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 September 30, 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 November 5, 2015, the number of common shares of the registrant outstanding was 105,434,793.





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)
 
September 30,
2015
 
December 31,
2014
ASSETS
(unaudited)
 
(audited)
Investments - NGHC
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $1,621,363 and $1,330,760)
$
1,631,552

 
$
1,374,087

Equity securities, available-for-sale, at fair value (cost $67,113 and $52,272)
61,928

 
45,802

Short-term investments
5,000

 
50

Equity investment in unconsolidated subsidiaries
233,538

 
155,900

Other investments
6,041

 
4,764

Securities pledged (amortized cost $42,806 and $47,546)
43,711

 
49,456

Investments - Exchanges
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $290,073 and $222,121)
285,705

 
222,739

Equity securities, available-for-sale, at fair value (cost $1,501 and $2,752)
1,544

 
2,817

Short-term investments
4,030

 
10,490

Total investments
2,273,049

 
1,866,105

Cash and cash equivalents (Exchanges - $11,765 and $9,437)
278,896

 
132,615

Accrued investment income (Exchanges - $2,287 and $1,898)
16,658

 
14,451

Premiums and other receivables, net (Related parties $68,219 and $64,129) (Exchanges - $62,846 and $58,238)
723,378

 
647,443

Deferred acquisition costs (Exchanges - $27,154 and $4,485)
152,576

 
125,999

Reinsurance recoverable on unpaid losses (Related parties - $54,458 and $88,970) (Exchanges - $64,848 and $23,583)
893,272

 
911,798

Prepaid reinsurance premiums (Exchanges - $62,577 and $26,924)
131,468

 
102,761

Income tax receivable (Exchanges - $1,884 and $0)
1,884

 

Notes receivable from related party
127,188

 
125,000

Due from affiliate (Exchanges - $8,242 and $0)
25,752

 
5,129

Premises and equipment, net
31,869

 
30,583

Intangible assets, net (Exchanges - $6,212 and $11,433)
266,859

 
248,837

Goodwill
125,246

 
70,764

Prepaid and other assets (Exchanges - $5,895 and $71)
36,238

 
43,231

Total assets
$
5,084,333

 
$
4,324,716

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Unpaid loss and loss adjustment expense reserves (Exchanges - $136,777 and $111,848)
$
1,565,318

 
$
1,562,153

Unearned premiums (Exchanges - $151,163 and $119,998)
974,742

 
864,436

Unearned service contract and other revenue
12,871

 
8,527

Reinsurance payable (Related parties - $26,779 and $41,965) (Exchanges - $17,243 and $13,811)
92,812

 
111,641

Accounts payable and accrued expenses (Related parties - $45,707 and $38,576) (Exchanges - $42,209 and $17,691)
228,982

 
207,121

Due to affiliate (Exchanges - $0 and $1,552)

 
1,552

Securities sold under agreements to repurchase, at contract value
41,441

 
46,804

Deferred tax liability (Exchanges - $40,036 and $38,402)
67,714

 
67,535

Income tax payable (Exchanges - $0 and $1,059)
734

 
30,591

Notes payable (Exchanges owed to related party - $54,455 and $48,374)
401,486

 
299,082

Other liabilities (Exchanges - $59,065 and $5,710)
167,677

 
51,824

Total liabilities
3,553,777

 
3,251,266


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 105,433,893 shares - 2015; authorized 150,000,000 shares, issued and outstanding 93,427,382 shares - 2014
1,054

 
934

Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,365,000 shares - 2015; authorized 10,000,000 shares, issued and outstanding 2,200,000 shares - 2014. Aggregate liquidation preference $220,000 - 2015, $55,000 - 2014
220,000

 
55,000

Additional paid-in capital
896,700

 
690,736

Accumulated other comprehensive income
2,446

 
20,192

Retained earnings
401,527

 
292,832

Total National General Holdings Corp. Stockholders' Equity
1,521,727

 
1,059,694

Non-controlling interest (Exchanges - $8,675 and $13,670)
8,829

 
13,756

Total stockholders’ equity
1,530,556

 
1,073,450

Total liabilities and stockholders' equity
$
5,084,333

 
$
4,324,716


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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Premium income:
 
 
 
 
 
 
 
Gross premium written
$
626,685

 
$
497,595

 
$
1,845,821

 
$
1,612,210

Ceded premiums (related parties - three months $451; $1,180 and nine months $1,181; $44,147)
(101,046
)
 
