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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 MARCH 31, 2022
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.:
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 May 2, 2022, the registrant had 17,519,237 shares of common stock outstanding.


FEDNAT HOLDING COMPANY
TABLE OF CONTENTS





PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 March 31,December 31,
 20222021
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost of $269,100 and $324,861, respectively)
$270,217 $327,532 
Equity securities, at fair value5,348 5,905 
Total investments275,565 333,437 
Cash and cash equivalents87,358 83,526 
Prepaid reinsurance premiums162,463 242,537 
Premiums receivable, net of allowance of $133 and $125, respectively
33,089 41,174 
Reinsurance recoverable, net of allowance of $109 and $249, respectively
581,921 613,203 
Deferred acquisition costs, net16,438 18,829 
Current and deferred income taxes, net13,446 30,014 
Other assets31,681 49,950 
Total assets$1,201,961 $1,412,670 
   
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves$661,595 $738,794 
Unearned premiums316,312 342,747 
Reinsurance payable and funds withheld liabilities46,535 102,748 
Long-term debt, net of deferred financing costs of $2,094 and $2,195, respectively
118,906 118,805 
Deferred revenue4,162 5,240 
Other liabilities40,312 44,950 
Total liabilities1,187,822 1,353,284 
Commitments and contingencies (see Note 10)
Shareholders' Equity
Preferred stock, $0.01 par value: 1,000,000 shares authorized
  
Common stock, $0.01 par value: 50,000,000 shares authorized; 17,519,237 and 17,446,930 issued and outstanding, respectively
175 174 
Additional paid-in capital186,202 186,007 
Accumulated other comprehensive income (loss)(2,563)(1,034)
Retained earnings (deficit)(169,675)(125,761)
Total shareholders’ equity14,139 59,386 
Total liabilities and shareholders' equity$1,201,961 $1,412,670 

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-1-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
March 31,
20222021
Revenues:  
Net premiums earned$45,985 $39,745 
Net investment income1,264 1,674 
Net realized and unrealized gains (losses)(15,053)92 
Direct written policy fees2,613 3,315 
Other income7,426 7,922 
Total revenues42,235 52,748 
   
Costs and expenses:  
Losses and loss adjustment expenses58,783 48,016 
Commissions and other underwriting expenses19,107 21,031 
General and administrative expenses6,997 6,066 
Interest expense2,300 1,926 
Total costs and expenses87,187 77,039 
   
Income (loss) before income taxes(44,952)(24,291)
Income tax expense (benefit)(1,038)(4,910)
Net income (loss)$(43,914)$(19,381)
  
Net Income (Loss) Per Common Share  
Basic$(2.51)$(1.35)
Diluted(2.51)(1.35)
  
Weighted Average Number of Shares of Common Stock Outstanding  
Basic17,462 14,395 
Diluted17,462 14,395 
  
Dividends Declared Per Common Share$ $ 

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


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended
March 31,
20222021
Net income (loss)$(43,914)$(19,381)
  
Change in net unrealized gains (losses) on investments, available-for-sale, net of tax
(1,529)(7,200)
Comprehensive income (loss)$(45,443)$(26,581)

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

-3-


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

Accumulated
Common StockAdditionalOtherRetainedTotal
PreferredIssuedPaid-inComprehensiveEarningsShareholders'
StockSharesAmountCapitalIncome (Loss)(Deficit)Equity
Balance as of January 1, 2022$ 17,446,930 $174 $186,007 $(1,034)$(125,761)$59,386 
Net income (loss)— — — — — (43,914)(43,914)
Other comprehensive income (loss)— — — — (1,529)— (1,529)
Shares issued under share-based compensation plans— 72,307 1 (1)— —  
Share-based compensation— — — 196 — — 196 
Balance as of March 31, 2022$ 17,519,237 $175 $186,202 $(2,563)$(169,675)$14,139 
Accumulated
Common StockAdditionalOtherRetainedTotal
PreferredIssuedPaid-inComprehensiveEarningsShareholders'
StockSharesAmountCapitalIncome (Loss)(Deficit)Equity
Balance as of January 1, 2021$ 13,717,908 $137 $169,298 $11,386 $(22,661)$158,160 
Net income (loss)— — — — — (19,381)(19,381)
Other comprehensive income (loss)— — — — (7,200)— (7,200)
Issuance of common stock— 3,500,000 35 15,087 — — 15,122 
Shares issued under share-based compensation plans— 95,553 1  — — 1 
Share-based compensation— — — 407 — — 407 
Balance as of March 31, 2021$ 17,313,461 $173 $184,792 $4,186 $(42,042)$147,109 

