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B U I L D I N G A S O L I D F O U N D A T I O N
2014 A N N U A L R E P O R T
Front Cover
National General Holdings Corp., headquartered in New York City, is a specialty personal
lines insurance holding company. National General traces its roots to 1939, has a financial
strength rating of A- (excellent) from A.M. Best, and provides personal and commercial
automobile, homeowners, umbrella, recreational vehicle, motorcycle, supplemental health,
and other niche insurance products. Companies and partners of National General include:
Inside Front Cover
2014 ANNUAL REPORT
LETTER TO SHAREHOLDERS
My fellow shareholders,
National General became a publicly traded company when our
In June, we acquired certain assets of Imperial Management
common stock was listed on NASDAQ on February 20, 2014
Corporation, which provides access to approximately $200
under the ticker symbol NGHC. This is our first annual report,
million of gross and managed premium of personal auto, com-
so we would like to review our significant accomplishments
mercial auto, and homeowners products written in Texas,
during 2014, which include:
• Completing three key acquisitions which substantially
increased the value of our franchise, adding the import-
ant homeowners and umbrella product lines to the auto
business
Louisiana, and Florida, as well as Federal Flood distribution
in 12 states. The transaction was a natural fit with our home-
owners expansion efforts, added diversification, enhanced
our geographic footprint, and was immediately accretive to
earnings. Additionally, we view Federal Flood distribution as
a unique and highly valuable addition to our portfolio, and
• Building a unique A&H division from the ground up which we
have already begun to expand this offering into additional
believe is now ready to meaningfully contribute to earnings
states. We paid the equivalent of statutory book value for
• Completing several capital raises that added nearly $500
million in capital to our balance sheet
• Making significant progress in building a state-of-the-art
the transaction, and since closing have taken numerous steps
to improve profitability, meaningfully increasing the value of
the franchise.
single policy administration system for our auto and home-
In April, we closed on the acquisition of Personal Express
owners business
The Tower Personal Lines transaction was first announced
in January, closed on September 15th and brings a profitable
portfolio of personal auto, homeowners, and umbrella cov-
erages predominantly written in the Northeast, as well as
ownership of two Attorneys-in-Fact that manage two recip-
Insurance Company, a California domiciled personal auto and
home insurer that provides access to approximately $20 million
of business. We paid a small premium to statutory book value
to acquire Personal Express, a price which was justified by
the highly profitable nature and the growth potential of the
book that we acquired.
rocal exchanges which write personal auto and homeowners
We plan to continue to build National General through both
predominantly in the Northeast. The transaction provides us
acquisitions and organic growth, and we believe executing
access to approximately $650 million of gross and managed
acquisitions is one of our core competencies. We expect
premium, and we see the homeowners business in particular
to continue to opportunistically complete acquisitions that
as a key area of growth given that it is less competitive than
we believe will add value to our franchise. Our deal pipeline
the auto market and can be cross-sold to our existing book.
remains robust, and we will consider deals of various types
The purchase price for Tower Personal Lines was minimal but
and sizes across the full spectrum of our product portfolio,
the transaction has substantially increased the value of our
including auto, homeowners, and A&H lines. We ideally search
personal lines franchise and has already contributed significant
for an acquisition that has a demonstrated track record of solid
profitability to our book.
underwriting results; however, we would consider acquiring
01
NATIONAL GENERAL HOLDINGS CORP.
an unprofitable operation which we could convert to a profitable
we made significant progress building NPS, a single policy
business by leveraging our technology and lower operating
administration system for our auto and homeowners business.
cost structure.
We made substantial progress on building our A&H division
during the year, and we continue to believe that our expanding
A&H segment offers a unique opportunity with significant
market potential in a predictable and complementary line of
business which adds value to our customers and agents. The
approval process at our underwriting company, National Health
Insurance Company, took longer than anticipated but is now
largely complete. We expect to write a significant amount of
premium volume on NHIC paper heading forward. Products
that we now offer include: short-term medical, medical stop
While we still need to make additional investment to finish
this project, we plan to substantially complete the roll-out of
homeowners onto NPS during 2015, and expect to realize sig-
nificant cost savings from retiring several legacy homeowners
systems inherited from the Tower transaction. Furthermore,
in the past several years we have incurred substantial annual
costs in developing NPS for auto and homeowners, and by
2016 we expect that our development efforts will be largely
complete and our expenses will benefit accordingly. NPS will
allow us to compete more effectively in the marketplace as
the system is highly user friendly.
