete for five years following the closing with respect to
residential property insurance in Alabama, Florida, Georgia, Louisiana, South Carolina and Texas.
Since the effective acquisition date the revenues and net income of the business acquired have been $4.4 million and $1.4 million,
respectively. We recognized $1.3 million of acquisition-related costs, pre-tax, for the twelve months ended December 31, 2019. These
costs are included in the general and administrative expenses line item of the consolidated statement of operations. We also capitalized
$0.5 million in application development costs to property and equipment included in the other asset line item on the consolidated
balance sheet.
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
The acquisition date fair values of certain assets and liabilities, including VOBA and intangible assets, are provisional and subject to
revision within one year of the acquisition date. As such, our estimates of fair values are pending finalization, which may result in
adjustments to goodwill. The following presents (in thousands) the preliminary acquisition date fair values of the net assets acquired
related to the Maison Companies as of December 2, 2019:
Assets:
Debt securities, available-for-sale
Cash and cash equivalents
Prepaid reinsurance premium
Premiums receivable
Reinsurance recoverable
Deferred acquisition costs and value of business acquired, net
Other assets
Total assets acquired
Liabilities:
Loss and adjustment expense reserves
Unearned premiums
Reinsurance payable
Income taxes, net
Deferred revenue
Other liabilities
Total liabilities assumed
Net specifically identifiable assets acquired
Goodwill
Net assets acquired
December 2,
2019
(In thousands)
$
$
56,929
35,968
25,279
2,977
7,603
8,721
3,507
140,984
16,660
50,513
24,071
1,778
1,515
7,487
102,024
38,960
10,997
49,957
As of December 31, 2019, we anticipate that all the gross contractual amounts of acquired receivables will be fully collected.
The goodwill recorded as part of the acquisition includes the expected synergies and other benefits that management believes will
result from the acquisition including reinsurance savings and reduction in operating and general and administrative expenses.
Value of Business Acquired
The entire $8.7 million acquired VOBA balance will be amortized by December 31, 2020.
-64-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Identifiable Intangible Assets
The following presents the fair value of identifiable intangible assets acquired as of the acquisition date:
Trade name (1)
Non-compete agreements
Insurance licenses (1)
Total
(1) These intangibles have an indefinite useful life.
Weighted-
Average
Amortization
Period
Fair
Value
(In thousands)
(In years)
$
$
1,800
300
182
2,282
—
2
—
These identifiable intangible assets were estimated using a discounted cash flow method. Significant inputs to the valuation models
include estimates of expected premiums, persistency rates, investment returns, claim costs, expenses and discount rates.
The identifiable intangible assets included in other assets on the consolidated balance sheet were:
Trade name
Non-competes
Insurance licenses
Total
Pro Forma Financial Information
As of December 31, 2019
Gross
Carrying
Amount
Accumulated
Amortization
(In thousands)
1,800
$
300
182
2,282
$
—
13
—
13
$
$
The following unaudited pro forma condensed consolidated statements of operations of the Company assume that the acquisition of
the Maison Companies was completed on January 1, 2018:
Revenue
Net income (loss)
For the Years Ended
2019
2018
(In thousands)
$
60,904
$
(8,678)
58,376
2,504
Pro forma adjustments include the revenue and net income (loss) of the Maison Companies for each period as well as estimates for
amortization of identifiable intangible assets acquired and fair value adjustments associated with investments, VOBA (different than
deferred acquisition costs) and reinsurance recoverable. Other pro forma adjustments include the incremental increase to interest
expense attributable to financing the acquisition and the impact of reflecting acquisition and integration costs in 2018, instead of 2019.
-65-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
4. FAIR VALUE
Fair Value Disclosures of Financial Instruments
The Company accounts for financial instruments at fair value or the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. Fair value measurements are generally based
upon observable and unobservable inputs. Observable inputs are based on market data from independent sources, while unobservable
inputs reflect the Company’s view of market assumptions in the absence of observable market information. All assets and liabilities
that are recorded at fair value are classified and disclosed in one of the following three categories:
•
•
•
Level 1 — Quoted market prices (unadjusted) for identical assets or liabilities in active markets is defined as a market where
transactions for the financial statement occur with sufficient frequency and volume to provide pricing information on an
ongoing basis, or observable inputs.
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.
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:
Level 1
Level 2
Level 3
Total
December 31, 2019
(In thousands)
Debt securities - available-for-sale, at fair value:
United States government obligations and authorities
$
83,764
$
110,429
$
— $
Obligations of states and political subdivisions
Corporate securities
International securities
Debt securities, at fair value
—
—
—
83,764
24,020
278,302
29,750
442,501
Equity securities, at fair value
17,361
2,678
—
—
—
—
—
194,193
24,020
278,302
29,750
526,265
20,039
Total investments, at fair value
$
101,125
$
445,179
$
— $
546,304
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Level 1
Level 2
Level 3
Total
December 31, 2018
(In thousands)
Debt securities - available-for-sale, at fair value:
United States government obligations and authorities
$
43,918
$
83,950
$
— $
Obligations of states and political subdivisions
Corporate securities
International securities
Debt securities, at fair value
—
—
—
43,918
9,767
268,731
22,275
384,723
Equity securities, at fair value
16,037
1,721
—
—
—
—
—
127,868
9,767
268,731
22,275
428,641
17,758
Total investments, at fair value
$
59,955
$
386,444
$
— $
446,399
Held-to-maturity debt securities reported on the consolidated balance sheets at amortized cost and disclosed at fair value below (and in
Note 5) and the level of fair value hierarchy of inputs used consisted of the following:
December 31, 2019
December 31, 2018
Level 1
Level 2
Level 3
Total
$
3,453
$
3,809
(In thousands)
878
$
1,155
— $
—
4,331
4,964
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.
A summary of the significant valuation techniques and market inputs for each financial instrument carried at fair value includes the
following:
•
•
•
•
United States Government Obligations and Authorities:
In determining the fair value for United States government securities in
Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair
value for United States government securities in Level 2, the Company uses the market approach utilizing primary valuation
inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields,
credit spreads, reference data and industry and economic events.
Obligations of States and Political Subdivisions: In determining the fair value for state and municipal securities, the Company uses
the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets
in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Corporate and International Securities:
In determining the fair value for corporate securities the Company uses the market
approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets
that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit
default swap curves (for high-yield corporates), reference data and industry and economic events.
Equity Securities: In determining the fair value for equity securities in Level 1, the Company uses quoted prices (unadjusted) in
active markets for identical or similar assets. In determining the fair value for equity securities in Level 2, the Company uses
the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets
in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
We did not have securities trading in less liquid or illiquid markets with limited or no pricing information, therefore we did not use
unobservable inputs to measure fair value as of December 31, 2019 and 2018. Additionally, we did not have any assets or liabilities
-67-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
measured at fair value on a nonrecurring basis as of December 31, 2019 or 2018, and we noted no significant changes in our valuation
methodologies between those periods.
There were no changes to the Company's valuation methodology and the Company is not aware of any events or circumstances that
would have a significant adverse effect on the carrying value of its assets and liabilities measured at fair value as of December 31, 2019
and 2018. There were no transfers between the fair value hierarchy levels during the years ended December 31, 2019, 2018 and 2017.
5. INVESTMENTS
Unrealized Gains and Losses
The difference between amortized cost or cost and estimated fair value and gross unrealized gains and losses, by major investment
category, consisted of the following:
□
Amortized
Cost
or Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair Value
December 31, 2019
Debt securities - available-for-sale:
United States government obligations and authorities
Obligations of states and political subdivisions
Corporate
International
Debt securities - held-to-maturity:
United States government obligations and authorities
Corporate
International
Total investments, excluding equity securities
December 31, 2018
Debt securities - available-for-sale:
United States government obligations and authorities
Obligations of states and political subdivisions
Corporate
International
Debt securities - held-to-maturity:
United States government obligations and authorities
Corporate
International
Total investments, excluding equity securities
3,073
294
10,252
593
14,212
12
20
1
33
14,245
$
$
426
22
132
12
592
39
—
—
39
631
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
1,091
27
510
12
1,640
1
2
—
3
1,643
$
$
$
1,151
130
4,971
411
6,663
158
6
1
165
6,828
$
$
$
$
$
194,193
24,020
278,302
29,750
526,265
3,558
717
56
4,331
530,596
Fair Value
127,868
9,767
268,731
22,275
428,641
3,928
982
54
4,964
433,605
$
$
$
$
$
191,546
23,748
268,182
29,169
512,645
3,585
697
55
4,337
516,982
Amortized
Cost
or Cost
127,928
9,870
273,192
22,674
433,664
4,085
986
55
5,126
438,790
$
$
$
$
$
-68-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Net Realized and Unrealized Gains and Losses
The Company calculates the gain or loss realized on the sale of investments by comparing the sales price (fair value) to the cost or
amortized cost of the security sold. Net realized gains and losses on investments are determined in accordance with the specific
identification method.
