Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017

OR
o
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: 001-36311
 

NATIONAL GENERAL HOLDINGS CORP.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
27-1046208
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

59 Maiden Lane, 38th Floor
New York, New York
 
10038
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 380-9500
(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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x
 
Accelerated Filer o
Non-Accelerated Filer o
 
(Do not check if a smaller reporting company)
 
 
Smaller Reporting Company o
 
 
Emerging Growth Company o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

As of August 4, 2017, the number of common shares of the registrant outstanding was 106,645,033.






NATIONAL GENERAL HOLDINGS CORP.

TABLE OF CONTENTS


 
 
Page
 
 
 
 
 
 
 
 
 
 
 



i



PART I - FINANCIAL INFORMATION


Item 1. Financial Statements

NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
 
 
 
 
 
June 30,
 
December 31,
 
2017
 
2016
ASSETS
(unaudited)
 
(audited)
Investments - NGHC
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost - $2,870,042 and $2,739,045)
$
2,924,583

 
$
2,755,454

Equity securities, available-for-sale, at fair value (cost - $4,843 and $22,854)
7,638

 
29,578

Fixed maturities, trading, at fair value
23,093

 
38,677

Equity securities, trading, at fair value
37,967

 
30,133

Short-term investments
31,255

 
15,674

Other investments (Related parties - $400,064 and $390,688)
493,106

 
497,588

Investments - Exchanges
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost - $304,859 and $301,017)
306,614

 
306,345

Short-term investments
82,403

 

Total investments
3,906,659

 
3,673,449

Cash and cash equivalents (Exchanges - $4,023 and $7,405)
241,838

 
220,299

Restricted cash and cash equivalents (Exchanges - $1,102 and $969)
39,058

 
65,601

Accrued investment income (Related parties - $2,320 and $1,298)
(Exchanges - $1,724 and $2,957)
28,306

 
28,769

Premiums and other receivables, net (Exchanges - $48,911 and $47,198)
1,332,694

 
1,090,669

Deferred acquisition costs (Exchanges - $36,678 and $31,043)
254,913

 
220,922

Reinsurance recoverable (Related parties - $38,750 and $37,046)
(Exchanges - $68,625 and $55,972)
969,081

 
948,236

Prepaid reinsurance premiums (Exchanges - $77,577 and $69,685)
182,947

 
156,970

Deferred tax asset (Exchanges - $(14,841) and $(19,095))
49,461

 
46,207

Premises and equipment, net (Exchanges - $5,652 and $4,117)
129,275

 
114,504

Intangible assets, net (Exchanges - $3,775 and $11,025)
410,655

 
467,720

Goodwill
189,587

 
155,290

Prepaid and other assets (Exchanges - $95 and $88)
52,658

 
56,345

Total assets
$
7,787,132

 
$
7,244,981

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.
1



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
 
 
 
 
 
June 30,
 
December 31,
 
2017
 
2016
LIABILITIES AND STOCKHOLDERS’ EQUITY
(unaudited)
 
(audited)
Liabilities:
 
 
 
Unpaid loss and loss adjustment expense reserves (Exchanges - $139,905 and $137,075)
$
2,360,156

 
$
2,265,072

Unearned premiums (Exchanges - $182,874 and $163,326)
1,881,472

 
1,635,625

Unearned service contract and other revenue
31,370

 
30,263

Reinsurance payable (Related parties - $33,476 and $33,419)
(Exchanges - $26,516 and $19,861)
128,026

 
98,810

Accounts payable and accrued expenses (Related parties - $34,857 and $29,271)
(Exchanges - $70,886 and $6,781)
468,050

 
336,991

Debt
754,736

 
752,001

Other liabilities (Exchanges - $78,239 and $47,057)
200,354

 
200,715

Total liabilities
5,824,164

 
5,319,477

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.01 par value - authorized 150,000,000 shares, issued and outstanding 106,607,110 shares - 2017; authorized 150,000,000 shares, issued and outstanding 106,428,092 shares - 2016.
1,066

 
1,064

Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - 2017; authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - 2016.
Aggregate liquidation preference $420,000 - 2017, $420,000 - 2016.
420,000

 
420,000

Additional paid-in capital
920,310

 
914,706

Accumulated other comprehensive income:
 
 
 
Unrealized foreign currency translation adjustment, net of tax
(4,392
)
 