(66,025
)
 
(310,747
)
 
(194,599
)
Net premium written
525,639

 
431,570

 
1,535,074

 
1,417,611

Change in unearned premium
(22,378
)
 
6,836

 
(83,832
)
 
(229,887
)
Net earned premium
503,261

 
438,406

 
1,451,242

 
1,187,724

Ceding commission income
12,150

 
705

 
27,200

 
7,632

Service and fee income
60,907

 
45,894

 
173,335

 
121,086

Net investment income
18,472

 
13,697

 
52,955

 
34,232

Net realized loss on investments
(4,594
)
 
(1,118
)
 
(3,018
)
 
(1,118
)
Other revenue
(157
)
 
373

 
(327
)
 
480

Total revenues
590,039

 
497,957

 
1,701,387

 
1,350,036

Expenses:
 
 
 
 
 
 
 
Loss and loss adjustment expense
302,259

 
275,019

 
895,774

 
755,970

Acquisition costs and other underwriting expenses
108,744

 
83,915

 
295,131

 
232,706

General and administrative expenses
118,581

 
90,128

 
343,426

 
243,386

Interest expense
9,428

 
4,709

 
27,109

 
7,821

Total expenses
539,012

 
453,771

 
1,561,440

 
1,239,883

Income before provision for income taxes and equity in earnings (losses) of unconsolidated subsidiaries
51,027

 
44,186

 
139,947

 
110,153

Provision for income taxes
8,614

 
10,026

 
24,892

 
17,786

Income before equity in earnings (losses) of unconsolidated subsidiaries
42,413

 
34,160

 
115,055

 
92,367

Equity in earnings (losses) of unconsolidated subsidiaries
2,288

 
(1,611
)
 
8,900

 
(3,098
)
Net income
44,701

 
32,549

 
123,955

 
89,269

Less: Net loss (income) attributable to non-controlling interest
(1,588
)
 
770

 
453

 
776

Net income attributable to National General Holdings Corp. ("NGHC")
$
43,113

 
$
33,319

 
$
124,408

 
$
90,045

Dividends on preferred stock
(4,125
)
 
(1,260
)
 
(9,900
)
 
(1,260
)
Net income attributable to NGHC common stockholders
$
38,988

 
$
32,059

 
$
114,508

 
$
88,785

Earnings per common share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.39

 
$
0.34

 
$
1.19

 
$
0.98

Diluted earnings per share
$
0.38

 
$
0.34

 
$
1.16

 
$
0.96

Dividends declared per common share
$
0.02

 
$
0.01

 
$
0.06

 
$
0.03

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
100,360,687

 
93,359,265

 
95,877,178

 
90,853,536

Diluted
102,940,728

 
95,663,429

 
98,314,808

 
92,615,198

Net realized loss on investments:
 
 
 
 
 
 
 
Other-than-temporary impairment loss
$
(6,009
)
 
$

 
$
(8,492
)
 
$

Portion of loss recognized in other comprehensive income

 

 

 

Net impairment losses recognized in earnings
(6,009
)
 

 
(8,492
)
 

Other net realized gain (loss) on investments
1,415

 
(1,118
)
 
5,474

 
(1,118
)
Net realized loss on investments
$
(4,594
)
 
$
(1,118
)
 
$
(3,018
)
 
$
(1,118
)

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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
44,701

 
$
32,549

 
$
123,955

 
$
89,269

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(208
)
 
(2,785
)
 
3,544

 
(3,227
)
Gross unrealized holding gain (loss) on securities, net of tax of $(9,906) and $(4,995) for the three months ended September 30, 2015 and 2014, respectively, and $(14,433) and $8,400 for the nine months ended September 30, 2015 and 2014, respectively.
(15,681
)
 
(9,277
)
 
(26,746
)
 
15,601

Reclassification adjustments for investment gain/loss included in net income:
 
 
 
 
 
 
 
Other-than-temporary impairment loss, net of tax of $2,103 and $0 for the three months ended September 30, 2015 and 2014, respectively, and $2,972 and $0 for the nine months ended September 30, 2015 and 2014, respectively.
3,906

 

 
5,520

 

Other net realized (gain) loss on investments, net of tax of $(495) and $578 for the three months ended September 30, 2015 and 2014, respectively, and $(1,916) and $578 for the nine months ended September 30, 2015 and 2014, respectively.
(920
)
 