The accompanying notes are an integral part of the unaudited consolidated financial statements.
-4-


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Three Months Ended
March 31,
20222021
Cash flow from operating activities:  
Net income (loss)$(43,914)$(19,381)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:  
Net realized and unrealized (gains) losses15,053 (92)
Amortization of investment premium or discount, net510 1,256 
Depreciation and amortization413 460 
Share-based compensation196 407 
Changes in operating assets and liabilities:  
Prepaid reinsurance premiums80,074 61,204 
Premiums receivable, net8,085 10,041 
Reinsurance recoverable, net31,282 (51,038)
Deferred acquisition costs, net2,391 1,429 
Current and deferred income taxes, net16,592 (1,291)
Deferred revenue(1,078)(278)
Loss and loss adjustment expense reserves(77,199)(53,654)
Unearned premiums(26,435)(4,794)
Reinsurance payable and funds withheld liabilities(56,213)(50,561)
Other13,219 (3,853)
Net cash provided by (used in) operating activities(37,024)(110,145)
Cash flow from investing activities:  
Proceeds from sales of debt securities56,161 87,007 
Purchases of debt securities(27,385)(56,148)
Maturities and redemptions of debt securities12,130 31,383 
Purchases of property and equipment(50)(174)
Net cash provided by (used in) investing activities40,856 62,068 
Cash flow from financing activities:  
Issuance of common stock  15,403 
Issuance of common stock for share-based awards 1 
Net cash provided by (used in) financing activities 15,404 
Net increase (decrease) in cash and cash equivalents3,832 (32,673)
Cash and cash equivalents at beginning-of-period83,526 102,367 
Cash and cash equivalents at end-of-period$87,358 $69,694 

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

-5-



FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
(Unaudited)
(Continued)
 
Three Months Ended
March 31,
20222021
Supplemental disclosure of cash flow information:  
Cash paid (received) during the period for interest$3,875 $3,750 
Cash paid (received) during the period for income taxes(17,782)(3,618)
Significant non-cash investing and financing transactions:
Right-of-use asset(6,497)(7,250)
Lease liability6,497 7,250 

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


-6-


FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022

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 insurance departments in Florida, Louisiana, Texas, Georgia, South Carolina, Alabama and Mississippi.

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

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

Material Distribution Relationships

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

SageSure Insurance Managers, LLC
The Company is a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) to facilitate our FNIC homeowners business outside of Florida. As a percentage of the total homeowners premiums, 11.7% and 24.5% of the Company’s premiums were underwritten by SageSure, for the three months ended March 31, 2022 and 2021, respectively. As part of our partnership with SageSure, previously we entered into a profit share agreement, whereby we shared 50% of net profits of this line of business through June 30, 2020, as calculated per the terms of the agreement, subject to certain limitations, which included limits on the net losses that SageSure could realize. The limit was based on the amount of inception to date profits within the profit share agreement. In addition, refer to Note 5 for information regarding a fully collateralized quota-share treaty on this book of business that became effective July 1, 2020.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of FNHC and its wholly-owned subsidiaries and all entities in which the Company has a controlling financial interest and any variable interest entity (“VIE”) of which the Company is the primary beneficiary. The Company’s management believes the consolidated financial statements reflect all material adjustments, including normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows of the Company for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company identifies a VIE as an entity that does not have sufficient equity to finance its own activities without additional financial support or where the equity investors lack certain characteristics of a controlling financial interest. The Company assesses its contractual, ownership or other interests in a VIE to determine if the Company’s interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders. The Company performs an ongoing qualitative assessment of its
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Our significant accounting policies were described in Note 2 of our 2021 Form 10-K. There have been no significant changes in our significant accounting policies for the three months ended March 31, 2022.

