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 March 31, 2018

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 May 3, 2018, the number of common shares of the registrant outstanding was 106,923,327.






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)
(Unaudited)
 
 
 
 
 
March 31,
 
December 31,
 
2018
 
2017
ASSETS
 
 
 
Investments:
 
 
 
Debt securities, available-for-sale, at fair value (Exchanges - $310,740 and $304,934)
$
3,244,320

 
$
3,139,889

Equity securities, at fair value
50,157

 
50,341

Short-term investments (Exchanges - $21,825 and $22,279)
39,969

 
38,266

Other investments (related parties - $241,801 and $347,548)
315,870

 
421,292

Total investments
3,650,316

 
3,649,788

Cash and cash equivalents (Exchanges - $5,880 and $5,442)
321,937

 
292,282

Restricted cash and cash equivalents (Exchanges - $674 and $609)
56,116

 
65,202

Accrued investment income (related parties - $1,174 and $2,334)
(Exchanges - $2,229 and $1,805)
23,091

 
22,372

Premiums and other receivables, net (Exchanges - $49,581 and $56,792)
1,497,871

 
1,324,321

Deferred acquisition costs (Exchanges - $21,635 and $20,837)
233,600

 
216,389

Reinsurance recoverable (related parties - $11,399 and $15,688)
(Exchanges - $107,250 and $94,204)
1,334,726

 
1,294,165

Prepaid reinsurance premiums (Exchanges - $97,248 and $100,980)
528,770

 
517,122

Premises and equipment, net (Exchanges - $3,527 and $4,269)
316,392

 
324,049

Intangible assets, net (Exchanges - $3,640 and $3,685)
397,406

 
404,070

Goodwill
174,153

 
174,153

Prepaid and other assets (Exchanges - $2,318 and $2,263)
134,768

 
155,830

Total assets
$
8,669,146

 
$
8,439,743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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)
(Unaudited)
 
 
 
 
 
March 31,
 
December 31,
 
2018
 
2017
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Unpaid loss and loss adjustment expense reserves (Exchanges - $158,796 and $143,353)
$
2,678,917

 
$
2,663,557

Unearned premiums and other revenue (Exchanges - $228,198 and $225,395)
2,230,544

 
2,032,605

Reinsurance payable (Exchanges - $58,554 and $68,275)
437,071

 
398,047

Accounts payable and accrued expenses (related parties - $72,641 and $140,057)
(Exchanges - $10,140 and $8,827)
411,547

 
431,881

Debt
713,893

 
713,710

Other liabilities (Exchanges - $55,513 and $41,582)
232,521

 
246,518

Total liabilities
$
6,704,493

 
$
6,486,318

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.01 par value - authorized 150,000,000 shares, issued and outstanding 106,887,566 shares - 2018; authorized 150,000,000 shares, issued and outstanding 106,697,648 shares - 2017.
$
1,069

 
$
1,067

Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - 2018; authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - 2017.
Aggregate liquidation preference $420,000 - 2018, $420,000 - 2017.
420,000

 
420,000

Additional paid-in capital
919,029

 
917,751

Accumulated other comprehensive income:
 
 
 
Unrealized foreign currency translation adjustment, net of tax
(8,529
)
 
(7,810
)
Unrealized losses on investments, net of tax
(37,193
)
 
(302
)
Total accumulated other comprehensive income (loss)
(45,722
)
 
(8,112
)
Retained earnings
662,713

 
597,863

Total National General Holdings Corp. Stockholders’ Equity
1,957,089

 
1,928,569

Non-controlling interest
7,564

 
24,856

Total stockholders’ equity
$
1,964,653

 
$
1,953,425

Total liabilities and stockholders’ equity
$
8,669,146

 
$
8,439,743




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 March 31,
 
2018
 
2017
Revenues:
 
 
 