Net realized and unrealized gains (losses) recognized in earnings, by major investment category, consisted of the following:
□
Year Ended December 31,
2019
2018
2017
(In thousands)
Gross realized and unrealized gains:
Debt securities
Equity securities
Total gross realized and unrealized gains
Gross realized and unrealized losses:
Debt securities
Equity securities
Total gross realized and unrealized losses
$
2,829
$
423
$
5,928
8,757
(664)
(1,009)
(1,673)
2,374
2,797
(3,990)
(2,951)
(6,941)
Net realized and unrealized gains (losses) on investments
$
7,084
$
(4,144) $
1,814
9,944
11,758
(1,671)
(1,539)
(3,210)
8,548
The above line item, net realized and unrealized gains (losses) on investments, includes the following equity securities gains (losses)
recognized in earnings:
Net realized and unrealized gains (losses)
Less:
Net realized and unrealized gains (losses) on securities sold
Net unrealized gains (losses) still held as of the end-of-period
Year Ended December 31,
2019
2018
(In thousands)
4,919
$
(577)
672
4,247
$
732
(1,309)
$
$
-69-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Contractual Maturity
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
Amortized cost and estimated fair value of debt securities, by contractual maturity, consisted of the following:
December 31, 2019
Amortized
Cost
Fair Value
(In thousands)
$
22,642
$
210,100
135,374
144,529
512,645
330
3,833
69
105
4,337
$
516,982
$
Year Ended December 31,
2018
(In thousands)
12,253
207
12,460
$
$
$
$
15,605
296
15,901
22,703
214,405
141,094
148,063
526,265
331
3,824
71
105
4,331
530,596
2017
9,776
478
10,254
Securities with Maturity Dates
Debt securities, available-for-sale:
One year or less
Over one through five years
Over five through ten years
Over ten years
Debt securities, held-to-maturity:
One year or less
Over one through five years
Over five through ten years
Over ten years
Total
Net Investment Income
Net investment income consisted of the following:
2019
Interest income
Dividends income
Net investment income
$
$
-70-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
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
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(In thousands)
December 31, 2019
Debt securities - available-for-sale:
United States government obligations and
authorities
Obligations of states and political subdivisions
Corporate
International
Debt securities, held-to-maturity:
United States government obligations and
authorities
Corporate
International
$
49,833
$
409
$
2,218
$
6,810
15,872
3,856
76,371
—
—
—
—
22
94
10
535
—
—
—
—
—
7,694
179
10,091
2,287
—
—
2,287
Total investments, excluding equity securities
$
76,371
$
535
$
12,378
$
17
—
38
2
57
39
—
—
39
96
$
52,051
$
6,810
23,566
4,035
86,462
2,287
—
—
2,287
$
88,749
$
426
22
132
12
592
39
—
—
39
631
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(In thousands)
December 31, 2018
Debt securities - available-for-sale:
United States government obligations and
authorities
Obligations of states and political subdivisions
Corporate
International
Debt securities, held-to-maturity:
United States government obligations and
authorities
Corporate
International
$
22,673
$
246
$
29,727
$
3,254
160,361
15,608
201,896
229
591
54
874
18
3,058
217
3,539
1
6
1
8
4,786
53,232
4,678
92,423
3,113
90
—
3,203
905
112
1,913
194
3,124
157
—
—
157
$
52,400
$
8,040
213,593
20,286
294,319
3,342
681
54
4,077
Total investments, excluding equity securities
$
202,770
$
3,547
$
95,626
$
3,281
$
298,396
$
1,151
130
4,971
411
6,663
158
6
1
165
6,828
As of December 31, 2019, the Company held a total of 203 debt securities that were in an unrealized loss position, of which 24
securities were in an unrealized loss position continuously for 12 months or more. As of December 31, 2018, the Company held a
total of 1,222 debt securities that were in an unrealized loss position, of which 371 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.
-71-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
The Company holds some of its debt securities as available-for-sale and as such, these securities are recorded at fair value. The
Company continually monitors the difference between cost and the estimated fair value of its investments, which involves uncertainty
as to whether declines in value are temporary in nature. If the decline of a particular investment is deemed temporary, the Company
records the decline as an unrealized loss in shareholders’ equity. If the decline is deemed to be other than temporary, the Company will
write the security’s cost-basis or amortized cost-basis down to the fair value of the investment and recognizes an OTTI loss in the
Company’s consolidated statement of operations. Additionally, any portion of such decline related to debt securities that is believed to
arise from factors other than credit will be recorded as a component of other comprehensive income rather than charged against
income. The Company did not have any OTTI losses on its available-for-sale securities for the years ended December 31, 2019, 2018
and 2017, respectively.
As discussed in Note 2 above, beginning January 1, 2018, the Company’s equity investments are measured at fair value through net
income (loss). The Company did not have any OTTI losses on its equity securities for the year ended December 31, 2017.
Collateral Deposits
Cash and cash equivalents and investments, the majority of which were debt securities, with fair values of $11.2 million and $10.3
million were deposited with governmental authorities and into custodial bank accounts as required by law or contractual obligations, as
of December 31, 2019 and 2018, respectively.
6. REINSURANCE
Overview
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. The Company reinsures (cedes)
a portion of written premiums on an excess of loss or a quota-share basis in order to limit the Company’s loss exposure. To the extent
that reinsuring companies are unable to meet their obligations assumed under these reinsurance agreements, the Company remains
primarily liable to its policyholders.
The Company is selective in choosing reinsurers and considers numerous factors, the most important of which is the financial stability
of the reinsurer or capital specifically pledged to uphold the contract, its history of responding to claims and its overall reputation. In
an effort to minimize the Company’s exposure to the insolvency of a reinsurer, the Company evaluates the acceptability and review the
financial condition of the reinsurer at least annually with the assistance of the Company’s reinsurance broker.
Significant Reinsurance Contracts
2018-2019 Excess of Loss Reinsurance Programs
With the February 21, 2018 acquisition of the minority interests of MNIC, the Company combined both FNIC and MNIC under a
single program allowing the Company to capitalize on efficiencies and scale. FNIC and MNIC’s combined 2018-2019 reinsurance
program cost $148.8 million. This amount included $102.7 million for the private reinsurance for the Company’s exposure, including
prepaid automatic premium reinstatement protection, along with $46.1 million payable to the FHCF. The combination of private and
FHCF reinsurance treaties affords FNIC and MNIC $1.8 billion of aggregate coverage with a maximum single event coverage totaling
$1.3 billion, exclusive of retentions. Both FNIC and MNIC maintained their FHCF participation at 75% for the 2018 hurricane
season. FNIC’s single event pre-tax retention for a catastrophic event in Florida is $20.0 million, up slightly from the 2017-2018
reinsurance program and MNIC’s single event pre-tax retention for a catastrophic event is $3.0 million, down slightly from the
2017-2018 reinsurance program.
The combined FNIC and MNIC private market excess of loss treaties, covering both Florida and non-Florida exposures, became
effective July 1, 2018 and all private layers have prepaid automatic reinstatement protection, which afforded the Company additional
coverage for subsequent events. These private market excess of loss treaties structure coverage into layers, with a cascading feature
such that substantially all layers attach after $20.0 million in losses for FNIC and after $3.0 million in losses for MNIC. If the aggregate
limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection
drops down for subsequent events until exhausted. Given market conditions, FNIC elected not to purchase any multiple year
protection and terminated the second year of the $89.0 million of multiple year protection that FNIC purchased in 2017 on a two-year
basis. FNIC also had $156.0 million of multiple year protection that expired on June 30, 2018. The overall reinsurance programs are
with reinsurers that currently have an A.M. Best or Standard & Poor’s rating of “A-” or better, or have fully collateralized their
maximum potential obligations in dedicated trusts.
-72-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
FNIC’s non-Florida excess of loss reinsurance treaties afforded us an additional $23.0 million of aggregate coverage with first event
coverage totaling $5.0 million and second event coverage totaling $18.0 million, with the incremental $13.0 million of second event
coverage applying to hurricane losses only. The end result is a non-Florida retention of $15.0 million for the first event and
$2.0 million for the second event though these retentions are reduced to $7.5 million and $1.0 million after taking into account the
profit sharing agreement that FNIC has with the nonaffiliated managing general underwriter that writes FNIC non-Florida property
business. FNIC’s non-Florida reinsurance program cost included $2.0 million for this private reinsurance, including prepaid automatic
premium reinstatement protection.
2019-2020 Catastrophe Excess of Loss Reinsurance Program
Given the December 2, 2019 acquisition of the Maison Companies, the Company and PIH agreed to combine FNIC, MNIC, and MIC
under a single reinsurance program allowing the carriers to capitalize on efficiencies, spread of risk and scale.
The combined reinsurance treaties provide approximately $1.3 billion of single-event reinsurance coverage in excess of a $27 million
retention for catastrophic losses on the first event (and $15 million on the second and third events), including hurricanes, and
aggregate coverage of $1.9 billion, at an approximate total cost of $224.1 million, of which FNIC's and MNIC's share of the cost is
estimated to total $179.3 million.
The combined FNIC, MIC and MNIC private market excess of loss treaties, covering both Florida and non-Florida exposures,
became effective July 1, 2019 and all private layers have prepaid automatic reinstatement protection, which affords the carriers
additional coverage for subsequent events. This private market excess of loss treaty structure breaks coverage into layers, with a
cascading feature such that substantially all layers attach after $20 million in losses for FNIC, $2 million in losses for MNIC and
$5 million in losses for MIC. For FNIC and MNIC, the second and third event attaches at $10 million per event, on a combined basis.
If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused
layer protection drops down for subsequent events until exhausted. The overall reinsurance program is with reinsurers that currently
have an A.M. Best Company or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential
obligations in dedicated trusts.
As indicated above, FNIC, MIC and MNIC’s combined 2019-2020 reinsurance program is estimated to cost $224.1 million. This
amount includes approximately $178.9 million for private reinsurance for the carriers’ exposure described above, including prepaid
automatic premium reinstatement protection, along with approximately $45.2 million payable to the FHCF. The combination of
private and FHCF reinsurance treaties affords FNIC, MNIC, and MIC approximately $1.9 billion of aggregate coverage with a
maximum single event coverage totaling approximately $1.3 billion, exclusive of retentions. Each carrier will pay directly its allocated
portion of the aggregate reinsurance ceded premium cost. The allocation methodology by which FNIC, MNIC, and MIC determines
their share of the premium and distribution of reinsurance recoveries under the combined reinsurance tower is based on catastrophe
loss modeling of the separate books of business. Each carrier shares the combined program cost in proportion to its contribution to
the total expected loss in each reinsurance layer. Each carrier's reinsurance recoveries will be based on that carrier's contributing share
of a given event's total loss. Both FNIC and MNIC maintained their FHCF participation at 75% for the 2019 hurricane season, and
MIC increased its FHCF participation to 90%.
FNIC’s non-Florida excess of loss reinsurance treaty affords us an additional $18 million of coverage for a second event, which applies
to hurricane losses only. The result is a non-Florida retention of $20 million for FNIC for the first event and $2 million for the second
event, although these retentions are reduced to $10 million and $1 million after taking into account the profit-sharing agreement that
FNIC has with the non-affiliated managing general underwriter that writes FNIC’s non-Florida property business. FNIC’s non-Florida
reinsurance program cost for the above specific coverage approximates $1.8 million for this private reinsurance.
The insurance carriers’ cost and amounts of reinsurance are based on current analysis of exposure to catastrophic risk. The data is
subjected to exposure level analysis at various dates through December 31, 2019. This analysis of the carriers’ exposure level in relation
to the total exposures to the FHCF and excess of loss treaties may produce changes in retentions, limits and reinsurance premiums in
total, and by carrier, as a result of increases or decreases in the carriers’ exposure levels.
Quota-Share Reinsurance Programs
FNIC's reinsurance programs also include quota-share treaties. One such treaty for 30% became effective July 1, 2014, and another
for 10% became effective on July 1, 2015 with each running for two years. The combined treaties provided up to a 40% quota-share
reinsurance on covered losses for the homeowners’ property and liability insurance program in Florida. The treaties are accounted for
-73-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
as retrospectively rated contracts whereby the estimated ultimate premium or commission is recognized over the period of the
contracts.