(2,320
)
Unrealized gains on investments, net of tax
37,268

 
15,030

Total accumulated other comprehensive income
32,876

 
12,710

Retained earnings
565,649

 
545,106

Total National General Holdings Corp. Stockholders’ Equity
1,939,901

 
1,893,586

Non-controlling interest (Exchanges - $23,067 and $31,675)
23,067

 
31,918

Total stockholders’ equity
1,962,968

 
1,925,504

Total liabilities and stockholders’ equity
$
7,787,132

 
$
7,244,981




See accompanying notes to unaudited condensed consolidated financial statements.
2



NATONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Shares and Per Share Data)
(Unaudited)

 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Net earned premium
$
981,751

 
$
712,940

 
$
1,901,922

 
$
1,367,860

Ceding commission income
21,508

 
11,704

 
41,502

 
9,809

Service and fee income
125,176

 
90,017

 
251,118

 
186,961

Net investment income
29,446

 
27,528

 
55,836

 
49,198

Net gain (loss) on investments
(2,175
)
 
3,995

 
(1,687
)
 
8,313

Other income (expense)
(6,098
)
 

 
3,703

 

Total revenues
1,149,608

 
846,184

 
2,252,394

 
1,622,141

Expenses:
 
 
 
 
 
 
 
Loss and loss adjustment expense
710,407

 
472,358

 
1,326,732

 
881,408

Acquisition costs and other underwriting expenses
188,795

 
108,874

 
364,096

 
221,773

General and administrative expenses
211,494

 
191,120

 
466,679

 
367,747

Interest expense
11,550

 
8,939

 
23,095

 
18,080

Total expenses
1,122,246

 
781,291

 
2,180,602

 
1,489,008

Income before provision for income taxes and earnings (losses) of equity method investments
27,362

 
64,893

 
71,792

 
133,133

Provision for income taxes
5,812

 
14,551

 
19,330

 
32,634

Income before earnings (losses) of equity method investments
21,550

 
50,342

 
52,462

 
100,499

Earnings (losses) of equity method investments (Related parties)
(18,915
)
 
7,356

 
(13,961
)
 
14,038

Net income
2,635

 
57,698

 
38,501

 
114,537

Less: Net (income) loss attributable to non-controlling interest
159

 
(9,228
)
 
6,284

 
(9,240
)
Net income attributable to NGHC
2,794

 
48,470

 
44,785

 
105,297

Dividends on preferred stock
(7,875
)
 
(4,125
)
 
(15,750
)
 
(8,250
)
Net income (loss) attributable to NGHC common stockholders
$
(5,081
)
 
$
44,345

 
$
29,035

 
$
97,047

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.05
)
 
$
0.42

 
$
0.27

 
$
0.92

Diluted
$
(0.05
)
 
$
0.41

 
$
0.27

 
$
0.90

Dividends declared per common share
$
0.04

 
$
0.03

 
$
0.08

 
$
0.06

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
106,560,000

 
105,803,802

 
106,514,396

 
105,700,682

Diluted
109,447,812

 
108,197,897

 
109,364,273

 
107,987,406




See accompanying notes to unaudited condensed consolidated financial statements.
3



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
2,635

 
$
57,698

 
$
38,501

 
$
114,537

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax
(1,358
)
 
(1,221
)
 
(2,072
)
 
(355
)
Gross gain on investments, net of tax (three months - $9,315 and $27,351; six months - $15,266 and $41,406)
17,300

 
50,796

 
28,351

 
76,229

Reclassification adjustments for investment gain/loss included in net income:
 
 
 
 
 
 
 
Other gain on investments, net of tax (three months - $(3,282) and $(1,534); six months - $(4,542) and $(2,800))
(6,096
)
 
(2,848
)
 
(8,437
)
 
(5,199
)
Other comprehensive income, net of tax
9,846

 
46,727

 
17,842

 
70,675

Comprehensive income
12,481

 
104,425

 
56,343

 
185,212

Less: Comprehensive (income) loss attributable to non-controlling interest
3,309

 
(15,765
)
 
8,608

 
(15,777
)
Comprehensive income attributable to NGHC
$
15,790

 
$
88,660

 
$
64,951

 
$
169,435




See accompanying notes to unaudited condensed consolidated financial statements.
4



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Shares)
(Unaudited)

 
Six Months Ended June 30, 2017
 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Non-controlling Interest
 
Total
Balance January 1, 2017
106,428,092

 
$
1,064

 
2,565,000

 
$
420,000

 
$
914,706

 
$
12,710

 
$
545,106

 
$
31,918

 
$
1,925,504

Net income (loss)

