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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
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)
Florida65-0248866
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification Number)
  
14050 N.W. 14th Street, Suite 180, Sunrise, FL
33323
(Address of principal executive offices)(Zip Code)
800-293-2532
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common StockFNHCNasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ   No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes þ   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨
Accelerated Filer
þ
Non-accelerated Filer ¨
Smaller reporting company
  
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 2, 2020, the registrant had 13,717,525 shares of common stock outstanding.



FEDNAT HOLDING COMPANY
TABLE OF CONTENTS
 
  
PART I: FINANCIAL INFORMATIONPAGE
   
ITEM 1
   
ITEM 2
   
ITEM 3
   
ITEM 4
   
PART II: OTHER INFORMATION 
   
ITEM 1
   
ITEM 1A
   
ITEM 2
   
ITEM 3
   
ITEM 4
   
ITEM 5
   
ITEM 6
   
SIGNATURES





PART I: FINANCIAL INFORMATION
Item 1.  Financial Statements
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
໿
 September 30,December 31,
 20202019
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $519,557 and $512,645, respectively)
$540,443 $526,265 
Debt securities, held-to-maturity, at amortized cost 4,337 
Equity securities, at fair value13,108 20,039 
Total investments553,551 550,641 
Cash and cash equivalents49,286 133,361 
Prepaid reinsurance premiums286,128 145,659 
Premiums receivable, net of allowance of $118 and $159, respectively
52,753 41,422 
Reinsurance recoverable, net of allowance of $52 and $0, respectively
452,194 209,615 
Deferred acquisition costs and value of business acquired, net51,157 56,136 
Current and deferred income taxes, net24,099 2,552 
Goodwill10,997 10,997 
Other assets34,643 28,633 
Total assets$1,514,808 $1,179,016 
   
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves$553,980 $324,362 
Unearned premiums380,374 360,870 
Reinsurance payable and funds withheld liabilities230,987 102,467 
Long-term debt, net of deferred financing costs of $1,357 and $1,478, respectively
98,643 98,522 
Deferred revenue6,795 6,856 
Other liabilities42,553 37,246 
Total liabilities1,313,332 930,323 
Commitments and contingencies (see Note 11)
Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized
  
Common stock, $0.01 par value: 25,000,000 shares authorized; 13,717,525 and 14,414,821 issued and outstanding, respectively
137 144 
Additional paid-in capital168,912 167,677 
Accumulated other comprehensive income (loss)15,763 10,281 
Retained earnings16,664 70,591 
Total shareholders’ equity201,476 248,693 
Total liabilities and shareholders' equity$1,514,808 $1,179,016 

The accompanying notes are an integral part of the unaudited consolidated financial statements.
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FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
໿
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Revenues:  
Net premiums earned$83,546 $87,374 $300,934 $268,464 
Net investment income2,404 4,068 9,637 12,037 
Net realized and unrealized investment gains (losses)1,324 794 8,882 5,050 
Direct written policy fees3,603 2,514 10,662 7,308 
Other income6,439 4,726 16,919 13,115 
Total revenues97,316 99,476 347,034 305,974 
   
Costs and expenses:  
Losses and loss adjustment expenses99,016 62,105 297,862 194,284 
Commissions and other underwriting expenses24,580 24,854 90,205 75,650 
General and administrative expenses5,333 5,246 17,241 17,336 
Interest expense1,915 1,894 5,745 8,860 
Total costs and expenses130,844 94,099 411,053 296,130 
   
Income (loss) before income taxes(33,528)5,377 (64,019)9,844 
Income tax expense (benefit)(12,783)718 (23,928)1,940 
Net income (loss)$(20,745)$4,659 $(40,091)$7,904 
  
Net Income (Loss) Per Common Share  
Basic$(1.51)$0.36 $(2.89)$0.62 
Diluted(1.51)0.36 (2.89)0.61 
  
Weighted Average Number of Shares of Common Stock Outstanding  
Basic13,708 12,854 13,890 12,831 
Diluted13,708 12,897 13,890 12,880 
  
Dividends Declared Per Common Share$0.09 $0.08 $0.27 $0.24 

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-2-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
໿
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Net income (loss)$(20,745)$4,659 $(40,091)$7,904 
  
Change in net unrealized gains (losses) on investments, available-for-sale, net of tax
1,373 2,388 5,482 15,398 
Comprehensive income (loss)$(19,372)$7,047 $(34,609)$23,302 