Net earned premium
$
905,538

 
$
918,485

Ceding commission income
44,468

 
19,994

Service and fee income
142,122

 
125,942

Net investment income
25,011

 
29,044

Net gain (loss) on investments
118

 
(1,412
)
Other income

 
9,801

Total revenues
1,117,257

 
1,101,854

Expenses:
 
 
 
Loss and loss adjustment expense
634,166

 
618,817

Acquisition costs and other underwriting expenses
168,710

 
174,720

General and administrative expenses
231,005

 
255,185

Interest expense
11,154

 
11,545

Total expenses
1,045,035

 
1,060,267

Income before provision for income taxes
72,222

 
41,587

Provision for income taxes
16,202

 
10,789

Net income
56,020

 
30,798

Net (income) loss attributable to non-controlling interest
12,188

 
6,125

Net income attributable to NGHC
68,208

 
36,923

Dividends on preferred stock
(7,875
)
 
(7,875
)
Net income attributable to NGHC common stockholders
$
60,333

 
$
29,048

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.57

 
$
0.27

Diluted
$
0.55

 
$
0.27

Dividends declared per common share
$
0.04

 
$
0.04

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
106,758,641

 
106,467,599

Diluted
108,950,984

 
109,166,681


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 March 31,
 
 
2018
 
2017
Net income
 
$
56,020

 
$
30,798

Other comprehensive income, net of tax:
 
 
 
 
Foreign currency translation adjustment, net of tax (tax - $(188) and $(385))
 
(719
)
 
(714
)
Gross gain (loss) on investments, net of tax (tax - $(11,173) and $6,616)
 
(42,033
)
 
12,286

Reclassification adjustments for investment gain/loss included in net income:
 
 
 
 
Other (gain) loss on investments, net of tax (tax - $0 and $(1,260))
 
2

 
(2,341
)
Other comprehensive income (loss), net of tax
 
(42,750
)
 
9,231

Comprehensive income
 
13,270

 
40,029

Comprehensive (income) loss attributable to non-controlling interest
 
17,292

 
5,299

Comprehensive income attributable to NGHC
 
$
30,562

 
$
45,328




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)

 
Three Months Ended March 31, 2018
 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Non-controlling Interest
 
Total
Balance January 1, 2018
106,697,648

 
$
1,067

 
2,565,000

 
$
420,000

 
$
917,751

 
$
(8,112
)
 
$
597,863

 
$
24,856

 
$
1,953,425

Cumulative-effect adjustment of change in accounting principles

 

 

 

 

 
36

 
8,794

 

 
8,830

Net income (loss)

 

 

 

 

 

 
68,208

 
(12,188
)
 
56,020

Foreign currency translation adjustment, net of tax

 

 

 

 

 
(719
)
 

 

 
(719
)
Change in unrealized loss on investments, net of tax

 

 

 

 

 
(36,927
)
 

 
(5,104
)
 
(42,031
)
Common stock dividends

 

 

 

 

 

 
(4,277
)
 

 
(4,277
)
Preferred stock dividends

 

 

 

 

 

 
(7,875
)
 

 
(7,875
)
Common stock issued under employee stock plans and exercises of stock options
251,491

 
2

 

 

 
490

 

 

 

 
492

Shares withheld related to net share settlement
(61,573
)
 

 

 

 
(1,342
)
 

 

 

 
(1,342
)
Stock-based compensation

 

 

 

 
2,130

 

 

 

 
2,130

Balance March 31, 2018
106,887,566

 
$
1,069

 
2,565,000

 
$
420,000

 
$
919,029

 
$
(45,722
)
 
$
662,713

 
$
7,564

 
$
1,964,653


 
Three Months Ended March 31, 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

 
$
913,787

 
$
11,475

 
$
539,114

 
$
31,918

 
$
1,917,358

Net income (loss)

 

 

 

 

 

 
36,923

 
(6,125
)
 
30,798

Foreign currency translation adjustment, net of tax

 

 

 

 

 
(714
)
 

 

 
(714
)
Change in unrealized gain on investments, net of tax

 

 

 

 

 
9,119

 

 
826

 
9,945

Common stock dividends

 