On July 1, 2016, the 30% quota-share treaty expired on a cut-off basis, which means as of that date the Company retained an
incremental 30% of its unearned premiums and losses. On July 1, 2017, the 10% quota-share treaty expired on a cut-off basis, which
means as of that date we retained an incremental 10% of the underlying unearned premiums and losses. The reinsurers remain liable
for the paid losses occurring during the terms of the treaties, until each treaty is commuted.
On July 1, 2017, FNIC bound a 10% quota-share on its Florida homeowners book of business, which excluded named storms, subject
to certain limitations. This treaty is not subject to accounting as a retrospectively rated contract. This treaty expired on July 1, 2018 on
a cut-off basis, meaning that the reinsurer will not be liable (under this agreement) for losses as a result of occurrences taking place
after the date of termination, and the unearned premium previously ceded was returned to FNIC.
On July 1, 2018, FNIC renewed the quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal
basis, excluding named storms, which was initially set at a 2% cession, and is subject to certain limitations. In addition, this quota-share
allowed FNIC to prospectively increase or decrease the cession percentage up to three times during the term of the agreement.
Effective October 1, 2018, FNIC elected to increase the cession percentage from 2% to 10% on an in-force, new and renewal basis.
The treaty expired on July 1, 2019 on a cut-off basis, meaning that the reinsurer will not be liable (under this agreement) for losses as a
result of occurrences taking place after the date of termination, and the unearned premium previously ceded was returned to FNIC.
On July 1, 2019, FNIC renewed the quota-share treaty on its Florida homeowners book of business, on an in-force, new and renewal
basis, excluding named storms, which was set at a 10% cession and is subject to certain limitations. In addition, this quota-share allows
FNIC the flexibility to prospectively increase or decrease the cession percentage up to three times during the term of the agreement.
The Company’s private passenger automobile quota-share treaties are programs which became effective at different points in the year
and cover auto policies across several states.
Associated Trust Agreements
Certain reinsurance agreements require FNIC to secure the credit, regulatory and business risk. Fully funded trust agreements securing
these risks totaled less than $0.1 million as of December 31, 2019 and 2018.
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:
December 31,
2019
2018
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
Reinsurance recoverable, net
$
$
$
(In thousands)
45,186
164,429
209,615
$
45,028
166,396
211,424
As of December 31, 2019 and 2018, the Company had reinsurance recoverable of $163.7 million and $183.5 million, respectively, as a
result of Hurricane Michael and Irma. All reinsurers in our excess-of-loss reinsurance programs have an A.M. Best or Standard &
Poor’s rating of “A-“ or better, or have fully collateralized their maximum potential obligations in dedicated trusts.
-74-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Net Premiums Written and Net Premiums Earned
Net premiums written and net premiums earned consisted of the following:
□
Net Premiums Written
Direct
Ceded
Net Premiums Earned
Direct
Ceded
2019
Year Ended December 31,
2018
(In thousands)
2017
$
$
$
$
610,608
(232,729)
377,879
582,334
(218,682)
363,652
$
$
$
$
567,764
(202,732)
365,032
580,020
(224,763)
355,257
$
$
$
$
603,417
(260,524)
342,893
603,193
(269,712)
333,481
-75-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
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 IBNR.
Activity in the liability for loss and LAE reserves is summarized as follows:
□
□
2019
Gross reserves, beginning-of-period
Less: reinsurance recoverable (1)
Net reserves, beginning-of-period
Net reserves from Maison acquisition
Incurred loss, net of reinsurance, related to:
Current year
Prior year loss development (2)
Ceded losses subject to offsetting experience account adjustments (3)
Prior years
Amortization of acquisition fair value adjustment
Total incurred loss and LAE, net of reinsurance
Paid loss, net of reinsurance, related to:
Current year
Prior years
Total paid loss and LAE, net of reinsurance
Net reserves, end-of-period
Plus: reinsurance recoverable (1)
Gross reserves, end-of-period
$
$
Year Ended December 31,
2018
(In thousands)
230,515
(98,345)
132,170
$
$
296,230
(166,396)
129,834
2017
158,110
(40,412)
117,698
11,825
—
—
262,118
13,460
(2,489)
10,971
(9)
273,080
173,313
81,493
254,806
159,933
164,429
324,362
$
231,133
2,166
(4,883)
(2,717)
—
228,416
155,462
75,290
230,752
129,834
166,396
296,230
$
245,545
13,926
(11,914)
2,012
—
247,557
160,945
72,140
233,085
132,170
98,345
230,515
(1) Reinsurance recoverable in this table includes only ceded loss and LAE reserves.
(2) Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective
reinsurance treaties to the extent there is an offsetting experience account adjustment.
(3) Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account
adjustment, such that there is no impact on pre-tax net income (loss).
The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as such
estimates are subject to the outcome of future events. The factors influencing changes in claim costs are often difficult to isolate or
quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple interpretations.
Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period
during which such adjustments are made.
During the year ended December 31, 2019, the Company experienced $13.5 million of unfavorable loss and LAE reserve development
on prior accident years, primarily in its personal automobile and commercial general liability lines of businesses. The development in
commercial general liability is being driven by late reported claims as well as large losses that are driving up the overall severity metrics.
Additionally, the unfavorable automobile development primarily related to 2017 accident year from our auto programs in the states of
Georgia and Texas, and is being driven by claims reopening and higher severity.
During the year ended December 31, 2018, the Company experienced $2.2 million of unfavorable loss and LAE reserve development
on prior accident years, primarily in our personal automobile and homeowners line of business. The unfavorable automobile
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
development primarily related to the 2016 accident year in the state of Georgia. The homeowners unfavorable development primarily
related to the continued impact from assignment of benefits ("AOB") and related ligation costs in the state of Florida.
As previously disclosed, the Company entered into 30% and 10% retrospectively-rated Florida-only property quota-share treaties,
which ended on July 1, 2016 and 2017, respectively. These agreements included a profit share (experience account) provision, under
which the 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.
During the year ended December 31, 2017, the Company experienced unfavorable loss and LAE reserve development on prior
accident years primarily in its all other peril homeowners coverage in Florida. In the first half of 2016, the Company began to
experience a new and higher level of AOB claims both in frequency and severity in our homeowners business in Florida, which caused
adverse experience on the loss activity in accident years 2015 and 2016. This increased level of AOB claims was the significant driver
in the Company’s decision to increase the Company’s 2015 accident year reserves related to the Company’s homeowners Florida
policies.
AOB is a legal construct that allows a third party to step into the shoes of the insured and is then paid directly by an insurance
company for services rendered on behalf of the insured for a covered loss. Absent an AOB, the insured would pay the third party and
those costs would be reimbursed by the insurance company to the insured. AOB is commonly used when a homeowner experiences a
water loss, for example a leaky pipe, an overflow from a sink, or a damaged appliance, and contacts a contractor or water remediation
company.
Misuse of this legal construct has led to contractors over inflating costs of claims and/or submitting improper claims, causing
insurance companies to have to either pay the overinflated claim, fight the claim in court, or both. In all cases, AOB claims cost the
insurance company, on average, more than five times the cost to settle non-AOB claims, which has been a primary driver the increase
to our overall loss and loss adjustment in comparison to historical severity averages.
-77-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
The following tables provide incurred losses and ALAE and cumulative paid losses and ALAE, net of reinsurance, for the prior 10 accident years, and the total of IBNR reserves
plus expected development on reported claims and the cumulative number of reported claims (in thousands, except number of reported claims), as of the most recent reporting
period, by the Company’s significant lines of business, which are homeowners, commercial general liability and automobile.
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2019
2019
Homeowners Incurred Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
IBNR & Expected
Cumulative
Development on
Number of
Reported Claims
Reported Claims (1)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
24,825
$
25,056
$
26,151
$
27,895
$
28,968
$
29,407
$
29,945
$
30,459
$
30,602
$
30,651
$
20,492
21,344
23,032
23,007
23,301
43,807
23,932
24,186
42,021
64,312
24,582
24,468
35,834
63,300
99,497
25,957
25,889
35,859
61,770
92,411
171,264
26,143
26,356
37,185
62,206
95,129
162,043
202,844
26,394
26,836
37,880
61,817
94,760
158,764
192,769
210,158
26,394
26,951
37,978
62,043
94,703
157,880
188,548
213,128
245,819
Total
$ 1,084,095
66
33
63
102
144
887
4,709
5,228
9,975
58,908
2,393
2,429
2,694
3,434
7,657
13,227
24,219
67,237
36,555
17,670
(1) The cumulative number of reported claims is measured by individual claimant at a coverage level.