loss, hospital indemnity, cancer, critical illness, AD&D, dental
It was 5 years ago in March of 2010 that we completed the
and vision. On the distribution side, we stand well positioned
transaction to acquire GMAC Insurance — and we have truly
to deliver A&H products through our call center general agency
come a long way. At year-end 2014, we were a company with
VelaPoint, our early 2015 acquisition of Healthcare Solutions
nearly 3,000 employees and more than 1.6 million customers,
Team, a managing general agency that offers health insurance
and results for the year were highlighted by a substantial
and supplemental products across the U.S. through more
increase in our premium volume, underwriting profitability,
than 500 independent agents, our internal managing general
net income, and book value. We now stand in a great position
agent/program manager America’s HealthCare Plan, and
to build on the many accomplishments we made in 2014 as
numerous partnerships with general agents and whole-
we construct a world-class personal lines insurer. On behalf
salers. We have exerted substantial effort and investment
of the National General team, I would like to thank you for
building our A&H division brick by brick over the past few
your investment, trust, and continued support.
years, and we now believe that we have all the pieces in
place and the segment is well positioned to grow profitably,
Sincerely,
contribute meaningfully to our earnings, and produce signif-
icant shareholder value heading forward.
Michael Karfunkel
Chairman & Chief Executive Officer
Our balance sheet is stronger than it has ever been. During
the year, we completed numerous capital raising activities,
including: a second equity offering in February that generated
total net proceeds of approximately $180 million, a $250 million
private debt issuance in May, and a $55 million preferred stock
offering in June. We also increased the size of our outstanding
credit facility to $135 million in May. At year-end 2014, we had
more than $1 billion in shareholders’ equity and more than
$1.3 billion in total capital. Our current capital position is more
than sufficient to support our current business plan and our
expected organic growth projections for 2015.
We have built a technology driven infrastructure which
creates operational efficiencies that will reduce expenses
and increase profitability. We aim to produce expense ratios
that are among the leaders in the industry. During the year,
02
02
2014 ANNUAL REPORT NGHC STOCK PERFORMANCE
0303
2014 ANNUAL REPORT KEY METRICS
GROSS WRITTEN PREMIUM
$ in Billions
NET WRITTEN PREMIUM
$ in Billions
$1.8
COMBINED RATIO*
Expense Loss
98.8%
95.2%
92.6%
28.7%
28.0%
27.9%
$2.1
$1.4
$1.3
$0.6
$0.7
70.1%
67.2%
64.7%
2012
2013
2014
2012
2013
2014
2012
2013
2014
UNDERWRITING INCOME*
$ in Millions
NET INVESTMENT INCOME
$ in Millions
NET INCOME
$ in Millions
$117
$51
$100
$7
$33
$31
$31
$40
$28
2012
2013
2014
2012
2013
2014
2012
2013
2014
DILUTED OPERATING
EPS*
FULLY DILUTED BOOK
VALUE PER SHARE
OPERATING RETURN ON
AVERAGE EQUITY
$1.34
$0.67
$0.53
$10.51
$7.90
$6.17
14.6%
9.3%
9.5%
2012
2013
2014
2012
2013
2014
2012
2013
2014
*NOTE: Non-GAAP measures. A reconciliation to the most directly comparable GAAP measures can be found in our 2014 10-K
enclosed within this report. Expense ratio, combined ratio, and underwriting income exclude the impact of non-cash impairment
of goodwill and non-cash amortization of intangible assets.