 

 

 

 

 

 
44,785

 
(6,284
)
 
38,501

Foreign currency translation adjustment, net of tax

 

 

 

 

 
(2,072
)
 

 

 
(2,072
)
Change in unrealized gain (loss) on investments, net of tax

 

 

 

 

 
22,238

 

 
(2,324
)
 
19,914

Purchase of non-controlling interests

 

 

 

 

 

 
30

 
(243
)
 
(213
)
Common stock dividends

 

 

 

 

 

 
(8,522
)
 

 
(8,522
)
Preferred stock dividends

 

 

 

 

 

 
(15,750
)
 

 
(15,750
)
Common stock issued under employee stock plans and exercises of stock options
179,018

 
2

 

 

 
1,117

 

 

 

 
1,119

Stock-based compensation

 

 

 

 
4,487

 

 

 

 
4,487

Balance June 30, 2017
106,607,110

 
$
1,066

 
2,565,000

 
$
420,000

 
$
920,310

 
$
32,876

 
$
565,649

 
$
23,067

 
$
1,962,968


 
Six Months Ended June 30, 2016
 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Non-controlling Interest
 
Total
Balance January 1, 2016
105,554,331

 
$
1,056

 
2,365,000

 
$
220,000

 
$
900,114

 
$
(19,414
)
 
$
412,044

 
$
22,840

 
$
1,536,640

Cumulative effect adjustment of change in accounting principle

 

 

 

 

 

 

 
(22,619
)
 
(22,619
)
Net income

 

 

 

 

 

 
105,297

 
9,240

 
114,537

Foreign currency translation adjustment, net of tax

 

 

 

 

 
(355
)
 

 

 
(355
)
Change in unrealized gain on investments, net of tax

 

 

 

 

 
64,493

 

 
6,537

 
71,030

Reciprocal Exchanges’ equity on March 31, 2016, date of consolidation

 

 

 

 

 

 

 
9,575

 
9,575

Return of capital
 
 
 
 
 
 
 
 
(150
)
 
 
 
 
 
 
 
(150
)
Common stock dividends

 

 

 

 

 

 
(6,350
)
 

 
(6,350
)
Preferred stock dividends

 

 

 

 

 

 
(8,250
)
 

 
(8,250
)
Common stock issued under employee stock plans and exercises of stock options
377,950

 
3

 

 

 
3,064

 

 

 

 
3,067

Stock-based compensation

 

 

 

 
4,148

 

 

 

 
4,148

Tax benefit from stock-based compensation

 

 

 

 
1,100

 
 
 
 
 
 
 
1,100

Balance June 30, 2016
105,932,281

 
$
1,059

 
2,365,000

 
$
220,000

 
$
908,276

 
$
44,724

 
$
502,741

 
$
25,573

 
$
1,702,373




See accompanying notes to unaudited condensed consolidated financial statements.
5



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
38,501

 
$
114,537

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
54,215

 
27,378

Net amortization of premium/discount on fixed maturities and debt, net
5,532

 
(1,570
)
Stock-compensation expense
4,487

 
4,148

Bad debt expense
28,592

 
14,061

Net (gain) loss on investments
1,687

 
(8,313
)
(Earnings) losses of equity method investments, net of dividends and distributions
13,961

 
(14,038
)
Other income (expense)
(3,703
)
 
775

Changes in assets and liabilities:
 
 
 
Accrued investment income
154

 
(1,010
)
Premiums and other receivables
(268,525
)
 
(101,789
)
Deferred acquisition costs
(33,838
)
 
(37,095
)
Reinsurance recoverable
(22,822
)
 
(3,165
)
Prepaid reinsurance premiums
(25,977
)
 
(20,086
)
Prepaid expenses and other assets
5,110

 
10,443

Unpaid loss and loss adjustment expense reserves
90,540

 
63,369

Unearned premiums
243,049

 
134,920

Unearned service contract and other revenue
992

 
9,826

Reinsurance payable
29,451

 
18,422

Accounts payable
31,110

 
(73,884
)
Deferred tax asset / liability
(12,853
)
 
(14,363
)
Other liabilities
19,686

 
32,567

Net cash provided by operating activities
199,349

 
155,133

Cash flows from investing activities:
 
 
 
Purchases of fixed maturities, available-for-sale
(538,564
)
 
(298,015
)
Proceeds from sale and maturity of fixed maturities, available-for-sale
502,882