1,074

 
(3,558
)
 
1,074

Other comprehensive income (loss), net of tax
(12,903
)
 
(10,988
)
 
(21,240
)
 
13,448

Comprehensive income
31,798

 
21,561

 
102,715

 
102,717

Less: Comprehensive loss (income) attributable to non-controlling interest
(1,232
)
 
770

 
3,947

 
776

Comprehensive income attributable to NGHC
$
30,566

 
$
22,331

 
$
106,662

 
$
103,493




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)

 
Nine Months Ended September 30, 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 (loss)

 

 

 

 

 
124,408

 

 
(453
)
 
123,955

Foreign currency translation adjustment, net of tax

 

 

 

 

 

 
3,544

 

 
3,544

Change in unrealized losses on investments, net of tax

 

 

 

 

 

 
(21,290
)
 
(3,494
)
 
(24,784
)
Change in non-controlling interest

 

 

 

 

 

 

 
(980
)
 
(980
)
Preferred stock dividends

 

 

 

 

 
(9,900
)
 

 

 
(9,900
)
Common stock dividends

 

 

 

 

 
(5,813
)
 

 

 
(5,813
)
Issuance of common stock
11,500,000

 
115

 

 

 
210,527

 

 

 

 
210,642

Issuance of preferred stock

 

 
165,000

 
165,000

 
(5,448
)
 

 

 

 
159,552

Common stock issued under employee stock plans and exercises of stock options
506,511

 
5

 

 

 
1,667

 

 

 

 
1,672

Stock-based compensation

 

 

 

 
(782
)
 

 

 

 
(782
)
Balance September 30, 2015
105,433,893

 
$
1,054

 
2,365,000

 
$
220,000

 
$
896,700

 
$
401,527

 
$
2,446

 
$
8,829

 
$
1,530,556


 
Nine Months Ended September 30, 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 (loss)

 

 

 

 

 
90,045

 

 
(776
)
 
89,269

Foreign currency translation adjustment, net of tax

 

 

 

 

 

 
(3,227
)
 

 
(3,227
)
Change in unrealized gains on investments, net of tax

 

 

 

 

 

 
16,675

 

 
16,675

Reciprocal Exchanges' equity on September 15, 2014, date of consolidation

 

 

 

 

 

 

 
37,341

 
37,341

Preferred stock dividends

 

 

 

 

 
(1,260
)
 

 

 
(1,260
)
Common stock dividends

 

 

 

 

 
(2,796
)
 

 

 
(2,796
)
Issuance of common stock
13,570,000

 
136

 

 

 
177,693

 

 

 

 
177,829

Issuance of preferred stock

 

 
2,200,000

 
55,000

 
(1,836
)
 

 

 

 
53,164

Capital contributions

 

 

 

 
75,404

 

 

 

 
75,404

Exercises of stock options
106,412

 
1

 

 

 
838

 

 

 

 
839

Stock-based compensation

 

 

 

 
1,803

 

 

 

 
1,803

Balance September 30, 2014
93,408,212

 
$
934

 
2,200,000

 
$
55,000

 
$
690,908

 
$
283,541

 
$
20,873

 
$
36,652

 
$
1,087,908




See accompanying notes to unaudited condensed consolidated financial statements.
5



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
123,955

 
$
89,269

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
22,134

 
19,716

Net amortization of premium on fixed maturities
4,179

 
2,338

Net amortization of discount on debt
6,298

 

Stock compensation expense
3,444

 
1,803

Equity in (earnings) losses of unconsolidated subsidiaries
(8,900
)
 
3,098

Other net realized loss (gain) on investments
(5,474
)
 
1,118

Other-than-temporary impairment loss
8,492

 

Realized gain on premises and equipment disposals

 
(23
)
Bad debt expense
16,645

 
22,624

Foreign currency translation adjustment, net of tax
(1,438
)
 
(3,227
)
Changes in assets and liabilities:
 
 
 
Accrued investment income
(4,208
)
 
(1,928
)
Premiums and other receivables
(92,274
)
 
(232,823
)
Deferred acquisition costs, net
(26,577
)
 
(51,679
)
Reinsurance recoverable on unpaid losses
18,526

 
77,659

Prepaid reinsurance premiums
(28,707
)
 
