UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
  þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2018
OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________TO _______________________
Commission File number 000-25001
  FedNat   Holding   Company
(Exact name of registrant as specified in its charter)
 
 
 
Florida
 
65-0248866
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification Number)
 
 
 
14050 N.W. 14 th   Street, Suite 180, Sunrise, FL
 
33323
(Address of principal executive offices)
 
(Zip Code)
800-293-2532
(Registrant’s telephone number, including area code)
 
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 electronically submitted and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     Yes   þ     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,”  and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 
 
 
Large accelerated filer   ¨
Accelerated filer   þ
Non‑accelerated filer   ¨
Smaller reporting company   ¨
 
 
(Do not check if a smaller reporting company)
Emerging growth company   ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.       ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨     No   þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 1, 2018 , the registrant had 12,774,444 shares of common stock outstanding.


 
 


FEDNAT HOLDING COMPANY
TABLE OF CONTENTS
 

 
 
PART I: FINANCIAL INFORMATION
PAGE
 
 
 
ITEM 1
 
 
 
ITEM 2
 
 
 
ITEM 3
 
 
 
ITEM 4
 
 
 
PART II: OTHER INFORMATION
 
 
 
 
ITEM 1
 
 
 
ITEM 1A
 
 
 
ITEM 2
 
 
 
ITEM 3
 
 
 
ITEM 4
 
 
 
ITEM 5
 
 
 
ITEM 6
 
 
 
SIGNATURES



- 2 -


PART I: FINANCIAL INFORMATION
Item 1.  Financial Statements
FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
໿
 
 
September 30,
 
December 31,
 
 
2018
 
2017
ASSETS
 
 
 
 
Investments:
 
 
 
 
Debt securities, available-for-sale, at fair value (amortized cost of $432,051 and $422,300, respectively)
 
$
424,148

 
$
423,238

Debt securities, held-to-maturity, at amortized cost
 
5,255

 
5,349

Equity securities, at fair value
 
19,535

 
15,434

Total investments (including $0 and $26,284 related to the VIE, respectively)
 
448,938

 
444,021

Cash and cash equivalents (including $0 and $14,211 related to the VIE, respectively)
 
69,457

 
86,228

Prepaid reinsurance premiums
 
134,285

 
135,492

Premiums receivable, net of allowance of $81 and $70, respectively (including $0 and $1,184 related to the VIE, respectively)
 
34,286

 
46,393

Reinsurance recoverable, net
 
134,736

 
124,601

Deferred acquisition costs, net
 
47,395

 
40,893

Income taxes, net
 
3,006

 
9,817

Property and equipment, net
 
4,120

 
4,025

Other assets (including $0 and $2,322 related to the VIE, respectively)
 
14,388

 
13,403

Total assets
 
$
890,611

 
$
904,873

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities
 
 
 
 
Loss and loss adjustment expense reserves
 
$
221,114

 
$
230,515

Unearned premiums
 
296,329

 
294,423

Reinsurance payable
 
77,004

 
71,944

Long-term debt, net of deferred financing costs of $623 and $749, respectively
 
44,377

 
49,251

Deferred revenue
 
4,913

 
6,222

Other liabilities
 
23,938

 
25,059

Total liabilities
 
667,675

 
677,414

 
 
 
 
 
Commitments and contingencies (see Note 9)
 
 
 
 
 
 
 
 
 
Shareholders' Equity
 
 
 
 
Preferred stock, $0.01 par value: 1,000,000 shares authorized
 
—

 
—

Common stock, $0.01 par value: 25,000,000 shares authorized; 12,774,444 and 12,988,247 shares issued and outstanding, respectively
 
128

 
130

Additional paid-in capital
 
140,608

 
139,728

Accumulated other comprehensive income (loss)
 
(5,901
)
 
1,770

Retained earnings
 
88,101

 
70,009

Total shareholders’ equity attributable to FedNat Holding Company shareholders
 
222,936

 
211,637

Non-controlling interest
 
—

 
15,822

Total shareholders’ equity
 
222,936

 
227,459

Total liabilities and shareholders' equity
 
$
890,611

 
$
904,873


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

- 3 -


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
໿
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
98,493

 
$
80,764

 
$
264,159

 
$
245,978

Net investment income
 
3,137

 
2,603

 
9,058

 
7,481

Net realized and unrealized investment gains (losses)
 
1,760

 
6,101

 
916

 
8,644

Direct written policy fees
 
3,796

 
4,098

 
10,685

 
13,617

Other income
 
3,646

 
5,131

 
14,833

 
14,190

Total revenues
 
110,832

 
98,697

 
299,651

 
289,910

 
 
 

 
 

 
 
 
 
Costs and expenses:
 
 

 
 

 
 
 
 
Losses and loss adjustment expenses
 
62,457

 
75,367

 
156,098

 
188,683

Commissions and other underwriting expenses
 
31,373

 
28,386

 
91,467

 
86,883

General and administrative expenses
 
5,000

 
5,042

 
16,345

 
14,737

Interest expense
 
1,032

 
81

 
3,139

 
247

Total costs and expenses
 
99,862

 
108,876

 
267,049

 
290,550

 
 
 

 
 

 
 
 
 
Income (loss) before income taxes
 
10,970

 
(10,179
)
 
32,602

 
(640
)
Income tax expense (benefit)
 
3,020

 
(3,781
)
 
8,587

 
(358
)
Net income (loss)
 
7,950

 
(6,398
)
 
24,015

 
(282
)
Net income (loss) attributable to non-controlling interest
 
—

 
(1,674
)
 
(218
)
 
(1,975
)
Net income (loss) attributable to FedNat Holding Company shareholders
 
$
7,950

 
$
(4,724
)
 
$
24,233

 
$
1,693

 
 
 

 
 

 
 
 
 
Net Income (Loss) Per Common Share
 
 

 
 

 
 
 
 
Basic
 
$
0.62

 
$
(0.36
)
 
$
1.90

 
$
0.13

Diluted
 
$
0.62

 
$
(0.36
)
 
$
1.88

 
$
0.13

 
 
 

 
 

 
 
 
 
Weighted Average Number of Shares of Common Stock Outstanding
 
 

 
 

 
 
 
 
Basic
 
12,749

 
13,135

 
12,775

 
13,211

Diluted
 
12,870

 
13,135

 
12,866

 
13,302

 
 
 

 
 

 
 
 
 
Dividends Declared Per Common Share
 
$
—

 
$
0.08

 
$
0.16

 
$
0.24


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

- 4 -


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
໿
 
 
Three Months Ended
 
Nine Months Ende d
 
 
September 30,
 
Septembe r 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
7,950

 
$
(6,398
)
 
$
24,015

 
$
(282
)
 
 
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on investments, available-for-sale, net of tax
 
(551
)
 
(2,445
)
 
(6,601
)
 
514

Comprehensive income (loss)
 
7,399

 
(8,843
)
 
17,414

 
232

 
 
 
 
 
 
 
 
 
Less: comprehensive income (loss) attributable to non-controlling interest, net of ta x
 
—

 
(1,674
)
 
(447
)
 
(2,233
)
Comprehensive income (loss) attributable to FedNat Holding Company share holders
 
$
7,399

 
$
(7,169
)
 
$
17,861

 
$
2,465


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


- 5 -


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

໿
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders'
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Attributable to
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 
Other
 
 
 
FedNat Holding
 
Non-
 
Total
 
 
Preferred
 
Issued
 
 
 
Paid-in
 
Comprehensive
 
Retained
 
Company
 
Controlling
 
Shareholders'
 
 
Stock
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Earnings
 
Shareholders
 
Interest
 
Equity
Balance as of June 30, 2018
 
$
—

 
12,731,777

 
$
127

 
$
140,102

 
$
(5,350
)
 
$
80,149

 
$
215,028

 
$
—

 
$
215,028

Net income (loss)
 
—

 
—

 
—

 
—

 
—

 
7,950

 
7,950

 
—

 
7,950

Other comprehensive income (loss)
 
—

 
—

 
—

 
—

 
(551
)
 
—

 
(551
)
 
—

 
(551
)
Dividends declared
 
—

 
—

 
—

 
—

 
—

 
2

 
2

 
—

 
2

Shares issued under share-based compensation plans
 
—

 
42,667

 
1

 
22

 
—

 
—

 
23

 
—

 
23

Repurchases of common stock
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation
 
—

 
—

 
—

 
484

 
—

 
—

 
484

 
—

 
484

Balance as of September 30, 2018
 
$
—

 
12,774,444

 
$
128

 
$
140,608

 
$
(5,901
)
 
$
88,101

 
$
222,936

 
$
—

 
$
222,936


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders'
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Attributable to
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 
Other
 
 
 
FedNat Holding
 
Non-
 
Total
 
 
Preferred
 
Issued
 
 
 
Paid-in
 
Comprehensive
 
Retained
 
Company
 
Controlling
 
Shareholders'
 
 
Stock
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Earnings
 
Shareholders
 
Interest
 
Equity
Balance as of June 30, 2017
 
$
—

 
13,060,207

 
$
130

 
$
138,191

 
$
5,157

 
$
73,126

 
$
216,604

 
$
18,169

 
$
234,773

Net income (loss)
 
—

 
—

 
—

 
—

 
—

 
(4,724
)
 
(4,724
)
 
(1,674
)
 
(6,398
)
Other comprehensive income (loss)
 
—

 
—

 
—

 
—

 
(2,444
)
 
—

 
(2,444
)
 
(1
)
 
(2,445
)
Dividends declared
 
—

 
—

 
—

 
—

 
—

 
(1,097
)
 
(1,097
)
 
—

 
(1,097
)
Shares issued under share-based compensation plans
 
—

 
77,519

 
—

 
102

 
—

 
—

 
102

 
—

 
102

Repurchases of common stock
 
—

 
(84,445
)
 
—

 
1

 
—

 
(1,317
)
 
(1,316
)
 
—

 
(1,316
)
Share-based compensation
 
—

 
—

 
—

 
867

 
—

 
—

 
867

 
—

 
867

Balance as of September 30, 2017
 
$
—

 
13,053,281

 
$
130

 
$
139,161

 
$
2,713

 
$
65,988

 
$
207,992

 
$
16,494

 
$
224,486








- 6 -



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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders'
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Attributable to
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 
Other
 
 
 
FedNat Holding
 
Non-
 
Total
 
 
Preferred
 
Issued
 
 
 
Paid-in
 
Comprehensive
 
Retained
 
Company
 
Controlling
 
Shareholders'
 
 
Stock
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Earnings
 
Shareholders
 
Interest
 
Equity
Balance as of January 1, 2018
 
$
—

 
12,988,247

 
$
130

 
$
139,728

 
$
1,770

 
$
70,009

 
$
211,637

 
$
15,822

 
$
227,459

Cumulative effect of new accounting standards
 
—

 
—

 
—

 
—

 
(994
)
 
994

 
—

 
—

 
—

Net income (loss)
 
—

 
—

 
—

 
—

 
—

 
24,233

 
24,233

 
(218
)
 
24,015

Other comprehensive income (loss)
 
—

 
—

 
—

 
—

 
(6,372
)
 
—

 
(6,372
)
 
(229
)
 
(6,601
)
Dividends declared
 
—

 
—

 
—

 
—

 
—

 
(2,077
)
 
(2,077
)
 
—

 
(2,077
)
Acquisition of non-controlling interest
 
—

 
—

 
—

 
(1,005
)
 
(305
)
 
—

 
(1,310
)
 
(15,375
)
 
(16,685
)
Shares issued under share-based compensation plans
 
—

 
112,905

 
1

 
38

 
—

 
—

 
39

 
—

 
39

Repurchases of common stock
 
—

 
(326,708
)
 
(3
)
 
—

 
—

 
(5,058
)
 
(5,061
)
 
—

 
(5,061
)
Share-based compensation
 
—

 
—

 
—

 
1,847

 
—

 
—

 
1,847

 
—

 
1,847

Balance as of September 30, 2018
 
$
—

 
12,774,444

 
$
128

 
$
140,608

 
$
(5,901
)
 
$
88,101

 
$
222,936

 
$
—

 
$
222,936


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders'
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Attributable to
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 
Other
 
 
 
FedNat Holding
 
Non-
 
Total
 
 
Preferred
 
Issued
 
 
 
Paid-in
 
Comprehensive
 
Retained
 
Company
 
Controlling
 
Shareholders'
 
 
Stock
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Earnings
 
Shareholders
 
Interest
 
Equity
Balance as of January 1, 2017
 
$
—

 
13,473,120

 
$
134

 
$
136,779

 
$
1,941

 
$
76,884

 
$
215,738

 
$
18,727

 
$
234,465

Net income (loss)
 
—

 
—

 
—

 
—

 
—

 
1,693

 
1,693

 
(1,975
)
 
(282
)
Other comprehensive income (loss)
 
—

 
—

 
—

 
—

 
772

 
—

 
772

 
(258
)
 
514

Dividends declared
 
—

 
—

 
—

 
—

 
—

 
(3,189
)
 
(3,189
)
 
—

 
(3,189
)
Shares issued under share-based compensation plans
 
—

 
159,014

 
—

 
103

 
—

 
—

 
103

 
—

 
103

Repurchases of common stock
 
—

 
(578,853
)
 
(4
)
 
—

 
—

 
(9,400
)
 
(9,404
)
 
—

 
(9,404
)
Share-based compensation
 
—

 
—

 
—

 
2,279

 
—

 
—

 
2,279

 
—

 
2,279

Balance as of September 30, 2017
 
$
—

 
13,053,281

 
$
130

 
$
139,161

 
$
2,713

 
$
65,988

 
$
207,992

 
$
16,494

 
$
224,486


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

- 7 -


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

໿
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
Cash flow from operating activities:
 
 
 
 
Net income (loss)
 
$
24,015

 
$
(282
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
Net realized and unrealized investment (gains) losses
 
(916
)
 
(8,644
)
Amortization of investment premium or discount, net
 
1,333

 
3,065

Depreciation and amortization
 
1,033

 
312

Share-based compensation
 
1,847

 
2,279

Tax impact related to share-based compensation
 
(32
)
 
(150
)
Changes in operating assets and liabilities:
 
 
 
 
Prepaid reinsurance premiums
 
1,207

 
(33,025
)
Premiums receivable, net
 
12,107

 
(291
)
Reinsurance recoverable, net
 
(10,135
)
 
(286,630
)
Deferred acquisition costs
 
(6,502
)
 
(2,363
)
Income taxes, net
 
9,083

 
(5,110
)
Deferred revenue
 
(1,309
)
 
(73
)
Loss and loss adjustment expense reserves
 
(9,401
)
 
303,115

Unearned premiums
 
1,906

 
18,205

Reinsurance payable
 
5,060

 
47,325

Other
 
(1,038
)
 
4,517

Net cash provided by (used in) operating activities
 
28,258

 
42,250

Cash flow from investing activities:
 
 
 
 
Proceeds from sales of equity securities
 
7,407

 
57,016

Proceeds from sales of debt securities
 
153,970

 
195,090

Purchases of equity securities
 
(8,377
)
 
(34,339
)
Purchases of debt securities
 
(254,110
)
 
(268,999
)
Maturities and redemptions of debt securities
 
86,935

 
28,718

Purchases of property and equipment
 
(1,002
)
 
(304
)
Net cash provided by (used in) investing activities
 
(15,177
)
 
(22,818
)
Cash flow from financing activities:
 
 
 
 
Payment of long-term debt
 
(5,000
)
 
—

Purchase of non-controlling interest
 
(16,685
)
 
—

Purchases of FedNat Holding Company common stock
 
(5,061
)
 
(9,404
)
Issuance of common stock for share-based awards
 
39

 
103

Dividends paid
 
(3,145
)
 
(3,189
)
Net cash provided by (used in) financing activities
 
(29,852
)
 
(12,490
)
Net increase (decrease) in cash and cash equivalents
 
(16,771
)
 
6,942

Cash and cash equivalents at beginning-of-period
 
86,228

 
74,593

Cash and cash equivalents at end-of-period
 
$
69,457

 
$
81,535


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

- 8 -


FEDNAT HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
 
໿
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid (received) during the period for income taxes
 
$
(466
)
 
$
(414
)

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



- 9 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2018


1. ORGANIZATION, CONSOLIDATION AND BASIS OF PREPARATION

Organization

FedNat Holding Company (“FNHC,” the “Company,” “we,” “us,” or "our") is an 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.  The Company, through its wholly owned subsidiaries, is authorized to underwrite and/or place homeowners multi-peril ("homeowners"), federal flood and other lines of insurance in Florida and other states. The Company markets, distributes and services its 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 specific lines of insurance by the state’s insurance departments, in Florida, Louisiana, Texas, Georgia, South Carolina and Alabama.  Monarch National Insurance Company (“MNIC”), our other insurance subsidiary, is licensed as an admitted carrier in Florida. Admitted carriers are bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices. Admitted carriers are also required to financially contribute to the state guarantee fund used to pay for losses if an insurance carrier becomes insolvent or unable to pay loss amounts due to their policyholders.

Monarch National Insurance Company

We completed our acquisition of MNIC in February 2018 by acquiring the membership interests in MNIC’s indirect parent, Monarch Delaware Holdings LLC (“Monarch Delaware”), held by our joint venture partners.  Our joint venture partners were Crosswinds Investor Monarch LP (“Crosswinds Investor”), a wholly owned subsidiary of Crosswinds Holdings Inc. (“Crosswinds Holdings”), a private equity firm and asset manager, and Transatlantic Reinsurance Company (“TransRe”), an international property and casualty reinsurance company. We purchased the 42.4% Class A membership interest in Monarch Delaware held by Crosswinds Investor for $12.3 million and the 15.2% non-voting membership interest in Monarch Delaware held by TransRe for $4.4 million . We also repaid the outstanding principal balance and interest due on the $5.0 million promissory note to TransRe. MNIC was organized in March 2015 and writes homeowners property and casualty insurance in Florida. 

Crosswinds AUM LLC, a subsidiary of Crosswinds Holdings, serves as an investment consultant to FNHC through December 31, 2018 for a quarterly fee of $75,000 .  In addition, subsidiaries of Crosswinds Holdings and TransRe each have a right of first refusal through December 31, 2018 to participate in our catastrophe excess of loss reinsurance program, at market rates and terms, up to a placement of $10.0 million in reinsurance limit in the aggregate from Crosswinds Holdings and up to a placement of $10.0 million in reinsurance limit in excess of its placement on our current catastrophe excess of loss reinsurance program from TransRe. TransRe does currently participate in the reinsurance program.

Please refer to Basis of Presentation and Principles of Consolidation and Note 12 below.

Material Distribution Relationships

Ivantage Select Agency, Inc.
The Company is a party to an insurance agency master agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company (“Allstate”), pursuant to which the Company has been authorized by ISA to appoint Allstate agents to offer the Company’s homeowners insurance products to consumers in Florida. As a percentage of the total homeowners premiums we underwrote,   24.5% and 24.6% were from Allstate’s network of Florida agents, for the three months ended September 30, 2018 and 2017 , respectively. For the nine months ended September 30, 2018 and 2017 , 23.9% and 24.0% , respectively, of the homeowners premiums we underwrote were from Allstate's network of Florida agents.


- 10 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

SageSure Insurance Managers, LLC
The Company is a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) to facilitate growth in our FNIC homeowners business outside of Florida.  As a percentage of the total homeowners premiums, 16.2% and 10.7% , respectively, of the Company’s premiums were underwritten by SageSure, for the three months ended September 30, 2018 and 2017 , respectively. For the nine months ended September 30, 2018 and 2017 , 14.2% and 9.7% , respectively, of the Company's homeowners premiums were underwritten by SageSure.

Basis of Presentation and Principles of Consolidation

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

The Company identifies a VIE as an entity that does not have sufficient equity to finance its own activities without additional financial support or where the equity investors lack certain characteristics of a controlling financial interest.  The Company assesses its contractual, ownership or other interests in a VIE to determine if the Company’s interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders.  The Company performs an ongoing qualitative assessment of its variable interests in a VIE to determine whether the Company has a controlling financial interest and would therefore be considered the primary beneficiary of the VIE.  If the Company determines it is the primary beneficiary of a VIE, the Company consolidates the assets and liabilities of the VIE in its consolidated financial statements.

As of December 31, 2017, in connection with the investment in Monarch Delaware, the Company had determined that the Company possessed the power to direct the activities of the VIE that most significantly impact its economic performance and the Company was the primary beneficiary of the VIE.  As such, the Company consolidated Monarch Delaware in its consolidated financial statements. Refer to Monarch National Insurance Company above, related to our 100% ownership of Monarch Delaware that became effective on February 21, 2018. In accordance with the accounting standard on consolidation, a primary beneficiary that acquires additional ownership of the previously controlled and consolidated subsidiaries is accounted for as an equity transaction and re-measurement of assets and liabilities of previously controlled and consolidated subsidiaries is not permitted. As a result, we accounted for this transaction by eliminating the carrying value of the non-controlling interest to reflect our 100% ownership interest in MNIC as of February 21, 2018. The difference between the consideration paid and the amount by which the non-controlling interest was eliminated has been recognized in additional paid-in capital. Following the closing, Monarch Delaware and Monarch Holdings were merged into MNIC.

Revisions of Previously Issued Financial Statements

Revisions to the three and nine months ended September 30, 2017, were described in Note 1 and Note 16 to our Consolidated Financial Statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data" included in our most recent Form 10-K for the year ended December 31, 2017 (the "2017 Form 10-K").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Our significant accounting policies were described in Note 2 of our 2017 Form 10-K. Other than the changes noted in "Recently Issued Accounting Pronouncements, Adopted" below, there have been no significant changes in our significant accounting policies for the nine months ended September 30, 2018 .

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

- 11 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

considerable variability is inherent in these estimates, the Company believes that the liability and LAE reserve is adequate. The Company reviews and evaluates its estimates and assumptions regularly and makes adjustments, reflected in current operations, as necessary, on an ongoing basis.

Recently Issued Accounting Pronouncements, Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The update replaces all general and most industry specific revenue recognition guidance (excluding insurance) currently prescribed by GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a promised good or service to customers in an amount that reflects that consideration to which the entity expects to be entitled in exchange for that good or service. The Company adopted this update and the other related revenue standard clarifications and technical guidance effective January 1, 2018, using the modified retrospective approach. The Company completed the analysis of its non-insurance revenues and has concluded that the implementation did not have any impact on the Company’s consolidated financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) , which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments.  In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . Most notably, the combined new guidance required equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Company adopted the guidance effective January 1, 2018, by reflecting a cumulative adjustment, which increased retained earnings and decreased accumulated other comprehensive income by $1.0 million . This adjustment represented the level of net unrealized gains and losses associated with our equity investments with readily determinable market values as of January 1, 2018. The adoption also resulted in the recognition of $2.6 million in our consolidated statements of operations and statements of comprehensive income (loss), which represented the change in net unrealized gains and losses on our equity securities for the first nine months of 2018. This new guidance increases our earnings volatility compared to the prior accounting rules.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) to improve the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update provides guidance on specific cash flow classification issues including the following: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Previous GAAP did not include specific guidance on these eight cash flow classification issues. The Company adopted the guidance effective January 1, 2018, and the provisions of this update did not have an impact on our consolidated statements of cash flows or results of operations.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The update allowed a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act of 2017 ("Tax Act"). Guidance had previously required the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to accumulated other comprehensive income. The Company adopted the guidance effective January 1, 2018, by reflecting a cumulative effect adjustment to retained earnings with an off-setting adjustment to accumulated other comprehensive income for less than $0.1 million .

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting . The update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The guidance requires non-employee share-based payments awards to be measured consistently with the accounting for employee share-based payment awards, which is the grant date fair value of the equity security, with measurement at the grant date. Previously, non-employee share-based payment awards were measured at either the fair value of consideration received or the fair value of the equity, at the earlier of the date the non-employee committed to perform or the date of performance completion.

- 12 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

The Company adopted the guidance effective June 30, 2018, and the provisions of this update did not have an impact on our consolidated financial position or results of operations.

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The update provides corrections and improvements and clarifies certain aspects of the guidance issued in ASU 2016-01. The Company adopted the guidance effective July 1, 2018, and the provisions of this update did not have an impact on our consolidated financial position or results of operations.

Recently Issued Accounting Pronouncements, Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) .  The update will supersede the current lease guidance in Topic 840, Leases and lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.  Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  The update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.  The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. All of the Company’s leases are classified as operating leases under current lease accounting guidance.  The Company intends to elect the optional transition method and the package of practical expedient, which will allow us to recognize our leases as of January 1, 2019 through a cumulative-effect adjustment to retained earnings, with no adjustment to comparative prior periods presented.  We established a comprehensive approach to implement this standard, and have gathered and assessed the necessary data to determine the scope of impact and now completing our evaluation of processes to meet the accounting and disclosure requirements.  The Company expects to recognize a right-of-sue asset and lease liability on our consolidated balance sheets, however the amount will depend on our leases in existence on January 1, 2019.  However, we do not expect there to be a significant difference in our pattern of lease expense recognition on our consolidated statements of operations, under this ASU.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The update requires entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as currently performed under the other-than-temporary impairment ("OTTI") model. The update also require enhanced disclosures for financial assets measured at amortized cost and available-for-sale debt securities to help the financial statement users better understand significant judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The update is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is in the early stage of evaluating the impact that the update will have on the Company’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. The update is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is in the early stage of evaluating the impact that the update will have on the Company’s consolidated financial position or results of operations.

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.

- 13 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

•
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.

The classification of assets and liabilities in the fair value hierarchy is based upon the lowest level input that is significant to the fair value.

The Company’s financial instruments measured at fair value on a recurring basis and the level of the fair value hierarchy of inputs used consisted of the following:
 
 
September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Debt securities - available-for-sale, at fair value:
 
 
 
 
 
 
 
 
United States government obligations and authorities
 
$
59,689

 
$
54,548

 
$
—

 
$
114,237

Obligations of states and political subdivisions
 
—

 
9,679

 
—

 
9,679

Corporate securities
 
—

 
283,213

 
—

 
283,213

International securities
 
—

 
17,019

 
—

 
17,019

Debt securities, at fair value
 
59,689

 
364,459

 
—

 
424,148

 
 
 
 
 
 
 
 
 
Equity securities, at fair value
 
19,535

 
—

 
—

 
19,535

 
 
 
 
 
 
 
 
 
Total investments, at fair value
 
$
79,224

 
$
364,459

 
$
—

 
$
443,683

໿
 
 
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Debt securities - available-for-sale, at fair value:
 
 
 
 
 
 
 
 
United States government obligations and authorities
 
$
51,219

 
$
46,918

 
$
—

 
$
98,137

Obligations of states and political subdivisions
 
—

 
66,266

 
—

 
66,266

Corporate securities
 
—

 
240,919

 
—

 
240,919

International securities
 
—

 
17,916

 
—

 
17,916

Debt securities, at fair value
 
51,219

 
372,019

 
—

 
423,238

 
 
 
 
 
 
 
 
 
Equity securities, at fair value
 
15,434

 
—

 
—

 
15,434

 
 
 
 
 
 
 
 
 
Total investments, at fair value
 
$
66,653

 
$
372,019

 
$
—

 
$
438,672


Held-to-maturity debt securities reported on the consolidated balance sheets at amortized cost and disclosed at fair value below (and in Note 4) and the level of fair value hierarchy of inputs used consisted of the following:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
September 30, 2018
 
$
3,846

 
$
1,232

 
$
—

 
$
5,078

December 31, 2017
 
3,936

 
1,338

 
—

 
5,274


The Company has engaged a nationally recognized third party pricing service to provide the fair values of securities in Level 2. The Company reviews the third party pricing methodologies on a quarterly basis and tests for significant differences between the market price used to value the securities and the recent sales activities.


- 14 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

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.

There were no changes to the Company’s valuation methodology and the Company is not aware of any events or circumstances that would have a significant adverse effect on the carrying value of its assets and liabilities measured at fair value as of September 30, 2018 and December 31, 2017 . There were no transfers between the fair value hierarchy levels during the nine months ended September 30, 2018 and 2017 .

- 15 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

4. INVESTMENTS

Unrealized Gains and Losses

The difference between amortized cost or cost and estimated fair value and gross unrealized gains and losses, by major investment category, consisted of the following:
໿
 
 
Amortized
 
Gross
 
Gross
 
 
 
 
Cost
 
Unrealized
 
Unrealized
 
 
 
 
or Cost
 
Gains
 
Losses
 
Fair Value
 
 
(In thousands)
September 30, 2018
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
United States government obligations and authorities
 
$
116,969

 
$
20

 
$
2,752

 
$
114,237

Obligations of states and political subdivisions
 
9,891

 
9

 
221

 
9,679

Corporate
 
287,901

 
246

 
4,934

 
283,213

International
 
17,290

 
20

 
291

 
17,019

 
 
432,051

 
295

 
8,198

 
424,148

 
 
 

 
 

 
 

 
 
Debt securities - held-to-maturity:
 
 

 
 

 
 

 
 
United States government obligations and authorities
 
4,140

 
1

 
174

 
3,967

Corporate
 
1,035

 
3

 
6

 
1,032

International
 
80

 
—

 
1

 
79

 
 
5,255

 
4

 
181

 
5,078

Total investments (1)
 
$
437,306

 
$
299

 
$
8,379

 
$
429,226

໿

(1) As a result of the adoption of ASU 2016-01 on January 1, 2018 (see additional details in Note 2 above) for our equity securities we now recognize changes in unrealized gains or losses within our statements of operations; therefore they are not included as of September 30, 2018.
 
 
Amortized
 
Gross
 
Gross
 
 
 
 
Cost
 
Unrealized
 
Unrealized
 
 
 
 
or Cost
 
Gains
 
Losses
 
Fair Value
 
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
United States government obligations and authorities
 
$
98,739

 
$
244

 
$
846

 
$
98,137

Obligations of states and political subdivisions
 
66,319

 
325

 
378

 
66,266

Corporate
 
239,435

 
2,233

 
749

 
240,919

International
 
17,807

 
136

 
27

 
17,916

 
 
422,300

 
2,938

 
2,000

 
423,238

 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
United States government obligations and authorities
 
4,160

 
9

 
106

 
4,063

Corporate
 
1,123

 
21

 
—

 
1,144

International
 
66

 
1

 
—

 
67

 
 
5,349

 
31

 
106

 
5,274

Equity securities
 
14,085

 
1,628

 
279

 
15,434

Total investments
 
$
441,734

 
$
4,597

 
$
2,385

 
$
443,946


- 16 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


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), by major investment category, consisted of the following:
໿
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
Gross realized and unrealized gains:
 
 
 
 
 
 
 
 
Debt securities
 
$
91

 
$
618

 
$
355

 
$
1,471

Equity securities
 
1,922

 
6,527

 
4,163

 
9,776

Total gross realized and unrealized gains
 
2,013

 
7,145

 
4,518

 
11,247

 
 
 

 
 
 
 
 
 
Gross realized and unrealized losses:
 
 

 
 
 
 
 
 
Debt securities
 
(253
)
 
(103
)
 
(2,571
)
 
(1,293
)
Equity securities
 
—

 
(941
)
 
(1,031
)
 
(1,310
)
Total gross realized and unrealized losses
 
(253
)
 
(1,044
)
 
(3,602
)
 
(2,603
)
Net realized and unrealized gains (losses) on investments
 
$
1,760

 
$
6,101

 
$
916

 
$
8,644


Proceeds from sale of investment securities were $161.4 million an d $252.1 million for the nine months ended September 30, 2018 and 2017 , respectively.

The above line item, net realized and unrealized gains (losses) on investments, includes $1.6 million and $2.6 million of recognized net unrealized gains on equity securities for the three and nine months ended September 30, 2018 , respectively.

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:
໿

- 17 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

 
 
September 30, 2018
 
 
Amortized
 
 
 
 
Cost
 
Fair Value
Securities with Maturity Dates
 
(In thousands)
Debt securities, available-for-sale:
 
 
 
 
One year or less
 
$
36,645

 
$
36,575

Over one through five years
 
212,426

 
209,585

Over five through ten years
 
181,102

 
176,126

Over ten years
 
1,878

 
1,862

 
 
432,051

 
424,148

Debt securities, held-to-maturity:
 
 
 
 
One year or less
 
750

 
751

Over one through five years
 
4,033

 
3,869

Over five through ten years
 
472

 
458

 
 
5,255

 
5,078

Total
 
$
437,306

 
$
429,226


Net Investment Income

Net investment income consisted of the following:
໿
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
Interest income
 
$
3,089

 
$
2,492

 
$
8,904

 
$
7,073

Dividends income
 
48

 
111

 
154

 
408

Net investment income
 
$
3,137

 
$
2,603

 
$
9,058

 
$
7,481


Aging of Gross Unrealized Losses

Gross unrealized losses and related fair values for debt securities (and equity securities as of December 31, 2017), grouped by duration of time in a continuous unrealized loss position, consisted of the following:
໿
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
 
 
 
 
 
(In thousands)
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
United States government obligations and authorities
 
$
83,061

 
$
1,450

 
$
27,124

 
$
1,302

 
$
110,185

 
$
2,752

Obligations of states and political subdivisions
 
5,879

 
94

 
3,265

 
127

 
9,144

 
221

Corporate
 
202,142

 
3,701

 
34,306

 
1,233

 
236,448

 
4,934

International
 
13,439

 
285

 
161

 
6

 
13,600

 
291

 
 
$
304,521

 
$
5,530

 
$
64,856

 
$
2,668

 
$
369,377

 
$
8,198




- 18 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
 
 
 
 
 
(In thousands)
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
United States government obligations and authorities
 
$
52,368

 
$
517

 
$
19,287

 
$
329

 
$
71,655

 
$
846

Obligations of states and political subdivisions
 
32,030

 
221

 
5,676

 
157

 
37,706

 
378

Corporate
 
109,780

 
625

 
6,452

 
124

 
116,232

 
749

International
 
8,935

 
27

 
25

 
—

 
8,960

 
27

 
 
203,113

 
1,390

 
31,440

 
610

 
234,553

 
2,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
4,312

 
279

 
—

 
—

 
4,312

 
279

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
207,425

 
$
1,669

 
$
31,440

 
$
610

 
$
238,865

 
$
2,279


As of September 30, 2018 , the Company held a total of 1,364 debt securities that were in an unrealized loss position, of which 195 securities were in an unrealized loss position continuously for 12 months or more. As of December 31, 2017 , the Company held a total of 866 debt and equity securities that were in an unrealized loss position, of which 73 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.

The Company holds some of its debt securities as available-for-sale and as such, these securities are recorded at fair value. The Company continually monitors the difference between cost and the estimated fair value of its investments, which involves uncertainty as to whether declines in value are temporary in nature. If the decline of a particular investment is deemed temporary, the Company records the decline as an unrealized loss in shareholders’ equity. If the decline is deemed to be other than temporary, the Company will write the security’s cost-basis or amortized cost-basis down to the fair value of the investment and recognizes an OTTI loss in the Company’s consolidated statement of operations. Additionally, any portion of such decline related to debt securities that is believed to arise from factors other than credit will be recorded as a component of other comprehensive income rather than charged against income. The Company did not have any OTTI losses on its available-for-sale debt securities for the first nine months of 2018 and 2017.

As discussed in Note 2 above, beginning January 1, 2018, the Company’s equity investments are measured at fair value through net income. See Note 4 of our 2017 Form 10-K for information on how the Company assessed and determined whether unrealized losses on our equity securities were other-than-temporary, which was primarily based on the duration of the decline in the fair value of such securities relative to their cost as of the balance sheet date. The Company did not have any OTTI losses on its equity securities for the first nine months of 2017.

Collateral Deposits

Cash and cash equivalents and investments, the majority of which were debt securities, with fair values of $10.2 million and $12.9 million , were deposited with governmental authorities and into custodial bank accounts as required by law or contractual obligations as of September 30, 2018 and December 31, 2017 , respectively.

- 19 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


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 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

2017-2018 Excess of Loss Reinsurance Programs
FNIC’s 2017-2018 reinsurance programs, which cost $174.4 million , including $124.0 million for the private reinsurance for FNIC’s Florida exposure, with prepaid automatic premium reinstatement protection on all layers, along with approximately $50.4 million payable to the Florida Hurricane Catastrophe Fund (“FHCF”). The combination of private and FHCF reinsurance treaties will afford FNIC with $2.2 billion of aggregate coverage with a maximum single event coverage totaling approximately $1.5 billion , exclusive of retentions. FNIC maintained its FHCF participation at 75% for the 2017 hurricane season. FNIC’s single event pre-tax retention for a catastrophic event in Florida is $18.0 million .

FNIC’s private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective June 1, 2017 and July 1, 2017. All private layers have prepaid automatic reinstatement protection, except the FHCF supplemental layer reinsurance contract, which affords FNIC additional coverage for subsequent events. The reinsurance program includes multiple year protection with $89.0 million of new multiple year protection this year and $156.0 million of renewing multiple year protection from last year. These private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all layers attach after $25.1 million in losses for FNIC’s exposure. FNIC purchased an underlying limit of protection for $7.1 million excess of $18.0 million with prepaid automatic reinstatement protection. These treaties are with reinsurers that currently have an A.M. Best Company (“A.M. Best”) or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

FNIC’s non-Florida excess of loss reinsurance treaties afford us up to an additional $21.0 million of aggregate coverage with first event coverage totaling $5.0 million and second event coverage up to $16.0 million . The Non-Florida retention is lowered to $13.0 million for the first event and $2.0 million for the second event (for hurricane losses only) on a gross basis though it is reduced to $6.5 million and $1.0 million on a net basis after taking into account the profit share agreement that FNIC has with our non-affiliated managing general underwriter that writes our Non-Florida property business. FNIC’s Non-Florida reinsurance program cost includes $1.7 million for this private reinsurance, including prepaid automatic premium reinstatement protection.

MNIC’s 2017-2018 reinsurance program, which cost $5.0 million , including $3.2 million for the private reinsurance for MNIC’s Florida exposure including prepaid automatic premium reinstatement protection on all layers, along with $1.8 million payable to FHCF. The combination of private and FHCF reinsurance treaties affords MNIC with $109.0 million of aggregate coverage with a maximum single event coverage totaling approximately $68.1 million , exclusive of retentions. MNIC maintained its FHCF participation at 75% for the 2017 hurricane season.

MNIC’s private market excess of loss treaties are effective July 1, 2017, and all private layers have prepaid automatic reinstatement protection, which affords MNIC additional coverage for subsequent events, and have a cascading feature such that substantially all layers attach at $3.4 million for MNIC’s Florida exposure. These treaties are with reinsurers that currently have an A.M. Best or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

2018-2019 Excess of Loss Reinsurance Programs
With the February 21, 2018 acquisition of the minority interests of MNIC, the Company has combined both FNIC and MNIC under a single program allowing the Company to capitalize on efficiencies and scale. FNIC and MNIC’s combined 2018-2019 reinsurance programs is estimated to cost $147.7 million . This amount includes approximately $102.5 million for the private reinsurance for the

- 20 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

Company’s exposure, including prepaid automatic premium reinstatement protection, along with approximately $45.2 million payable to the FHCF. The combination of private and FHCF reinsurance treaties affords FNIC and MNIC approximately $1.8 billion of aggregate coverage with a maximum single event coverage totaling approximately $1.3 billion , exclusive of retentions. Both FNIC and MNIC maintained their FHCF participation at 75% for the 2018 hurricane season. FNIC’s single event pre-tax retention for a catastrophic event in Florida is $20.0 million , up slightly from the 2017-2018 reinsurance program and MNIC’s single event pre-tax retention for a catastrophic event is $3.0 million , down slightly from the 2017-2018 reinsurance program.