Going Concern

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

Accounting Estimates and Assumptions

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

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


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

Recently Issued Accounting Pronouncements, Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2020-1, Accounting for Equity Securities and Equity Investments, which clarifies the interaction between accounting standards related to equity securities (Topic 321), equity method investments (Topic 323), and certain derivatives (Topic 815). The update clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The Company adopted the guidance effective January 1, 2022, which did not have any impact on the Company’s consolidated financial condition, results of operations, or disclosures.

In August 2020, the FASB issued ASU 2020-6, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-6"), which simplifies an issuer's accounting for convertible instruments by eliminating two of the three models in the current guidance that requires separate accounting for certain embedded conversion features. The new guidance simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. ASU 2020-6 requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement (if the effect is more dilutive) for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This new guidance requires disclosures about events that occur during the reporting period and cause conversion contingencies to be met and about the fair value of convertible debt at the instrument level, among other things. The Company adopted the guidance effective January 1, 2022, which did not have any impact on the Company’s consolidated financial condition or results of operations.

3. FAIR VALUE

Fair Value Disclosures of Financial Instruments

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

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

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


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

The Company’s financial instruments measured at fair value on a recurring basis and the level of the fair value hierarchy of inputs used consisted of the following:
March 31, 2022
Level 1Level 2Level 3Total
(In thousands)
Debt securities - available-for-sale, at fair value:    
United States government obligations and authorities$41,125 $41,304 $ $82,429 
Obligations of states and political subdivisions(1)15,579  15,578 
Corporate securities 149,608  149,608 
International securities 22,602  22,602 
Debt securities, at fair value41,124 229,093  270,217 
    
Equity securities, at fair value1,652 3,696  5,348 
    
Total investments, at fair value$42,776 $232,789 $ $275,565 
Other assets - embedded derivative, at fair value$ $ $10,448 $10,448 

December 31, 2021
Level 1Level 2Level 3Total
(In thousands)
Debt securities - available-for-sale, at fair value:    
United States government obligations and authorities$41,125 $49,567 $ $90,692 
Obligations of states and political subdivisions 19,278  19,278 
Corporate securities 188,980  188,980 
International securities901 27,681  28,582 
Debt securities, at fair value42,026 285,506  327,532 
    
Equity securities, at fair value1,879 4,026  5,905 
    
Total investments, at fair value$43,905 $289,532 $ $333,437 
Other assets - embedded derivative, at fair value$ $ $10,725 $10,725 

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

As of March 31, 2022, we have an embedded derivative, associated with a reinsurance limit for our 2020-2021 excess of loss catastrophe reinsurance program, carried at $10.4 million included in other assets on our consolidated balance sheets. There is no contractual maturity date and no collateral posted for this embedded derivative; however, the related contract is with excess-of-loss reinsurers that have an S&P A rating or are collateralized.


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

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

United States Government Obligations and Authorities - In determining the fair value for United States government securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for United States government securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Obligations of States and Political Subdivisions - In determining the fair value for state and municipal securities, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Corporate and International Securities - In determining the fair value for corporate securities the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.
Equity Securities - In determining the fair value for equity securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for equity securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Other Assets Embedded Derivative – In determining the fair value of the embedded derivative in Level 3, the Company uses the best estimates of current settlement values, using present value of projected cash flows. The assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market participant and include assumptions for the non-performance risk, which is added to the discount rates used in determining the fair value from the net cash flows and reflects the credit risk of either our counter-party for our assets or us for our liabilities of not fulfilling the obligations of an underlying amounts due to us or amounts we owe. Changes in the fair value of this embedded derivative results primarily from changes in market conditions or the credit risk associated with our counterparties.