04
2014 GWP BY PRODUCT
60%
1%
7%
18%
7%
7%
Personal Auto
Commercial Auto
A&H
Homeowners
RV/Packaged
Other
2014 P&C GWP BY STATE
NJ CT TX
FL
MI
LA
VA
MA
CA
Other
NY
NC
05
FINANCIAL HIGHLIGHTS
SUMMARY INCOME STATEMENT
Gross written premium
Net written premium
Net earned premium
Ceding commission income
Service, fees, and other income
Net investment income
Net realized gain/(loss) on investments
Other than temporary impairment losses
Other revenue
Total revenues
Loss and loss adjustment expense
Acquisition and other underwriting costs
General and administrative
Interest expense
Total expenses
Pre-tax income
Provision for income taxes
Equity in earnings (loss) of unconsolidated subsidaries
Net income
Less: net income attributable to non-controlling interest
Net income attributable to NGHC
Less: dividends on preferred shares
Net income available to common stockholders
Operating earnings (2)
NGHC
2014
Reciprocal
Exchanges (1)
Consolidated
2013
NGHC
$2,065,065
$70,042
$2,135,107
$1,338,755
1,816,948
1,585,598
7,643
178,333
50,627
(648)
(2,244)
(1,660)
53,076
47,622
4,787
139
1,799
0
0
0
1,870,024
1,633,220
12,430
168,571
(A)
52,426
(648)
(2,244)
(1,660)
679,316
688,066
87,100
127,541
30,808
1,200
(2,869)
16
1,817,649
54,347
1,862,095
(B)
931,862
26,719
6,267
11,967
5,724
50,677
3,670
1,164
0
2,506
2,506
0
0
$0
1,053,065
315,089
348,762
(C)
17,736
462,124
134,887
280,552
2,042
1,734,652
(D)
879,605
127,443
23,876
1,180
104,747
2,504
102,243
2,291
52,257
11,140
1,274
42,391
82
42,309
2,158
$99,952
$40,151
$46,154
1,026,346
308,822
346,696
12,012
1,693,876
123,773
22,712
1,180
102,241
(2)
102,243
2,291
$99,952
$125,306
06
SUMMARY BALANCE SHEET
NGHC
2014
Reciprocal
Exchanges
Consolidated
2013
NGHC
Cash and investments
$1,753,237
$245,483
$1,998,720
$1,116,707
Premiums and other receivables, net
Deferred acquisition costs
Reinsurance recoverable on unpaid losses
Prepaid reinsurance premiums
Premises and equipment, net
Notes receivable from related party
Goodwill & intangible assets
Other assets
Total assets
699,553
121,514
888,215
75,837
30,583
125,000
308,168
65,765
58,238
4,485
23,583
26,924
0
0
11,433
1,969
757,791
125,999
911,798
102,761
30,583
125,000
319,601
67,734
449,252
60,112
950,828
50,878
29,535
0
156,915
23,288
4,067,872
372,115
4,439,987
2,837,515
Unpaid loss and loss adjustment expense reserves
1,450,305
Unearned premiums & other service revenue
Reinsurance & accounts payable
Securities sold under repurchase agreements
Notes payable (reciprocal exchanges owed to related party)
Other liabilities
Total liabilities
752,965
397,608
46,804
255,631
104,779
111,848
119,998
31,502
0
48,374
46,723
1,562,153
1,259,241
872,963
429,110
46,804
304,005
151,502
476,232
184,677
109,629
81,142
83,727
3,008,092
358,445
3,366,537
2,194,648
Stockholders' equity
1,059,780
13,670
1,073,450
642,867
Total liabilities and stockholders' equity
$4,067,872
$372,115
$4,439,987
$2,837,515
NOTES: (1) Results for the twelve months ended December 31, 2014 include only 107 days of results of the Reciprocal Exchanges
(as the Attorneys-in-Fact were acquired with the closing of the Tower Personal Lines transaction on September 15, 2014). (2) Non-
GAAP financial measure. Please see the Non-GAAP Reconciliation information within our attached form 10-K for the reconciliation
of Non-GAAP measures to the most directly comparable GAAP measure. (A-D) Consolidated column includes eliminations as
follows: (A) $(9,901), (B) $(9,901), (C) $(9,901), and (D) $(9,901).