The combined FNIC and MNIC private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective July 1, 2018 and all private layers have prepaid automatic reinstatement protection, which affords the Company additional coverage for subsequent events. These private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all layers attach after $20.0 million in losses for FNIC and after $3.0 million in losses for MNIC. If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted. Given current market conditions, FNIC has elected not to purchase any multiple year protection and terminated the second year of the $89.0 million of multiple year protection that FNIC purchased last year on a two-year basis. FNIC also had $ 156.0 million of multiple year protection that expired on June 30, 2018. The overall reinsurance programs are with reinsurers that currently have an A.M. Best or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

FNIC’s non-Florida excess of loss reinsurance treaties afford us an additional $23.0 million of aggregate coverage with first event coverage totaling $5.0 million and second event coverage totaling $18.0 million , with the incremental $13.0 million of second event coverage applying to hurricane losses only. The end result is a non-Florida retention of $15.0 million for the first event and $2.0 million for the second event though these retentions are reduced to $7.5 million and $1.0 million after taking into account the profit sharing agreement that FNIC has with the nonaffiliated managing general underwriter that writes our non-Florida property business. FNIC’s non-Florida reinsurance program cost will approximate $2.0 million for this private reinsurance, including prepaid automatic premium reinstatement protection.

The Company’s cost and amounts of reinsurance are based on management’s current analysis of exposure to catastrophic risk. The data will be subjected to exposure level analysis at various dates during the period ending December 31, 2018. This analysis of the Company’s exposure level in relation to the total exposures to the FHCF and excess of loss treaties may produce changes in retentions, limits and reinsurance premiums as a result of increases or decreases in the Company’s exposure level.

Quota-Share Reinsurance Programs
Our reinsurance programs also include quota-share treaties. One such treaty for 30% became effective July 1, 2014, and another for 10% became effective on July 1, 2015 with each running for two years. The combined treaties provided up to a 40% quota-share reinsurance on covered losses for the homeowners’ property and liability insurance program in Florida. The treaties are accounted for as retrospectively rated contracts whereby the estimated ultimate premium or commission is recognized over the period of the contracts.

On July 1, 2016, the 30% quota-share treaty expired on a cut-off basis, which means as of that date the Company retained an incremental 30% of its unearned premiums and losses. On July 1, 2017, the 10% quota-share treaty expired on a cut-off basis, which means as of that date we retained an incremental 10% of the underlying unearned premiums and losses. The reinsurers remain liable for 30% and 10% of the paid losses occurring during the terms of the treaties, until each treaty is commuted.

On July 1, 2017, FNIC bound a 10% quota-share on its Florida homeowners book of business, which excluded named storms. This treaty is not subject to accounting as a retrospectively rated contract.

The existing 10% quota-share expired on July 1, 2018 on a cut-off basis, meaning that the reinsurer will not be liable (under this agreement) for losses as a result of occurrences taking place after the date of termination, and the unearned premium previously ceded will be returned to FNIC.

FNIC’s quota-share reinsurance program for 2018-2019, is a new 2% quota-share on FNIC’s Florida homeowners book of business, which became effective on July 1, 2018 on an in-force, new and renewal basis, excluding named storms. In addition, this quota-share allows FNIC the flexibility to prospectively increase or decrease the cession percentage up to three times during the term of the agreement.


- 21 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

The Company’s private passenger automobile quota-share treaties are typically programs which become effective at different points in the year and cover auto policies across several states. The automobile quota-share treaties cede approximately 75% of all written premiums entered into by the Company, subject to certain limitations including, but not limited to premium and other caps.

Associated Trust Agreements
Certain reinsurance agreements require FNIC and MNIC to secure the credit, regulatory and business risk. Fully funded trust agreements securing these risks for FNIC totaled less than $0.1 million and $2.6 million as of September 30, 2018 and December 31, 2017 , respectively.

Reinsurance Recoverable

Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated with the reinsurance placement and presented on the consolidated balance sheet as reinsurance recoverable. Reinsurance recoverable, net consisted of the following:
໿
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(In thousands)
Reinsurance recoverable on paid losses
 
$
42,664

 
$
26,256

Reinsurance recoverable on unpaid losses
 
92,072

 
98,345

Reinsurance recoverable, net
 
$
134,736

 
$
124,601


As of September 30, 2018 and December 31, 2017 , the Company had reinsurance recoverable of $105.1 million and $88.0 million , respectively as a result of Hurricane Irma. Hurricane Irma made landfall in the United States as a Category 4 hurricane on September 10, 2017. Additionally, all reinsurers in our excess-of-loss reinsurance programs have an A.M. Best or Standard & Poor’s rating of “A-“ or better, or have fully collateralized their maximum potential obligations in dedicated trusts.

Net Premiums Written and Net Premiums Earned

Net premiums written and net premiums earned consisted of the following:
໿
໿
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
Net Premiums Written
 
 
 
 
 
 
 
 
Direct
 
$
139,022

 
$
154,782

 
$
440,151

 
$
469,525

Ceded
 
(81,023
)
 
(146,522
)
 
(177,604
)
 
(249,248
)
 
 
$
57,999

 
$
8,260

 
$
262,547

 
$
220,277

Net Premiums Earned
 
 

 
 

 
 

 
 

Direct
 
$
144,907

 
$
152,779

 
$
438,239

 
$
451,320

Ceded
 
(46,414
)
 
(72,015
)
 
(174,080
)
 
(205,342
)
 
 
$
98,493

 
$
80,764

 
$
264,159

 
$
245,978




- 22 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

6. LOSS AND LOSS ADJUSTMENT RESERVES

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

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

 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
(In thousands)
Gross reserves, beginning-of-period
 
$
230,515

 
$
158,110

Less: reinsurance recoverable (1)
 
(98,345
)
 
(40,412
)
Net reserves, beginning-of-period
 
132,170

 
117,698

 
 
 
 
 
Incurred loss, net of reinsurance, related to:
 
 
 
 
Current year
 
159,998

 
191,747

Prior year loss development (2)
 
330

 
8,309

Ceded losses subject to offsetting experience account adjustments (3)
 
(4,230
)
 
(11,373
)
Prior years
 
(3,900
)
 
(3,064
)
Total incurred loss and LAE, net of reinsurance
 
156,098

 
188,683

 
 
 

 
 
Paid loss, net of reinsurance, related to:
 
 

 
 
Current year
 
87,960

 
109,988

Prior years
 
71,266

 
57,322

Total paid loss and LAE, net of reinsurance
 
159,226

 
167,310

 
 
 

 
 
Net reserves, end-of-period
 
129,042

 
139,071

Plus: reinsurance recoverable (1)
 
92,072

 
322,520

Gross reserves, end-of-period
 
$
221,114

 
$
461,591


(1)
Reinsurance recoverable in this table includes only ceded loss and LAE reserves.
(2)
Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment.
(3)
Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment, such that there is no impact on pre-tax net income.

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

During the nine months ended September 30, 2018 , the Company experienced $0.3 million of unfavorable loss and LAE reserve development which relates to personal automobile and commercial general liability lines of business, offset by redundancy in the homeowners line of business as a result of lower LAE expenses associated with Hurricane Irma.

During the nine months ended September 30, 2017, the Company experienced $8.3 million of unfavorable loss and LAE reserve development on prior accident years primarily in our personal automobile and homeowners line of business. The automobile’s unfavorable development primarily related to the 2016 accident year from our auto program in the state of Georgia. The homeowners unfavorable development primarily related to the continued impact from assignment of benefits and related ligation costs in the state of Florida.

- 23 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


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

7. LONG-TERM DEBT

See Note 7 of our 2017 Form 10-K for information regarding our long-term debt.

As discussed in Note 1 above, the outstanding principal balance and interest due on the $5.0 million promissory note to TransRe was paid in full in February 2018. The associated deferred financing costs for this debt of less than $0.1 million was recognized as interest expense in our consolidated statements of operations for the three months ended March 31, 2018.

8. INCOME TAXES

The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%. The Securities and Exchange Commission and FASB previously issued guidance that allow a one-year measurement period after the enactment of the Tax Act to finalize calculations and record the related income tax effects. Subsequent to the Tax Act, we have continued to review and analyze the actual and potential impact. While we do not anticipate any significant changes to amounts currently recorded, any additional adjustments as a result of the Tax Act will be made during 2018.

Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes. The effective income tax rate was 27.5% and 37.1% for the three months ended September 30, 2018 and 2017 , respectively. The effective income tax rate was 26.3% and 55.9% for the nine months ended September 30, 2018 and 2017 , respectively. Differences in the effective tax and the statutory Federal income tax rate of 21% and 35% in 2018 and 2017, is driven by state income taxes and anticipated annual permanent differences, including estimates for tax-exempt interest, dividends received deduction, executive compensation and other items.

The Company had an uncertain tax position of $0.6 million as of September 30, 2018 and December 31, 2017 . The Company does not have a valuation allowance as of September 30, 2018 and December 31, 2017 .

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated statements of operations and statements of comprehensive income (loss). For the nine months ended September 30, 2018 and 2017 , the Company did not recognize any expenses related to an uncertain tax position and our associated accrued interest and penalties was less than $0.1 million .

9. COMMITMENTS AND CONTINGENCIES

Litigation and Legal Proceedings

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


- 24 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

The Company reviews the outstanding matters, if any, on a quarterly basis.  The Company accrues for estimated losses and contingent obligations in the consolidated financial statements if and when the obligation or potential loss from any litigation, legal proceeding or claim is considered probable and the amount of the potential exposure is reasonably estimable.  The Company records such probable and estimable losses, through the establishment of legal expense reserves.  As events evolve, facts concerning litigation and contingencies become known and as additional information becomes available, the Company’s management reassesses its potential liabilities related to pending claims and litigation and may revise its previous estimates and make appropriate adjustment to the financial statements. Estimates that require judgment are subject to change and are based on management’s assessment, including the advice of legal counsel, the expected outcome of litigation and legal proceedings or other dispute resolution proceedings or the expected resolution of contingencies. The Company’s management believes that the Company’s accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on the Company’s consolidated financial statements.

Please see the Company’s Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 7, 2018, for information regarding the matter involving Federated Mutual Insurance Company.

Please see the Company’s Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 7, 2018, for information regarding the settlement on May 8, 2018 of the Company’s action against its former chief financial officer.

Assessment Related Activity

The Company operates in a regulatory environment where certain entities and organizations have the authority to require us to participate in assessments. Currently these entities and organizations include: Florida Insurance Guaranty Association (“FIGA”), Citizens Property Insurance Corporation (“Citizens”), FHCF, Florida Joint Underwriters Insurance Association (“JUA”), Georgia Insurers Insolvency Pool (“GIIP”), Special Insurance Fraud Fund (“SIIF”), Fair Access to Insurance Requirements Plan (“FAIRP”), Georgia Automobile Insurance Plan (“GAIP”), Property Insurance Association of Louisiana (“PIAL”), Louisiana Automobile Insurance Plan (“LAIP”), South Carolina Property & Casualty Insurance Guaranty Association (“SCPCIGA”), Texas Property and Casualty Insurance Guaranty Association (“TPCIGA”), Texas Windstorm Insurance Association (“TWIA”), Texas Automobile Insurance Plan Association (“TAIPA”), Alabama Insurance Guaranty Association (“AIGA”), and Alabama Insurance Underwriters Association (“AIUA”). As a direct premium writer in Florida, we are required to participate in certain insurer solvency associations under Florida law, administered by FIGA.

FNIC is also required to participate in an insurance apportionment plan under Florida law, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan, which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. There were no material assessments by the JUA Plan as of December 31, 2017. Future assessments by the JUA and the JUA Plan are indeterminable at this time.

Leases

The Company is committed under an operating lease agreement for office space. FNHC and its subsidiaries lease facilities under a long-term lease agreement. Additional information about leases can be found in Note 9 of our 2017 Form 10-K.

10. SHAREHOLDERS' EQUITY

Common Stock Repurchases

The Company may repurchase shares in open market transactions in accordance with Rule 10b-18 or under Rule 10b5-1 of the Exchange Act from time to time in its discretion, based on ongoing assessments of the Company’s capital needs, the market price of its common stock and general market conditions. The amount and timing of all repurchase transactions are contingent upon market conditions, applicable legal requirements and other factors.

In March 2017, the Company’s Board of Directors authorized a program to repurchase shares of common stock of FNHC, at such times and at prices as management determined advisable, up to an aggregate of $10.0 million of common stock through March 31, 2018. This authorization was fully expended as of March 31, 2018.


- 25 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

In December 2017, the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million (plus $0.8 million remaining from previous authorization which was fully expended as of March 31, 2018) of its outstanding shares of common stock through December 31, 2018. During the nine months ended September 30, 2018 , the Company repurchased 326,708 shares of its common stock at a total cost of $5.1 million , which is an average price per share of $15.49 .  As of September 30, 2018 , the remaining availability for future repurchases of our common stock under this program was $5.7 million .

Securities Offerings

In June 2018, the Company filed with the Securities and Exchange Commission (“SEC”) on Form S-3, a shelf registration statement enabling the Company to offer and sell, from time to time, up to an aggregate of $150.0 million of securities.

Stock Compensation Plan

In April 2012, the Company’s Board of Directors adopted, and in September 2012 the Company’s shareholders approved, the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan permits the issuance of up to 1,000,000 shares of the Company’s common stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive awards, such as stock options and restricted stocks. Officers, directors, executive management and all other employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be granted singly, in combination, or in tandem. The 2012 Plan will expire on April 5, 2022.

In June 2018, the Company filed with the SEC on Form S-8, a registration statement registering 800,000 shares of common stock reserved for issuance under the Company’s 2018 Omnibus Incentive Compensation Plan (the “2018 Plan”).  The 2018 Plan, which was approved by the Company’s shareholders at the 2018 annual meeting, is an equity compensation plan that may be used for our employees, non-employee directors, consultants and advisors.


- 26 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

Share-Based Compensation Expense

Share-based compensation arrangements include the following:
໿
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
Restricted stock
 
$
484

 
$
866

 
$
1,847

 
$
2,279

Stock options
 
—

 
—

 
—

 
—

Total share-based compensation expense
 
$
484

 
$
866

 
$
1,847

 
$
2,279

 
 
 

 
 

 
 

 
 

Intrinsic value of options exercised
 
$
151

 
$
357

 
$
229

 
$
364

Fair value of restricted stock vested
 
$
622

 
$
686

 
$
2,098

 
$
2,191


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

Stock Option Awards

A summary of the Company’s stock option activity includes the following:
໿
 
 
Number of Shares
 
Weighted Average Option Exercise Price
Outstanding at January 1, 2018
 
50,351

 
$
3.72

Granted
 
—

 
—

Exercised
 
(10,834
)
 
3.47

Cancelled
 
(500
)
 
2.45

Outstanding at September 30, 2018
 
39,017

 
$
3.80


Restricted Stock Awards

The Company recognizes share-based compensation expense for all restricted stock awards (“RSAs”) held by the Company’s directors, executives and other key employees. For all RSA awards, excluding relative total shareholder return ("TSR"), the accounting charge is measured at the grant date as the fair value of FNHC common stock and expensed as non-cash compensation over the vesting term using the straight-line basis for service awards and over successive one-year requisite service periods for performance‑based awards.
Our expense for our performance awards depends on achievement of specified results; therefore the ultimate expense can range from 0% to 250% of target. Our TSR cliff vesting awards contain performance criteria which are tied to the achievement of certain market conditions. The TSR grant date fair value was determined using a Monte Carlo simulation and, unlike the performance condition awards, the expense is not reversed if the performance condition is not met. This value is recognized as expense over the requisite service period using the straight‑line recognition method.

During the nine months ended September 30, 2018 and 2017 , the Board of Directors granted 133,060 and 106,454  RSAs, respectively, vesting over three or five years , to the Company’s directors, executives and other key employees.

- 27 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


RSA activity includes the following:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018
 
297,543

 
$
20.57

Granted
 
133,060

 
16.31

Vested
 
(102,071
)
 
20.56

Cancelled
 
(52,188
)
 
17.93

Outstanding at September 30, 2018
 
276,344

 
$
19.02


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

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) associated with debt securities - available-for-sale consisted of the following:
໿
 
 
Three Months Ended September 30,
 
 
2018
 
2017
 
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
 
 
(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period
 
$
(7,166
)
 
$
1,816

 
$
(5,350
)
 
$
8,248

 
$
(3,166
)
 
$
5,082

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification
 
(575
)
 
145

 
(430
)
 
2,013

 
(710
)
 
1,303

Reclassification adjustment for realized losses (gains) included in net income
 
(162
)
 
41

 
(121
)
 
(6,101
)
 
2,353

 
(3,748
)
 
 
(737
)
 
186

 
(551
)
 
(4,088
)
 
1,643

 
(2,445
)
Accumulated other comprehensive income (loss), end-of-period
 
$
(7,903
)
 
$
2,002

 
$
(5,901
)
 
$
4,160

 
$
(1,523
)
 
$
2,637

 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
 
 
(In thousands)
Accumulated other comprehensive income (loss), beginning-of-period
 
$
2,287

 
$
(593
)
 
$
1,694

 
$
3,324

 
$
(1,201
)
 
$
2,123

Cumulative effect of new accounting standards
 
(1,349
)
 
355

 
(994
)
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification
 
(10,573
)
 
2,679

 
(7,894
)
 
9,480

 
(3,656
)
 
5,824

Reclassification adjustment for realized losses (gains) included in net income
 
1,732

 
(439
)
 
1,293

 
(8,644
)
 
3,334

 
(5,310
)

 
(8,841
)
 
2,240

 
(6,601
)
 
836

 
(322
)
 
514

Accumulated other comprehensive income (loss), end-of-period
 
$
(7,903
)
 
$
2,002

 
$
(5,901
)
 
$
4,160

 
$
(1,523
)
 
$
2,637


- 28 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018


11. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period, including vested restricted stock awards during the period. Diluted EPS is computed by dividing net income by the weighted average number of shares outstanding, noted above, adjusted for the dilutive effect of stock options and unvested restricted stock awards.  Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed exercise of common stock options and the vesting of RSAs using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive.

The following table presents the calculation of basic and diluted EPS:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands, except per share data)
Net income (loss) attributable to FedNat Holding Company shareholders
 
$
7,950

 
$
(4,724
)
 
$
24,233

 
$
1,693

 
 
 

 
 

 
 

 
 

Weighted average number of common shares outstanding - basic
 
12,749

 
13,135

 
12,775

 
13,211

 
 
 
 
 
 
 
 
 
Net income (loss) per common share - basic     
 
$
0.62

 
$
(0.36
)
 
$
1.90

 
$
0.13

 
 
 

 
 

 
 

 
 

 
 
 

 
 

 
 

 
 

Weighted average number of common shares outstanding - basic
 
12,749

 
13,135

 
12,775

 
13,211

Dilutive effect of stock compensation plans
 
121

 
—

 
91

 
91

Weighted average number of common shares outstanding - diluted
 
12,870

 
13,135

 
12,866

 
13,302

 
 
 
 
 
 
 
 
 
Net income (loss) per common share - diluted
 
$
0.62

 
$
(0.36
)
 
$
1.88

 
$
0.13

 
 
 

 
 

 
 

 
 

Dividends per share
 
$
—

 
$
0.08

 
$
0.16

 
$
0.24


Dividends Declared

In February 2018, our Board of Directors declared a $0.08  per common share dividend, paid in June 2018, to shareholders of record on May 1, 2018 , amounting to $1.1 million .

In June 2018, our Board of Directors declared a $0.08  per common share dividend, payable in September 2018, to shareholders of record on August 1, 2018, amounting to $1.0 million .

In October 2018, our Board of Directors declared a $0.08 per common share dividend, payable in December 2018, to shareholders of record on November 1, 2018, amounting to $1.0 million .


- 29 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

12. VARIABLE INTEREST ENTITY

Refer to Monarch National Insurance Company in Note 1 above, for information about how we acquired 100% of Monarch Delaware; therefore, as of February 21, 2018, Monarch Delaware became a wholly-owned subsidiary instead of a VIE. Prior to February 21, 2018, FedNat Underwriters, Inc. (“FNU”) through the Managing General Agency and Claims Administration Agreement (the “Monarch MGA Agreement”) directed the activities which most significantly impact the Monarch Entities’ insurance operating company, MNIC. MNIC’s activities directed by FNU through the Monarch MGA Agreement included underwriting and claims. As a result, MNIC was a VIE prior to February 21, 2018, because the equity holders (i.e., FNHC, Crosswinds Investor and TransRe owned 42.4% , 42.4% , and 15.2% , respectively, of Monarch Delaware), as a group, lacked the characteristics of a controlling financial interest.

In addition to having power to direct the activities which most significantly impacted MNIC, FNHC had the obligation to absorb the losses and/or the right to receive benefits that potentially could be significant through its 42.4% indirect equity interests in MNIC through Monarch Delaware and Monarch National Holding Company (“Monarch Holding”).

As a result, FNHC was the primary beneficiary of MNIC, resulting in Monarch Delaware, MNIC’s indirect parent company, consolidating into our financial statements.

The carrying amounts of Monarch Delaware, which could only be used to settle obligations of Monarch Delaware, and liabilities of Monarch Delaware for which creditors did not have recourse included the following:
໿
 
 
December 31,
 
 
2017
 
 
(In thousands)
Assets
 
 
Investments :
 
 
Debt securities, available-for-sale, at fair value
 
$
25,111

Equity securities, available-for-sale, at fair value
 
1,173

Total investments
 
26,284

Cash and cash equivalents
 
14,211

Reinsurance recoverable
 
3,323

Prepaid reinsurance premiums
 
2,481

Premiums receivable, net
 
1,184

Deferred acquisition costs
 
1,722

Other assets
 
2,322

Total assets
 
$
51,527

 
 
 
Liabilities
 
 
Loss and loss adjustment expense reserves
 
$
6,356

Unearned premiums
 
8,752

Reinsurance payable
 
1,802

Debt, net of deferred financing costs
 
4,930

Other liabilities
 
1,825

Total liabilities
 
$
23,665


Earned premiums and loss and LAE, attributable to Monarch Delaware, from January 1, 2018 to February 21, 2018, were $2.3 million and $2.3 million , respectively. Earned premiums and loss and LAE, attributable to Monarch Delaware for the three months ended September 30, 2017 were $1.8 million and $5.4 million , respectively. Earned premiums and loss and LAE, attributable to Monarch Delaware for the nine months ended September 30, 2017 were $7.1 million and $10.2 million , respectively.

- 30 -

FedNat Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
September 30, 2018

13. SUBSEQUENT EVENTS

Dividends Declared

Refer to Note 11 above for information related to our dividend declared in October 2018.

Hurricane Michael

On October 10, 2018, Hurricane Michael made landfall in the panhandle region of Florida. The Company writes approximately 10% of the total insured values in the two Florida counties most affected by the storm, but has limited exposure in Alabama and no exposure in Georgia.

The Company currently estimates that its aggregate gross losses as a result of Hurricane Michael will be approximately $275 million according to preliminary post landfall catastrophe model estimates. The Company believes that its losses, including both Florida and Non-Florida exposures, net of reinsurance, should not exceed its first event pre-tax retention amount of $23 million . For additional information, refer to the Company's Form 8-K dated October 15, 2018.

Quota-Share Reinsurance Program

In conjunction with the Company’s post-hurricane season capital management planning, effective October 1, 2018, FNIC has adjusted the cession percentage on its current quota share treaty, which became effective on July 1, 2018, from 2% to 10%. No other terms of the treaty were modified. This treaty covers FNIC’s Florida homeowners book of business, on an in-force, new and renewal basis, and excludes named storms. For additional information on this treaty, refer to the Company's Form 8-K dated June 29, 2018.


- 31 -


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

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

Overview

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q (the “Form 10-Q”). In addition, please refer to our audited consolidated financial statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K for the year ended December 31, 2017 (the “ 2017 Form 10-K”).

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

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 (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 that 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 2017 Form 10-K, and discussed from time to time in our reports filed with the Securities and Exchange Commission (“SEC”).

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this 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 an 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. The Company, through its wholly owned subsidiaries, is authorized to underwrite and/or place homeowners multi-peril ("homeowners"), federal flood and other lines of insurance in Florida and other states. The Company markets, distributes and services its 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 specific lines of insurance by the state’s insurance departments, in Florida, Louisiana, Texas, Georgia, South Carolina and Alabama. Monarch National Insurance Company (“MNIC”), our other wholly owned insurance subsidiary, is licensed as an admitted carrier in Florida. Admitted carriers are bound by rate and form regulations, and are strictly regulated to protect policyholders. Admitted carriers are also required to financially contribute to the state guarantee fund used to pay for losses if an insurance carrier becomes insolvent or unable to pay loss amounts due to their policyholders.

Through our wholly-owned subsidiary, FedNat Underwriters, Inc. (“FNU”), we serve as managing general agent for FNIC and MNIC. MNIC was founded in 2015 through a joint venture. On February 21, 2018, FNIC acquired the interests in MNIC’s indirect parent

- 32 -


company, Monarch Delaware Holdings LLC (“Monarch Delaware”), from our joint venture partners (see “Joint Ventures,” below, for more information).

Joint Ventures

Monarch National Insurance Company

We completed our acquisition of MNIC in February 2018 by acquiring the membership interests in MNIC’s indirect parent, Monarch Delaware Holdings LLC (“Monarch Delaware”), held by our joint venture partners.  Our joint venture partners were Crosswinds Investor Monarch LP (“Crosswinds Investor”), a wholly owned subsidiary of Crosswinds Holdings Inc. (“Crosswinds Holdings”), a private equity firm and asset manager, and Transatlantic Reinsurance Company (“TransRe”), an international property and casualty reinsurance company. We purchased the 42.4% Class A membership interest in Monarch Delaware held by Crosswinds Investor for $12.3 million and the 15.2% non-voting membership interest in Monarch Delaware held by TransRe for $4.4 million. We also repaid the outstanding principal balance and interest due on the $5.0 million promissory note to TransRe. MNIC was organized in March 2015 and writes homeowners property and casualty insurance in Florida. 

Crosswinds AUM LLC, a subsidiary of Crosswinds Holdings, serves as an investment consultant to FNHC through December 31, 2018 for a quarterly fee of $75,000.  In addition, subsidiaries of Crosswinds Holdings and TransRe each have a right of first refusal through December 31, 2018 to participate in our catastrophe excess of loss reinsurance program, at market rates and terms, up to a placement of $10.0 million in reinsurance limit in the aggregate from Crosswinds Holdings and up to a placement of $10.0 million in reinsurance limit in excess of its placement on our current catastrophe excess of loss reinsurance program from TransRe. TransRe does currently participate in the reinsurance program.

Please refer to Notes 1 and 12 to the notes to the Consolidated Financial Statements included herein and to our 2017 Form 10-K for additional information regarding the accounting and consolidation of this joint venture.

Southeast Catastrophe Consulting Company, LLC

The Company owns 33% of Southeast Catastrophe Consulting Company, LLC (“SECCC”), based in Mobile, Alabama. The Company has an agreement with SECCC in which it provides claims adjusting services for FNIC and MNIC, primarily in the event of catastrophes such as Hurricanes Irma, Matthew and Michael.

Overview of Insurance Lines of Business

Homeowners’ Property and Casualty Insurance
FNIC and MNIC underwrite homeowners’ insurance in Florida and FNIC also underwrites insurance in Alabama, Texas, Louisiana and South Carolina. Homeowners’ insurance generally protects an owner of real and personal property against covered causes of loss to that property. The Florida homeowners’ policies in-force totaled 249,222 and 272,346  as of September 30, 2018 and December 31, 2017 , respectively.

Florida
Our homeowners’ insurance products provide maximum dwelling coverage in the amount of approximately $3.5 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 subject 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 ensure that they meet the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive, inadequate or discriminatory). Premium rates in Florida and other states are regulated and approved by the respective states’ office of insurance regulation. We continuously monitor and seek appropriate adjustment to our rates in order to remain competitive and profitable.

In 2017, FNIC applied for a statewide average rate increase of 6.5% for Florida homeowners multiple-peril insurance policies only, which was subsequently increased and approved by the Florida OIR to a statewide average rate increase of 10.0% and became effective for new and renewal policies on August 1, 2017.

Also, in 2017, MNIC applied for a statewide average rate increase of 2.0% for Florida homeowners multiple-peril insurance policies, which was approved by the Florida OIR and became effective for new and renewal policies on October 1, 2017.


- 33 -


On October 8, 2018, Florida Governor Rick Scott issued an Executive Order, which immediately declared a state of emergency for certain counties in the expected path of Hurricane Michael.  As provided for under state statute, the Commissioner of Florida’s OIR issued an executive order suspending the filing of approvals for rate changes by insurance companies until January 7, 2019.  On October 12, 2018, FNIC applied for a statewide average rate increase of 3.6% for Florida homeowners multiple-peril insurance policies, proposed to become effective March 1, 2019, pending regulatory approval.

Non-Florida
Our non-Florida homeowners insurance products provide maximum dwelling coverage of approximately $1.8 million, with the aggregate maximum policy limit being approximately $3.5 million. We currently offer dwelling coverage “A” up to $2.0 million with an aggregate total insured value of $3.5 million. The approximate average premium on the policies currently in-force is $1,803. 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. SageSure Insurance Managers, LLC ("SageSure") receives a 50% profit share on our non-Florida homeowners insurance products. See Note 1 of the notes to our Consolidated Financial Statements for information about our general underwriting agreement with SageSure.

Other Insurance Lines of Business
Personal Automobile - On December 19, 2017, we announced our decision to undergo an orderly withdrawal from this line of business and began the appropriate steps. As of July 31, 2018, withdrawal plans in all applicable states have received regulatory approval. Effective August 1, 2018, a novation agreement was executed with a third party transferring the Texas automobile book to another insurance carrier. The unearned premium reserve on the in-force business and the claims handling responsibility for losses relating to the Texas auto business after July 31, 2018 were transferred to the third party. We expect our personal automobile line of business to materially cease by the fourth quarter of 2018. We provided nonstandard personal automobile insurance principally to insureds that were unable to obtain standard insurance coverage due to factors such as driving record, age, vehicle type or other, including market conditions. FNIC offered this line of business as an admitted carrier in Florida, Texas, Georgia and Alabama, and marketed the insurance through licensed general agents in their respective territories.

Commercial General Liability - On March 13, 2018, we announced our decision to undergo an orderly withdrawal from this line of business and began the appropriate steps. Withdrawal plans in all applicable states have received regulatory approval. We underwrote for approximately 380 classes of skilled craft workers (excluding home-builders and developers) and mercantile trades (such as owners, landlords and tenants). The limits of liability ranged from $100,000 per occurrence with a $200,000 policy aggregate to $1.0 million per occurrence with a $2.0 million policy aggregate. We marketed the commercial general liability insurance products through independent agents and a limited number of unaffiliated general agencies.

Flood - FNIC writes flood insurance through the National Flood Insurance Program (“NFIP”). We write the policies for the NFIP, which assumes 100% of the flood risk while we retain a commission for our services. FNIC offers this line of business in Florida, Louisiana, Texas, South Carolina and Alabama.

See the discussion in Item 1: “Business” in our 2017 Form 10-K, for additional information with respect to our business.

Regulation

All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. We may be the subject of additional special examinations or analysis. These examinations or analysis may result in one or more corrective orders being issued by the Florida OIR. The Florida OIR has completed its regularly scheduled statutory examination of FNIC for the five years ended December 31, 2015, of MNIC for the period of March 17, 2015 (inception) through December 31, 2015, and of MNIC for the year ended December 31, 2016. There were no material findings by the Florida OIR in connection with these examinations. Additionally, the Florida OIR has initiated a statutory examination of MNIC for the year ended December 31, 2017.


- 34 -


RESULTS OF OPERATIONS

Operating Results Overview - Three Months Ended September 30, 2018 Compared with Three Months Ended September 30, 2017

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 2017 Form 10-K.

The following table sets forth results of operations for the periods presented:
 
 
Three Months Ended
 
 
September 30,
 
 
2018
 
% Change
 
2017
 
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
Gross premiums written
 
$
139,022

 
(10.2
)%
 
$
154,782

Gross premiums earned
 
144,907

 
(5.2
)%
 
152,779

Ceded premiums
 
(46,414
)
 
(35.5
)%
 
(72,015
)
Net premiums earned
 
98,493

 
22.0
 %
 
80,764

Net investment income
 
3,137

 
20.5
 %
 
2,603

Net realized and unrealized investment gains (losses)
 
1,760

 
(71.2
)%
 
6,101

Direct written policy fees
 
3,796

 
(7.4
)%
 
4,098

Other income
 
3,646

 
(28.9
)%
 
5,131

Total revenues
 
110,832

 
12.3
 %
 
98,697

 
 
 

 
 
 
 
Costs and expenses:
 
 

 
 
 
 
Losses and loss adjustment expenses
 
62,457

 
(17.1
)%
 
75,367

Commissions and other underwriting expenses
 
31,373

 
10.5
 %
 
28,386

General and administrative expenses
 
5,000

 
(0.8
)%
 
5,042

Interest expense
 
1,032

 
1,174.1
 %
 
81

Total costs and expenses
 
99,862

 
(8.3
)%
 
108,876

 
 
 

 
 
 
 
Income (loss) before income taxes
 
10,970

 
(207.8
)%
 
(10,179
)
Income tax expense (benefit)
 
3,020

 
(179.9
)%
 
(3,781
)
Net income (loss)
 
7,950

 
(224.3
)%
 
(6,398
)
Net income (loss) attributable to non-controlling interest
 
—

 
(100.0
)%
 
(1,674
)
Net income (loss) attributable to FNHC shareholders
 
$
7,950

 
(268.3
)%
 
$
(4,724
)
 
 
 

 
 

 
 

Ratios to net premiums earned:
 
 

 
 

 
 

Net loss ratio
 
63.4
%
 
 

 
93.3
%
Net expense ratio
 
36.9
%
 
 

 
41.4
%
Combined ratio
 
100.3
%
 
 

 
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.

The table below summarizes our unaudited results of operations by line of business for the periods presented. Although we conduct our operations under a single reportable segment, we have provided line of business information as we believe it is useful to our shareholders and the investing public. “Homeowners” line of business consists of our homeowners and fire property and casualty

- 35 -


insurance business. “Automobile” line of business consists of our nonstandard personal automobile insurance business. “Other” line of business primarily consists of our commercial general liability and federal flood businesses, along with corporate and investment operations.
 
Three Months Ended September 30,
 
2018
 
2017
 
Homeowners
 
Automobile
 
Other
 
Consolidated
 
Homeowners
 
Automobile
 
Other
 
Consolidated
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
136,503

 
$
(3,041
)
 
$
5,560

 
$
139,022

 
$
141,409

 
$
7,176

 
$
6,197

 
$
154,782

Gross premiums earned
136,587

 
2,766

 
5,554

 
144,907

 
133,505

 
13,525

 
5,749

 
152,779

Ceded premiums
(40,782
)
 
(2,091
)
 
(3,541
)
 
(46,414
)
 
(61,239
)
 
(7,877
)
 
(2,899
)
 
(72,015
)
Net premiums earned
95,805

 
675

 
2,013

 
98,493

 
72,266

 
5,648

 
2,850

 
80,764

Net investment income
—

 
—

 
3,137

 
3,137

 
—

 
—

 
2,603

 
2,603

Net realized and unrealized investment gains (losses)
—

 
—

 
1,760

 
1,760

 
—

 
—

 
6,101

 
6,101

Direct written policy fees
2,198

 
1,466

 
132

 
3,796

 
2,204

 
1,742

 
152

 
4,098

Other income
2,613

 
191

 
842

 
3,646

 
3,183

 
752

 
1,196

 
5,131

Total revenues
100,616

 
2,332

 
7,884

 
110,832

 
77,653

 
8,142

 
12,902

 
98,697

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
56,856

 
2,609

 
2,992

 
62,457

 
65,600

 
7,013

 
2,754

 
75,367

Commissions and other underwriting expenses
28,647

 
1,545

 
1,181

 
31,373

 
24,184

 
2,978

 
1,224

 
28,386

General and administrative expenses
4,187

 
75

 
738

 
5,000

 
3,915

 
150

 
977

 
5,042

Interest expense
—

 
—

 
1,032

 
1,032

 
81

 
—

 
—

 
81

Total costs and expenses
89,690

 
4,229

 
5,943

 
99,862

 
93,780

 
10,141

 
4,955

 
108,876

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
10,926

 
(1,897
)
 
1,941

 
10,970

 
(16,127
)
 
(1,999
)
 
7,947

 
(10,179
)
Income tax expense (benefit)
2,768

 
(481
)
 
733

 
3,020

 
(6,221
)
 
(771
)
 
3,211

 
(3,781
)
Net income (loss)
8,158

 
(1,416
)
 
1,208

 
7,950

 
(9,906
)
 
(1,228
)
 
4,736

 
(6,398
)
Net income (loss) attributable to non-controlling interest
—

 
—

 
—

 
—

 
(1,674
)
 
—

 
—

 
(1,674
)
Net income (loss) attributable to FNHC shareholders
$
8,158

 
$
(1,416
)
 
$
1,208

 
$
7,950

 
$
(8,232
)
 
$
(1,228
)
 
$
4,736

 
$
(4,724
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios to net premiums earned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss ratio
59.3
%
 
386.5
%
 
148.6
%
 
63.4
%
 
90.8
%
 
124.2
%
 
96.6
%
 
93.3
%
Net expense ratio
34.3
%
 
 
 
 
 
36.9
%
 
38.9
%
 
 
 
 
 
41.4
%
Combined ratio
93.6
%
 
 
 
 
 
100.3
%
 
129.7
%
 
 
 
 
 
134.7
%


- 36 -


Revenue

Total revenue increased $12.1 million or 12.3% , to $110.8 million for the three months ended September 30, 2018 , compared with $98.7 million for the three months ended September 30, 2017 . The increase was primarily driven by lower ceded premiums due to decreased reinsurance spend, partially offset by a decline in gross premiums earned and lower recognized investment gains, all of which is discussed below.

Gross Premiums Written

The following table sets forth the gross premiums written for the periods presented:
໿
 
 
Three Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
(In thousands)
Gross premiums written:
 
 
 
 
Homeowners Florida
 
$
114,441

 
$
126,211

Homeowners non-Florida
 
22,062

 
15,198

Automobile
 
(3,041
)
 
7,176

Commercial general liability
 
1,435

 
2,546

Federal flood
 
4,125

 
3,651

Total gross premiums written
 
$
139,022

 
$
154,782


Gross written premiums decreased $15.8 million , or 10.2% , to $139.0 million in the quarter, compared with $154.8 million for the same three-month period last year. The decrease in premiums written is the result of declining premiums in the non-core businesses we are exiting, Automobile and commercial general liability, as well as a decline in homeowners Florida. Our homeowners non-Florida business continues to show exceptional growth year over year, especially in the states of Texas and Louisiana.

The lower premiums in Automobile were due to our decision to select specific types and amounts of premiums to be underwritten with consideration and focus on profitability. Automobile was not profitable throughout the 2017 year and we announced in December 2017 that we were taking the appropriate steps, including the completion of all required regulatory filings and approvals, to withdraw from Automobile. The novation transaction, discussed above in Overview of Insurance Lines of Business - Personal Automobile, led to negative gross premium for Automobile due to the reversal of unearned premium. The increase in the homeowners non-Florida gross premiums written was due to the expansion of our operations outside of Florida, allowing us to leverage our infrastructure and diversify insurance risk.