We did not have securities trading in less liquid or illiquid markets with limited or no pricing information, therefore we did not use unobservable inputs to measure fair value as of March 31, 2022 and December 31, 2021. Additionally, we did not have any assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2022 or December 31, 2021, and we noted no significant changes in our valuation methodologies between those periods.

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

There were 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 March 31, 2022 and December 31, 2021. There were no transfers between the fair value hierarchy levels during the three months ended March 31, 2022 and 2021.
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022


4. INVESTMENTS

Unrealized Gains and Losses

The difference between amortized cost or cost and estimated fair value and gross unrealized gains and losses, by major investment category, consisted of the following:
AmortizedGrossGross 
CostUnrealizedUnrealized 
or CostGainsLossesFair Value
(In thousands)
March 31, 2022    
Debt securities - available-for-sale:    
United States government obligations and authorities$82,328 $101 $ $82,429 
Obligations of states and political subdivisions15,547 31  15,578 
Corporate148,648 960  149,608 
International22,577 25  22,602 
$269,100 $1,117 $ $270,217 
AmortizedGrossGross 
CostUnrealizedUnrealized 
or CostGainsLossesFair Value
(In thousands)
December 31, 2021    
Debt securities - available-for-sale:    
United States government obligations and authorities$90,750 $625 $683 $90,692 
Obligations of states and political subdivisions19,031 391 144 19,278 
Corporate186,489 4,413 1,922 188,980 
International28,591 212 221 28,582 
$324,861 $5,641 $2,970 $327,532 

Net Realized and Unrealized Gains and Losses

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

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

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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

Three Months Ended
March 31,
20222021
(In thousands)
Gross realized and unrealized gains:  
Debt securities$185 $864 
Equity securities 1 
Total gross realized and unrealized gains185 865 
  
Gross realized and unrealized losses:  
Debt securities(14,681)(720)
Equity securities(557)(53)
Total gross realized and unrealized losses(15,238)(773)
Net realized and unrealized gains (losses) on investments$(15,053)$92 

The above line item, net realized and unrealized gains (losses) on investments, includes the following equity securities gains (losses) recognized in earnings:
Three Months Ended
March 31,
20222021
(In thousands)
Net gains (losses) on equity securities:
Realized$ $ 
Unrealized(557)(52)
(557)(52)
Less:
Net realized and unrealized gains (losses) on securities sold  
Net unrealized gains (losses) still held as of the end-of-period$(557)$(52)

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:

March 31, 2022
Amortized 
CostFair Value
Securities with Maturity Dates(In thousands)
Debt securities, available-for-sale:  
One year or less$21,657 $21,720 
Over one through five years63,760 63,966 
Over five through ten years104,947 105,536 
Over ten years78,737 78,995 
Total$269,100 $270,217 


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

Net Investment Income

Net investment income consisted of the following:
Three Months Ended
March 31,
20222021
(In thousands)
Interest income$1,214 $1,650 
Dividends income50 24 
Net investment income$1,264 $1,674 

Aging of Gross Unrealized Losses

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

Less than 12 months12 months or longerTotal
 Gross Gross Gross
FairUnrealizedFairUnrealizedFairUnrealized
ValueLossesValueLossesValueLosses
  (In thousands)  
December 31, 2021
Debt securities - available-for-sale:     
United States government obligations and authorities
$46,038 $672 $881 $11 $46,919 $683 
Obligations of states and political subdivisions7,322 144   7,322 144 
Corporate86,423 1,875 860 47 87,283 1,922 
International15,345 221   15,345 221 
$155,128 $2,912 $1,741 $58 $156,869 $2,970 

As of December 31, 2021, the Company held a total of 351 debt securities that were in an unrealized loss position, of which 5 securities were in an unrealized loss position continuously for 12 months or more. The unrealized losses associated with these securities consisted primarily of losses related to corporate securities. Refer to Note 6 below for information regarding the assessment of allowances for credit losses.

