NGHC 2015 1Q 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2015

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)
 
(IRS 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o
 
Accelerated Filer o
 
Non-Accelerated Filer x
(Do not check if a smaller
reporting company)
 
Smaller Reporting Company 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 7, 2015, the number of common shares of the registrant outstanding was 93,572,226.





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)
 
March 31,
2015
 
December 31,
2014
ASSETS
(unaudited)
 
(audited)
Investments - NGHC
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $1,345,963 and $1,330,760)
$
1,406,561

 
$
1,374,087

Equity securities, available-for-sale, at fair value (cost $52,551 and $52,272)
48,194

 
45,802

Short-term investments
18,447

 
50

Equity investment in unconsolidated subsidiaries
167,568

 
155,900

Other investments
5,798

 
4,764

Securities pledged (amortized cost $0 and $47,546)

 
49,456

Investments - Exchanges
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $210,300 and $222,121)
212,570

 
222,739

Equity securities, available-for-sale, at fair value (cost $2,752 and $2,752)
2,865

 
2,817

Short-term investments
3,385

 
10,490

Total investments
1,865,388

 
1,866,105

Cash and cash equivalents (Exchanges - $28,605 and $9,437)
229,102

 
132,615

Accrued investment income (Exchanges - $1,854 and $1,898)
13,275

 
14,451

Premiums and other receivables, net (Related parties $140,636 and $64,129) (Exchanges - $60,292 and $58,238)
791,281

 
647,443

Deferred acquisition costs (Exchanges - $12,547 and $4,485)
155,029

 
125,999

Reinsurance recoverable on unpaid losses (Related parties - $73,771 and $88,970) (Exchanges - $15,444 and $23,583)
873,431

 
911,798

Prepaid reinsurance premiums (Exchanges - $70,340 and $26,924)
152,919

 
102,761

Notes receivable from related party
126,434

 
125,000

Due from affiliate
4,098

 
5,129

Premises and equipment, net
29,466

 
30,583

Intangible assets, net (Exchanges - $9,182 and $11,433)
244,018

 
248,837

Goodwill
92,141

 
70,764

Prepaid and other assets (Exchanges - $41 and $71)
53,090

 
48,154

Total assets
$
4,629,672

 
$
4,329,639

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Unpaid loss and loss adjustment expense reserves (Exchanges - $111,631 and $111,848)
$
1,551,624

 
$
1,562,153

Unearned premiums (Exchanges - $140,154 and $119,998)
961,979

 
864,436

Unearned service contract and other revenue (Exchanges - $20,172 and $0)
29,721

 
8,527

Reinsurance payable (Related parties - $61,914 and $41,965) (Exchanges - $19,878 and $13,811)
153,105

 
111,641

Accounts payable and accrued expenses (Related parties - $38,126 and $38,576) (Exchanges - $9,431 and $17,691)
178,587

 
207,121

Due to affiliate (Exchanges - $1,521 and $1,552)
1,521

 
1,552

Securities sold under agreements to repurchase, at contract value

 
46,804

Deferred tax liability (Exchanges - $38,370 and $38,402)
52,110

 
67,535

Income tax payable (Exchanges - $1,059 and $1,059)
56,177

 
30,591

Notes payable (Exchanges owed to related party - $50,417 and $48,374)
305,417

 
304,005

Other liabilities (Exchanges - $8,985 and $5,710)
65,306

 
51,824

Total liabilities
3,355,547

 
3,256,189


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)
Stockholders’ equity:
 
 
 
Common stock, $0.01 par value - authorized 150,000,000 shares, issued and outstanding 93,495,258 shares - 2015; authorized 150,000,000 shares, issued and outstanding 93,427,382 shares - 2014
935

 
934

Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,350,000 shares - 2015; authorized 10,000,000 shares, issued and outstanding 2,200,000 shares - 2014
205,000

 
55,000

Additional paid-in capital
687,189

 
690,736

Accumulated other comprehensive income
32,683

 
20,192

Retained earnings
332,701

 
292,832

Total National General Holdings Corp. Stockholders' Equity
1,258,508

 
1,059,694

Non-controlling interest (Exchanges - $15,507 and $13,670)
15,617

 
13,756

Total stockholders’ equity
1,274,125

 
1,073,450

Total liabilities and stockholders' equity
$
4,629,672

 
$
4,329,639


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,
 
2015
 
2014
Revenues:
 
 
 