Gross Premiums Earned

The following table sets forth the gross premiums earned for the periods presented:
 
 
Three Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
(In thousands)
Gross premiums earned:
 
 
 
 
Homeowners Florida
 
$
118,603

 
$
121,771

Homeowners non-Florida
 
17,984

 
11,734

Automobile
 
2,766

 
13,525

Commercial general liability
 
2,122

 
3,005

Federal flood
 
3,432

 
2,744

Total gross premiums earned
 
$
144,907

 
$
152,779


Gross premiums earned decreased $7.9 million , or 5.2% , to $144.9 million for the three months ended September 30, 2018, as compared to $152.8 million for the three months ended September 30, 2017. The results are a reflection of our decision to exit the Automobile and commercial general liability lines and were partially offset by a 2.3% increase in earned premiums in Homeowners. Additionally, in homeowners Florida, our 10.0% rate increase, effective August 1, 2017, has earned out and homeowners non-Florida continues to grow on an earned basis.

- 37 -


Ceded Premiums Earned

Ceded premiums decreased $25.6 million , or 35.5% , to $46.4 million in the quarter, compared to $72.0 million the same three-month period last year. The decrease was primarily driven by lower excess of loss reinsurance spend of $10.0 million and lowering the homeowners Florida quota share from 10% to 2%, a $6.7 million impact, as well as lower gross premiums earned in Automobile during the period.

Net Investment Income

Net investment income increased $0.5 million , or 20.5% , to $3.1 million during the three months ended September 30, 2018 , as compared to $2.6 million during the three months ended September 30, 2017 . The increase in net investment income was primarily due to the growth in our fixed income portfolio including a re-allocation of $30 million of equity investments into fixed income securities during the third quarter of 2017. The increase was also due to the improvement in the yield on our fixed income portfolio as a result of portfolio repositioning during the first quarter of 2018, particularly the sale of tax-free municipal bonds, the proceeds of which were reinvested in taxable municipal and corporate fixed income securities with higher coupon rates.

Net Realized and Unrealized Investment Gains (Losses)

Net realized and unrealized investment gains (losses) were $1.8 million  for the three months ended September 30, 2018 , compared to $6.1 million in the prior year period. During the third quarter of 2018, we recognized $1.6 million in unrealized investment gains for equity securities.  Our prior year investment gains were driven by a decision to re-deploy approximately $30.6 million of equities into fixed-income securities during the third quarter of 2017 in order to reduce the Company’s exposure to the equity markets.

As discussed in Note 2 of the notes to our Consolidated Financial Statements, effective January 1, 2018, we began recording all unrealized gains (losses) for equity securities through the income statement instead of through other comprehensive income. This new accounting for equity securities creates volatility in our earnings compared to the prior accounting rules.

Direct Written Policy Fees

Direct written policy fees decreased by $0.3 million , or 7.4% , to $3.8 million for the three months ended September 30, 2018 , compared with $4.1 million in the same period in 2017 . The decrease in direct written policy fees is correlated to lower number of policies in-force in Automobile offset by accelerating the recognition of policy fee income from the policies which were novated to a third party during the third quarter of 2018.

Other Income

Other income included the following for the periods presented:
໿
 
 
Three Months Ended
 
 
September 30,
 
 
2018
 
% Change
 
2017
 
 
(In thousands)
Other income:
 
 
 
 
 
 
Commission income
 
$
856

 
(47.3
)%
 
$
1,623

Brokerage
 
2,190

 
(19.6
)%
 
2,723

Partnership income (loss)
 
124

 
(49.8
)%
 
247

Financing revenue
 
476

 
(11.5
)%
 
538

Total other income
 
$
3,646

 
(28.9
)%
 
$
5,131


The decrease in other income was due to lower commission and brokerage revenue. Commission income decreased as a result of lower Automobile fee income driven by the reduction in premiums earned and, to a lesser extent, lower fee income from other areas of the business. The brokerage revenue decrease is the result of lower excess of loss reinsurance spend, effective July 1, 2018, as discussed under " Ceded Premiums Earned " above.
 


- 38 -


Expenses

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses (“LAE”) decreased $12.9 million , or 17.1% , to $62.5 million for the three months ended September 30, 2018 , compared with $75.4 million for the same three-month period last year. The net loss ratio decreased 29.9 percentage points, to 63.4% in the current quarter, as compared to 93.3% in the third quarter of 2017 .  The lower ratio was the result of the decrease in net losses from severe weather ($6.1 million in the third quarter of 2018, impacts of Hurricane Florence and Tropical Storm Gordon, as compared to $26.9 million in the prior year quarter, impacts of Hurricane Irma and Hurricane Harvey) and the decrease in the size of Automobile ($4.4 million lower losses, including adverse development) driven by the closure of poor performing programs.  These decreases were partially offset by $7.5 million of lower ceded losses related to Homeowners quota share treaties in the third quarter of 2018 as compared to the third quarter of 2017.

Commissions and Other Underwriting Expenses

The following table sets forth the commissions and other underwriting expenses for the periods presented:
 
 
Three Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
(In thousands)
Commissions and other underwriting expenses:
 
 
 
 
Homeowners Florida
 
$
14,258

 
$
14,707

All others
 
4,866

 
5,853

Ceding commissions
 
(689
)
 
(5,457
)
Total commissions
 
18,435

 
15,103

 
 
 
 
 
Automobile
 
1,466

 
1,742

Homeowners non-Florida
 
571

 
371

Total fees
 
2,037

 
2,113

 
 
 
 
 
Salaries and wages
 
3,147

 
3,958

Other underwriting expenses
 
7,754

 
7,212

Total commissions and other underwriting expenses
 
$
31,373

 
$
28,386


Commissions and other underwriting expenses increased $3.0 million , or 10.5% , to $31.4 million for the three months ended September 30, 2018 , compared with $28.4 million for the three months ended September 30, 2017 . The increase is made up of lower ceding commissions as a result of homeowners Florida quota share percentage being reduced from 10% to 2% and higher homeowners non-Florida commission costs due to higher premiums earned. These items are offset by lower salaries and wages from the impact of our headcount reduction initiatives.

During the third quarter of 2018, we also incurred $0.9 million of severance and other related costs associated with headcount reduction initiatives. Some of these costs are included in each of the expense lines, except interest expense.

The net expense ratio decreased 4.5 percentage points to 36.9% in the third quarter of 2018, as compared to 41.4% in the third quarter of 2017. The decrease in the ratio is primarily related to the lower reinsurance spend during the quarter driving higher net premiums earned. Refer to the discussion above for more information.

General and Administrative Expenses

General and administrative expenses remained relatively flat at $5.0 million for the three months ended September 30, 2018 and 2017.


- 39 -


Interest Expense

Interest expense increased $0.9 million to $1.0 million for the three months ended September 30, 2018 , compared with $0.1 million in the prior year period. The increase in interest expense is the result of the Company issuing $45.0 million of senior notes, late in December 2017. During the third quarter of 2017, the Company only had $5.0 million of debt on its balance sheet.

Income Taxes

Income taxes increased $6.8 million , to $3.0 million for the three months ended September 30, 2018 , compared with a tax (benefit) of $(3.8) million for the three months ended September 30, 2017 . The increase in income tax expense is the result of higher taxable income during the current quarter as compared to the third quarter of 2017, offset by the decrease in the federal corporate tax rate from 35% to 21%, effective January 1, 2018.
໿

- 40 -


Operating Results Overview - Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017

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 2017 Form 10-K.

The following table sets forth results of operations for the periods presented:
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
% Change
 
2017
 
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
Gross premiums written
 
$
440,151

 
(6.3
)%
 
$
469,525

Gross premiums earned
 
438,239

 
(2.9
)%
 
451,320

Ceded premiums
 
(174,080
)
 
(15.2
)%
 
(205,342
)
Net premiums earned
 
264,159

 
7.4
 %
 
245,978

Net investment income
 
9,058

 
21.1
 %
 
7,481

Net realized and unrealized investment gains (losses)
 
916

 
(89.4
)%
 
8,644

Direct written policy fees
 
10,685

 
(21.5
)%
 
13,617

Other income
 
14,833

 
4.5
 %
 
14,190

Total revenues
 
299,651

 
3.4
 %
 
289,910

 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
Losses and loss adjustment expenses
 
156,098

 
(17.3
)%
 
188,683

Commissions and other underwriting expenses
 
91,467

 
5.3
 %
 
86,883

General and administrative expenses
 
16,345

 
10.9
 %
 
14,737

Interest expense
 
3,139

 
1,170.9
 %
 
247

Total costs and expenses
 
267,049

 
(8.1
)%
 
290,550

 
 
 
 
 
 
 
Income (loss) before income taxes
 
32,602

 
(5,194.1
)%
 
(640
)
Income tax expense (benefit)
 
8,587

 
(2,498.6
)%
 
(358
)
Net income (loss)
 
24,015

 
(8,616.0
)%
 
(282
)
Net income (loss) attributable to non-controlling interest
 
(218
)
 
(89.0
)%
 
(1,975
)
Net income (loss) attributable to FNHC shareholders
 
$
24,233

 
1,331.4
 %
 
$
1,693

 
 
 

 
 

 
 

Ratios to net premiums earned:
 
 

 
 

 
 

Net loss ratio
 
59.1
%
 
 
 
76.7
%
Net expense ratio
 
40.8
%
 
 
 
41.3
%
Combined ratio
 
99.9
%
 
 
 
118.0
%

(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.

The table below summarizes our unaudited results of operations by line of business for the periods presented.

- 41 -


 
Nine Months Ended September 30,
 
2018
 
2017
 
Homeowners
 
Automobile
 
Other
 
Consolidated
 
Homeowners
 
Automobile
 
Other
 
Consolidated
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
414,914

 
$
8,628

 
$
16,609

 
$
440,151

 
$
414,256

 
$
37,089

 
$
18,180

 
$
469,525

Gross premiums earned
403,579

 
17,876

 
16,784

 
438,239

 
390,211

 
43,932

 
17,177

 
451,320

Ceded premiums
(150,722
)
 
(13,350
)
 
(10,008
)
 
(174,080
)
 
(172,391
)
 
(24,629
)
 
(8,322
)
 
(205,342
)
Net premiums earned
252,857

 
4,526

 
6,776

 
264,159

 
217,820

 
19,303

 
8,855

 
245,978

Net investment income
—

 
—

 
9,058

 
9,058

 
—

 
—

 
7,481

 
7,481

Net realized and unrealized investment gains (losses)
—

 
—

 
916

 
916

 
—

 
—

 
8,644

 
8,644

Direct written policy fees
5,978

 
4,229

 
478

 
10,685

 
6,501

 
6,652

 
464

 
13,617

Other income
10,560

 
1,084

 
3,189

 
14,833

 
8,705

 
2,661

 
2,824

 
14,190

Total revenues
269,395

 
9,839

 
20,417

 
299,651

 
233,026

 
28,616

 
28,268

 
289,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
141,428

 
6,777

 
7,893

 
156,098

 
159,497

 
25,119

 
4,067

 
188,683

Commissions and other underwriting expenses
83,284

 
5,021

 
3,162

 
91,467

 
72,073

 
11,091

 
3,719

 
86,883

General and administrative expenses
13,361

 
275

 
2,709

 
16,345

 
11,288

 
500

 
2,949

 
14,737

Interest expense
100

 
—

 
3,039

 
3,139

 
247

 
—

 
—

 
247

Total costs and expenses
238,173

 
12,073

 
16,803

 
267,049

 
243,105

 
36,710

 
10,735

 
290,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
31,222

 
(2,234
)
 
3,614

 
32,602

 
(10,079
)
 
(8,094
)
 
17,533

 
(640
)
Income tax expense (benefit)
7,911

 
(566
)
 
1,242

 
8,587

 
(3,886
)
 
(3,123
)
 
6,651

 
(358
)
Net income (loss)
23,311

 
(1,668
)
 
2,372

 
24,015

 
(6,193
)
 
(4,971
)
 
10,882

 
(282
)
Net income (loss) attributable to non-controlling interest
(218
)
 
—

 
—

 
(218
)
 
(1,975
)
 
—

 
—

 
(1,975
)
Net income (loss) attributable to FNHC shareholders
$
23,529

 
$
(1,668
)
 
$
2,372

 
$
24,233

 
$
(4,218
)
 
$
(4,971
)
 
$
10,882

 
$
1,693

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios to net premiums earned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss ratio
55.9
%
 
149.7
%
 
116.5
%
 
59.1
%
 
73.2
%
 
130.1
%
 
45.9
%
 
76.7
%
Net expense ratio
38.3
%
 
 
 
 
 
40.8
%
 
38.3
%
 
 
 
 
 
41.3
%
Combined ratio
94.2
%
 
 
 
 
 
99.9
%
 
111.5
%
 
 
 
 
 
118.0
%


- 42 -


Revenue

Total revenue increased $9.8 million , or 3.4% , to $299.7 million for the nine months ended September 30, 2018 , compared with $289.9 million for the nine months ended September 30, 2017 . The increase was primarily driven by lower ceded premiums due to decreased reinsurance spend, partially offset by lower recognized investment gains and declines in direct written policy fees and other income, all of which is discussed below.

Gross Premiums Written

The following table sets forth the gross premiums written for the periods presented:
໿
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
(In thousands)
Gross premiums written:
 
 
 
 
Homeowners Florida
 
$
355,818

 
$
373,875

Homeowners non-Florida
 
59,096

 
40,381

Automobile
 
8,628

 
37,089

Commercial general liability
 
5,519

 
8,768

Federal flood
 
11,090

 
9,412

Total gross premiums written
 
$
440,151

 
$
469,525


Gross written premiums decreased $29.3 million , or 6.3% , to $440.2 million for the nine months ended September 30, 2018 , compared with $469.5 million for the nine months ended September 30, 2017 . Gross premiums written decreased primarily due to the decline in Automobile and homeowners Florida offset by the growth in homeowners non-Florida.

The lower premiums in Automobile were due to our decision to select specific types and amounts of premiums to be underwritten with consideration and focus on profitability. Automobile was not profitable throughout the 2017 year and we announced in December 2017 that we were taking the appropriate steps, including the completion of all required regulatory filings and approvals, to withdraw from Automobile. The third party transaction, discussed above in Overview of Insurance Lines of Business - Personal Automobile, led to negative gross premium for Automobile due to the reversal of unearned premium. The increase in the homeowners non-Florida gross premiums written was due to the expansion of our operations outside of Florida, allowing us to leverage our infrastructure and diversify insurance risk. Additionally, homeowners Florida written premiums in the first nine months of 2018 includes the effect of the rate increase of 10.0%, that became effective on August 1, 2017.

Gross Premiums Earned

The following table sets forth the gross premiums earned for the periods presented:
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
(In thousands)
Gross premiums earned:
 
 
 
 
Homeowners Florida
 
$
356,507

 
$
359,147

Homeowners non-Florida
 
47,072

 
31,064

Automobile
 
17,876

 
43,932

Commercial general liability
 
7,144

 
9,339

Federal flood
 
9,640

 
7,838

Total gross premiums earned
 
$
438,239

 
$
451,320


Gross premiums earned decreased $13.1 million , or 2.9% , to $438.2 million for the nine months ended September 30, 2018 , as compared to $451.3 million for the nine months ended September 30, 2017 . The results are a reflection of our decision to exit the Automobile and commercial general liability lines, as discussed earlier, and were partially offset by a 3.4% increase in earned premiums in Homeowners. Additionally, in homeowners Florida, our August 1, 2017 10.0% rate increase is now fully reflected in our earned premiums, and our homeowners non-Florida continues to grow on an earned basis.

- 43 -


Ceded Premiums Earned

Ceded premiums decreased $31.2 million , or 15.2% , to $174.1 million for the nine months ended September 30, 2018 , compared to $205.3 million for the nine months ended September 30, 2017 . The decrease was primarily driven by lower excess of loss reinsurance spend of $8.6 million and lowering the homeowners Florida quota share from 10% to 2% during the third quarter of 2018, a $6.7 million impact, as well as lower gross premiums earned during the period in Automobile.

Net Investment Income

Net investment income increased $1.6 million , or 21.1% , to $9.1 million during the nine months ended September 30, 2018 , compared to $7.5 million during the nine months ended September 30, 2017 . The increase in net investment income was primarily due to the growth in our fixed income portfolio including a re-allocation of $30 million of equity investments into fixed income securities during the third quarter of 2017. The increase was also due to the improvement in the yield on our fixed income portfolio as a result of portfolio repositioning during the first quarter of 2018, particularly the sale of tax-free municipal bonds, the proceeds of which were reinvested in taxable municipal and corporate fixed income securities with higher coupon rates.

Net Realized and Unrealized Investment Gains (Losses)

Net realized and unrealized investment gains (losses) were $0.9 million  for the nine months ended September 30, 2018 , compared to $8.6 million in the prior year period.  During the first nine months of 2018, we recognized $2.6 million in unrealized investment gains for equity securities.  These unrealized gains were more than offset by $1.7 million in net realized losses primarily due to the decision to liquidate and transfer certain bond positions, including positions related to tax-free municipal securities. This liquidation was done to reduce exposure in certain bond types as well as consolidate our investment strategy between MNIC's investment securities and the rest of the Company's investment securities, which resulted in us selling out of certain bond and equity positions. We also experienced losses associated with our portfolio managers, under our control, moving out of positions due to both macro and micro conditions, a typical practice each and every quarter. Our prior year investment gains were driven by a decision to re-deploy approximately $30.6 million of equities into fixed-income securities during the third quarter of 2017 in order to reduce the Company’s exposure to the equity markets.

As discussed in Note 2 of the notes to our Consolidated Financial Statements, effective January 1, 2018, we began recording all unrealized gains (losses) for equity securities through the income statement instead of through other comprehensive income. This new accounting for equity securities creates volatility in our earnings compared to the prior accounting rules.

Direct Written Policy Fees

Direct written policy fees decreased by $2.9 million , or 21.5% , to $10.7 million for the nine months ended September 30, 2018 , compared with $13.6 million in the same period in 2017. The decrease in direct written policy fees is correlated to the lower number of policies in-force in Automobile offset by accelerating the recognition of policy fee income from the policies which were novated to a third party during the third quarter of 2018. Additionally, further impacting the variance is the fact that Automobile policies have a higher policy fee amount per premium dollar and generate policy fees twice per year (with six month policies) as compared with Homeowners policies .

Other Income

Other income included the following for the periods presented:

໿
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
% Change
 
2017
 
 
(In thousands)
Other income:
 
 
 
 
 
 
Commission income
 
$
3,827

 
(23.6
)%
 
$
5,008

Brokerage
 
9,274

 
27.2
 %
 
7,291

Partnership income (loss)
 
255

 
21.4
 %
 
210

Financing revenue
 
1,477

 
(12.1
)%
 
1,681

Total other income
 
$
14,833

 
4.5
 %
 
$
14,190


- 44 -



The increase in other income was due to higher brokerage revenue, which is the result of an increase in the amount of our homeowners reinsurance placed, the type of reinsurance purchased and the commissions paid on these reinsurance agreements in place during the nine months ended September 30, 2018 as compared to during the same period in 2017 . The increase was partially offset by a lower commission income, which is the result of lower Automobile fee income driven by the reduction in premiums earned and, to a less extent, lower fee income from other areas of the business.

Expenses

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses (“LAE”) decreased $32.6 million , or 17.3% , to $156.1 million for the nine months ended September 30, 2018 , compared with $188.7 million for the same period last year. The net loss ratio decreased 17.6 percentage points, to 59.1% in the first nine months of 2018, as compared to 76.7% in the first nine months of 2017. The lower ratio was the result of the decrease in the lower net losses from severe weather ($7.8 million in the nine months ended September 30, 2018, impacts of Hurricane Florence and Tropical Storm Gordon, as compared to $34.5 million in the prior year period, impacts of Hurricane Irma and Hurricane Harvey), the continued earn-out of our homeowners Florida August 1, 2017 10% rate increase and the decrease in the size of Automobile ($18.3 million lower losses, including adverse development) driven by the closure of poor performing programs.  These decreases were partially offset by $11.7 million of lower ceded losses related to Homeowners quota share treaties in the nine months ended September 30, 2018 as compared to the same period in 2017.

Commissions and Other Underwriting Expenses

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

 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
(In thousands)
Commissions and other underwriting expenses:
 
 
 
 
Homeowners Florida
 
$
42,796

 
$
43,171

All others
 
14,488

 
17,150

Ceding commissions
 
(8,777
)
 
(14,511
)
Total commissions and other fees
 
48,507

 
45,810

 
 
 
 
 
Automobile
 
4,229

 
6,653

Homeowners non-Florida
 
1,354

 
983

Total fees
 
5,583

 
7,636

 
 
 
 
 
Salaries and wages
 
11,282

 
11,361

Other underwriting expenses
 
26,095

 
22,076

Total commissions and other underwriting expenses
 
$
91,467

 
$
86,883


Commissions and other underwriting expenses increased $4.6 million , or 5.3% , to $91.5 million for the nine months ended September 30, 2018 , compared with $86.9 million for the nine months ended September 30, 2017 . The increase was due primarily to higher costs related to the homeowners non-Florida 50% profit share provision as a result of higher profitability in the first nine months of 2018 as compared to the first nine months of 2017. The higher profitability is the direct result of continued earned premium growth, together with good loss experience in these states. The additional costs were offset by lower acquisition related costs from Automobile driven by the lower gross premiums earned during the first nine months of 2018 as compared with the first nine months of 2017.

During the first nine months of 2018, we also incurred $1.8 million of severance and other related costs associated with our decision to exit our Automobile and headcount reduction initiatives. Some of these costs are included in each of the expense lines, except interest expense.


- 45 -


The net expense ratio decreased 0.5 percentage points to 40.8% in the first nine months of 2018, as compared to 41.3% in the first nine months of 2017. The increase in the ratio is related to higher homeowners non-Florida profit share costs, higher severance costs, higher professional fees offset by lower acquisition costs from Automobile. Refer to the discussions above for more information.

General and Administrative Expenses

General and administrative expenses increased $1.6 million , or 10.9% , to $16.3 million for the nine months ended September 30, 2018 , compared with $14.7 million in the prior year period. The increase in general and administrative expenses was primarily due to higher legal and professional fees, including audit, tax and actuarial fees, as well as higher payroll costs as a result of severance related costs, as noted above.

Interest Expense

Interest expense increased $2.9 million to $3.1 million for the nine months ended September 30, 2018 , compared with $0.2 million in the prior year period. The increase in interest expense is the result of the Company issuing $45.0 million of senior notes, late in December 2017. During the first nine months of 2017, the Company only had $5.0 million of debt on its balance sheet.

Income Taxes

Income taxes increased $9.0 million , to $8.6 million for the nine months ended September 30, 2018 , compared with a tax expense of $0.4 million for the nine months ended September 30, 2017 . The increase in income tax expense is the result of higher taxable income during the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, offset by the decrease in the federal corporate tax rate from 35% to 21%, effective January 1, 2018.  





- 46 -


LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of funds are net premiums, investment income, commission income and fee income. Our primary uses of funds are the payment of claims, catastrophe reinsurance premiums and operating expenses. As of September 30, 2018 , the Company held $448.9 million in investments. Cash and cash equivalents decreased $16.8 million , to $69.5 million as of September 30, 2018 , compared with $86.2 million as of December 31, 2017 . Contributing to this decrease was a $16.7 million payment related to FNIC's acquisition of the interest in MNIC's indirect parent company (see "General -- Joint Ventures," above for more information) and the $5.0 million payment in full of the promissory note to TransRe. Total shareholders’ equity decreased $4.6 million , to $222.9 million as of September 30, 2018 , compared with $227.5 million as of December 31, 2017 .  Contributing to this decrease was the $16.7 million non-controlling interest buyout transaction discussed above.

Historically, we have met our liquidity requirements primarily through cash generated from operations. In December 2017, we received proceeds of $25.0 million principal amount of Senior Unsecured Floating Rate Notes due 2027 (the “2027 Notes”), pursuant to an indenture dated as of December 28, 2017 (the “Indenture”), as supplemented by a supplemental indenture dated as of December 28, 2017. We also received in December 2017 proceeds of $20.0 million of Senior Unsecured Fixed Rate Notes due 2022 (the “2022 Notes”), pursuant to the Indenture, as supplemented by a supplemental indenture dated as of December 29, 2017. A portion of the proceeds from the 2027 Notes and 2022 Notes was used on February 28, 2018 to infuse capital into FNIC. Refer to Note 17 of the notes to our Consolidated Financial Statements in our 2017 Form 10-K for additional information regarding the capital infusion. The remaining proceeds are available to repurchase shares of our common stock, and for general corporate purposes, including managing the capital needs of our subsidiaries.

Among other things, the Indenture limits the Company's ability to incur additional debt without the approval of the existing noteholders. The supplemental indentures limit the Company's debt to equity ratio to 35%. The Company's actual debt to equity ratio as of September 30, 2018 was approximately 20% .

Statutory Capital and Surplus of Our Insurance Subsidiaries

See “Item 1. Description of Business—Regulation,” of our 2017 Form 10-K, for discussion of the Company’s insurance operations and related laws and regulations of the states in which we operate.  The Florida 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.  As of December 31, 2017, FNIC’s statutory surplus was $162.2 million and its RBC ratio was 301.9% and as of September 30, 2018, our statutory capital of FNIC was $162.1 million.  As a result of the Company's $23.0 million pre-tax net loss on Hurricane Michael, recorded in the fourth quarter, the Company is evaluating capital management alternatives to ensure FNIC’s year end 2018 statutory surplus and RBC ratio are at levels necessary to meet the expectations of our regulators and of Demotech, our insurance industry ratings service. Options under consideration include capital infusions to FNIC from existing holding company liquidity or other alternatives as may be approved by the Company's Board of Directors. One such action has already been taken. As described under Note 5 of the notes to our Consolidated Financial Statements, FNIC’s current period quota-share treaty incepted with a 2% ceding percentage, and included terms enabling FNIC to increase its ceding percentage during the term of the treaty. On November 6, 2018, the Company announced that it had increased its ceding percentage under this treaty from 2% to 10% effective October 1, 2018.

Cash Flows Discussion

We believe that existing cash and investment balances, when combined with anticipated cash flows and the proceeds of our debt offering as described above, will be adequate to meet our expected liquidity needs in both the short-term and the reasonably foreseeable future. We believe the combined balances will be sufficient to meet our ongoing operating requirements and anticipated cash needs, and satisfy the covenants in our senior notes. Future growth strategies may require additional external financing, and we may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us on favorable terms, or at all, or that any such financing would not negatively impact our results of operations. We expect to continue declaring and paying dividends at comparable levels, subject to our future liquidity needs and reserve requirements.

Subject to our compliance with capital requirements as described above, we may consider various opportunities to deploy our capital, including repurchases of our common stock if such repurchases represent a more favorable use of available capital.


- 47 -


Operating Activities

Net cash provided by operating activities decreased to $28.3 million in the nine months ended September 30, 2018 from $42.3 million in the same period in 2017 . This decrease reflects higher expenses paid, excluding those related to losses and loss adjustment expenses, and lower net premiums collected in the first nine months of 2018 as compared to the corresponding period in 2017. 

Investing Activities

Net cash used in investing activities of $15.2 million in the nine months ended September 30, 2018 reflected purchases of debt and equity investment securities of $262.5 million , partly offset by sales, maturities and redemptions of our debt and equity investment securities of $248.3 million . Net cash used in investing activities of $22.8 million in the nine months ended September 30, 2017 reflected purchases of debt and equity investment securities of $303.3 million , partly offset by sales, maturities and redemptions of our debt and equity investment securities of $280.8 million .

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2018 of $29.9 million primarily reflects the purchase of our non-controlling interest of $16.7 million , payment of long-term debt of $5.0 million , and repurchase of our common stock of $5.1 million . Net cash used in financing activities of $12.5 million for the nine months ended September 30, 2017 primarily reflects repurchases of our common stock of $9.4 million and dividend payments of $3.2 million .

Impact of Inflation and Changing Prices

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

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

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with 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 recoverability of deferred acquisition costs; (vi) reserve for loss and losses adjustment expenses; and, (vii) income taxes. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations, and cash flows would be affected.

There have been no significant changes to our critical accounting estimates during the nine months ended September 30, 2018 .  Refer to Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” included in our 2017 Form 10-K for a more complete description of our critical accounting estimates.

- 48 -


 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

Our investment policy is established by the Board of Directors' Investment Committee and is reviewed on a regular basis. Pursuant to this investment policy, as of September 30, 2018,  approximately 96% of investments were in debt securities and cash and cash equivalents, which are considered to be either held-until-maturity or available-for-sale, based upon our estimates of required liquidity. Approximately 99% of the debt securities are considered available-for-sale and are marked to market. We may in the future consider additional debt securities to be held-to-maturity securities, which are carried at amortized cost. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.

There have been no material changes to the Company’s exposures to market risks since December 31, 2017. Please refer to the 2017 Form 10-K for a complete discussion of the Company’s exposures to market risks.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness

Our management and our audit committee do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control gaps and instances of fraud have been detected. These inherent limitations include the realities that judgments and decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.

Part II: OTHER INFORMATION

Item 1.  Legal Proceedings

Please see the Company’s Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 7, 2018, for information regarding the matter involving Federated Mutual Insurance Company.
    

- 49 -


Please see the Company’s Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 7, 2018, for information regarding the settlement on May 8, 2018 of the Company’s action against its former chief financial officer.

Refer to Note 9 to our Consolidated Financial Statements set forth in Part I, “Financial Statements” for further information about legal proceedings.

Item 1A.  Risk Factors

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of the Company’s 2017 Form 10-K.  Please refer to that section for disclosures regarding what we believe are the most significant risks and uncertainties related to our business.

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

(c)
Issuer Purchases of Equity Securities . The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended September 30, 2018 by or on behalf of FNHC. All purchases were made in the open market in accordance with Rule 10b-18 or under Rule 10b5-1 of the Exchange Act.
໿
 
 
 
 
 
 
Total Number of
 
Approximate Dollar
 
 
Total Number
 
Average
 
Shares Purchased
 
Value of Shares That
 
 
of Shares
 
Price Paid
 
as Part of Publicly
 
May Yet Be Purchased
 
 
Repurchased
 
Per Share
 
Announced Plans
 
Under the Plans   (1)
July 2018
 
—

 
$
—

 
—

 
$
5,719,920

August 2018
 
—

 
—

 
—

 
5,719,920

September 2018
 
—

 
—

 
—

 
5,719,920


໿
(1)
In December 2017, the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to $10.0 million (plus $0.8 million remaining from previous authorization) of its outstanding shares of common stock through December 31, 2018. As of September 30, 2018 , the remaining availability for future repurchases of our common stock was $5.7 million .
໿


- 50 -



Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Company Articles of Incorporation and Bylaws

The Company’s Board approved, effective November 7, 2018, a restatement to the Company’s articles of incorporation and a restatement and amendment to the Company’s bylaws, each of which combine into single documents the various amendments approved by the Board in 2016 and 2017 as part of the Company’s corporate governance update, as follows:

-- Second Restated Articles of Incorporation -This reflects a compilation of the various amendments to the articles since the last restatement in 1998.

-- Second Amended and Restated Bylaws -The Second Restatement includes the amendments from 2016 and 2017 previously approved by the Board.  Two additional amendments were approved by the Board (and which do not require shareholder approval):

•
Article II, Section 1 was amended to authorize holding an annual meeting by remote communication as permitted by the Florida statutes.  A corresponding change was also made to Article II, Section 3.

•
Article IV, Section 1 was amended to clarify that the office of “Chief Executive Officer” is a standing office of the Company. Other references in the bylaws to “President” were changed to “Chief Executive Officer” where appropriate.

The Second Restated Articles of Incorporation and the Second Amended and Rested Bylaws are included as Exhibit 3.1 and Exhibit 3.2, respectively, to this Form 10-Q, and the foregoing descriptions are qualified by reference to the full text of the exhibits.


- 51 -



Item 6.  Exhibits
Exhibit No.
Description
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
31.1
31.2
32.1
32.2
101.INS
XBRL Instance Document***
101.SCH
XBRL Taxonomy Extension Schema Document***
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document***
101.LAB
XBRL Taxonomy Extension Label Linkbase Document***
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document***
________________________
* Filed herewith.
** This exhibit, which is filed herewith, is subject to a confidential treatment request filed with the SEC.
*** In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of Exchange Act, except as shall be expressly set forth by specific reference in such filing.



- 52 -


SIGNATURES

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

 
FEDNAT HOLDING COMPANY
 
 
 
 
 
 
By:
/s/ Michael H. Braun
 
 
 
Michael H. Braun, Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Ronald Jordan
 
 
 
Ronald Jordan, Chief Financial Officer
 
 
 
(Principal Financial Officer)
 

Date: November 7, 2018


- 53 -
  SECOND RESTATED ARTICLES OF INCORPORATION OF FEDNAT HOLDING COMPANY a Florida corporation (Document No. S36299) Pursuant to the provisions of Section 607.1007, Florida Statutes, FEDNAT HOLDING COMPANY, a Florida corporation (the “Company”), adopts the following Second Restated Articles of Incorporation: ARTICLE I - NAME The name of the Company is FEDNAT HOLDING COMPANY. ARTICLE II - MAILING ADDRESS The current mailing address of the principal place of business of the Company is 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323. ARTICLE III - CAPITAL STOCK The aggregate number of shares of all classes of capital stock which the Company shall have the authority to issue is 26,000,000, consisting of (i) 25,000,000 shares of common stock, par value $.01 per share (the “Common Stock”); and (ii) 1,000,000 shares of Preferred Stock, par value $.01 per share (the “Preferred Stock”). A. Provisions Relating to the Common Stock. 1. Voting Rights. Except as otherwise required by law or as may be provided by the resolutions of the Board of Directors authorizing the issuance of any class or series of the Preferred Stock, as herein provided, all rights to vote and all voting power shall be vested exclusively in the holders of the Common Stock with each share of Common Stock entitled to one vote. 2. Dividends. Subject to the rights of the holders of the Preferred Stock, the holders of the Common Stock shall be entitled to receive when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends and other distributions payable in cash, property, stock (including shares of any class or series of the Company, whether or not shares of such class or series are already outstanding) or otherwise. 3. Liquidating Distributions. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, and after the holders of the Preferred Stock shall have been paid in full the amounts to which they shall be entitled, if any, or a sum sufficient for such payment in full shall have been set aside, the remaining net assets of the Company, if any, shall be distributed pro rata to the holders of Common Stock in accordance with their respective rights and rests to the exclusion of the holders of Preferred Stock. 4828-8426-5046.1 

 
  B. Provisions Relating to Preferred Stock 1. General. The Preferred Stock may be issued from time to time, in one or more classes or series, the shares of each class or series to have such designations powers, preferences and rights, and qualifications, limitations and restrictions thereof as are stated and expressed herein and in the resolution or resolutions providing for the issuance of such class or series adopted by the Board of Directors as hereinafter prescribed. 2. Preferences. Subject to the rights of the holders of the Company's Common Stock, authority is hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the Preferred Stock from time to time, in one or more classes or series, to determine and take necessary proceedings fully to effect the issuance conversion and redemption of any such Preferred Stock, and, with respect to each class or series of Preferred Stock, to fix and state by the resolution or resolutions from time to time adopted providing for the issuance thereof the following: (a) whether or not the class or series is to have voting rights, special or conditional, full or limited, or is to be without voting rights; (b) the number of shares to constitute the class or series and the designations thereof; (c) the preferences and relative, participating, optional or other special rights, if any, and the qualifications, limitations or restrictions thereof, if any, with respect to any class or series; (d) whether or not the shares of any class or series shall be redeemable and if redeemable the redemption price or prices, and the time or times at which and the terms and conditions upon which, such shares shall be redeemable and the manner of redemption; (e) whether or not the shares of a class or series shall be subject to the operation of retirement or sinking funds to be applied to the purchase or redemption of such shares for retirement, and if such retirement or sinking fund or funds be established, the periodic amount thereof and the terms and provisions relative to the operation thereof; (f) the dividend rate, whether dividends are payable in cash, stock or other property of the Company, the conditions upon which and the times when such dividends are payable, the preference to or the relation to the payment of the dividends payable, on any other class or classes or series of stock, whether or not such dividend shall be cumulative or noncumulative, and if cumulative, the date or dates from which such dividends shall accumulate; (g) the preferences, if any, and the amounts thereof that the holders of any class or series thereof shall be entitled to receive upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Company; 2 4828-8426-5046.1 

 
  (h) whether or not the shares of any class or series shall be convertible into, or exchangeable for, the shares of any other class or classes or of any other series of the same or any other class or classes of the Company and the conversion price or prices or ratio or ratios or the rate or rates at which such conversion or exchange may be made, with such adjustments, if any, as shall be stated and expressed or provided for in such resolution or resolutions; and (i) such other special rights and protective provisions with respect to any class or series as the Board of Directors may deem advisable. The shares of each class or series of the Preferred Stock may vary from the shares of any other class or series thereof in any or all of the foregoing respects. The Board of Directors may increase the number of shares of Preferred Stock designated for any existing class or series by a resolution adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any other class or series. The Board of Directors may decrease the number of shares of the Preferred Stock designated for any existing class or series by a resolution, subtracting from such series unissued shares of the Preferred Stock designated for such class, or series, and the shares so subtracted shall become authorized, unissued and undesignated shares of the Preferred Stock. ARTICLE IV - REGISTERED AGENT The street address of the Company's registered office is 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323. The name of the Company's registered agent at that address is Michael H. Braun. ARTICLE V - BOARD OF DIRECTORS A. Number of Directors. The number of directors constituting the Company's Board of Directors shall not be less than three nor more than 15, and the exact number of Directors shall be fixed from time to time in the manner provided in the Company's Bylaws. B. Term of Office. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. The number of directors in each class shall be determined by the Board of Directors and shall consist of as nearly equal a number of directors as practicable. The term of the Class I directors initially shall expire at the next ensuing annual meeting of shareholders; the term of Class II directors initially shall expire at the annual meeting of shareholders held one year thereafter; and the term of Class III directors initially shall expire at the annual meeting of shareholders held one year thereafter. In the case of each class, the directors shall serve until their respective successors are duly elected and qualified or until his or her earlier resignation, death, incapacity or removal from office. At each annual meeting of shareholders, directors of the respective class whose term expires shall be elected, and the directors chosen to succeed those whose terms shall have expired shall be elected to hold office for a term to expire at the third ensuing annual meeting of shareholders after their election, and until their respective successors are elected and qualified or until their earlier resignation, death, incapacity or removal from office. 3 4828-8426-5046.1 