07
OFFICE LOCATIONS
National General Corporate Headquarters
59 Maiden Lane, 38th Floor
New York, NY 10038
Imperial Fire and Casualty
4670 I-49 North Service Road
Opelousas, LA 70570
Winston-Salem Operational Center
5630 University Parkway
Winston-Salem, NC 27105
Imperial Fire and Casualty Operational Center
14800 Quorum Drive
Dallas, TX 75254
Cleveland Operational Center
800 Superior Avenue
Cleveland, OH 44114
California Branch Office
3800 East Concours Drive
Ontario, CA 91764
St. Louis Branch Office
13736 Riverport Drive
Maryland Heights, MO 63043
National General Preferred — Buffalo
550 Essjay Road
Williamsville, NY 14221
National General Preferred — Chicago
222 South Riverside Drive
Chicago, IL 60606
National General Preferred — Quincy
Batterymarch Park III
Quincy, MA 02169
National General Bermuda
Purvis House, 29 Victoria Street
Hamilton Bermuda HM10
RAC Insurance Partners
6161 Blue Lagoon Drive
Miami, FL 33126
National Automotive Insurance Company
1615 Poydras Street
New Orleans, LA 70112
Personal Express
5301 Truxtun Avenue
Bakersfield, CA 93309
VelaPoint
1100 Northwest Compton Drive
Hillsboro, Oregon 97006
Healthcare Solutions Team
1900 South Highland Avenue
Lombard, IL 60148
EuroAccident
Svardvagen 5
182 33 Danderyd
Sweden
National General Luxembourg
ZI Am Bann, Bâtiment Elise
21 rue Léon Laval
L-3372 Leudelange
08
NATIONAL GENERAL HOLDINGS CORP. CORPORATE INFO
SENIOR MANAGEMENT
Michael Karfunkel
Chairman and Chief Executive Officer
BOARD OF DIRECTORS
Michael Karfunkel
Chairman and Chief Executive Officer
National General Holdings Corp.
Michael Weiner
Executive Vice President
Chief Financial Officer
Byron Storms
President of Property & Casualty
Tom Newgarden
Executive Vice President
Chief Product/Analytics Officer
Michael Murphy
Executive Vice President
Accident and Health
Brenda Castellano
Executive Vice President
Sales & Strategy
Jeffrey Weissmann
Executive Vice President
General Counsel and Secretary
Peter Rendall
Executive Vice President
Treasurer
Barry Karfunkel
Executive Vice President
Chief Marketing Officer
Robert Karfunkel
Executive Vice President
Strategy and Development
George Hall
Senior Vice President
Chief Claims Officer
Chris Brooks
Senior Vice President
Human Resources
Leslie Leb
Senior Vice President
Chief Information Officer
Don Bolar
Senior Vice President
Chief Accounting Officer
Dave Koegel
Senior Vice President
Chief Actuary
Barry Karfunkel
Executive Vice President and Chief Marketing Officer
National General Holdings Corp.
Barry Zyskind
Chief Executive Officer, President, and Director
AmTrust Financial Services, Inc.
INDEPENDENT DIRECTORS
Ephraim Brecher
Former Vice President — Taxes and Tax Counsel
AT&T
Donald DeCarlo
Former Chairman and Commissioner
New York State Insurance Fund
Patrick Fallon
Managing Director and Chief Operating Officer
CSG Partners
Barbara Paris, M.D
Vice-Chair, Medicine and Director of Division of Geriatrics
Maimonides Medical Center
ADDITIONAL INFORMATION
WEBSITE
www.NationalGeneral.com
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Company, LLC
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
INDEPENDENT AUDITORS
BDO USA, LLP
100 Park Avenue
New York, NY 10017
INVESTOR CONTACT
Dean Evans
Director of Investor Relations
(212) 380-9462
Dean.Evans@NGIC.com
09
2014 ANNUAL REPORT From left to right: Donald DeCarlo (member of Board of Directors), Kristin Keegan (Financial Analyst), Leslie Leb
(Chief Information Officer), Tom Newgarden (Chief Product/Analytics Officer), Byron Storms (President of Property
& Casualty), Mike Weiner (Chief Financial Officer), Peter Rendall (Treasurer), Michael Karfunkel (Chairman and Chief
Executive Officer), Jeffrey Weissmann (General Counsel and Secretary), Leah Karfunkel, Michael Murphy (Executive
Vice President Accident and Health), Barry Karfunkel (Chief Marketing Officer), Caleb Muhs (Financial Analyst),
Robert Karfunkel (Executive Vice President Strategy and Development).