Premium income:
 
 
 
Gross premium written
$
643,455

 
$
646,142

Ceded premiums (related parties - $348 and $30,277, respectively)
(113,430
)
 
(78,657
)
Net premium written
530,025

 
567,485

Change in unearned premium
(50,860
)
 
(209,633
)
Net earned premium
479,165

 
357,852

Ceding commission income
5,080

 
5,370

Service and fee income
54,870

 
36,706

Net investment income
16,148

 
9,214

Net realized gain on investments
1,187

 

Other revenue
1,245

 
7

Total revenues
557,695

 
409,149

Expenses:
 
 
 
Loss and loss adjustment expense
306,686

 
225,347

Acquisition costs and other underwriting expenses
89,885

 
74,373

General and administrative expenses
105,687

 
76,199

Interest expense
9,080

 
593

Total expenses
511,338

 
376,512

Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
46,357

 
32,637

Provision for income taxes
8,387

 
7,336

Income before equity in earnings of unconsolidated subsidiaries
37,970

 
25,301

Equity in earnings of unconsolidated subsidiaries
4,958

 
1,123

Net income
42,928

 
26,424

Less: Net loss (income) attributable to non-controlling interest
(160
)
 
(32
)
Net income attributable to National General Holdings Corp. ("NGHC")
$
42,768

 
$
26,392

Dividends on preferred stock
(1,031
)
 

Net income attributable to NGHC common stockholders
$
41,737

 
$
26,392

Earnings per common share:
 
 
 
Basic earnings per share
$
0.45

 
$
0.31

Diluted earnings per share
$
0.43

 
$
0.30

Dividends declared per common share
$
0.02

 
$
0.01

Weighted average common shares outstanding:
 
 
 
Basic
93,454,236

 
85,774,057

Diluted
96,087,952

 
86,884,898

Net realized gain on investments:
 
 
 
Other than temporary impairment loss
$
(1,016
)
 
$

Portion of loss recognized in other comprehensive income

 

Net impairment losses recognized in earnings
(1,016
)
 

Other net realized gain on investments
2,203

 

Net realized gain on investments
$
1,187

 
$


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,
 
2015
 
2014
Net income
$
42,928

 
$
26,424

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
1,024

 
(597
)
Gross unrealized holding gain on securities, net of tax expense of $5,990 and $4,478 in 2015 and 2014, respectively
14,355

 
8,771

Reclassification adjustment for investment gain included in net income
(1,187
)
 

Other comprehensive income, net of tax
14,192

 
8,174

Comprehensive income
57,120

 
34,598

Less: Comprehensive loss (income) attributable to non-controlling interest
(1,861
)
 
(32
)
Comprehensive income attributable to NGHC
$
55,259

 
$
34,566




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, 2015
 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest in Subsidiary
 
Total
Balance January 1, 2015
93,427,382

 
$
934

 
2,200,000

 
$
55,000

 
$
690,736

 
$
292,832

 
$
20,192

 
$
13,756

 
$
1,073,450

Net income

 

 

 

 

 
42,768

 

 
160

 
42,928

Foreign currency translation adjustment, net of tax

 

 

 

 

 

 
1,024

 

 
1,024

Change in unrealized gain on investments, net of tax

 

 

 

 

 

 
11,467

 
1,701

 
13,168

Preferred stock dividends

 

 

 

 

 
(1,031
)
 

 

 
(1,031
)
Common stock dividends

 

 

 

 

 
(1,868
)
 

 

 
(1,868
)
Issuance of preferred stock

 

 
150,000

 
150,000

 
(4,975
)
 

 

 

 
145,025

Exercises of stock options
67,876

 
1

 

 

 
340

 

 

 

 
341

Stock-based compensation

 

 

 

 
1,088

 

 

 

 
1,088

Balance March 31, 2015
93,495,258

 
$
935

 
2,350,000

 
$
205,000

 
$
687,189

 
$
332,701

 
$
32,683

 
$
15,617

 
$
1,274,125


 
Three Months Ended March 31, 2014
 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest in Subsidiary
 