 
343,252

Purchases of equity securities, available-for-sale
(736
)
 
(15,873
)
Proceeds from sale of equity securities, available-for-sale
7,641

 
15,142

Purchases of trading investments
(173,547
)
 

Proceeds from sale and maturity of trading investments
180,904

 

Purchases of short-term investments
(515,112
)
 
(63,919
)
Proceeds from sale of short-term investments
417,276

 
12,149

Purchases of other investments
(35,404
)
 
(139,805
)
Proceeds from sale of other investments
12,192

 
12,992

Purchases of premises and equipment
(28,620
)
 
(14,466
)
Acquisition of consolidated subsidiaries, net of cash
(21,591
)
 
(115,505
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.
6



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
 
 
 
 
Decrease in cash due to deconsolidation of the Reciprocal Exchanges
$

 
$
(8,393
)
Increase in cash due to consolidation of the Reciprocal Exchanges

 
2,673

Net cash used in investing activities
(192,679
)
 
(269,768
)
Cash flows from financing activities:
 
 
 
Securities sold under agreements to repurchase, net

 
66,989

Proceeds from debt
95,000

 
50,000

Repayments of debt, return of capital and purchase of non-controlling interests
(86,441
)
 
(150
)
Dividends paid to common shareholders
(8,522
)
 
(6,350
)
Dividends paid to preferred shareholders
(15,750
)
 
(8,250
)
Exercises of stock options
1,119

 
3,067

Net cash (used in) provided by financing activities
(14,594
)
 
105,306

Effect of exchange rate changes on cash and cash equivalents
2,920

 
(1,254
)
Net decrease in cash, cash equivalents, and restricted cash
(5,004
)
 
(10,583
)
Cash, cash equivalents, and restricted cash at beginning of the period
285,900

 
282,277

Cash, cash equivalents, and restricted cash at end of the period
$
280,896

 
$
271,694

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
21,131

 
$
4,200

Cash paid for interest
25,721

 
15,740

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Promissory note issued for acquisition
$

 
$
182,287

Unsettled securities purchases and sales
93,269

 
23,230

Decrease in non-controlling interest due to deconsolidation of the Reciprocal Exchanges

 
22,619

Increase in non-controlling interest due to consolidation of the Reciprocal Exchanges

 
9,575

Accrued common stock dividends
4,264

 
3,178

Accrued preferred stock dividends
7,875

 
4,125


See accompanying notes to unaudited condensed consolidated financial statements.
7


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)


1. Basis of Reporting

The accompanying unaudited interim condensed consolidated financial statements include the accounts of National General Holdings Corp. and its subsidiaries (the “Company” or “NGHC”) and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP” or “U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, previously filed with the SEC on March 23, 2017. The balance sheet at December 31, 2016, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The unaudited condensed consolidated financial statements as of June 30, 2017, and the audited condensed consolidated balance sheet as of December 31, 2016, include the accounts and operations of Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer (together with their subsidiaries, the “Reciprocal Exchanges” or “Exchanges”). From January 1, 2016 to March 31, 2016, the Reciprocal Exchanges did not meet the criteria for consolidation under GAAP and as a result their accounts and operations are excluded from presentation during the period then ended. The Company does not own the Reciprocal Exchanges but manages their business operations through its wholly-owned management companies.

These interim condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

All significant inter-company transactions and accounts have been eliminated in the condensed consolidated financial statements. To facilitate period-to-period comparisons, certain reclassifications have been made to amounts in prior period condensed consolidated financial statements to conform to current period presentation.

A detailed description of the Company’s significant accounting policies and management judgments is located in the audited consolidated financial statements, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC.


2. Recent Accounting Pronouncements

Adopted During 2017

In March 2016, the FASB issued ASU 2016-07, “Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting” as part of its initiative to reduce complexity in accounting standards. ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company adopted ASU 2016-07 on January 1, 2017. The adoption of this guidance did not have an effect on the Company’s results of operations, financial position or liquidity.


8


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 on January 1, 2017. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity. The Company will continue to estimate expected forfeitures. Excess tax benefits were reflected in the statement of cash flows prospectively.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance on eight specific cash flow classification issues. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt ASU 2016-15 on January 1, 2017 resulting in the application of its requirements using a retrospective transition method to each period presented. The adoption of this guidance did not have an effect on the Company’s results of operations, financial position or liquidity; other than the required classifications of the eight specific transactions in the statements of cash flows.

