FEDNAT HOLDING CO – 10-Q – Management report and analysis of the financial situation and operating results

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Overview

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

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

Below, in addition to providing consolidated revenues and net income (loss), we
also provide adjusted operating revenues and adjusted operating income (loss)
because we believe these performance measures that are not United States of
America generally accepted accounting principles ("GAAP") measures allow for a
better understanding of the underlying trend in our business, as the excluded
items are not necessarily indicative of our operating fundamentals or
performance.
Non-GAAP measures do not replace the most directly comparable GAAP measures and
we have included a detailed reconciliation thereof in "Results of Operations"
below.

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

•Net realized and unrealized investment gains (losses);
•Gains (losses) associated early extinguishment of debt;
•Merger and acquisition, integration and other strategic costs and the
amortization of specifically identifiable intangibles (other than value of
business acquired);
•Impairment of intangibles;
•Income (loss) from initial adoption of new regulations and accounting guidance;
and
•Income (loss) from discontinued operations.

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

Forward-looking statements

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

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

                                    GENERAL

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

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

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

Monarch National Insurance Company (“MNIC”), an insurance subsidiary, is
authorized to take out property and risk insurance for homeowners in Florida.

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

Material distribution relationships

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

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

Overview of insurance business sectors

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

Florida

Our homeowners insurance products provide maximum dwelling coverage of
approximately $3.6 million, with the aggregate maximum policy limit being
approximately $6.3 million. We currently offer dwelling coverage "A" up to $4.0
million with an aggregate total insured value of $6.5 million. We continually
review and update these limits. The typical deductible is either $2,500 or
$1,000 for non-hurricane-related claims and generally 2% of the coverage amount
for the structure for hurricane-related claims.

Premium rates charged to our homeowners insurance policyholders are continually
evaluated to assure that they meet the expectation that they are actuarially
sound and produce a reasonable level of profit (neither excessive, inadequate or
discriminatory).
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Premium rate in Florida and other states are regulated and approved by the
respective state insurance regulatory bureau. We continuously monitor and
seek an appropriate adjustment to our rates in order to remain competitive and
profitable.

Thanks to MIC, we assumed Florida policies through the public insurer
Citizen’s Property Insurance Company (“Citizens”).

Here are our recent pricing measures that we have taken in our three
insurance subsidiaries:

•In 2020, FNIC received approval from the Florida Office of Insurance
Regulations ("OIR") for a statewide-average rate increase of 6.7% for Florida
homeowners multiple-peril insurance policies, which became effective for new
policies on February 8, 2021 and for renewal policies on March 30, 2021.
•In 2020, FNIC received OIR approval for a statewide-average rate increase of
8.3% for Florida dwelling fire insurance policies, which became effective for
new policies on February 2, 2021 and for renewal policies on March 30, 2021.
•In 2020, MIC received OIR approval for a statewide-average rate increase of
15.0% for Florida manufactured home insurance policies, which became effective
for new policies on March 10, 2021.
•In 2021, FNIC received OIR approval for a statewide-average rate increase of
9.0% for Florida homeowners multiple-peril insurance policies, which became
effective for new policies on March 1, 2021 and for renewal policies on April
15, 2021.
•In 2021, FNIC received approval from the OIR for a statewide-average rate
increase of 0.9% for Florida homeowners multiple-peril insurance policies, which
became effective for new policies on September 1, 2021 and for renewal policies
on October 15, 2021.
•Other rate filings have been filed with the OIR and are pending approval.

No-Florida

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

Effective December 1, 2020, FNIC entered into a 80% quota-share treaty with
Anchor Re, a wholly-owned Arizona captive reinsurance subsidiary of SageSure,
the non-affiliated managing general underwriter that writes FNIC's non-Florida
homeowners business. Effective January 31, 2021, the Company terminated its
existing quota-share reinsurance treaty with Anchor Re and commuted the
agreement. Immediately after the commutation, the Company entered into 80%
quota-share treaty with Anchor Re on February 1, 2021 on an in-force, new and
renewal basis, which covers the thirteen month period through February 28, 2022,
subject to certain limitations. The treaty arrangement is fully collateralized
through Anchor Re.

Our MIC non-Florida insurance products include home insurance,
prefabricated house insurance and residential fire insurance. MIC wrote both
full risk property policies as well as wind and hail only exposures.