Total
Balance January 1, 2014
79,731,800

 
$
797

 

 
$

 
$
437,006

 
$
197,552

 
$
7,425

 
$
87

 
$
642,867

Net income

 

 

 

 

 
26,392

 

 
32

 
26,424

Foreign currency translation adjustment, net of tax

 

 

 

 

 

 
(597
)
 

 
(597
)
Change in unrealized gain on investments, net of tax

 

 

 

 

 

 
8,771

 

 
8,771

Common stock dividends

 

 

 

 

 
(932
)
 

 

 
(932
)
Issuance of common stock
13,612,600

 
136

 

 

 
178,503

 

 

 

 
178,639

Stock-based compensation

 

 

 

 
418

 

 

 

 
418

Balance March 31, 2014
93,344,400

 
$
933

 

 
$

 
$
615,927

 
$
223,012

 
$
15,599

 
$
119

 
$
855,590




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,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
42,928

 
$
26,424

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and goodwill impairment
7,956

 
6,775

Net amortization of premium on fixed maturities
1,188

 
740

Net amortization of discount on debt
2,043

 

Stock compensation expense
1,088

 
418

Equity in earnings of unconsolidated subsidiaries
(4,958
)
 
(1,123
)
Net realized gain on investments
(2,203
)
 

Other than temporary impairment loss
1,016

 

Bad debt expense
5,823

 
7,086

Foreign currency translation adjustment, net of tax
(427
)
 
(597
)
Changes in assets and liabilities:
 
 
 
Accrued investment income
(257
)
 
(430
)
Premiums and other receivables
(147,734
)
 
(247,513
)
Deferred acquisition costs, net
(29,030
)
 
(38,981
)
Reinsurance recoverable on unpaid losses
38,367

 
23,354

Prepaid reinsurance premiums
(50,158
)
 
(6,692
)
Prepaid expenses and other assets
(4,618
)
 
576

Unpaid loss and loss adjustment expense reserves
(10,529
)
 
56,238

Unearned premiums
97,543

 
216,325

Unearned service contract and other revenue
21,194

 
1,639

Reinsurance payable
41,464

 
24,199

Accounts payable
(34,089
)
 
93,033

Income tax payable
25,587

 
17,028

Deferred tax liability
(21,117
)
 
(12,199
)
Other liabilities
13,482

 
(4,447
)
Net cash provided by (used in) operating activities
(5,441
)
 
161,853

Cash flows from investing activities:
 
 
 
Investment in unconsolidated subsidiaries
(6,710
)
 
(1,576
)
Purchases of other investments
(1,556
)
 
(349
)
Acquisition of consolidated subsidiaries, net of cash
(15,524
)
 
6,393

Purchases of short term investments
(48,209
)
 
(124,000
)
Proceeds from sale of short-term investments
36,917

 
124,000

Purchases of premises and equipment
(2,112
)
 
(3,525
)
Purchases of fixed maturities
(62,334
)
 
(324,903
)
Proceeds from sale and maturity of fixed maturities
106,724

 
62,834

Net cash provided by (used in) investing activities
7,196

 
(261,126
)
Cash flows from financing activities:
 
 
 
Securities sold under agreements to repurchase, net
(46,804
)
 
(42,636
)
Notes payable repayments
(631
)
 
(1,394
)
Proceeds from notes payable

 
125

Issuance of common stock

 
178,639

Issuance of preferred stock, net of fees
145,025

 

Exercises of stock options
341

 

Dividends paid to preferred shareholders
(1,031
)
 

Dividends paid to common shareholders
(1,868
)
 
(932
)
Net cash provided by financing activities
95,032

 
133,802


See accompanying notes to unaudited condensed consolidated financial statements.
6



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

Effect of exchange rate changes on cash and cash equivalents
(300
)
 

Net increase in cash and cash equivalents
96,487

 
34,529

Cash and cash equivalents, beginning of the period
132,615

 
73,823

Cash and cash equivalents, end of the period
$
229,102

 
$
108,352

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
2,900

 
$
1,700

Cash paid for interest
31

 
728


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, 2014, previously filed with the SEC on March 9, 2015. The balance sheet at December 31, 2014 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 March 31, 2015 and for the three months ended March 31, 2015, and the audited condensed consolidated balance sheet as of December 31, 2014, also 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"), following the Company's acquisition on September 15, 2014 of two management companies that are the attorneys-in-fact for the Reciprocal Exchanges. 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.