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

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

໿
Accumulated
Common StockAdditionalOtherTotal
PreferredIssuedPaid-inComprehensiveRetainedShareholders'
StockSharesAmountCapitalIncome (Loss)EarningsEquity
Balance as of July 1, 2020$ 13,703,175 $137 $168,485 $14,390 $38,668 $221,680 
Net income (loss)— — — — — (20,745)(20,745)
Other comprehensive income (loss)— — — — 1,373 — 1,373 
Dividends declared— — — — — (1,259)(1,259)
Shares issued under share-based compensation plans— 14,350  41 — — 41 
Share-based compensation— — — 386 — — 386 
Balance as of September 30, 2020$ 13,717,525 $137 $168,912 $15,763 $16,664 $201,476 

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

The accompanying notes are an integral part of the unaudited consolidated financial statements.
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FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)
(In thousands, except share data)
(Unaudited)

Accumulated
Common StockAdditionalOtherTotal
PreferredIssuedPaid-inComprehensiveRetainedShareholders'
StockSharesAmountCapitalIncome (Loss)EarningsEquity
Balance as of January 1, 2020$ 14,414,821 $144 $167,677 $10,281 $70,591 $248,693 
Cumulative effect of new accounting standards— — — — — (25)(25)
Net income (loss)— — — — — (40,091)(40,091)
Other comprehensive income (loss)— — — — 5,482 — 5,482 
Dividends declared— — — — — (3,819)(3,819)
Shares issued under share-based compensation plans— 102,939 1 41 — — 42 
Repurchases of common stock— (800,235)(8)— — (9,992)(10,000)
Share-based compensation— — — 1,194 — — 1,194 
Balance as of September 30, 2020$ 13,717,525 $137 $168,912 $15,763 $16,664 $201,476 

Accumulated
Common StockAdditionalOtherTotal
PreferredIssuedPaid-inComprehensiveRetainedShareholders'
StockSharesAmountCapitalIncome (Loss)EarningsEquity
Balance as of January 1, 2019$ 12,784,444 $128 $141,128 $(3,750)$77,753 $215,259 
Net income (loss)— — — — — 7,904 7,904 
Other comprehensive income (loss)— — — — 15,398 — 15,398 
Dividends declared— — — — — (3,133)(3,133)
Shares issued under share-based compensation plans— 84,922 1  — — 1 
Share-based compensation— — — 1,960 — — 1,960 
Balance as of September 30, 2019$ 12,869,366 $129 $143,088 $11,648 $82,524 $237,389 

The accompanying notes are an integral part of the unaudited consolidated financial statements.
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FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

໿
Nine Months Ended
September 30,
20202019
Cash flow from operating activities:  
Net income (loss)$(40,091)$7,904 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:  
Net realized and unrealized investment (gains) losses(8,882)(5,050)
Loss (gain) on early extinguishment of debt 3,575 
Amortization of investment premium or discount, net2,353 606 
Depreciation and amortization1,427 1,088 
Share-based compensation1,194 1,960 
Changes in operating assets and liabilities:  
Prepaid reinsurance premiums(140,469)(61,717)
Premiums receivable, net(11,331)(10,141)
Reinsurance recoverable, net(242,611)8,549 
Deferred acquisition costs and value of business acquired, net4,979 (9,103)
Income taxes, net(23,322)(893)
Deferred revenue(61)1,654 
Loss and loss adjustment expense reserves229,618 (9,282)
Unearned premiums19,504 35,401 
Reinsurance payable and funds withheld liabilities128,520 59,203 
Other401 2,632 
Net cash provided by (used in) operating activities(78,772)26,386 
Cash flow from investing activities:  
Proceeds from sales of equity securities11,441 7,461 
Proceeds from sales of debt securities346,890 123,415 
Purchases of equity securities(4,727)(5,190)
Purchases of debt securities(402,894)(169,933)
Maturities and redemptions of debt securities60,767 29,158 
Purchases of property and equipment(2,585)(1,562)
Net cash provided by (used in) investing activities8,892 (16,651)
Cash flow from financing activities:  
Proceeds from issuance of long-term debt, net of issuance costs 98,390 
Payment of long-term debt and prepayment penalties (48,000)
Purchases of FedNat Holding Company common stock(10,418) 
Issuance of common stock for share-based awards42 1 
Dividends paid(3,819)(3,131)
Net cash provided by (used in) financing activities(14,195)47,260 
Net increase (decrease) in cash and cash equivalents(84,075)56,995 
Cash and cash equivalents at beginning-of-period133,361 64,423 
Cash and cash equivalents at end-of-period$49,286 $121,418 