15,556

Prepaid expenses and other assets
7,158

 
(2,803
)
Unpaid loss and loss adjustment expense reserves
3,165

 
97,825

Unearned premiums
110,306

 
210,558

Unearned service contract and other revenue
(1,186
)
 
1,630

Reinsurance payable
(18,829
)
 
(27,235
)
Accounts payable
526

 
116,331

Income tax payable
(30,244
)
 
17,490

Deferred tax liability
2,743

 
(43,812
)
Other liabilities
101,530

 
720

Net cash provided by operating activities
211,264

 
314,205

Cash flows from investing activities:
 
 
 
Investment in unconsolidated subsidiaries
(68,859
)
 
(16,690
)
Distributions from unconsolidated subsidiaries
2,059

 

Purchases of other investments
(3,474
)
 
(1,297
)
Acquisition of consolidated subsidiaries, net of cash
(61,413
)
 
(37,064
)
Notes receivable from related party

 
(125,364
)
Purchases of equity securities
(11,085
)
 
(36,755
)
Proceeds from sale of equity securities
2,339

 
1,703

Purchases of short term investments
(82,162
)
 
(124,000
)
Proceeds from sale of short-term investments
83,672

 
124,830

Purchases of premises and equipment
(9,584
)
 
(7,048
)
Proceeds from the sale of premises and equipment

 
794

Purchases of fixed maturities
(642,838
)
 
(742,702
)
Proceeds from sale and maturity of fixed maturities
276,697

 
313,373

Net cash used in investing activities
(514,648
)
 
(650,220
)

See accompanying notes to unaudited condensed consolidated financial statements.
6



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

Cash flows from financing activities:
 
 
 
Securities sold under agreements to repurchase, net
(5,363
)
 
(14,267
)
Notes payable repayments
(631
)
 
(84,436
)
Proceeds from notes payable
96,550

 
250,000

Issuance of common stock, net of fees
210,642

 
177,829

Issuance of preferred stock, net of fees
159,552

 
53,164

Exercises of stock options
1,672

 
839

Dividends paid to preferred shareholders
(6,806
)
 

Dividends paid to common shareholders
(5,610
)
 
(2,796
)
Net cash provided by financing activities
450,006

 
380,333

Effect of exchange rate changes on cash and cash equivalents
(341
)
 

Net increase in cash and cash equivalents
146,281

 
44,318

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

 
73,823

Cash and cash equivalents, end of the period
$
278,896

 
$
118,141

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
52,700

 
$
39,031

Cash paid for interest
8,524

 
9,082

Non-cash capital contribution

 
75,404


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 September 30, 2015 and for the three and nine months ended September 30, 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 nine months ended September 30, 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 June 2014, the FASB issued ASU 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. ASU 2014-11 requires new disclosures for certain transactions comprised of (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. Such disclosures include: (a) the carrying amount of assets derecognized (sold) as of the date of derecognition; (b) the amount of gross proceeds received by the transferor at the time of derecognition for the assets derecognized; (c) the information about the transferor’s ongoing exposure to the economic return on the transferred financial assets; and (d) the amounts that are reported in the statement of financial position arising from the transaction, such as those represented by derivative contracts. ASU 2014-11 also requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. Such disclosures include: (i) a disaggregation of the gross obligation by the class of collateral pledged; (ii) the remaining contractual time to maturity of the agreements; and (iii) a discussion of the potential risks associated with the agreements and the related collateral pledged including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed. For public entities, the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for all annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. All other amendments in this Update are effective for public entities for the first interim or annual period beginning after December 15, 2014. The disclosure requirements are not required to be presented for comparative periods before the effective date. The Company adopted ASU 2014-11 on April 1, 2015 and the effects of adoption were limited to the expanded disclosure requirements about the nature of collateral pledged in the Company's repurchase agreements which are accounted for as secured borrowings. The implementation of the standard did not have an impact on the Company’s results of operations, financial position or liquidity.

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

9

NATIONAL GENERAL HOLDINGS CORP.

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

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 Company adopted ASU 2015-03 on April 1, 2015 which resulted in the reclassification of $4,923 of debt issuance costs from Prepaid and other assets to Notes payable in the Company's Condensed Consolidated Balance Sheet as of December 31, 2014 (see Note 10, "Debt").