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, 2014 filed with the SEC.

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 prior period consolidated financial statement amounts to conform to current period presentation.


2. Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2015, as compared to those described in our Annual Report on Form 10-K for the year ended December 31, 2014, that are of significance, or potential significance, to the Company.

In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity’s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective prospectively for fiscal years beginning after December 15, 2014, and interim periods within those years. The Company adopted ASU 2014-08 on January 1, 2015 and the implementation of the standard did not have an impact 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 February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" to address concerns that GAAP might require a reporting entity to consolidate another legal entity in situations in which the reporting entity's contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity's voting rights, or the reporting entity is not exposed to a majority of the legal entity's economic benefits or obligations. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 amends certain areas in the consolidation analysis including: (i) the effect of related parties on the primary beneficiary determination; (ii) the evaluation of fees paid to a decision maker or a service provider as a variable interest; (iii) the effect of fee arrangements on the primary beneficiary determination; and (iv) certain investment funds. The amendments in ASU 2015-02 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in ASU 2015-02 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or may apply the amendments retrospectively. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, as part of its initiative to reduce complexity in accounting standards. ASU 2015-03 amends the current practice where debt issuance costs were recognized as separate assets (i.e., deferred charges) on the balance sheet and were not deducted from the carrying value of the debt liability. ASU 2015-03 amends the current practice and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. The amendments in ASU 2015-03 are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The adoption of ASU 2015-03 is expected to be limited to disclosure requirements and is not expected to have an effect on the Company’s results of operations, financial position or liquidity.


3. Reciprocal Exchanges

As of September 15, 2014, through its wholly-owned management companies, 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.

Subsidiaries of ACP Re Ltd. ("ACP Re"), a related party, hold the 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 it holds a variable interest in each of the Reciprocal Exchanges because of the significance of the management fees paid by the Reciprocal Exchanges to the wholly-owned subsidiaries of the Company as the Reciprocal

9

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

Exchanges' decision-maker and the relevance of these fees to the economic performance of the Reciprocal Exchanges. Each of the Reciprocal Exchanges qualifies as a Variable Interest Entity ("VIE") because the policyholders of the Reciprocal Exchanges lack the ability to direct the activities of the Reciprocal Exchanges that have a significant impact on the Reciprocal Exchanges' economic performance. The Company is the primary beneficiary because it, through its wholly-owned management companies, has both the power to direct the activities of the Reciprocal Exchanges that most significantly impact their economic performance and the right to economic benefits that could be potentially significant. Accordingly, the Company consolidates these Reciprocal Exchanges and eliminates all intercompany balances and transactions with the Company.

The following table presents the balance sheet of the Reciprocal Exchanges as of September 15, 2014:

September 15, 2014
 
 
Assets:
 
 
Cash and investments
 
$
235,684

Accrued investment income
 
1,975

Premiums receivables
 
62,412

Reinsurance recoverable on unpaid losses
 
19,137

Prepaid reinsurance premiums
 
27,166

Intangible assets, net
 
13,901

Income tax receivable
 
819

Other assets
 
124

Total assets
 
$
361,218

Liabilities:
 
 
Unpaid loss and loss adjustment expense reserves
 
$
113,828

Unearned premiums
 
114,786

Reinsurance payable
 
5,167

Accounts payable and accrued expenses
 
10,120

Deferred tax liability
 
39,238

Notes payable
 
44,600

Due to affiliate
 
17,808

Other liabilities
 
4,506

Total liabilities
 
350,053

Stockholders’ equity:
 
 
Non-controlling interest
 
11,165

Total stockholders’ equity
 
11,165

Total liabilities and stockholders' equity
 
$
361,218


For the three months ended March 31, 2015, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $49,450, $49,314 and $136, respectively.

For the three months ended March 31, 2015, the Company earned service and fee income from the Reciprocal Exchanges in the amount of $8,578. Such amount is eliminated in our consolidated earnings.