 

 

 

 

 
(4,260
)
 

 
(4,260
)
Preferred stock dividends

 

 

 

 

 

 
(7,875
)
 

 
(7,875
)
Common stock issued under employee stock plans and exercises of stock options
107,141

 
1

 

 

 
171

 

 

 

 
172

Shares withheld related to net share settlement
(32,983
)
 

 

 

 
(834
)
 

 

 

 
(834
)
Stock-based compensation

 

 

 

 
2,180

 

 

 

 
2,180

Balance March 31, 2017
106,502,250

 
$
1,065

 
2,565,000

 
$
420,000

 
$
915,304

 
$
19,880

 
$
563,902

 
$
26,619

 
$
1,946,770




See accompanying notes to unaudited condensed consolidated financial statements.
5



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
 
 
 
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
56,020

 
$
30,798

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Net (gain) loss on investments
(118
)
 
1,412

Bad debt expense
20,184

 
15,545

Depreciation and amortization
20,141

 
35,273

Stock-compensation expense
2,130

 
2,180

Deferred income taxes
(4,512
)
 
(18,928
)
Other, net
(2,576
)
 
(7,687
)
Changes in assets and liabilities:
 
 
 
Accrued investment income
(1,082
)
 
(1,306
)
Premiums and other receivables
(200,150
)
 
(319,067
)
Deferred acquisition costs
(20,755
)
 
(21,790
)
Reinsurance recoverable
(40,537
)
 
(20,087
)
Prepaid reinsurance premiums
(11,648
)
 
(13,002
)
Prepaid expenses and other assets
38,712

 
(5,801
)
Unpaid loss and loss adjustment expense reserves
17,044

 
4,582

Unearned premiums and other revenue
213,465

 
231,123

Reinsurance payable
39,036

 
35,661

Accounts payable
(52,811
)
 
118,396

Other liabilities
(20,601
)
 
70,839

Net cash provided by operating activities
$
51,942

 
$
138,141

Cash flows from investing activities:
 
 
 
Purchases of debt securities, available-for-sale
$
(310,241
)
 
$
(82,163
)
Proceeds from sale and maturity of debt securities, available-for-sale
193,733

 
41,469

Purchases of equity securities

 
(23,433
)
Proceeds from sale of equity securities

 
23,778

Purchases of debt securities, trading

 
(78,340
)
Proceeds from sale and maturity of debt securities, trading

 
52,810

Purchases of short-term investments
(906,325
)
 
(231,502
)
Proceeds from sale of short-term investments
904,788

 
194,061

Purchases of other investments
(2,979
)
 
(21,203
)
Proceeds from sale and return of other investments
109,793

 
2,741

Purchases of premises and equipment
(5,716
)
 
(17,704
)
Acquisition of consolidated subsidiaries, net of cash

 
(16,968
)
Net cash used in investing activities
$
(16,947
)
 
$
(156,454
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.
6



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
 
 
 
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Dividends paid to common shareholders
$
(4,268
)
 
$
(4,257
)
Dividends paid to preferred shareholders
(7,875
)
 
(7,875
)
Taxes paid related to net share settlement of equity awards
(1,342
)
 
(834
)
Other financing activities, net
492

 
128

Net cash used in financing activities
$
(12,993
)
 
$
(12,838
)
Effect of exchange rate changes on cash and cash equivalents
$
(1,433
)
 
$
246

Net increase (decrease) in cash, cash equivalents, and restricted cash
20,569

 
(30,905
)
Cash, cash equivalents, and restricted cash at beginning of the period
357,484

 
285,900

Cash, cash equivalents, and restricted cash at end of the period
$
378,053

 
$
254,995

 
 
 
 
Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Unsettled securities purchases
$
27,598

 
$
106,858

Unsettled securities sales
10,962

 
82,173

Accrued common stock dividends
4,277

 
4,260

Accrued preferred stock dividends
7,875

 
7,875


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”) 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 (the “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, 2017 previously filed with the SEC on February 26, 2018. The balance sheet at December 31, 2017, has been derived from the audited consolidated financial statements at that date. The interim condensed consolidated financial statements as of and for the three months ended March 31, 2017 have been adjusted from the information set forth in the Form 10-Q for the quarterly period ended March 31, 2017. See Note 3, “Revisions of Previously Issued Financial Statements” in the Company’s 2017 Form 10-K.