Collateral Deposits

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

5. REINSURANCE

Overview

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

The Company is selective in choosing reinsurers and considers numerous factors, the most important of which is the financial stability of the reinsurer or capital specifically pledged to uphold the contract, its history of responding to claims and its overall
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

reputation. In an effort to minimize the Company’s exposure to the insolvency of a reinsurer, the Company evaluates the acceptability and review the financial condition of the reinsurer at least annually with the assistance of the Company’s reinsurance broker.

Significant Reinsurance Contracts

2020-2021 Catastrophe Excess of Loss Reinsurance Program
The Company’s excess of loss catastrophe reinsurance program for 2020-2021 (the “2020-2021 Program”), which covers the Company and its wholly-owned insurance subsidiaries, FNIC, MIC and MNIC became effective July 1, 2020 through June 30, 2021. FNIC, MIC, and MNIC are collectively referred to herein as the “carriers”. The 2020-2021 Program provides up to approximately $1.3 billion of single-event reinsurance coverage in excess of up to a $31 million retention for catastrophic losses, including hurricanes, and aggregate coverage up to $1.9 billion, at an approximate total cost of $305.9 million, subject to adjustments based on actual exposure or premium of policies at different points in time in the coming months. The Company will retain 100% of the first $25 million retention on each event plus up to an additional $6 million in retention on the first event by retaining an approximate 9.1% co-participation of the next $70 million of limit after the first $25 million. More specifically, the 2020-2021 Program includes up to approximately $1.3 billion in aggregate private reinsurance for coverage in all states in which the Company operates, of which up to approximately $650 million is limited to any one event, plus an additional $650 million of reinsurance provided by the Florida Hurricane Catastrophe Fund (“FHCF”), that responds on both a per occurrence and in the aggregate basis, and which coverage is exclusive to the state of Florida.

The private layers of the 2020-2021 Program, covering both Florida and non-Florida exposures have prepaid automatic reinstatement protection, which affords the carriers additional coverage for subsequent events. The private reinsurance market continued to harden this year due to a number of factors, including issues unique to the U.S. coastal catastrophe reinsurance marketplace generally and the Florida market specifically. These factors resulted in more restrictive terms by some of our individual reinsurers. The change in terms from the prior year’s program includes some portion of the program having a single aggregate retention for our carriers taken as a whole, versus each carrier’s own individual retention, plus some portions of the program not “cascading”, which provides less broad coverage for multiple event scenarios generating gaps in coverage that need to be filled with additional post renewal reinsurance protection or be retained net by the Company. As of March 31, 2022, the 2020-2021 Program was placed with reinsurers with an A.M. Best Company or Standard & Poor’s rating of “A-” or better, or that have fully collateralized their maximum potential obligations in dedicated trusts. For the purpose of debt covenant compliance, if any reinsurer on the 2020-2021 Program is not collateralized or has a rating lower than “A-” by A.M. Best Company or Standard & Poor’s then the Company treats that reinsurer’s participation as if it was part of the Company’s net retention. Refer to "Part I, Item 1A., Risk Factors” of our 2021 Form 10-K for more information.

The total 2020-2021 Program cost includes approximately $258.3 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic reinstatement premium protection, along with approximately $47.6 million payable to the FHCF. The combination of private and FHCF reinsurance treaties affords the carriers up to approximately $1.9 billion of aggregate coverage within Florida and $1.3 billion in states outside Florida with a maximum single event coverage totaling up to approximately $1.3 billion within Florida and approximately $650 million outside Florida, exclusive of retentions.

Each carrier shares the combined program cost in proportion to its contribution to the total expected loss in each reinsurance layer. Each carrier’s reinsurance recoveries will be based on that carrier’s contributing share of a given event’s total loss and each carrier will be responsible for its portion of the 2020-2021 Program’s $25 million per event retention ($31 million for the first event only) based on a specific allocation formula. Both FNIC and MNIC increased their FHCF participation to 90% for the 2020 hurricane season, and MIC maintained its FHCF participation at 90%.