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

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FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
 
໿
Nine Months Ended
September 30,
20202019
Supplemental disclosure of cash flow information:  
Cash paid (received) during the period for interest$7,500 $4,860 
Cash paid (received) during the period for income taxes(598)2,729 
Significant non-cash investing and financing transactions:
Right-of-use asset(7,605)(7,860)
Lease liability7,605 7,860 

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


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2020

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 our FNIC homeowners insurance products to consumers in Florida. As a percentage of the total homeowners premiums we underwrote, 20.9% and 23.6% were from Allstate’s network of Florida agents, for the three months ended September 30, 2020 and 2019, respectively. As a percentage of the total homeowners premiums we underwrote, 20.9% and 23.5% were from Allstate’s network of Florida agents, for the nine months ended September 30, 2020 and 2019, respectively.

SageSure Insurance Managers, LLC
The Company is a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) to facilitate growth in our FNIC homeowners business outside of Florida.  As a percentage of the total homeowners premiums, 26.2% and 25.2% of the Company’s premiums were underwritten by SageSure, for the three months ended September 30, 2020 and 2019, respectively. As a percentage of the total homeowners premiums, 26.0% and 22.4% of the Company’s premiums were underwritten by SageSure, for the nine months ended September 30, 2020 and 2019, 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, which include limits on the net losses that SageSure can realize. The limit is consistent with the amount of inception to date profits of the profit share agreement. In addition, refer to Note 6 for information regarding a fully collateralized quota-share treaty on this book of business.

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
-8-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2020

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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

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

Accounting Estimates and Assumptions

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

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

Recently Issued Accounting Pronouncements, Adopted

In 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 adopted the guidance effective January 1, 2020, by reflecting a cumulative effect adjustment of less than $0.1 million, after-tax, which decreased retained earnings, held-to-maturity debt securities and reinsurance recoverable.

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

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

Recently Issued Accounting Pronouncements, Not Yet Adopted

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

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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2020


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.

Revenues and net loss of the business acquired were $14.4 million and $5.2 million, respectively, for the three months ended September 30, 2020. Revenues and net loss of the business acquired were $46.7 million and $10.2 million, respectively, for the nine months ended September 30, 2020.

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, 2019:

ThreeNine
MonthsMonths
EndedEnded
September 30, 2019September 30, 2019
(In thousands)
Revenue$114,675 $352,291 
Net income (loss)1,128 581 

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

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

4. FAIR VALUE

Fair Value Disclosures of Financial Instruments

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

Level 1 - Quoted market prices (unadjusted) for identical assets or liabilities in active markets is defined as a market where transactions for the financial statement occur with sufficient frequency and volume to provide pricing information on an ongoing basis, or observable inputs.
Level 2 - Quoted market prices for similar assets or liabilities and valuations, using models or other valuation techniques using observable market data.  Significant other observable that can be corroborated by observable market data; and
Level 3 - Instruments that use non-binding broker quotes or model driven valuations that do not have observable market data or those that are estimated based on an ownership interest to which a proportionate share of net assets is attributed.

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

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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2020


The Company’s financial instruments measured at fair value on a recurring basis and the level of the fair value hierarchy of inputs used consisted of the following:
September 30, 2020
Level 1Level 2Level 3Total
(In thousands)
Debt securities - available-for-sale, at fair value:    
United States government obligations and authorities$36,115 $155,418 $ $191,533 
Obligations of states and political subdivisions 22,226  22,226 
Corporate securities 295,745  295,745 
International securities 30,939  30,939 
Debt securities, at fair value36,115 504,328  540,443 
    
Equity securities, at fair value10,724 2,384  13,108 
    
Total investments, at fair value$46,839 $506,712 $ $553,551 
໿
December 31, 2019
Level 1Level 2Level 3Total
(In thousands)
Debt securities - available-for-sale, at fair value:    
United States government obligations and authorities$83,764 $110,429 $ $194,193 
Obligations of states and political subdivisions 24,020  24,020 
Corporate securities 278,302  278,302 
International securities 29,750  29,750 
Debt securities, at fair value83,764 442,501  526,265 
    