-78-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Homeowners Cumulative Paid Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
14,052
$
21,350
$
24,730
$
26,886
$
27,984
$
29,092
$
29,739
$
30,376
$
30,449
$
11,119
19,250
13,693
21,323
20,728
19,986
22,723
23,120
31,606
37,033
24,047
23,923
33,867
53,831
52,214
25,580
25,186
35,123
57,891
79,359
102,556
25,982
26,113
35,803
59,722
86,647
142,716
135,589
26,287
26,777
37,473
60,555
90,415
148,274
176,580
141,173
$
All outstanding liabilities for unpaid claims and ALAE prior to 2010, net of reinsurance
Acquired balance from acquisition
30,585
26,340
26,861
37,688
61,441
92,327
152,258
179,327
194,160
157,768
958,755
11,825
3
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance
$
137,168
The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for homeowners policies, as
of December 31, 2019:
Homeowners
59.5 %
23.8 %
4.5 %
3.3 %
2.4 %
3.1 %
1.5 %
1.2 %
0.2 %
0.5 %
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Average Annual Payout of Losses and ALAE, Net of Reinsurance
(Unaudited)
-79-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Commercial General Liability Incurred Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
IBNR & Expected
Cumulative
Development on
Number of
Reported Claims
Reported Claims
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2019
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
8,552
$
7,582
$
7,474
$
7,045
$
7,535
$
7,597
$
7,645
$
7,809
$
8,252
$
8,401
$
6,436
5,854
5,279
4,749
4,952
7,095
4,603
4,801
5,069
7,475
4,760
4,700
5,221
7,709
8,082
5,409
4,658
5,502
6,384
7,008
10,727
6,254
4,346
5,704
6,620
6,020
5,809
8,289
6,828
4,509
5,580
6,348
5,377
6,561
7,853
6,553
7,817
5,109
5,984
6,697
7,947
8,502
6,558
6,233
1,604
Total
$
64,852
106
81
94
125
149
584
858
2,345
4,395
789
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Commercial General Liability Cumulative Paid Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
1,187
$
2,279
$
3,855
$
5,553
$
6,363
$
7,238
$
7,382
$
7,631
$
7,918
$
764
2,763
871
3,366
1,714
882
3,673
2,632
2,233
717
4,246
3,342
3,366
2,593
798
4,866
3,686
3,867
3,855
2,296
1,515
5,831
3,841
4,606
4,375
3,249
3,657
1,592
6,349
4,098
5,033
5,130
3,827
5,088
2,478
963
761
1,224
712
670
761
783
743
577
388
78
8,165
7,365
4,521
5,467
6,270
5,866
6,606
3,293
1,554
147
All outstanding liabilities for unpaid claims and ALAE prior to 2010, net of reinsurance
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance
$
1,416
17,014
Total
$
49,254
-80-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for commercial general
liability policies, as of December 31, 2019:
Commercial general liability
13.2 %
17.7 %
13.9 %
10.5 %
11.4 %
8.6 %
6.0 %
5.1 %
7.3 %
3.5 %
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Average Annual Payout of Losses and ALAE, Net of Reinsurance
(Unaudited)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2019
2019
Automobile Incurred Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
IBNR & Expected
Cumulative
Development on
Number of
Reported Claims
Reported Claims
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
2,823
$
2,963
$
3,111
$
3,088
$
3,044
$
3,035
$
3,059
$
3,041
$
3,042
$
3,042
$
3,580
3,350
1,735
2,954
1,741
1,517
2,912
1,717
1,863
2,038
2,762
1,424
1,826
3,213
3,045
2,848
1,455
1,829
3,551
2,882
13,414
2,796
1,491
2,161
4,315
2,781
20,205
20,411
2,756
1,448
2,123
4,379
2,878
24,346
22,472
3,513
2,762
1,444
2,127
4,417
2,915
25,918
24,579
4,623
(3)
Total
$
71,824
—
—
1
5
10
8
21
243
600
1
969
789
822
3,471
6,015
6,538
56,541
42,064
7,975
92
-81-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Automobile Cumulative Paid Losses and ALAE, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
1,713
$
2,482
$
2,715
$
2,863
$
2,942
$
2,978
$
2,984
$
3,035
$
3,037
$
1,417
2,381
867
2,562
1,293
907
2,644
1,333
1,609
1,455
2,726
1,384
1,906
3,120
1,393
2,755
1,393
2,069
3,678
2,293
8,084
2,755
1,430
2,109
4,122
2,670
17,258
12,821
2,755
1,444
2,112
4,291
2,807
23,053
20,762
2,331
3,037
2,755
1,447
2,116
4,383
2,890
25,582
23,860
3,626
(5)
All outstanding liabilities for unpaid claims and ALAE prior to 2010, net of reinsurance
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance
$
9
2,142
Total
$
69,691
The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for automobile policies, as of
December 31, 2019:
Automobile
40.9 %
31.4 %
14.9 %
7.9 %
2.6 %
1.4 %
0.2 %
0.7 %
— %
— %
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Average Annual Payout of Losses and ALAE, Net of Reinsurance
(Unaudited)
-82-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in the consolidated
balance sheets is as follows:
Liabilities for unpaid losses and ALAE:
Homeowners
Commercial general liability
Automobile
Flood
Total liabilities for unpaid losses and ALAE, net of reinsurance
Reinsurance recoverables:
Homeowners
Commercial general liability
Automobile
Flood
Total reinsurance recoverables
Unallocated loss adjustment expenses
Gross liability for unpaid losses and LAE
December 31,
2019
2018
(In thousands)
$
137,168
$
17,014
2,142
—
156,324
102,279
18,888
4,374
—
125,541
160,578
158,043
500
3,228
123
—
8,275
78
164,429
166,396
3,609
$
324,362
$
4,293
296,230
Management establishes a liability on an aggregate basis to provide for the estimated IBNR. The estimates of the liability for loss
and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this
process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and
economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in
increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in results of operations in the
period in which they are made and the liabilities may deviate substantially from prior estimates.
Various actuarial methods are utilized to determine the reserves that are booked to our financial statements. Weightings of tests and
methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures and time
elements. On an overall basis, changes to methods and/or assumptions underlying reserve estimations and selections as of
December 31, 2019 and 2018, were not considered material.
IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff. Various
standard actuarial tests are applied to subsets of the business at a line of business and coverage basis. Included in the analyses are the
following:
•
•
•
•
Reported Loss Development Method: A reported loss development pattern is calculated based on historical loss development
data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or
underwriting year, as appropriate, to ultimate levels;
Paid Development Method: A paid loss development pattern is calculated based on historical paid loss development data, and
this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year,
as appropriate, to ultimate levels;
Expected Loss Ratio Method: Expected loss ratios are applied to premiums earned, based on historical company experience, or
historical insurance industry results when company experience is deemed not to be sufficient; and
Bornhuetter-Ferguson Method: The results from the Expected Loss Ratio Method are essentially blended with either the
Reported Loss Development Method or the Paid Development Method.
□
-83-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
8. LONG-TERM DEBT
Long-term debt consisted of the following:
Senior unsecured fixed rate notes, due March 15, 2029, net of deferred financing costs of $1,478
and $0, respectively
Senior unsecured floating rate notes, due December 31, 2027, net of deferred financing costs of $0
and $348, respectively
Senior unsecured fixed rate notes, due December 31, 2022, net of deferred financing costs of $0
and $248, respectively
Total long-term debt, net
December 31,
2019
2018
(In thousands)
$
$
98,522
$
—
—
—
98,522
$
24,652
19,752
44,404
As of December 31, 2019, the Company’s estimated annual aggregate amount of debt maturities includes the following:
For the Years Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total debt maturities
Less: deferred financing costs
Total debt maturities, net
Senior Unsecured Notes
Aggregate
Debt
Maturities
(In thousands)
$
$
—
—
—
—
—
100,000
100,000
1,478
98,522
On March 5, 2019, the Company completed a private placement offering and issued $100.0 million in principal amount of Senior
Unsecured Fixed Rate Notes due 2029 (the "Notes"), pursuant to an indenture dated as of March 5, 2029 (the "Indenture"). The
Notes mature on March 15, 2029 and bear interest at a fixed rate of 7.5% per year, payable semi-annually in arrears, subject to
increases in the interest rate payable in the event of a downgrade in the credit rating assigned to the Notes. The Notes are not
convertible or exchangeable for any equity securities, other securities or assets of the Company or any subsidiary. A portion of the cash
from the offering was used to redeem all $45.0 million of the Company's Senior Unsecured Fixed Rate Notes Due 2022 and the
Company's Senior Notes Due 2027. We recognized $3.6 million as interest expense in our consolidated statements of operations for
the year ended 2019, for prepayment fees, including the write-off unamortized debt issuance costs on the repayment.
The Company may redeem the Notes under certain circumstances as set forth in the Indenture. Prior to March 15, 2024, the Company
may redeem the Notes, in whole or in part, at a redemption price equal to 100.00% of the principal amount of the Notes to be
redeemed, plus the “Applicable Premium,” plus accrued and unpaid interest on such Notes, if any, on the Notes redeemed, to the
applicable redemption date. The “Applicable Premium” is defined in the Indenture to mean, with respect to any Note on any
applicable redemption date, the greater of (1) 1.0% of the then-outstanding principal amount of such Note and (2) the excess (if any)
of: (A) the present value at such redemption date of (i) the applicable redemption price of such Note at March 15, 2024 (excluding any
accrued but unpaid interest), plus (ii) all required interest payments due on such Note through March 15, 2024 (excluding accrued but
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
unpaid interest), computed using a discount rate equal to the Treasury Rate (as defined in the Indenture) on such redemption date plus
50 basis points; over (B) the then-outstanding principal amount of such Note.
On and after March 15, 2024, the Company may redeem the Notes, in whole or in part, at 103.750% in 2024, 101.875% in 2025, and
100% in 2026 and thereafter, together with any accrued and unpaid interest on the Notes being redeemed to but excluding the date of
redemption.
If a change in control of the Company, as defined in the Indenture, occurs, the holders of the Notes will have the right to require the
Company to purchase all or a portion of their Notes at a price in cash equal to 101% of the principal amount thereof, plus any accrued
but unpaid interest.
The Notes are senior unsecured obligations of the Company and will rank equally with all of the Company’s other future senior
unsecured indebtedness. The Indenture includes customary covenants and events of default. Among other things, the covenants
indebtedness or make restricted payments, including
restrict the ability of the Company and its subsidiaries to incur additional
dividends, and under certain circumstances, the Company is required to maintain certain levels of reinsurance coverage while the
Notes remain outstanding, and maintain certain other financial covenants. These covenants are subject to important exceptions and
qualifications set forth in the Indenture. Principal and interest on the Notes are subject to acceleration in the event of certain events of
default, including automatic acceleration upon certain bankruptcy-related events.
9. INCOME TAXES
The components of income tax expense include the following:
□
Federal:
Current
Deferred
Federal income tax expense (benefit)
State:
Current
Deferred
State income tax expense (benefit)
Total income tax expense (benefit)
Year Ended December 31,
2019
2018
2017
(In thousands)
$
(982) $
5,162
$
567
(415)
241
(124)
117
(751)
4,411
1,383
(296)
1,087
$
(298) $
5,498
$
2,431
810
3,241
494
(150)
344
3,585
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
The actual income tax expense differs from the “expected” income tax expense (computed by applying the combined applicable
effective federal and state tax rates to income before income tax expense) as follows:
□
Computed expected tax expense provision, at federal rate
$
150
$
4,244
$
Year Ended December 31,
2019
2018
2017
(In thousands)
State tax, net of federal tax benefit
Tax-exempt interest
Income subject to dividends-received deduction
Return to provision
Rate changes
Executive compensation
Meals and entertainment
Uncertain tax position
Other
(122)
(3)
(34)
(307)
—
230
43
(203)
(52)
761
(134)
(13)
158
—
436
28
—
18
Total income tax expense (benefit)
$
(298) $
5,498
$
3,124
187
(429)
(76)
329
297
185
76
—
(108)
3,585
Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes. For the years
ended December 31, 2019, 2018 and 2017, the effective income tax rate was (41.8)%, 27.2% and 40.2%, respectively. Differences in
the effective tax and the statutory Federal income tax rate of 21% in 2019 and 2018 and 35% in 2017, are driven by state income taxes
and anticipated annual permanent differences, including estimates for tax-exempt interest, dividends received deduction, executive
compensation and other items.