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2014
OR
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
(State or Other Jurisdiction of
Incorporation or Organization)
59 Maiden Lane, 38th Floor
New York, New York
(Address of Principal Executive Offices)
27-1046208
(IRS Employer
Identification No.)
10038
(Zip Code)
(212) 380-9500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Shares, $0.01 par value per share
Series A Preferred Stock, $0.01 par value per share
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.Yes
No
Indicate by check mark whether the registrant has submitted electronically 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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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
Accelerated Filer
Non-Accelerated Filer
(Do not check if a smaller
reporting company)
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
No
As of June 30, 2014, the last business day of the registrant's most recently completed second quarter, the aggregate market value of the
common stock held by non-affiliates was $619,046,447.
As of March 4, 2015, the number of common shares of the registrant outstanding was 93,470,486.
Documents incorporated by reference: Portions of the Proxy Statement for the 2015 Annual Meeting of Shareholders of the Registrant to
be filed subsequently with the SEC are incorporated by reference into Part III of this report.
NATIONAL GENERAL HOLDINGS CORP.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Page
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23
40
40
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41
42
45
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i
Note on Forward-Looking Statements
PART I
This Form 10-K contains certain forward-looking statements that are intended to be covered by the safe harbors created by
The Private Securities Litigation Reform Act of 1995. When we use words such as “anticipate,” “intend,” “plan,” “believe,”
“estimate,” “expect,” or similar expressions, we do so to identify forward-looking statements. Examples of forward-looking
statements include the plans and objectives of management for future operations, including those relating to future growth of our
business activities and availability of funds, and are based on current expectations that involve assumptions that are difficult or
impossible to predict accurately and many of which are beyond our control. There can be no assurance that actual developments
will be those anticipated by us. Actual results may differ materially from those expressed or implied in these statements as a result
of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers,
changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance
of financial markets on our investment portfolio, our ability to accurately underwrite and price our products and to maintain and
establish accurate loss reserves, estimates of the fair value of our life settlement contracts, development of claims and the effect
on loss reserves, accuracy in projecting loss reserves, the cost and availability of reinsurance coverage, the effects of emerging
claim and coverage issues, changes in the demand for our products, our degree of success in integrating of acquired businesses,
the effect of general economic conditions, state and federal legislation, regulations and regulatory investigations into industry
practices, risks associated with conducting business outside the United States, developments relating to existing agreements,
disruptions to our business relationships with AmTrust Financial Services, Inc., ACP Re Ltd., Maiden Holdings, Ltd., or third
party agencies, breaches in data security or other disruptions with our technology, heightened competition, changes in pricing
environments, and changes in asset valuations. Additional information about these risks and uncertainties, as well as others that
may cause actual results to differ materially from those projected, is contained in Item 1A, "Risk Factors” in this Annual Report
on Form 10-K. The projections and statements in this report speak only as of the date of this report and we undertake no obligation
to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise,
except as may be required by law.
Item 1. Business
Legal Organization
National General Holdings Corp., a Delaware corporation, is a specialty personal lines insurance holding company. Shares
of our common stock began trading on the NASDAQ Global Market on February 20, 2014. References to “National General,” “the
Company,” “we,” “us” or “our” in this Annual Report on Form 10-K and in other statements and information publicly disseminated
by National General Holdings Corp. refer to National General Holdings Corp. (formerly known as American Capital Acquisition
Corporation) and all of its consolidated subsidiaries unless the context requires otherwise.
Business Overview
We are a specialty personal lines insurance holding company. Through our subsidiaries, we provide a variety of insurance
products, including personal and commercial automobile, supplemental health, homeowners and umbrella and other niche products.
We sell insurance products with a focus on underwriting profitability through a combination of our customized and predictive
analytics and our technology driven low cost infrastructure.
Our automobile insurance products protect our customers against losses due to physical damage to their motor vehicles, bodily
injury and liability to others for personal injury or property damage arising out of auto accidents. Our homeowners and umbrella
insurance products protect our customers against losses to dwellings and contents from a variety of perils, as well as coverage for
personal liability. We offer our property and casualty ("P&C") insurance products through a network of approximately 19,000
independent agents, a number of affinity partners and through direct-response marketing programs. We have approximately one
and a half million P&C policyholders.