In May 2015, the FASB issued ASU 2015-09, "Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts" to expand existing GAAP disclosure requirements for short-duration contracts regarding the liability for unpaid claims and claim adjustment expenses. The amendments in ASU 2015-09 are intended to increase the transparency of significant estimates made in measuring those liabilities, improve comparability by requiring consistent disclosure of information, and provide financial statement users with additional information to facilitate analysis of the amount, timing, and uncertainty of cash flows arising from contracts issued by insurance entities and the development of loss reserve estimates. Specifically, the amendments require the following information for annual reporting periods about the liability for unpaid claims and claim adjustment expenses: (1) incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding; (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position; (3) the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses for each accident year presented of incurred claims development information, accompanied by a description of reserving methodologies (as well as any changes to those methodologies); (4) quantitative information about claim frequency (unless it is impracticable to do so) for each accident year presented of incurred claims development information, accompanied by a qualitative description of methodologies used for determining claim frequency information (as well as any changes to these methodologies); and (5) the average annual percentage payout of incurred claims by age (that is, history of claims duration) for the same number of accident years as presented in (3) and (4) above for all claims except health insurance claims. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a roll forward of the liability for unpaid claims and claim adjustment expenses. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. Additional disclosures about liabilities for unpaid claims and claim adjustment expenses reported at present value include the following: (1) the aggregate amount of discount for the time value of money deducted to derive the liability for unpaid claims and claim adjustment expenses for each period presented in the statement of financial position; (2) the amount of interest accretion recognized for each period presented in the statement of income; and (3) the line item(s) in the statement of income in which the interest accretion is classified. The amendments in ASU 2015-09 are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. In the year of initial application of the amendments in ASU 2015-09, an insurance entity need not disclose information about claims development for a particular category that occurred earlier than five years before the end of the first financial reporting year in which the amendments are first applied if it is impracticable to obtain the information required to satisfy the disclosure requirement. For each subsequent year following the year of initial application, the minimum required number of years will increase by at least 1 but need not exceed 10 years, including the most recent period presented in the statement of financial position. Early application of the amendments in ASU 2015-09 is permitted. The amendments should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The adoption of ASU 2015-09 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.

In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)", which provides guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient as well as limits certain disclosure requirements only to investments for which the entity elects to measure the fair value using that practical expedient. The updated guidance is effective for reporting periods beginning after December 15, 2015, and should be applied retrospectively for all periods presented. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" which defers the effective date of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the

10

NATIONAL GENERAL HOLDINGS CORP.

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

guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments" which applies to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in ASU 2015-16 require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, and should be applied prospectively to adjustments to provisional amounts that occur after the effective with earlier application permitted for financial statements that have not been issued. The only disclosures required at transition will be the nature of and reason for the change in accounting principle. An entity should disclose that information in the first annual period of adoption and in the interim periods within the first annual period if there is a measurement-period adjustment during the first annual period in which the changes are effective. The adoption of ASU 2015-16 is not expected to have a material 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 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.


11

NATIONAL GENERAL HOLDINGS CORP.

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

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 September 30, 2015, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $52,498, $50,934 and $1,564, respectively. For the three months ended September 30, 2014, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $6,751, $7,496 and $(745), respectively. For the nine months ended September 30, 2015, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $136,702, $137,223 and $(521), respectively. For the nine months ended September 30, 2014, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $6,751, $7,496 and $(745), respectively.

For the three months ended September 30, 2015 and 2014, the Company earned service and fee income from the Reciprocal Exchanges in the amount of $11,194 and $0, respectively. For the nine months ended September 30, 2015 and 2014, the Company earned service and fee income from the Reciprocal Exchanges in the amount of $30,504 and $0, respectively. Such amounts are eliminated in our consolidated earnings.