Here are our recent pricing measures that we have taken in all of our
insurance subsidiaries that do business outside of Florida:

•In 2021, FNIC applied for a statewide-average rate increase of 6.9% for South
Carolina homeowners insurance policies, which was approved by the respective
regulatory agency and became effective for new policies on April 1, 2021 and for
renewal policies on May 1, 2021.
•In 2021, FNIC applied for a statewide-average rate increase of 9.0% for Texas
homeowners insurance policies, which was approved by the respective regulatory
agency and became effective for new policies on April 8, 2021 and for renewal
policies on May 1, 2021.
•In 2021, MIC applied for a statewide-average rate increase of 11.1% for
Louisiana homeowners insurance policies, which was approved by the respective
regulatory agency and became effective for new policies on May 15, 2021 and for
renewal policies on July 1, 2021.
•In 2021, FNIC applied for a statewide-average rate increase of 11.0% for
Louisiana homeowners insurance policies, which was approved by the respective
regulatory agency and became effective for new policies on July 1, 2021 and for
renewal policies on July 1, 2021.
•Rate filings have been applied for by FNIC and MIC outside of Florida and are
pending to be approved by the respective regulators.

In November 2021, the Company announced its plan to re-focus its operations on
the Florida market, which has been the Company's historical focus. In
conjunction with this shift in strategy, the Company intends to commence an
orderly runoff of Maison's insurance operations. In that regard, Maison will be
filing appropriate documentation with its insurance regulators in Louisiana,
Florida and Texas concerning Maison's withdrawal plan. This withdrawal plan is
subject to regulatory review periods of 60 days in Texas, and 45 days in Florida
(except that no action can be taken in Florida in furtherance of the withdrawal
for 90 days
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following submission of the withdrawal plan). Subject to such review, we expect
to begin non-renewing Maison's Louisiana policies as on their anniversary dates
beginning in January 2022. Nonrenewal of Maison's Texas policies is expected to
begin in February 2022, and the nonrenewal of Maison's Florida policies is
expected to begin in June 2022. With respect to FNIC's Texas and Louisiana
books, the Company and SageSure (the third-party MGU that wrote the business and
owns the renewal rights thereof) expect to begin transferring policies onto an
alternative insurance carrier partners of SageSure in December 2021, by virtue
of making an offer of coverage to FNIC policyholders. FNIC policies in South
Carolina, Alabama and Mississippi will continue to be renewed by FNIC until such
time as SageSure's alternative insurance carrier partners obtain the necessary
licensing in those states. The rollover of all existing policies are governed by
the appropriate regulatory requirements of each state in which the policy is
located.

Other Insurance Lines of Business
FNIC writes flood insurance through the National Flood Insurance Program
("NFIP"). We write the policy for the NFIP, which assumes 100% of the flood risk
while we retain a commission for our service. FNIC offers this line of business
in Florida, Louisiana, Texas, Alabama, South Carolina and Mississippi. 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.

See the discussion in point 1: “Companies” in our 10-K 2020 form, for more information
information relating to our activity.

Regulation

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

Impact of COVID-19

Refer to in "Part 1, Item 1, Business" and "Part I, Item 1A., Risk Factors" of
our 2020 Form 10-K for information with respect to the Company's response to
COVID-19's impact to our business.


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                             RESULTS OF OPERATIONS

Overview of Operating Results – Three Months Ended September 30, 2021 Compared to
Three months ended September 30, 2020

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

The following table sets forth results of operations for the periods presented:
                                                             Three Months Ended
                                                               September 30,
                                                     2021         % Change         2020
                                                           (Dollars in thousands)
Revenues:
Gross premiums written                           $ 157,003         (12.8) %    $ 180,152
Gross premiums earned                              178,368          (2.8) %      183,518
Ceded premiums                                    (124,439)         24.5  %      (99,972)
Net premiums earned                                 53,929         (35.4) %       83,546
Net investment income                                1,685         (29.9) %        2,404
Net realized and unrealized gains (losses)           1,273          (3.9) %        1,324
Direct written policy fees                           3,179         (11.8) %        3,603
Other income                                         6,658           3.4  %        6,439
Total revenues                                      66,724         (31.4) %       97,316

Costs and expenses:
Losses and loss adjustment expenses                 59,644         (39.8) % 