We launched our accident and health (“A&H”) business in 2012 to provide accident and non-major medical health insurance
products targeting our existing P&C policyholders and the anticipated emerging market of employed persons who are uninsured
or underinsured. We market our and other carriers’ A&H insurance products through a multi-pronged distribution platform that
includes a network of over 4,300 independent agents, direct-to-consumer marketing, wholesaling and worksite marketing.
1
We are licensed to operate in 50 states and the District of Columbia, but focus on underserved niche markets. Approximately
84% of our P&C premium written is originated in eleven core states: New York, North Carolina, California, Michigan, New Jersey,
Florida, Connecticut, Texas, Louisiana, Virginia and Massachusetts.
For the years ended December 31, 2014, 2013 and 2012, our gross premium written was $2,135 million, $1,339 million and
$1,352 million, net premium written was $1,870 million, $679 million and $632 million and total consolidated revenues were $1,862
million, $932 million and $808 million, respectively.
Our company (formerly known as American Capital Acquisition Corporation) was formed in 2009 to acquire the private
passenger auto business of the U.S. consumer property and casualty insurance segment of General Motors Acceptance Corporation
(“GMAC,” now known as Ally Financial), which operations date back to 1939. We acquired this business on March 1, 2010.
Our wholly-owned subsidiaries include fifteen regulated domestic insurance companies, of which fourteen write primarily
P&C insurance and one writes solely A&H insurance. Our insurance subsidiaries have been assigned an “A-” (Excellent) group
rating by A.M. Best Company, Inc. (“A.M. Best”).
Two of our wholly-owned subsidiaries that we acquired on September 15, 2014 are management companies that act as attorneys-
in-fact for Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New
Jersey reciprocal insurer (together, the “Reciprocal Exchanges”). We do not own the Reciprocal Exchanges but manage their business
operations through our wholly-owned management companies.
Business Segments
We are a specialty national carrier with regional focuses. We manage our business through two segments:
• Property and Casualty (“P&C”) - Our P&C segment operates its business through two primary distribution channels:
agency and affinity. Our agency channel focuses primarily on writing standard, preferred and nonstandard auto coverage
and homeowners and umbrella coverage through our network of approximately 19,000 independent agents. In our affinity
channel, we partner with a number of affinity groups and membership organizations to deliver insurance products tailored
to the needs of our affinity partners’ members or customers under our affinity partners’ brand name or label, which we
refer to as selling on a “white label” basis. A primary focus of a number of our affinity relationships is providing recreational
vehicle coverage, of which we believe we are one of the top writers in the U.S.
• Accident and Health (“A&H”) - Our A&H segment was formed in 2012 to provide accident and non-major medical
health insurance products targeting our existing insureds and the anticipated emerging market of uninsured or underinsured
employees. Through a number of recent acquisitions of both carriers and general agencies, including VelaPoint, LLC, our
call center general agency, National Health Insurance Company, a life and health insurance carrier established in 1979,
and Euro Accident Health & Care Insurance Aktiebolag (“EuroAccident”), our European group life and health insurance
managing general agent, we have assembled a multi-pronged distribution platform that includes direct-to-consumer
marketing through our call center agency, selling through independent agents, wholesaling insurance products through
large general agencies/program managers and, through our affinity relationships, worksite marketing through employers.
For our gross premium written and net income attributable to NGHC by segment, see Note 26, "Segment Information" in the
notes to our consolidated financial statements.
P&C Segment
Distribution and Marketing
Agency Distribution Channel
Our agency channel focuses on writing automobile insurance, including standard, preferred and nonstandard, as well as
preferred homeowners and umbrella insurance, through independent insurance agents and brokers. We have established a broad
geographic presence throughout the country and have a significant market presence in our eleven largest states of New York, North
Carolina, California, Michigan, New Jersey, Florida, Connecticut, Texas, Louisiana, Virginia and Massachusetts.