12

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:

September 30, 2015
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
57,166

 
$
554

 
$
(5,665
)
 
$
52,055

   Preferred stock
 
11,448

 
43

 
(74
)
 
11,417

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury
 
19,406

 
1,254

 
(3
)
 
20,657

   Federal agencies
 
1,945

 
31

 

 
1,976

   States and political subdivision bonds
 
188,823

 
4,248

 
(793
)
 
192,278

   Foreign government
 
29,412

 
418

 
(148
)
 
29,682

   Corporate bonds
 
1,044,046

 
28,028

 
(33,113
)
 
1,038,961

   Residential mortgage-backed securities
 
408,984

 
11,044

 
(84
)
 
419,944

   Commercial mortgage-backed securities
 
135,961

 
1,654

 
(3,566
)
 
134,049

   Asset-backed securities
 
4,981

 
3

 

 
4,984

   Structured securities
 
120,684

 
39

 
(2,286
)
 
118,437

Total
 
$
2,022,856

 
$
47,316

 
$
(45,732
)
 
$
2,024,440

Less: Securities pledged
 
42,806

 
905

 

 
43,711

Total net of Securities pledged
 
$
1,980,050

 
$
46,411

 
$
(45,732
)
 
$
1,980,729

NGHC
 
$
1,731,282

 
$
45,923

 
$
(40,014
)
 
$
1,737,191

Reciprocal Exchanges
 
291,574

 
1,393

 
(5,718
)
 
287,249

Total
 
$
2,022,856

 
$
47,316

 
$
(45,732
)
 
$
2,024,440



13

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 September 30, 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
September 30, 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
 
$
9,756

 
$
10,116

 
$
500

 
$
500

 
$
10,256

 
$
10,616

Due after one year through five years
 
248,555

 
256,096

 
23,455

 
22,991

 
272,010

 
279,087

Due after five years through ten years
 
719,103

 
716,196

 
140,508

 
139,001

 
859,611

 
855,197

Due after ten years
 
224,397

 
219,252

 
43,023

 
42,823

 
267,420

 
262,075

Mortgage-backed securities
 
462,358

 
473,603

 
82,587

 
80,390

 
544,945

 
553,993

Total
 
$
1,664,169

 
$
1,675,263

 
$
290,073

 
$
285,705

 
$
1,954,242

 
$
1,960,968




14

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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest
 
 
 
 
 
 
 
 
Cash and short term investments
 
$
2

 
$
11

 
$
11

 
$
28

Equity securities
 
102

 

 
299

 

Fixed maturities
 
17,321

 
13,858

 
48,243

 
35,537

Investment Income
 
17,425

 
13,869

 
48,553

 
35,565

Investment expense
 
(1,110
)
 
(106
)
 
(2,381
)
 
(1,135
)
Repurchase Agreements interest income (expense)
 
78

 
(66
)
 
(25
)
 
(198
)
Other Income (1)
 
2,079

 

 
6,808

 

Net Investment Income
 
$
18,472

 
$
13,697

 
$
52,955

 
$
34,232

NGHC
 
$
16,140

 
$
13,697

 
$
46,403

 
$
34,232

Reciprocal Exchanges
 
2,332

 

 
6,552

 

Net Investment Income
 
$
18,472

 
$
13,697

 
$
52,955

 
$
34,232


(1) Includes interest income of $2,115 and $6,514 for the three and nine months ended September 30, 2015, respectively, 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 nine months ended September 30, 2015 and 2014 were $148,508 and $193,749, respectively. For the three and nine months ended September 30, 2015, the Company recognized an other-than-temporary impairment ("OTTI") loss of $6,009 and $8,492, respectively, on investments based on our qualitative and quantitative review.

The tables below indicate the gross realized gains and losses (including any OTTI) for the three and nine months ended September 30, 2015 and 2014.

Three Months Ended September 30, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$

 
$
(55
)
 
$
(55
)
Fixed maturities
 
1,579

 
(109
)
 
1,470

OTTI
 

 
(6,009
)
 
(6,009
)
Total gross realized gains and losses
 
$
1,579

 
$
(6,173
)
 
$
(4,594
)
NGHC
 
$
1,349

 
$
(6,067
)
 
$
(4,718
)
Reciprocal Exchanges
 
230

 
(106
)
 
124

Total gross realized gains and losses
 
$
1,579

 
$
(6,173
)
 
$
(4,594
)

15

NATIONAL GENERAL HOLDINGS CORP.