 
  C. Vacancies. A director may resign at any time by giving written notice to the Company, the Board of Directors or the Chairman of the Board of Directors. Such resignation shall take effect when the notice is delivered unless the notice specifies a later effective date, in which event the Board of Directors may fill the pending vacancy before the effective date if they provide that the successor does not take office until the effective date. Any vacancy occurring in the Board of Directors due to death, resignation, retirement, disqualification, removal and any directorship to be filled by reason of an increase in the size of the Board of Directors shall be filled by the affirmative vote of a majority of the current directors though less than a quorum of the Board of Directors, or may be filled by an election at an annual or special meeting of the shareholders called for that purpose, unless otherwise provided by law. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, or until the next election of one or more directors by shareholders if the vacancy is caused by an increase in the number of directors. D. Removal. A director may be removed from office prior to the expiration of his or her term: (i) only for cause; and (ii) only upon the affirmative vote of at least two-thirds of outstanding shares of capital stock of the Company entitled to vote for the election of directors. E. Amendments. Notwithstanding anything contained in these Articles of Incorporation to the contrary, this Article V shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote for the election of directors. ARTICLE VI - LIMITATION ON DIRECTOR LIABILITY A director shall not be personally liable to the Company or the holders of shares of capital stock for monetary damages for breach of fiduciary duty as a director, except (i) for any breach of the duty of loyalty of such director to the Company or such holders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 607.0831 of the Florida Business Company Act (the “FBCA”), or (iv) for any transaction from which such director derives an improper personal benefit. This Article VI shall be read to authorize the limitation of liability to the fullest extent permitted under Florida law. If the FBCA is hereafter amended to authorize the further or broader elimination or limitation of the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by the FBCA, as so amended. No repeal or modification of this Article VI shall adversely affect any right of or protection afforded to a director of the Company existing immediately prior to such repeal or modification. ARTICLE VII - SPECIAL MEETINGS OF SHAREHOLDERS Except as otherwise required by law and subject to the rights of the holders of the Preferred Stock, special meetings of shareholders of the Company may be called only by (i) the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, (ii) the Company's Chief Executive Officer or (iii) holders of record who hold, in the aggregate, a net long position (as defined in the Bylaws of the Company) in shares representing at least twenty-five percent (25%) of the outstanding shares of the Company (the “Requisite Percentage”) at the time the special meeting is called and who continue to hold such Requisite Percentage through the date of such special meeting of the shareholders of the Company, subject to and in compliance with the 4 4828-8426-5046.1 

 
  procedures and other requirements as provided in the Bylaws of the Company. Notwithstanding anything contained in these Second Restated Articles of Incorporation to the contrary, this Article VII shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. ARTICLE VIII - NO SHAREHOLDER ACTION WITHOUT A MEETING Any action required or permitted to be taken by the shareholders of the Company shall be taken at a duly called annual or special meeting of such holders and may not be taken by any consent in writing by such holders. Notwithstanding anything contained in these Second Restated Articles of Incorporation to the contrary, this Article VIII shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. ARTICLE IX - INDEMNIFICATION The Company shall indemnify and advance expenses to, and may purchase and maintain insurance on behalf of its officers and directors to the fullest extent permitted by law as now or hereafter in effect. Without limiting the generality of the foregoing, the Company's Bylaws may provide for indemnification and advancement of expenses to officers, directors, employees and agents on such terms and conditions as the Board of Directors may from time to time deem appropriate or advisable. ARTICLE X - BYLAWS The Board of Directors shall have the power to adopt, amend or repeal the Bylaws or any part hereof. Certain provisions of the Bylaws, as stated therein, may not be altered, amended or repealed except by the affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Except for such provisions requiring a majority vote to alter, amend or repeal, the Bylaws may be altered, amended or repealed, and new bylaws may be adopted, by the shareholders upon the affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Notwithstanding anything contained in these Second Restated Articles of Incorporation to the contrary, this Article X shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. ARTICLE XI - AMENDMENT Except as provided herein, these Second Restated Articles of Incorporation may be altered, amended or repealed by the shareholders of the Company in accordance with Florida law. 5 4828-8426-5046.1 

 
  IN WITNESS WHEREOF, the undersigned, for the purpose of restating the Company’s Articles of Incorporation pursuant to laws of the State of Florida, has executed these Second Restated Articles of Incorporation as of November 7, 2018. FEDNAT HOLDING COMPANY, a Florida corporation By:/s/ Michael H. Braun Michael H. Braun, Chief Executive Officer 6 4828-8426-5046.1 

 
  FEDNAT HOLDING COMPANY Officer's Certificate I, Michael H. Braun, the duly appointed, qualified and acting Chief Executive Officer of FEDNAT HOLDING COMPANY, a Florida corporation (the “Company”), do hereby certify that the attached Second Restated Articles of Incorporation of the Company do not contain an amendment requiring shareholder approval and were adopted by the Board of Directors of the Company on November 7, 2018. IN WITNESS WHEREOF, I have executed this Certificate as of November 7, 2018. /s/ Michael H. Braun Michael H. Braun, Chief Executive Officer ACCEPTANCE OF APPOINTMENT OF REGISTERED AGENT I hereby accept the appointment as registered agent contained in the foregoing Second Restated Articles of Incorporation of FedNat Holding Company and state that I am familiar with and accept the obligations of Section 607.0505 of the Florida Business Corporation Act. /s/ Michael H. Braun Michael H. Braun 7 4828-8426-5046.1 

 
SECOND AMENDED AND RESTATED BYLAWS OF FEDNAT HOLDING COMPANY (November 7, 2018) ARTICLE I Offices Section 1. Name. The name of the company is FEDNAT HOLDING COMPANY, a Florida Corporation (the "Company"). Section 2. Other Offices. The location of the registered office of the Company shall be as stated in the Articles of Incorporation, which location may be changed from time to time by the Company's Board of Directors (the "Board of Directors"). The Company may also have offices at such other places, either within or without the State of Florida, as the Board of Directors may from time to time determine or as the business of the Company may require. ARTICLE II Meetings of Shareholders Section 1. Annual Meetings. All annual meetings of the shareholders of the Company for the election of directors and for such other business as may properly come before the meeting shall be held on such date or at such time as may be fixed, from time to time, by the Board of Directors, and at such place, within or without the State of Florida, as may be designated by or on behalf of the Board of Directors and stated in the notice of meeting or in a duly executed waiver of notice thereof. The Board of Directors may, in its sole discretion, determine that an annual meeting of shareholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 607.0701 of the Florida Business Corporation Act. Section 2. Special Meetings. Except as otherwise required by law and subject to the rights of the holders of the Preferred Stock, special meetings of shareholders of the Company may be called only by (i) the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, (ii) the Company's Chief Executive Officer or (iii) holders of record who hold, in the aggregate, a net long position (as defined below) in shares representing at least twenty- five percent (25%) of the outstanding shares of the Company (the "Requisite Percentage") at the time the special meeting is called and who continue to hold such Requisite Percentage through the date of such special meeting of the shareholders of the Company, subject to and in compliance with the procedures and other requirements as provided herein. Special meetings of shareholders may be held at such time and date, and at such place, within or without the State of Florida, as shall be designated by the Board of Directors and set forth in the notice of meeting required pursuant to Section 3 of this Article. Notwithstanding anything contained in these Bylaws to the contrary, this Article II, Section 2 shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company 4817-7395-5670.1

 
entitled to vote at a shareholders' meeting duly called for such purpose. Only such business as is set forth in the notice of a special meeting may be transacted at such Special Meeting. (a) In order for a special meeting to be called upon shareholder request ("Shareholder Requested Special Meeting"), one or more requests for a special meeting (each, a "Special Meeting Request" and, collectively, the "Special Meeting Requests"), must be signed by Proposing Persons that have a combined Net Long Position of at least the Requisite Percentage. In determining whether a Shareholder Requested Special Meeting has been properly requested by Proposing Persons that have a combined Net Long Position of at least the Requisite Percentage, multiple Special Meeting Requests delivered to the Secretary will be considered together if (i) each Special Meeting Request generally identifies the same purpose or purposes of the Shareholder Requested Special Meeting and generally the same matters proposed to be acted on at such meeting (in each case as determined in good faith by the Board of Directors), and (ii) such Special Meeting Requests have been dated and delivered to the Secretary within thirty (30) days of the earliest dated Special Meeting Request. Additionally, the Special Meeting Request(s) shall provide in reasonable detail, the following: (1) As to each Proposing Person, (w) the name and address of such Proposing Person (including, if applicable, the name and address as they appear on the Company's books), (x) reasonable evidence demonstrating the Proposing Person's Net Long Position, (y) a representation that such Proposing Person intends to hold a Net Long Position of at least the Requisite Percentage through the date of the Shareholder Requested Special Meeting, and (z) an acknowledgment by the Proposing Person that any reduction in such Proposing Person's Net Long Position with respect to which a Special Meeting Request relates following the delivery of such Special Meeting Request to the Secretary shall constitute a revocation of such Special Meeting Request to the extent such reduction results in such Proposing Person(s) no longer owning, together with all other deemed Proposing Persons pursuant to this clause at least the Requisite Percentage (provided that the change of any right to acquire capital share into such capital share will not be considered a reduction); (2) As to the purpose or purposes of the Shareholder Requested Special Meeting, a reasonably brief statement of the purpose or purposes of the Shareholder Requested Special Meeting, the matter(s) proposed to be acted on at the Shareholder Requested Special Meeting and the reasons for conducting such business at the Shareholder Requested Special Meeting, and the text of any proposal or business to be considered at the Shareholder Requested Special Meeting (including the text of any resolutions proposed to be considered and, in the event that such business includes a proposal to amend the Articles of Incorporation or Bylaws, the language of the proposed amendment); and (3) To the extent not duplicative of the information called for by Article II, Section 2, the information as would be required by Article II, Section 10 of these Bylaws, including, without limitation, the information regarding any material interest of the Proposing Person in the matter(s) proposed to be acted on at the Shareholder Requested Special Meeting, all agreements, arrangements or understanding between or among any Proposing Person and any other record holder or beneficial owner of shares of any class or series of capital share of 2 4817-7395-5670.1

 
the Company, and all information required by Article III, Section 13 with respect to director nominations. (4) For purposes of this Article II, Section 2, the following terms shall have the following meanings: "Proposing Person" shall mean (x) each shareholder that is a beneficial owner or record owner that signs a Special Meeting Request pursuant to Article II, Section 2, (y) the beneficial owner or beneficial owners, if different, on whose behalf such Special Meeting Request is made, and (z) any other person with whom such shareholder or such beneficial owner (or any of their respective associates or other participants in such solicitation) is acting. For clarity, a shareholder may act as a Proposing Person under a voting arrangement or agreement or a proxy from another person which affords the Proposing Person the right to vote or direct the vote of shares of common share of the Company held beneficially or of record by such other person. "Net Long Position" shall be determined with respect to each Proposing Person in accordance with the definition thereof set forth in Rule 14e-4 under the Securities Exchange Act of 1934 (the "Exchange Act"), provided that (x) for purposes of such definition, in determining such Proposing Person's "short position," the reference in such Rule to "the date the tender offer is first publicly announced or otherwise made known by the bidder to the holders of the security to be acquired" shall be the date of the relevant Special Meeting Request and the reference to the "highest tender offer price or stated amount of the consideration offered for the subject security" shall refer to the closing sales price of the Company's common share on the Nasdaq Share Market on such date (or, if such date is not a trading day, the next succeeding trading day) and (y) the net long position of such Proposing Person shall be reduced by the number of shares as to which such Proposing Person does not, or will not, have the right to vote or direct the vote at the special meeting of shareholders or as to which such Proposing Person has entered into any derivative or other agreement, arrangement or understanding that hedges or transfers, in whole or in part, directly or indirectly, any of the economic consequences of ownership of such shares. Whether the Proposing Person has complied with the requirements of this definition shall be determined in good faith by the Board, which determination shall be conclusive and binding on the Company and the shareholders. (b) Notwithstanding anything to the contrary in this Article II, Section 2: (1) The Secretary shall not accept, and shall consider ineffective, a Special Meeting Request if (u) such Special Meeting Request does not comply with Article VII of the Company's Articles of Incorporation and these Bylaws, or relates to an item of business that is not a proper subject for shareholder action under applicable law, (v) the Special Meeting Request is received by the Company during the period commencing one hundred twenty (120) days prior to the first anniversary of the date of the immediately preceding annual meeting of shareholders and ending on the date of the final adjournment of the next annual meeting of shareholders, (w) an identical or substantially similar item (a "Similar Item") to that included in the Special Meeting Request was presented at any meeting of shareholders held within one (1) year prior to receipt by the Company of such Special Meeting Request, (x) a Similar Item, including the election or removal of directors, is already included in the Company's notice as an 3 4817-7395-5670.1

 
item of business to be brought before a meeting of the shareholders that has been called but not yet held, (y) such Special Meeting Request was made in a manner that involved a violation of Regulation 14A under the Exchange Act, or other applicable law or (z) such Special Meeting Request is presented by a shareholder that has violated the reporting requirements of Section 13 of the Exchange Act. For purposes hereof, a Similar Item will not include the proposal for an election or removal of one or more directors, unless such proposal was presented at an annual meeting of the shareholders or special meeting of the shareholders which was held within one hundred twenty (120) days of the Secretary's receipt of the Special Meeting Request. (2) Business transacted at any Shareholder Requested Special Meeting shall be limited to the purpose stated in the valid Special Meeting Request: provided however, that nothing shall prohibit the Board of Directors from submitting matters to the shareholders at any Shareholder Requested Special Meeting or other shareholder submitting nominations under Article III, Section 13 if such Shareholder Requested Special Meeting includes the election of directors. (3) Any Proposing Person may revoke a Special Meeting Request by written revocation delivered to, or mailed and received by, the Secretary at any time prior to the date of the Shareholder Requested Special Meeting. In the event any revocation(s) are received by the Secretary after the Secretary's receipt of a valid Special Meeting Request(s) from Proposing Persons holding the Requisite Percentage or any Special Meeting Request is deemed to be revoked, and as a result of such revocation(s), there no longer are valid unrevoked Special Meeting Request(s) from Proposing Persons holding the Requisite Percentage, the Board of Directors shall have the discretion to determine whether or not to proceed with the Shareholder Requested Special Meeting. (4) Notwithstanding anything in these Bylaws to the contrary, the Secretary shall not be required to call a special meeting except in accordance with Article VIII of the Articles of Incorporation and this Article II, Section 2. In addition to the requirements of this Article II, Section 2, each Proposing Person shall comply with all requirements of applicable law, including all requirements of the Exchange Act, with respect to any Special Meeting Request. (c) In connection with a Shareholder Requested Special Meeting called in accordance with this Article II, Section 2, each Proposing Person that signed and delivered a Special Meeting Request shall further update and supplement the information previously provided to the Company in connection with such request, if necessary, so that the information provided or required to be provided in such request pursuant to this Article II, Section 2 shall be true and correct as of the record date for notice of the Shareholder Requested Special Meeting and as of the date that is ten (10) business days prior to the Shareholder Requested Special Meeting or any adjournment or postponement thereof. Such update and supplement shall be delivered to, or mailed and received by, the Secretary at the principal executive offices of the Company not later than five (5) business days after the record date for notice of the special meeting (in the case of the update and supplement required to be made as of such record date), and not later than eight (8) business days prior to the date for the special meeting or any adjournment or postponement thereof. As used herein, the term "business day" shall mean any day that is not a Saturday or 4 4817-7395-5670.1

 
Sunday or a day on which banks in the city of the Company's principal place of business are required or permitted to close. (d) The Secretary shall cause notice to be given to the shareholders entitled to vote, in accordance with the provisions of Article II of these Bylaws, that a Shareholder Requested Special Meeting will be held not more than one hundred twenty (120) days after receipt of a Special Meeting Request properly made in accordance with Article VIII of the Articles of Incorporation and these Bylaws. Section 3. Notice. A written notice of each meeting of shareholders shall be given to each shareholder entitled to vote at the meeting, at the address as it appears on the stock transfer records of the Company, not less than ten (10) nor more than sixty (60) days before the date of the meeting, by or at the direction of the Chief Executive Officer, the Secretary or the officer or persons calling the meeting. The notice so given shall state the date, time and place of meeting, the means of remote communication, if any, by which shareholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special shareholders' meeting, the purpose or purposes for which the meeting is called. Section 4. Waiver of Notice. Shareholders may waive notice of any meeting before or after the date and time specified in the written notice of meeting. Any such waiver of notice must be in writing, be signed by the shareholder entitled to the notice and be delivered to the Company for inclusion in the appropriate corporate records. Neither the business to be transacted at, nor the purpose of, any shareholders' meeting need be specified in any written waiver of notice. Attendance of a person at a shareholders' meeting shall constitute a waiver of notice of such meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. Section 5. Record Date. For the purpose of determining shareholders entitled to notice of or to vote at a shareholders' meeting, to demand a special meeting, to act by written consent or to take any other action, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy (70) days nor, in the case of a shareholders' meeting, less than ten (10) days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice or to vote at a shareholders' meeting, then the record date for such shall be the close of business on the day before the first notice is delivered to shareholders. Section 6. Quorum. A majority of the shares entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum for action on that matter at a meeting of shareholders. If a quorum is not present or represented at a meeting of shareholders, the holders of a majority of the shares represented, and who would be entitled to vote at a meeting if a quorum were present, may adjourn the meeting from time to time and to another place, without notice other than announcement at the meeting, until a quorum shall be present or represented. Once a quorum has been established at a shareholders' meeting, the subsequent withdrawal of shareholders, so as to reduce the number of shares entitled to vote at the meeting below the number required for a quorum, shall not affect the validity of any action taken at the meeting or any adjournment thereof. 5 4817-7395-5670.1

 
Section 7. Voting. If a quorum is present, action on a matter, other than the election of directors, shall be approved if the votes cast by the shareholders represented at the meeting and entitled to vote on the subject matter favoring the action exceed the votes cast opposing the action, unless a greater number of affirmative votes or voting by classes is required by Florida law or by the Articles of Incorporation. In an uncontested election of directors, a director who is unopposed shall be elected if the votes cast by the shareholders represented at the meeting and entitled to vote on the election of such director exceed the votes cast opposing the election of such director. In a contested election of directors, a director whose election is opposed by one or more other candidates shall be elected if such director receives a plurality of the votes cast. Elections of directors shall occur in accordance with Article III, Section 3 of these Bylaws. Each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, unless otherwise provided under the Articles of Incorporation (or any resolution authorizing any class or series of Preferred Stock) or under Florida law. Section 8. Proxies. A shareholder entitled to vote at any meeting of shareholders or any adjournment thereof may vote in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for him by signing an appointment form, either personally or by his attorney- in-fact. An appointment of proxy is effective when received by the Secretary or other officer or agent authorized to tabulate votes. Section 9. No Shareholder Action Without a Meeting. Any action required or permitted to be taken by the shareholders of the Company shall be taken at a duly called annual or special meeting of such holders and may not be taken by any consent in writing by such holders. Notwithstanding anything contained in these Bylaws to the contrary, this Article II, Section 9 shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Section 10. Advance Notice of Shareholder Proposed Business at Annual Meeting. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Company, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the 6 4817-7395-5670.1

 
shareholder proposing such business, (iii) the class and number of shares of the Company which are beneficially owned by the shareholder, and (iv) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Article II, Section 10; provided, however, that nothing in this Article II, Section 10, shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting in accordance with said procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article II, Section 10, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding anything contained in the Bylaws to the contrary, this Article II, Section 10 shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote thereon. ARTICLE III Directors Section 1. Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of the Board of Directors. Directors must be natural persons who are at least 18 years of age but need not be residents of Florida or shareholders of the Company. Section 2. Compensation. Directors of the Company who also serve as officers or members of management ("Employee Directors") shall serve as directors without compensation. Non¬ employee directors of the Company shall be entitled to receive such compensation and benefits as is from time to time determined by the Board of Directors. The Employee Directors may be paid their expenses, if any, and the non-employee directors may he paid a fee and expenses, if any, of attendance at each meeting of the Board of Directors or of any committee. No such payments shall preclude any director from serving in any other capacity and receiving compensation therefor. Section 3. Number, Election & Term. The Company's Board of Directors shall consist of not less than three nor more than 15 members, with the exact number to be fixed from time to time in accordance with a resolution adopted by a majority of the entire Board of Directors. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. The number of directors in each class shall be as nearly equal in number as practicable. The term of the Class I directors shall expire at the next ensuing annual meeting of shareholders; the term of the Class II directors shall expire at the annual meeting of shareholders held one year thereafter; and the term of the Class III directors shall expire at the annual meeting of shareholders held one year thereafter, in each case until his or her successor is duly elected and 7 4817-7395-5670.1

 
qualified or until his or her earlier resignation, death, incapacity or removal from office. Upon the expiration of the initial terms of office for each class of directors, the successor directors of each class shall be elected for a full term of three years, to serve until their successors are duly elected and qualified or until their earlier resignation, death, incapacity or removal from office. The Board of Directors shall apportion any increase or decrease in the number of directors among the classes as nearly equal in number as possible. Section 4. Vacancies. Whenever any vacancy on the Board of Directors shall occur due to death, resignation, retirement, disqualification, removal, increase in the number of directors, or otherwise, a majority of the remaining directors in office, although less than a quorum of the Board of Directors, may fill the vacancy for the balance of the unexpired term, at which time a successor or successors shall be duly elected by the shareholders and qualified. Notwithstanding the provisions of any other Article hereof, only the remaining directors of the Company shall have the authority, in accordance with the procedure stated herein, to fill any vacancy that arises on the Board of Directors. Section 5. Removal of Directors. A director may be removed from office prior to the expiration of his or her term: (i) only for cause; and (ii) only upon the affirmative vote of at least two-thirds of the outstanding shares of capital stock of the Company entitled to vote for the election of directors. Section 6. Quorum and Voting. A majority of the number of directors fixed by or in accordance with these Bylaws shall constitute a quorum for the transaction of business at any meeting of directors. If a quorum is present when a vote is taken, the affirmative vote of a majority of the directors present shall be the act of the Board of Directors. Section 7. Deemed Assent. A director who is present at a meeting of the Board of Directors or a committee of the Board of Directors when corporate action is taken is deemed to have assented to the action taken unless (i) the director objects at the beginning of the meeting (or promptly upon his arrival) to the holding of the meeting or transacting specified business at the meeting, or (ii) the director votes against or abstains from the action taken. Section 8. Committees. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an executive committee, a compensation committee, an audit committee and one or more other committees each of which must have at least two members and, to the extend provided in the designating resolution, shall have and may exercise all the authority of the Board of Directors, except such authority as may be reserved to the Board of Directors under Florida law. (a) Executive Committee. The Board of Directors by resolution may designate one or more directors to constitute an executive committee, which committee, to the extent provided in such resolution, shall have and may exercise all powers and authority of the Board of Directors in the management of the business and affairs of the Company, except where action of the Board of Directors is required by statute. 8 4817-7395-5670.1

 
(b) Other Committees. The Board of Directors may by resolution create other committees for such terms and with such powers and duties as the Board of Directors shall deem appropriate. (c) Organization of Committees. The chairman of all committees of the Board of Directors shall be chosen by the members thereof. Each committee shall elect a secretary, who shall be either a member of the committee or the secretary of the Company. The chairman of each committee shall preside at all meetings of such committee. (d) Meetings. Regular meetings of each committee may be held without the giving of notice if a day of the week, a time, and a place shall have been established by the committee for such meetings. Special meetings (and, if the requirements of the preceding sentence have not been met, regular meetings) shall be called as provided in Section 9 with respect to notices of special meetings of the Board of Directors. (e) Quorum and Manner of Acting. A majority of the members of each committee shall be present either in person or by telephone, radio, television, or similar means of communication through which all persons participating may simultaneously hear each other at all times, at each meeting of such committee in order to constitute a quorum for the transaction of business. The act of a majority of the members so present at a meeting at which a quorum is present shall be the act of such committee. The members of each committee shall act only as a committee, and shall have no power or authority, as such, by virtue of their membership on the committee. (f) Record of Committee Action; Reports. Each committee shall maintain a record, which need not be in the form of complete minutes, of the action taken by it at each meeting, which record shall include the date, time and place of the meeting, the names of the members present and absent, the action considered, and the number of votes cast for and against the adoption of the action considered. All action by each committee shall be reported to the Board of Directors at its meeting next succeeding such action, such report to be in sufficient detail as to enable the Board of Directors to be informed of the conduct of the Company's business and affairs since the last meeting of the board. (g) Removal. Any member of any committee may be removed from such committee, either with or without cause, at any time by resolution adopted by a majority of the whole Board of Directors at any meeting of the board. (h) Vacancies. Any vacancy in any committee shall be filled by the Board of Directors in the manner prescribed by these Bylaws. Section 9. Meetings. Regular and special meetings of the Board of Directors shall be held at the principal place of business of the Company or at any other place, within or without the State of Florida, designated by the person or persons entitled to give notice of or otherwise call the meeting. Meetings of the Board of Directors may be called by the Chief Executive Officer or by any two directors. Members of the Board of Directors (and any committee of the Board of Directors) may participate in a meeting of the Board of Directors (or any committee of the Board of Directors) by means of a conference telephone or similar communications equipment through 9 4817-7395-5670.1

 
which all persons participating may simultaneously hear each other during the meeting; participation by these means constitutes presence in person at the meeting. Section 10. Notice of Meetings. Regular meetings of the Board of Directors may be held without notice of the date, time, place or purpose of the meeting, so long as the date, time and place of such meetings are fixed generally by the Board of Directors. Special meetings of the Board of Directors must be preceded by at least two days' written notice of the date, time and place of the meeting. The notice need not describe either the business to be transacted at or the purpose of the special meeting. Section 11. Waiver of Notice. Notice of a meeting of the Board of Directors need not be given to a director who signs a waiver of notice either before or after the meeting. Attendance of a director at a meeting shall constitute a waiver of notice of that meeting and a waiver of any and all objections to the place of the meeting, the time of the meeting and the manner in which it has been called or convened, except when a director states, at the beginning of the meeting or promptly upon arrival at the meeting, any objection to the transaction of business because the meeting is not lawfully called or convened. The waiver of notice need not describe either the business to be transacted at or the purpose of the special meeting. Section 12. Director Action Without a Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors (or a committee of the board) may be taken without a meeting if the action is taken by the written consent of all members of the Board of Directors (or of the committee of the Board of Directors). The action must be evidenced by one or more written consents describing the action to be taken and signed by each director (or committee member), which consent(s) shall be filed in the minutes of the proceedings of the Board of Directors. The action taken shall be deemed effective when the last director signs the consent, unless the consent specifies otherwise. Section 13. Shareholder Nominations for Director Candidates. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Company may be made at a meeting of shareholders by or at the direction of the Board of Directors by any nominating committee or person appointed by the Board of Directors or by any shareholder of the Company entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Article III, Section 13. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Company. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made whichever first occurs. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re- election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the persons, (iii) the class and number of shares of 10 4817-7395-5670.1

 
capital stock of the Company which are beneficially owned by the, person, (iv) the consent of each nominee to serve as a director of the Company if so elected, and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice, (i) the name and record address of shareholder, and (ii) the class and number of shares of capital stock of the Company which are beneficially owned by the shareholder. The Company may require any proposed nominee to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as director of the Company. No person shall be eligible for election as a director of the Company unless nominated in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 14. Amendments. Notwithstanding anything contained in the Bylaws to the contrary, this Article III shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote thereon. ARTICLE IV Officers Section 1. Officers. The officers of the Company shall consist of a Chief Executive Officer, President, one or more Vice Presidents and Secretaries and a Treasurer and if elected by the Board of Directors by resolution, a Chairman. The Board of Directors may also appoint such other officers as it deems appropriate from time to time. Any two or more offices may be held by the same person. Section 2. Duties. The officers of the Company shall have the following duties: The Chief Executive Officer shall have general and active management of the business and affairs of the Company subject to the direction of the Board of Directors. The Chief Executive Officer shall see to it that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board of Directors or in the event the Board of Directors shall not have designated a Chairman of the Board of Directors, the Chief Executive Officer shall preside at all meetings of the Board of Directors and shareholders. The President shall have such powers and perform such duties as the Board of Directors shall from time to time designate. In the absence or disability of the Chief Executive Officer, the President shall have the powers and shall exercise the duties of the Chief Executive Officer. Each Vice President, if any, shall have such powers and perform such duties as the Board of Directors shall from time to time designate. In the absence or disability of the President, a Vice 11 4817-7395-5670.1

 
President specifically designated by the vote of the Board of Directors shall have the powers and shall exercise the duties of the President. The Secretary shall have custody of and shall maintain all of the corporate records (except the financial records), shall record the minutes of all meetings of the shareholders and the Board of Directors, shall authenticate records of the Company, shall send all notices of meetings and shall perform such other duties as are prescribed by the Board of Directors or the Chief Executive Officer, under whose supervision he shall be. The Treasurer shall have custody of all corporate funds, securities and financial records, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the Company as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render an account of all his transactions as treasurer and of the financial condition of the Company at regular meetings of the Board of Directors or when the Board of Directors so requests. The Treasurer shall also perform such other duties as are prescribed by the Board of Directors. Each Assistant Secretary and Assistant Treasurer, if any, shall be appointed by the Board of Directors and shall have such powers and shall perform such duties as shall be assigned to them by the Board of Directors. Section 3. Resignation of Officer. An officer may resign at any time by delivering notice to the Company. The resignation shall be effective upon receipt, unless the notice specifies a later effective date acceptable to the Board of Directors. If the resignation is effective at a later date and the Company accepts the future effective date, the Board of Directors may fill the pending vacancy before the effective date provided the Board of Directors provides that the successor officer does not take office until the future effective date. Section 4. Removal of Officer. The Board of Directors may remove any officer at any time with or without cause. Section 5. Compensation. The compensation of officers shall be fixed from time to time at the discretion of the Board of Directors. The Board of Directors may enter into employment agreements with any officer of the Company. ARTICLE V Stock Certificates Section 1. Certificate of Stock. Shares of the Corporation may, but need not, be represented by certificates. Each shareholder shall be entitled to a certificate of the capital stock of the Corporation in such form as may be prescribed from time to time by the Directors. No certificate shall be issued for any share until the consideration therefore has been fully paid. The certificate shall be signed by the Chief Executive Officer or President and the Secretary of the Company, or any other officer so designated by the Board of Directors, but when a certificate is 12 4817-7395-5670.1

 
counter-signed by a transfer agent or a registrar, other than a Director, officer or employee of the Corporation, such signature may be a facsimile. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer at the time of its issue. Section 2. Book-Entry Shares. The Corporation may issue shares of its capital stock in book-entry (uncertificated) form. In such event, all references in these Bylaws to the delivery of stock certificates shall be inapplicable. The Corporation's transfer agent shall keep appropriate records indicating the number of shares of capital stock owned by each person to whom shares are issued, any restrictions applicable to such shares of capital stock and the duration thereof, and other relevant information. Upon expiration of any applicable restrictions for any reason, the transfer agent shall adjust its records to reflect the expiration of such restrictions, and by notifying the person in whose name such shares were issued that such restrictions have lapsed. Section 3. Legends for Preferences and Restrictions on Transfer. If the Company shall be authorized to issue more than one class of stock or more them one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Company shall issue to represent such class or series of stock, provided that, except as otherwise provided by law, in lieu of the foregoing requirements, there be set forth on the face or back of the certificate which the Company shall issue to represent such class or series of stock, a statement that the Company will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. A written restriction on the transfer or registration of transfer of a security of the Company, if permitted by law and noted conspicuously on the certificate representing the security may be enforced against the holder of the restricted security or any successor or transferee of the holder including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate representing the security, a restriction, even though permitted by law, is ineffective except against a person with actual knowledge of the restriction. If the Company issues any shares that are not registered under the Securities Act of 1933, as amended, and registered or qualified under the applicable state securities laws, the transfer of any such shares shall be restricted substantially in accordance with the following legend, or in such other form as the Board of Directors may provide from time to time: “THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AT HOLDER'S EXPENSE, AN OPINION (SATISFACTORY TO THE COMPANY) OF 13 4817-7395-5670.1

 
COUNSEL (SATISFACTORY TO THE COMPANY) THAT REGISTRATION IS NOT REQUIRED.” Section 4. Facsimile Signatures. Any and all signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer, transfer agent or registrar at the date of the issue. Section 5. Registered Shareholders. The Company shall be entitled to treat the holder of record of shares as the holder in fact and, except as otherwise provided by the laws of Florida, shall not be bound to recognize any equitable or other claim to or interest in the shares. Section 6. Transfer of Shares. Shares of the Company shall be transferred on its books only after the surrender to the Company or the transfer agent of the share certificates duly endorsed by the holder of record or attorney-in-fact. If the surrendered certificates are canceled, new certificates shall be issued to the person entitled to them, and the transaction recorded on the books of the Company. Section 7. Lost, Stolen or Destroyed Certificates. If a shareholder claims to have lost or destroyed a certificate of shares issued by the Company, a new certificate shall be issued upon delivery to the Company of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed, and, at the discretion of the Board of Directors, upon the deposit of a bond or other indemnity as the Board of Directors reasonably requires. ARTICLE VI Distributions The Board of Directors may, in its sole judgment and discretion, from time to time authorize and declare, and the Company may pay, distributions on its outstanding shares in cash, property or its own shares, unless the distribution, after giving it effect, would result in (i) the Company being unable to pay its debts as they become due in the usual course of business, or (ii) a violation of applicable law. ARTICLE VII Corporate Records The Company shall keep as permanent records minutes of all meetings of its shareholders and Board of Directors, a record of all actions taken by the Board of Directors without a meeting, and a record of all actions taken by a committee of the Board of Directors in place of the Board of Directors on behalf of the Company. The Company shall also maintain accurate accounting records and a record of its shareholders in a form that permits preparation of a list of the names and addresses of all shareholders in alphabetical order by class of shares showing the number and series of shares held by each. ARTICLE VIII 14 4817-7395-5670.1

 
Indemnification of Officers, Directors, Employees and Agents Section 1. Indemnification. The Company shall, and does hereby, indemnify and hold harmless to the fullest extent permitted or authorized by current or future legislation or current or future judicial or administrative decisions (but, in the case of any such future legislation or decisions, only to the extent that it permits the Company to provide broader indemnification rights than permitted prior to such legislation or decisions), each person (including here and hereinafter, the heirs, executors, administrators, personal representatives or estate of such person) who was or is a party, or is threatened to be made a party, or was or is a witness, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), from, against and in respect of any liability (which for purposes of this Article shall include any judgment, settlement penalty or fine) or cost, charge or expense (including attorneys' fees and expenses) asserted against him or incurred by him by reason of the fact that such indemnified person (1) is or was a director or officer of the Company or (2) is or was an employee or agent of the Company as to whom the Company has agreed in writing to grant such indemnity or (3) is or was serving, at the request of the Company, as a director, officer, employee or trustee of another Company, partnership, joint venture, trust or other enterprise (including serving as a fiduciary of an employee benefit plan) or is or was serving as an agent of such other Company, partnership, joint venture, trust or other enterprise in each case, as to whom the Company has agreed in writing to grant such indemnity. Each director, officer, employee or agent of the Company as to whom indemnification rights have been granted under this Section 1 of this Article shall be referred to as an "Indemnified Person". Notwithstanding the foregoing, except as specified in Section 3 of this Article, the Company shall not be required to indemnify an Indemnified Person in connection with a Proceeding (or any part thereof) initiated by such Indemnified Person unless the authorization for such Proceeding (or any part thereof) was not cleared by the Board of Directors of the Company within 60 days after receipt of notice thereof from such Indemnified Person stating his intent to initiate such Proceeding and only then upon such terms and conditions as the Board of Directors may deem appropriate. Section 2. Advance of Costs, Charges and Expenses. Costs, charges and expenses (including attorneys' fees and expenses) incurred by an officer or director who is an Indemnified Person in defending a Proceeding shall be paid by the Company, to the fullest extent permitted or authorized by current or future legislation or current of future judicial or administrative decisions (but, in the case of any such future legislation or decisions, only to the extent that it permits the Company to provide broader rights to advance costs, charges and expenses than permitted prior to such legislation or decisions), in advance of the final disposition of such Proceeding, upon receipt of an undertaking by or on behalf of the Indemnified Person to repay all amounts so advanced in the event that it shall ultimately be determined that such person is not entitled to be indemnified by the Company as authorized in this Article. The Company may, upon approval of the Indemnified Person, authorize the Company's counsel to represent such person in any Proceeding, whether or not the Company is a party to such Proceeding. Such authorization may be made by the Chairman of the Board, unless he is a party to such Proceeding, or by the Board of Directors by majority vote, including directors who are parties to such Proceeding. 15 4817-7395-5670.1

 
Section 3. Procedure For Indemnification. Any indemnification or advance under this Article shall be made promptly and in any event within 45 days upon the written request of the Indemnified Person. The right to indemnification or advances as granted by this Article shall be enforceable by the Indemnified Person in any court of competent jurisdiction, if the Company denies such request under this Article, in whole or in part, or if no disposition thereof is made within 45 days. Such Indemnified Person's costs and expenses incurred in connection with successfully establishing his right to indemnification or advances, in whole or in part, in any such action shall also be indemnified by the Company. It shall be a defense to any such action that the claimant has not met the standard of conduct, if any, required by current or future legislation or by current or future judicial or administrative decisions for Indemnification (but, in the case of any such future legislation or decisions, only to the extent that it does not impose a more stringent standard of conduct than permitted prior to such legislation or decision), but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors or any committee thereof, its independent legal counsel, and its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct, if any, nor the fact that there has been an actual determination by the Company (including its Board of Directors or any committee thereof, its independent legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 4. Rights Not Exclusive; Contract Rights; Survival. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any agreement, vote of shareholders or disinterested directors or otherwise, both as to actions in such person's official capacity and as to actions in another capacity while holding such office, and shall continue as to an Indemnified Person who has ceased to be a. director, officer, employee or agent and shall inure to the benefit of the heirs, executors, administrators, personal representatives and estate of such person. All rights to indemnification and advances under this Article shall be deemed to be a contract between the Company and each Indemnified Person who serves or served in such capacity at any time while this Article is in effect and, as such, are enforceable against the Company. Any repeal or modification of this Article or any repeal or modification of relevant provisions of Florida's Company law or any other applicable laws shall not in any way diminish these rights to indemnification of or advances to such Indemnified Person, or the obligations of the Company arising hereunder, for claims relating to matters occurring prior to such repeals or modification. Section 5. Insurance. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee or agent of another Company partnership, joint venture, trust or other enterprise (including serving as a fiduciary of an employee benefit plan), with respect to any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of this Article or the applicable provisions of Florida law. 16 4817-7395-5670.1

 
Section 6. Savings Clause. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and hold harmless, and make advances to, each Indemnified Person as to costs, charges and expenses (including attorneys' fees), liabilities, judgments, fines and amounts paid in settlement with respect to any Proceeding, including any action by or in the right of the Company, to the full extent permitted by any applicable portion of this Article that shall not have began invalidated and as otherwise permitted by applicable law. ARTICLE IX Miscellaneous Section 1. Corporate Seal. The corporate seal of the Company shall be circular in form and shall include the name and jurisdiction of incorporation of the Company. Section 2. Fiscal Year. The fiscal year of the Company shall end on December 31 of each calendar year, unless otherwise fixed by resolution of the Board of Directors. ARTICLE X Amendment The Board of Directors shall have the power to adopt, amend or repeal the Bylaws or any part hereof. Certain provisions of the Bylaws, as stated herein, may not be altered, amended or repealed except by the affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Except for such provisions requiring a majority vote to alter, amend or repeal, the Bylaws may be altered, amended or repealed, and new bylaws may be adopted, by the shareholders upon the affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. Notwithstanding anything contained in these Bylaws to the contrary, this Article X shall not be altered, amended or repealed except by an affirmative vote of at least a majority of the outstanding shares of capital stock of the Company entitled to vote at a shareholders' meeting duly called for such purpose. 17 4817-7395-5670.1

 
FHCF Supplement Layer Reinsurance Contract Effective: June 1, 2018 Federated National Insurance Company Sunrise, Florida _______________________ *****Portions of this document omitted pursuant to an application for an order for confidential treatment pursuant to Rule 24b-2 under the Exchange Act. Confidential portions of this document have been filed separately with the Securities and Exchange Commission. 18\F7V1085