Not Yet Adopted

With the exception of those discussed below or as adopted above, there have been no recent accounting pronouncements, changes in accounting pronouncements, or quantitative or qualitative progress made towards implementation of outstanding accounting pronouncements during the six months ended June 30, 2017, as compared to those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, that are of significance, or potential significance, to the Company.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” to remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and provide for improved disclosure requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity applies the following five steps: (1) identifies the contract(s) with a customer; (2) identifies the performance obligations in the contract; (3) determines the transaction price; (4) allocates the transaction price to the performance obligations in the contract; and (5) recognizes revenue when (or as) the entity satisfies the performance obligations. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” which defers the effective date of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” for all entities by one year. Public business entities are to apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. While the guidance specifically excludes revenues from insurance contracts, investments and financial instruments from its scope, the guidance will be applicable to the Company’s service and fee income not specifically exempted from the guidance. The Company is examining its different revenue streams and related contracts within service and fee income to enable application of the guidance. Currently, the Company is evaluating the impact this guidance will have on its results of operations, financial position or liquidity and disclosures; and is in the process of estimating the impact of adopting this guidance. The Company does not expect to early adopt ASU 2014-09.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Specifically, under ASU 2016-01, equity investments (other than those accounted for using the equity method of accounting or those subject to consolidation) will be measured at fair value with changes in fair value recognized in earnings. Also, for those financial liabilities for which the fair value option accounting has been elected, ASU 2016-01 requires changes in fair value due to instrument-specific credit risk to be presented separately in other comprehensive income. ASU 2016-01 requires companies to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of certain provisions is permitted. ASU 2016-01 should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. As of June 30, 2017 and December 31, 2016, the Company had $1,817 and $4,371, respectively, of net unrealized gains, net of tax,

9


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

for equity securities, available-for-sale, recognized as a component of accumulated other comprehensive income (“AOCI”). The Company does not expect to early adopt ASU 2016-01.


3. Reciprocal Exchanges

The Company manages the business operations of the Reciprocal Exchanges and has the ability to direct their activities. The Reciprocal Exchanges are insurance carriers organized as unincorporated associations. Each policyholder insured by the Reciprocal Exchanges shares risk with the other policyholders. In the event of dissolution, policyholders would share any residual unassigned surplus in the same proportion as the amount of insurance purchased but are not subject to assessment for any deficit in unassigned surplus of the Reciprocal Exchanges. The Company receives management fee income for the services provided to the Reciprocal Exchanges. The assets of the Reciprocal Exchanges can be used only to settle the obligations of the Reciprocal Exchanges and general creditors to their liabilities have no recourse to the Company as primary beneficiary.

In March 2016, the Company purchased the Reciprocal Exchanges surplus notes that were issued by the Reciprocal Exchanges when they were originally capitalized. The obligation to repay principal and interest on the surplus notes is subordinated to the Reciprocal Exchanges’ other liabilities including obligations to policyholders and claimants for benefits under insurance policies. Principal and interest on the surplus notes are payable only with regulatory approval. The Company has no ownership interest in the Reciprocal Exchanges.

The Company determined that each of the Reciprocal Exchanges qualifies as a Variable Interest Entity (“VIE”) because they do not have sufficient equity to finance their operations without the surplus notes. The Company is the primary beneficiary as it has both, the power to direct their activities that most significantly impact their economic performance and that the Company would absorb more than an insignificant amount of expected losses or residual returns of the Reciprocal Exchanges. Accordingly, the Company consolidates the Reciprocal Exchanges as of March 31, 2016, and eliminates all intercompany balances and transactions with the Company.

The consolidation of the Reciprocal Exchanges at March 31, 2016 was treated as a business combination with the assets, liabilities and non-controlling interest recognized at fair value at the date of consolidation. The Company has no ownership interest in the Reciprocal Exchanges, therefore, the difference between the fair value of the assets acquired and liabilities assumed represents the fair value of the non-controlling interest.

For the three months ended June 30, 2017, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $70,193, $70,322 and $(129), respectively. For the six months ended June 30, 2017, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $131,436, $137,720 and $(6,284), respectively. For both the three and six months ended June 30, 2016, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $54,521, $45,297 and $9,224, respectively, as results related to the Reciprocal Exchanges were included from March 31, 2016, the date at which the exchanges were consolidated by the Company.