99,016

Commissions and other technical costs 23,591 (4.0)%

24,580

General and administrative expenses                  5,974          12.0  %        5,333
Interest expense                                     2,296          19.9  %        1,915
Total costs and expenses                            91,505         (30.1) %      130,844

Income (loss) before income taxes                  (24,781)        (26.1) %      (33,528)
Income tax expense (benefit)                             -        (100.0) %      (12,783)
Net income (loss)                                $ (24,781)         19.5  %    $ (20,745)


Ratios to net premiums earned:
Net loss ratio                                       110.6  %                      118.5  %
Net expense ratio                                     54.8  %                       35.8  %
Combined ratio                                       165.4  %                      154.3  %



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

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The following table sets forth a reconciliation of GAAP to non-GAAP measures:
                                                                  Three Months Ended
                                                                    September 30,
                                                                 2021             2020
                                                                (Dollars in thousands)
Revenue
Total revenues                                              $    66,724       $  97,316
Less:
Net realized and unrealized investment gains (losses)             1,273           1,324
Adjusted operating revenues                                 $    65,451       $  95,992

Net Income (Loss)
Net income (loss)                                           $   (24,781)      $ (20,745)
Less:
Net realized and unrealized investment gains (losses)             1,273     

793

Acquisition and strategic costs                                      (9)    

(15)

Amortization of identifiable intangibles                            (38)    

(22)

Adjusted operating income (loss)                            $   (26,007)    

$ (21,501)

Income tax rate assumed for reconciling items above                   -  %        40.10  %



Revenue

Total revenue decreased $30.6 million or 31.4%, to $66.7 million for the three
months ended September 30, 2021, compared with $97.3 million for the three
months ended September 30, 2020. The decrease was driven primarily by increases
in ceded premiums from incremental quota-share agreements and lower gross
premiums earned, which are discussed in further detail below.

Gross written premiums

The following table sets forth the gross premiums written for the periods
presented:
                                      Three Months Ended
                                        September 30,
                                     2021           2020
                                        (In thousands)
Gross premiums written:
Homeowners Florida                $  91,370      $ 106,101
Homeowners non-Florida               59,660         68,447
Federal flood                         5,993          5,660
Non-core (1)                            (20)           (56)
Total gross premiums written      $ 157,003      $ 180,152


(1) Reflects discontinued lines of business.

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

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Gross earned premiums

The following table sets forth the gross premiums earned for the periods
presented:
                                     Three Months Ended
                                       September 30,
                                    2021           2020
                                       (In thousands)
Gross premiums earned:
Homeowners Florida               $ 108,193      $ 115,346
Homeowners non-Florida              65,017         63,759
Federal flood                        5,178          4,469
Non-core (1)                           (20)           (56)
Total gross premiums earned      $ 178,368      $ 183,518


(1) Reflects discontinued lines of business.

Gross premiums earned decreased $5.1 million, or 2.8%, to $178.4 million for the
three months ended September 30, 2021, as compared to $183.5 million for the
three months ended September 30, 2020. The lower gross premiums earned was
primarily driven by the exposure management discussed earlier.

Ceded earned premiums

Ceded premiums earned increased $24.4 million, or 24.5%, to $124.4 million in
the quarter, compared to $100.0 million in the same three-month period last
year. The increase was driven by approximately $26 million of higher quota-share
ceded premiums: $20 million related to new and incremental treaties for FNIC's
Florida book of business and $6 million related to the quota-share treaty for
FNIC's non-Florida book of business cession percentage increasing to 80% from
50% during the fourth quarter of 2020. The increase to ceded premium earned
associated with the aforementioned quota-share treaties is largely offset by
corresponding reductions in loss and LAE, and commission and other underwriting
expenses when comparing the periods. Refer to Note 5 of the notes to our
Consolidated Financial Statements for additional information regarding these
quota-share treaties.

Net Investment Income

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

Net realized and unrealized gains (losses)

Net realized and unrealized gains (losses) remained relatively flat at $1.3
million for the three months ended September 30, 2021, compared to the prior
year period. We recognized less than $(0.1) million and $0.3 million in
unrealized investment gains (losses) for equity securities during these
respective periods. Our current and prior year net realized investment gains 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.