 
Table of Contents Article Page 1 Classes of Business Reinsured 1 2 Commencement and Termination 1 3 Territory 3 4 Exclusions 3 5 Retention and Limit 4 6 Other Reinsurance 5 7 Definitions 5 8 Loss Occurrence 6 9 Loss Notices and Settlements 6 10 Cash Call 7 11 Salvage and Subrogation 7 12 Reinsurance Premium 7 13 Sanctions 8 14 Late Payments 8 15 Offset 9 16 Access to Records 9 17 Liability of the Reinsurer 9 18 Net Retained Lines (BRMA 32E) 10 19 Errors and Omissions (BRMA 14F) 10 20 Currency (BRMA 12A) 10 21 Taxes (BRMA 50B) 10 22 Federal Excise Tax (BRMA 17D) 11 23 Foreign Account Tax Compliance Act 11 24 Reserves 11 25 Insolvency 12 26 Arbitration 13 27 Service of Suit (BRMA 49C) 14 28 Severability (BRMA 72E) 14 29 Governing Law (BRMA 71B) 15 30 Confidentiality 15 31 Non-Waiver 16 32 Notices and Contract Execution 16 33 Intermediary 17 18\F7V1085

 
FHCF Supplement Layer Reinsurance Contract Effective: June 1, 2018 entered into by and between Federated National Insurance Company Sunrise, Florida (hereinafter referred to as the "Company") and The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article 1 - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies in force at the effective time and date hereof or issued or renewed at or after that time and date, and classified by the Company as Property business, including but not limited to, Dwelling Fire, Inland Marine, Mobile Home, Commercial and Homeowners business (including any business assumed from Citizens Property Insurance Corporation), subject to the terms, conditions and limitations hereinafter set forth. Article 2 - Commencement and Termination A. This Contract shall become effective at 12:01 a.m., Eastern Standard Time, June 1, 2018, with respect to losses arising out of loss occurrences commencing at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, June 1, 2019. B. Notwithstanding the provisions of paragraph A above, the Company may terminate a Subscribing Reinsurer's percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event any of the following circumstances occur: 1. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at the inception of this Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) 12 months prior to that date; or 2. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at any time during the term of this Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) at the date of the Subscribing Reinsurer's most recent financial 18\F7V1085 Page 1

 
statement filed with regulatory authorities and available to the public as of the inception of this Contract; or 3. The Subscribing Reinsurer's A.M. Best's rating has been assigned or downgraded below A- and/or Standard & Poor's rating has been assigned or downgraded below BBB+; or 4. The Subscribing Reinsurer has become, or has announced its intention to become, merged with, acquired by or controlled by any other entity or individual(s) not controlling the Subscribing Reinsurer's operations previously; or 5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or 6. The Subscribing Reinsurer has become insolvent or has been placed into liquidation, receivership, supervision, administration, winding-up or under a scheme of arrangement, or similar proceedings (whether voluntary or involuntary) or proceedings have been instituted against the Subscribing Reinsurer for the appointment of a receiver, liquidator, rehabilitator, supervisor, administrator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or 7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company's prior written consent; or 8. The Subscribing Reinsurer has ceased assuming new or renewal property or casualty treaty reinsurance business; or 9. The Subscribing Reinsurer has hired an unaffiliated runoff claims manager that is compensated on a contingent basis or is otherwise provided with financial incentives based on the quantum of claims paid; or 10. The Subscribing Reinsurer has failed to comply with the funding requirements set forth in the Reserves Article. C. The "term of this Contract" as used herein shall mean the period from 12:01 a.m., Eastern Standard Time, June 1, 2018 to 12:01 a.m., Eastern Standard Time, June 1, 2019. However, if this Contract is terminated, the "term of this Contract" as used herein shall mean the period from 12:01 a.m., Eastern Standard Time, June 1, 2018 to the effective time and date of termination. D. If this Contract is terminated or expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the termination or expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. 18\F7V1085 Page 2

 
Article 3 - Territory This Contract shall only apply to risks located in the State of Florida. Article 4 - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company under obligatory reinsurance agreements, except business assumed by the Company from Citizens Property Insurance Corporation. 2. Hail damage to growing or standing crops. 3. Business rated, coded or classified as Flood insurance or which should have been rated, coded or classified as such. 4. Business rated, coded or classified as Mortgage Impairment and Difference in Conditions insurance or which should have been rated, coded or classified as such. 5. Title insurance and all forms of Financial Guarantee, Credit and Insolvency. 6. Aviation, Ocean Marine, Boiler and Machinery, Fidelity and Surety, Accident and Health, Animal Mortality and Workers Compensation and Employers Liability. 7. Errors and Omissions, Malpractice and any other type of Professional Liability insurance. 8. Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25.0% of the Company's property loss under the applicable original policy. 9. Loss or liability as excluded under the provisions of the "War Exclusion Clause" attached to and forming part of this Contract. 10. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)" attached to and forming part of this Contract. 11. Loss or liability from any Pool, Association or Syndicate and any assessment or similar demand for payment related to the FHCF or Citizens Property Insurance Corporation. 12. Loss or liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the 18\F7V1085 Page 3

 
Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 13. Losses in the respect of overhead transmission and distribution lines other than those on or within 150 meters (or 500 feet) of the insured premises. 14. Mold, unless resulting from a peril otherwise covered under the policy involved. 15. Loss or liability as excluded under the provisions of the "Terrorism Exclusion" attached to and forming part of this Contract. 16. All property loss, damage, destruction, erasure, corruption or alteration of Electronic Data from any cause whatsoever (including, but not limited to, Computer Virus) or loss of use, reduction in functionality, cost, expense or whatsoever nature resulting therefrom, unless resulting from a peril otherwise covered under the policy involved. "Electronic Data" as used herein means facts, concepts and information converted to a form usable for communications, interpretation or processing by electronic and electromechanical data processing or electronically-controlled equipment and includes programs, software and other coded instructions for the processing and manipulation of data or the direction and manipulation of such equipment. "Computer Virus" as used herein means a set of corrupting, harmful or otherwise unauthorized instructions or code, including a set of maliciously-introduced, unauthorized instructions or code, that propagate themselves through a computer system network of whatsoever nature. However, in the event that a peril otherwise covered under the policy results from any of the matters described above, this Contract, subject to all other terms and conditions, will cover physical damage directly caused by such listed peril. Article 5 - Retention and Limit A. Subject further to the provisions of paragraph B below, the Company shall retain and be liable for the first $297,000,000 of ultimate net loss arising out of any one loss occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the Reinsurer's liability for ultimate net loss (plus an allowance for loss adjustment expense) shall not exceed $934,000,000 as respects all losses arising out of loss occurrences commencing during the term of this Contract. B. The amounts provided for in paragraph A above are based on an estimate of the Company's Florida Hurricane Catastrophe Fund ("FHCF") Mandatory layer. Such amounts shall be provisional, and shall be further adjusted to the Company's actual FHCF Mandatory layer used in its Reimbursement Contract for the 2018/2019 hurricane season beginning on June 1, 2018 (hereinafter the "Reimbursement Contract"). 18\F7V1085 Page 4

 
C. Notwithstanding the provisions of paragraphs A and B above, the following shall apply: 1. When the Company experiences ultimate net loss from one or two covered events during the term of this Contract, the Company’s full retention shall be applied to each of the covered events; and 2. When the Company experiences ultimate net loss from more than two covered events during the term of this Contract, the Company’s full retention shall be applied to each of the two covered events causing the largest ultimate net loss for the Company. For each other covered event resulting in ultimate net loss, the Company’s retention shall be reduced to one - third of its full retention and applied to all other covered events. D. No claim will be made under this Contract in any one loss occurrence unless at least two risks insured or reinsured by the Company are involved in such loss occurrence. E. As part of the Reinsurer's limit of liability set forth in paragraphs A and B above, the Reinsurer shall be liable for an amount equal to 5.0% of ultimate net loss paid or to be paid by the Reinsurer as an allowance for loss adjustment expense incurred by the Company. Article 6 - Other Reinsurance The Company shall be permitted to carry other reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. Article 7 - Definitions A. "Loss in excess of policy limits" and "extra contractual obligations" as used in this Contract shall mean: 1. "Loss in excess of policy limits" shall mean 90.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, such loss in excess of the Company's policy limits having been incurred because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company's alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. Any loss in excess of policy limits that is made in connection with this Contract shall not exceed 25.0% of the actual catastrophe loss. 2. "Extra contractual obligations" shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company, not covered by any other provision of this Contract and which arise from the handling of any claim on business subject to this Contract, such liabilities arising because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company's alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent 18\F7V1085 Page 5

 
upon such an action. An extra contractual obligation shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy. Any extra contractual obligations that are made in connection with this Contract shall not exceed 25.0% of the actual catastrophe loss. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. B. "Policies" as used in this Contract shall mean all policies, contracts and binders of insurance or reinsurance. C. "Ultimate net loss" as used in this Contract shall mean the sum or sums (including loss in excess of policy limits and extra contractual obligations, as defined herein) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. Article 8 - Loss Occurrence A. "Loss occurrence" as used in this Contract shall mean the sum of individual insured losses incurred under Policies resulting from the same covered event. B. "Covered event" as used in this Contract shall mean any one storm declared to be a hurricane by the National Hurricane Center of the National Weather Service or any other division of the National Weather Service, operated by the National Oceanographic and Atmospheric Administration of the United States Government (NHC) which causes insured losses in Florida. A covered event begins when a hurricane causes damage in Florida while it is a hurricane and continues throughout any subsequent downgrades in storm status by the National Hurricane Center regardless of whether the hurricane makes landfall. Any storm, including a tropical storm, which does not become a hurricane is not a covered event. Article 9 - Loss Notices and Settlements A. Whenever losses sustained by the Company are reserved by the Company for an amount greater than 50.0% of the Company's retention hereunder and/or appear likely to result in a claim under this Contract, the Company shall notify the Subscribing Reinsurers and shall provide updates related to development of such losses. The Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract and the terms of the original policy (with the exception of loss in excess of policy 18\F7V1085 Page 6

 
limits or extra contractual obligations coverage, if any, under this Contract), shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable, including the associated allowance for loss adjustment expense, upon receipt of reasonable evidence of the amount paid by the Company. Article 10 - Cash Call Notwithstanding the provisions of the Loss Notices and Settlements Article, upon the request of the Company, the Reinsurer shall pay any amount with regard to a loss settlement or settlements (including the associated allowance for loss adjustment expense) that are scheduled to be made (including any payments projected to be made) within the next 20 days by the Company, subject to receipt by the Reinsurer of a satisfactory proof of loss. Such agreed payment shall be made within 10 days from the date the demand for payment was transmitted to the Reinsurer. Article 11 - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights, if, in the Company's opinion, it is economically reasonable to do so. Article 12 - Reinsurance Premium A. As premium for reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer a premium equal to the product of the following (or a pro rata portion thereof in the event the term of this Contract is less than 12 months): 1. The final rate on line determined in accordance with the Company's Reimbursement Contract; times 2. The Company's actual limit under the FHCF Mandatory layer used in its Reimbursement Contract. B. The Company shall pay the Reinsurer an annual deposit premium of *****, in four equal installments of ***** on July 1 and October 1 of 2018, and on January 1 and April 1 of 2019. However, in the event this Contract is terminated, there shall be no deposit premium installments due after the effective date of termination. C. On or before May 31, 2019, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for the term of this Contract, computed in accordance with 18\F7V1085 Page 7

 
paragraph A above, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. Article 13 - Sanctions Neither the Company nor any Subscribing Reinsurer shall be liable for premium or loss under this Contract if it would result in a violation of any mandatory sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America that are applicable to either party. Article 14 - Late Payments A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in the Intermediary Article (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest charge on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest charges have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due 10 days after the proof of loss or demand for payment is transmitted to the Reinsurer. If such loss or claim payment is not received within the 10 days, interest will accrue on the payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment was transmitted to the Reinsurer. 18\F7V1085 Page 8

 
3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of this paragraph C, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 10 days following transmittal of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest charges due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest charge on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. Interest charges arising out of the application of this Article that are $1,000 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article 15 - Offset The Company and the Reinsurer may offset any balance or amount due from one party to the other under this Contract or any other contract heretofore or hereafter entered into between the Company and the Reinsurer, whether acting as assuming reinsurer or ceding company. The provisions of this Article shall not be affected by the insolvency of either party. Article 16 - Access to Records The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance, provided the Reinsurer gives the Company at least 15 days prior notice of request for such access. However, a Subscribing Reinsurer or its designated representatives shall not have any right of access to the records of the Company if it is not current in all undisputed payments due the Company. "Undisputed" as used herein shall mean any amount that the Subscribing Reinsurer has not contested in writing to the Company specifying the reason(s) why the payments are disputed. Article 17 - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications 18\F7V1085 Page 9

 
of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article 18 - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article 19 - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article 20 - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article 21 - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. 18\F7V1085 Page 10

 
Article 22 - Federal Excise Tax (BRMA 17D) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article 23 - Foreign Account Tax Compliance Act A. To the extent the Reinsurer is subject to the deduction and withholding of premium payable hereon as set forth in the Foreign Account Tax Compliance Act (Sections 1471-1474 of the Internal Revenue Code), the Reinsurer shall allow such deduction and withholding from the premium payable under this Contract. B. In the event of any return of premium becoming due hereunder, the return premium shall be determined and paid in full without regard to any amounts deducted or withheld under paragraph A of this Article. In the event the Company or its agent recovers such premium deductions and withholdings on the return premium from the United States Government, the Company or its agent shall reimburse the Reinsurer for such amounts. Article 24 - Reserves A. The Reinsurer agrees to fund its share of amounts, including but not limited to, the Company's ceded unearned premium and outstanding loss and the allowance for loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) (hereinafter referred to as "Reinsurer's Obligations") by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if the Reinsurer: 1. Is unauthorized in any state of the United States of America or the District of Columbia having jurisdiction over the Company and if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved; or 18\F7V1085 Page 11

 
2. Has an A.M. Best Company's rating equal to or below B++ at the inception of this Contract. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or the allowance for loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of amounts, including but not limited to, the Reinsurer's Obligations as set forth above, funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of amounts, including but not limited to, the Reinsurer's Obligations as set forth above, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article 25 - Insolvency A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the 18\F7V1085 Page 12

 
Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more Subscribing Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. Article 26 - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. 18\F7V1085 Page 13

 
C. If more than one Subscribing Reinsurer is involved in the same dispute, all such Subscribing Reinsurers shall, at the option of the Company, constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the Subscribing Reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such Subscribing Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Subscribing Reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. Article 27 - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article 28 - Severability (BRMA 72E) If any provision of this Contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Contract or the enforceability of such provision in any other jurisdiction. 18\F7V1085 Page 14

 
Article 29 - Governing Law (BRMA 71B) This Contract shall be governed by and construed in accordance with the laws of the State of Florida. Article 30 - Confidentiality A. The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract, including all information obtained through any audits and any claims information between the Company and the Reinsurer, and any submission or other materials relating to any renewal (hereinafter referred to as "Confidential Information") are proprietary and confidential to the Company. B. Except as provided for in paragraph C below, the Reinsurer shall not disclose any Confidential Information to any third parties, including but not limited to the Reinsurer's subsidiaries and affiliates, other insurance companies and their subsidiaries and affiliates, underwriting agencies, research organizations, any unaffiliated entity engaged in modeling insurance or reinsurance data, and statistical rating organizations. C. Confidential Information may be used by the Reinsurer only in connection with the performance of its obligations or enforcement of its rights under this Contract and will only be disclosed when required by (1) retrocessionaires subject to the business ceded to this Contract, (2) regulators performing an audit of the Reinsurer's records and/or financial condition, (3) external auditors performing an audit of the Reinsurer's records in the normal course of business, or (4) the Reinsurer's legal counsel; provided that the Reinsurer advises such parties of the confidential nature of the Confidential Information and their obligation to maintain its confidentiality. The Company may require that any third-party representatives of the Reinsurer agree, in writing, to be bound by this Confidentiality Article or by a separate written confidentiality agreement, containing terms no less stringent than those set forth in this Article. If a third-party representative of the Reinsurer is not bound, in writing, by this Confidentiality Article or by a separate written confidentiality agreement, the Reinsurer shall be responsible for any breach of this provision by such third-party representative of the Reinsurer. D. Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company with written notice of same at least 10 days prior to such release or disclosure, to the extent legally permissible, and to use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article. E. Any disclosure of Non-Public Personally Identifiable Information shall comply with all state and federal statutes and regulations governing the disclosure of Non-Public Personally Identifiable Information. "Non-Public Personally Identifiable Information" shall be defined as this term or a similar term is defined in any applicable state, provincial, territory, or federal law. Disclosing or using this information for any purpose not authorized by applicable law is expressly forbidden without the prior consent of the Company. 18\F7V1085 Page 15

 
F. The parties agree that any information subject to privilege, including the attorney-client privilege or attorney work product doctrine (collectively "Privilege") shall not be disclosed to the Reinsurer until, in the Company's opinion, such Privilege is deemed to be waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. Furthermore, the Reinsurer shall not assert that any Privilege otherwise applicable to the Confidential Information has been waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. G. The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns. Article 31 - Non-Waiver The failure of the Company or Reinsurer to insist on compliance with this Contract or to exercise any right, remedy or option hereunder shall not: (1) constitute a waiver of any rights contained in this Contract, (2) prevent the Company or Reinsurer from thereafter demanding full and complete compliance, (3) prevent the Company or Reinsurer from exercising such remedy in the future, nor (4) affect the validity of this Contract or any part thereof. Article 32 - Notices and Contract Execution A. Whenever a notice, statement, report or any other written communication is required by this Contract, unless otherwise specified, such notice, statement, report or other written communication may be transmitted by certified or registered mail, nationally or internationally recognized express delivery service, personal delivery, electronic mail, or facsimile. With the exception of notices of termination, first class mail is also acceptable. B. The use of any of the following shall constitute a valid execution of this Contract or any amendments thereto: 1. Paper documents with an original ink signature; 2. Facsimile or electronic copies of paper documents showing an original ink signature; and/or 3. Electronic records with an electronic signature made via an electronic agent. For the purposes of this Contract, the terms "electronic record," "electronic signature" and "electronic agent" shall have the meanings set forth in the Electronic Signatures in Global and National Commerce Act of 2000 or any amendments thereto. C. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original. 18\F7V1085 Page 16

 
Article 33 - Intermediary Aon Benfield Inc., or one of its affiliated corporations duly licensed as a reinsurance intermediary, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating to this Contract will be transmitted to the Company or the Reinsurer through the Intermediary. Payments by the Company to the Intermediary will be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary will be deemed payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date specified below: This 28th day of March in the year 2018. Federated National Insurance Company /s/ Michael H. Braun 18\F7V1085 Page 17

 
War Exclusion Clause As regards interests which at time of loss or damage are on shore, no liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 18\F7V1085

 
Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.) 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 12/12/57 N.M.A. 1119 BRMA 35B 18\F7V1085

 
Terrorism Exclusion (Property Treaty Reinsurance) Notwithstanding any provision to the contrary within this Contract or any amendment thereto, it is agreed that this Contract excludes loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with any act of terrorism, as defined herein, regardless of any other cause or event contributing concurrently or in any other sequence to the loss. An act of terrorism includes any act, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of political, religious, ideological or similar purposes to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which: 1. Involves violence against one or more persons, or 2. Involves damage to property; or 3. Endangers life other than the person committing the action; or 4. Creates a risk to health or safety of the public or a section of the public; or 5. Is designed to interfere with or disrupt an electronic system. This Contract also excludes loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against or responding to any act of terrorism. Notwithstanding the above and subject otherwise to the terms, conditions, and limitations of this Contract, in respect only of personal lines, this Contract will pay actual loss or damage (but not related cost and expense) caused by any act of terrorism provided such act is not directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with radiological, biological, chemical, or nuclear pollution or contamination. 18\F7V1085

 
The Interests and Liabilities Agreements, constituting 30 pages in total, have been omitted in accordance with Rule 24b-2 under the Exchange Act. These pages have been filed separately with the Securities and Exchange Commission. 18\F7V1085

 
Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida *****Portions of this document omitted pursuant to an application for an order for confidential treatment pursuant to Rule 24b-2 under the Exchange Act. Confidential portions of this document have been filed separately with the Securities and Exchange Commission. 18\F7V1075

 
Table of Contents Article Page 1 Classes of Business Reinsured 1 2 Commencement and Termination 1 3 Territory 3 4 Exclusions 3 5 Retention and Limit 4 6 Other Reinsurance 5 7 Reinstatement 5 8 Definitions 6 9 Loss Occurrence 7 10 Loss Notices and Settlements 9 11 Cash Call 9 12 Salvage and Subrogation 10 13 Reinsurance Premium 10 14 Sanctions 11 15 Late Payments 11 16 Offset 12 17 Access to Records 12 18 Liability of the Reinsurer 13 19 Net Retained Lines (BRMA 32E) 13 20 Errors and Omissions (BRMA 14F) 13 21 Currency (BRMA 12A) 13 22 Taxes (BRMA 50B) 14 23 Federal Excise Tax (BRMA 17D) 14 24 Foreign Account Tax Compliance Act 14 25 Reserves 14 26 Insolvency 16 27 Arbitration 16 28 Service of Suit (BRMA 49C) 17 29 Severability (BRMA 72E) 18 30 Governing Law (BRMA 71B) 18 31 Confidentiality 18 32 Non-Waiver 19 33 Notices and Contract Execution 19 34 Intermediary 20 Schedule A 18\F7V1075

 
Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract Effective: July 1, 2018 entered into by and between FedNat Insurance Company Sunrise, Florida (hereinafter referred to as the "Company") and The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article 1 - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies in force at the effective time and date hereof or issued or renewed at or after that time and date, and classified by the Company as Property business, including but not limited to, Dwelling Fire, Inland Marine, Mobile Home, Commercial and Homeowners business (including any business assumed from Citizens Property Insurance Corporation), subject to the terms, conditions and limitations set forth herein and in Schedule A attached hereto. Article 2 - Commencement and Termination A. This Contract shall become effective at 12:01 a.m., Eastern Standard Time, July 1, 2018, with respect to losses arising out of loss occurrences commencing at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, July 1, 2019. B. Notwithstanding the provisions of paragraph A above, the Company may terminate a Subscribing Reinsurer's percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event any of the following circumstances occur: 1. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at the inception of this Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) 12 months prior to that date; or 2. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at any time during the term of this Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) at the date of the Subscribing Reinsurer's most recent financial 18\F7V1075 Page 1

 
statement filed with regulatory authorities and available to the public as of the inception of this Contract; or 3. The Subscribing Reinsurer's A.M. Best's rating has been assigned or downgraded below A- and/or Standard & Poor's rating has been assigned or downgraded below BBB+; or 4. The Subscribing Reinsurer has become, or has announced its intention to become, merged with, acquired by or controlled by any other entity or individual(s) not controlling the Subscribing Reinsurer's operations previously; or 5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or 6. The Subscribing Reinsurer has become insolvent or has been placed into liquidation, receivership, supervision, administration, winding-up or under a scheme of arrangement, or similar proceedings (whether voluntary or involuntary) or proceedings have been instituted against the Subscribing Reinsurer for the appointment of a receiver, liquidator, rehabilitator, supervisor, administrator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or 7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company's prior written consent; or 8. The Subscribing Reinsurer has ceased assuming new or renewal property or casualty treaty reinsurance business; or 9. The Subscribing Reinsurer has hired an unaffiliated runoff claims manager that is compensated on a contingent basis or is otherwise provided with financial incentives based on the quantum of claims paid; or 10. The Subscribing Reinsurer has failed to comply with the funding requirements set forth in the Reserves Article. C. The "term of this Contract" as used herein shall mean the period from 12:01 a.m., Eastern Standard Time, July 1, 2018 to 12:01 a.m., Eastern Standard Time, July 1, 2019. However, if this Contract is terminated, the "term of this Contract" as used herein shall mean the period from 12:01 a.m., Eastern Standard Time, July 1, 2018 to the effective time and date of termination. D. If this Contract is terminated or expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the termination or expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. 18\F7V1075 Page 2

 
Article 3 - Territory The territorial limits of this Contract shall be identical with those of the Company's policies, excluding risks located in the State of Florida. Article 4 - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company under obligatory reinsurance agreements, except business assumed by the Company from Citizens Property Insurance Corporation. 2. Hail damage to growing or standing crops. 3. Business rated, coded or classified as Flood insurance or which should have been rated, coded or classified as such. 4. Business rated, coded or classified as Mortgage Impairment and Difference in Conditions insurance or which should have been rated, coded or classified as such. 5. Title insurance and all forms of Financial Guarantee, Credit and Insolvency. 6. Aviation, Ocean Marine, Boiler and Machinery, Fidelity and Surety, Accident and Health, Animal Mortality and Workers Compensation and Employers Liability. 7. Errors and Omissions, Malpractice and any other type of Professional Liability insurance. 8. Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25.0% of the Company's property loss under the applicable original policy. 9. Loss or liability as excluded under the provisions of the "War Exclusion Clause" attached to and forming part of this Contract. 10. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)" attached to and forming part of this Contract. 11. Loss or liability excluded by the Pools, Associations and Syndicates Exclusion Clause (Catastrophe) attached to and forming part of this Contract and any assessment or similar demand for payment related to the FHCF or Citizens Property Insurance Corporation. 12. Loss or liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, 18\F7V1075 Page 3

 
pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 13. Losses in the respect of overhead transmission and distribution lines other than those on or within 150 meters (or 500 feet) of the insured premises. 14. Mold, unless resulting from a peril otherwise covered under the policy involved. 15. Loss or liability as excluded under the provisions of the "Terrorism Exclusion" attached to and forming part of this Contract. 16. All property loss, damage, destruction, erasure, corruption or alteration of Electronic Data from any cause whatsoever (including, but not limited to, Computer Virus) or loss of use, reduction in functionality, cost, expense or whatsoever nature resulting therefrom, unless resulting from a peril otherwise covered under the policy involved. "Electronic Data" as used herein means facts, concepts and information converted to a form usable for communications, interpretation or processing by electronic and electromechanical data processing or electronically-controlled equipment and includes programs, software and other coded instructions for the processing and manipulation of data or the direction and manipulation of such equipment. "Computer Virus" as used herein means a set of corrupting, harmful or otherwise unauthorized instructions or code, including a set of maliciously-introduced, unauthorized instructions or code, that propagate themselves through a computer system network of whatsoever nature. However, in the event that a peril otherwise covered under the policy results from any of the matters described above, this Contract, subject to all other terms and conditions, will cover physical damage directly caused by such listed peril. Article 5 - Retention and Limit A. Coverage A: The Company shall retain and be liable for the first $15,000,000 of ultimate net loss arising out of each loss occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed the amount, shown as "Reinsurer's Per Occurrence Limit" for Coverage A in Schedule A attached hereto, as respects any one loss occurrence. B. Coverage B: The Company shall retain and be liable for the first $2,000,000 of ultimate net loss arising out of each loss occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention (subject to the provisions of paragraph C below), but the liability of the Reinsurer shall not exceed the amount, shown as "Reinsurer's Per Occurrence Limit" for Coverage B in Schedule A attached hereto, as respects any one loss occurrence, nor shall it exceed the amount, shown as "Reinsurer's 18\F7V1075 Page 4

 
Term Limit" for Coverage B in Schedule A attached hereto, in all during the term of this Contract. This Coverage B shall only apply to losses arising out of any hurricane named at the time of landfall. C. Notwithstanding the provisions of paragraph B above, no claim shall be made under Coverage B unless and until the Company's subject excess ultimate net loss arising out of loss occurrences commencing during the term of this Contract exceeds $13,000,000 in the aggregate. "Subject excess ultimate net loss" as used herein shall mean the amount, if any, but which the Company's ultimate net loss arising out of any one loss occurrence exceeds $2,000,000, but said amount shall not exceed $13,000,000 in excess of $2,000,000 as respects any one loss occurrence. D. Notwithstanding the provisions above, no claim shall be made under any coverage section as respects losses arising out of loss occurrences commencing during the term of this Contract unless at least two risks insured or reinsured by the Company are involved in such loss occurrence. For purposes hereof, the Company shall be the sole judge of what constitutes "one risk." Article 6 - Other Reinsurance The Company shall be permitted to carry other reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. Article 7 - Reinstatement A. In the event all or any portion of the reinsurance coverage provided under Coverage A is exhausted by ultimate net loss, the amount so exhausted shall be reinstated immediately from the time the loss occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium equal to the product of the following: 1. The percentage of the occurrence limit for Coverage A reinstated (based on the ultimate net loss paid by the Reinsurer under Coverage A); times 2. The earned reinsurance premium for Coverage A for the term of this Contract (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any ultimate net loss under Coverage A, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer for that coverage section. If the earned reinsurance premium for Coverage A for the term of this Contract has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due for Coverage A shall be based on the amount shown as "Annual Deposit Premium" for Coverage A in Schedule A attached hereto, and shall be readjusted when the earned reinsurance premium for Coverage A for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer for Coverage A as reflected by any 18\F7V1075 Page 5

 
such statement (less prior payments, if any, for that coverage section) shall be payable by the Company concurrently with payment by the Reinsurer of the requested ultimate net loss for Coverage A. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer for ultimate net loss under any coverage section shall not exceed either of the following: 1. The amount, shown as "Reinsurer's Per Occurrence Limit" for that coverage section in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or 2. The amount, shown as "Reinsurer's Term Limit" for that coverage section in Schedule A attached hereto, in all during the term of this Contract. Article 8 - Definitions A. "Loss adjustment expense," regardless of how such expenses are classified for statutory reporting purposes, as used in this Contract shall mean all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including a) pre-judgment interest, unless included as part of the award or judgment; b) post-judgment interest; c) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including Declaratory Judgment Expense; and d) expenses and a pro rata share of salaries of the Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss adjustment expense as defined above does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than in (d) above, and office and other overhead expenses. B. "Loss in excess of policy limits" and "extra contractual obligations" as used in this Contract shall mean: 1. "Loss in excess of policy limits" shall mean 90.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, such loss in excess of the Company's policy limits having been incurred because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company's alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. Any loss in excess of policy limits that is made in connection with this Contract shall not exceed 25.0% of the actual catastrophe loss. 2. "Extra contractual obligations" shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company, not 18\F7V1075 Page 6

 
covered by any other provision of this Contract and which arise from the handling of any claim on business subject to this Contract, such liabilities arising because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company's alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. An extra contractual obligation shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy. Any extra contractual obligations that are made in connection with this Contract shall not exceed 25.0% of the actual catastrophe loss. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. C. "Policies" as used in this Contract shall mean all policies, contracts and binders of insurance or reinsurance. D. "Ultimate net loss" as used in this Contract shall mean the sum or sums (including loss in excess of policy limits, extra contractual obligations and loss adjustment expense, as defined herein) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. Article 9 - Loss Occurrence A. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards a named storm, all individual losses sustained by the Company occurring during any period (a) from and after 12:00 a.m. Eastern Standard Time on the date a watch, warning, advisory, or other bulletin (whether for wind, flood or otherwise) for such named storm is first issued by the National Hurricane Center ("NHC") or its successor or any other division of the National Weather Service ("NWS"), (b) continuing for a time period thereafter during which such named storm continues, regardless of its category rating or lack thereof and regardless of whether the watch, warning, or advisory or other bulletin remains in effect for such named storm and (c) ending 96 hours following the issuance of the last watch, warning or advisory or 18\F7V1075 Page 7

 
other bulletin for such named storm or related to such named storm by the NHC or its successor or any other division of the NWS. "Named storm" shall mean any storm or storm system that has been declared by the NHC or its successor or any other division of the NWS to be a named storm at any time, which may include, by way of example and not limitation, hurricane, wind, gusts, typhoon, tropical storm, hail, rain, tornados, cyclones, ensuing flood, storm surge, water damage, fire following, sprinkler leakage, riots, vandalism, and collapse, and all losses and perils (including, by way of example and not limitation, those mentioned previously in this sentence) in each case arising out of, caused by, occurring during, occasioned by or resulting from such storm or storm system, including by way of example and not limitation the merging of one or more separate storm(s) or storm system(s) into a combined storm surge event. However, the named storm need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards storm or storm systems that are not a named storm, including, by way of example and not limitation, ensuing wind, gusts, typhoon, tropical storm, hail, rain, tornados, cyclones, ensuing flood, storm surge, fire following, sprinkler leakage, riots, vandalism, collapse and water damage, all individual losses sustained by the Company occurring during any period of 144 consecutive hours arising out of, caused by, occurring during, occasioned by or resulting from the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 3. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 96 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 96 consecutive hours may be extended in respect of individual losses which occur beyond such 96 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 4. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the introductory portion of this paragraph) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's loss occurrence. 5. As regards freeze, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's loss occurrence. 6. As regards firestorms, brush fires and any other fires or series of fires, irrespective of origin (except as provided in subparagraphs 3 and 4 above), all individual losses sustained by the Company which commence during any period of 168 consecutive hours within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another may be included in the Company's loss occurrence. 18\F7V1075 Page 8

 
B. For all loss occurrences hereunder, the Company may choose the date and time when any such period of consecutive hours commences, provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident, or loss or series of disasters, accidents, or losses. Furthermore: 1. For all loss occurrences other than those referred to in subparagraphs A.1., A.2., and A.3. above, only one such period of 168 consecutive hours shall apply with respect to one event. 2. As regards those loss occurrences referred to in subparagraphs A.1. and A.2., only one such period of consecutive hours (as set forth therein) shall apply with respect to one event, regardless of the duration of the event. 3. As regards those loss occurrences referred to in subparagraph A.3. above, if the disaster, accident, or loss or series of disasters, accidents, or losses occasioned by the event is of greater duration than 96 consecutive hours, then the Company may divide that disaster, accident, or loss or series of disasters, accidents, or losses into two or more loss occurrences, provided that no two periods overlap and no individual loss is included in more than one such period. C. It is understood that losses arising from a combination of two or more perils as a result of the same event may be considered as having arisen from one loss occurrence. Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils, and no single loss occurrence shall encompass a time period greater than 168 consecutive hours, except as regards those loss occurrences referred to in subparagraphs A.1., A.4. and A.6. above. Article 10 - Loss Notices and Settlements A. Whenever losses sustained by the Company are reserved by the Company for an amount greater than 50.0% of the Company's retention under any coverage section hereunder and/or appear likely to result in a claim under such coverage section, the Company shall notify the Subscribing Reinsurers under that coverage section and shall provide updates related to development of such losses. The Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract and the terms of the original policy (with the exception of loss in excess of policy limits or extra contractual obligations coverage, if any, under this Contract), shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid by the Company. Article 11 - Cash Call Notwithstanding the provisions of the Loss Notices and Settlements Article, upon the request of the Company, the Reinsurer shall pay any amount with regard to a loss settlement or settlements that are scheduled to be made (including any payments projected to be made) 18\F7V1075 Page 9

 
within the next 20 days by the Company, subject to receipt by the Reinsurer of a satisfactory proof of loss. Such agreed payment shall be made within 10 days from the date the demand for payment was transmitted to the Reinsurer. Article 12 - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights, if, in the Company's opinion, it is economically reasonable to do so. Article 13 - Reinsurance Premium A. As premium for each coverage section of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer a premium equal to the product of the following (or a pro rata portion thereof in the event the term of this Contract is less than 12 months), subject to a minimum premium of the amount, shown as "Minimum Premium" for that coverage section in Schedule A attached hereto (or a pro rata portion thereof in the event the term of this Contract is less than 12 months): 1. The amount, shown as "Annual Deposit Premium" for that coverage section in Schedule A attached hereto; times 2. The percentage calculated by dividing (a) the actual Average Annual Loss ("AAL") determined by the Company's wind insurance in force on September 30, 2018, by (b) the original AAL of the amount, shown as "AAL" for that coverage section in Schedule A attached hereto. The Company's AAL shall be derived by averaging the applicable data produced by Applied Insurance Research (AIR) Touchstone v5 and Risk Management Solutions (RMS) RiskLink v17 catastrophe modeling software, in the long-term perspective, including secondary uncertainty and loss amplification, but excluding storm surge. It is understood that the calculation of the actual AAL shall be based on the amount, shown as "Reinsurer's Per Occurrence Limit" for that coverage section in Schedule A attached hereto.  B. The Company shall pay the Reinsurer an annual deposit premium for each coverage section of the amount, shown as "Annual Deposit Premium" for that coverage section in Schedule A attached hereto, in four equal installments of the amount, shown as "Deposit Premium Installment" for that coverage section in Schedule A attached hereto, on July 1 and October 1 of 2018, and on January 1 and April 1 of 2019. However, in the event this Contract is terminated, there shall be no deposit premium installments due after the effective date of termination. 18\F7V1075 Page 10

 
C. On or before June 30, 2019, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for each coverage section for the term of this Contract, computed in accordance with paragraph A above, and any additional premium due the Reinsurer or return premium due the Company for each such coverage section shall be remitted promptly. Article 14 - Sanctions Neither the Company nor any Subscribing Reinsurer shall be liable for premium or loss under this Contract if it would result in a violation of any mandatory sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America that are applicable to either party. Article 15 - Late Payments A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in the Intermediary Article (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest charge on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest charges have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due 10 days after the proof of loss or demand for payment is transmitted to the Reinsurer. If such 18\F7V1075 Page 11

 
loss or claim payment is not received within the 10 days, interest will accrue on the payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment was transmitted to the Reinsurer. 3. As respects a "cash call" made in accordance with the Cash Call Article, payment shall be deemed due 10 days after the demand for payment is transmitted to the Reinsurer. If such loss or claim payment is not received within the 10 days, interest shall accrue on the payment or amount overdue in accordance with paragraph B above, from the date the demand for payment was transmitted to the Reinsurer. 4. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1, 2, and 3 of this paragraph C, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 10 days following transmittal of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest charges due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest charge on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. Interest charges arising out of the application of this Article that are $1,000 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article 16 - Offset The Company and the Reinsurer may offset any balance or amount due from one party to the other under this Contract or any other contract heretofore or hereafter entered into between the Company and the Reinsurer, whether acting as assuming reinsurer or ceding company. The provisions of this Article shall not be affected by the insolvency of either party. Article 17 - Access to Records The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance, provided the Reinsurer gives the Company at least 15 days prior notice of request for such access. However, a 18\F7V1075 Page 12

 
Subscribing Reinsurer or its designated representatives shall not have any right of access to the records of the Company if it is not current in all undisputed payments due the Company. "Undisputed" as used herein shall mean any amount that the Subscribing Reinsurer has not contested in writing to the Company specifying the reason(s) why the payments are disputed. Article 18 - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article 19 - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article 20 - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article 21 - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. 18\F7V1075 Page 13

 
B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article 22 - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article 23 - Federal Excise Tax (BRMA 17D) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article 24 - Foreign Account Tax Compliance Act A. To the extent the Reinsurer is subject to the deduction and withholding of premium payable hereon as set forth in the Foreign Account Tax Compliance Act (Sections 1471-1474 of the Internal Revenue Code), the Reinsurer shall allow such deduction and withholding from the premium payable under this Contract. B. In the event of any return of premium becoming due hereunder, the return premium shall be determined and paid in full without regard to any amounts deducted or withheld under paragraph A of this Article. In the event the Company or its agent recovers such premium deductions and withholdings on the return premium from the United States Government, the Company or its agent shall reimburse the Reinsurer for such amounts. Article 25 - Reserves A. The Reinsurer agrees to fund its share of amounts, including but not limited to, the Company's ceded unearned premium and outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) (hereinafter referred to as "Reinsurer's Obligations") by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or 18\F7V1075 Page 14

 
banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if the Reinsurer: 1. Is unauthorized in any state of the United States of America or the District of Columbia having jurisdiction over the Company and if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved; or 2. Has an A.M. Best Company's rating equal to or below B++ at the inception of this Contract. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of amounts, including but not limited to, the Reinsurer's Obligations as set forth above, funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of amounts, including but not limited to, the Reinsurer's Obligations as set forth above, if so requested by the Reinsurer. 18\F7V1075 Page 15