Equity securities, at fair value17,361 2,678  20,039 
    
Total investments, at fair value$101,125 $445,179 $ $546,304 

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

Level 1Level 2Level 3Total
(In thousands)
September 30, 2020$ $ $ $ 
December 31, 20193,453 878  4,331 

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


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2020

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

United States Government Obligations and Authorities - In determining the fair value for United States government securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for United States government securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Obligations of States and Political Subdivisions - In determining the fair value for state and municipal securities, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Corporate and International Securities - In determining the fair value for corporate securities the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.
Equity Securities - In determining the fair value for equity securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for equity securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.

We did not have securities trading in less liquid or illiquid markets with limited or no pricing information, therefore we did not use unobservable inputs to measure fair value as of September 30, 2020 and December 31, 2019. Additionally, we did not have any assets or liabilities measured at fair value on a nonrecurring basis as of September 30, 2020 or December 31, 2019, 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 September 30, 2020 and December 31, 2019. There were no transfers between the fair value hierarchy levels during the nine months ended September 30, 2020 and 2019.

5. INVESTMENTS

Unrealized Gains and Losses

The difference between amortized cost or cost and estimated fair value and gross unrealized gains and losses, by major investment category, consisted of the following:
໿
AmortizedGrossGross 
CostUnrealizedUnrealized 
or CostGainsLossesFair Value
(In thousands)
September 30, 2020    
Debt securities - available-for-sale:    
United States government obligations and authorities$188,805 $2,835 $107 $191,533 
Obligations of states and political subdivisions21,332 909 15 22,226 
Corporate279,670 16,394 319 295,745 
International29,750 1,204 15 30,939 
$519,557 $21,342 $456 $540,443 
໿

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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2020

AmortizedGrossGross 
CostUnrealizedUnrealized 
or CostGainsLossesFair Value
(In thousands)
December 31, 2019    
Debt securities - available-for-sale:    
United States government obligations and authorities$191,546 $3,073 $426 $194,193 
Obligations of states and political subdivisions23,748 294 22 24,020 
Corporate268,182 10,252 132 278,302 
International29,169 593 12 29,750 
512,645 14,212 592 526,265 
    
Debt securities - held-to-maturity:    
United States government obligations and authorities3,585 12 39 3,558 
Corporate697 20  717 
International55 1  56 
4,337 33 39 4,331 
Total investments, excluding equity securities$516,982 $14,245 $631 $530,596 

Net Realized and Unrealized Gains and Losses

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

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

໿
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(In thousands)
Gross realized and unrealized gains:  
Debt securities$919 $897 $11,708 $2,048 
Equity securities1,361 326 3,566 4,633 
Total gross realized and unrealized gains2,280 1,223 15,274 6,681 
  
Gross realized and unrealized losses:  
Debt securities(121)(4)(2,608)(524)
Equity securities(835)(425)(3,784)(1,107)
Total gross realized and unrealized losses(956)(429)(6,392)(1,631)
Net realized and unrealized gains (losses) on investments$1,324 $794 $8,882 $5,050 

-13-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2020


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

Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(In thousands)
Net realized and unrealized gains (losses)$526 $(99)$(218)$3,526 
Less:
Net realized and unrealized gains (losses) on securities sold2,635 1,012 2,053 394 
Net realized and unrealized gains (losses) recognized during the period still held as of the end-of-period
$(2,109)$(1,111)$(2,271)$3,132 

Contractual Maturity

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

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

໿
September 30, 2020
Amortized 
CostFair Value
Securities with Maturity Dates(In thousands)
Debt securities, available-for-sale:  
One year or less$18,875 $19,022 
Over one through five years195,641 203,440 
Over five through ten years132,764 140,422 
Over ten years172,277 177,559 
Total$519,557 $540,443 

Net Investment Income

Net investment income consisted of the following:
໿
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(In thousands)
Interest income$2,374 $4,005 $9,445 $11,831 
Dividends income30 63 192 206 
Net investment income$2,404 $4,068 $9,637 $12,037 



-14-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2020


Aging of Gross Unrealized Losses

Gross unrealized losses and related fair values for debt securities, grouped by duration of time in a continuous unrealized loss position, consisted of the following:
໿
Less than 12 months