In addition, the Company purchased subsequent event reinsurance coverage that has a lower retention than the first event. Under the 2020-2021 Program, FNIC’s non-Florida book of business as written by SageSure has excess of loss reinsurance treaties which afford this specific book of business additional protection through an additional $16 million of coverage for a second event, which applies to hurricane losses only. This additional reinsurance coverage is specific to FNIC's non-Florida business and does not afford coverage to MIC's non-Florida business. The result is a retention of approximately $18 million for FNIC's book with SageSure for the first event and approximately $2 million for the second event, although these retentions may be reduced after taking into account the quota-share reinsurance agreement that FNIC has with Anchor Re, Inc. ("Anchor Re"). Furthermore, for Florida only losses, the carriers purchased second and third event coverage of 71.5% of $15 million excess of $10 million that reduces the second and third event retention for the carriers, from $25 million to $14.3 million per event, on a combined basis, which could be reduced further by an additional 28.5% placed on a parametric basis with an Excess and Surplus lines carrier that will provide coverage for the second and third Florida hurricane loss, if the first event loss criteria has been satisfied to the carriers after the inception of
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

treaty. The amount of recovery with the parametric product is based on the magnitude of the hurricane and the proximity of the individual insured risk to the hurricane path. This coverage terminated on May 31, 2021.

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

Effective January 1, 2021, the Company entered into an aggregate excess of loss agreement on its MIC book of business through the end of the calendar year. This new agreement provides reinsurance coverage on non-named storms, of 65% of $15 million excess of $10 million with a $0.85 million occurrence deductible and a $4.15 million occurrence limit at an approximate cost of $2.3 million.

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

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

The carriers’ cost and amounts of reinsurance are based on current analysis of exposure to catastrophic risk. Most of the data is subjected to exposure level analysis at various dates through December 31, 2020. This analysis of the carriers’ exposure levels in relation to the total exposures to the FHCF and excess of loss treaties may produce changes in retentions, limits and reinsurance premiums in total, and by carrier, as a result of increases or decreases in the carriers’ exposure levels.

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

Due to non-Florida exposures becoming a larger portion of the overall book of business, the Company broadened its approach to its reinsurance purchases for this treaty year by separating the program into two reinsurance towers. The first tower includes all exposures for FNIC Florida, MIC in all states and MNIC and includes ground up first event limit protection up to approximately $982 million (“Primary Tower”), subject to a maximum first-event retention of $10 million. The second tower provides ground up first event limit up to $450 million for all FNIC’s non-Florida business produced by its managing general underwriter partner (“FNIC SageSure Tower”), subject to a first-event retention of $8.25 million. The $18.25 million combined towers maximum retention is a reduction in the first event retention of approximately 41% compared to up to $31 million in last year’s program. The combination of these separate towers provides the Company with an increase in aggregate catastrophe reinsurance protection of approximately $345 million compared to the previous treaty year original purchase. More specifically, the 2021-2022 Program includes up to approximately $2.25 billion in aggregate reinsurance across all states in which the Company operates, including $504 million of reinsurance provided by the Florida Hurricane Catastrophe Fund (“FHCF”). Up to approximately $972 million is available for a first event within Florida, including $468 million of private coverage plus the FHCF coverage. Up to approximately $910 million of coverage is available for a first event outside of Florida, including the $468 million of private coverage from the Primary Tower, which is available to cover catastrophe losses in MIC’s book of business located in Louisiana and Texas. FHCF coverage responds on both a per occurrence and aggregate basis, and is exclusive to the state of Florida. Additionally, the 2021-2022 Program provides $831 million of private reinsurance across the combined towers for second and subsequent events, subject to individual retentions within each tower and the aggregate limit. All layers above a $30 million attachment point have prepaid automatic reinstatement protection, which affords the carriers additional coverage for subsequent events without additional cost.
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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022


Most of the privately placed layers of the 2021-2022 Program are effective July 1, 2021, with certain agreements effective for June 2021. The portion of the 2021-2022 Program placed with private reinsurers is with partners that as of March 31, 2022 had an A.M. Best Company or Standard & Poor’s rating of “A-” or better, or that have fully collateralized their maximum potential obligations in dedicated trusts. For the purpose of debt covenant compliance, if any reinsurer on the 2021-2022 Program is not collateralized or has a rating lower than “A-” by A.M. Best Company or Standard & Poor’s then the Company treats that reinsurer’s participation as if it was part of the Company’s net retention. Refer to "Part I, Item 1A., Risk Factors” of our 2021 Form 10-K for more information.