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.

The unaudited condensed consolidated financial statements 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 “Exchanges” or “Reciprocal Exchanges”). The Company has no ownership interest in the Reciprocal Exchanges but manages their business operations and has the ability to direct their activities through its wholly-owned management companies. The Reciprocal Exchanges are property and casualty insurers.

To conform to the current-year quarter presentation, the Company reclassified earnings (losses) of equity method investments with related parties as a component of net investment income on its condensed consolidated statements of income.

A detailed description of the Company’s significant accounting policies and management judgments is located in the notes to the audited consolidated financial statements, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC.



8


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

2. Recent Accounting Pronouncements

Adopted During 2018

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 improved disclosure requirements. While the guidance excludes revenue from insurance contracts, investments and financial instruments from its scope, the guidance is applicable to the Company’s service and fee income not specifically exempted from the guidance. The Company adopted ASU 2014-09 effective January 1, 2018, using the modified retrospective method and recorded a cumulative-effect adjustment to the opening balance sheet, increasing retained earnings by $8,830. See Note 3, “Service and Fee Income” for additional information.

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) are to be measured at fair value with changes in fair value recognized in earnings. The Company adopted ASU 2016-01 effective January 1, 2018, and recorded a cumulative-effect adjustment to the opening balance sheet, increasing Accumulated Other Comprehensive Income (“AOCI”) by $36 and decreasing retained earnings by the same amount. To conform to the current-year quarter presentation, equity securities are presented in a single line in the Company’s condensed consolidated balance sheets and statements of cash flows.

In October 2016, the FASB issued ASU 2016-16 “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted ASU 2016-16 effective January 1, 2018. Based on the intra-entity transfers of assets executed by the Company, the adoption of this guidance did not have an effect on the Company’s results of operations, financial position or liquidity.

Not Yet Adopted

With the exception of those adopted above or discussed below, 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 three months ended March 31, 2018, as compared to those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, that are of significance, or potential significance, to the Company.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the early stages of evaluating the impact this guidance will have on its results of operations, financial position or liquidity and disclosures. The Company expects the adoption will have a significant impact on its consolidated financial statements, primarily to the consolidated balance sheets by recognizing a right-of-use asset and corresponding lease liability and related disclosures, due to the addition of operating leases previously accounted for as off-balance sheet transactions. The Company is currently unable to quantify the impact of adopting this guidance.



9


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

3. Service and Fee Income

On January 1, 2018, the Company adopted ASU 2014-09 and all the related amendments (“ASC 606”) for in scope contracts with customers using the modified retrospective method. Financial statements presented prior to the adoption of ASC 606 are reported under the previous guidance of ASC 605, “Revenue Recognition.” ASC 606 is applicable to the Company’s service and fee income, primarily related to the recognition of commission revenue in the Accident and Health segment.

Disaggregation of Revenue by Type and Operating Segment

The following table summarizes revenue by type and operating segment within service and fee income:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
Property
and
Casualty
 
Accident
and
Health
(1)
 
Total
 
Property
and
Casualty
 
Accident
and
Health
 
Total
Commission revenue
 
$
21,709

 
$
17,524

 
$
39,233

 
$
29,745

 
$
10,669

 
$
40,414

Finance and processing fees
 
32,060

 
1,255

 
33,315

 
23,600

 
2,484

 
26,084

Installment fees
 
21,302

 

 
21,302

 
18,502

 

 
18,502

Group health administrative fees
 

 
19,291

 
19,291

 