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

Three Months Ended September 30, 2014
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$

 
$
(505
)
 
$
(505
)
Fixed maturities
 
152

 
(204
)
 
(52
)
Other
 

 
(561
)
 
(561
)
Total gross realized gains and losses
 
$
152

 
$
(1,270
)
 
$
(1,118
)
NGHC
 
$
152

 
$
(1,270
)
 
$
(1,118
)
Reciprocal Exchanges
 

 

 

Total gross realized gains and losses
 
$
152

 
$
(1,270
)
 
$
(1,118
)
Nine Months Ended September 30, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$
5

 
$
(55
)
 
$
(50
)
Fixed maturities
 
6,669

 
(1,145
)
 
5,524

OTTI
 

 
(8,492
)
 
(8,492
)
Total gross realized gains and losses
 
$
6,674

 
$
(9,692
)
 
$
(3,018
)
NGHC
 
$
5,537

 
$
(8,826
)
 
$
(3,289
)
Reciprocal Exchanges
 
1,137

 
(866
)
 
271

Total gross realized gains and losses
 
$
6,674

 
$
(9,692
)
 
$
(3,018
)
Nine Months Ended September 30, 2014
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$

 
$
(505
)
 
$
(505
)
Fixed maturities
 
152

 
(204
)
 
(52
)
Other
 

 
(561
)
 
(561
)
Total gross realized gains and losses
 
$
152

 
$
(1,270
)
 
$
(1,118
)
NGHC
 
$
152

 
$
(1,270
)
 
$
(1,118
)
Reciprocal Exchanges
 

 

 

Total gross realized gains and losses
 
$
152

 
$
(1,270
)
 
$
(1,118
)



16

NATIONAL GENERAL HOLDINGS CORP.

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

(d) Unrealized Gains and Losses

Unrealized gains (losses) on investments as of September 30, 2015 and December 31, 2014 consisted of the following:

 
 
September 30, 2015
 
December 31, 2014
Net unrealized loss on common stock
 
$
(5,111
)
 
$
(6,345
)
Net unrealized loss on preferred stock
 
(31
)
 
(60
)
Net unrealized gain on fixed maturities
 
6,726

 
45,855

Net unrealized gain (loss) on other
 
(278
)
 
18

Deferred income tax expense
 
(409
)
 
(13,787
)
Net unrealized gains, net of deferred income tax expense
 
$
897

 
$
25,681

NGHC
 
$
3,708

 
$
24,998

Reciprocal Exchanges
 
(2,811
)
 
683

Net unrealized gains, net of deferred income tax expense
 
897

 
25,681

Non-controlling interest
 
2,811

 
(683
)
NGHC net unrealized gains, net of deferred income tax expense
 
$
3,708

 
$
24,998

Period Ended:
 
 
 
 
NGHC year-to-date change in net unrealized gains, net of deferred income tax expense
 
$
(21,290
)
 
$
17,938



(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 September 30, 2015 and December 31, 2014:

 
 
Less Than 12 Months
 
12 Months or More
 
Total
September 30, 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
 
$
42,260

 
$
(5,643
)
 
7

 
$
136

 
$
(22
)
 
2

 
$
42,396

 
$
(5,665
)
Preferred stock
 
4,952

 
(74
)
 
1

 

 

 

 
4,952

 
(74
)
U.S. Treasury
 
501

 
(3
)
 
2

 

 

 

 
501

 
(3
)
States and political subdivision bonds
 
21,855

 
(643
)
 
23

 
5,879

 
(150
)
 
12

 
27,734

 
(793
)
Foreign government
 
4,444

 
(148
)
 
2

 

 

 

 
4,444

 
(148
)
Corporate bonds
 
335,634

 
(27,477
)
 
193

 
24,231

 
(5,636
)
 
13

 
359,865

 
(33,113
)
Residential mortgage-backed securities
 
9,523

 
(44
)
 
14

 
2,036

 
(40
)
 
8

 
11,559

 
(84
)
Commercial mortgage-backed securities
 
73,727

 
(3,566
)
 
29

 

 

 

 
73,727

 
(3,566
)
Structured securities
 
92,372

 
(2,286
)
 
44

 

 

 

 
92,372

 
(2,286
)
Total
 
$
585,268

 
$
(39,884
)
 
315

 
$
32,282

 
$
(5,848
)
 
35

 
$
617,550

 
$
(45,732
)
NGHC
 
$
435,365

 
$
(34,166
)
 
177

 
$
32,282

 
$
(5,848
)
 
35

 
$
467,647

 
$
(40,014
)
Reciprocal Exchanges
 
149,903

 
(5,718
)
 
138

 

 

 

 
149,903

 
(5,718
)
Total
 
$
585,268

 
$
(39,884
)
 
315

 
$
32,282

 
$
(5,848
)
 
35

 
$
617,550

 
$
(45,732
)

17

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, 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 g