 
In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article 26 - Insolvency A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more Subscribing Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. Article 27 - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 18\F7V1075 Page 16

 
30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one Subscribing Reinsurer is involved in the same dispute, all such Subscribing Reinsurers shall, at the option of the Company, constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the Subscribing Reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such Subscribing Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Subscribing Reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. Article 28 - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests 18\F7V1075 Page 17

 
and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article 29 - Severability (BRMA 72E) If any provision of this Contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Contract or the enforceability of such provision in any other jurisdiction. Article 30 - Governing Law (BRMA 71B) This Contract shall be governed by and construed in accordance with the laws of the State of Florida. Article 31 - Confidentiality A. The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract, including all information obtained through any audits and any claims information between the Company and the Reinsurer, and any submission or other materials relating to any renewal (hereinafter referred to as "Confidential Information") are proprietary and confidential to the Company. B. Except as provided for in paragraph C below, the Reinsurer shall not disclose any Confidential Information to any third parties, including but not limited to the Reinsurer's subsidiaries and affiliates, other insurance companies and their subsidiaries and affiliates, underwriting agencies, research organizations, any unaffiliated entity engaged in modeling insurance or reinsurance data, and statistical rating organizations. C. Confidential Information may be used by the Reinsurer only in connection with the performance of its obligations or enforcement of its rights under this Contract and will only be disclosed when required by (1) retrocessionaires subject to the business ceded to this Contract, (2) regulators performing an audit of the Reinsurer's records and/or financial condition, (3) external auditors performing an audit of the Reinsurer's records in the normal course of business, or (4) the Reinsurer's legal counsel; provided that the Reinsurer advises such parties of the confidential nature of the Confidential Information and their obligation to maintain its confidentiality. The Company may require that any third-party representatives of the Reinsurer agree, in writing, to be bound by this Confidentiality Article or by a separate written confidentiality agreement, containing terms no less stringent than those set forth in this Article. If a third-party representative of the Reinsurer is not bound, in writing, by this Confidentiality Article or by a separate written confidentiality agreement, the Reinsurer shall be responsible for any breach of this provision by such third-party representative of the Reinsurer. 18\F7V1075 Page 18

 
D. Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company with written notice of same at least 10 days prior to such release or disclosure, to the extent legally permissible, and to use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article. E. Any disclosure of Non-Public Personally Identifiable Information shall comply with all state and federal statutes and regulations governing the disclosure of Non-Public Personally Identifiable Information. "Non-Public Personally Identifiable Information" shall be defined as this term or a similar term is defined in any applicable state, provincial, territory, or federal law. Disclosing or using this information for any purpose not authorized by applicable law is expressly forbidden without the prior consent of the Company. F. The parties agree that any information subject to privilege, including the attorney-client privilege or attorney work product doctrine (collectively "Privilege") shall not be disclosed to the Reinsurer until, in the Company's opinion, such Privilege is deemed to be waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. Furthermore, the Reinsurer shall not assert that any Privilege otherwise applicable to the Confidential Information has been waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. G. The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns. Article 32 - Non-Waiver The failure of the Company or Reinsurer to insist on compliance with this Contract or to exercise any right, remedy or option hereunder shall not: (1) constitute a waiver of any rights contained in this Contract, (2) prevent the Company or Reinsurer from thereafter demanding full and complete compliance, (3) prevent the Company or Reinsurer from exercising such remedy in the future, nor (4) affect the validity of this Contract or any part thereof. Article 33 - Notices and Contract Execution A. Whenever a notice, statement, report or any other written communication is required by this Contract, unless otherwise specified, such notice, statement, report or other written communication may be transmitted by certified or registered mail, nationally or internationally recognized express delivery service, personal delivery, electronic mail, or facsimile. With the exception of notices of termination, first class mail is also acceptable. B. The use of any of the following shall constitute a valid execution of this Contract or any amendments thereto: 1. Paper documents with an original ink signature; 18\F7V1075 Page 19

 
2. Facsimile or electronic copies of paper documents showing an original ink signature; and/or 3. Electronic records with an electronic signature made via an electronic agent. For the purposes of this Contract, the terms "electronic record," "electronic signature" and "electronic agent" shall have the meanings set forth in the Electronic Signatures in Global and National Commerce Act of 2000 or any amendments thereto. C. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original. Article 34 - Intermediary Aon Benfield Inc., or one of its affiliated corporations duly licensed as a reinsurance intermediary, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating to this Contract will be transmitted to the Company or the Reinsurer through the Intermediary. Payments by the Company to the Intermediary will be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary will be deemed payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date specified below: This 9th day of August in the year 2018. FedNat Insurance Company /s/ Michael H. Braun 18\F7V1075 Page 20

 
Schedule A Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida Coverage A Coverage B Reinsurer's Per Occurrence Limit $5,000,000 $13,000,000 Reinsurer's Term Limit $10,000,000 $13,000,000 Minimum Premium ***** ***** AAL ***** ***** Annual Deposit Premium ***** ***** Deposit Premium Installments ***** ***** The figures listed above for each coverage section shall apply to each Subscribing Reinsurer in the percentage share for that coverage section as expressed in its Interests and Liabilities Agreement attached hereto. 18\F7V1075 Schedule A

 
War Exclusion Clause As regards interests which at time of loss or damage are on shore, no liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 18\F7V1075

 
Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.) 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 12/12/57 N.M.A. 1119 BRMA 35B 18\F7V1075

 
Pools, Associations and Syndicates Exclusion Clause (Catastrophe) It is hereby understood and agreed that: A. This Contract excludes loss or liability arising from: 1. Business derived directly or indirectly from any pool, association, or syndicate which maintains its own reinsurance facilities. This subparagraph 1 shall not apply with respect to: a. Residual market mechanisms created by statute. This Contract shall not extend, however, to afford coverage for liability arising from the inability of any other participant or member in the residual market mechanism to meet its obligations, nor shall this Contract extend to afford coverage for liability arising from any claim against the residual market mechanism brought by or on behalf of any insolvency fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract). For the purposes of this Clause, the California Earthquake Authority shall be deemed to be a "residual market mechanism." b. Inter-agency or inter-government joint underwriting or risk purchasing associations (however styled) created by or permitted by statute or regulation. 2. Those perils insured by the Company that the Company knows, at the time the risk is bound, to be insured by or in excess of amounts insured or reinsured by any pool, association or syndicate formed for the purpose of insuring oil, gas, or petro-chemical plants; oil or gas drilling rigs; and/or aviation risks. This subparagraph 2 shall not apply: a. If the total insured value over all interests of the risk is less than $250,000,000. b. To interests traditionally underwritten as Inland Marine or Stock or Contents written on a blanket basis. c. To Contingent Business Interruption liability, except when it is known to the Company, at the time the risk is bound, that the key location is insured by or through any pool, association or syndicate formed for the purpose of insuring oil, gas, or petro-chemical plants; oil or gas drilling rigs; and/or aviation risks; unless the total insured value over all interests of the risk is less than $250,000,000. B. With respect to loss or liability arising from the Company's participation or membership in any residual market mechanism created by statute, the Company may include in its ultimate net loss only amounts for which the Company is assessed as a direct consequence of a covered loss occurrence, subject to the following provisions: 1. Recovery is limited to perils otherwise protected hereunder. 2. In the event the terms of the Company's participation or membership in any such residual market mechanism permit the Company to recoup any such direct 18\F7V1075 Page 1 of 2

 
assessment attributed to a loss occurrence by way of a specific policy premium surcharge or similar levy on policyholders, the amount received by the Company as a result of such premium surcharge or levy shall reduce the Company's ultimate net loss for such loss occurrence. 3. The result of any rate increase filing permitted by the terms of the Company's participation or membership in any such residual market mechanism following any assessment shall have no effect on the Company's ultimate net loss for any covered loss occurrence. 4. The result of any premium tax credit filing permitted by the terms of the Company's participation or membership in any such residual market mechanism following any assessment shall reduce the Company's ultimate net loss for any covered loss occurrence. 5. The Company may not include in its ultimate net loss any amount resulting from an assessment that, pursuant to the terms of the Company's participation or membership in the residual market mechanism, the Company is required to pay only after such assessment is collected from the policyholder. 6. The ultimate net loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of a residual market mechanism nor any fines or penalties imposed on the Company for late payment. 7. If, however, a residual market mechanism only provides for assessment based on an aggregate of losses in any one contract or plan year of said mechanism, then the amount of that assessment to be included in the ultimate net loss for any one loss occurrence shall be determined by multiplying the Company's share of the aggregate assessment by a factor derived by dividing the Company's ultimate net loss (net of the assessment) with respect to the loss occurrence by the total of all of its ultimate net losses (net of assessments) from all loss occurrences included by the mechanism in determining the assessment. 8/1/2012 18\F7V1075 Page 2 of 2

 
Terrorism Exclusion (Property Treaty Reinsurance) Notwithstanding any provision to the contrary within this Contract or any amendment thereto, it is agreed that this Contract excludes loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with any act of terrorism, as defined herein, regardless of any other cause or event contributing concurrently or in any other sequence to the loss. An act of terrorism includes any act, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of political, religious, ideological or similar purposes to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which: 1. Involves violence against one or more persons, or 2. Involves damage to property; or 3. Endangers life other than the person committing the action; or 4. Creates a risk to health or safety of the public or a section of the public; or 5. Is designed to interfere with or disrupt an electronic system. This Contract also excludes loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against or responding to any act of terrorism. Notwithstanding the above and subject otherwise to the terms, conditions, and limitations of this Contract, in respect only of personal lines, this Contract will pay actual loss or damage (but not related cost and expense) caused by any act of terrorism provided such act is not directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with radiological, biological, chemical, or nuclear pollution or contamination. 18\F7V1075

 
The Interests and Liabilities Agreements, constituting 11 pages in total, have been omitted in accordance with Rule 24b-2 under the Exchange Act. These pages have been filed separately with the Securities and Exchange Commission. 18\F7V1075

 
Non-Florida Reinstatement Premium Protection Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida _______________________ *****Portions of this document omitted pursuant to an application for an order for confidential treatment pursuant to Rule 24b-2 under the Exchange Act. Confidential portions of this document have been filed separately with the Securities and Exchange Commission. 18\F7V1072

 
Table of Contents Article Page 1 Coverage 1 2 Commencement and Termination 1 3 Concurrency of Conditions 2 4 Premium 3 5 Sanctions 3 6 Loss Notices and Settlements 3 7 Late Payments 4 8 Offset 5 9 Access to Records 5 10 Errors and Omissions (BRMA 14F) 5 11 Currency (BRMA 12A) 5 12 Taxes (BRMA 50B) 6 13 Federal Excise Tax (BRMA 17D) 6 14 Foreign Account Tax Compliance Act 6 15 Reserves 6 16 Insolvency 8 17 Arbitration 8 18 Service of Suit (BRMA 49C) 9 19 Severability (BRMA 72E) 10 20 Governing Law (BRMA 71B) 10 21 Confidentiality 10 22 Non-Waiver 11 23 Notices and Contract Execution 11 24 Intermediary 12 Schedule A 18\F7V1072

 
Non-Florida Reinstatement Premium Protection Reinsurance Contract Effective: July 1, 2018 entered into by and between FedNat Insurance Company Sunrise, Florida (hereinafter referred to as the "Company") and The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article 1 - Coverage By this Contract the Reinsurer agrees to indemnify the Company for 100% of any reinstatement premium which the Company pays or becomes liable to pay as a result of loss occurrences covered under Coverage A of the Company's Non-Florida Property Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2018 (hereinafter referred to as the "Original Contract" and described in Schedule A attached hereto), subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract. Article 2 - Commencement and Termination A. This Contract shall become effective at 12:01 a.m., Eastern Standard Time, July 1, 2018, with respect to reinstatement premium payable by the Company under Coverage A of the Original Contract as a result of losses arising out of loss occurrences commencing at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, July 1, 2019. B. Notwithstanding the provisions of paragraph A above, the Company may terminate a Subscribing Reinsurer's percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event any of the following circumstances occur: 1. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at the inception of this Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) 12 months prior to that date; or 2. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at any time during the term of this Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) at the date of the Subscribing Reinsurer's most recent financial 18\F7V1072 Page 1

 
statement filed with regulatory authorities and available to the public as of the inception of this Contract; or 3. The Subscribing Reinsurer's A.M. Best's rating has been assigned or downgraded below "A-" and/or Standard & Poor's rating has been assigned or downgraded below "BBB+"; or 4. The Subscribing Reinsurer has become, or has announced its intention to become, merged with, acquired by or controlled by any other entity or individual(s) not controlling the Subscribing Reinsurer's operations previously; or 5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or 6. The Subscribing Reinsurer has become insolvent or has been placed into liquidation, receivership, supervision, administration, winding-up or under a scheme of arrangement, or similar proceedings (whether voluntary or involuntary) or proceedings have been instituted against the Subscribing Reinsurer for the appointment of a receiver, liquidator, rehabilitator, supervisor, administrator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or 7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company's prior written consent; or 8. The Subscribing Reinsurer has ceased assuming new or renewal property or casualty treaty reinsurance business; or 9. The Subscribing Reinsurer has hired an unaffiliated runoff claims manager that is compensated on a contingent basis or is otherwise provided with financial incentives based on the quantum of claims paid; or 10. The Subscribing Reinsurer has failed to comply with the funding requirements set forth in the Reserves Article. C. If this Contract is terminated or expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the termination or expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. Article 3 - Concurrency of Conditions A. It is agreed that this Contract will follow the terms, conditions, exclusions, definitions, warranties and settlements of the Company under Coverage A of the Original Contract, which are not inconsistent with the provisions of this Contract. B. The Company shall advise the Reinsurer of any material changes in the Original Contract which may affect the liability of the Reinsurer under this Contract. 18\F7V1072 Page 2

 
Article 4 - Premium A. As premium for the reinsurance coverage provided hereunder for the term of this Contract, the Company shall pay the Reinsurer the product of the following (or a pro rata portion thereof in the event the term of this Contract is less than 12 months and for purposes of calculating subparagraph 2 below, the term of the Original Contract is a full 12 months): 1. The Final Adjusted Rate on Line for Coverage A of the Original Contract; times 2. An amount equal to 100% reinsurance placement percentage under Coverage A of the Original Contract of the final adjusted premium paid by the Company for Coverage A of the Original Contract. "Final Adjusted Rate on Line" as used herein shall mean an amount equal to a 100% reinsurance placement percentage under Coverage A of the Original Contract of the final adjusted premium paid by the Company for Coverage A of the Original Contract divided by the amount, shown as the "Reinsurer's Per Occurrence Limit" for Coverage A of the Original Contract in Schedule A attached hereto. B. The Company shall pay the Reinsurer a deposit premium of *****, in four equal installments of *****, on July 1 and October 1 of 2018, and January 1 and April 1 of 2019. However, in the event this Contract is terminated, there shall be no deposit premium installments due after the effective date of termination. C. As soon as possible after the termination or expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for the term of this Contract, computed in accordance with paragraph A above, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. Article 5 - Sanctions Neither the Company nor any Subscribing Reinsurer shall be liable for premium or loss under this Contract if it would result in a violation of any mandatory sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America that are applicable to either party. Article 6 - Loss Notices and Settlements A. Whenever reinstatement premium settlements made by the Company under the Original Contract appear likely to result in a claim hereunder, the Company shall notify the Reinsurer. The Company will advise the Reinsurer of all subsequent developments relating to such claims that, in the opinion of the Company, may materially affect the position of the Reinsurer. B. All reinstatement premium settlements made by the Company under the Original Contract, provided they are within the terms of the Original Contract and within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts 18\F7V1072 Page 3

 
for which it may be liable within 10 days of receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. Article 7 - Late Payments A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in the Intermediary Article (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest charge on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest charges have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due 10 days after the proof of loss or demand for payment is transmitted to the Reinsurer. If such loss or claim payment is not received within the 10 days, interest will accrue on the payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment was transmitted to the Reinsurer. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of this paragraph C, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 10 days following transmittal of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. 18\F7V1072 Page 4

 
D. Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest charges due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest charge on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. Interest charges arising out of the application of this Article that are $1,000 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article 8 - Offset The Company and the Reinsurer may offset any balance or amount due from one party to the other under this Contract or any other contract heretofore or hereafter entered into between the Company and the Reinsurer, whether acting as assuming reinsurer or ceding company. The provisions of this Article shall not be affected by the insolvency of either party. Article 9 - Access to Records The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance, provided the Reinsurer gives the Company at least 15 days prior notice of request for such access. However, a Subscribing Reinsurer or its designated representatives shall not have any right of access to the records of the Company if it is not current in all undisputed payments due the Company. "Undisputed" as used herein shall mean any amount that the Subscribing Reinsurer has not contested in writing to the Company specifying the reason(s) why the payments are disputed. Article 10 - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article 11 - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. 18\F7V1072 Page 5

 
B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article 12 - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article 13 - Federal Excise Tax (BRMA 17D) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article 14 - Foreign Account Tax Compliance Act A. To the extent the Reinsurer is subject to the deduction and withholding of premium payable hereon as set forth in the Foreign Account Tax Compliance Act (Sections 1471-1474 of the Internal Revenue Code), the Reinsurer shall allow such deduction and withholding from the premium payable under this Contract. B. In the event of any return of premium becoming due hereunder, the return premium shall be determined and paid in full without regard to any amounts deducted or withheld under paragraph A of this Article. In the event the Company or its agent recovers such premium deductions and withholdings on the return premium from the United States Government, the Company or its agent shall reimburse the Reinsurer for such amounts. Article 15 - Reserves A. The Reinsurer agrees to fund its share of amounts, including but not limited to, the Company's ceded unearned premium and outstanding loss reserves (being the sum of all reinstatement premiums paid by the Company under the Original Contract but not yet recovered from the Reinsurer, plus the Company's reserves for reinstatement premium due under the Original Contract, if any) (hereinafter referred to as "Reinsurer's Obligations") by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 18\F7V1072 Page 6

 
2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if the Reinsurer: 1. Is unauthorized in any state of the United States of America or the District of Columbia having jurisdiction over the Company and if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved; or 2. Has an A.M. Best Company's rating equal to or below B++ at the inception of this Contract. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of reinstatement premiums paid by the Company under the terms of the Original Contract, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of amounts, including, but not limited to, the Reinsurer's Obligations as set forth above, funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of amounts, including but not limited to, the Reinsurer's Obligations as set forth above, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. 18\F7V1072 Page 7

 
Article 16 - Insolvency A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more Subscribing Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. Article 17 - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. 18\F7V1072 Page 8

 
B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one Subscribing Reinsurer is involved in the same dispute, all such Subscribing Reinsurers shall, at the option of the Company, constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the Subscribing Reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such Subscribing Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Subscribing Reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. Article 18 - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. 18\F7V1072 Page 9

 
Article 19 - Severability (BRMA 72E) If any provision of this Contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Contract or the enforceability of such provision in any other jurisdiction. Article 20 - Governing Law (BRMA 71B) This Contract shall be governed by and construed in accordance with the laws of the State of Florida. Article 21 - Confidentiality A. The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract, including all information obtained through any audits and any claims information between the Company and the Reinsurer, and any submission or other materials relating to any renewal (hereinafter referred to as "Confidential Information") are proprietary and confidential to the Company. B. Except as provided for in paragraph C below, the Reinsurer shall not disclose any Confidential Information to any third parties, including but not limited to the Reinsurer's subsidiaries and affiliates, other insurance companies and their subsidiaries and affiliates, underwriting agencies, research organizations, any unaffiliated entity engaged in modeling insurance or reinsurance data, and statistical rating organizations. C. Confidential Information may be used by the Reinsurer only in connection with the performance of its obligations or enforcement of its rights under this Contract and will only be disclosed when required by (1) retrocessionaires subject to the business ceded to this Contract, (2) regulators performing an audit of the Reinsurer's records and/or financial condition, (3) external auditors performing an audit of the Reinsurer's records in the normal course of business, or (4) the Reinsurer's legal counsel; provided that the Reinsurer advises such parties of the confidential nature of the Confidential Information and their obligation to maintain its confidentiality. The Company may require that any third-party representatives of the Reinsurer agree, in writing, to be bound by this Confidentiality Article or by a separate written confidentiality agreement, containing terms no less stringent than those set forth in this Article. If a third-party representative of the Reinsurer is not bound, in writing, by this Confidentiality Article or by a separate written confidentiality agreement, the Reinsurer shall be responsible for any breach of this provision by such third-party representative of the Reinsurer. D. Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company with written notice of same at least 10 days prior to such release or disclosure, to the extent legally permissible, and to use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article. 18\F7V1072 Page 10

 
E. Any disclosure of Non-Public Personally Identifiable Information shall comply with all state and federal statutes and regulations governing the disclosure of Non-Public Personally Identifiable Information. "Non-Public Personally Identifiable Information" shall be defined as this term or a similar term is defined in any applicable state, provincial, territory, or federal law. Disclosing or using this information for any purpose not authorized by applicable law is expressly forbidden without the prior consent of the Company. F. The parties agree that any information subject to privilege, including the attorney-client privilege or attorney work product doctrine (collectively "Privilege") shall not be disclosed to the Reinsurer until, in the Company's opinion, such Privilege is deemed to be waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. Furthermore, the Reinsurer shall not assert that any Privilege otherwise applicable to the Confidential Information has been waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. G. The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns. Article 22 - Non-Waiver The failure of the Company or Reinsurer to insist on compliance with this Contract or to exercise any right, remedy or option hereunder shall not: (1) constitute a waiver of any rights contained in this Contract, (2) prevent the Company or Reinsurer from thereafter demanding full and complete compliance, (3) prevent the Company or Reinsurer from exercising such remedy in the future, nor (4) affect the validity of this Contract or any part thereof. Article 23 - Notices and Contract Execution A. Whenever a notice, statement, report or any other written communication is required by this Contract, unless otherwise specified, such notice, statement, report or other written communication may be transmitted by certified or registered mail, nationally or internationally recognized express delivery service, personal delivery, electronic mail, or facsimile. With the exception of notices of termination, first class mail is also acceptable. B. The use of any of the following shall constitute a valid execution of this Contract or any amendments thereto: 1. Paper documents with an original ink signature; 2. Facsimile or electronic copies of paper documents showing an original ink signature; and/or 3. Electronic records with an electronic signature made via an electronic agent. For the purposes of this Contract, the terms "electronic record," "electronic signature" and "electronic agent" shall have the meanings set forth in the Electronic Signatures in Global and National Commerce Act of 2000 or any amendments thereto. 18\F7V1072 Page 11

 
C. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original. Article 24 - Intermediary Aon Benfield Inc., or one of its affiliated corporations duly licensed as a reinsurance intermediary, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating to this Contract will be transmitted to the Company or the Reinsurer through the Intermediary. Payments by the Company to the Intermediary will be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary will be deemed payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date specified below: This 9th day of August in the year 2018. FedNat Insurance Company /s/ Michael H. Braun 18\F7V1072 Page 12

 
Schedule A Non-Florida Reinstatement Premium Protection Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida Original Contract Coverage A Reinsurer's Per Occurrence Limit $5,000,000 Reinsurer's Term Limit $10,000,000 Minimum Premium ***** AAL ***** Annual Deposit Premium ***** Deposit Premium Installments ***** 18\F7V1072 Schedule A

 
The Interests and Liabilities Agreements, constituting 4 pages in total, have been omitted in accordance with Rule 24b-2 under the Exchange Act. These pages have been filed separately with the Securities and Exchange Commission. 18\F7V1072

 
Reinstatement Premium Protection Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida and Monarch National Insurance Company Sunrise, Florida _______________________ *****Portions of this document omitted pursuant to an application for an order for confidential treatment pursuant to Rule 24b-2 under the Exchange Act. Confidential portions of this document have been filed separately with the Securities and Exchange Commission. 18\F7V1055

 
Table of Contents Article Page 1 Coverage 1 2 Commencement and Termination 1 3 Concurrency of Conditions 2 4 Premium 3 5 Sanctions 3 6 Loss Notices and Settlements 4 7 Late Payments 4 8 Offset 5 9 Severability of Interests and Obligations 5 10 Access to Records 6 11 Errors and Omissions (BRMA 14F) 6 12 Currency (BRMA 12A) 6 13 Taxes (BRMA 50B) 7 14 Federal Excise Tax (BRMA 17D) 7 15 Foreign Account Tax Compliance Act 7 16 Reserves 7 17 Insolvency 9 18 Arbitration 9 19 Service of Suit (BRMA 49C) 10 20 Severability (BRMA 72E) 11 21 Governing Law (BRMA 71B) 11 22 Confidentiality 11 23 Non-Waiver 12 24 Agency Agreement (BRMA 73A) 12 25 Notices and Contract Execution 12 26 Intermediary 13 Schedule A Schedule B 18\F7V1055

 
Reinstatement Premium Protection Reinsurance Contract Effective: July 1, 2018 entered into by and between FedNat Insurance Company Sunrise, Florida and Monarch National Insurance Company Sunrise, Florida (hereinafter referred to as the "Company") and The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article 1 - Coverage By this Contract the Reinsurer agrees to indemnify the Company for 100% of any reinstatement premium which the Company pays or becomes liable to pay as a result of loss occurrences covered under the provisions of the Company's Excess Catastrophe Reinsurance Contract, effective July 1, 2018 (hereinafter referred to as the "Original Contract"), subject to the terms and conditions hereinafter set forth herein and in Schedules A and B attached to and forming part of this Contract. Article 2 - Commencement and Termination A. This Contract shall become effective at 12:01 a.m., Eastern Standard Time, July 1, 2018, with respect to reinstatement premium payable by the Company under the Original Contract as a result of losses arising out of loss occurrences commencing at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, July 1, 2019. B. Notwithstanding the provisions of paragraph A above, the Company may terminate a Subscribing Reinsurer's percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event any of the following circumstances occur: 1. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at the inception of this Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) 12 months prior to that date; or 2. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at any time during the term of this 18\F7V1055 Page 1

 
Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) at the date of the Subscribing Reinsurer's most recent financial statement filed with regulatory authorities and available to the public as of the inception of this Contract; or 3. The Subscribing Reinsurer's A.M. Best's rating has been assigned or downgraded below A- and/or Standard & Poor's rating has been assigned or downgraded below BBB+; or 4. The Subscribing Reinsurer has become, or has announced its intention to become, merged with, acquired by or controlled by any other entity or individual(s) not controlling the Subscribing Reinsurer's operations previously; or 5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or 6. The Subscribing Reinsurer has become insolvent or has been placed into liquidation, receivership, supervision, administration, winding-up or under a scheme of arrangement, or similar proceedings (whether voluntary or involuntary) or proceedings have been instituted against the Subscribing Reinsurer for the appointment of a receiver, liquidator, rehabilitator, supervisor, administrator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or 7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company's prior written consent; or 8. The Subscribing Reinsurer has ceased assuming new or renewal property or casualty treaty reinsurance business; or 9. The Subscribing Reinsurer has hired an unaffiliated runoff claims manager that is compensated on a contingent basis or is otherwise provided with financial incentives based on the quantum of claims paid; or 10. The Subscribing Reinsurer has failed to comply with the funding requirements set forth in the Reserves Article. C. If this Contract is terminated or expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the termination or expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. Article 3 - Concurrency of Conditions A. It is agreed that this Contract will follow the terms, conditions, exclusions, definitions, warranties and settlements of the Company under the Original Contract, which are not inconsistent with the provisions of this Contract. 18\F7V1055 Page 2

 
B. The Company shall advise the Reinsurer of any material changes in the Original Contract which may affect the liability of the Reinsurer under this Contract. Article 4 - Premium A. As premium for the reinsurance coverage provided hereunder for each excess layer for the term of this Contract, the Company shall pay the Reinsurer the product of the following (or a pro rata portion thereof in the event the term of this Contract is less than 12 months and for purposes of calculating subparagraph 3 below, the term of the Original Contract is a full 12 months): 1. The amount, shown as "Reinstatement Factor" for that excess layer in Schedule B attached hereto; times 2. The Final Adjusted Rate on Line for the corresponding excess layer of the Original Contract; times 3. An amount equal to 100% reinsurance placement percentage under each excess layer of the Original Contract of the final adjusted premium paid by the Company for the corresponding excess layer of the Original Contract. "Final Adjusted Rate on Line" as used herein shall mean an amount equal to a 100% reinsurance placement percentage under each excess layer of the Original Contract of the final adjusted premium paid by the Company for the corresponding excess layer of the Original Contract divided by the amount, shown as the "Reinsurer's Per Occurrence Limit" for that excess layer under the Original Contract in Schedule A attached hereto. B. The Company shall pay the Reinsurer a deposit premium for each excess layer of the amount, shown as "Annual Deposit Premium" for that excess layer in Schedule B attached hereto, in four equal installments of the amount, shown as "Deposit Premium Installment" for that excess layer in Schedule B attached hereto, on July 1 and October 1 of 2018, and January 1 and April 1 of 2019. However, in the event this Contract is terminated, there shall be no deposit premium installments due after the effective date of termination. C. As soon as possible after the termination or expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for each excess layer for the term of this Contract, computed in accordance with paragraph A above, and any additional premium due the Reinsurer or return premium due the Company for each such excess layer shall be remitted promptly. Article 5 - Sanctions Neither the Company nor any Subscribing Reinsurer shall be liable for premium or loss under this Contract if it would result in a violation of any mandatory sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America that are applicable to either party. 18\F7V1055 Page 3

 
Article 6 - Loss Notices and Settlements A. Whenever reinstatement premium settlements made by the Company under the Original Contract appear likely to result in a claim hereunder, the Company shall notify the Reinsurer. The Company will advise the Reinsurer of all subsequent developments relating to such claims that, in the opinion of the Company, may materially affect the position of the Reinsurer. B. All reinstatement premium settlements made by the Company under the Original Contract, provided they are within the terms of the Original Contract and within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable within 10 days of receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. Article 7 - Late Payments A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in the Intermediary Article (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest charge on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest charges have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due 10 days after the proof of loss or demand for payment is transmitted to the Reinsurer. If such loss or claim payment is not received within the 10 days, interest will accrue on the 18\F7V1055 Page 4

 
payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment was transmitted to the Reinsurer. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of this paragraph C, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 10 days following transmittal of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest charges due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest charge on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. Interest charges arising out of the application of this Article that are $1,000 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article 8 - Offset The Company and the Reinsurer may offset any balance or amount due from one party to the other under this Contract or any other contract heretofore or hereafter entered into between the Company and the Reinsurer, whether acting as assuming reinsurer or ceding company. The provisions of this Article shall not be affected by the insolvency of either party. Article 9 - Severability of Interests and Obligations The rights, duties and obligations set forth below shall apply as if this Contract were a separate contract between the Subscribing Reinsurers and each named reinsured company: A. Balances payable by any Subscribing Reinsurer to or from any reinsured party under the Contract shall not serve to offset any balances recoverable to, or from, any other reinsured party to the Contract and balances payable shall be separated by named reinsured company and paid directly to the appropriate named reinsured company’s bank account. 18\F7V1055 Page 5

 
B. Balances recoverable by any Subscribing Reinsurer to or from any reinsured party under the Contract shall not serve to offset any balances payable to, or from, any other reinsured party to the Contract. C. Reports and remittances made to the Reinsurer in accordance with the applicable articles of the Contract are to be in sufficient detail to identify both the Reinsurer's loss obligations due to each named reinsured company and each named reinsured company's premium remittance under the report. D. In the event of the insolvency of any of the parties to the Contract, offset shall be only allowed in accordance with the laws of the insolvent party's state of domicile. E. Nothing in this Article shall be construed to provide a separate retention, Reinsurer's limit of liability any one loss occurrence or Reinsurer's annual limit of liability for each named reinsured company. Article 10 - Access to Records The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance, provided the Reinsurer gives the Company at least 15 days prior notice of request for such access. However, a Subscribing Reinsurer or its designated representatives shall not have any right of access to the records of the Company if it is not current in all undisputed payments due the Company. "Undisputed" as used herein shall mean any amount that the Subscribing Reinsurer has not contested in writing to the Company specifying the reason(s) why the payments are disputed. Article 11 - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article 12 - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. 18\F7V1055 Page 6

 
Article 13 - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article 14 - Federal Excise Tax (BRMA 17D) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article 15 - Foreign Account Tax Compliance Act A. To the extent the Reinsurer is subject to the deduction and withholding of premium payable hereon as set forth in the Foreign Account Tax Compliance Act (Sections 1471-1474 of the Internal Revenue Code), the Reinsurer shall allow such deduction and withholding from the premium payable under this Contract. B. In the event of any return of premium becoming due hereunder, the return premium shall be determined and paid in full without regard to any amounts deducted or withheld under paragraph A of this Article. In the event the Company or its agent recovers such premium deductions and withholdings on the return premium from the United States Government, the Company or its agent shall reimburse the Reinsurer for such amounts. Article 16 - Reserves A. The Reinsurer agrees to fund its share of amounts, including but not limited to, the Company's ceded unearned premium and outstanding loss reserves (being the sum of all reinstatement premiums paid by the Company under the Original Contract but not yet recovered from the Reinsurer, plus the Company's reserves for reinstatement premium due under the Original Contract, if any) (hereinafter referred to as "Reinsurer's Obligations") by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; 18\F7V1055 Page 7

 
if the Reinsurer: 1. Is unauthorized in any state of the United States of America or the District of Columbia having jurisdiction over the Company and if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved; or 2. Has an A.M. Best Company's rating equal to or below B++ at the inception of this Contract. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of reinstatement premiums paid by the Company under the terms of the Original Contract, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of amounts, including, but not limited to, the Reinsurer's Obligations as set forth above, funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of amounts, including but not limited to, the Reinsurer's Obligations as set forth above, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. 18\F7V1055 Page 8

 
Article 17 - Insolvency A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more Subscribing Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. Article 18 - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. 18\F7V1055 Page 9

 
B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one Subscribing Reinsurer is involved in the same dispute, all such Subscribing Reinsurers shall, at the option of the Company, constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the Subscribing Reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such Subscribing Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Subscribing Reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. Article 19 - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. 18\F7V1055 Page 10

 
Article 20 - Severability (BRMA 72E) If any provision of this Contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Contract or the enforceability of such provision in any other jurisdiction. Article 21 - Governing Law (BRMA 71B) This Contract shall be governed by and construed in accordance with the laws of the State of Florida. Article 22 - Confidentiality A. The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract, including all information obtained through any audits and any claims information between the Company and the Reinsurer, and any submission or other materials relating to any renewal (hereinafter referred to as "Confidential Information") are proprietary and confidential to the Company. B. Except as provided for in paragraph C below, the Reinsurer shall not disclose any Confidential Information to any third parties, including but not limited to the Reinsurer's subsidiaries and affiliates, other insurance companies and their subsidiaries and affiliates, underwriting agencies, research organizations, any unaffiliated entity engaged in modeling insurance or reinsurance data, and statistical rating organizations. C. Confidential Information may be used by the Reinsurer only in connection with the performance of its obligations or enforcement of its rights under this Contract and will only be disclosed when required by (1) retrocessionaires subject to the business ceded to this Contract, (2) regulators performing an audit of the Reinsurer's records and/or financial condition, (3) external auditors performing an audit of the Reinsurer's records in the normal course of business, or (4) the Reinsurer's legal counsel; provided that the Reinsurer advises such parties of the confidential nature of the Confidential Information and their obligation to maintain its confidentiality. The Company may require that any third-party representatives of the Reinsurer agree, in writing, to be bound by this Confidentiality Article or by a separate written confidentiality agreement, containing terms no less stringent than those set forth in this Article. If a third-party representative of the Reinsurer is not bound, in writing, by this Confidentiality Article or by a separate written confidentiality agreement, the Reinsurer shall be responsible for any breach of this provision by such third-party representative of the Reinsurer. D. Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company with written notice of same at least 10 days prior to such release or disclosure, to the extent legally permissible, and to 18\F7V1055 Page 11

 
use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article. E. Any disclosure of Non-Public Personally Identifiable Information shall comply with all state and federal statutes and regulations governing the disclosure of Non-Public Personally Identifiable Information. "Non-Public Personally Identifiable Information" shall be defined as this term or a similar term is defined in any applicable state, provincial, territory, or federal law. Disclosing or using this information for any purpose not authorized by applicable law is expressly forbidden without the prior consent of the Company. F. The parties agree that any information subject to privilege, including the attorney-client privilege or attorney work product doctrine (collectively "Privilege") shall not be disclosed to the Reinsurer until, in the Company's opinion, such Privilege is deemed to be waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. Furthermore, the Reinsurer shall not assert that any Privilege otherwise applicable to the Confidential Information has been waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. G. The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns. Article 23 - Non-Waiver The failure of the Company or Reinsurer to insist on compliance with this Contract or to exercise any right, remedy or option hereunder shall not: (1) constitute a waiver of any rights contained in this Contract, (2) prevent the Company or Reinsurer from thereafter demanding full and complete compliance, (3) prevent the Company or Reinsurer from exercising such remedy in the future, nor (4) affect the validity of this Contract or any part thereof. Article 24 - Agency Agreement (BRMA 73A) If more than one reinsured company is named as a party to this Contract, the first named company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article 25 - Notices and Contract Execution A. Whenever a notice, statement, report or any other written communication is required by this Contract, unless otherwise specified, such notice, statement, report or other written communication may be transmitted by certified or registered mail, nationally or internationally recognized express delivery service, personal delivery, electronic mail, or facsimile. With the exception of notices of termination, first class mail is also acceptable. 18\F7V1055 Page 12

 
B. The use of any of the following shall constitute a valid execution of this Contract or any amendments thereto: 1. Paper documents with an original ink signature; 2. Facsimile or electronic copies of paper documents showing an original ink signature; and/or 3. Electronic records with an electronic signature made via an electronic agent. For the purposes of this Contract, the terms "electronic record," "electronic signature" and "electronic agent" shall have the meanings set forth in the Electronic Signatures in Global and National Commerce Act of 2000 or any amendments thereto. C. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original. Article 26 - Intermediary Aon Benfield Inc., or one of its affiliated corporations duly licensed as a reinsurance intermediary, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating to this Contract will be transmitted to the Company or the Reinsurer through the Intermediary. Payments by the Company to the Intermediary will be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary will be deemed payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representatives has executed this Contract as of the dates specified below: This 9th day of August in the year 2018. FedNat Insurance Company /s/ Michael H. Braun This 9th day of August in the year 2018. Monarch National Insurance Company /s/ Michael H. Braun 18\F7V1055 Page 13

 
Schedule A Reinstatement Premium Protection Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida and Monarch National Insurance Company Sunrise, Florida Original Original Original Original Contract Contract Contract Contract First Second Third Fourth Excess Excess Excess Excess Reinsurer's Per Occurrence Limit $85,000,000 $180,000,000 $60,000,000 $117,500,000 Reinsurer's Term Limit $170,000,000 $360,000,000 $120,000,000 $235,000,000 Minimum Premium ***** ***** ***** ***** AAL ***** ***** ***** ***** Annual Deposit Premium ***** ***** ***** ***** Deposit Premium Installments ***** ***** ***** ***** 18\F7V1055 Schedule A