The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate
tax rate from 35% to 21%. In connection with the Company’s analysis of the impact of the Tax Act, the Company recorded a discrete
provisional net tax expense of $0.3 million for the year ended December 31, 2017. This estimated net expense primarily consists of the
U.S. federal rate reduction from 35% to 21% applied to the net deferred tax asset. During 2018, the impact of the Tax Legislation was
not adjusted from the Company's preliminary estimates. The accounting for income tax effects of the Tax Legislation has been
completed.
The Company does not have a valuation allowance on its deferred income tax asset as of December 31, 2019 and 2018.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated
statements of operations and statements of comprehensive income (loss). A reconciliation of these uncertain tax positions was as
follows:
Balance at January 1
Increases/(decreases) for tax positions taken during the prior years
Balance at December 31
Year Ended December 31,
2019
2018
2017
(In thousands)
$
$
585
(203)
382
$
$
585
—
585
$
$
585
—
585
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred
income tax asset (liability) include the following:
□
Deferred income tax assets:
Unearned premiums
Unpaid losses and loss adjustment expenses
Accrued expenses
Net operating loss carryforwards
Deferred revenue
Share-based compensation
Unrealized losses on investment securities
Lease liability
Other
Total deferred income tax assets
Deferred income tax liabilities:
Deferred acquisition costs and other
Depreciation and amortization
Unrealized gains on investment securities
Lease asset
Other
Total deferred income tax liabilities
$
As of December 31,
2019
2018
(In thousands)
$
10,232
1,596
216
2,095
—
161
—
1,655
23
15,978
(12,703)
(1,679)
(3,270)
(1,655)
(257)
(19,564)
9,977
958
832
1,714
236
255
1,254
—
21
15,247
(11,198)
(577)
—
—
(273)
(12,048)
Deferred income tax asset (liability), net
$
(3,586) $
3,199
The deferred income tax asset (liability), net is included in income taxes, net on our Consolidated Balance Sheets along with income
tax receivable, net.
The Company files a federal income tax return and various state and local tax returns. The Company’s consolidated federal and state
income tax returns for 2016 - 2018 are open for review by the Internal Revenue Service and other state taxing authorities.
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
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
advice of legal counsel, the expected outcome of litigation and legal proceedings or other dispute resolution proceedings or the
expected resolution of contingencies. The Company’s management believes that the Company’s accruals for probable and estimable
losses are reasonable and that the amounts accrued do not have a material effect on the Company’s consolidated financial statements.
Regarding the matter involving the Co-Existence Agreement effective as of August 30, 2013 with Federated Mutual Insurance
Company ("Mutual") and the related arbitration (please see Note 9 of our 2018 Form 10-K for more information), the Company and
Mutual have exchanged releases and all remaining pending proceedings have been resolved by an agreed order entered by the U.S.
District Court for the Northern District of Illinois on November 22, 2019.
Assessment Related Activity
The Company operates in a regulatory environment where certain entities and organizations have the authority to require us to
participate in assessments. Currently these entities and organizations include: Florida Insurance Guaranty Association (“FIGA”),
Citizens Property Insurance Corporation (“Citizens”), FHCF, Florida Automobile Joint Underwriters Association (“JUA”), Georgia
Insurers Insolvency Pool (“GIIP”), Special Insurance Fraud Fund (“SIIF”), Fair Access to Insurance Requirements Plan (“FAIRP”),
Georgia Automobile Insurance Plan (“GAIP”), Property Insurance Association of Louisiana (“PIAL”), Louisiana Automobile
Insurance Plan (“LAIP”), South Carolina Property & Casualty Insurance Guaranty Association (“SCPCIGA”), Texas Property and
Casualty Insurance Guaranty Association (“TPCIGA”), Texas Windstorm Insurance Association (“TWIA”), Texas Automobile
Insurance Plan Association (“TAIPA”), Alabama Insurance Guaranty Association (“AIGA”), and Alabama Insurance Underwriters
Association (“AIUA”). As a direct premium writer in Florida, we are required to participate in certain insurer solvency associations
under Florida law, administered by FIGA.
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, 2019. 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. FNHC and its subsidiaries lease certain
facilities, furniture and equipment under long-term lease agreements. Rental expense for the years ended December 31, 2019, 2018
and 2017 was $1.0 million, $0.7 million and $0.6 million, respectively.
Future minimum lease payments under these agreements are as follows:
□
Year Ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total
Aggregate
Minimum
Lease Payments
(In thousands)
$
$
1,028
1,066
1,098
1,131
1,164
4,433
9,920
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.
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Additional information related to our operating lease agreement for office space consisted of the following:
Right-of-use asset
Accrued rent
Right-of-use asset, net
Lease liability
Weighted average discount rate
Weighted average remaining years of lease term
Lease expense
Sublease income
Lease expense, net
Net cash provided by (used in) operating activities
December 31,
2019
(In thousands)
8,096
(317)
7,779
8,096
4.70 %
8.7
Year
Ended
December 31,
2019
(In thousands)
1,046
(229)
817
(573)
$
$
$
$
$
$
The interest rates implicit in our leases were not known, therefore the weighted-average discount rate above was determined by what
FedNat would have had to pay to borrow the lease payments in a similar economic environment that existed at inception of our leases
while considering our general credit and the theoretical collateral of the office space. In the event of a change to lease term, the
Company would re-evaluate all inputs and assumptions, including the discount rate.
Refer to Note 2 above for additional information regarding the implementation of new lease accounting rules on January 1, 2019.
11. SHAREHOLDERS’ EQUITY
Common Stock Repurchases
The Company may repurchase shares in open market transactions in accordance with Rule 10b-18 or under Rule 10b5-1 of the
Exchange Act from time to time in its discretion, based on ongoing assessments of the Company’s capital needs, the market price of
its common stock and general market conditions. The amount and timing of all repurchase transactions are contingent upon market
conditions, applicable legal requirements and other factors.
In December 2017, the Company’s Board of Directors authorized an additional share repurchase program under which the Company
may repurchase up to $10.0 million (plus $0.8 million remaining from previous authorization which was fully expended as of March
31, 2018) of its outstanding shares of common stock through December 31, 2018. The unused portion of this authorization expired on
December 31, 2018.
In December 2018, the Company’s Board of Directors authorized an additional share repurchase program under which the Company
may repurchase up to $10.0 million of its outstanding shares of common stock through December 31, 2019. During the year ended
December 31, 2019, the Company repurchased 237,647 shares of its common stock at a total cost of $3.9 million, which is an average
price per share of $16.27. The unused portion of this authorization expired on December 31, 2019.
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
In December 2019, the Company's Board of Directors authorized a new share repurchase program under which the Company may
repurchase up to $10 million of its outstanding shares of common stock from January 1, 2020 through December 31, 2020. As of
December 31, 2019, the remaining availability for future repurchases of our common stock under this program was $10.0 million.
Securities Offerings
In June 2018, the Company filed with the Securities and Exchange Commission (“SEC”) on Form S-3, a shelf registration statement
enabling the Company to offer and sell, from time to time, up to an aggregate of $150.0 million of securities. No securities have been
offered or sold under this registration statement.
Stock Compensation Plan
In June 2018, the Company filed with the SEC on Form S-8, a registration statement registering 800,000 shares of common stock
reserved for issuance under the Company’s 2018 Omnibus Incentive Compensation Plan (the “2018 Plan”). The 2018 Plan, which
was approved by the Company’s shareholders at the 2018 annual meeting is an equity compensation plan that may be used for our
employees, non-employee directors, consultants and advisors.
Share-Based Compensation Expense
Share-based compensation arrangements include the following:
□
Restricted stock
Performance stock
Total share-based compensation expense
Recognized tax benefit
Intrinsic value of options exercised
Fair value of restricted stock vested
Year Ended December 31,
2019
2018
2017
(In thousands)
$
$
$
$
$
1,841
335
2,176
534
2
1,977
$
$
$
$
$
2,134
233
2,367
600
229
2,360
$
$
$
$
$
2,639
207
2,846
1,098
371
2,328
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.
The unamortized share-based compensation expense is $2.8 million as of December 31, 2019, which will be recognized over the
remaining weighted average vesting period of approximately 1.68 years.
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Stock Option Awards
A summary of the Company’s stock option activity includes the following:
Outstanding at January 1, 2017
Granted
Exercised
Cancelled
Outstanding at December 31, 2017
Granted
Exercised
Cancelled
Outstanding at December 31, 2018
Granted
Exercised
Cancelled
Outstanding at December 31, 2019
□
Weighted
Average
Option
Number of
Shares
Exercise Price
79,484
$
—
(29,133)
—
50,351
—
(10,834)
(500)
39,017
—
(167)
—
38,850
$
3.70
—
3.68
—
3.72
—
3.47
2.45
3.80
—
2.45
—
3.80
Stock options outstanding and exercisable in a select price range is as follows:
Range of Exercise Price
Shares Outstanding
and Exercisable
Options Outstanding and Exercisable
Weighted Average
Remaining
Contractual Life
(years)
Weighted Average
Exercise Price
$2.45 - $4.40
38,850
1.89
$3.80
Aggregate
Intrinsic Value
495,541
Restricted Stock Awards
The Company recognizes share-based compensation expense for all restricted stock awards (“RSAs”) held by the Company’s directors,
executives and other key employees. For all RSA awards, excluding grants based on total relative shareholder return ("TSR"), the
accounting charge is measured at the grant date as the fair value of FNHC common stock and expensed as non-cash compensation
over the vesting term using the straight-line basis for service awards and over successive one-year requisite service periods for
performance-based awards. Our expense for our performance awards depends on achievement of specified results; therefore the
ultimate expense can range from 0% to 250% of target. Our TSR-based cliff vesting awards contain performance criteria which are
tied to the achievement of certain market conditions. The TSR grant date fair value was determined using a Monte Carlo simulation
and, unlike the performance condition awards, the expense is not reversed if the performance condition is not met. This value is
recognized as expense over the requisite service period using the straight-line recognition method.
During the years ended December 31, 2019 and 2018, the Board of Directors granted 140,156 and 133,060 RSAs, respectively, vesting
over three or five years, to the Company’s directors, executives and other key employees.
