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nghc-20200930

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 September 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 October 27, 2020, the number of common shares of the registrant outstanding was 113,475,176.

NATIONAL GENERAL HOLDINGS CORP.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2020 and 20 19	3
	Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2020 and 20 19	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity - Three and Nine Months Ended September 30, 2020 and 20 19	5
	Condensed Consolidated Statements of Cash Flows - Ni ne Months Ended Septem ber 30, 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	21
	Note 6. Deferred Acquisition Costs	25
	Note 7. Unpaid Losses and Loss Adjustment Expense Reserves	25
	Note 8. Reinsurance	27
	Note 9. Debt	29
	Note 10. Contingencies	32
	Note 11. Income Taxes	32
	Note 12. Stockholders’ Equity	33
	Note 13. Stock-Based Compensation	35
	Note 14. Earnings Per Share	37
	Note 15. Related Party Transactions	38
	Note 16. Segment Information	39
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)





	September 30,		December 31,
	2020		2019
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (allowance for expected credit losses $1,085 - 2020) (Exchanges - $300,124 and $324,249; allowance for expected credit losses $150 - 2020)	$	4,549,133	$	4,476,358
Short-term investments (Exchanges - $30,952 and $5,245)	510,800		67,353
Other investments (related parties - $231,593 and $238,841)	282,866		311,287
Total investments	5,342,799		4,854,998
Cash and cash equivalents (Exchanges - $416 and $959)	188,282		135,942
Restricted cash and cash equivalents (Exchanges - $325 and $24)	63,061		28,521
Accrued investment income (related parties - $1,210 and $2,391) (Exchanges - $1,397 and $2,001)	26,135		30,927
Premiums and other receivables (net of allowance for expected credit losses $37,163 - 2020; net of bad debt allowance $24,067 - 2019) (Exchanges - $70,076 and $55,859; net of allowance for expected credit losses $844 - 2020; net of bad debt allowance $541 - 2019)	1,598,316		1,428,948
Deferred acquisition costs (Exchanges - $18,507 and $23,307)	284,963		263,523
Reinsurance recoverable (net of allowance for expected credit losses $810 - 2020) (Exchanges - $125,095 and $119,125; net of allowance for expected credit losses $173 - 2020)	1,286,852		1,394,308
Prepaid reinsurance premiums (Exchanges - $105,597 and $105,894)	458,960		575,747
Property and equipment, net (Exchanges - $0 and $241)	382,696		403,827
Intangible assets, net (Exchanges - $3,090 and $3,225)	345,974		365,823
Goodwill	179,328		179,328
Prepaid and other assets (Exchanges - $4,312 and $3,521)	66,890		94,642
Total assets	$	10,224,256	$	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)



	September 30,		December 31,
	2020		2019
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves (Exchanges - $208,496 and $205,786)	$	2,897,465	$	2,886,414
Unearned premiums and other revenue (Exchanges - $219,582 and $252,553)	2,337,469		2,312,241
Reinsurance payable (Exchanges - $51,711 and $35,689)	402,428		562,844
Accounts payable and accrued expenses (Exchanges - $7,604 and $8,497)	420,144		315,366
Debt	679,436		686,006
Other liabilities (Exchanges - $44,004 and $30,803)	401,749		376,169
Total liabilities	$	7,138,691	$	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 113,934,259 and 113,368,811 shares - 2020 and 2019, outstanding 113,475,176 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	1,073,288		1,065,634
Accumulated other comprehensive income:
Unrealized foreign currency translation adjustment, net of tax	(637)		(202)
Unrealized gain on investments, net of tax	195,590		74,750
Total accumulated other comprehensive income	194,953		74,548
Retained earnings	1,392,872		1,058,138
Total National General Holdings Corp. stockholders’ equity	3,103,770		2,649,454
Noncontrolling interest	(18,205)		(31,960)
Total stockholders’ equity	$	3,085,565	$	2,617,494
Total liabilities and stockholders’ equity	$	10,224,256	$	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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues:
Net earned premium	$	1,178,573	$	1,053,638	$	3,319,346	$	3,048,446
Ceding commission income	30,724		57,587		127,669		187,313
Service and fee income	184,969		161,626		545,002		476,041
Net investment income	28,904		33,740		90,322		102,316
Net gain (loss) on investments	19,839		1,581		18,136		(3,627)
Total revenues	1,443,009		1,308,172		4,100,475		3,810,489
Expenses:
Loss and loss adjustment expense	774,164		745,334		2,066,608		2,112,678
Acquisition costs and other underwriting expenses	268,645		209,090		726,265		615,134
General and administrative expenses	244,611		263,864		774,589		759,725
Interest expense	11,292		12,898		34,851		38,822
Total expenses	1,298,712		1,231,186		3,602,313		3,526,359
Income before provision for income taxes	144,297		76,986		498,162		284,130
Provision for income taxes	27,428		16,747		106,107		61,494
Net income	116,869		60,239		392,055		222,636
Net (income) loss attributable to noncontrolling interest	(6,900)		10,915		(14,753)		18,152
Net income attributable to NGHC	109,969		71,154		377,302		240,788
Dividends on preferred stock	(7,875)		(7,875)		(24,675)		(24,675)
Net income attributable to NGHC common stockholders	$	102,094	$	63,279	$	352,627	$	216,113