Relationships with our Independent Agents. We have built a strong network of approximately 19,000 insurance agents and
brokers, many of whom are loyal, highly motivated and productive agents, by providing competitive compensation, a user-friendly
technology platform and superior service for our core markets. In order to provide quick and responsive service to our agents, we
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operate an agency customer service call center staffed by experienced and highly-trained employees. Before being employed in our
agency customer service call center, our representatives must pass a rigorous selection and training program to ensure that they
understand the independent agency and brokerage business and can provide outstanding service. We believe that the strong
relationships we have developed with our agents and brokers over time is a testament to the value proposition we provide to our
producers and policyholders. Our focus on building and maintaining a strong agency network has created an effective variable cost
distribution platform and is central to the long-term success of our agency channel. We have also developed an innovative program
for select agents, known as our agent captive program, which allows select agents to participate in the underwriting profits on
business they produce. We believe this program encourages the participants to produce more profitable business and increases their
loyalty to us.
Our North Carolina Business. We are the largest writer of nonstandard auto insurance sold through independent agents in
North Carolina, with over 50% market share. For the year ended December 31, 2014, in North Carolina, we generated $378.5
million of gross premium written.
The North Carolina nonstandard auto insurance market is serviced by a small number of carriers with most liability insurance
ceded to the state-controlled North Carolina Reinsurance Facility, the NCRF. We are not subject to any underwriting risk on the
NCRF business written because losses are incurred by the NCRF. As a servicing carrier to the state facility, we receive a ceding
commission from the NCRF to help offset operating expenses for providing the coverage to North Carolina residents. See Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations-Reinsurance.”
Affinity Distribution Channel
Through the affinity distribution channel of our P&C insurance business we are a leader in affinity marketing and have been
in operation since 1953, relying on best-in-class marketing strategies and analytics to maximize the value of our longstanding
relationships. Our affinity channel has a longstanding client base and benefits from strong product design and analytical capabilities.
In general, an affinity partner relationship consists of a partnership between a sponsoring organization and an insurance company
entered into to address the specific insurance needs of the sponsor organization’s members or customers. Through the affinity
relationship, the insurance company receives an endorsement that positions it favorably among the sponsoring organizations’
members or customers. In exchange for the endorsement, the affinity customer receives access to a quality insurer, advantageous
pricing and customized products.
A primary focus of our affinity channel is providing recreational vehicle, or RV, coverage, of which we are one of the largest
writers in the U.S. Pursuant to a marketing agreement with our affinity partner Good Sam Enterprises, LLC and its affiliates ("Good
Sam"), Good Sam has agreed to operate an insurance program through which Good Sam Club members and Camping World
customers may purchase insurance and insurance products, and we have the right to market white-labeled P&C insurance products
under the Good Sam name to such members and customers on an exclusive basis, with a focus on RV insurance. This agreement
was entered into effective January 1, 2012, and has a 20 year term. We pay marketing fees to Good Sam for access to its insurance
program based on a percentage of business produced, which fees range from the low single digits to the low double digits for the
various products sold through this program. In the event of a material breach of contract that remains uncured 30 days after notice
thereof, the agreement is terminable by the non-breaching party. In 2014, we had net premium written of $149.5 million under this
agreement.
We maintain a diversified base of affinity relationships. Our affinity relationships are generally long-term in nature. Our top
ten affinity relationships based on net earned premium have been in place for over ten years and are characterized by a mutual desire
to deliver a high quality insurance product to the buyer. It has been our experience that termination of affinity partner relationships
is infrequent because we generally own the renewal rights to the relationship business and a terminating affinity partner would lose
its rights to promotion fees and commissions on the underlying policies following termination.
We generally target potential affinity partners with strong brands, actively managed mailing lists, high traffic websites and
active membership bases. We develop new affinity relationships primarily through our employee sales force. We believe that
employing a dedicated employee sales force results in higher quality affinity relationships with better profitability. In certain cases,
we may also use unaffiliated brokers to develop affinity partner relationships.
Product Overview
In our P&C segment, we operate in niche businesses and offer a broad range of products employing multiple channels of
distribution. Through our agency channel, we primarily sell nonstandard automobile insurance through independent agents and
brokers and also offer standard and preferred auto, motorcycle, commercial vehicle, homeowners and umbrella products. Through
our affinity channel, we primarily underwrite and market standard and preferred auto and RV insurance.