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, fair value, and gross unrealized gains and losses on available-for-sale securities were as follows:

March 31, 2015
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
47,548

 
$
153

 
$
(4,555
)
 
$
43,146

   Preferred stock
 
7,755

 
158

 

 
7,913

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury
 
22,253

 
1,547

 
(1
)
 
23,799

   Federal agencies
 
98

 
1

 

 
99

   States and political subdivision bonds
 
177,288

 
5,864

 
(206
)
 
182,946

   Foreign government
 
6,573

 

 
(1,067
)
 
5,506

   Corporate bonds
 
856,668

 
50,743

 
(9,790
)
 
897,621

   Residential mortgage-backed securities
 
408,596

 
14,033

 
(65
)
 
422,564

   Commercial mortgage-backed securities
 
79,827

 
2,354

 
(585
)
 
81,596

   Asset-backed securities
 
4,960

 
40

 

 
5,000

Total
 
$
1,611,566

 
$
74,893

 
$
(16,269
)
 
$
1,670,190

Less: Securities pledged
 

 

 

 

Total net of Securities pledged
 
$
1,611,566

 
$
74,893

 
$
(16,269
)
 
$
1,670,190

NGHC
 
$
1,398,514

 
$
71,568

 
$
(15,327
)
 
$
1,454,755

Reciprocal Exchanges
 
213,052

 
3,325

 
(942
)
 
215,435

Total
 
$
1,611,566

 
$
74,893

 
$
(16,269
)
 
$
1,670,190



11

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

December 31, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
47,269

 
$
1,004

 
$
(7,349
)
 
$
40,924

   Preferred stock
 
7,755

 
65

 
(125
)
 
7,695

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury
 
37,446

 
1,536

 
(3
)
 
38,979

   Federal agencies
 
98

 

 

 
98

   States and political subdivision bonds
 
172,617

 
4,961

 
(169
)
 
177,409

   Foreign government
 
6,194

 

 
(658
)
 
5,536

   Corporate bonds
 
839,436

 
36,525

 
(8,699
)
 
867,262

   Residential mortgage-backed securities
 
459,596

 
11,132

 
(92
)
 
470,636

   Commercial mortgage-backed securities
 
79,579

 
1,602

 
(189
)
 
80,992

   Asset-backed securities
 
5,461

 

 
(91
)
 
5,370

Total
 
$
1,655,451

 
$
56,825

 
$
(17,375
)
 
$
1,694,901

Less: Securities pledged
 
47,546

 
1,910

 

 
49,456

Total net of Securities pledged
 
$
1,607,905

 
$
54,915

 
$
(17,375
)
 
$
1,645,445

NGHC
 
$
1,430,578

 
$
55,031

 
$
(16,264
)
 
$
1,469,345

Reciprocal Exchanges
 
224,873

 
1,794

 
(1,111
)
 
225,556

Total
 
$
1,655,451

 
$
56,825

 
$
(17,375
)
 
$
1,694,901


The amortized cost and fair value of available-for-sale fixed maturities and securities pledged, held as of March 31, 2015, 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, 2015
 
Cost or Amortized
Cost
 
Fair
Value
 
Cost or Amortized
Cost
 
Fair
Value
 
Cost or Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
13,973

 
$
14,030

 
$
4,290

 
$
4,289

 
$
18,263

 
$
18,319

Due after one year through five years
 
313,685

 
330,594

 
37,234

 
37,581

 
350,919

 
368,175

Due after five years through ten years
 
512,817

 
537,994

 
65,159

 
66,411

 
577,976

 
604,405

Due after ten years
 
416,298

 
431,829

 
77,085

 
77,331

 
493,383

 
509,160

Mortgage-backed securities
 
89,190

 
92,114

 
26,532

 
26,958

 
115,722

 
119,072

Total
 
$
1,345,963

 
$
1,406,561

 
$
210,300

 
$
212,570

 
$
1,556,263

 
$
1,619,131



12

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

(b) Investment Income

The components of net investment income consisted of the following:

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Interest
 
 
 
 
Cash and short term investments
 
$
5

 
$
10

Equity securities
 
75

 