Earnings Per Share (“EPS”) attributable to NGHC common stockholders:
Basic EPS	$	0.90	$	0.56	$	3.11	$	1.91
Diluted EPS	$	0.88	$	0.54	$	3.04	$	1.87

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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	116,869	$	60,239	$	392,055	$	222,636

Other comprehensive income:
Foreign currency translation adjustment	62		(4,104)		(550)		(8,147)
Income tax effect	(13)		862		115		1,707
Total foreign currency translation adjustment, net of tax	49		(3,242)		(435)		(6,440)

Gross unrealized gain on investments before reclassifications	17,347		33,294		173,235		190,266
Income tax effect	(3,644)		(6,991)		(36,380)		(39,955)
Total change in net unrealized gain on investments, net of tax	13,703		26,303		136,855		150,311

Reclassification adjustments for investments gain or loss to net income:
Net realized gain on investments	(19,393)		(1,886)		(21,350)		(1,835)
Income tax effect	4,073		396		4,484		385
Total gain on investments reclassifications to net income, net of tax	(15,320)		(1,490)		(16,866)		(1,450)

Other comprehensive income (loss) before income tax effect	(1,984)		27,304		151,335		180,284
Income tax effect	416		(5,733)		(31,781)		(37,863)
Other comprehensive income (loss), net of tax	(1,568)		21,571		119,554		142,421
Comprehensive income	115,301		81,810		511,609		365,057
Comprehensive income (loss) attributable to noncontrolling interest	2,757		9,821		(13,902)		8,248
Comprehensive income attributable to NGHC	$	118,058	$	91,631	$	497,707	$	373,305

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 September 30, 2020
	Preferred Stock		Common Stock		Treasury Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Noncontrolling Interest		Total
Balance July 1, 2020	$	450,000	$	1,139	$	(8,482)	$	1,069,152	$	186,864	$	1,296,451	$	(15,448)	$	2,979,676
Net income	—		—		—		—		—		109,969		6,900		116,869
Foreign currency translation adjustment, net of tax	—		—		—		—		48		—		—		48
Change in unrealized gain (loss) on investments, net of tax	—		—		—		—		8,041		—		(9,657)		(1,616)
Common stock dividends declared	—		—		—		—		—		(5,673)		—		(5,673)
Preferred stock dividends declared	—		—		—		—		—		(7,875)		—		(7,875)
Common stock issued under employee stock plans and exercises of stock options	—		—		—		1,134		—		—		—		1,134
Shares withheld related to net share settlement	—		—		—		(156)		—		—		—		(156)
Stock-based compensation	—		—		—		3,158		—		—		—		3,158
Balance September 30, 2020	$	450,000	$	1,139	$	(8,482)	$	1,073,288	$	194,953	$	1,392,872	$	(18,205)	$	3,085,565


	Three Months Ended September 30, 2019
	Preferred Stock		Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Noncontrolling Interest		Total
Balance July 1, 2019	$	450,000	$	1,132	$	1,060,379	$	59,910	$	907,841	$	(18,394)	$	2,460,868
Net income (loss)	—		—		—		—		71,154		(10,915)		60,239
Foreign currency translation adjustment, net of tax	—		—		—		(3,242)		—		—		(3,242)
Change in unrealized gain on investments, net of tax	—		—		—		23,719		—		1,094		24,813
Common stock dividends declared	—		—		—		—		(5,665)		—		(5,665)
Preferred stock dividends declared	—		—		—		—		(7,875)		—		(7,875)
Common stock issued under employee stock plans and exercises of stock options	—		1		188		—		—		—		189
Shares withheld related to net share settlement	—		—		(493)		—		—		—		(493)
Stock-based compensation	—		—		2,785		—		—		—		2,785
Balance September 30, 2019	$	450,000	$	1,133	$	1,062,859	$	80,387	$	965,455	$	(28,215)	$	2,531,619

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)


	Nine Months Ended September 30, 2020
	Preferred Stock		Common Stock		Treasury Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Noncontrolling Interest		Total
Balance January 1, 2020	$	450,000	$	1,134	$	—	$	1,065,634	$	74,548	$	1,058,138	$	(31,960)	$	2,617,494
Cumulative-effect adjustment of change in accounting principle, net of tax	—		—		—		—		—		(863)		(147)		(1,010)
Net income	—		—		—		—		—		377,302		14,753		392,055
Foreign currency translation adjustment, net of tax	—		—		—		—		(436)		—		—		(436)
Change in unrealized gain (loss) on investments, net of tax	—		—		—		—		120,841		—		(851)		119,990
Common stock repurchased	—		—		(8,482)		—		—		—		—		(8,482)
Common stock dividends declared	—		—		—		—		—		(17,030)		—		(17,030)
Preferred stock dividends declared	—		—		—		—		—		(24,675)		—		(24,675)
Common stock issued under employee stock plans and exercises of stock options	—		5		—		1,965		—