Direct Written Policy Fees

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


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Other income

Other income includes the following items for the periods presented:

                                            Three Months Ended
                                               September 30,
                                      2021         % Change       2020
                                          (Dollars in thousands)
Other income:
Commission income                 $      968         12.4  %    $   861
Brokerage                              5,319          2.7  %      5,181
Financing and other revenue              371         (6.5) %        397
Total other income                $    6,658          3.4  %    $ 6,439



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

Expenses

Losses and LAE

Losses and LAE incurred, net of reinsurance, included the following for the
periods presented:
                                                                                    Three Months Ended
                                                                                       September 30,
                                                                       2021                                     2020
                                                                              Net Loss                                 Net Loss
                                                          Amount               Ratio               Amount               Ratio
                                                                                      (In thousands)
Current accident year, excluding catastrophes:
Homeowners                                              $ 38,671                   71.7  %       $ 61,396                   73.5  %
Non-core (1)                                                   -                      -  %              -                      -  %
Total current accident year, excluding
catastrophes                                              38,671                   71.7  %         61,396                   73.5  %
Current year catastrophes (2):
Florida                                                   14,648                   27.2  %         21,268                   25.4  %
Texas                                                      4,700                    8.7  %          1,885                    2.3  %
Louisiana                                                    286                    0.5  %         15,111                   18.1  %
Other states                                                 696                    1.3  %              -                      -  %
Total current year catastrophes                           20,330                   37.7  %         38,264                   45.8  %
Prior year loss development (redundancy):
Homeowners                                                   648                    1.2  %         (1,100)                  (1.3) %
Non-core (1)                                                  (5)                     -  %            672                    0.8  %
Ceded losses subject to offsetting experience
account adjustments (3)                                        -                      -  %           (216)                  (0.3) %
Total prior year loss development (redundancy)               643                    1.2  %           (644)                  (0.8) %
Total net losses and LAE                                $ 59,644                  110.6  %       $ 99,016                  118.5  %



(1)Reflects exited lines of business.
(2)Includes Property Claims Services ("PCS") weather events and other events
impacting multiple insureds for which the Company's insurance carriers
established catastrophe event codes, net of the benefit of claims handling
services. These catastrophe events are typically wind, hail and tornado related
weather events. Any individual catastrophe event with gross losses greater than
$20 million, on a pre-tax basis, are considered significant and specifically
addressed in the commentary below. Also includes net catastrophe losses from
current or prior quarter events, net of claims handling services, which
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were adjusted in the specific period noted above. Excludes any catastrophe
related activity recorded in other financial statement accounts, outside of loss
and loss adjustment expenses.
(3)Reflects homeowners losses ceded under retrospective reinsurance treaties to
the extent there is an offsetting experience account adjustment, such that there
is no impact on pre-tax net income (loss).

Losses and LAE decreased $39.4 million, or 39.8%, to $59.6 million for the three
months ended September 30, 2021, compared to $99.0 million for 2020 driven by
higher ceded losses under quota-share reinsurance treaties and lower net
catastrophe losses. The net loss ratio decreased 7.9 percentage points, to
110.6% in the current quarter, as compared to 118.5% in the third quarter of
2020. The lower loss ratio was primarily the result of higher ceded losses, as
discussed earlier, and lower net catastrophe losses, partially offset by higher
ceded premiums earned, the denominator on the net loss ratio calculation. The
current quarter included approximately $20.3 million of catastrophe losses, net
of reinsurance and claims handling fee income, driven by Hurricane Ida as well
as other severe weather events, which together impacted Louisiana, Florida and
Texas. By comparison, the third quarter of 2020 catastrophe net losses were
$38.3 million, net of reinsurance, which included Hurricanes Laura and Sally as
well as other severe weather events. Additionally, higher ceded losses through
our quota-share treaties and lower attritional losses in FNIC's Florida book of
business drove lower current accident year losses, excluding catastrophes,
compared to the prior year.

Commissions and other subscription fees

The following table sets forth the commissions and other underwriting expenses
for the periods presented:
                                                                 Three Months Ended
                                                                   September 30,
                                                                 2021           2020
                                                                   (In thousands)

Commissions and other subscription fees:

      Homeowners Florida                                     $   12,539      $ 13,736
      All others                                                 13,108        13,337
      Ceding commissions                                        (16,546)       (7,909)
      Total commissions                                           9,101        19,164

      Fees                                                        1,271         1,358
      Salaries and wages                                          3,124         3,351
      Other underwriting expenses                                10,095    

707

Total commissions and other sales charges $ 23,591

$ 24,580


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

The net expense ratio increased 19.0 percentage points to 54.8% in the third
quarter of 2021, as compared to 35.8% in the third quarter of 2020 due primarily
to higher ceded reinsurance premiums in 2021. Our gross expense ratio was 25.9%
during the three months ended September 30, 2021, as compared to 20.6% during
the three months ended September 30, 2020, demonstrating the Company's continued
focus on expense control.