 
14,561

 
14,561

Late payment fees
 
7,558

 
25

 
7,583

 
7,600

 
31

 
7,631

Other service and fee income
 
14,306

 
7,092

 
21,398

 
14,222

 
4,528

 
18,750

Total
 
$
96,935

 
$
45,187

 
$
142,122

 
$
93,669

 
$
32,273

 
$
125,942

NGHC
 
$
94,489

 
$
45,187

 
$
139,676

 
$
91,589

 
$
32,273

 
$
123,862

Reciprocal Exchanges
 
2,446

 

 
2,446

 
2,080

 

 
2,080

Total
 
$
96,935

 
$
45,187

 
$
142,122

 
$
93,669

 
$
32,273

 
$
125,942

(1) The impact to commission revenue for the three months ended March 31, 2018 was an increase of $2,501 as a result of applying ASC 606. Prior period amounts have not been adjusted under the modified retrospective method.



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 Debt Securities

The amortized cost, gross unrealized gains and losses, and fair value on available-for-sale debt securities were as follows:
March 31, 2018
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
U.S. Treasury
 
$
35,830

 
$
860

 
$
(372
)
 
$
36,318

Federal agencies
 
25,711

 

 
(371
)
 
25,340

States and political subdivision bonds
 
384,342

 
1,510

 
(7,595
)
 
378,257

Foreign government
 
87,393

 
1,714

 
(28
)
 
89,079

Corporate bonds
 
1,118,188

 
3,525

 
(22,890
)
 
1,098,823

Residential mortgage-backed securities
 
1,052,632

 
566

 
(27,207
)
 
1,025,991

Commercial mortgage-backed securities
 
229,624

 
593

 
(6,741
)
 
223,476

Asset-backed securities
 
5,605

 
236

 
(103
)
 
5,738

Structured securities
 
358,518

 
3,308

 
(528
)
 
361,298

Total
 
$
3,297,843

 
$
12,312

 
$
(65,835
)
 
$
3,244,320

NGHC
 
$
2,981,076

 
$
11,504

 
$
(59,000
)
 
$
2,933,580

Reciprocal Exchanges
 
316,767

 
808

 
(6,835
)
 
310,740

Total
 
$
3,297,843

 
$
12,312

 
$
(65,835
)
 
$
3,244,320

December 31, 2017
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
U.S. Treasury
 
$
36,236

 
$
987

 
$
(230
)
 
$
36,993

Federal agencies
 
20,711

 
5

 
(27
)
 
20,689

States and political subdivision bonds
 
418,557

 
4,431

 
(3,907
)
 
419,081

Foreign government
 
55,575

 
2,736

 
(57
)
 
58,254

Corporate bonds
 
1,053,777

 
14,809

 
(7,697
)
 
1,060,889

Residential mortgage-backed securities
 
1,020,481

 
211

 
(15,953
)
 
1,004,739

Commercial mortgage-backed securities
 
143,519

 
2,340

 
(1,816
)
 
144,043

Asset-backed securities
 
421

 

 
(7
)
 
414

Structured securities
 
390,514

 
4,959

 
(686
)
 
394,787

Total
 
$
3,139,791

 
$
30,478

 
$
(30,380
)
 
$
3,139,889

NGHC
 
$
2,835,293

 
$
27,117

 
$
(27,455
)
 
$
2,834,955

Reciprocal Exchanges
 
304,498

 
3,361

 
(2,925
)
 
304,934

Total
 
$
3,139,791

 
$
30,478

 
$
(30,380
)
 
$
3,139,889


As of March 31, 2018 and December 31, 2017, the Company had no other-than-temporary impairments (“OTTI”) in AOCI related to available-for-sale debt securities.