 
Schedule B Reinstatement Premium Protection Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida and Monarch National Insurance Company Sunrise, Florida First Second Third Fourth RPP Layer RPP Layer RPP Layer RPP Layer Reinstatement Factor ***** ***** ***** ***** Annual Deposit Premium ***** ***** ***** ***** Deposit Premium Installments ***** ***** ***** ***** 18\F7V1055 Schedule B

 
The Interests and Liabilities Agreements, constituting 33 pages in total, have been omitted in accordance with Rule 24b-2 under the Exchange Act. These pages have been filed separately with the Securities and Exchange Commission. 18\F7V1055

 
Excess Catastrophe Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida and Monarch National Insurance Company Sunrise, Florida _______________________ *****Portions of this document omitted pursuant to an application for an order for confidential treatment pursuant to Rule 24b-2 under the Exchange Act. Confidential portions of this document have been filed separately with the Securities and Exchange Commission. 18\F7V1054

 
Table of Contents Article Page 1 Classes of Business Reinsured 1 2 Commencement and Termination 1 3 Territory 3 4 Exclusions 3 5 Retention and Limit 4 6 Florida Hurricane Catastrophe Fund 5 7 Other Reinsurance 5 8 Reinstatement 6 9 Definitions 6 10 Loss Occurrence 8 11 Loss Notices and Settlements 10 12 Cash Call 10 13 Salvage and Subrogation 10 14 Reinsurance Premium 11 15 Sanctions 11 16 Late Payments 12 17 Offset 13 18 Severability of Interests and Obligations 13 19 Access to Records 14 20 Liability of the Reinsurer 14 21 Net Retained Lines (BRMA 32E) 14 22 Errors and Omissions (BRMA 14F) 15 23 Currency (BRMA 12A) 15 24 Taxes (BRMA 50B) 15 25 Federal Excise Tax (BRMA 17D) 15 26 Foreign Account Tax Compliance Act 15 27 Reserves 16 28 Insolvency 17 29 Arbitration 18 30 Service of Suit (BRMA 49C) 19 31 Severability (BRMA 72E) 19 32 Governing Law (BRMA 71B) 19 33 Confidentiality 19 34 Non-Waiver 20 35 Agency Agreement (BRMA 73A) 21 36 Notices and Contract Execution 21 37 Intermediary 21 Schedule A 18\F7V1054

 
Excess Catastrophe Reinsurance Contract Effective: July 1, 2018 entered into by and between FedNat Insurance Company Sunrise, Florida and Monarch National Insurance Company Sunrise, Florida (hereinafter collectively referred to as the "Company" except to the extent individually referred to) and The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article 1 - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies in force at the effective time and date hereof or issued or renewed at or after that time and date, and classified by the Company as Property business, including but not limited to, Dwelling Fire, Inland Marine, Mobile Home, Commercial and Homeowners business (including any business assumed from Citizens Property Insurance Corporation), subject to the terms, conditions and limitations set forth herein and in Schedule A attached hereto. Article 2 - Commencement and Termination A. This Contract shall become effective at 12:01 a.m., Eastern Standard Time, July 1, 2018, with respect to losses arising out of loss occurrences commencing at or after that time and date, and shall remain in force until 12:01 a.m., Eastern Standard Time, July 1, 2019. B. Notwithstanding the provisions of paragraph A above, the Company may terminate a Subscribing Reinsurer's percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event any of the following circumstances occur: 1. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at the inception of this Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) 12 months prior to that date; or 2. The Subscribing Reinsurer's policyholders' surplus (or its equivalent under the Subscribing Reinsurer's accounting system) at any time during the term of this 18\F7V1054 Page 1

 
Contract has been reduced by 20.0% or more of the amount of surplus (or the applicable equivalent) at the date of the Subscribing Reinsurer's most recent financial statement filed with regulatory authorities and available to the public as of the inception of this Contract; or 3. The Subscribing Reinsurer's A.M. Best's rating has been assigned or downgraded below A- and/or Standard & Poor's rating has been assigned or downgraded below BBB+; or 4. The Subscribing Reinsurer has become, or has announced its intention to become, merged with, acquired by or controlled by any other entity or individual(s) not controlling the Subscribing Reinsurer's operations previously; or 5. A State Insurance Department or other legal authority has ordered the Subscribing Reinsurer to cease writing business; or 6. The Subscribing Reinsurer has become insolvent or has been placed into liquidation, receivership, supervision, administration, winding-up or under a scheme of arrangement, or similar proceedings (whether voluntary or involuntary) or proceedings have been instituted against the Subscribing Reinsurer for the appointment of a receiver, liquidator, rehabilitator, supervisor, administrator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or 7. The Subscribing Reinsurer has reinsured its entire liability under this Contract without the Company's prior written consent; or 8. The Subscribing Reinsurer has ceased assuming new or renewal property or casualty treaty reinsurance business; or 9. The Subscribing Reinsurer has hired an unaffiliated runoff claims manager that is compensated on a contingent basis or is otherwise provided with financial incentives based on the quantum of claims paid; or 10. The Subscribing Reinsurer has failed to comply with the funding requirements set forth in the Reserves Article. C. The "term of this Contract" as used herein shall mean the period from 12:01 a.m., Eastern Standard Time, July 1, 2018 to 12:01 a.m., Eastern Standard Time, July 1, 2019. However, if this Contract is terminated, the "term of this Contract" as used herein shall mean the period from 12:01 a.m., Eastern Standard Time, July 1, 2018 to the effective time and date of termination. D. If this Contract is terminated or expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the termination or expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. 18\F7V1054 Page 2

 
Article 3 - Territory The territorial limits of this Contract shall be identical with those of the Company's policies. Article 4 - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company under obligatory reinsurance agreements, except business assumed by the Company from Citizens Property Insurance Corporation. 2. Hail damage to growing or standing crops. 3. Business rated, coded or classified as Flood insurance or which should have been rated, coded or classified as such. 4. Business rated, coded or classified as Mortgage Impairment and Difference in Conditions insurance or which should have been rated, coded or classified as such. 5. Title insurance and all forms of Financial Guarantee, Credit and Insolvency. 6. Aviation, Ocean Marine, Boiler and Machinery, Fidelity and Surety, Accident and Health, Animal Mortality and Workers Compensation and Employers Liability. 7. Errors and Omissions, Malpractice and any other type of Professional Liability insurance. 8. Loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25.0% of the Company's property loss under the applicable original policy. 9. Loss or liability as excluded under the provisions of the "War Exclusion Clause" attached to and forming part of this Contract. 10. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)" attached to and forming part of this Contract. 11. Loss or liability excluded by the Pools, Associations and Syndicates Exclusion Clause (Catastrophe) attached to and forming part of this Contract and any assessment or similar demand for payment related to the FHCF or Citizens Property Insurance Corporation. 12. Loss or liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or 18\F7V1054 Page 3

 
governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 13. Losses in the respect of overhead transmission and distribution lines other than those on or within 150 meters (or 500 feet) of the insured premises. 14. Mold, unless resulting from a peril otherwise covered under the policy involved. 15. Loss or liability as excluded under the provisions of the "Terrorism Exclusion" attached to and forming part of this Contract. 16. All property loss, damage, destruction, erasure, corruption or alteration of Electronic Data from any cause whatsoever (including, but not limited to, Computer Virus) or loss of use, reduction in functionality, cost, expense or whatsoever nature resulting therefrom, unless resulting from a peril otherwise covered under the policy involved. "Electronic Data" as used herein means facts, concepts and information converted to a form usable for communications, interpretation or processing by electronic and electromechanical data processing or electronically-controlled equipment and includes programs, software and other coded instructions for the processing and manipulation of data or the direction and manipulation of such equipment. "Computer Virus" as used herein means a set of corrupting, harmful or otherwise unauthorized instructions or code, including a set of maliciously-introduced, unauthorized instructions or code, that propagate themselves through a computer system network of whatsoever nature. However, in the event that a peril otherwise covered under the policy results from any of the matters described above, this Contract, subject to all other terms and conditions, will cover physical damage directly caused by such listed peril. Article 5 - Retention and Limit A. As respects FedNat Insurance Company, the Company shall retain and be liable for the first $20,000,000 of ultimate net loss arising out of each loss occurrence. As respects Monarch National Insurance Company, the Company shall retain and be liable for the first $3,000,000 of ultimate net loss arising out of each loss occurrence. The Reinsurer shall then be liable, as respects each excess layer, for the amount by which such ultimate net loss exceeds the Company's respective retention, but the liability of the Reinsurer under each excess layer shall not exceed a combined amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, as respects any one loss occurrence. As respects FedNat Insurance Company, whether a loss occurrence results in an ultimate net loss under one or more of the excess layers set forth in Schedule A attached hereto, the 18\F7V1054 Page 4

 
Company's retention will not exceed the first $20,000,000 of ultimate net loss arising out of such loss occurrence. As respects Monarch National Insurance Company, whether a loss occurrence results in an ultimate net loss under one or more of the excess layers set forth in Schedule A attached hereto, the Company's retention will not exceed the first $3,000,000 of ultimate net loss arising out of such loss occurrence. B. Recoveries shall always be made, in the first instance, under the lowest excess layer that is not entirely exhausted. If there is any amount of ultimate net loss arising out of a loss occurrence in excess of either of Company's respective retentions under the lowest excess layer that has not been recovered thereunder, such amount shall be recovered under the next or subsequent excess layer or layers, as appropriate. Recoveries under each excess layer set forth in Schedule A attached to and forming part of this Contract shall inure as follows: 1. Recoveries under the First Excess layer shall inure to the benefit of the Second Excess layer; 2. Recoveries under the First and Second Excess layers shall inure to the benefit of the Third Excess layer; and 3. Recoveries under the First, Second and Third Excess layers shall inure to the benefit of the Fourth Excess layer. It is understood, however, that any fully exhausted excess layer or the exhausted portion of any excess layer shall no longer inure to the benefit of any subsequent excess layer(s). C. Notwithstanding the provisions above, no claim shall be made hereunder as respects losses arising out of loss occurrences commencing during the term of this Contract unless at least two risks insured or reinsured by the Company are involved in such loss occurrence. For purposes hereof, the Company shall be the sole judge of what constitutes "one risk." Article 6 - Florida Hurricane Catastrophe Fund The Company has purchased 75.0% of the FHCF mandatory layer of coverage and shall be deemed to inure to the benefit of this Contract. Further, any FHCF loss reimbursement shall be deemed to be paid to the Company in accordance with the FHCF reimbursement contract at the full payout level set forth therein and will be deemed not to be reduced by any reduction or exhaustion of the FHCF's claims-paying capacity as respects the mandatory FHCF coverage. Article 7 - Other Reinsurance A. The Company shall be permitted to carry other reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. 18\F7V1054 Page 5

 
B. Any loss reimbursement received under the Company's FHCF Supplement Layer Reinsurance Contract (18\F7V1085), which shall be deemed to be placed at 19.0%, shall be deemed to inure to the benefit of this Contract. Article 8 - Reinstatement A. In the event all or any portion of the reinsurance under any excess layer of reinsurance coverage provided by this Contract is exhausted by ultimate net loss, the amount so exhausted shall be reinstated immediately from the time the loss occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium equal to the product of the following: 1. The percentage of the occurrence limit for the excess layer reinstated (based on the ultimate net loss paid by the Reinsurer under that excess layer); times 2. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any ultimate net loss under any excess layer hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer for that excess layer. If the earned reinsurance premium for any excess layer for the term of this Contract has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due for that excess layer shall be based on the amount, shown as "Annual Deposit Premium" for that excess layer in Schedule A attached hereto, and shall be readjusted when the earned reinsurance premium for that excess layer for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer for any excess layer as reflected by any such statement (less prior payments, if any, for that excess layer) shall be payable by the Company concurrently with payment by the Reinsurer of the requested ultimate net loss for that excess layer. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer for ultimate net loss under any excess layer of reinsurance coverage provided by this Contract shall not exceed either of the following: 1. The amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or 2. The amount, shown as "Reinsurer's Term Limit" for that excess layer in Schedule A attached hereto, in all during the term of this Contract. Article 9 - Definitions A. "Loss adjustment expense," regardless of how such expenses are classified for statutory reporting purposes, as used in this Contract shall mean all costs and expenses allocable to 18\F7V1054 Page 6

 
a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including a) pre-judgment interest, unless included as part of the award or judgment; b) post-judgment interest; c) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including Declaratory Judgment Expense; and d) expenses and a pro rata share of salaries of the Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss adjustment expense as defined above does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than in (d) above, and office and other overhead expenses. B. "Loss in excess of policy limits" and "extra contractual obligations" as used in this Contract shall mean: 1. "Loss in excess of policy limits" shall mean 90.0% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, such loss in excess of the Company's policy limits having been incurred because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company's alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. Any loss in excess of policy limits that is made in connection with this Contract shall not exceed 25.0% of the actual catastrophe loss. 2. "Extra contractual obligations" shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company, not covered by any other provision of this Contract and which arise from the handling of any claim on business subject to this Contract, such liabilities arising because of, but not limited to, failure by the Company to settle within the policy limits or by reason of the Company's alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of an action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such an action. An extra contractual obligation shall be deemed, in all circumstances, to have occurred on the same date as the loss covered or alleged to be covered under the policy. Any extra contractual obligations that are made in connection with this Contract shall not exceed 25.0% of the actual catastrophe loss. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. C. "Policies" as used in this Contract shall mean all policies, contracts and binders of insurance or reinsurance. 18\F7V1054 Page 7

 
D. "Ultimate net loss" as used in this Contract shall mean the sum or sums (including loss in excess of policy limits, extra contractual obligations and loss adjustment expense, as defined herein) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. Article 10 - Loss Occurrence A. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards a named storm, all individual losses sustained by the Company occurring during any period (a) from and after 12:00 a.m. Eastern Standard Time on the date a watch, warning, advisory, or other bulletin (whether for wind, flood or otherwise) for such named storm is first issued by the National Hurricane Center ("NHC") or its successor or any other division of the National Weather Service ("NWS"), (b) continuing for a time period thereafter during which such named storm continues, regardless of its category rating or lack thereof and regardless of whether the watch, warning, or advisory or other bulletin remains in effect for such named storm and (c) ending 96 hours following the issuance of the last watch, warning or advisory or other bulletin for such named storm or related to such named storm by the NHC or its successor or any other division of the NWS. "Named storm" shall mean any storm or storm system that has been declared by the NHC or its successor or any other division of the NWS to be a named storm at any time, which may include, by way of example and not limitation, hurricane, wind, gusts, typhoon, tropical storm, hail, rain, tornados, cyclones, ensuing flood, storm surge, water damage, fire following, sprinkler leakage, riots, vandalism, and collapse, and all losses and perils (including, by way of example and not limitation, those mentioned previously in this sentence) in each case arising out of, caused by, occurring during, occasioned by or resulting from such storm or storm system, including by way of example and not limitation the merging of one or more separate storm(s) or storm system(s) into a combined storm surge event. However, the named storm need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards storm or storm systems that are not a named storm, including, by way of example and not limitation, ensuing wind, gusts, typhoon, tropical storm, hail, rain, tornados, cyclones, ensuing flood, storm surge, fire following, sprinkler leakage, riots, vandalism, collapse and water damage, all individual losses sustained by the Company occurring during any period of 144 consecutive hours arising out of, caused by, occurring during, occasioned by or resulting from the same event. However, the 18\F7V1054 Page 8

 
event need not be limited to one state or province or states or provinces contiguous thereto. 3. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 96 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 96 consecutive hours may be extended in respect of individual losses which occur beyond such 96 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 4. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the introductory portion of this paragraph) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's loss occurrence. 5. As regards freeze, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's loss occurrence. 6. As regards firestorms, brush fires and any other fires or series of fires, irrespective of origin (except as provided in subparagraphs 3 and 4 above), all individual losses sustained by the Company which commence during any period of 168 consecutive hours within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another may be included in the Company's loss occurrence. B. For all loss occurrences hereunder, the Company may choose the date and time when any such period of consecutive hours commences, provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident, or loss or series of disasters, accidents, or losses. Furthermore: 1. For all loss occurrences other than those referred to in subparagraphs A.1., A.2., and A.3. above, only one such period of 168 consecutive hours shall apply with respect to one event. 2. As regards those loss occurrences referred to in subparagraphs A.1. and A.2., only one such period of consecutive hours (as set forth therein) shall apply with respect to one event, regardless of the duration of the event. 3. As regards those loss occurrences referred to in subparagraph A.3. above, if the disaster, accident, or loss or series of disasters, accidents, or losses occasioned by the event is of greater duration than 96 consecutive hours, then the Company may divide that disaster, accident, or loss or series of disasters, accidents, or losses into two or more loss occurrences, provided that no two periods overlap and no individual loss is included in more than one such period. 18\F7V1054 Page 9

 
C. It is understood that losses arising from a combination of two or more perils as a result of the same event may be considered as having arisen from one loss occurrence. Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils, and no single loss occurrence shall encompass a time period greater than 168 consecutive hours, except as regards those loss occurrences referred to in subparagraphs A.1., A.4. and A.6. above. Article 11 - Loss Notices and Settlements A. Whenever losses sustained by the Company are reserved by the Company for an amount greater than 50.0% of the Company's respective retention under any excess layer hereunder and/or appear likely to result in a claim under such excess layer, the Company shall notify the Subscribing Reinsurers under that excess layer and shall provide updates related to development of such losses. The Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract and the terms of the original policy (with the exception of loss in excess of policy limits or extra contractual obligations coverage, if any, under this Contract), shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid by the Company. Article 12 - Cash Call Notwithstanding the provisions of the Loss Notices and Settlements Article, upon the request of the Company, the Reinsurer shall pay any amount with regard to a loss settlement or settlements that are scheduled to be made (including any payments projected to be made) within the next 20 days by the Company, subject to receipt by the Reinsurer of a satisfactory proof of loss. Such agreed payment shall be made within 10 days from the date the demand for payment was transmitted to the Reinsurer. Article 13 - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights, if, in the Company's opinion, it is economically reasonable to do so. 18\F7V1054 Page 10

 
Article 14 - Reinsurance Premium A. As premium for each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer a premium equal to the product of the following (or a pro rata portion thereof in the event the term of this Contract is less than 12 months), subject to a minimum premium of the amount, shown as "Minimum Premium" for that excess layer in Schedule A attached hereto (or a pro rata portion thereof in the event the term of this Contract is less than 12 months): 1. The amount, shown as "Annual Deposit Premium" for that excess layer in Schedule A attached hereto; times 2. The percentage calculated by dividing (a) the actual Average Annual Loss ("AAL") determined by the Company's wind insurance in force on September 30, 2018, by (b) the original AAL of the amount, shown as "AAL" for that excess layer in Schedule A attached hereto. The Company's AAL shall be derived by averaging the applicable data produced by Applied Insurance Research (AIR) Touchstone v5 and Risk Management Solutions (RMS) RiskLink v17 catastrophe modeling software, in the long-term perspective, including secondary uncertainty and loss amplification, but excluding storm surge. It is understood that the calculation of the actual AAL shall be based on the amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, net of (1) the FHCF mandatory layer of coverage purchased by FedNat Insurance Company using the current estimates of the mandatory FHCF coverage of 75.0% of $931,000,000 excess of $290,500,000, (2) the FHCF mandatory layer of coverage purchased by Monarch National Insurance Company using the current estimates of the mandatory FHCF coverage of 75.0% of $32,300,000 excess of $10,000,000, and of (3) the Company's FHCF Supplement Layer Reinsurance Contract (18\F7V1085), which shall be deemed to be placed at 19.0%.  B. The Company shall pay the Reinsurer an annual deposit premium for each excess layer of the amount, shown as "Annual Deposit Premium" for that excess layer in Schedule A attached hereto, in four equal installments of the amount, shown as "Deposit Premium Installment" for that excess layer in Schedule A attached hereto, on July 1 and October 1 of 2018, and on January 1 and April 1 of 2019. However, in the event this Contract is terminated, there shall be no deposit premium installments due after the effective date of termination. C. On or before June 30, 2019, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for each excess layer for the term of this Contract, computed in accordance with paragraph A above, and any additional premium due the Reinsurer or return premium due the Company for each such excess layer shall be remitted promptly. Article 15 - Sanctions Neither the Company nor any Subscribing Reinsurer shall be liable for premium or loss under this Contract if it would result in a violation of any mandatory sanction, prohibition or restriction 18\F7V1054 Page 11

 
under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America that are applicable to either party. Article 16 - Late Payments A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in the Intermediary Article (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest charge on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365ths of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest charges have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due 10 days after the proof of loss or demand for payment is transmitted to the Reinsurer. If such loss or claim payment is not received within the 10 days, interest will accrue on the payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment was transmitted to the Reinsurer. 3. As respects a "cash call" made in accordance with the Cash Call Article, payment shall be deemed due 10 days after the demand for payment is transmitted to the Reinsurer. If such loss or claim payment is not received within the 10 days, interest shall accrue on the payment or amount overdue in accordance with paragraph B above, from the date the demand for payment was transmitted to the Reinsurer. 4. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1, 2, and 3 of this paragraph C, the due date shall be as 18\F7V1054 Page 12

 
provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 10 days following transmittal of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting a Subscribing Reinsurer from contesting the validity of any claim, or from participating in the defense of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest charges due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest charge on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. Interest charges arising out of the application of this Article that are $1,000 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article 17 - Offset The Company and the Reinsurer may offset any balance or amount due from one party to the other under this Contract or any other contract heretofore or hereafter entered into between the Company and the Reinsurer, whether acting as assuming reinsurer or ceding company. The provisions of this Article shall not be affected by the insolvency of either party. Article 18 - Severability of Interests and Obligations The rights, duties and obligations set forth below shall apply as if this Contract were a separate contract between the Subscribing Reinsurers and each named reinsured company: A. Balances payable by any Subscribing Reinsurer to or from any reinsured party under the Contract shall not serve to offset any balances recoverable to, or from, any other reinsured party to the Contract and balances payable shall be separated by named reinsured company and paid directly to the appropriate named reinsured company’s bank account. B. Balances recoverable by any Subscribing Reinsurer to or from any reinsured party under the Contract shall not serve to offset any balances payable to, or from, any other reinsured party to the Contract. C. Reports and remittances made to the Reinsurer in accordance with the applicable articles of the Contract are to be in sufficient detail to identify both the Reinsurer's loss obligations 18\F7V1054 Page 13

 
due to each named reinsured company and each named reinsured company's premium remittance under the report. D. In the event of the insolvency of any of the parties to the Contract, offset shall be only allowed in accordance with the laws of the insolvent party's state of domicile. E. Nothing in this Article shall be construed to provide a separate retention, Reinsurer's limit of liability any one loss occurrence or Reinsurer's annual limit of liability for each named reinsured company. Article 19 - Access to Records The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance, provided the Reinsurer gives the Company at least 15 days prior notice of request for such access. However, a Subscribing Reinsurer or its designated representatives shall not have any right of access to the records of the Company if it is not current in all undisputed payments due the Company. "Undisputed" as used herein shall mean any amount that the Subscribing Reinsurer has not contested in writing to the Company specifying the reason(s) why the payments are disputed. Article 20 - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article 21 - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. 18\F7V1054 Page 14

 
Article 22 - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article 23 - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article 24 - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article 25 - Federal Excise Tax (BRMA 17D) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article 26 - Foreign Account Tax Compliance Act A. To the extent the Reinsurer is subject to the deduction and withholding of premium payable hereon as set forth in the Foreign Account Tax Compliance Act (Sections 1471-1474 of the Internal Revenue Code), the Reinsurer shall allow such deduction and withholding from the premium payable under this Contract. B. In the event of any return of premium becoming due hereunder, the return premium shall be determined and paid in full without regard to any amounts deducted or withheld under paragraph A of this Article. In the event the Company or its agent recovers such premium 18\F7V1054 Page 15

 
deductions and withholdings on the return premium from the United States Government, the Company or its agent shall reimburse the Reinsurer for such amounts. Article 27 - Reserves A. The Reinsurer agrees to fund its share of amounts, including but not limited to, the Company's ceded unearned premium and outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) (hereinafter referred to as "Reinsurer's Obligations") by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if the Reinsurer: 1. Is unauthorized in any state of the United States of America or the District of Columbia having jurisdiction over the Company and if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved; or 2. Has an A.M. Best Company's rating equal to or below B++ at the inception of this Contract. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 18\F7V1054 Page 16

 
3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of amounts, including but not limited to, the Reinsurer's Obligations as set forth above, funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of amounts, including but not limited to, the Reinsurer's Obligations as set forth above, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article 28 - Insolvency A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more Subscribing Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy 18\F7V1054 Page 17

 
obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. Article 29 - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one Subscribing Reinsurer is involved in the same dispute, all such Subscribing Reinsurers shall, at the option of the Company, constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the Subscribing Reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such Subscribing Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Subscribing Reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. 18\F7V1054 Page 18

 
Article 30 - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article 31 - Severability (BRMA 72E) If any provision of this Contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Contract or the enforceability of such provision in any other jurisdiction. Article 32 - Governing Law (BRMA 71B) This Contract shall be governed by and construed in accordance with the laws of the State of Florida. Article 33 - Confidentiality A. The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract, including all information obtained through any audits and any claims information between the Company and the Reinsurer, and any submission or other materials relating to any renewal (hereinafter referred to as "Confidential Information") are proprietary and confidential to the Company. B. Except as provided for in paragraph C below, the Reinsurer shall not disclose any Confidential Information to any third parties, including but not limited to the Reinsurer's subsidiaries and affiliates, other insurance companies and their subsidiaries and affiliates, 18\F7V1054 Page 19

 
underwriting agencies, research organizations, any unaffiliated entity engaged in modeling insurance or reinsurance data, and statistical rating organizations. C. Confidential Information may be used by the Reinsurer only in connection with the performance of its obligations or enforcement of its rights under this Contract and will only be disclosed when required by (1) retrocessionaires subject to the business ceded to this Contract, (2) regulators performing an audit of the Reinsurer's records and/or financial condition, (3) external auditors performing an audit of the Reinsurer's records in the normal course of business, or (4) the Reinsurer's legal counsel; provided that the Reinsurer advises such parties of the confidential nature of the Confidential Information and their obligation to maintain its confidentiality. The Company may require that any third-party representatives of the Reinsurer agree, in writing, to be bound by this Confidentiality Article or by a separate written confidentiality agreement, containing terms no less stringent than those set forth in this Article. If a third-party representative of the Reinsurer is not bound, in writing, by this Confidentiality Article or by a separate written confidentiality agreement, the Reinsurer shall be responsible for any breach of this provision by such third-party representative of the Reinsurer. D. Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company with written notice of same at least 10 days prior to such release or disclosure, to the extent legally permissible, and to use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article. E. Any disclosure of Non-Public Personally Identifiable Information shall comply with all state and federal statutes and regulations governing the disclosure of Non-Public Personally Identifiable Information. "Non-Public Personally Identifiable Information" shall be defined as this term or a similar term is defined in any applicable state, provincial, territory, or federal law. Disclosing or using this information for any purpose not authorized by applicable law is expressly forbidden without the prior consent of the Company. F. The parties agree that any information subject to privilege, including the attorney-client privilege or attorney work product doctrine (collectively "Privilege") shall not be disclosed to the Reinsurer until, in the Company's opinion, such Privilege is deemed to be waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. Furthermore, the Reinsurer shall not assert that any Privilege otherwise applicable to the Confidential Information has been waived or otherwise compromised by virtue of its disclosure pursuant to this Contract. G. The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns. Article 34 - Non-Waiver The failure of the Company or Reinsurer to insist on compliance with this Contract or to exercise any right, remedy or option hereunder shall not: (1) constitute a waiver of any rights contained in this Contract, (2) prevent the Company or Reinsurer from thereafter demanding full and 18\F7V1054 Page 20

 
complete compliance, (3) prevent the Company or Reinsurer from exercising such remedy in the future, nor (4) affect the validity of this Contract or any part thereof. Article 35 - Agency Agreement (BRMA 73A) If more than one reinsured company is named as a party to this Contract, the first named company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article 36 - Notices and Contract Execution A. Whenever a notice, statement, report or any other written communication is required by this Contract, unless otherwise specified, such notice, statement, report or other written communication may be transmitted by certified or registered mail, nationally or internationally recognized express delivery service, personal delivery, electronic mail, or facsimile. With the exception of notices of termination, first class mail is also acceptable. B. The use of any of the following shall constitute a valid execution of this Contract or any amendments thereto: 1. Paper documents with an original ink signature; 2. Facsimile or electronic copies of paper documents showing an original ink signature; and/or 3. Electronic records with an electronic signature made via an electronic agent. For the purposes of this Contract, the terms "electronic record," "electronic signature" and "electronic agent" shall have the meanings set forth in the Electronic Signatures in Global and National Commerce Act of 2000 or any amendments thereto. C. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original. Article 37 - Intermediary Aon Benfield Inc., or one of its affiliated corporations duly licensed as a reinsurance intermediary, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating to this Contract will be transmitted to the Company or the Reinsurer through the Intermediary. Payments by the Company to the Intermediary will be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary will be deemed payment to the Company only to the extent that such payments are actually received by the Company. 18\F7V1054 Page 21

 
In Witness Whereof, the Company by its duly authorized representatives has executed this Contract as of the dates specified below: This 9th day of August in the year 2018. FedNat Insurance Company /s/ Michael H. Braun This 9th day of August in the year 2018. Monarch National Insurance Company /s/ Michael H. Braun 18\F7V1054 Page 22

 
Schedule A Excess Catastrophe Reinsurance Contract Effective: July 1, 2018 FedNat Insurance Company Sunrise, Florida and Monarch National Insurance Company Sunrise, Florida First Second Third Fourth Excess Excess Excess Excess Reinsurer's Per Occurrence Limit $85,000,000 $180,000,000 $60,000,000 $117,500,000 Reinsurer's Term Limit $170,000,000 $360,000,000 $120,000,000 $235,000,000 Minimum Premium ***** ***** ***** ***** AAL ***** ***** ***** ***** Annual Deposit Premium ***** ***** ***** ***** Deposit Premium Installments ***** ***** ***** ***** The figures listed above for each excess layer shall apply to each Subscribing Reinsurer in the percentage share for that excess layer as expressed in its Interests and Liabilities Agreement attached hereto. 18\F7V1054 Schedule A

 
War Exclusion Clause As regards interests which at time of loss or damage are on shore, no liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. 18\F7V1054

 
Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.) 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 12/12/57 N.M.A. 1119 BRMA 35B 18\F7V1054

 
Pools, Associations and Syndicates Exclusion Clause (Catastrophe) It is hereby understood and agreed that: A. This Contract excludes loss or liability arising from: 1. Business derived directly or indirectly from any pool, association, or syndicate which maintains its own reinsurance facilities. This subparagraph 1 shall not apply with respect to: a. Residual market mechanisms created by statute. This Contract shall not extend, however, to afford coverage for liability arising from the inability of any other participant or member in the residual market mechanism to meet its obligations, nor shall this Contract extend to afford coverage for liability arising from any claim against the residual market mechanism brought by or on behalf of any insolvency fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract). For the purposes of this Clause, the California Earthquake Authority shall be deemed to be a "residual market mechanism." b. Inter-agency or inter-government joint underwriting or risk purchasing associations (however styled) created by or permitted by statute or regulation. 2. Those perils insured by the Company that the Company knows, at the time the risk is bound, to be insured by or in excess of amounts insured or reinsured by any pool, association or syndicate formed for the purpose of insuring oil, gas, or petro-chemical plants; oil or gas drilling rigs; and/or aviation risks. This subparagraph 2 shall not apply: a. If the total insured value over all interests of the risk is less than $250,000,000. b. To interests traditionally underwritten as Inland Marine or Stock or Contents written on a blanket basis. c. To Contingent Business Interruption liability, except when it is known to the Company, at the time the risk is bound, that the key location is insured by or through any pool, association or syndicate formed for the purpose of insuring oil, gas, or petro-chemical plants; oil or gas drilling rigs; and/or aviation risks; unless the total insured value over all interests of the risk is less than $250,000,000. B. With respect to loss or liability arising from the Company's participation or membership in any residual market mechanism created by statute, the Company may include in its ultimate net loss only amounts for which the Company is assessed as a direct consequence of a covered loss occurrence, subject to the following provisions: 1. Recovery is limited to perils otherwise protected hereunder. 2. In the event the terms of the Company's participation or membership in any such residual market mechanism permit the Company to recoup any such direct 18\F7V1054 Page 1 of 2

 
assessment attributed to a loss occurrence by way of a specific policy premium surcharge or similar levy on policyholders, the amount received by the Company as a result of such premium surcharge or levy shall reduce the Company's ultimate net loss for such loss occurrence. 3. The result of any rate increase filing permitted by the terms of the Company's participation or membership in any such residual market mechanism following any assessment shall have no effect on the Company's ultimate net loss for any covered loss occurrence. 4. The result of any premium tax credit filing permitted by the terms of the Company's participation or membership in any such residual market mechanism following any assessment shall reduce the Company's ultimate net loss for any covered loss occurrence. 5. The Company may not include in its ultimate net loss any amount resulting from an assessment that, pursuant to the terms of the Company's participation or membership in the residual market mechanism, the Company is required to pay only after such assessment is collected from the policyholder. 6. The ultimate net loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of a residual market mechanism nor any fines or penalties imposed on the Company for late payment. 7. If, however, a residual market mechanism only provides for assessment based on an aggregate of losses in any one contract or plan year of said mechanism, then the amount of that assessment to be included in the ultimate net loss for any one loss occurrence shall be determined by multiplying the Company's share of the aggregate assessment by a factor derived by dividing the Company's ultimate net loss (net of the assessment) with respect to the loss occurrence by the total of all of its ultimate net losses (net of assessments) from all loss occurrences included by the mechanism in determining the assessment. 8/1/2012 18\F7V1054 Page 2 of 2

 
Terrorism Exclusion (Property Treaty Reinsurance) Notwithstanding any provision to the contrary within this Contract or any amendment thereto, it is agreed that this Contract excludes loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with any act of terrorism, as defined herein, regardless of any other cause or event contributing concurrently or in any other sequence to the loss. An act of terrorism includes any act, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of political, religious, ideological or similar purposes to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which: 1. Involves violence against one or more persons, or 2. Involves damage to property; or 3. Endangers life other than the person committing the action; or 4. Creates a risk to health or safety of the public or a section of the public; or 5. Is designed to interfere with or disrupt an electronic system. This Contract also excludes loss, damage, cost or expense directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against or responding to any act of terrorism. Notwithstanding the above and subject otherwise to the terms, conditions, and limitations of this Contract, in respect only of personal lines, this Contract will pay actual loss or damage (but not related cost and expense) caused by any act of terrorism provided such act is not directly or indirectly caused by, contributed to by, resulting from or arising out of or in connection with radiological, biological, chemical, or nuclear pollution or contamination. 18\F7V1054

 
The Interests and Liabilities Agreements, constituting 66 pages in total, have been omitted in accordance with Rule 24b-2 under the Exchange Act. These pages have been filed separately with the Securities and Exchange Commission. 18\F7V1054

 
NET QUOTA SHARE REINSURANCE AGREEMENT NO. POR1238172 EFFECTIVE: JULY 1, 2018 between FEDNAT INSURANCE COMPANY Sunrise, Florida and SWISS REINSURANCE AMERICA CORPORATION Armonk, New York _______________________ *****Portions of this document omitted pursuant to an application for an order for confidential treatment pursuant to Rule 24b-2 under the Exchange Act. Confidential portions of this document have been filed separately with the Securities and Exchange Commission. EFFECTIVE: JULY 1, 2018 P18-0057 7/6/2018 11:54 AM.v3

 
NET QUOTA SHARE REINSURANCE AGREEMENT NO. POR1238172 ARTICLE CONTENTS PAGE PREAMBLE 1 I BUSINESS COVERED 1 II EFFECTIVE DATE AND TERMINATION 3 III TERRITORY 4 IV RETENTION 4 V DEFINITIONS 4 VI EXCLUSIONS 8 VII SPECIAL ACCEPTANCE 11 VIII INTERNATIONAL TRADE CONTROLS AND ECONOMIC SANCTIONS 11 IX REINSURANCE PREMIUM 11 X SLIDING SCALE COMMISSION 12 XI LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES 13 XII REPORTS AND REMITTANCES 14 XIII ACCESS TO RECORDS 17 XIV TAXES 17 XV OFFSET 18 XVI DISPUTE RESOLUTION 18 XVII INSOLVENCY 19 XVIII AMENDMENTS 20 SIGNATURES 21 ATTACHMENTS: INSOLVENCY FUNDS EXCLUSION CLAUSE POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE POLLUTION AND SEEPAGE EXCLUSION CLAUSE NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4 POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. TERRORISM EXCLUSION CLAUSE (USA) – REINSURANCE (PROPERTY) TERRORISM EXCLUSION CLAUSE (USA) – REINSURANCE (CASUALTY) EFFECTIVE: JULY 1, 2018 P18-0057 7/6/2018 11:54 AM.v3