General and administrative expenses

General and administrative costs increased $ 0.7 million or 12.0% to $ 6.0
million
for the three months ended September 30, 2021 compared to $ 5.3 million
in the third quarter of 2020.

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Interest charges

Interest expense increased $0.4 million or 19.9% to $2.3 million for the three
months ended September 30, 2021 compared to $1.9 million for the three months
ended September 30, 2020. Refer to Note 8 of the notes to our Consolidated
Financial Statements for information related to changes to our existing debt and
new debt issuance, which will increase interest expense during the remainder of
2021 as compared to 2020.

Income Taxes

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


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Overview of Operating Results – Nine Months Ended September 30, 2021 Compared to
Nine months ended September 30, 2020

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

The following table sets forth results of operations for the periods presented:
                                                             Nine Months Ended
                                                               September 30,
                                                     2021         % Change         2020
                                                           (Dollars in thousands)
Revenues:
Gross premiums written                           $ 527,495          (5.6) %    $ 558,492
Gross premiums earned                              535,848          (0.6) %      538,988
Ceded premiums                                    (406,693)         70.8  %     (238,054)
Net premiums earned                                129,155         (57.1) %      300,934
Net investment income                                5,092         (47.2) %        9,637

Net realized and unrealized gains (losses) 10,949 23.3%

       8,882
Direct written policy fees                           9,730          (8.7) %       10,662
Other income                                        23,584          39.4  %       16,919
Total revenues                                     178,510         (48.6) %      347,034

Costs and expenses:
Losses and LAE                                     185,090         (37.9) %      297,862

Commissions and other technical costs 61,977 (31.3)%

90,205

General and administrative expenses                 17,854           3.6  %       17,241
Interest expense                                     6,451          12.3  %        5,745
Total costs and expenses                           271,372         (34.0) %      411,053

Income (loss) before income taxes                  (92,862)         45.1  %      (64,019)
Income tax expense (benefit)                         1,669        (107.0) %      (23,928)
Net income (loss)                                $ (94,531)        135.8  %    $ (40,091)


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



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

                                      -41-
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The following table sets forth a reconciliation of GAAP to non-GAAP measures:
                                                                    Nine Months Ended
                                                                      September 30,
                                                                   2021             2020
                                                                  (Dollars in thousands)
  Revenue
  Total revenues                                              $   178,510       $ 347,034
  Less:
  Net realized and unrealized investment gains (losses)             1,524   

8 882

  Adjusted operating revenues                                 $   176,986       $ 338,152

  Net Income (Loss)
  Net income (loss)                                           $   (94,531)      $ (40,091)
  Less:
  Net realized and unrealized investment gains (losses)             1,524   

5.320

  Acquisition and strategic costs                                     (26)  

(41)

  Amortization of identifiable intangibles                           (113)  

(67)

  Adjusted operating income (loss)                            $   (95,916)  

$ (45,303)

  Income tax rate assumed for reconciling items above                   -  %        40.10  %



Revenue

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

Gross written premiums

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


(1) Reflects discontinued lines of business.

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

                                      -42-
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Gross earned premiums

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


(1) Reflects discontinued lines of business.

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

Ceded earned premiums

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

Net investment income

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

Net realized and unrealized gains (losses)

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

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

                                      -43-
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Direct written policy costs

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

Other income

Other income includes the following items for the periods presented:

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



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


                                      -44-
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Expenses

Losses and LAE

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



(1)Reflects exited lines of business.
(2)Includes PCS weather events and other events impacting multiple insureds for
which the Company's insurance carriers established catastrophe event codes, net
of the benefit of claims handling services. These catastrophe events are
typically wind, hail and tornado related weather events. Any individual
catastrophe event with gross losses greater than $20 million, on a pre-tax
basis, are considered significant and specifically addressed in the commentary
below. Also includes net catastrophe losses from current or prior quarter
events, net of claims handling services, which were adjusted in the specific
period noted above. Excludes any catastrophe related activity recorded in other
financial statement accounts, outside of loss and loss adjustment expenses.
(3)Reflects homeowners losses ceded under retrospective reinsurance treaties to
the extent there is an offsetting experience account adjustment, such that there
is no impact on pre-tax net income (loss).