10


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

4. Investments

(a) Available-for-Sale Securities

The cost or amortized cost, gross unrealized gains and losses, and fair value on available-for-sale securities were as follows:
June 30, 2017
 
Cost or
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
51,816

 
$
1,067

 
$
(97
)
 
$
52,786

Federal agencies
 
4,414

 
1

 
(137
)
 
4,278

States and political subdivision bonds
 
441,971

 
5,559

 
(3,407
)
 
444,123

Foreign government
 
59,906

 
1,284

 
(229
)
 
60,961

Corporate bonds
 
1,581,708

 
49,152

 
(5,465
)
 
1,625,395

Residential mortgage-backed securities
 
508,032

 
5,117

 
(3,356
)
 
509,793

Commercial mortgage-backed securities
 
144,708

 
2,478

 
(1,576
)
 
145,610

Asset-backed securities
 
437

 

 
(5
)
 
432

Structured securities
 
381,909

 
6,157

 
(247
)
 
387,819

Total fixed maturities
 
3,174,901

 
70,815

 
(14,519
)
 
3,231,197

Equity securities:
 
 
 
 
 
 
 
 
Common stock
 
2,724

 
2,695

 
(7
)
 
5,412

Preferred stock
 
2,119

 
109

 
(2
)
 
2,226

Total equity securities
 
4,843

 
2,804

 
(9
)
 
7,638

Total
 
$
3,179,744

 
$
73,619

 
$
(14,528
)
 
$
3,238,835

NGHC
 
$
2,874,885

 
$
70,440

 
$
(13,104
)
 
$
2,932,221

Reciprocal Exchanges
 
304,859

 
3,179

 
(1,424
)
 
306,614

Total
 
$
3,179,744

 
$
73,619

 
$
(14,528
)
 
$
3,238,835

December 31, 2016
 
Cost or
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Fixed maturities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
45,405

 
$
937

 
$
(494
)
 
$
45,848

Federal agencies
 
739

 

 
(26
)
 
713

States and political subdivision bonds
 
460,089

 
3,625

 
(11,403
)
 
452,311

Foreign government
 
60,025

 

 
(3,226
)
 
56,799

Corporate bonds
 
1,580,918

 
43,322

 
(13,338
)
 
1,610,902

Residential mortgage-backed securities
 
450,997

 
4,305

 
(5,982
)
 
449,320

Commercial mortgage-backed securities
 
107,546

 
1,521

 
(1,724
)
 
107,343

Structured securities
 
334,343

 
4,656

 
(436
)
 
338,563

Total fixed maturities
 
3,040,062

 
58,366

 
(36,629
)
 
3,061,799

Equity securities:
 
 
 
 
 
 
 
 
Common stock
 
21,274

 
7,050

 
(308
)
 
28,016

Preferred stock
 
1,580

 
17

 
(35
)
 
1,562

Total equity securities
 
22,854

 
7,067

 
(343
)
 
29,578

Total
 
$
3,062,916

 
$
65,433

 
$
(36,972
)
 
$
3,091,377

NGHC
 
$
2,761,899

 
$
58,180

 
$
(35,047
)
 
$
2,785,032

Reciprocal Exchanges
 
301,017

 
7,253

 
(1,925
)
 
306,345

Total
 
$
3,062,916

 
$
65,433

 
$
(36,972
)
 
$
3,091,377


11


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

As of June 30, 2017 and December 31, 2016, the Company had no other-than-temporary impairments (“OTTI”) in AOCI related to available-for-sale fixed maturities.

The amortized cost and fair value of available-for-sale fixed maturities held as of June 30, 2017, by contractual maturity, are shown in the table below. Actual maturities may differ from contractual maturities because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
NGHC
 
Reciprocal Exchanges
 
Total
June 30, 2017
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
31,427

 
$
31,858

 
$
7,480

 
$
7,478

 
$
38,907

 
$
39,336

Due after one year through five years
 
654,084

 
674,837

 
137,573

 
137,826

 
791,657

 
812,663

Due after five years through ten years
 
1,259,608

 
1,284,142

 
76,471

 
77,814

 
1,336,079

 
1,361,956

Due after ten years
 
328,830

 
334,427

 
26,251

 
26,980

 
355,081

 
361,407

Mortgage-backed securities
 
596,093

 
599,319

 
57,084

 
56,516

 
653,177

 
655,835

Total
 
$
2,870,042

 
$
2,924,583

 
$
304,859

 
$
306,614

 
$
3,174,901

 
$
3,231,197


(b) Gross Unrealized Losses

The tables below summarize the gross unrealized losses on fixed maturities and equity securities classified as available for sale, by length of time the security has continuously been in an unrealized loss position as of June 30, 2017 and December 31, 2016.
 
