14. VARIABLE INTEREST ENTITY

FNHC, Crosswinds Holdings and TransRe own 42.4%, 42.4%, and 15.2%, respectively, of Monarch Delaware as of December 31, 2017. Monarch Delaware owns 100% of Monarch Holding, which owns 100% of MNIC. MNIC entered into a Managing General Agency and Claims Administration Agreement (the “Monarch MGA Agreement”) with FedNat Underwriters, Inc. (“FNU”), a wholly-owned subsidiary of FNHC, to operate MNIC’s insurance operations. Additionally, the Monarch Entities entered into an Investment Management Agreement (“Investment Agreement”) with an affiliate of Crosswinds to perform as the Monarch Entities’ investment manager. Lastly, Monarch Holding entered into a $5.0 million debt agreement with TransRe.

We believe FNU, through the Monarch MGA Agreement, directs the activities which most significantly impact the Monarch Entities’ insurance operating company, MNIC. MNIC’s activities directed by FNU through the Monarch MGA Agreement include underwriting and claims. As a result, MNIC is a VIE because the equity holders, as a group, lack the characteristics of a controlling financial interest.

In addition to having power to direct the activities which most significantly impact MNIC, FNHC has 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 Holding.

As a result, FNHC is 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 can only be used to settle obligations of Monarch Delaware, and liabilities of Monarch Delaware for which creditors do not have recourse include the following:



	December 31,
	2017		2016
	(In thousands)
Assets:
Investments:
Debt securities, available-for-sale, at amortized cost	$	25,111	$	27,100
Equity securities, available-for-sale, at fair value	1,173		1,604
Total investments	26,284		28,704

Cash and cash equivalents	14,211		15,668
Reinsurance recoverable	3,323		—
Prepaid reinsurance premiums	2,481		1,070
Premiums receivable, net	1,184		1,584
Deferred acquisition costs	1,722		1,539
Other assets	2,322		371
Total assets	$	51,527	$	48,936

Liabilities:
Loss and loss adjustment expense reserves	6,356		1,659
Unearned premiums	8,752		8,406
Reinsurance payable	1,802		864
Debt	4,930		4,909
Other liabilities	1,825		1,026
Total liabilities	$	23,665	$	16,864

Earned premiums and loss and LAE, attributable to Monarch Delaware, were $9.4 million and $12.5 million, $4.7 million and $2.9 million, and $0.6 million and $0.3 million, for the years ended December 31, 2017, 2016 and 2015, respectively.

The net cash flows generated by Monarch Delaware are reflected in cash flows from operations in the consolidated statements of cash flows. Cash flows used in operating activities by Monarch Delaware were $3.8 million for the year ended December 31, 2017, as compared to cash flows provided by operating activities by Monarch Delaware of $6.8 million and $4.7 million for the years ended and December 31, 2016 and 2015, respectively.