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

The first nine months of 2021, net losses were driven by approximately $78.0
million of net catastrophe losses, net of reinsurance and claims handling fee
income, which was partially offset by $10.7 million of income recognized within
realized and unrealized gains in our consolidated statement of operations (refer
to Notes 2, 3 and 5 for further information). The first nine months of 2021
weather events were driven by Hurricane Ida, Winter Storm Uri as well as a
number of convective storm and hail events impacting Louisiana, Florida and
Texas. The net catastrophe losses were adversely impacted by having reached the
net loss limit contained in the FNIC non-Florida quota-share treaty, which
reduced the amount of net losses that we were able to cede in the current
period. Prospective catastrophe cessions into this treaty will be dependent on
future profits in the related book of business through the end
                                      -45-
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of the treaty period. The first nine months of 2020, net losses were driven by
net catastrophe losses of $107.9 million and prior period reserve strengthening
of $6.9 million. Additionally, higher ceded losses through our quota-share
treaties and lower attritional losses in FNIC's Florida book of business drove
lower current accident year losses, excluding catastrophes, compared to the
prior year.

Commissions and other subscription fees

The following table sets forth the commissions and other underwriting expenses
for the periods presented:
                                                                  Nine Months Ended
                                                                    September 30,
                                                                 2021           2020
                                                                   (In thousands)

Commissions and other subscription fees:

       Homeowners Florida                                     $  36,963      $ 41,181
       All others                                                36,318        37,789
       Ceding commissions                                       (55,991)      (13,969)
       Total commissions                                         17,290        65,001

       Fees                                                       3,839         3,694
       Salaries and wages                                         9,759        10,068
       Other underwriting expenses                               31,089     

11,442

Total commissions and other sales charges $ 61,977

$ 90,205


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

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

General and administrative expenses

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

Interest charges

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

Income taxes

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


                                      -46-
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Consolidated Company Outlook – Potential Changes in Financial Trends

As discussed under Overview of Insurance Lines of Business - Non-Florida above,
the Company intends to re-focus its operations on its Florida homeowners
business. The orderly runoff of MIC and the transfer-upon-renewal of FNIC's
non-Florida business to alternative insurance carrier partners of SageSure
impact forward-looking expectations with respect to financial trends. Such
impacts with respect to the Company non-Florida business include, but are not
limited to:

•Declines in gross written and gross earned premiums;
•Declines in loss and loss adjustment expenses as well as in commissions and
other underwriting expenses;
•Declines in exposure to catastrophe weather losses;
•Declines in the expected cost of excess of loss reinsurance coverages over the
runoff period; and
•Reduced need or potential need for surplus infusions into FNIC and MIC, and
corresponding reductions in the Company's overall capital needs.

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

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of funds are gross written premiums, investment income,
commission income and fee income. Our primary uses of funds are the payment of
claims, catastrophe and other reinsurance premiums and operating expenses. As of
September 30, 2021, on a consolidated basis, the Company held $166.9 million in
cash and cash equivalents and $355.3 million in investments. As of December 31,
2020, on a consolidated basis, the Company held $102.4 million in cash and cash
equivalents and $491.4 million in investments. Total shareholders' equity
decreased $87.0 million, to $71.2 million as of September 30, 2021, compared
with $158.2 million as of December 31, 2020 due primarily to a net loss and
unrealized losses on our bond portfolio, partially offset by issuance of common
stock.

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

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

The Company’s actual debt ratio at September 30, 2021 was
about 62.5%.

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

Historically, we have met our liquidity requirements primarily through cash
generated from operations. Beginning in 2020, property and casualty businesses,
including FNHC's insurance carriers, have been impacted by multiple
catastrophes, hail, and wind-related severe weather events and private
reinsurers have tightened coverage provisions and raised the cost of their
coverages. As a result, sales of our portfolio of fixed income securities was a
significant source of liquidity for the Company. Quota-share reinsurance
                                      -47-
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treaties are another liquidity management tool, via the ceding commission the
Company receives upon inception and the related reduction to statutory surplus
requirements. New quota-share treaties entered or increased were responsive to
these purposes, as well as to reduce the Company's exposure to non-named storm
catastrophes.