The private reinsurance market continued to harden this year due to a number of factors, including the elevated number of catastrophic events impacting U.S. coastal areas in recent years. These factors have resulted in more restrictive terms for the current and upcoming reinsurance treaty year. The change in terms includes a further reduction in the availability of cascading coverage, which automatically “drops-down” coverage for subsequent events and prevents gaps in reinsurance protection when multiple events occur during the same treaty year. In addition, there was limited open market capacity available for lower layer attachment points on an “all perils” basis. As a result, a vast majority of the first layer for the Primary Tower ($20 million excess of $10 million), which includes one automatic reinstatement, covers “all perils” only through November 30, 2021, after which coverage includes only named storms such as tropical depressions, tropical storms and hurricanes, and excludes tornado or hail events. The first layer in the FNIC SageSure Tower ($22 million excess of $8 million) provides both per occurrence and aggregate protection and was placed with Anchor Re, an affiliate of SageSure (the non-affiliated managing general underwriter that writes FNIC’s non-Florida property business) on a fully-collateralized basis. In addition, 66% of the reinstatement premium protection ($12 million) for the layer that attaches above $30 million of the FNIC SageSure Tower provides protection on an “all perils” basis whereas the remaining 34% ($6 million) provides protection following only a hurricane.

As indicated above, the carriers’ combined 2021-2022 Program is estimated to cost $274.1 million, consisting of $204.8 million for the Primary Tower and $69.4 million for FNIC SageSure Tower after consideration of 19% downward premium adjustment resulting from the September 30, 2021 exposure adjustment, driven by our exposure management initiatives. This amount includes approximately $237.9 million for private reinsurance for the carriers’ exposure described above, including prepaid automatic premium reinstatement protection, along with approximately $36.2 million, within the Primary Tower, payable to the FHCF. All carriers maintained their 90% FHCF participation for the wind season. In the Primary Tower, each carrier will share the combined cost in proportion to its contribution to the total expected loss in each reinsurance layer. Each carrier’s reinsurance recoveries will be based on that carrier’s contributing share of a given event’s total loss and each carrier will be responsible for its portion of the 2021-2022 Program’s per event retention based on a specific allocation formula.

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

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

The carriers’ cost and amounts of reinsurance are based on current analysis of exposure to catastrophic risk. The data was subjected to exposure level analysis at various dates through December 31, 2021. This analysis of the carriers’ exposure levels in relation to the total exposures to the FHCF and excess of loss treaties may produce changes in retentions, limits and reinsurance premiums in total, and by carrier, as a result of increases or decreases in the carriers’ exposure levels.

Quota-Share Reinsurance Programs

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

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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

On November 15, 2020, FNIC entered into a 10% quota-share reinsurance treaty through November 15, 2021 on its Florida homeowners book of business on an in-force, new and renewal basis. This treaty excludes all catastrophe losses and provides coverage only on attritional losses and is subject to certain limitations.

On December 31, 2020, FNIC entered into a 10% quota-share reinsurance treaty through December 31, 2021 on its Florida homeowners book of business on an in-force, new and renewal basis. This treaty excludes named storms and is subject to certain limitations.

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

On November 15, 2021, FNIC renewed its 10% quota-share treaty through November 15, 2022 on its Florida homeowners book of business on an in-force, new and renewal basis. This treaty excludes all catastrophe losses and provides coverage only on attritional losses and is subject to certain limitations.