11


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

The amortized cost and fair value of available-for-sale debt securities held as of March 31, 2018, 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
March 31, 2018
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
32,184

 
$
31,994

 
$
5,149

 
$
5,182

 
$
37,333

 
$
37,176

Due after one year through five years
 
574,994

 
568,786

 
150,573

 
146,766

 
725,567

 
715,552

Due after five years through ten years
 
868,737

 
856,975

 
66,330

 
65,344

 
935,067

 
922,319

Due after ten years
 
297,644

 
299,553

 
14,371

 
14,515

 
312,015

 
314,068

Mortgage-backed securities
 
1,207,517

 
1,176,272

 
80,344

 
78,933

 
1,287,861

 
1,255,205

Total
 
$
2,981,076

 
$
2,933,580

 
$
316,767

 
$
310,740

 
$
3,297,843

 
$
3,244,320


(b) Gross Unrealized Losses

The tables below summarize the gross unrealized losses on debt securities classified as available for sale, by length of time the security has continuously been in an unrealized loss position.
 
 
Less Than 12 Months
 
12 Months or More
 
Total
March 31, 2018
 
Fair
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury
 
$
20,464

 
$
(270
)
 
131

 
$
11,543

 
$
(102
)
 
134

 
$
32,007

 
$
(372
)
Federal agencies
 
24,738

 
(343
)
 
15

 
602

 
(28
)
 
4

 
25,340

 
(371
)
States and political subdivision bonds
 
192,758

 
(4,198
)
 
302

 
82,744

 
(3,397
)
 
119

 
275,502

 
(7,595
)
Foreign government
 
21,588

 
(28
)
 
2

 

 

 

 
21,588

 
(28
)
Corporate bonds
 
726,521

 
(17,230
)
 
738

 
109,865

 
(5,660
)
 
96

 
836,386

 
(22,890
)
Residential mortgage-backed securities
 
890,769

 
(22,670
)
 
99

 
84,388

 
(4,537
)
 
7

 
975,157

 
(27,207
)
Commercial mortgage-backed securities
 
164,033

 
(5,987
)
 
17

 
12,360

 
(754
)
 
14

 
176,393

 
(6,741
)
Asset-backed securities
 
318

 
(47
)
 
1

 
1,585

 
(56
)
 
7

 
1,903

 
(103
)
Structured securities
 
52,459

 
(399
)
 
34

 
6,022

 
(129
)
 
3

 
58,481

 
(528
)
Total
 
$
2,093,648

 
$
(51,172
)
 
1,339

 
$
309,109

 
$
(14,663
)
 
384

 
$
2,402,757

 
$
(65,835
)
NGHC
 
$
1,857,583

 
$
(45,042
)
 
1,203

 
$
292,084

 
$
(13,958
)
 
375

 
$
2,149,667

 
$
(59,000
)
Reciprocal Exchanges
 
236,065

 
(6,130
)
 
136

 
17,025

 
(705
)
 
9

 
253,090

 
(6,835
)
Total
 
$
2,093,648

 
$
(51,172
)
 
1,339

 
$
309,109

 
$
(14,663
)
 
384

 
$
2,402,757

 
$
(65,835
)

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, 2017
 
Fair
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury
 
$
21,567

 
$
(131
)
 
62

 
$
10,555

 
$
(99
)
 
20

 
$
32,122

 
$
(230
)
Federal agencies
 
10,069

 
(11
)
 
6

 
615

 
(16
)
 
4

 
10,684

 
(27
)
States and political subdivision bonds
 
145,396

 
(1,851
)
 
215

 
86,894

 
(2,056
)
 
125

 
232,290

 
(3,907
)
Foreign government
 

 

 

 
2,443

 
(57
)
 
2

 
2,443

 
(57
)
Corporate bonds
 
402,236

 
(4,564
)
 
341

 
110,207

 
(3,133
)
 
93

 
512,443

 
(7,697
)
Residential mortgage-backed securities
 
886,032

 
(13,476
)
 
72

 
89,412

 
(2,477
)
 
9

 
975,444

 
(15,953
)
Commercial mortgage-backed securities
 
50,537

 
(727
)
 
14

 
27,072

 
(1,089
)
 
27

 
77,609

 
(1,816
)
Asset-backed securities
 

 

 

 
414

 
(7
)
 