 
Less Than 12 Months
 
12 Months or More
 
Total
June 30, 2017
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
28,778

 
$
(97
)
 
18

 
$

 
$

 

 
$
28,778

 
$
(97
)
Federal agencies
 
4,213

 
(137
)
 
22

 

 

 

 
4,213

 
(137
)
States and political subdivision bonds
 
246,211

 
(3,233
)
 
283

 
4,311

 
(174
)
 
9

 
250,522

 
(3,407
)
Foreign government
 
15,891

 
(162
)
 
4

 
1,933

 
(67
)
 
1

 
17,824

 
(229
)
Corporate bonds
 
369,687

 
(5,007
)
 
170

 
28,324

 
(458
)
 
5

 
398,011

 
(5,465
)
Residential mortgage-backed securities
 
253,802

 
(3,329
)
 
59

 
1,004

 
(27
)
 
3

 
254,806

 
(3,356
)
Commercial mortgage-backed securities
 
60,397

 
(992
)
 
54

 
3,990

 
(584
)
 
2

 
64,387

 
(1,576
)
Asset-backed securities
 
432

 
(5
)
 
2

 

 

 

 
432

 
(5
)
Structured securities
 
38,249

 
(244
)
 
25

 
450

 
(3
)
 
1

 
38,699

 
(247
)
Total fixed maturities
 
1,017,660

 
(13,206
)
 
637

 
40,012

 
(1,313
)
 
21

 
1,057,672

 
(14,519
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
101

 
(7
)
 
3

 

 

 

 
101

 
(7
)
Preferred stock
 
289

 
(2
)
 
1

 

 

 

 
289

 
(2
)
Total equity securities
 
390

 
(9
)
 
4

 

 

 

 
390

 
(9
)
Total
 
$
1,018,050

 
$
(13,215
)
 
641

 
$
40,012

 
$
(1,313
)
 
21

 
$
1,058,062

 
$
(14,528
)
NGHC
 
$
811,898

 
$
(12,006
)
 
587

 
$
37,725

 
$
(1,098
)
 
18

 
$
849,623

 
$
(13,104
)
Reciprocal Exchanges
 
206,152

 
(1,209
)
 
54

 
2,287

 
(215
)
 
3

 
208,439

 
(1,424
)
Total
 
$
1,018,050

 
$
(13,215
)
 
641

 
$
40,012

 
$
(1,313
)
 
21

 
$
1,058,062

 
$
(14,528
)

12


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

 
 
Less Than 12 Months
 
12 Months or More
 
Total
December 31, 2016
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
37,436

 
$
(494
)
 
24

 
$

 
$

 

 
$
37,436

 
$
(494
)
Federal agencies
 
419

 
(26
)
 
3

 

 

 

 
419

 
(26
)
States and political subdivision bonds
 
318,946

 
(11,236
)
 
387

 
2,956

 
(167
)
 
6

 
321,902

 
(11,403
)
Foreign government
 
48,156

 
(3,226
)
 
6

 

 

 

 
48,156

 
(3,226
)
Corporate bonds
 
495,443

 
(12,376
)
 
292

 
33,112

 
(962
)
 
21

 
528,555

 
(13,338
)
Residential mortgage-backed securities
 
262,269

 
(5,894
)
 
212

 
2,141

 
(88
)
 
4

 
264,410

 
(5,982
)
Commercial mortgage-backed securities
 
51,120

 
(1,002
)
 
27

 
4,890

 
(722
)
 
3

 
56,010

 
(1,724
)
Structured securities
 
54,361

 
(243
)
 
43

 
17,908

 
(193
)
 
10

 
72,269

 
(436
)
Total fixed maturities
 
1,268,150

 
(34,497
)
 
994

 
61,007

 
(2,132
)
 
44

 
1,329,157

 
(36,629
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
3,198

 
(308
)
 
5

 

 

 

 
3,198

 
(308
)
Preferred stock
 
1,298

 
(35
)
 
2

 

 

 

 
1,298

 
(35
)
Total equity securities
 
4,496

 
(343
)
 
7

 

 

 

 
4,496

 
(343
)
Total
 
$
1,272,646

 
$
(34,840
)
 
1,001

 
$
61,007

 
$
(2,132
)
 
44

 
$
1,333,653

 
$
(36,972
)
NGHC
 
$
1,190,788

 
$
(33,382
)
 