Fixed maturities
 
15,006

 
9,753

Reverse Repurchase Agreements
 

 

Investment Income
 
15,086

 
9,763

Investment expense
 
(1,212
)
 
(469
)
Repurchase Agreements interest expense
 
(70
)
 
(80
)
Other Income (1)
 
2,344

 

Net Investment Income
 
$
16,148

 
$
9,214

NGHC
 
$
14,109

 
$
9,214

Reciprocal Exchanges
 
2,039

 

Net Investment Income
 
$
16,148

 
$
9,214


(1) Includes interest income of approximately $2,188 for the three months ended March 31, 2015, under the ACP Re Credit Agreement (see Note 15, "Related Party Transactions").


(c) Realized Gains and Losses

Proceeds from sales of equity securities and fixed maturities during the three months ended March 31, 2015 and 2014 were $53,402 and $0, respectively. For the three months ended March 31, 2015, the Company recognized an other-than-temporary impairment ("OTTI") of $1,016 on an investment based on our qualitative and quantitative review.

The tables below indicate the gross realized gains and losses (including any OTTI loss) for the three months ended March 31, 2015 and 2014.

Three Months Ended March 31, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$

 
$

 
$

Fixed maturities
 
2,624

 
(421
)
 
2,203

Other Than Temporary Impairment Loss
 

 
(1,016
)
 
(1,016
)
Total gross realized gains and losses
 
$
2,624

 
$
(1,437
)
 
$
1,187

NGHC
 
$
1,773

 
$
(1,279
)
 
$
494

Reciprocal Exchanges
 
851

 
(158
)
 
693

Total gross realized gains and losses
 
$
2,624

 
$
(1,437
)
 
$
1,187



13

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

Three Months Ended March 31, 2014
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$

 
$

 
$

Fixed maturities
 

 

 

Total gross realized gains and losses
 
$

 
$

 
$



(d) Unrealized Gains and Losses

Unrealized gains (losses) on equity securities, fixed maturities and securities sold but not yet purchased consisted of the following:

 
 
March 31, 2015
 
December 31, 2014
Net unrealized loss on common stock
 
$
(4,402
)
 
$
(6,345
)
Net unrealized gain (loss) on preferred stock
 
158

 
(60
)
Net unrealized gains on fixed maturities
 
62,868

 
45,855

Net unrealized gain (loss) on other
 
(6
)
 
18

Deferred income tax expense
 
(19,769
)
 
(13,787
)
Net unrealized gains, net of deferred income tax expense
 
$
38,849

 
$
25,681

NGHC
 
$
36,465

 
$
24,998

Reciprocal Exchanges
 
2,384

 
683

Net unrealized gains, net of deferred income tax expense
 
38,849

 
25,681

Non-controlling interest
 
(2,384
)
 
(683
)
NGHC net unrealized gains, net of deferred income tax expense
 
$
36,465

 
$
24,998

Period Ended:
 
 
 
 
NGHC change in net unrealized gains, net of deferred income tax expense
 
$
11,467

 
$
17,938




14

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

(e) Gross Unrealized Losses

The tables below summarize the gross unrealized losses on equity securities and fixed maturities by length of time the security has continuously been in an unrealized loss position as of March 31, 2015 and December 31, 2014:

 
 
Less Than 12 Months
 
12 Months or More
 
Total
March 31, 2015
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
Common stock
 
$
38,618

 
$
(4,555
)
 
4

 
$

 
$

 

 
$
38,618

 
$
(4,555
)
Preferred stock
 

 

 

 

 

 

 

 

U.S. Treasury
 
699

 
(1
)
 
2

 

 

 

 
699

 
(1
)
States and political subdivision bonds
 
14,841

 
(185
)
 
33

 
1,722

 
(21
)
 
3

 
16,563

 
(206
)
Foreign government
 
5,506

 
(1,067
)
 
2

 

 

 

 
5,506

 
(1,067
)
Corporate bonds
 
90,193

 
(6,686
)
 
64

 
23,343

 
(3,104
)
 
9

 
113,536

 
(9,790
)
Residential mortgage-backed securities
 
1,458

 
(14
)
 
14

 
1,941

 
(51
)
 
