Schedule II – Condensed Financial Information of Registrant

Condensed Balance Sheets

FEDNAT HOLDING COMPANY (Parent Company Only)

December 31, 2018 and 2017

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	December 31,
	2018			2017
	(In thousands)
ASSETS
Investments in subsidiaries	$	224,951		$	220,901
Investment securities, available-for-sale, at fair value	19,431			15,826
Equity securities, at fair value	1,490			—
Cash and cash equivalents	4,109			46,717
Deferred income taxes, net	786			415
Income taxes receivable	9,885			7,700
Other assets	2,436			1,938
Total assets	$	263,088		$	293,497

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Due to subsidiaries	$	987		$	19,624
Long-term debt	44,404			44,321
Other liabilities	2,438			2,093
Total liabilities	47,829			66,038

Shareholders' Equity
Preferred stock	—			—
Common stock	128			130
Additional paid-in capital	141,128			139,728
Accumulated other comprehensive income (loss)	(3,750		)	1,770
Retained earnings	77,753			70,009
Total shareholders’ equity attributable to FedNat Holding Company shareholders	215,259			211,637
Non-controlling interest	—			15,822
Total shareholders’ equity	215,259			227,459
Total liabilities and shareholders' equity	$	263,088		$	293,497

The accompanying note is an integral part of the condensed financial statements.

Schedule II – Condensed Financial Information of Registrant (Continued)

Condensed Statements of Earnings

FEDNAT HOLDING COMPANY (Parent Company Only)

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	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Revenues:
Management fees	$	2,608		$	2,611		$	2,492
Net investment income	843			501			623
Net realized and unrealized investment gains (losses)	(765		)	—			—
Equity in income of consolidated subsidiaries	30,895			16,902			8,550
Total revenue	33,581			20,014			11,665

Costs and expenses:
General and administrative expenses	9,296			11,087			9,862
Interest expense	4,077			—			—
Total costs and expenses	13,373			11,087			9,862

Income (loss) before income taxes	20,208			8,927			1,803
Income tax expense (benefit)	5,498			3,585			542
Net income (loss)	14,710			5,342			1,261
Net income (loss) attributable to non-contolling interest	(218		)	(2,647		)	246
Net income (loss) attributable to FedNat Holding Company shareholders	$	14,928		$	7,989		$	1,015

The accompanying note is an integral part of the condensed financial statements.

Schedule II – Condensed Financial Information of Registrant (Continued)

Condensed Statements of Cash Flows

FEDNAT HOLDING COMPANY (Parent Company Only)

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	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Cash flow from operating activities:
Net income (loss)	$	14,710		$	5,342		$	1,261
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net realized and unrealized investment (gains) losses	765			—			—
Equity in undistributed income of consolidated subsidiaries	(30,895		)	(16,902		)	(10,691		)
Amortization of investment premium or discount, depreciation and amortization	141			88			73
Share-based compensation	1,183			2,846			4,420
Changes in operating assets and liabilities:
Deferred income taxes, net of other comprehensive (loss) income	(230		)	(2,057		)	2,127
Income taxes, net	(2,141		)	6,411			2,978
Due to subsidiaries	(9,317		)	20,468			23,574
Other, net	1,497			1,450			3,786
Net cash provided by (used in) operating activities	(24,287		)	17,646			27,528
Cash flow from investing activities:
Capital contributions to consolidated subsidiaries	(30,000		)	(25,000		)	—
Sales, maturities and redemptions of investments securities	54,543			42,979			76,928
Purchases of investment securities	(61,009		)	(26,828		)	(83,724		)
Purchases of property and equipment	(639		)	(102		)	(299		)
Net cash provided by (used in) investing activities	(37,105		)	(8,951		)	(7,095		)
Cash flow from financing activities:
Proceeds from issuance of long-term debt	—			45,000			—
Tax impact related to share-based compensation	—			—			589
Issuance of common stock for share-based awards	39			103			361
Purchases of FedNat Holding Company common stock	(5,061		)	(10,616		)	(11,317		)
Dividends from consolidated subsidiaries	27,990			—			—
Dividends paid	(4,184		)	(4,251		)	(4,677		)
Net cash provided by (used in) financing activities	18,784			30,236			(15,044		)
Net increase (decrease) in cash and cash equivalents	(42,608		)	38,931			5,389
Cash and cash equivalents at beginning of period	46,717			7,786			2,397
Cash and cash equivalents at end of period	$	4,109		$	46,717		$	7,786

The accompanying note is an integral part of the condensed financial statements.

Schedule II – Condensed Financial Information of Registrant (Continued)

Note to Condensed Financial Statements

FEDNAT HOLDING COMPANY (Parent Company Only)

(1) ORGANIZATION AND BASIS OF PRESENTATION

FedNat Holding Company (“FNHC”), the Parent Company, is an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents.

The accompanying condensed financial statements include the activity of the Parent Company and on an equity basis, its consolidated subsidiaries. Accordingly, these condensed financial statements have been presented for the parent company only. These condensed financial statements should be read in conjunction with the consolidated financial statements and related notes of FNHC and subsidiaries set forth in Part II, Item 8 Financial Statements and Supplemental Data of this Annual Report.

In applying the equity method to our consolidated subsidiaries, we record the investment at cost and subsequently adjust for additional capital contributions, distributions and proportionate share of earnings or losses.