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nghc-20200630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2020


☐			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

(Address of Principal Executive Offices)

10038

(Zip Code)

(212) 380-9500

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading
Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

NGHC

The Nasdaq Stock Market LLC

7.50% Non-Cumulative Preferred Stock, Series A

NGHCP

The Nasdaq Stock Market LLC

Depositary Shares, Representing 1/40th of a Share of 7.50% Non-Cumulative Preferred Stock, Series B

NGHCO

The Nasdaq Stock Market LLC

Depositary Shares, Representing 1/40th of a Share of 7.50% Non-Cumulative Preferred Stock, Series C

NGHCN

The Nasdaq Stock Market LLC

7.625% Subordinated Notes due 2055

NGHCZ

The Nasdaq Stock Market LLC

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of July 29, 2020, the number of common shares of the registrant outstanding was 113,401,545.

NATIONAL GENERAL HOLDINGS CORP.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of June 3 0 , 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Income - Three and Six Months Ended June 3 0 , 2020 and 20 19	3
	Condensed Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 3 0 , 2020 and 20 19	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity - Three and Six Months Ended June 3 0 , 2020 and 20 19	5
	Condensed Consolidated Statements of Cash Flows - Six Months Ended June 3 0 , 2020 and 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	9
	Note 1. Basis of Reporting	9
	Note 2. Recent Accounting Pronouncements	10
	Note 3. Allowance for Expected Credit Losses	11
	Note 4. Investments	13
	Note 5. Fair Value of Financial Instruments	20
	Note 6. Deferred Acquisition Costs	24
	Note 7. Unpaid L osses and Loss Adjustment Expense Reserves	24
	Note 8. Reinsurance	26
	Note 9. Debt	28
	Note 10. Contingencies	31
	Note 11. Income Taxes	31
	Note 12. Stockholders’ Equity	32
	Note 13. Stock-B ased Compensation	34
	Note 14. Earnings Per Share	36
	Note 15. Related Party Transactions	37
	Note 16. Segment Information	38
	Note 17. Subsequent Event	45
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	77
Item 4.	Controls and Procedures	79

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	80
Item 1A.	Risk Factors	80
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 6.	Exhibits	83
	Signatures	83

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)





	June 30,		December 31,
	2020		2019
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (allowance for expected credit losses $1,203 - 2020) (Exchanges - $320,773 and $324,249; allowance for expected credit losses $149 - 2020)	$	4,581,531	$	4,476,358
Short-term investments (Exchanges - $19,330 and $5,245)	216,484		67,353
Other investments (related parties - $235,458 and $238,841)	287,735		311,287
Total investments	5,085,750		4,854,998
Cash and cash equivalents (Exchanges - $4 and $959)	297,282		135,942
Restricted cash and cash equivalents (Exchanges - $233 and $24)	37,726		28,521
Accrued investment income (related parties - $2,405 and $2,391) (Exchanges - $1,939 and $2,001)	29,499		30,927
Premiums and other receivables (net of allowance for expected credit losses $40,078 - 2020; net of bad debt allowance $24,067 - 2019) (Exchanges - $49,649 and $55,859; net of allowance for expected credit losses $1,867 - 2020; net of bad debt allowance $541 - 2019)	1,487,734		1,428,948
Deferred acquisition costs (Exchanges - $23,097 and $23,307)	275,931		263,523
Reinsurance recoverable (net of allowance for expected credit losses $517 - 2020) (Exchanges - $113,321 and $119,125; net of allowance for expected credit losses $173 - 2020)	1,292,636		1,394,308
Prepaid reinsurance premiums (Exchanges - $82,684 and $105,894)	518,082		575,747
Property and equipment, net (Exchanges - $18 and $241)	388,889		403,827
Intangible assets, net (Exchanges - $3,135 and $3,225)	350,821		365,823
Goodwill	179,328		179,328
Prepaid and other assets (Exchanges - $4,310 and $3,521)	74,165		94,642
Total assets	$	10,017,843	$	9,756,534

See accompanying notes to unaudited condensed consolidated financial statements.


NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
(Unaudited)



	June 30,		December 31,
	2020		2019
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves (Exchanges - $200,270 and $205,786)	$	2,826,584	$	2,886,414
Unearned premiums and other revenue (Exchanges - $226,403 and $252,553)	2,328,447		2,312,241
Reinsurance payable (Exchanges - $23,907 and $35,689)	461,896		562,844
Accounts payable and accrued expenses (Exchanges - $7,753 and $8,497)	327,929		315,366
Debt	682,266		686,006
Other liabilities (Exchanges - $30,279 and $30,803)	411,045		376,169
Total liabilities	$	7,038,167	$	7,139,040
Contingencies (Note 10)