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

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

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

Effective December 31, 2021, the Company terminated its existing 80% quota-share reinsurance treaty with Anchor Re and commuted the agreement. Immediately after the commutation, the Company entered into a 100% quota-share treaty with Anchor Re on December 31, 2021 on an in-force, new and renewal basis, which covers the six month period through June 30, 2022, subject to certain limitations which include limits on the net losses that Anchor Re can realize during the treaty year. The new treaty excludes catastrophe losses, involves a funded trust and is fully collateralized through Anchor Re. The Company recorded a pre-tax loss of $2.5 million in the fourth quarter of 2021 related to the settlement of the managing general underwriting and profit share agreements with SageSure through December 31, 2021.

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


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

Reinsurance Recoverable, Net

Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated with the reinsurance placement and presented on the consolidated balance sheet as reinsurance recoverable. Reinsurance recoverable, net consisted of the following:
March 31,December 31,
20222021
(In thousands)
Reinsurance recoverable on paid losses$100,499 $59,096 
Reinsurance recoverable on unpaid losses481,531 554,356 
Allowance for credit loss(109)(249)
Reinsurance recoverable, net$581,921 $613,203 

As of March 31, 2022, and December 31, 2021, the Company had reinsurance recoverable of $480.0 million (as a result of Hurricanes Ida, Laura, Irma, Sally as well as April 2021 Storms) and $504.8 million (as a result of Hurricanes Ida, Irma, Laura, April 2021 Storms and Hurricane Sally), respectively. April 2021 Storms were a collection of severe weather events impacting Texas, Florida, Louisiana and other states over a six-day period starting approximately April 10, 2021.

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

Net Premiums Written and Net Premiums Earned

Net premiums written and net premiums earned consisted of the following:
Three Months Ended
March 31,
20222021
(In thousands)
Net Premiums Written  
Direct$137,892 $174,207 
Ceded(38,269)(78,149)
$99,623 $96,058 
Net Premiums Earned  
Direct$164,328 $179,002 
Ceded(118,343)(139,257)
$45,985 $39,745 

6. ALLOWANCES FOR CREDIT LOSS

Overview

There is significant risk and judgment involved in determining estimates of our allowances for credit loss, which reduce the amortized cost of an asset to produce an estimate of the net amount that will be collected over the asset's contractual life. Longer time horizons generally present more uncertainty in expected cash flow. We evaluate the expected credit loss of assets on an individual basis, except in cases where assets collectively share similar risk characteristics where we pool them together. We evaluate and estimate our allowances for credit loss by considering reasonable, relevant and supportable available information.


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FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2022

Activity in the allowances for credit loss, by asset line item on the consolidated balance sheet, is summarized as follows:
Reinsurance
PremiumsRecoverable,
ReceivableNetTotal
(In thousands)
Balance as of December 31, 2021$125 $249 $374 
Credit loss expense (recovery) (1)8 (140)(132)
Balance as of March 31, 2022$133 $109 $242 

(1)Reflected in commissions and other underwriting expenses on the consolidated statements of comprehensive income (loss).

Accrued investment income is included in other assets on the consolidated balance sheet. We immediately write-off accrued investment income if it becomes uncollectible, therefore we do not measure or record an allowance for credit losses.

Investments

Our investment policy is established by the Board of Directors’ Investment Committee and is reviewed on a regular basis. This policy currently limits investment in non-investment-grade debt securities (including high-yield bonds), and limits total investments in preferred stock, common stock and mortgage notes receivable. We also comply with applicable laws and regulations that further restrict the type, quality and concentration of our investments. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.

Our investment portfolio has inherent risks because it contains volatility associated with market pricing and interest rate sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates or credit worthiness. The effects of market volatility, declining economic conditions, such as a U.S. or global economic slowdown, whether due to COVID-19, or other factors, could adversely impact the credit quality of securities in our portfolio and may have unforeseen consequences on the liquidity and financial stability of the issuers of securities we hold.

Our debt securities portfolio includes securities that:

Are explicitly guaranteed by a sovereign entity that can print its own currency;
The currency is routinely held by central banks, used in international commerce and commonly viewed as a reserve currency; and
Have experienced a consistent high credit rating by rating agencies and a long history with no credit losses.

We believe if these go