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
RSA activity includes the following:
□
Outstanding at January 1, 2017
Granted
Vested
Cancelled
Outstanding at December 31, 2017
Granted
Vested
Cancelled
Outstanding at December 31, 2018
Granted
Vested
Cancelled
Outstanding at December 31, 2019
Weighted
Average
Grant Date
Fair Value
19.69
17.95
16.57
19.80
20.54
16.31
21.06
17.87
18.78
18.03
20.87
17.66
17.82
Number of
Shares
337,203
$
106,454
(140,514)
(5,600)
297,543
133,060
(112,071)
(56,198)
262,334
140,156
(94,755)
(52,390)
255,345
$
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.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) associated with debt securities - available-for-sale consisted of the following:
Before
Tax
2019
Income
Tax
Year Ended December 31,
Net
Before
Tax
(In thousands)
2018
Income
Tax
Net
$
(5,023) $
1,273
$
(3,750)
$
2,287
$
(593) $
1,694
—
—
—
(1,349)
355
(994)
20,809
(5,144)
15,665
(2,165)
18,644
531
(4,613)
(1,634)
14,031
(8,747)
2,786
(5,961)
2,217
(706)
1,511
(6,530)
2,080
(4,450)
$
13,621
$
(3,340) $
10,281
$
(5,023) $
1,273
$
(3,750)
Accumulated other comprehensive income
(loss), beginning-of-period
Cumulative effect of new accounting
standards
Other comprehensive income (loss) before
reclassification
Reclassification adjustment for realized
losses (gains) included in net income
Accumulated other comprehensive
income (loss), end-of-period
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a profit sharing plan under Section 401(K) of the Internal Revenue Code, which is a defined contribution plan
that allows employees to defer compensation through contributions to the 401(K) Plan. This plan covers substantially all employees
who meet specified service requirements and includes a 100% match up to the first 6% of an employee’s salary, not to exceed statutory
limits. Additionally, the Company may make additional profit-sharing contributions.
For the years ended December 31, 2019 and 2018, the Company made no additional profit-sharing contribution.
The Company’s total contributions to the 401(K) Plan were $0.9 million, $1.0 million and $0.8 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
13. RELATED PARTY TRANSACTIONS
Related to an equity method investment in Southeast Catastrophe Consulting Company, LLC, based in Mobile, Alabama, the
Company recorded claims adjustment service fees and other expenses of $6.7 million and $17.0 million for the years ended
December 31, 2018 and 2017, respectively. Additionally, the Company recognized other income in the consolidated statements of
operations, of $0.3 million, $0.3 million, $2.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
14. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding
for the period, including vested restricted stock awards during the period. Diluted EPS is computed by dividing net income by the
weighted average number of shares outstanding, noted above, adjusted for the dilutive effect of stock options and unvested restricted
stock awards. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market
prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common
stock that would be issued upon the assumed exercise of common stock options and the vesting of RSAs using the treasury stock
method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive.
The following table presents the calculation of basic and diluted EPS:
Year Ended December 31,
2019
2018
(In thousands, except per share data)
2017
Net income (loss) attributable to FedNat Holding Company shareholders
$
1,011
$
14,928
$
7,989
Weighted average number of common shares outstanding - basic
12,977
12,775
13,170
Net income (loss) per common share - basic
$0.08
$1.17
$0.61
Weighted average number of common shares outstanding - basic
Dilutive effect of stock compensation plans
Weighted average number of common shares outstanding - diluted
12,977
46
13,023
12,775
92
12,867
Net income (loss) per common share - diluted
Dividends per share
$
$
0.08
0.33
$
$
1.16
0.24
$
$
13,170
80
13,250
0.60
0.32
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
Dividends Declared
In January 2019, our Board of Directors declared a $0.08 per common share dividend, payable in March 2019, to shareholders of
record on February 14, 2019, amounting to $1.0 million.
In May 2019, our Board of Directors declared a $0.08 per common share dividend, payable in June 2019, to shareholders of record on
May 14, 2019. amounting to $1.1 million.
In July 2019, our Board of Directors declared a $0.08 per common share dividend, payable in September 2019, to shareholders of
record on August 16, 2019. amounting to $1.0 million.
In November 2019, our Board of Directors declared a $0.09 per common share dividend, payable in December 2019, to shareholders
of record on November 15, 2019. amounting to $1.2 million.
In February 2020, our Board of Directors declared a $0.09 per common share dividend, payable in March 2020, to shareholders of
record on February 14, 2020. amounting to $1.3 million.
15. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The Company’s insurance companies are subject to regulations and standards of the Florida Office of Insurance Regulation (the
"Florida OIR") and Louisiana Department of Insurance (the "LDI"). These standards require that insurance companies prepare
statutory-basis financial statements in accordance with the National Association of Insurance Commissioners (“NAIC”) Accounting
Practices and Procedures Manual. The Company did not use any prescribed or permitted statutory accounting practices that differed
from the NAIC’s statutory accounting practices as of December 31, 2019.
The Company’s insurance companies are required to report their risk-based capital (“RBC”) each December 31. Failure to maintain an
adequate RBC could subject the Company to regulatory action and could restrict the payment of dividends. As of December 31, 2019,
the RBC levels of the Company’s insurance companies did not subject them to any regulatory action.
Additionally, Florida Statutes require the Company’s Florida domiciled insurance companies to maintain specified levels of statutory
capital and restrict the timing and amount of dividends and other distributions that may be paid to the parent company. These
standards require dividends to be paid only from statutory unassigned surplus. The maximum dividend that may be paid by the
Company’s insurance companies to their parent company, without prior regulatory approval is limited to the lesser of statutory net
income from operations of the preceding calendar year, not including realized capital gains, plus a 2 years carryforward or 10.0% of
statutory unassigned surplus as of the preceding year end. A dividend may also be taken without prior regulatory approval if (a) the
dividend is equal to or less than the greater of (i) 10.0% of the insurer’s surplus as to policyholders derived from realized net operating
profits on its business and net realized capital gains; or (ii) the insurer’s entire net operating profits and realized net capital gains
derived during the immediately preceding calendar year; (b) the insurer will have surplus as to policyholders equal to or exceeding 115
percent of the minimum required statutory surplus as to policyholders after the dividend or distribution is made; and (c) the insurer
has filed notice with the Florida OIR at least 10 business days prior to the dividend payment or distribution, or such shorter period of
time as approved by the Florida OIR on a case-by-case basis. These dividends are referred to as “ordinary dividends.” However, if a
dividend, together with other dividends paid within the preceding 12 months, exceeds this statutory limit or is paid from sources other
than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval
before such dividend can be paid.
With respect to the Company's Louisiana domiciled insurer, Louisiana law restricts a domestic insurer from declaring and paying any
dividends to its stockholders unless its capital is fully paid in cash and is unimpaired and it has a surplus beyond its capital stock and
the initial minimum surplus required and all other liabilities equal to fifteen percent of its capital stock, provided that this restriction
shall not apply when an insurer's paid-in capital and surplus exceeds the minimum required by Louisiana law by one hundred percent
or more. No extraordinary dividend or other extraordinary distribution to its shareholders may be made until 30 days after the
commissioner of insurance has received notice of the declaration thereof and has not within that period disapproved the payment, or
has approved the payment within the thirty-day period. An extraordinary dividend or distribution includes any dividend or
distribution of cash or other property, whose fair market value together with that of other dividends or distributions made within the
preceding twelve months exceeds the lesser of (a) 10.0% percent of the insurer's surplus as regards policyholders as of the 31st day of
December next preceding; or (b) the net income, not including realized capital gains, for the twelve-month period ending the 31st day
of December next preceding, but shall not include pro rata distributions of any class of the insurer's own securities. In determining
-94-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
whether a dividend or distribution is extraordinary, an insurer may carry forward net income from the previous two calendar years that
has not already been paid out as dividends. This carryforward shall be computed by taking the net income from the second and third
preceding calendar years, not including realized capital gains, less dividends paid in the second and immediate preceding calendar years.
Notwithstanding the foregoing, an insurer may declare an extraordinary dividend or distribution which is conditional upon regulatory
approval. and the declaration shall confer no rights upon shareholders until either the payment is approved or has not been
disapproved within the 30-day period referred to above.
As of December 31, 2019 and 2018, on a combined statutory basis, the capital and surplus of the Company’s insurance companies was
$192.5 million and $161.7 million, respectively. Combined statutory operational results of the Company’s insurance companies was a
net loss of $36.8 million, net income of $2.9 million and net loss of $19.6 million for the years ended December 31, 2019, 2018 and
2017, respectively. Statutory capital and surplus exceeds amounts necessary to satisfy regulatory requirements.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the Company’s unaudited quarterly results of operations includes the following:
2019
Net premiums earned
Total revenue
Losses and loss adjustment expenses
Total costs and expenses
Net income (loss) attributable to FedNat Holding Company
shareholders
Net income (loss) per share - basic
2018
Net premiums earned
Total revenue
Losses and loss adjustment expenses
Total costs and expenses
Net income (loss) attributable to FedNat Holding Company
shareholders
Net income (loss) per share - basic
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
$
$
$
$
$
$
$
$
$
$
$
$
88,784
101,197
66,839
106,435
$
$
$
$
(3,865) $
(0.30) $
92,306
105,301
65,340
95,596
7,110
0.55
$
$
$
$
$
$
87,374
99,476
62,105
94,099
4,659
0.36
First
Quarter
Second
Quarter
Third
Quarter
(In thousands, except per share data)
82,109
93,077
46,071
83,461
7,463
0.58
$
$
$
$
$
$
83,557
95,742
47,570
83,726
8,820
0.69
$
$
$
$
$
$
98,493
110,832
62,457
99,862
7,950
0.62
$
$
$
$
$
$
$
$
$
$
$
$
95,188
108,987
78,796
118,118
(6,893)
(0.51)
Fourth
Quarter
91,098
96,442
72,318
108,836
(9,305)
(0.73)
-95-
FedNat Holding Company and Subsidiaries
Notes to Consolidated Statements (Continued)
December 31, 2019
17. SUBSEQUENT EVENTS
Dividends Declared
Refer to Note 14 above for information related to our dividend declared in February 2020.
Florida Statewide Average Rate Increase
The Company applied for and was approved by the Florida OIR for a statewide average rate increase of 2.8% for FNIC Florida
homeowners multiple-peril insurance policies, which became effective for new policies on January 25, 2020 and is expected to become
effective for renewal policies on March 15, 2020.
The Company applied for and was approved by the Florida OIR for a statewide average rate increase of 5.1% for FNIC Florida
dwelling fire insurance policies, which became effective for new policies on February 25, 2020 and is expected to become effective for
renewal policies on April 1, 2020.