Stockholders’ equity:
Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,120 shares - 2020 and 2019; Aggregate liquidation preference $450,000 - 2020 and 2019.	$	450,000	$	450,000
Common stock, $0.01 par value - authorized 150,000,000 shares, issued 113,856,628 and 113,368,811 shares - 2020 and 2019, outstanding 113,397,545 and 113,368,811 shares - 2020 and 2019.	1,139		1,134
Treasury stock, at cost - 459,083 shares - 2020.	(8,482)		—
Additional paid-in capital	1,069,152		1,065,634
Accumulated other comprehensive income:
Unrealized foreign currency translation adjustment, net of tax	(686)		(202)
Unrealized gain on investments, net of tax	187,550		74,750
Total accumulated other comprehensive income	186,864		74,548
Retained earnings	1,296,451		1,058,138
Total National General Holdings Corp. stockholders’ equity	2,995,124		2,649,454
Noncontrolling interest	(15,448)		(31,960)
Total stockholders’ equity	$	2,979,676	$	2,617,494
Total liabilities and stockholders’ equity	$	10,017,843	$	9,756,534

See accompanying notes to unaudited condensed consolidated financial statements.

NATIONAL GENERAL HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)

(Unaudited)





	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenues:
Net earned premium	$	1,065,567	$	1,030,651	$	2,140,773	$	1,994,808
Ceding commission income	46,640		60,192		96,945		129,726
Service and fee income	180,592		148,908		360,033		314,415
Net investment income	31,175		35,131		61,418		68,576
Net gain (loss) on investments	5,158		(5,230)		(1,703)		(5,208)
Total revenues	1,329,132		1,269,652		2,657,466		2,502,317
Expenses:
Loss and loss adjustment expense	600,446		715,535		1,292,444		1,367,344
Acquisition costs and other underwriting expenses	229,378		194,126		457,620		406,044
General and administrative expenses	262,409		247,767		529,978		495,861
Interest expense	11,779		12,925		23,559		25,924
Total expenses	1,104,012		1,170,353		2,303,601		2,295,173
Income before provision for income taxes	225,120		99,299		353,865		207,144
Provision for income taxes	50,507		22,241		78,679		44,747
Net income	174,613		77,058		275,186		162,397
Net (income) loss attributable to noncontrolling interest	(8,039)		818		(7,853)		7,237
Net income attributable to NGHC	166,574		77,876		267,333		169,634
Dividends on preferred stock	(8,925)		(8,925)		(16,800)		(16,800)
Net income attributable to NGHC common stockholders	$	157,649	$	68,951	$	250,533	$	152,834

Earnings Per Share (“EPS”) attributable to NGHC common stockholders:
Basic EPS	$	1.39	$	0.61	$	2.21	$	1.35
Diluted EPS	$	1.37	$	0.60	$	2.17	$	1.33

See accompanying notes to unaudited condensed consolidated financial statements.

NATIONAL GENERAL HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)





	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net income	$	174,613	$	77,058	$	275,186	$	162,397

Other comprehensive income:
Foreign currency translation adjustment	(270)		210		(612)		(4,043)
Income tax effect	56		(44)		128		845
Total foreign currency translation adjustment, net of tax	(214)		166		(484)		(3,198)

Gross unrealized gain on investments before reclassifications	196,361		80,187		155,888		156,972
Income tax effect	(41,236)		(16,839)		(32,736)		(32,964)
Total change in net unrealized gain on investments, net of tax	155,125		63,348		123,152		124,008

Reclassification adjustments for investments gain or loss to net income:
Net realized (gain) loss on investments	(1,693)		(69)		(1,957)		51
Income tax effect	356		14		411		(11)
Total (gain) loss on investments reclassifications to net income, net of tax	(1,337)		(55)		(1,546)		40

Other comprehensive income before income tax effect	194,398		80,328		153,319		152,980
Income tax effect	(40,824)		(16,869)		(32,197)		(32,130)
Other comprehensive income, net of tax	153,574		63,459		121,122		120,850
Comprehensive income	328,187		140,517		396,308		283,247
Comprehensive income attributable to noncontrolling interest	(18,594)		(3,312)		(16,659)		(1,573)
Comprehensive income attributable to NGHC	$	309,593	$	137,205	$	379,649	$	281,674

See accompanying notes to unaudited condensed consolidated financial statements.

NATIONAL GENERAL HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Shares)

(Unaudited)


	Three Months Ended June 30, 2020
	Preferred Stock		Common Stock		Treasury Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Noncontrolling Interest		Total
Balance April 1, 2020	$	450,000	$	1,137	$	—	$	1,066,075	$	43,845	$	1,144,473	$	(34,042)	$	2,671,488
Net income	—		—		—		—		—		166,574		8,039		174,613
Foreign currency translation adjustment, net of tax	—		—		—		—		(214)		—		—		(214)