2

 
414

 
(7
)
Structured securities
 
73,561

 
(631
)
 
18

 
3,727

 
(55
)
 
4

 
77,288

 
(686
)
Total
 
$
1,589,398

 
$
(21,391
)
 
728

 
$
331,339

 
$
(8,989
)
 
286

 
$
1,920,737

 
$
(30,380
)
NGHC
 
$
1,408,081

 
$
(19,254
)
 
623

 
$
300,732

 
$
(8,201
)
 
268

 
$
1,708,813

 
$
(27,455
)
Reciprocal Exchanges
 
181,317

 
(2,137
)
 
105

 
30,607

 
(788
)
 
18

 
211,924

 
(2,925
)
Total
 
$
1,589,398

 
$
(21,391
)
 
728

 
$
331,339

 
$
(8,989
)
 
286

 
$
1,920,737

 
$
(30,380
)

There were 1,723 and 1,014 securities at March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, of the $14,663 and $8,989, respectively, of unrealized losses in unrealized loss positions for a period of twelve or more consecutive months, none of those were greater than or equal to 25% of its amortized 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.

(c) Equity Securities

The fair values on equity securities were as follows:
 
 
March 31, 2018
 
December 31, 2017
Common stock
 
$
47,993

 
$
48,119

Preferred stock
 
2,164

 
2,222

Total
 
$
50,157

 
$
50,341

NGHC
 
$
50,157

 
$
50,341

Reciprocal Exchanges
 

 

Total
 
$
50,157

 
$
50,341



13


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

(d) Investment Income

The components of net investment income consisted of the following:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash and short-term investments
 
$
187

 
$
34

Debt securities
 
24,256

 
26,818

Equity securities
 
155

 
75

Other income, net (related parties - $(295) and $3,814)
 
1,821

 
3,818

Investment income
 
26,419

 
30,745

Investment expenses
 
(1,408
)
 
(1,701
)
Net Investment Income
 
$
25,011

 
$
29,044

NGHC
 
$
22,867

 
$
26,160

Reciprocal Exchanges
 
2,144

 
2,884

Net Investment Income
 
$
25,011

 
$
29,044


(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 table below indicates realized gains and losses.
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
Gross
Gains
 
Gross
Losses
 
Net Gains (Losses)
 
Gross
Gains
 
Gross
Losses
 
Net Gains (Losses)
Debt securities, available-for-sale
 
$
1,169

 
$
(1,171
)
 
$
(2
)
 
$
2,487

 
$
(1,745
)
 
$
742

Debt securities, trading
 

 

 

 
6,902

 
(9,545
)
 
(2,643
)
Equity securities
 
725

 
(1,773
)
 
(1,048
)
 
8,027

 
(8,187
)
 
(160
)
Foreign exchange and other investments, net
 
1,168

 

 
1,168

 
649

 

 
649

Net realized gain (loss) on investments
 
$
3,062

 
$
(2,944
)
 
$
118

 
$
18,065

 
$
(19,477
)
 
$
(1,412
)
NGHC
 
$
2,437

 
$
(2,188
)
 
$
249

 
$
18,065

 
$
(19,477
)
 
$
(1,412
)
Reciprocal Exchanges
 
625

 
(756
)
 
(131
)
 

 

 

Net realized gain (loss) on investments
 
$
3,062

 
$
(2,944
)
 
$
118

 
$
18,065

 
$
(19,477
)
 
$
(1,412
)

Net gains and losses recognized during the reporting period on equity securities and debt securities classified as trading still held at the reporting date were as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
Equity
Securities
 
Equity Securities and Debt Securities
Net losses recognized during the period
 
$
(1,048
)
 
$
(5,662
)
Less: Net losses recognized during the period on securities sold during the period
 

 
(1,800
)
Net losses recognized during the reporting period on securities still held at the reporting date
 
$
(1,048
)
 
$
(3,862
)


14


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

(f) Credit Quality of Investments

The tables below summarize the credit quality of the Company’s debt securities and preferred stock securities, as rated by Standard & Poor’s.
 