-96-
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
FedNat Holding Company
Opinion on Internal Control over Financial Reporting
We have audited FedNat Holding Company and subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). In our opinion, FedNat Holding Company and subsidiaries (the Company) maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of
the Maison Companies, which are included in the 2019 consolidated financial statements of the Company and constituted 14% and 21% of total and
net assets, respectively, as of December 31, 2019 and 1% and 134% of revenues and net income, respectively, for the year then ended. Our audit of
internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the
Maison Companies.
in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
We also have audited,
consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive
income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related
notes and the financial statement schedules listed in the index at Item 15 and our report dated March 6, 2020 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 6, 2020
-97-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in
the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of
our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Our evaluation did not include the internal controls of the Maison Companies, which are included in the
2019 consolidated financial statements of the Company and constituted 14% and 21% of total and net assets, respectively, as of
December 31, 2019 and 1% and 134% of revenues and net income, respectively, for the year then ended.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2019.
Management’s Report on Internal Control over Financial Reporting
Because of its inherent limitations,
internal controls over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).
Based on the results of this evaluation, our management has concluded that our internal control over financial reporting was effective
as of December 31, 2019 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with GAAP. We reviewed the results of management’s assessment with the
Company’s Audit Committee. Our independent registered public accounting firm that audited the consolidated financial statements
include in this Annual Report, Ernst & Young LLP, has issued an attestation report on the effectiveness of our internal control over
financial reporting which appears in Part II, Item 8, “Financial Statements and Supplementary Data” included in this Annual Report.
Changes in Internal Control over Financial Reporting
During the fourth quarter, we implemented our previously disclosed remediation plan for the claims matter that was identified as a
material weakness as of our third quarter Form 10-Q filing. We strengthened the level and scope of managerial review of claim
payment controls and implemented additional compensating controls to enhance the control environment. During the fourth quarter
we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, the
material weakness was successfully remediated during the fourth quarter of 2019. There were no other changes in our internal control
over financial reporting that occurred during the year ended December 31, 2019 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Limitations on Effectiveness
Our management and our audit committee do not expect that our disclosure controls and procedures or internal control over financial
reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control gaps and
-98-
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.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated herein by reference to the applicable information in the Proxy Statement for our
2020 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the applicable information in the Proxy Statement for our
2020 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference to the applicable information in our Proxy Statement for our
2020 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated herein by reference to the applicable information in the Proxy Statement for the
2020 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to the applicable information in the Proxy Statement for the
2020 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the close of the fiscal year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a)
The following documents are filed as part of this report.
(1)
Financial Statements
The following consolidated financial statements of the Company and the reports of independent auditors
thereon are filed with this report:
Independent Auditor’s Reports
-99-
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and
2017.
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017.
Notes to Consolidated Financial Statements for the years ended December 31, 2019, 2018 and 2017.
(2)
Financial Statement Schedules.
The following are included herein under Item 8, Financial Statements and Supplementary Data:
Schedule II, Condensed Financial Information of Registrant
Schedule V, Valuation and Qualifying Accounts
Schedule VI, Supplemental Information Concerning Insurance Operations
(3)
Exhibits.
-100-
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Incorporated by Reference
Form
Exhibit
Filing Date
Filed
Herewith
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
Equity Purchase Agreement dated as of February 25,
2019 among FedNat Holding Company, 1347 Property
Insurance Holdings, Inc., Maison Managers, Inc., and
Maison Insurance Company, and ClaimCor, LLC
Second Restated Articles of Incorporation of FedNat
Holding Company
Second Amended and Restated Bylaws of FedNat
Holding Company
Description of Registrant's Securities
Indenture dated December 28, 2017 by and among
Federated National Holding Company, The Bank of
New York Mellon, as Trustee, The Bank of New York
Mellon, London Branch, as Paying Agent, and the Bank
of New York Mellon SA/NV, Luxembourg Branch, as
Registrar
Supplemental Indenture No. 1 dated as of December 28,
2017, regarding Senior Unsecured Floating Rate Notes
due 2027
Supplemental Indenture No. 2 dated as of December 29,
2017, regarding Senior Unsecured Floating Rate Notes
due 2022
Senior Unsecured Floating Rate Note due 2027
Senior Unsecured Floating Rate Note due 2022
Indenture dated March 5, 2019 between FedNat
Holding Company and The Bank of New York Mellon,
as Trustee, Paying Agent, and Registrar
Form of Rule 144A Senior Unsecured Note due 2029
(included in Exhibit 4.7)
Form of IAI Senior Unsecured Note due 2029 (included
in Exhibit 4.7)
Form of First Supplemental Indenture by and between
FedNat Holding Company and The Bank of New York
Mellon, as trustee
Form of 7.50% Senior Unsecured Note due 2029 of
FedNat Holding Company
Private Placement Excess Catastrophe Reinsurance
Contract effective July 1, 2019 among FedNat Insurance
Company, Monarch Insurance Company, Maison
Insurance Company and subscribing reinsurers
Excess Catastrophe Reinsurance Contract effective July
1, 2019 among FedNat Insurance Company, Monarch
National Insurance Company, Maison Insurance
Company and subscribing reinsurers
Second and Third Event Excess Catastrophe
Reinsurance Contract effective July 1, 2019 among
FedNat Insurance Company, Monarch National
Insurance Company and subscribing reinsurers
Net Quota Share Reinsurance Agreement effective July
1, 2019 between FedNat Insurance Company and Swiss
Reinsurance America Corporation
Non-Florida Property Catastrophe Excess of Loss
Reinsurance Contract, effective July 1, 2019, between
FedNat Insurance Company and subscribing reinsurers
Reinstatement Premium Protection Reinsurance
Contract effective July 1, 2019, among FedNat
Insurance Company, Monarch National Insurance
Company, Maison Insurance Company, and subscribing
reinsurers
-101-
8-K
10-Q
10-Q
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
S-4
S-4
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.1
4.2
4.3
4.4
4.5
February 26, 2019
November 7, 2018
November 7, 2018
X
January 3, 2018
January 3, 2018
January 3, 2018
January 3, 2018
January 3, 2018
March 6, 2019
March 6, 2019
March 6, 2019
January 16, 2020
January 16, 2020
10-Q
10.1
November 12, 2019
10-Q
10.2
November 12, 2019
10-Q
10.3
November 12, 2019
10-Q
10-Q
10.4
November 12, 2019
10.5
November 12, 2019
10-Q
10.6
November 12, 2019
10.7
10.8
10.9*
10.10
10.11
10.12
10.13
10.14*
10.15+
10.16+
10.17+
10.18+
10.19+
10.20+
10.21+
10.22+
10.23+
10.24+
10.25+
10.26+
10.27
Reimbursement Contract between FedNat Insurance
Company and The State Board of Administration of
Florida (SBA) as administrator of the Florida Hurricane
Catastrophe Fund (FHCF), effective June 1, 2019
Reimbursement Contract between Monarch National
Insurance Company and The State Board of
Administration of Florida (SBA) as administrator of the
Florida Hurricane Catastrophe Fund (FHCF), effective
June 1, 2019
Administrator Agreement, effective July 1, 2013,
between Federated National Insurance Company and
SageSure Insurance Managers LLC, as amended
Administrative Services Agreement dated November 1,
2015 between FedNat Underwriters Inc. and SageSure
Insurance Managers LLC
Insurance Agency Master Agreement dated February 4,
2013 between Ivantage Select Agency, Inc. and
Federated National Underwriters, Inc.
First Amendment to Insurance Agency Master
Agreement dated February 12, 2013 between Ivantage
Select Agency, Inc. and Federated National
Underwriters, Inc.
Second Amendment to Insurance Agency Master
Agreement dated February 12, 2013 between Ivantage
Select Agency, Inc. and Federated National
Underwriters, Inc.
Third Amendment to Insurance Agency Master
Agreement dated August 10, 2018 between Ivantage
Select Agency, Inc. and FedNat Underwriters, Inc.
Confidential Information, Non-Solicitation and Non-
Competition Agreement dated as of April 17, 2017
between the Company and Ronald Jordan
Change of Control Agreement dated as of April 17,
2017 between the Company and Ronald Jordan
10-Q
10.1
May 8, 2018
10-Q
10.2
May 8, 2018
10-Q
10.5
November 6, 2013
10-Q
10.6
November 6, 2013
10-Q
10.6
May 11, 2015
10-Q
10-Q
10.3
10.4
May 10, 2017
May 10, 2017
X
X
X
2018 Omnibus Incentive Compensation Plan
DEF 14A
Annex B
April 13, 2018
Form of Restricted Stock Grant Summary of the
Company (Time-Based Vesting)
Form of Restricted Stock Grant Summary Agreement of
the Company (Performance-Based Vesting)
Form of Indemnification Agreement between the
Company and its directors and executive officers
Form of Amended and Restated Non-Competition,
Non-Disclosure and Non-Solicitation Agreement
between the Company and certain employees of the
Company
Second Amended and Restated Employment Agreement
dated January 18, 2012 between the Company and
Michael H. Braun
Amendment to Employment Agreement and Restrictive
Covenant Agreement effective as of March 17, 2015
between Monarch Delaware Holdings LLC and Michael
H. Braun
Non-Competition, Non-Disclosure and Non-
Solicitation Agreement effective as of March 17, 2015
between Monarch Delaware Holdings LLC and Michael
H. Braun
Employment Agreement dated January 8, 2019 between
the Company and Ronald A. Jordan
Change of Control Agreement dated as of May 2, 2016
between Federated National Holding Company and
Erick Fernandez
Form of Note Purchase Agreement dated February 25,
2019 between FedNat Holding Company and the
Purchasers of Senior Unsecured Notes due 2029
-102-
8-K
8-K
10-K
8-K
8-K
99.2
January 14, 2019
99.3
January 14, 2019
10.14
March 17, 2008
10.1
August 7, 2013
10.1
January 20, 2012
10-Q
10.3
May 11, 2015
10-Q
8-K
10.4
May 11, 2015
99.1
January 14, 2019
10-K
10.31
March 16, 2017
8-K
10.2
February 26, 2019
Form of Registration Rights Agreement dated March 5,
2019 between FedNat Holding Company and the Note
Purchasers
Cooperation Agreement dated August 9, 2019 by and
between FedNat Holding Company and Capital Returns
Management, LLC.
Consent Order dated August 7, 2019 among the Florida
Office of Insurance Regulation, FedNat Holding
Company, 1347 Property Insurance Holding, Inc., and
Maison Insurance Company
Consent Agreement dated August 9, 2019 among the
Louisiana Department of Insurance, FedNat Holding
Company and Maison Insurance Company.