3

 
3,399

 
(65
)
Commercial mortgage-backed securities
 
35,153

 
(585
)
 
13

 

 

 

 
35,153

 
(585
)
Asset-backed securities
 

 

 

 

 

 

 

 

Total
 
$
186,468

 
$
(13,093
)
 
132

 
$
27,006

 
$
(3,176
)
 
15

 
$
213,474

 
$
(16,269
)
NGHC
 
$
135,716

 
$
(12,151
)
 
77

 
$
27,006

 
$
(3,176
)
 
15

 
$
162,722

 
$
(15,327
)
Reciprocal Exchanges
 
50,752

 
(942
)
 
55

 

 

 

 
50,752

 
(942
)
Total
 
$
186,468

 
$
(13,093
)
 
132

 
$
27,006

 
$
(3,176
)
 
15

 
$
213,474

 
$
(16,269
)



 
 
Less Than 12 Months
 
12 Months or More
 
Total
December 31, 2014
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
Common stock
 
$
33,717

 
$
(7,349
)
 
3

 
$

 
$

 

 
$
33,717

 
$
(7,349
)
Preferred stock
 

 

 

 
4,878

 
(125
)
 
1

 
4,878

 
(125
)
U.S. Treasury
 
6,343

 
(3
)
 
5

 

 

 

 
6,343

 
(3
)
States and political subdivision bonds
 
16,320

 
(92
)
 
39

 
8,341

 
(77
)
 
8

 
24,661

 
(169
)
Foreign government
 
5,536

 
(658
)
 
1

 

 

 

 
5,536

 
(658
)
Corporate bonds
 
116,880

 
(5,594
)
 
108

 
23,592

 
(3,105
)
 
10

 
140,472

 
(8,699
)
Residential mortgage-backed securities
 
15,598

 
(34
)
 
17

 
1,975

 
(58
)
 
3

 
17,573

 
(92
)
Commercial mortgage-backed securities
 
33,735

 
(189
)
 
10

 

 

 

 
33,735

 
(189
)
Asset-backed securities
 
4,869

 
(91
)
 
3

 

 

 

 
4,869

 
(91
)
Total
 
$
232,998

 
$
(14,010
)
 
186

 
$
38,786

 
$
(3,365
)
 
22

 
$
271,784

 
$
(17,375
)
NGHC
 
$
142,313

 
$
(12,899
)
 
97

 
$
38,786

 
$
(3,365
)
 
22

 
$
181,099

 
$
(16,264
)
Reciprocal Exchanges
 
90,685

 
(1,111
)
 
89

 

 

 

 
90,685

 
(1,111
)
Total
 
$
232,998

 
$
(14,010
)
 
186

 
$
38,786

 
$
(3,365
)
 
22

 
$
271,784

 
$
(17,375
)


15

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

There were 147 and 208 securities at March 31, 2015 and December 31, 2014, respectively, that account for the gross unrealized loss, none of which are deemed by the Company to be an OTTI. Significant factors influencing the Company’s determination that none of the securities are OTTI included the magnitude of unrealized losses in relation to cost, the nature of the investment 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.

(f) Credit Quality of Investments

The tables below summarize the credit quality of our fixed maturities, securities pledged and preferred stock securities as of March 31, 2015 and December 31, 2014, as rated by Standard & Poor’s.

 
 
NGHC
 
Reciprocal Exchanges
March 31, 2015
 
Cost or Amortized Cost
 
Fair Value
 
Percentage of Fixed Maturities and Preferred Securities
 
Cost or Amortized Cost
 
Fair Value
 
Percentage of Fixed Maturities and Preferred Securities
U.S. Treasury
 
$
18,800

 
$
20,285

 
1.5
%
 
$
3,453

 
$
3,514

 
1.5
%
AAA
 
336,897

 
349,286

 
24.7
%
 
18,014

 
18,035

 
8.4
%
AA, AA+, AA-
 
251,418

 
259,678

 
18.4
%
 
12,125

 
12,400

 
5.8
%
A, A+, A-
 
289,536

 
311,077

 
22.0
%
 
52,055

 
52,745

 
24.5
%
BBB, BBB+, BBB-
 
392,849

 
409,697

 
29.0
%
 
99,722

 
100,995

 
46.9
%
BB+ and lower
 
61,466

 
61,586

 
4.4
%
 
27,683

 
27,746

 
12.9
%
Total
 
$
1,350,966

 
$
1,411,609

 
100.0
%
 
$
213,052

 
$
215,435

 
100.0
%

 
 