 
NGHC
 
Reciprocal Exchanges
March 31, 2018
 
Cost or
Amortized Cost
 
Fair Value
 
Percentage
 
Cost or Amortized Cost
 
Fair Value
 
Percentage
U.S. Treasury
 
$
29,333

 
$
29,801

 
1.0
%
 
$
6,497

 
$
6,517

 
2.1
%
AAA
 
281,886

 
282,501

 
9.6
%
 
13,245

 
12,846

 
4.1
%
AA, AA+, AA-
 
1,438,345

 
1,401,862

 
47.8
%
 
126,409

 
124,086

 
39.9
%
A, A+, A-
 
557,155

 
548,341

 
18.7
%
 
154,305

 
151,145

 
48.6
%
BBB, BBB+, BBB-
 
570,184

 
568,001

 
19.3
%
 
10,278

 
10,115

 
3.3
%
BB+ and lower
 
106,292

 
105,238

 
3.6
%
 
6,033

 
6,031

 
2.0
%
Total
 
$
2,983,195

 
$
2,935,744

 
100.0
%
 
$
316,767

 
$
310,740

 
100.0
%
 
 
NGHC
 
Reciprocal Exchanges
December 31, 2017
 
Cost or
Amortized Cost
 
Fair Value
 
Percentage
 
Cost or Amortized Cost
 
Fair Value
 
Percentage
U.S. Treasury
 
$
30,244

 
$
31,026

 
1.1
%
 
$
5,992

 
$
5,967

 
2.0
%
AAA
 
255,132

 
259,506

 
9.1
%
 
29,540

 
28,961

 
9.5
%
AA, AA+, AA-
 
1,399,287

 
1,382,191

 
48.7
%
 
133,250

 
133,316

 
43.7
%
A, A+, A-
 
531,185

 
534,298

 
18.8
%
 
135,682

 
136,657

 
44.8
%
BBB, BBB+, BBB-
 
574,456

 
581,406

 
20.5
%
 

 

 
%
BB+ and lower
 
47,542

 
48,759

 
1.8
%
 
34

 
33

 
%
Total
 
$
2,837,846

 
$
2,837,186

 
100.0
%
 
$
304,498

 
$
304,934

 
100.0
%

The tables below summarize the investment quality of the Company’s corporate bond holdings and industry concentrations.
March 31, 2018
 
AAA
 
AA+,
AA,
AA-
 
A+,A,A-
 
BBB+,
BBB,
BBB-
 
BB+ or
Lower
 
Fair
Value
 
% of
Corporate
Bonds
Portfolio
Corporate Bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Institutions
 
3.6
%
 
2.1
%
 
25.4
%
 
10.4
%
 
2.0
%
 
$
477,583

 
43.5
%
Industrials
 
0.5
%
 
4.3
%
 
23.9
%
 
24.2
%
 
2.4
%
 
607,146

 
55.3
%
Utilities/Other
 
%
 
%
 
1.1
%
 
0.1
%
 
%
 
14,094

 
1.2
%
Total
 
4.1
%
 
6.4
%
 
50.4
%
 
34.7
%
 
4.4
%
 
$
1,098,823

 
100.0
%
NGHC
 
3.7
%
 
2.3
%
 
36.6
%
 
33.8
%
 
4.4
%
 
$
888,297

 
80.8
%
Reciprocal Exchanges
 
0.4
%
 
4.1
%
 
13.8
%
 
0.9
%
 
%
 
210,526

 
19.2
%
Total
 
4.1
%
 
6.4
%
 
50.4
%
 
34.7
%
 
4.4
%
 
$
1,098,823

 
100.0
%

15


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

December 31, 2017
 
AAA
 
AA+,
AA,
AA-
 
A+,A,A-
 
BBB+,
BBB,
BBB-
 
BB+ or
Lower
 
Fair
Value
 
% of
Corporate
Bonds
Portfolio
Corporate Bonds: