SEC Document

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, 2016

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 x
 
Accelerated Filer o
 
Non-Accelerated Filer o
(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 5, 2016, the number of common shares of the registrant outstanding was 105,714,916.





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,
2016
 
December 31,
2015
ASSETS
(unaudited)
 
(audited)
Investments - NGHC
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $1,990,919 and $2,081,456)
$
2,016,391

 
$
2,063,051

Equity securities, available-for-sale, at fair value (cost $54,668 and $63,303)
38,038

 
57,216

Short-term investments
2,440

 
1,528

Equity investment in unconsolidated subsidiaries
243,005

 
234,948

Other investments
54,090

 
13,031

Securities pledged (amortized cost $126,482 and $54,955)
129,097

 
55,394

Investments - Exchanges
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $255,013 and $244,069)
255,013

 
238,969

Equity securities, available-for-sale, at fair value (cost $588 and $1,501)
588

 
1,574

Short-term investments

 
1,999

Total investments
2,738,662

 
2,667,710

Cash and cash equivalents (Exchanges - $2,673 and $8,393)
274,749

 
282,277

Accrued investment income (Exchanges - $2,658 and $2,347)
21,249

 
20,402

Premiums and other receivables, net (Related parties $27,974 and $62,306) (Exchanges - $52,922 and $56,194)
886,417

 
758,633

Deferred acquisition costs (Exchanges - $0 and $23,803)
145,155

 
160,531

Reinsurance recoverable on unpaid losses (Related parties - $37,412 and $42,774) (Exchanges - $43,401 and $39,085)
837,886

 
833,176

Prepaid reinsurance premiums (Exchanges - $59,706 and $61,730)
132,157

 
128,343

Income tax receivable (Exchanges - $300 and $300)
300

 
300

Notes receivable from related party
127,188

 
125,057

Due from affiliate (Exchanges - $11,703 and $12,060)
16,880

 
41,536

Premises and equipment, net (Exchanges - $2,386 and $332)
69,082

 
42,931

Intangible assets, net (Exchanges - $32,638 and $4,825)
371,104

 
348,898

Goodwill
119,553

 
112,414

Prepaid and other assets (Exchanges - $187 and $93)
43,859

 
41,184

Total assets
$
5,784,241

 
$
5,563,392

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Unpaid loss and loss adjustment expense reserves (Exchanges - $137,093 and $132,392)
$
1,783,533

 
$
1,755,624

Unearned premiums (Exchanges - $143,194 and $146,186)
1,288,024

 
1,192,499

Unearned service contract and other revenue
28,342

 
12,504

Reinsurance payable (Related parties - $30,964 and $31,923) (Exchanges - $11,092 and $14,357)
82,462

 
69,172

Accounts payable and accrued expenses (Related parties - $41,849 and $51,755) (Exchanges - $6,972 and $19,845)
305,277

 
284,902

Securities sold under agreements to repurchase, at contract value
114,196

 
52,484

Deferred tax liability (Exchanges - $23,716 and $32,724)
7,043

 
12,247

Income tax payable
28,052

 
5,593

Notes payable (Exchanges owed to related party - $0 and $45,476)
446,244

 
491,537

Other liabilities (Exchanges - $37,550 and $38,105)
94,969

 
150,190

Total liabilities
4,178,142

 
4,026,752


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 105,714,916 shares - 2016; authorized 150,000,000 shares, issued and outstanding 105,554,331 shares - 2015
1,057

 
1,056

Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,365,000 shares - 2016; authorized 10,000,000 shares, issued and outstanding 2,365,000 shares - 2015. Aggregate liquidation preference $220,000 - 2016, $220,000 - 2015
220,000

 
220,000

Additional paid-in capital
903,933

 
900,114

Accumulated other comprehensive income (loss):
 
 
 
Unrealized foreign currency translation adjustments
(2,914
)
 
(3,780
)
Unrealized gains (losses) on investments
7,448

 
(15,634
)
Total accumulated other comprehensive income (loss)
4,534

 
(19,414
)
Retained earnings
461,574

 
412,044

Total National General Holdings Corp. Stockholders' Equity
1,591,098

 
1,513,800

Non-controlling interest (Exchanges - $14,768 and $22,619)
15,001

 
22,840

Total stockholders’ equity
1,606,099

 
1,536,640

Total liabilities and stockholders' equity
$
5,784,241

 
$
5,563,392


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,
 
 
2016
 
2015
Revenues:
 
 
 
 
Premium income:
 
 
 
 
Gross premium written
 
$
816,194

 
$
643,455

Ceded premiums (related parties - $408 and $348, respectively)
 
(71,607
)
 
(113,430
)
Net premium written
 
744,587

 
530,025

Change in unearned premium
 
(89,667
)
 
(50,860
)
Net earned premium
 
654,920

 
479,165

Ceding commission income
 
(1,895
)
 
5,080

Service and fee income
 
96,944

 
54,870

Net investment income
 
21,670

 
16,148

Net realized gain on investments
 
3,617

 
1,187

Other revenue
 
701

 
1,245

Total revenues
 
775,957

 
557,695

Expenses:
 
 
 
 
Loss and loss adjustment expense
 
409,050

 
306,686

Acquisition costs and other underwriting expenses
 
112,899

 
89,885

General and administrative expenses
 
176,627

 
105,687

Interest expense
 
9,141

 
9,080

Total expenses
 
707,717

 
511,338

Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
 
68,240

 
46,357

Provision for income taxes
 
18,083

 
8,387

Income before equity in earnings of unconsolidated subsidiaries
 
50,157

 
37,970

Equity in earnings of unconsolidated subsidiaries
 
6,682

 
4,958

Net income
 
56,839

 
42,928

Less: Net loss (income) attributable to non-controlling interest
 
(12
)
 
(160
)
Net income attributable to National General Holdings Corp. ("NGHC")
 
$
56,827

 
$
42,768

Dividends on preferred stock
 
(4,125
)
 
(1,031
)
Net income attributable to NGHC common stockholders
 
$
52,702

 
$
41,737

Earnings per common share:
 
 
 
 
Basic earnings per share
 
$
0.50

 
$
0.45

Diluted earnings per share
 
$
0.49

 
$
0.43

Dividends declared per common share
 
$
0.03

 
$
0.02

Weighted average common shares outstanding:
 
 
 
 
Basic
 
105,597,594

 
93,454,236

Diluted
 
108,266,508

 
96,087,952

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
 
3,617

 
2,203

Net realized gain on investments
 
$
3,617

 
$
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,
 
 
2016
 
2015
Net income
 
$
56,839

 
$
42,928

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustment
 
866

 
1,024

Gross unrealized holding gain on securities, net of tax of $13,695 and $5,990 for the three months ended March 31, 2016 and 2015, respectively
 
25,433

 
14,355

Reclassification adjustments for investment gain/loss included in net income:
 
 
 
 
Other-than-temporary impairment loss, net of tax of $0 and $0 for the three months ended March 31, 2016 and 2015, respectively
 

 
1,016

Other net realized gain on investments, net of tax of ($1,266) and $0 for the three months ended March 31, 2016 and 2015, respectively
 
(2,351
)
 
(2,203
)
Other comprehensive income, net of tax
 
23,948

 
14,192

Comprehensive income
 
80,787

 
57,120

Less: Comprehensive loss (income) attributable to non-controlling interest
 
(12
)
 
(1,861
)
Comprehensive income attributable to NGHC
 
$
80,775

 
$
55,259




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, 2016
 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Non-controlling Interest
 
Total
Balance January 1, 2016
105,554,331

 
$
1,056

 
2,365,000

 
$
220,000

 
$
900,114

 
$
412,044

 
$
(19,414
)
 
$
22,840

 
$
1,536,640

Cumulative effect adjustment of change in accounting principle

 

 

 

 

 

 

 
(22,619
)
 
(22,619
)
Net income

 

 

 

 

 
56,827

 

 
12

 
56,839

Foreign currency translation adjustment, net of tax

 

 

 

 

 

 
866

 

 
866

Change in unrealized gain on investments, net of tax

 

 

 

 

 

 
23,082

 

 
23,082

Reciprocal Exchanges' equity on March 31, 2016, date of consolidation

 

 

 

 

 

 

 
14,768

 
14,768

Preferred stock dividends

 

 

 

 

 
(4,125
)
 

 

 
(4,125
)
Common stock dividends

 

 

 

 

 
(3,172
)
 

 

 
(3,172
)
Return of capital

 

 

 

 
(150
)
 

 

 

 
(150
)
Common stock issued under employee stock plans and exercises of stock options
160,585

 
1

 

 

 
1,851

 

 

 

 
1,852

Stock-based compensation

 

 

 

 
2,118

 

 

 

 
2,118

Balance March 31, 2016
105,714,916

 
$
1,057

 
2,365,000

 
$
220,000

 
$
903,933

 
$
461,574

 
$
4,534

 
$
15,001

 
$
1,606,099


 
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
 
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

Common stock issued under employee stock plans and 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




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,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
56,839

 
$
42,928

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
8,856

 
7,956

Net amortization of premium on fixed maturities
1,174

 
1,188

Net amortization of discount on debt
182

 
2,043

Stock compensation expense
2,118

 
1,088

Equity in earnings of unconsolidated subsidiaries
(6,682
)
 
(4,958
)
Other net realized gain on investments
3,617

 
(2,203
)
Other-than-temporary impairment loss

 
1,016

Bad debt expense
6,959

 
5,823

Foreign currency translation adjustment, net of tax
1,547

 
(427
)
Changes in assets and liabilities:
 
 
 
Accrued investment income
(2,655
)
 
(257
)
Premiums and other receivables
(113,845
)
 
(147,734
)
Deferred acquisition costs, net
(7,616
)
 
(29,030
)
Reinsurance recoverable on unpaid losses
(370
)
 
38,367

Prepaid reinsurance premiums
(5,838
)
 
(50,158
)
Prepaid expenses and other assets
(2,705
)
 
(4,618
)
Unpaid loss and loss adjustment expense reserves
20,896

 
(10,529
)
Unearned premiums
96,892

 
97,543

Unearned service contract and other revenue
15,838

 
21,194

Reinsurance payable
15,337

 
41,464

Accounts payable
(16,885
)
 
(34,089
)
Income tax payable
22,905

 
25,587

Deferred tax liability
(12,133
)
 
(21,117
)
Other liabilities
(54,666
)
 
13,482

Net cash provided by (used in) operating activities
29,765

 
(5,441
)
Cash flows from investing activities:
 
 
 
Investment in unconsolidated subsidiaries
(1,310
)
 
(6,710
)
Purchases of other investments
(129,012
)
 
(1,556
)
Decrease in cash due to deconsolidation of the Reciprocal Exchanges
(8,393
)
 

Increase in cash due to consolidation of the Reciprocal Exchanges
2,673

 

Acquisition of consolidated subsidiaries, net of cash

 
(15,524
)
Purchases of equity securities
(556
)
 

Proceeds from sale of equity securities
8,749

 

Purchases of short-term investments
(2,651
)
 
(48,209
)
Proceeds from sale of short-term investments
1,739

 
36,917

Purchases of premises and equipment
(4,991
)
 
(2,112
)
Purchases of fixed maturities
(36,533
)
 
(62,334
)
Proceeds from sale and maturity of fixed maturities
76,487

 
106,724

Net cash provided by (used in) investing activities
(93,798
)
 
7,196


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
61,712

 
(46,804
)
Notes payable repayments

 
(631
)
Issuance of preferred stock, net (fees $0 and $4,975, respectively)

 
145,025

Exercises of stock options
1,407

 
341

Return of capital
(150
)
 

Dividends paid to preferred shareholders
(4,125
)
 
(1,031
)
Dividends paid to common shareholders
(3,172
)
 
(1,868
)
Net cash provided by financing activities
55,672

 
95,032

Effect of exchange rate changes on cash and cash equivalents
833

 
(300
)
Net increase (decrease) in cash and cash equivalents
(7,528
)
 
96,487

Cash and cash equivalents, beginning of the period
282,277

 
132,615

Cash and cash equivalents, end of the period
$
274,749

 
$
229,102

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
3,200

 
$
2,900

Cash paid for interest
1,962

 
31

Supplemental disclosures of non-cash investing and financing activity:
 
 
 
Unsettled investment security purchases
$
25,010

 
$

Decrease in non-controlling interest due to deconsolidation of the Reciprocal Exchanges
22,619

 

Increase in non-controlling interest due to consolidation of the Reciprocal Exchanges
14,768

 

Accrued preferred stock dividends
4,125

 
1,031

Accrued common stock dividends
3,172

 
1,868


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, 2015, previously filed with the SEC on February 29, 2016. The balance sheet at December 31, 2015 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 balance sheet as of March 31, 2016 and the audited condensed consolidated balance sheet as of December 31, 2015, 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"). The unaudited condensed financial statements for the three months ended March 31, 2016 do not include the accounts and operations of the Reciprocal Exchanges as these entities did not meet the criteria for consolidation under FASB ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," as of January 1, 2016, but met the criteria for consolidation as of March 31, 2016. As discussed in Note 2, “Recent Accounting Pronouncements,” ASU 2015-02 was adopted using a modified retrospective approach by recording a cumulative effect adjustment as of January 1, 2016. As a result, periods prior to the adoption were not impacted by the deconsolidation of 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, 2015 filed with the SEC.

All significant inter-company transactions and accounts have been eliminated in the condensed consolidated financial statements.

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, 2016, as compared to those described in our Annual Report on Form 10-K for the year ended December 31, 2015, that are of significance, or potential significance, to the Company.

In November 2014, the FASB issued ASU 2014-16, "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity (a consensus of the FASB Emerging Issues Task Force)", to reduce diversity in practice in the accounting for hybrid financial instruments issued in the form of a share. The amendments in ASU 2014-16 do not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. An entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria. ASU 2014-16 clarifies how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, ASU 2014-16 clarifies that an entity should consider all relevant terms and features-including the embedded derivative feature being evaluated for bifurcation-in evaluating the nature of the host contract. Furthermore, ASU 2014-16 clarifies that no single term or feature would necessarily determine the economic

8

NATIONAL GENERAL HOLDINGS CORP.

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

characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. In addition, the amendments in ASU 2014-16 clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (that is, the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The effects of initially adopting the amendments in ASU 2014-16 are to be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods. The amendments in ASU 2014-16 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU 2014-16 on January 1, 2016 and the implementation of the standard did not have an impact on the Company’s results of operations, financial position or liquidity.

In January 2015, the FASB issued ASU 2015-01, "Income Statement-Extraordinary and Unusual Items (Subtopic 225-20) (simplifying income statement presentation by eliminating the concept of extraordinary items)”, as part of its initiative to reduce complexity in accounting standards. ASU No. 2015-01 eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement-Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Previously, an event or transaction was presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction met the criteria for extraordinary classification, an entity was required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also was required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. An entity has a choice of transition methods. It may apply the amendments in ASU 2015-01 either prospectively or retrospectively to all prior periods presented in the financial statements. The amendments in ASU 2015-01 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. An entity has the option to adopt the changes earlier provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company adopted ASU 2015-01 prospectively on January 1, 2016 and 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. The adoption of ASU 2015-02 on January 1, 2016 required the Company to evaluate whether its VIE’s met the amended criteria for consolidation at the earliest date of involvement unless certain reconsideration events existed. The Reciprocal Exchanges were evaluated based on the facts and circumstances that existed in September 2014 when the the Company acquired the managing entities for the Reciprocal Exchanges. As a result of the evaluation, the Company was not required to consolidate the Reciprocal Exchanges as of January 1, 2016 (the Reciprocal Exchanges had previously been included in the Company’s consolidated results). The Company adopted ASU 2015-02 using a modified retrospective approach by recording a cumulative effect adjustment as of January 1, 2016. The total NGHC stockholders’ equity was not affected by this change. On March 31, 2016, the Company purchased the surplus notes representing the obligation of the Reciprocal Exchanges from a related party for consideration of $88,900 (see Note 3, "Reciprocal Exchanges" for additional information). The Company has significant economic interest in the Reciprocal Exchanges due to its ownership of the surplus notes. In addition, the Company, through its wholly owned subsidiaries, earns fees from the Reciprocal Exchanges that are variable interests. 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 Company, through its wholly-owned subsidiary that holds the surplus notes, would absorb more than an insignificant amount of expected losses or residual returns of the Reciprocal Exchanges. Hence, the Company is required to consolidate the Reciprocal Exchanges at March 31, 2016.

9

NATIONAL GENERAL HOLDINGS CORP.

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


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 Company adopted ASU 2015-07 on January 1, 2016 and the implementation of the standard did not have an impact on the Company’s results of operations, financial position or liquidity.

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 date 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 Company adopted ASU 2015-16 on January 1, 2016 and the effects of adoption will be limited to disclosures relating to adjustments for acquisitions to provisional amounts when identified during the measurement period in which the adjustment amounts are determined. The implementation of the standard did not have a material impact on the Company’s results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-07, "Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting" as part of its initiative to reduce complexity in accounting standards. The amendments in ASU 2016-07 eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in ASU 2016-07 require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in ASU 2016-07 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. No additional disclosures are required at transition. The adoption of ASU 2016-07 is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations", which improves the operability and understandability of the implementation guidance on principal versus agent considerations by clarifying that: 1) an entity determines whether it is a principal or an agent for each specific good or service promised to the customer; 2) an entity determines the nature of each specific good or service; 3) when another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of (a) a good or another asset from the other party that it then transfers to the customer; (b) a right to a service that will be performed by another party, which gives the entity the ability to direct that party to provide the service to the customer on the entity's behalf, or (c) a good or service from the other party that it combines with other goods or services to provide the specific good or service to the customer; and 4) the purpose

10

NATIONAL GENERAL HOLDINGS CORP.

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

of the indicators in paragraph 606-10-55-39 in Topic 606 is to support or assist in the assessment of control. The effective date and transition requirement for ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09, which were deferred to the quarter ending March 31, 2018 by ASU 2015-14. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" as part of its initiative to reduce complexity in accounting standards. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Specifically, the amendments require: (1) All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period; (2) Excess tax benefits should be classified along with other income tax cash flows as an operating activity; (3) An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur; (4) The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions; and (5) Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual 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. An entity that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures, should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company is currently evaluating the impact this guidance will have on its consolidated financial condition, results of operations, cash flows and disclosures and is currently unable to estimate the impact of adopting this guidance.


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.

Effective March 31, 2016, Integon National Insurance Company, a subsidiary of the Company, purchased from subsidiaries of ACP Re Ltd. ("ACP Re"), a related party, the surplus notes that were issued by the Reciprocal Exchanges when they were originally capitalized. The purchase price of $88,900 was based on an independent third party valuation of the fair market value of the surplus notes. 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.

Under ASU 2015-02, as a result of the Company's purchase of the surplus notes effective March 31, 2016, the Company determined that it holds a variable interest in each of the Reciprocal Exchanges. The Company would absorb more than an insignificant amount of the Reciprocal Exchanges expected losses or residual returns through its ownership of the surplus notes. In addition, the Company, through its wholly owned subsidiaries, earns fees from the Reciprocal Exchanges that are variable interests. Each of the Reciprocal Exchanges qualifies as a Variable Interest Entity ("VIE") because they do not have sufficient

11

NATIONAL GENERAL HOLDINGS CORP.

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

equity to finance their operations without the surplus notes. 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 Company, through its wholly-owned subsidiary that holds surplus notes, would absorb more than an insignificant amount of expected losses or residual returns of the Reciprocal Exchanges. Accordingly, the Company consolidates these Reciprocal Exchanges as of March 31, 2016, and eliminates all intercompany balances and transactions with the Company.

Prior to the adoption of ASU 2015-02 on January 1, 2016, the Company consolidated the Reciprocal Exchanges under the previous guidance. Upon adoption of ASU 2015-02, on January 1, 2016, the Company did not meet the requirements for consolidation under ASU 2015-02 as it did not hold a variable interest in the Reciprocal Exchanges. Hence, the operations of the Reciprocal Exchanges for the period ended March 31, 2016 are not included in the Company's condensed consolidated financial statements.

The consolidation of the Reciprocal Exchanges on March 31, 2016 is treated as a business combination with the assets, liabilities and non-controlling interest recognized at fair value at the date of consolidation. The Company has no ownership in the Reciprocal Exchanges. Hence, the difference between the fair value of the assets and liabilities acquired represents the fair value of non-controlling interest acquired.

12

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 March 31, 2016:

March 2016
 
Assets:
 
Cash and investments
$
258,274

Accrued investment income
2,658

Premiums and other receivables, net
52,922

Reinsurance recoverable on unpaid losses
43,401

Prepaid reinsurance premiums
59,706

Income tax receivable
300

Due from affiliate
11,703

Premises and equipment, net
2,386

Intangible assets, net
32,638

Prepaid and other assets
187

Total assets
$
464,175

 
 
Liabilities:
 
Unpaid loss and loss adjustment expense reserves
$
137,093

Unearned premiums
143,194

Reinsurance payable
11,982

Accounts payable and accrued expenses
6,972

Deferred tax liability
23,716

Notes payable
88,900

Other liabilities
37,550

Total liabilities
449,407

Stockholders’ equity:
 
Non-controlling interest
14,768

Total stockholders’ equity
14,768

Total liabilities and stockholders' equity
$
464,175


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, 2016, the Company earned service and fee income from the Reciprocal Exchanges in the amount of $9,590 which is included in the Company's consolidated operations. 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.



13

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, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
53,625

 
$
1,656

 
$
(18,318
)
 
$
36,963

   Preferred stock
 
1,631

 
32

 

 
1,663

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury
 
23,268

 
1,440

 

 
24,708

   States and political subdivision bonds
 
186,714

 
5,831

 
(174
)
 
192,371

   Foreign government
 
40,316

 
1,793

 
(106
)
 
42,003

   Corporate bonds
 
1,409,644

 
47,427

 
(33,096
)
 
1,423,975

   Residential mortgage-backed securities
 
361,004

 
11,013

 
(62
)
 
371,955

   Commercial mortgage-backed securities
 
119,878

 
2,143

 
(1,958
)
 
120,063

   Structured securities
 
231,590

 
1,472

 
(7,636
)
 
225,426

Total
 
$
2,427,670

 
$
72,807

 
$
(61,350
)
 
$
2,439,127

Less: Securities pledged
 
126,482

 
2,615

 

 
129,097

Total net of Securities pledged
 
$
2,301,188

 
$
70,192

 
$
(61,350
)
 
$
2,310,030

NGHC
 
$
2,172,069

 
$
72,807

 
$
(61,350
)
 
$
2,183,526

Reciprocal Exchanges
 
255,601

 

 

 
255,601

Total
 
$
2,427,670

 
$
72,807

 
$
(61,350
)
 
$
2,439,127



14

NATIONAL GENERAL HOLDINGS CORP.

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

December 31, 2015
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
53,356

 
$
569

 
$
(6,960
)
 
$
46,965

   Preferred stock
 
11,448

 
377

 

 
11,825

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury
 
19,348

 
1,052

 
(48
)
 
20,352

   Federal agencies
 
1,945

 
7

 

 
1,952

   States and political subdivision bonds
 
193,017

 
4,516

 
(609
)
 
196,924

   Foreign government
 
31,383

 
31

 
(352
)
 
31,062

   Corporate bonds
 
1,375,336

 
22,224

 
(47,902
)
 
1,349,658

   Residential mortgage-backed securities
 
419,293

 
6,254

 
(978
)
 
424,569

   Commercial mortgage-backed securities
 
135,134

 
720

 
(3,649
)
 
132,205

   Structured securities
 
205,024

 
15

 
(4,347
)
 
200,692

Total
 
$
2,445,284

 
$
35,765

 
$
(64,845
)
 
$
2,416,204

Less: Securities pledged
 
54,955

 
439

 

 
55,394

Total net of Securities pledged
 
$
2,390,329

 
$
35,326

 
$
(64,845
)
 
$
2,360,810

NGHC
 
$
2,199,714

 
$
34,773

 
$
(58,826
)
 
$
2,175,661

Reciprocal Exchanges
 
245,570

 
992

 
(6,019
)
 
240,543

Total
 
$
2,445,284

 
$
35,765

 
$
(64,845
)
 
$
2,416,204


The amortized cost and fair value of available-for-sale fixed maturities and securities pledged, held as of March 31, 2016, 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, 2016
 
Cost or Amortized
Cost
 
Fair
Value
 
Cost or Amortized
Cost
 
Fair
Value
 
Cost or Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
26,271

 
$
24,965

 
$

 
$

 
$
26,271

 
$
24,965

Due after one year through five years
 
265,906

 
268,129

 
27,107

 
27,107

 
293,013

 
295,236

Due after five years through ten years
 
1,001,823

 
1,024,657

 
159,563

 
159,563

 
1,161,386

 
1,184,220

Due after ten years
 
373,458

 
366,659

 
37,403

 
37,403

 
410,861

 
404,062

Mortgage-backed securities
 
449,943

 
461,078

 
30,940

 
30,940

 
480,883

 
492,018

Total
 
$
2,117,401

 
$
2,145,488

 
$
255,013

 
$
255,013

 
$
2,372,414

 
$
2,400,501



15

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,
 
 
2016
 
2015
Interest
 
 
 
 
Cash and short-term investments
 
$
684

 
$
5

Equity securities
 
333

 
75

Fixed maturities
 
19,739

 
15,006

Investment income
 
20,756

 
15,086

Investment expense
 
(1,638
)
 
(1,212
)
Repurchase agreements interest expense
 
(144
)
 
(70
)
Other income (1)
 
2,696

 
2,344

Net Investment Income
 
$
21,670

 
$
16,148

NGHC
 
$
21,670

 
$
14,109

Reciprocal Exchanges
 

 
2,039

Net Investment Income
 
$
21,670

 
$
16,148


(1) Includes interest income of $2,188 and $2,188 for the three months ended March 31, 2016 and 2015, respectively, under the ACP Re Credit Agreement (see Note 14, "Related Party Transactions").

(c) Realized Gains and Losses

Proceeds from sales of equity securities and fixed maturities during the three months ended March 31, 2016 and 2015 were $81,805 and $53,402, respectively. For the three months ended March 31, 2016 and 2015, the Company recognized an other-than-temporary impairment ("OTTI") loss of $0 and $1,016, 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 months ended March 31, 2016 and 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$
442

 
$
(2
)
 
$
440

Fixed maturities
 
4,199

 
(1,022
)
 
3,177

Total gross realized gains and losses
 
$
4,641

 
$
(1,024
)
 
$
3,617

NGHC
 
$
4,641

 
$
(1,024
)
 
$
3,617

Total gross realized gains and losses
 
$
4,641

 
$
(1,024
)
 
$
3,617


16

NATIONAL GENERAL HOLDINGS CORP.

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

Three Months Ended March 31, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities
 
$
2,624

 
$
(421
)
 
$
2,203

OTTI
 

 
(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


(d) Unrealized Gains and Losses

Unrealized gains (losses) on investments as of March 31, 2016 and December 31, 2015 consisted of the following:

 
 
March 31, 2016
 
December 31, 2015
Net unrealized loss on common stock
 
$
(16,662
)
 
$
(6,391
)
Net unrealized gain on preferred stock
 
32

 
377

Net unrealized gain (loss) on fixed maturities
 
28,087

 
(23,066
)
Net unrealized loss on other
 

 
(20
)
Deferred income tax
 
(4,009
)
 
10,185

Net unrealized gain (loss), net of deferred income tax
 
$
7,448

 
$
(18,915
)
NGHC
 
$
7,448

 
$
(15,634
)
Reciprocal Exchanges
 

 
(3,281
)
Net unrealized gain (loss), net of deferred income tax
 
7,448

 
(18,915
)
Non-controlling interest
 

 
3,281

NGHC net unrealized gain (loss), net of deferred income tax
 
$
7,448

 
$
(15,634
)
 
 
 
 
 
Period Ended:
 
 
 
 
NGHC change for the year-to-date period in net unrealized gain (loss), net of deferred income tax
 
$
23,082

 
$
(40,632
)
Non-controlling interest change for the year-to-date period in net unrealized gain (loss), net of deferred income tax
 
$

 
$
(3,964
)

(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, 2016 and December 31, 2015:


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
March 31, 2016
 
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
 
$
26,934

 
$
(18,280
)
 
4

 
$
139

 
$
(38
)
 
3

 
$
27,073

 
$
(18,318
)
States and political subdivision bonds
 
5,840

 
(95
)
 
7

 
2,751

 
(79
)
 
7

 
8,591

 
(174
)
Foreign government
 
15,259

 
(106
)
 
1

 

 

 

 
15,259

 
(106
)
Corporate bonds
 
215,855

 
(19,902
)
 
61

 
39,388

 
(13,194
)
 
17

 
255,243

 
(33,096
)
Residential mortgage-backed securities
 
3,626

 
(60
)
 
6

 
260

 
(2
)
 
2

 
3,886

 
(62
)
Commercial mortgage-backed securities
 
51,685

 
(1,958
)
 
20

 

 

 

 
51,685

 
(1,958
)
Structured securities
 
120,411

 
(7,636
)
 
57

 

 

 

 
120,411

 
(7,636
)
Total
 
$
439,610

 
$
(48,037
)
 
156

 
$
42,538

 
$
(13,313
)
 
29

 
$
482,148

 
$
(61,350
)
NGHC
 
$
439,610

 
$
(48,037
)
 
156

 
$
42,538

 
$
(13,313
)
 
29

 
$
482,148

 
$
(61,350
)
Total
 
$
439,610

 
$
(48,037
)
 
156

 
$
42,538

 
$
(13,313
)
 
29

 
$
482,148

 
$
(61,350
)
 
 
Less Than 12 Months
 
12 Months or More
 
Total
December 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
 
$
39,490

 
$
(6,932
)
 
5

 
$
130

 
$
(28
)
 
2

 
$
39,620

 
$
(6,960
)
U.S. Treasury
 
7,141

 
(48
)
 
5

 

 

 

 
7,141

 
(48
)
States and political subdivision bonds
 
17,674

 
(501
)
 
22

 
4,878

 
(108
)
 
10

 
22,552

 
(609
)
Foreign government
 
21,322

 
(352
)
 
4

 

 

 

 
21,322

 
(352
)
Corporate bonds
 
684,613

 
(37,919
)
 
229

 
32,121

 
(9,983
)
 
38

 
716,734

 
(47,902
)
Residential mortgage-backed securities
 
102,889

 
(919
)
 
23

 
1,655

 
(59
)
 
9

 
104,544

 
(978
)
Commercial mortgage-backed securities
 
66,222

 
(3,472
)
 
30

 
2,364

 
(177
)
 
2

 
68,586

 
(3,649
)
Structured securities
 
153,042

 
(4,347
)
 
65

 

 

 

 
153,042

 
(4,347
)
Total
 
$
1,092,393

 
$
(54,490
)
 
383

 
$
41,148

 
$
(10,355
)
 
61

 
$
1,133,541

 
$
(64,845
)
NGHC
 
$
988,188

 
$
(50,599
)
 
284

 
$
28,691

 
$
(8,227
)
 
34

 
$
1,016,879

 
$
(58,826
)
Reciprocal Exchanges
 
104,205

 
(3,891
)
 
99

 
12,457

 
(2,128
)
 
27

 
116,662

 
(6,019
)
Total
 
$
1,092,393

 
$
(54,490
)
 
383

 
$
41,148

 
$
(10,355
)
 
61

 
$
1,133,541

 
$
(64,845
)

There were 185 and 444 securities at March 31, 2016 and December 31, 2015, respectively, that account for the gross unrealized loss, none of which are deemed by the Company to be an OTTI. At March 31, 2016, the Company determined that the unrealized losses on fixed maturities were primarily due to market interest rate and credit quality movements since their date of purchase. At March 31, 2016, the Company determined that the unrealized losses on common stock were primarily due to market movements of equities in the energy transportation sector. Significant factors influencing the Company’s determination that none of these securities were 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.

As of March 31, 2016 and December 31, 2015, of the $13,313 and $10,355, respectively, of unrealized losses related to securities in unrealized loss positions for a period of twelve or more consecutive months, $5,022 and $8,466, respectively, of those unrealized losses were related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost. Those unrealized losses were evaluated based on factors such as discounted cash flows and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations.

18

NATIONAL GENERAL HOLDINGS CORP.

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


(f) Credit Quality of Investments

The tables below summarize the credit quality of our fixed maturities, securities pledged and preferred securities as of March 31, 2016 and December 31, 2015, as rated by Standard & Poor’s.

 
 
NGHC
 
Reciprocal Exchanges
March 31, 2016
 
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
 
$
17,281

 
$
18,721

 
0.9
%
 
$
5,987

 
$
5,987

 
2.3
%
AAA
 
406,900

 
420,832

 
19.6
%
 
28,594

 
28,594

 
11.2
%
AA, AA+, AA-
 
352,194

 
361,387

 
16.8
%
 
28,010

 
28,010

 
11.0
%
A, A+, A-
 
568,651

 
584,768

 
27.2
%
 
79,738

 
79,738

 
31.2
%
BBB, BBB+, BBB-
 
625,805

 
636,464

 
29.7
%
 
105,475

 
105,475

 
41.3
%
BB+ and lower
 
147,613

 
124,391

 
5.8
%
 
7,797

 
7,797

 
3.0
%
Total
 
$
2,118,444

 
$
2,146,563

 
100.0
%
 
$
255,601

 
$
255,601

 
100.0
%
 
 
NGHC
 
Reciprocal Exchanges
December 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
 
$
13,416

 
$
14,448

 
0.7
%
 
$
5,932

 
$
5,904

 
2.5
%
AAA
 
343,128

 
348,073

 
16.4
%
 
39,724

 
38,888

 
16.2
%
AA, AA+, AA-
 
379,560

 
383,888

 
18.0
%
 
36,866

 
36,934

 
15.4
%
A, A+, A-
 
501,409

 
508,884

 
23.9
%
 
50,612

 
50,153

 
20.8
%
BBB, BBB+, BBB-
 
634,250

 
623,742

 
29.3
%
 
82,417

 
80,322

 
33.4
%
BB+ and lower
 
274,594

 
249,660

 
11.7
%
 
30,020

 
28,343

 
11.7
%
Total
 
$
2,146,357

 
$
2,128,695

 
100.0
%
 
$
245,571

 
$
240,544

 
100.0
%

The tables below summarize the investment quality of our corporate bond holdings and industry concentrations as of March 31, 2016 and December 31, 2015.

March 31, 2016
 
AAA
 
AA+,
AA,
AA-
 
A+,A,A-
 
BBB+,
BBB,
BBB-
 
BB+ or
Lower
 
Fair
Value
 
% of
Corporate
Bonds
Portfolio
Corporate Bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial institutions
 
1.5
%
 
4.0
%
 
18.6
%
 
14.2
%
 
0.6
%
 
$
553,429

 
38.9
%
Industrials
 
%
 
3.3
%
 
16.5
%
 
30.5
%
 
5.9
%
 
800,940

 
56.2
%
Utilities/Other
 
%
 
%
 
1.1
%
 
2.6
%
 
1.2
%
 
69,606

 
4.9
%
Total
 
1.5
%
 
7.3
%
 
36.2
%
 
47.3
%
 
7.7
%
 
$
1,423,975

 
100.0
%
NGHC