Management continually monitors and adjusts its liquidity and capital plans for
FNHC and its subsidiaries in light of the aforementioned challenges to ensure
that we have adequate liquidity and capital. The Company's Board and management
continue to explore all options to strengthen the Company's capital position.
Additional weather-related events and actions by reinsurers could adversely
affect the Company's ability to access sources of liquidity. There can be no
assurances that the Company will be able to obtain additional capital on
satisfactory terms, if at all.

Statutory capital and Surplus from our Insurance Subsidiaries

As described more fully in Part I, Item 1. Business, Regulation of our 2020 Form
10-K, the Company's insurance operations are subject to the laws and regulations
of the states in which we operate. The OIR and their regulatory counterparts in
other states utilize the National Association of Insurance Commissions ("NAIC")
risk-based capital ("RBC") requirements, and the resulting RBC ratio, as a key
metric in the exercise of their regulatory oversight. The RBC ratio is a measure
of the sufficiency of an insurer's statutory capital and surplus. In addition,
the RBC ratio is used by insurance industry ratings services in the
determination of the financial strength ratings (i.e., claims paying ability)
they assign to insurance companies. Our rating agency, Demotech, Inc. requires a
minimum RBC ratio of 300% for a carrier to maintain the "A" rating that our
insurance companies currently have. As of September 30, 2021 and December 31,
2020, FNIC's statutory surplus, which includes MNIC, was $90.9 million and
$105.9 million, respectively. As of September 30, 2021 and December 31, 2020,
MIC's statutory surplus was $19.3 million and $39.3 million, respectively.
FNIC's September 30, 2021 surplus reflects a surplus infusion of $20 million in
November 2021 with, effective date as of September 30, 2021, as approved by the
Florida regulator. In conjunction with the Company's November 2021 decision to
re-focus on its Florida homeowners business as discussed under Overview of
Insurance Lines of Business - Non-Florida above, the Company intends to execute
an orderly runoff of MIC's business. Consequently, no surplus infusion was made
to MIC as of September 30, 2021. The Company remains committed to maintaining
statutory surplus in MIC that satisfies minimum regulatory requirements through
the runoff period. As a result of the Company's decision to support Maison to
the level of minimum regulatory capital but not to a 300% RBC level, Demotech
has withdrawn its rating of Maison. The ratings of FNIC and MNIC remain in place
and are independent of this action.

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

Based on the 2020 statutory accounts of FNIC, MIC and MNIC,
the statutory surplus exceeded the regulatory intervention thresholds established by the
RBC requirements from the NAIC.

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

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

Refer to "Part I, Item 1A., Risk Factors" of our 2020 Form 10-K for more
information on how over time, additional weather-related events and actions by
reinsurers, including loss limitations in reinsurance treaties and our ability
to renew existing reinsurance treaties, could adversely affect the Company's
ability to maintain a 300% RBC ratio in FNIC and MNIC and minimum required
regulatory capital in MIC or FNHC's ability to contribute necessary capital. In
addition, because of the valuation allowance on the Company's NOL deferred tax
assets, the insurance carriers will not benefit from immediate tax benefits of
any future quarterly losses they incur. As such, any surplus infusions required
will be large than they would have been if our net deferred tax assets were
deemed fully realizable.
                                      -48-
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Discussion of cash flow

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

Operating activities

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

Investment activities

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

Fundraising activities

Net cash provided by (used in) financing activities for the nine months ended
September 30, 2021 of $35.5 million as compared to $(14.2) million for the nine
months ended September 30, 2020. The change primarily reflects proceeds from
issuance of long-term debt of $20.0 million and issuance of shares of our common
stock of $15.6 million in our 2021 public offering as compared to repurchases of
$10.4 million of FedNat Holding Company common stock and payment of dividends of
$3.8 million in 2020.

Impact of inflation and price changes

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

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

Critical accounting policies

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

There have been no material changes in our critical accounting estimates
during the nine months ended September 30, 2021. Refer to Part II, Article 7:
“Discussion and analysis by management of the financial position and results of
Transactions – Critical Accounting Estimates “included in our Form 10-K 2020 for a
more complete description of our critical accounting estimates.


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