NGHC
 
Reciprocal Exchanges
December 31, 2014
 
Cost or Amortized Cost
 
Fair Value
 
Percentage of Fixed Maturities and Preferred Securities
 
Cost or Amortized Cost
 
Fair Value
 
Percentage of Fixed Maturities and Preferred Securities
U.S. Treasury
 
$
19,068

 
$
20,475

 
1.4
%
 
$
18,378

 
$
18,504

 
8.2
%
AAA
 
359,424

 
370,058

 
25.9
%
 
24,956

 
25,027

 
11.1
%
AA, AA+, AA-
 
275,905

 
282,443

 
19.8
%
 

 

 
%
A, A+, A-
 
300,789

 
318,955

 
22.3
%
 
99,754

 
100,412

 
44.5
%
BBB, BBB+, BBB-
 
328,594

 
335,745

 
23.5
%
 
48,440

 
48,486

 
21.5
%
BB+ and lower
 
99,529

 
100,745

 
7.1
%
 
33,345

 
33,127

 
14.7
%
Total
 
$
1,383,309

 
$
1,428,421

 
100.0
%
 
$
224,873

 
$
225,556

 
100.0
%



16

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

The tables below summarize the investment quality of our corporate bond holdings and industry concentrations as of March 31, 2015 and December 31, 2014.

March 31, 2015
 
AAA
 
AA+,
AA,
AA-
 
A+,A,A-
 
BBB+,
BBB,
BBB-
 
BB+ or
Lower
 
Fair
Value
 
% of
Corporate
Bonds
Portfolio
Corporate Bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Institutions
 
1.3
%
 
3.7
%
 
25.8
%
 
10.6
%
 
1.8
%
 
$
387,760

 
43.2
%
Industrials
 
%
 
2.3
%
 
8.8
%
 
33.3
%
 
6.4
%
 
456,180

 
50.8
%
Utilities/Other
 
%
 
%
 
1.0
%
 
4.8
%
 
0.2
%
 
53,681

 
6.0
%
Total
 
1.3
%
 
6.0
%
 
35.6
%
 
48.7
%
 
8.4
%
 
$
897,621

 
100.0
%
NGHC
 
1.3
%
 
5.7
%
 
32.0
%
 
42.7
%
 
6.3
%
 
$
789,737

 
88.0
%
Reciprocal Exchanges
 
%
 
0.3
%
 
3.6
%
 
6.0
%
 
2.1
%
 
107,884

 
12.0
%
Total
 
1.3
%
 
6.0
%
 
35.6
%
 
48.7
%
 
8.4
%
 
$
897,621

 
100.0
%

December 31, 2014
 
AAA
 
AA+,
AA,
AA-
 
A+,A,A-
 
BBB+,
BBB,
BBB-
 
BB+ or
Lower
 
Fair
Value
 
% of
Corporate
Bonds
Portfolio
Corporate Bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Institutions
 
1.4
%
 
3.6
%
 
26.9
%
 
8.9
%
 
2.5
%
 
$
376,236

 
43.3
%
Industrials
 
%
 
2.4
%
 
9.4
%
 
31.7
%
 
5.9
%
 
427,592

 
49.4
%
Utilities/Other
 
%
 
%
 
2.2
%
 
3.1
%
 
2.0
%
 
63,434

 
7.3
%
Total
 
1.4
%
 
6.0
%
 
38.5
%
 
43.7
%
 
10.4
%
 
$
867,262

 
100.0
%
NGHC
 
1.4
%
 
6.0
%
 
34.0
%
 
38.6
%
 
8.3
%
 
$
762,822

 
88.3
%
Reciprocal Exchanges
 
%
 
%
 
4.5
%
 
5.1
%
 
2.1
%
 
104,440

 
11.7
%
Total
 
1.4
%
 
6.0
%
 
38.5
%
 
43.7