Registration Rights Agreement dated December 2, 2019
between FedNat Holding Company and 1347 Property
Insurance Holdings, Inc.
Standstill Agreement dated December 2, 2019 between
FedNat Holding Company and 1347 Property Insurance
Holdings, Inc.
Reinsurance Capacity Right of First Refusal Agreement
dated December 2, 2019 between FedNat Holding
Company and 1347 Property Insurance Holdings, Inc.
Investment Advisory Agreement dated December 2,
2019 between Fundamental Global Advisors LLC and
FedNat Holding Company
Subsidiaries of the Company
Consent of Independent Registered Public Accounting
Firm
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
21.1
23.1
31.1
31.2
32.1
32.2
101.INS**
Inline XBRL Instance Document.
101.SCH**
Inline XBRL Taxonomy Extension Schema Document.
101.CAL**
101.DEF**
101.LAB**
101.PRE**
Inline XBRL Taxonomy Extension Calculation Linkbase
Document.
Inline XBRL Taxonomy Extension Definition Linkbase
Document
Inline XBRL Taxonomy Extension Label Linkbase
Document.
Inline XBRL Taxonomy Extension Presentation
Linkbase Document.
104
Cover Page Interactive Data File (formatted in Inline
XBRL and contained in Exhibit 101)
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10.1
March 6, 2019
10.1
August 12, 2019
10.1
August 13, 2019
10.2
August 13, 2019
10.1
December 2, 2019
10.2
December 2, 2019
10.3
December 2, 2019
10.4
December 2, 2019
X
X
X
X
X
X
X
X
X
X
X
X
X
____________________
+ Indicates a Management Compensation Plan or Arrangement
* Portions of this exhibit have been omitted from this exhibit in accordance with and as permitted by Item 601(b)(10)(iv) of Regulation S-K.
** In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Exchange Act,
or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act
or Exchange Act, except as shall be expressly set forth by specific reference in such filing.
-103-
Index to Financial Statement Schedules
Schedule II Condensed Financial Information of Registrant
Schedule V Valuation and Qualifying Accounts
Schedule VI Supplemental Information Concerning Insurance Operations
ITEM 16. FORM 10-K SUMMARY
Not applicable.
PAGE
106
110
111
-104-
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form
10-K report to be signed on its behalf by the undersigned, thereto duly authorized.
SIGNATURES
FEDNAT HOLDING COMPANY
By:
/s/ Michael H. Braun
Michael H. Braun, Chief Executive Officer
(Principal Executive Officer)
Date: March 6, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf
of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Michael H. Braun
Michael H. Braun
/s/ Ronald A. Jordan
Ronald A. Jordan
/s/ Erick A. Fernandez
Erick A. Fernandez
/s/ Bruce F. Simberg
Bruce F. Simberg
/s/ Jenifer G. Kimbrough
Jenifer G. Kimbrough
/s/ Thomas A. Rogers
Thomas A. Rogers
/s/ William G. Stewart
William G. Stewart
/s/ Richard W. Wilcox, Jr.
Richard W. Wilcox, Jr.
/s/ Roberta N. Young
Roberta N. Young
/s/ David W. Michelson
David W. Michelson
/s/ David K. Patterson
David K. Patterson
Chief Executive Officer, President and Director
March 6, 2020
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
March 6, 2020
March 6, 2020
Chairman of the Board and Director
March 6, 2020
Director
Director
Director
Director
Director
Director
Director
-105-
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
Schedule II – Condensed Financial Information of Registrant
Condensed Balance Sheets
FEDNAT HOLDING COMPANY (Parent Company Only)
December 31, 2019 and 2018
□
December 31,
2019
2018
(In thousands)
ASSETS
Investments in subsidiaries (1)
Investment securities, available-for-sale, at fair value
Equity securities, at fair value
Cash and cash equivalents
Deferred income taxes, net
Income taxes receivable
Note receivable and accrued interest to subsidiary (1)
Right-of-use assets
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Due to subsidiaries, net (1)
Long-term debt
Lease liabilities
Other liabilities
Total liabilities
Shareholders' Equity
Preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders’ equity
$
268,767
$
24,951
1,751
21,031
1,940
13,850
18,107
7,716
2,878
$
$
360,991
$
1,779
$
98,522
7,716
4,281
112,298
—
144
167,677
10,281
70,591
248,693
Total liabilities and shareholders' equity
$
360,991
$
(1) Eliminated in consolidation.
The accompanying note is an integral part of the condensed financial statements.
224,951
19,431
1,490
4,109
786
9,885
—
—
2,436
263,088
987
44,404
—
2,438
47,829
—
128
141,128
(3,750)
77,753
215,259
263,088
-106-
Year Ended December 31,
2019
2018
2017
(In thousands)
$
2,160
$
2,608
$
2,611
107
1,757
448
20,909
25,381
13,892
10,776
24,668
713
(298)
1,011
—
1,011
$
—
843
(765)
30,895
33,581
9,296
4,077
13,373
20,208
5,498
14,710
(218)
14,928
$
—
501
—
16,902
20,014
11,087
—
11,087
8,927
3,585
5,342
(2,647)
7,989
Schedule II – Condensed Financial Information of Registrant (Continued)
Condensed Statements of Earnings
FEDNAT HOLDING COMPANY (Parent Company Only)
□
Revenues:
Management fees (1)
Interest from subsidiaries (1)
Net investment income
Net realized and unrealized investment gains (losses)
Equity in income of consolidated subsidiaries
Total revenue
Costs and expenses:
General and administrative expenses
Interest expense
Total costs and expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to non-controlling interest
Net income (loss) attributable to FedNat Holding Company shareholders
$
(1) Eliminated in consolidation.
The accompanying note is an integral part of the condensed financial statements.
-107-
Schedule II – Condensed Financial Information of Registrant (Continued)
Condensed Statements of Cash Flows
FEDNAT HOLDING COMPANY (Parent Company Only)
□
Cash flow from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Net realized and unrealized investment (gains) losses
Equity in undistributed income of consolidated subsidiaries (1)
Amortization of investment premium or discount, depreciation and amortization
Loss (gain) on early extinguishment of debt
Share-based compensation
Changes in operating assets and liabilities:
Income taxes, net
Due to subsidiaries, net (1)
Other, net
Net cash provided by (used in) operating activities
Cash flow from investing activities:
Capital contributions to consolidated subsidiaries (1)
Sales, maturities and redemptions of investments securities
Purchases of investment securities
Payment for acquisition
Issuance of note receivable to subsidiary (1)
Purchases of property and equipment
Net cash provided by (used in) investing activities
Cash flow from financing activities:
Proceeds from issuance of long-term debt, net of issuance costs
Payment of long-term debt and prepayment penalties
Issuance of common stock for share-based awards
Purchases of FedNat Holding Company common stock
Dividends from consolidated subsidiaries
Dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Year Ended December 31,
2019
2018
2017
(In thousands)
$
1,011
$
14,710
$
5,342
(448)
(20,909)
369
3,575
1,050
(5,379)
3,044
998
(16,689)
—
11,276
(15,617)
(25,566)
(18,000)
(289)
(48,196)
98,390
(48,000)
1
(3,449)
39,174
(4,309)
81,807
16,922
4,109
765
(30,895)
141
—
1,183
(2,371)
(9,317)
1,497
(24,287)
(30,000)
54,543
(61,009)
—
—
(639)
(37,105)
—
—
39
(5,061)
27,990
(4,184)
18,784
(42,608)
46,717
—
(16,902)
88
—
2,846
4,354
20,468
1,450
17,646
(25,000)
42,979
(26,828)
—
—
(102)
(8,951)
—
45,000
103
(10,616)
—
(4,251)
30,236
38,931
7,786
46,717
Cash and cash equivalents at end of period
$
21,031
$
4,109
$
(1) Eliminated in consolidation.
The accompanying note is an integral part of the condensed financial statements.
-108-
Schedule II – Condensed Financial Information of Registrant (Continued)
Note to Condensed Financial Statements
FEDNAT HOLDING COMPANY (Parent Company Only)
(1) ORGANIZATION AND BASIS OF PRESENTATION
FedNat Holding Company (“FNHC”), the Parent Company, is an insurance holding company that controls substantially all steps in
the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our
independent agents and general agents.
The accompanying condensed financial statements include the activity of the Parent Company and on an equity basis, its consolidated
subsidiaries. Accordingly, these condensed financial statements have been presented for the parent company only. These condensed
financial statements should be read in conjunction with the consolidated financial statements and related notes of FNHC and
subsidiaries set forth in Part II, Item 8 Financial Statements and Supplemental Data of this Annual Report.
In applying the equity method to our consolidated subsidiaries, we record the investment at cost and subsequently adjust for additional
capital contributions, distributions and proportionate share of earnings or losses.
-109-
Schedule V – Valuation and Qualifying Accounts
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
□
Year
Description
2019
Allowance for uncollectible reinsurance recoverable
Allowance for uncollectible premiums receivable
2018
Allowance for uncollectible reinsurance recoverable
Allowance for uncollectible premiums receivable
2017
Allowance for uncollectible reinsurance recoverable
Allowance for uncollectible premiums receivable
$
$
$
$
$
$
Balance at
January 1,
Charged to
Costs and
Expenses
Balance at
Deductions
December 31,
— $
77
$
— $
70
$
— $
55
$
(in thousands)
— $
82
$
— $
7
$
— $
15
$
— $
— $
— $
— $
— $
— $
—
159
—
77
—
70
-110-
Schedule VI – Supplemental Information Concerning Insurance Operations
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
□
December 31,
Loss and
Loss
Year Ended December 31,
Claim and Claim
Adjustment Expenses
Amortization
Paid Claims
Year
Line of Business
Cost
Reserves
Premiums
Premiums
Income
Year
Acquisition
Expense
Unearned
Earned
Investment
Current
Prior
Year
Acquisition
Adjustment
Premiums
Costs
Expenses
Written
Deferred
Adjustment
Net
Incurred Related to
of Deferred
and Claim
Net
2019
2018
2017
Property and Casualty Insurance
Property and Casualty Insurance
Property and Casualty Insurance
$
$
$
56,136
39,436
40,893
$
$
$
324,362
296,230
230,515
$
$
$
360,870
281,992
294,423
$
$
$
363,652
355,257
333,481
$
$
$
15,901
12,460
10,254
$
$
$
262,109
231,133
245,545
$
$
$
10,971
(2,717)
2,012
$
$
$
96,885
97,873
87,310
$
$
$
254,806
230,752
233,085
$
$
$
377,879
365,032
342,893
(In thousands)
-111-