963

 
$
51,813

 
$
(1,665
)
 
28

 
$
1,242,601

 
$
(35,047
)
Reciprocal Exchanges
 
81,858

 
(1,458
)
 
38

 
9,194

 
(467
)
 
16

 
91,052

 
(1,925
)
Total
 
$
1,272,646

 
$
(34,840
)
 
1,001

 
$
61,007

 
$
(2,132
)
 
44

 
$
1,333,653

 
$
(36,972
)

There were 662 and 1,045 securities at June 30, 2017 and December 31, 2016, respectively, that account for the gross unrealized loss, none of which are deemed by the Company to be other-than-temporary impairments. Significant factors influencing the Company’s determination that none of these securities were OTTI included the length of time and/or magnitude of unrealized losses in relation to cost, the nature of the investment, the current financial condition of the issuer and its future prospects, the ability to recover to cost in the near term, and management’s intent not to sell these securities and it being more likely than not that the Company will not be required to sell these investments before anticipated recovery of fair value to the Company’s cost basis.

As of June 30, 2017 and December 31, 2016, of the $1,313 and $2,132, respectively, of unrealized losses related to securities in unrealized loss positions for a period of twelve or more consecutive months, $0 and $0, respectively, of those unrealized losses were related to securities in unrealized loss positions greater than or equal to 25% of its amortized cost or cost.

The Company regularly monitors its investments that have fair values less than cost or amortized cost for indicators of other-than-temporary impairment, an assessment that requires significant management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known, which could negatively impact the amounts reported.


13


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

(c) Trading Securities

The fair values on trading securities were as follows:
 
 
June 30, 2017
 
Percentage
 
December 31, 2016

 
Percentage
Fixed maturities:
 
 
 
 
 
 
 
 
States and political subdivision bonds
 
$
825

 
1.35
%
 
$

 
%
Corporate bonds
 
22,268

 
36.47
%
 
38,677

 
56.21
%
Total fixed maturities
 
23,093

 
37.82
%
 
38,677

 
56.21
%
Equity securities:
 
 
 
 
 
 
 
 
Common stock
 
37,967

 
62.18
%
 
30,133

 
43.79
%
Total equity securities
 
37,967

 
62.18
%
 
30,133

 
43.79
%
Total
 
$
61,060

 
100.00
%
 
$
68,810

 
100.00
%
NGHC
 
$
61,060

 
100.00
%
 
$
68,810

 
100.00
%
Reciprocal Exchanges
 

 
%
 

 
%
Total
 
$
61,060

 
100.00
%
 
$
68,810

 
100.00
%

The portion of trading gains and losses for the period related to trading securities still held during the three and six months ended June 30, 2017 and 2016 were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net gains (losses) recognized during the period on trading securities
 
$
(12,150
)
 
$

 
$
(15,912
)
 
$

Less: Net gains (losses) recognized during the period on trading securities sold during the period
 
(57
)
 

 
43

 

Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date
 
$
(12,093
)
 
$

 
$
(15,955
)
 
$


(d) Investment Income

The components of net investment income consisted of the following:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income
 
 
 
 
 
 
 
 
Cash and short-term investments
 
$
117

 
$
46

 
$
151

 
$
54

Fixed maturities
 
28,339

 
23,879

 
55,157

 
43,618

Equity securities
 
91

 
58

 
166

 
391

Investment income
 
28,547

 
23,983

 
55,474

 
44,063

Repurchase agreements interest expense
 

 
(176
)
 

 
(320
)
Other income
 
3,412

 
4,767

 
4,576

 
8,139

Investment expenses
 
(2,513
)
 
(1,046
)
 
(4,214
)
 
(2,684
)
Net Investment Income
 
$
29,446

 
$
27,528

 
$
55,836

 
$
49,198

NGHC
 
$
27,299

 
$
25,280

 
$
50,805

 
$
46,950

Reciprocal Exchanges
 
2,147

 
2,248

 
5,031

 
2,248

Net Investment Income
 
$
29,446

 
$
27,528

 
$
55,836

 
$
49,198



14


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

(e) Net Realized Gains (Losses)

Purchases and sales of investments are recorded on a trade date basis. Realized gains and losses are determined based on the specific identification method. The tables below indicate realized gains, losses and impairment write-downs on investments for the three and six months ended June 30, 2017 and 2016.
Three Months Ended June 30, 2017
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
8,233

 
$
(626
)
 
$
7,607