 
NET QUOTA SHARE REINSURANCE AGREEMENT NO. POR1238172 (hereinafter referred to as the "Agreement") between FEDNAT INSURANCE COMPANY Sunrise, Florida (hereinafter referred to as the "Company") and SWISS REINSURANCE AMERICA CORPORATION Armonk, New York (hereinafter referred to as the "Reinsurer") ARTICLE I - BUSINESS COVERED A. By this Agreement the Company obligates itself to cede to the Reinsurer and the Reinsurer obligates itself to accept from the Company a 2% Quota Share participation of the Company's Ultimate Net Liability for Policies in force as of July 1, 2018, and new and renewal Policies becoming effective on or after said date as respects losses occurring on or after July 1, 2018, subject to Paragraph B. This Quota Share is subject to the maximum cession limits set forth below: 1. Property Business ***** each risk (2% share of the Company's Ultimate Net Liability of ***** ), but in no event shall the Reinsurer's liability from all risks in any one Loss Occurrence exceed ***** (2% of ***** ) during the term of this Agreement. Notwithstanding the limits stated above, the Reinsurer's liability shall not exceed ***** (2% of ***** ) as respects all Loss Occurrences taking place during the term of this Agreement. 2. Casualty Business ***** each Policy each Loss Occurrence (2% share of the Company's Ultimate Net Liability of ***** .) B. The cession percentage set forth in Paragraph A. of this Article may be adjusted up to three times during the Agreement Year, subject to the following: EFFECTIVE: JULY 1, 2018 1. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
1. The Company has provided the Reinsurer no less than 45 day's written notice prior to the end of any calendar quarter during the Agreement Year, of its desire to adjust the cession percentage prospectively. 2. The adjusted cession percentage shall not be less than 2% nor greater than 20%. 3. The cession adjustment is to take effect as respects in force, new and renewal business on a prospective basis on the last day of the calendar quarter in which such notice was given as respects Loss Occurrences taking place on or after such date; 4. Such cession adjustment shall be at the election of the Company only if the Loss Ratio from Agreement inception through the end of the quarter in which such notice was given is less than or equal to 30%. 5. If such Loss Ratio is greater than 30%, any such cession adjustment must be mutually agreed by both parties. 6. Mutual agreement of the parties to any cession adjustment is evidenced by addendum to this Agreement signed by both parties. For purposes of this Paragraph B., "Loss Ratio" shall mean the actual ratio of Incurred Losses to Earned Premiums from Agreement inception to the end of the calendar quarter for which calculation is being made. The terms "Incurred Losses" and "Earned Premiums" shall be defined as they are under Article X - Sliding Scale Commission, provided however, as respects Incurred Losses, there will be no Incurred But Not Reported ("IBNR") losses included. C. Loss Adjustment Expenses and any loss arising under this Agreement with respect to Loss In Excess of Policy Limits and Extra Contractual Obligations, as defined herein, shall be recovered in the same proportion as the contractual loss recoverable hereunder; provided such contractual loss plus Loss Adjustment Expenses, Loss In Excess of Policy Limits and Extra Contractual Obligations shall never exceed the maximum cession limit set forth under Paragraph A. above. D. This Agreement is solely between the Company and the Reinsurer, and nothing contained in this Agreement shall create any obligations or establish any rights against the Reinsurer in favor of any person or entity not a party hereto. E. The performance of obligations by both parties under this Agreement shall be in accordance with a fiduciary standard of good faith and fair dealing. F. Under this Agreement, the indemnity for reinsured loss applies only to the following Property and Casualty Business except as excluded under Article VI - Exclusions of this Agreement. PROPERTY LINES OF BUSINESS Homeowners (Section I only) EFFECTIVE: JULY 1, 2018 2. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
Dwelling Fire (Section I only) CASUALTY LINES OF BUSINESS Homeowners (Section II only) Dwelling Fire (Section II only) ARTICLE II - EFFECTIVE DATE AND TERMINATION A. This Agreement shall become effective at 12:01 a.m., Eastern Standard Time, July 1, 2018, and shall terminate at 12:01 a.m., Eastern Standard Time on July 1, 2019. B. Upon termination of this Agreement: 1. All reinsurance hereunder shall be automatically cancelled as of the date of termination and the Reinsurer shall be released of all liability as respects losses occurring on or after the date of termination. The Reinsurer shall return to the Company the unearned premiums on the business in force hereunder at the date of termination, less the commission allowed thereon. 2. Alternatively, at the Company's option, and provided written notice of the Company's election of such option is given to the Reinsurer by certified mail, electronic mail or by a courier service each producing evidence of receipt by the Reinsurer prior to the date of termination, this Agreement will terminate on a "Run-off" basis and the Reinsurer shall be liable for losses occurring on or after to the date of termination for all Policies covered hereunder and in force at the date of termination of this Agreement until their natural expiry, cancellation or next anniversary of such business, whichever first occurs; but in no case shall the Reinsurer be liable for losses occurring more than 12 months after the termination date unless the Company is required by statute or regulation to continue coverage on a Policy. In such case, the Reinsurer shall continue to be liable for losses occurring subsequent to the date of termination until the earliest date on which the Company may cancel such Policy. The Reinsurer shall return to the Company the unearned premiums, if any, less commissions applicable, for the unexpired periods. ARTICLE III – TERRITORY As respects Property Business, this Agreement applies to risks located in Florida. As respects Casualty Business, the Agreement applies to Policies issued by the Company within Florida and shall apply to losses covered hereunder wherever occurring. EFFECTIVE: JULY 1, 2018 3. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
ARTICLE IV - RETENTION A. The Company warrants that it shall retain net for its own account and not reinsure in any way, 98% of its Ultimate Net Liability. B. In the event there is a cession adjustment pursuant to Paragraph B. of Article I – Business Covered, the Company's net retention shall be revised to reflect the difference between the revised cession percentage and 100% as of the effective date of the change. ARTICLE V – DEFINITIONS A. AGREEMENT YEAR "Agreement Year" shall mean the 12 month period commencing July 1, 2018 and continuing through June 30, 2019. B. DECLARATORY JUDGMENT EXPENSES "Declaratory Judgment Expenses" shall mean all legal expenses incurred in the representation of the Company in litigation brought to determine the Company's defense and/or indemnification obligations that are allocable to any specific claim or loss applicable to Policies subject to this Agreement. In addition, the Company shall promptly notify the Reinsurer of any Declaratory Judgment Expenses subject to this Agreement. C. EXTRA CONTRACTUAL OBLIGATIONS 1. "Extra Contractual Obligations" are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. 2. The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence. 3. However, coverage hereunder as respects Extra Contractual Obligations shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. EFFECTIVE: JULY 1, 2018 4. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
4. Recoveries, collectibles or retention from any other form of insurance or reinsurance including deductibles or self-insured retention which protect the Company against Extra Contractual Obligations, whether collectible or not, shall inure to the benefit of the Reinsurer and shall be deducted from the total amount of Extra Contractual Obligations for purposes of determining the loss hereunder. 5. If any provision of this paragraph shall be rendered illegal or unenforceable by the laws, regulations or public policy of any jurisdiction, such provision shall be considered void in such jurisdiction, but this shall not affect the validity or enforceability of any other provision of this Article or the enforceability of such provision in any other jurisdiction. D. GROSS PREMIUMS WRITTEN "Gross Premiums Written" shall mean the Company's written premiums for subject business less return premiums. E. LOSS ADJUSTMENT EXPENSES "Loss Adjustment Expenses" shall mean all expenses paid by the Company in connection with the investigation, settlement, defense or litigation, including court costs and postjudgment interest, of any claim or loss which is the subject matter of Policies covered under this Agreement and shall include Declaratory Judgment Expenses. However, "Loss Adjustment Expenses" shall not include the salaries and expenses of Company employees, office expenses, and other overhead expenses. F. LOSS IN EXCESS OF POLICY LIMITS 1. "Loss in Excess of Policy Limits" is defined as loss in excess of the limit of the original Policy, such loss in excess of the limit having been incurred because of failure by the Company to settle within the Policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. 2. However, this paragraph shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. 3. For the purposes of this paragraph, the word "loss" shall mean any amounts which the Company would have been contractually liable to pay had it not been for the limit of the original Policy. EFFECTIVE: JULY 1, 2018 5. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
4. With respect to coverage provided under this paragraph, recoveries from any insurance or reinsurance other than this Agreement, whether collectible or not, shall be deducted to arrive at the amount of the Company's Ultimate Net Liability. G. LOSS OCCURRENCE As respects Property Business covered under this Agreement: 1. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the state of Florida. However, the duration and extent of any one Loss Occurrence shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows: a. As regards windstorm, other than Named Windstorms, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 120 consecutive hours arising out of and directly occasioned by the same event. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company, occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's Loss Occurrence. d. As regards Freeze, only individual losses directly occasioned by collapse, breakage of glass and water damage (including but not limited to those caused by freezing and/or melting of ice, snow and sleet, or ice damming on a structure or bursting of frozen pipes and tanks) may be included in the Company's Loss Occurrence. 2. For all Loss Occurrences the Company may choose the date and time when any such period of consecutive hours commences provided that it is not EFFECTIVE: JULY 1, 2018 6. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event except for those Loss Occurrences referred to in a. and b. above, where only one such period of 72 consecutive hours shall apply with respect to one event, regardless of the duration of the event. 3. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any Loss Occurrence claimed under the 168 hours provision. As respects Casualty Business covered under this Agreement: "Loss Occurrence" shall mean any accident or occurrence or series of accidents or occurrences arising out of any one event and happening within the term and scope of this Agreement. H. NAMED WINDSTORMS "Named Windstorms" shall mean a storm and all other atmospheric perils arising out of such storm that are identified and named as a Tropical Storm or Hurricane by the National Hurricane Center of the National Weather Service, operated by the National Oceanographic Administration of the U.S. Government ("NHC"). The duration of such Named Windstorm shall be deemed to be as follows: 1. Beginning at the time a Named Windstorm warning is issued by the NHC for any part of each state in which the Company writes the business reinsured hereunder; 2. Continuing for the time period which the Named Windstorm conditions exist anywhere in such state; and 3. Ending 72 hours following termination of the last Named Windstorm warning by NHC for any part of such state. I. POLICIES "Policies" shall mean each of the Company's binders, policies and contracts of insurance on the business covered hereunder. J. RISK The Company shall be the sole judge of what constitutes one risk provided, however, that: 1. A risk shall never be less than all insurable values within exterior walls and under one roof regardless of fire divisions, the number of Policies involved, and whether there is a single, multiple or unrelated named insureds involved in such risk. EFFECTIVE: JULY 1, 2018 7. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
2. When two or more buildings are situated at the same general location, the Company shall identify on its records at the time of acceptance by the Company, those individual buildings and all insurable values contained therein that are considered to constitute each risk. If such identification is not made, each building and all insurable values contained therein shall be considered to be a separate risk. 3. A risk shall be determined from the standpoint of the predominant peril and such peril shall be noted in the Company's records. K. ULTIMATE NET LIABILITY "Ultimate Net Liability" shall mean the remaining portion of the Company's gross liability on each Policy reinsured under this Agreement after deducting recoveries from all other reinsurance, whether specific or general and whether collectible or not. ARTICLE VI - EXCLUSIONS I. AS RESPECTS PROPERTY BUSINESS COVERED UNDER THIS AGREEMENT THIS AGREEMENT DOES NOT COVER: A. THE FOLLOWING GENERAL CATEGORIES 1. All Lines of Business not specifically listed in Article I - Business Covered. 2. Reinsurance assumed. 3. Ex-gratia Payments. 4. Loss or damage occasioned by war, invasion, revolution, bombardment, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law, or confiscation by order of any government or public authority, but not excluding loss or damage which would be covered under a standard form of Policy containing a standard war exclusion clause. 5. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause, which is made part of this Agreement. 6. Pool, Syndicate and Association business as per the attached Pools, Associations and Syndicates Exclusion Clause, which is made part of this Agreement. EFFECTIVE: JULY 1, 2018 8. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
7. Any statutory or regulatory fine or penalty imposed upon the Company on account of any unfair trade or claim practice. B. THE FOLLOWING PERILS 1. Flood and/or Earthquake when written on a stand-alone basis. 2. Pollution and Seepage as per the attached Pollution and Seepage Exclusion Clause which is made part of this Agreement. 3. Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement: a. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A. b. Nuclear Incident Exclusion Clause - Reinsurance - No. 4. 4. a. Loss, damage or expense of whatsoever nature caused directly or indirectly by any of the following, regardless of any other cause or event contributing concurrently or in any other sequence to the loss: nuclear reaction or radiation, or radioactive contamination, however caused. b. However, if nuclear reaction or radiation, or radioactive contamination results in fire it is specifically agreed herewith that this Agreement will pay for such fire loss or damage subject to all of the terms, conditions and limitations of this Agreement. c. This exclusion shall not apply to loss, damage or expense originating from and occurring at risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard. 5. Terrorism as per the attached Terrorism Exclusion Clause (USA) – Reinsurance (Property), which is made part of this Agreement. 6. Loss, damage or expense of whatsoever nature arising from Named Windstorms. II. AS RESPECTS CASUALTY BUSINESS COVERED UNDER THIS AGREEMENT THIS AGREEMENT DOES NOT COVER: 1. All Lines of Business not specifically listed in Article I - Business Covered. 2. Ex-gratia payments. 3. Loss or damage caused directly or indirectly by: (a) enemy attack by armed forces including action taken by military, naval or air forces in resisting an EFFECTIVE: JULY 1, 2018 9. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
actual or an immediately impending enemy attack; (b) invasion; (c) insurrection; (d) rebellion; (e) revolution; (f) intervention; (g) civil war; and (h) usurped power. 4. Reinsurance assumed by the Company. 5. Business derived from any Pool, Association, including Joint Underwriting Association, Syndicate, Exchange, Plan, Fund or other facility directly as a member, subscriber or participant, or indirectly by way of reinsurance or assessments. 6. Pollution Liability as per the attached Pollution Liability Exclusion Clause - Reinsurance. 7. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause. 8. Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement: a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A. b. Nuclear Incident Exclusion Clause - Reinsurance - No. 4. 9. Any statutory or regulatory fine or penalty imposed upon the Company on account of any unfair trade or claim practice. 10. Terrorism as per the attached Terrorism Exclusion Clause (USA) – Reinsurance (Casualty), which is made part of this Agreement. 11. Any actual or alleged liability whatsoever for any claim or claims in respect of loss or losses, directly or indirectly arising out of, resulting from, or in consequence of asbestos, in whatever form or quantity. ARTICLE VII - SPECIAL ACCEPTANCE Risks and/or Policies which are beyond the terms, conditions or limitations of this Agreement may be submitted to the Reinsurer for special acceptance hereunder; and such risks and/or Policies, if accepted in writing by the Reinsurer, shall be subject to all of the terms, conditions and limitations of this Agreement, except as modified by the special acceptance. Premiums and losses derived from any special acceptance shall be included with other data for purposes of this Agreement. ARTICLE VIII - INTERNATIONAL TRADE CONTROLS AND ECONOMIC SANCTIONS No Reinsurer shall be deemed to provide cover and no Reinsurer shall be liable to pay any claim or pay any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that Reinsurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of any jurisdiction applicable to that Reinsurer. EFFECTIVE: JULY 1, 2018 10. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
ARTICLE IX - REINSURANCE PREMIUM A. The Company shall cede to the Reinsurer 2% of the Company's unearned premiums on its Ultimate Net Liability in force as of July 1, 2018 on the business covered hereunder. B. The Company shall cede to the Reinsurer 2% of the Company's Gross Premiums Written applicable to new and renewal Policies becoming effective on or after July 1, 2018, with respect to its Ultimate Net Liability on the business covered hereunder. C. The Reinsurer will allow the Company an allowance for other reinsurance equal to ***** of the premiums ceded under Paragraphs A. and B. above. Other reinsurance includes but is not limited to Property Per Risk Reinsurance, Florida Hurricane Catastrophe Mandatory Coverage Layer and Property Catastrophe Excess of Loss Reinsurance. D. In the event there is a cession adjustment pursuant to Paragraph B. of Article I – Business Covered, the percentage of the Company's Gross Premiums Written to be ceded to the Reinsurer commencing on the effective date of such cession change shall be the newly revised cession percentage and any resulting difference in unearned premiums shall be debited or credited to the appropriate party. ARTICLE X – SLIDING SCALE COMMISSION A. The Reinsurer shall make to the Company a provisional commission allowance of ***** of the Gross Premiums Written ceded hereunder. Such provisional commission allowance shall also apply to the Company's unearned premiums ceded hereunder as respects business in force as of July 1, 2018. The Company shall debit the Reinsurer with the provisional commission allowance; such provisional commission shall be adjusted as provided hereafter. On all return premiums the Company shall return to the Reinsurer the provisional commission allowance of ***** . Such commission allowance includes provision for all brokerage and commission, premium taxes of all kinds, all board, bureau and exchange assessments and any other expenses whatsoever except Loss Adjustment Expenses. B. The adjusted commission allowance which the Reinsurer shall make to the Company shall be in accordance with the following formula and computed and paid on Earned Premiums. All intermediate and final calculations shall be rounded to two decimal places. EFFECTIVE: JULY 1, 2018 11. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
If the actual ratio of Incurred The adjusted commission Losses to Earned Premiums is: shall be: ***** or less ***** Maximum Higher than ***** but ***** less ***** of not exceeding ***** the difference between the actual loss ratio and ***** ***** or higher ***** Minimum C. The term "Incurred Losses" means all losses and Loss Adjustment Expenses paid less recoveries, including salvage and subrogation, during the current Period for which computation is being made plus all losses and Loss Adjustment Expenses outstanding at the end of the current Period plus a reserve for IBNR losses at the end of the current Period, as determined by the Company, less all losses and Loss Adjustment Expenses outstanding and IBNR, determined by the Company, at the close of the preceding period. D. The term "Earned Premiums" means the total of the Gross Premiums Written, ceded during the current Period plus the unearned premiums as respects premiums in force at the beginning of such Period, less the unearned premiums at the close of the current Period, provided that in the event of a Run-off termination, only those unearned premiums applicable to any unexpired periods shall be deducted. Said unearned premiums to be calculated on an actual daily basis or in accordance with the Company's methodology, as agreed. E. The term "Period" means the actual time covered by each adjustment of commission. F. Within 90 days after the close of each Period, the Reinsurer shall calculate the commission adjustment on the Earned Premiums during the Period. The first adjustment of commission shall be made as of September 30, 2019, for the Period from July 1, 2018, through June 30, 2019 and annually thereafter. If the adjusted commission on the Earned Premiums during the Period exceeds the provisional commission already allowed on the Earned Premiums, the Reinsurer shall pay the difference to the Company. If the provisional commission already allowed on the Earned Premiums exceeds the adjusted commission on the Earned Premiums, the difference shall be refunded by the Company to the Reinsurer. In addition, the difference in commission adjustment shall be paid by the debtor party within 30 days after the Company's verification of the Reinsurer's calculations. G. In the event reserves for losses and Loss Adjustment Expenses used in any previous calculation of adjusted commission shall have been underestimated or overestimated, as proven by subsequent developments, such previous calculations shall be revised at the request of either party. The Company shall refund to the Reinsurer, or the Reinsurer shall pay to the Company, such amount as will give effect to the revision(s). EFFECTIVE: JULY 1, 2018 12. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
H. After the first commission adjustment, as noted in Paragraph F. above, all subsequent adjustments of commission shall be made every September 30th until the expiration of all liability and the settlement of all losses covered under this Agreement. ARTICLE XI - LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES A. The Reinsurer shall pay its pro rata share of losses including prejudgment interest paid by the Company arising under Policies covered under this Agreement, subject to Article I – Business Covered, and the Reinsurer shall benefit proportionately in all recoveries, including salvage and subrogation. B. The Reinsurer shall pay its pro rata share of Loss Adjustment Expenses paid by the Company, subject to Article I – Business Covered. C. The Company shall have the responsibility to investigate, defend or negotiate settlements of all claims and lawsuits related to Policies written by the Company and reinsured under this Agreement. The Reinsurer, at its own expense, may associate with the Company in the defense of any claim, suit or other proceeding which involves or is likely to involve the reinsurance provided under this Agreement, and the Company shall cooperate in every respect in the defense of any such claim, suit or proceeding. ARTICLE XII - REPORTS AND REMITTANCES A. The Company shall provide the Reinsurer with a quarterly account and bordereaux, as well as quarterly and annual reports, in accordance with the provisions set forth in Paragraphs C., E., F. and G. below. B. Portfolio Assumption - Within 45 days after July 1, 2018, the Company shall pay to the Reinsurer the Reinsurer's pro rata share of the Company's unearned premium reserve segregated by Line of Business on the business in force as of said date. C. Quarterly Account - Within 30 days after the close of each calendar quarter, the Company shall forward a quarterly account summarizing the following transactions under this Agreement during such quarter: 1. Gross Premiums Written ceded segregated by Line of Business specifically identifying the current cession rate in the event there has been a cession change pursuant to Paragraph B. of Article I – Business Covered; 2. ***** allowance for reinsurance; 3. Provisional Commissions; 4. Loss and Loss Adjustment Expenses paid less recoveries, including salvage and subrogation, segregated by Line of Business, by year of loss. EFFECTIVE: JULY 1, 2018 13. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
The balance due either party shall be paid within 45 days after the close of each for the transactions during such quarter. D. In respect of Paragraph C. above: 1. All quarterly Account Statements shall be sent to the Reinsurer at: a. E-Mail/Word, Excel, PDF, or TIF Formats, or other scanned documents: *****, or b. Standard Mail: Swiss Reinsurance America Corporation P.O. Box 74008504 Chicago, IL 60674-8504 2. All checks and supporting documentation shall be sent to the Reinsurer through one of the options set forth below and shall identify the applicable Reinsurer Agreement Number(s): a. WIRE TRANSFER (i) All wires shall be sent to: Bank of America 655 Grant Street Concord, CA 94520 Account Name: Swiss Reinsurance America Corporation Account Address: 175 King Street Armonk, NY 10504 Account Number: ***** Wire ABA Number: ***** ACH ABA Number: ***** SWIFT: ***** (ii) All supporting documentation shall be sent to: (a) E-Mail/Word, Excel, PDF, or TIF Formats, or other scanned documents: *****, or (b) Standard Mail: Swiss Reinsurance America Corporation P.O. Box 74008504 Chicago, IL 60674-8504 b. COURIER OR OVERNIGHT CARRIER EFFECTIVE: JULY 1, 2018 14. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
Both checks and supporting documentation shall be sent to: Bank of America Lockbox Services Swiss Reinsurance America Corporation 540 West Madison Street, 4th Floor Chicago, IL 60661 Re: Lockbox 74008504 c. STANDARD MAIL Both checks and supporting documentation shall be sent to: Swiss Reinsurance America Corporation P.O. Box 74008504 Chicago, IL 60674-8504 E. Premium Bordereau as respects each Policy covered under this Agreement - Within 30 days after the close of each quarter, the Company shall submit a premium bordereau to the Reinsurer segregated by underwriting year, the following information as respects each Policy covered under this Agreement: 1. Name of Insured, 2. Policy Number, 3. Effective and Expiration Dates, 4. Line of Business. F. Loss Bordereau as respects each Policy covered under this Agreement - Within 30 days after the close of each quarter, the Company shall submit a loss bordereau to the Reinsurer segregating by underwriting year of loss the following information as respects each loss covered under this Agreement: 1. Name of Insured, 2. Policy Number, 3. Policy Limits, 4. Effective and Expiration Dates, 5. Claim Number, 6. Date of Loss, 7. Line of Business. EFFECTIVE: JULY 1, 2018 15. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
G. Quarterly Report - The Company shall furnish the Reinsurer within 30 days after the close of each quarter the following information as respects the business ceded hereunder: 1. Unearned premium reserves segregated by Line of Business at the end of the quarter and calculated on the actual daily basis or in accordance with the Company's methodology, as agreed. 2. Estimated loss and Loss Adjustment Expense reserves outstanding at the end of the quarter segregated by Line of Business, by year of loss. H. Annual Report - The Company shall furnish the Reinsurer, within 45 days after the termination date of this Agreement, and annually thereafter, a summary of the business ceded hereunder: 1. Gross Premiums Written ceded from inception to date, segregated by Line of Business; provided that in the event there was a cession change under the Agreement, pursuant to Paragraph B. of Article I- Business Covered, such report shall provide separately the Gross Premiums Written ceded during the year as respects the initial 2% cession and the Gross Premiums Written ceded during the year as respects the revised cession percentage, specifically identifying the new percentage. 2. Unearned premium reserves segregated by Line of Business; 3. Losses and Loss Adjustment Expenses paid, less recoveries, including salvage and subrogation, from inception to date; 4. Losses and Loss Adjustment Expenses outstanding, segregated by Line of Business; 5. IBNR, as determined by the Company, as of each June 30th. ARTICLE XIII - ACCESS TO RECORDS The Reinsurer or its duly authorized representatives shall have the right to examine, at the offices of the Company at a reasonable time, during the currency of this Agreement or anytime thereafter, all books and records of the Company relating to business which is the subject of this Agreement. ARTICLE XIV - TAXES The Company shall be liable for all taxes on premiums paid to the Reinsurer under this Agreement, except income or profit taxes of the Reinsurer, and shall indemnify and hold the Reinsurer harmless for any such taxes which the Reinsurer may become obligated to pay to any local, state or federal taxing authority. EFFECTIVE: JULY 1, 2018 16. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
ARTICLE XV - OFFSET Each party to this Agreement together with their successors or assigns shall have and may exercise, at any time, the right to offset any balance or balances due the other (or, if more than one, any other). Such offset may include balances due under this Agreement regardless of whether such balances arise from premiums, losses or otherwise, and regardless of capacity of any party, whether as assuming insurer and/or ceding insurer, under the various agreements involved; provided however, that in the event of insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of any applicable Florida law, statute or regulation governing such offset. ARTICLE XVI - DISPUTE RESOLUTION Part I - Choice Of Law And Forum Any dispute arising under this Agreement shall be resolved in the State of Florida, and the laws of the State of Florida shall govern the interpretation and application of this Agreement. Part II - Mediation If a dispute between the Company and the Reinsurer, arising out of the provisions of this Agreement or concerning its interpretation or validity and whether arising before or after termination of this Agreement has not been settled through negotiation, both parties agree to try in good faith to settle such dispute by nonbinding mediation, before resorting to arbitration. Part III - Arbitration A. Resolution of Disputes - As a condition precedent to any right of action arising hereunder, any dispute not resolved by mediation between the Company and the Reinsurer arising out of the provisions of this Agreement or concerning its interpretation or validity, whether arising before or after termination of this Agreement, shall be submitted to arbitration in the manner hereinafter set forth. B. Composition of Panel - Unless the parties agree upon a single arbitrator within 15 days after the receipt of a notice of intention to arbitrate, all disputes shall be submitted to an arbitration panel composed of two arbitrators and an umpire chosen in accordance with Paragraph C. hereof. C. Appointment of Arbitrators - The members of the arbitration panel shall be chosen from disinterested persons with at least 10 years' experience in the insurance and reinsurance business. Unless a single arbitrator is agreed upon, the party requesting arbitration (hereinafter referred to as the "claimant") shall appoint an arbitrator and give written notice thereof by certified mail or by a courier service producing evidence of receipt by the receiving party, to the other party (hereinafter referred to as the "respondent") together with its notice of intention to arbitrate. Within 30 days after receiving such notice, the respondent shall also appoint an EFFECTIVE: JULY 1, 2018 17. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
arbitrator and notify the claimant thereof by certified mail or by a courier service producing evidence of receipt by the receiving party. Before instituting a hearing, the two arbitrators so appointed shall choose an umpire. If, within 20 days after the appointment of the arbitrator chosen by the respondent, the two arbitrators fail to agree upon the appointment of an umpire, each of them shall nominate three individuals to serve as umpire, of whom the other shall decline two and the umpire shall be chosen from the remaining two by drawing lots. The name of the individual first drawn shall be the umpire. D. Failure of Party to Appoint an Arbitrator - If the respondent fails to appoint an arbitrator within 30 days after receiving a notice of intention to arbitrate, the claimant's arbitrator shall appoint an arbitrator on behalf of the respondent, such arbitrator shall then, together with the claimant's arbitrator, choose an umpire as provided in Paragraph C. of Part III of this Article. E. Submission of Dispute to Panel – Within 30 days after the notice of appointment of all arbitrators, the panel shall meet, and determine a timely period for discovery, discovery procedures and schedules for hearings. F. Procedure Governing Arbitration - All proceedings before the panel shall be informal and the panel shall not be bound by the formal rules of evidence. The panel shall have the power to fix all procedural rules relating to the arbitration proceeding. In reaching any decision, the panel shall give due consideration to the customs and usages of the insurance and reinsurance business. G. Arbitration Award - The arbitration panel shall render its decision within 60 days after termination of the proceeding, which decision shall be in writing, stating the reasons therefor. The decision of the majority of the panel shall be final and binding on the parties to the proceeding. In no event, however, will the panel be authorized to award punitive, exemplary or consequential damages of whatsoever nature in connection with any arbitration proceeding concerning this Agreement. H. Cost of Arbitration - Unless otherwise allocated by the panel, each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other parties the expense of the umpire and the arbitration. ARTICLE XVII - INSOLVENCY A. In the event of insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company as respects Policies covered hereunder, without diminution because of such insolvency, directly to the Company or its liquidator, receiver, conservator or statutory successor except as provided in Sections 4118(a)(1)(A) and 1114(c) of the New York Insurance Law. B. The Reinsurer shall be given written notice of the pendency of each claim or loss which may involve the reinsurance provided by this Agreement within a reasonable time after such claim or loss is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim or loss and interpose, at its own EFFECTIVE: JULY 1, 2018 18. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
expense, in the proceedings where the claim or loss is to be adjudicated, any defense which it may deem available to the Company, its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. C. In addition to the offset provisions set forth in Article XV - Offset, any debts or credits, liquidated or unliquidated, in favor of or against either party on the date of the receivership or liquidation order (except where the obligation was purchased by or transferred to be used as an offset) are deemed mutual debts or credits and shall be set off with the balance only to be allowed or paid. Although such claim on the part of either party against the other may be unliquidated or undetermined in amount on the date of the entry of the receivership or liquidation order, such claim will be regarded as being in existence as of such date and any claims then in existence and held by the other party may be offset against it. D. Nothing contained in this Article is intended to change the relationship or status of the parties to this Agreement or to enlarge upon the rights or obligations of either party hereunder except as provided herein. ARTICLE XVIII - AMENDMENTS This Agreement may be amended by mutual consent of the parties expressed in an addendum; and such addendum, when executed by both parties, shall be deemed to be an integral part of this Agreement and binding on the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the following dates: EFFECTIVE: JULY 1, 2018 19. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
FEDNAT INSURANCE COMPANY /s/ Michael H. Braun /s/ Ronald A. Jordan Signature Signature Michael H. Braun Ronald A. Jordan Print Name Print Name CEO & President CFO Title Title Date: 7/20/2018 Date: 07/20/2018 SWISS REINSURANCE AMERICA CORPORATION /s/ Daryl Polenz /s/ Thomas Smith Signature Signature Daryl Polenz Thomas Smith Print Name Print Name Vice President Title Date: 7/6/2018 Date: 7/6/2018 EFFECTIVE: JULY 1, 2018 20. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
SUPPLEMENT TO THE ATTACHMENTS DEFINITION OF IDENTIFICATION TERMS USED WITHIN THE ATTACHMENTS A. Wherever the term "Company" or "Reinsured" or "Reassured" or whatever other term is used to designate the reinsured company or companies within the various attachments to the reinsurance agreement, the term shall be understood to mean Company or Reinsured or Reassured or whatever other term is used in the attached reinsurance agreement to designate the reinsured company or companies. B. Wherever the term "Agreement" or "Contract" or "Policy" or whatever other term is used to designate the attached reinsurance agreement within the various attachments to the reinsurance agreement, the term shall be understood to mean Agreement or Contract or Policy or whatever other term is used to designate the attached reinsurance agreement. C. Wherever the term "Reinsurer" or "Reinsurers" or "Underwriters" or whatever other term is used to designate the reinsurer or reinsurers in the various attachments to the reinsurance agreement, the term shall be understood to mean Reinsurer or Reinsurers or Underwriters or whatever other term is used to designate the reinsuring company or companies. EFFECTIVE: JULY 1, 2018 1. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
INSOLVENCY FUNDS EXCLUSION CLAUSE This Agreement excludes all liability of the Company arising by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund or from reimbursement of any person for any such liability. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by any person of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. EFFECTIVE: JULY 1, 2018 1. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE SECTION A Excluding: (a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968, for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This Exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business, written by the Company for the same perils, which is known at the time to be insured by or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance is excluded hereunder: Industrial Risk Insurers (successor to Factory Insurance Association and Oil Insurance Association); Associated Factory Mutuals. Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro- Chemical Plants and/or Oil or Gas Drilling Rigs. United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. SECTION B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $350,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above. (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builders Risks on the classes of risks specified in this subsection (d) only. EFFECTIVE: JULY 1, 2018 1. POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
POLLUTION AND SEEPAGE EXCLUSION CLAUSE This Reinsurance does not apply to: 1. Pollution, seepage, contamination or environmental impairment (hereinafter collectively referred to as "pollution") insurances, however styled; 2. Loss or damage caused directly or indirectly by pollution, unless said loss or damage follows as a result of a loss caused directly by a peril covered hereunder; 3. Expenses resulting from any governmental direction or request that material present in or part of or utilized on an insured's property be removed or modified, except as provided in 5. below; 4. Expenses incurred in testing for and/or monitoring pollutants; 5. Expenses incurred in removing debris, unless (A) the debris results from a loss caused directly by a peril covered hereunder, and (B) the debris to be removed is itself covered hereunder, and (C) the debris is on the insured's premises, subject, however, to a limit of $5,000 plus 25% of (i) the property damage loss, any risk, any one location, any one original insured, and (ii) any deductible applicable to the loss; 6. Expenses incurred to extract pollutants from land or water at the insured's premises unless (A) the release, discharge, or dispersal of pollutants results from a loss caused directly by a peril covered hereunder, and (B) such expenses shall not exceed $10,000; 7. Loss of income due to any increased period of time required to resume operations resulting from enforcement of any law regulating the prevention, control, repair, clean-up or restoration of environmental damage; 8. Claims under 5. and/or 6. above, unless notice thereof is given to the Company by the insured within 180 days after the date of the loss occurrence to which such claims relate. "Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. Where no pollution exclusion has been accepted or approved by an insurance regulatory authority for use in a policy that is subject to this Agreement or where a pollution exclusion that has been used in a policy is overturned, either in whole or in part, by a court having jurisdiction, there shall be no recovery for pollution under this Agreement unless said pollution loss or damage follows as a result of a loss caused directly by a peril covered hereunder. Nothing herein shall be deemed to extend the coverage afforded by this reinsurance to property or perils specifically excluded or not covered under the terms and conditions of the original policy involved. EFFECTIVE: JULY 1, 2018 1 POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A. N.M.A. 1119 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1. of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph 2. III. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of paragraphs 1. and 2. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate: (a) where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January, 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operation of paragraphs 1., 2. and 3. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. N.M.A. 1119 EFFECTIVE: JULY 1, 2018 1 POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
6. The term "special nuclear material" shall have the meaning given to it by the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. NOTE: - Without in any way restricting the operation of paragraph 1. hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December, 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply, (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December, 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. EFFECTIVE: JULY 1, 2018 2 POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4 1. This Reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operations of Nuclear Incident Exclusion Clauses, - Liability, - Physical Damage, - Boiler and Machinery and paragraph 1. of this Clause, it is understood and agreed that for all purposes of the reinsurance assumed by the Reinsurer from the Reinsured, all original insurance policies or contracts of the Reinsured (new, renewal and replacement) shall be deemed to include the applicable existing Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the time and any subsequent revisions thereto as agreed upon and approved by the Insurance Industry and/or a qualified Advisory or Rating Bureau. EFFECTIVE: JULY 1, 2018 1 POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE This Reinsurance excludes: (1) Any loss occurrence arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants: a) At or from premises owned, rented or occupied by an original assured; or b) At or from any site or location used for the handling, storage, disposal, processing or treatment of waste; or c) Which are at any time transported, handled, stored, treated, disposed of, or processed as waste; or d) At or from any site or location on which any original assured is performing operations: (i) If the pollutants are brought on or to the site or location in connection with such operations; or (ii) If the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants. (2) Any liability, loss, cost or expense arising out of any governmental direction or request to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. "Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. Subparagraphs a) and d)(i) of paragraph (1) of this exclusion do not apply to loss occurrences caused by heat, smoke or fumes from a hostile fire. As used herein, "hostile fire" means one which becomes uncontrollable or breaks out from where it was intended to be. "Original assured" as used herein means all insureds as defined in the policy issued by the Company. EFFECTIVE: JULY 1, 2018 1 POR1238172 P18-0057 7/6/2018 11:54 AM.v3

 
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. N.M.A. 1590 1. This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1. of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II. in this paragraph 2. from the time specified in Clause III. in this paragraph 2. shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION* I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liabilities Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II. above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph 2. shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof. 3. Except for those classes of policies specified in Clause II. of paragraph 2. and without in any way restricting the operation of paragraph 1. of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: 2012 JULY 1 EFFECTIVE: JULY 1, 2018 P18-0057 POR1238172 7/6/2018 11:54 AM.v3

 
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include with respect to such coverages, from the time specified in Clause V. of this paragraph 3., the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION* It is agreed that the policy does not apply: I. Under any Liability Coverage to injury, sickness, disease, death or destruction, bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief, first aid, to expenses incurred with respect to bodily injury, sickness, disease or death, bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or EFFECTIVE: JULY 1, 2018 P18-0057 POR1238172 7/6/2018 11:54 AM.v3

 
(c) the injury, sickness, disease, death or destruction, bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility, property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "hazardous properties" include radioactive, toxic or explosive properties; "nuclear material" means source material, special nuclear material or byproduct material; "source material," "special nuclear material," and "byproduct material" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "waste" means any waste material (1) containing byproduct material other than the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed for its source material content and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear facility" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "nuclear reactor" means any apparatus designed or used to sustain nuclear fission in a self- supporting chain reaction or to contain a critical mass of fissionable material; with respect to injury to or destruction of property, the word "injury" or "destruction" includes all forms of radioactive contamination of property; "property damage" includes all forms of radioactive contamination of property. V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3., whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph 3. shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or EFFECTIVE: JULY 1, 2018 P18-0057 POR1238172 7/6/2018 11:54 AM.v3

 
(ii) Statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraph 1. of this Clause, it is understood and agreed that paragraphs 2. and 3. above are not applicable to original liability policies of the Reassured in Canada, and that with respect to such policies, this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. *NOTE: The words printed in BOLD TYPE in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. EFFECTIVE: JULY 1, 2018 P18-0057 POR1238172 7/6/2018 11:54 AM.v3

 
TERRORISM EXCLUSION CLAUSE (USA) – REINSURANCE (PROPERTY) Notwithstanding any provision to the contrary within this Agreement or any endorsement thereto, this reinsurance Agreement does not cover any loss, damage or expense of whatsoever nature directly or indirectly caused by, resulting from, arising out of or in connection with any act of terrorism in the United States of America, regardless of any other cause contributing concurrently or in any other sequence to the loss, damage or expense. For the purpose of this exclusion, terrorism means any actual or threatened violent act or act harmful to human life, tangible or intangible property or infrastructure, directed towards or having the effect of (a) influencing or protesting against any de jure or de facto government or policy thereof or (b) intimidating, coercing or putting in fear a civilian population or section thereof. In any action, suit or other proceedings where the reinsurer alleges that by reason of this exclusion a loss, damage or expense is not covered by this reinsurance Agreement, the burden of proving that such loss, damage or expense is covered shall be upon the Company. TERRUSA-PROP EFFECTIVE: JULY 1, 2018 P18-0057 POR1238172 7/6/2018 11:54 AM.v3

 
TERRORISM EXCLUSION CLAUSE (USA) – REINSURANCE (CASUALTY) Notwithstanding any provision to the contrary within this Agreement or any endorsement thereto, this reinsurance Agreement does not cover any liability, loss, cost or expense of whatsoever nature directly or indirectly caused by, resulting from, arising out of or in connection with any act of terrorism in the United States of America, regardless of any other cause contributing concurrently or in any other sequence to the liability, loss, cost or expense. For the purpose of this exclusion, terrorism means any actual or threatened violent act or act harmful to human life, tangible or intangible property or infrastructure, directed towards or having the effect of (a) influencing or protesting against any de jure or de facto government or policy thereof or (b) intimidating, coercing or putting in fear a civilian population or section thereof. In any action, suit or other proceedings where the reinsurer alleges that by reason of this exclusion a liability, loss, cost or expense is not covered by this reinsurance Agreement, the burden of proving that such liability, loss, cost or expense is covered shall be upon the Company. TERRUSA-CAS EFFECTIVE: JULY 1, 2018 P18-0057 POR1238172 7/6/2018 11:54 AM.v3

 
Exhibit 31(1)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Michael H. Braun, certify that:
1. I have reviewed this Form 10-Q of FedNat Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:   November 7, 2018

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




Exhibit 31(2)

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Ronald Jordan, certify that:
1. I have reviewed this Form 10-Q of FedNat Holding Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:  November 7, 2018
/s/ Ronald Jordan
 
Ronald Jordan
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 



Exhibit 32(1)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Quarterly Report on Form 10-Q of FedNat Holding Company for the quarter ended  September 30, 2018  as filed with the Securities and Exchange Commission (the “Report”), I, Michael H. Braun, Chief Executive Officer of FedNat Holding Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)
 
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)
 
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of FedNat Holding Company.

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

November 7, 2018




Exhibit 32(2)

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Quarterly Report on Form 10-Q of FedNat Holding Company for the quarter ended September 30, 2018  as filed with the Securities and Exchange Commission (the “Report”), I, Ronald Jordan, Chief Financial Officer of FedNat Holding Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 
(1)
 
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)
 
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of FedNat Holding Company.
/s/ Ronald Jordan
 
Ronald Jordan
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 

November 7, 2018