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•
Standard and preferred automobile insurance. These policies provide coverage designed for drivers with greater
financial resources and a less risky driving and claims history and are renewed with greater frequency than nonstandard
policies.
• Nonstandard automobile insurance. These policies provide coverage for liability and physical damage and are designed
for drivers who represent a higher-than-normal level of risk as a result of factors such as their driving record, limited
driving experience and claims history. Because these individuals often have limited financial resources and a greater
tendency to miss payments or to make late payments, their premiums are generally higher than those for drivers who
qualify for standard or preferred coverage. A significant part of our profits from these policies results from fees paid by
our customers, which include origination fees, installment fees relating to installment payment plans, late payment fees,
policy cancellation fees and reinstatement fees. For the year ended December 31, 2014, our P&C segment generated $110.1
million in revenue from policy service fees.
• Homeowners insurance. Our homeowners policies are generally multiple-peril policies, providing property and liability
coverages for one- and two-family, owner-occupied residences. We also provide additional coverage to the homeowner
for personal umbrella.
• Recreational vehicle insurance. Unlike many of our competitors, our policies carry RV-specific endorsements tailored
to these vehicles, including automatic personal effects coverage, optional replacement cost coverage, RV storage coverage
and full-time liability coverage. We also bundle coverage for RVs and passenger cars in a single policy for which the
customer is billed on a combined statement.
• Commercial automobile insurance. These policies include coverage for liability and physical damage caused by light-
to-medium duty commercial vehicles, focused on artisan vehicles, with an average of two vehicles per policy.
• Motorcycle insurance. We provide coverage for most types of motorcycles, as well as golf carts and all-terrain vehicles.
Our policy coverage offers flexibility to permit the customer to select the type (e.g., liability) and limit of insurance (e.g.,
$100,000/$250,000/$500,000), and to include other risks, such as add-on equipment and towing.
Fee Income
In addition to traditional insurance premiums, we generate revenue by charging policy service fees to policyholders. These
fees include service fees for installment or renewal policies and fees for non-sufficient funds, late payments, cancellations and
various financial responsibility filing fees. The fee income we generate varies depending on the type of policy and state regulations.
We also collect management fees in connection with our management of the Reciprocal Exchanges.
Geographic Distribution
We are licensed to operate in 50 states and the District of Columbia. We believe that our geographic and product mix creates
limited exposure to catastrophic events. For the year ended December 31, 2014 our top eleven states represented 83.6% of our gross
premium written. The following table sets forth the distribution of our P&C gross premium written by state as a percent of total
gross premium written for the years ended December 31, 2014, 2013 and 2012:
(amounts in thousands)
New York
North Carolina
California
Michigan
New Jersey
Florida
Connecticut
Texas
Louisiana
Virginia
Massachusetts
Other States
Total
2014
Year Ended December 31,
2013
2012
$
406,445
378,475
306,292
101,353
93,460
85,017
66,455
62,180
60,838
58,480
47,753
20.4% $
19.0%
15.4%
5.1%
4.7%
4.3%
3.3%
3.1%
3.0%
2.9%
2.4%
180,663
352,556
178,317
85,931
863
95,573
1,771
31,943
12,929
83,850
—
13.8% $
27.0%
13.7%
6.6%
0.1%
7.3%
0.1%
2.4%
1.0%
6.4%
—%
182,200
339,826
177,513
72,635
1,869
120,705
1,968
36,577
12,646
73,784
—
13.6%
25.3%
13.2%
5.4%
0.1%
9.0%
0.1%
2.7%
0.9%
5.5%
—%
327,960
$ 1,994,708
16.4%
280,858
100.0% $ 1,305,254
21.6%
323,935
100.0% $ 1,343,658
24.2%
100.0%
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Underwriting and Claims Management Philosophy
We believe that proactive and prompt claims management is essential to reducing losses and lowering loss adjustment expenses
("LAE") and enables us to more effectively and accurately measure reserves. To this end, we utilize our technology and extensive
database of loss history in order to appropriately price and structure policies, maintain lower levels of loss, enhance our ability to
accurately predict losses, and maintain lower claims costs. We believe a strong underwriting foundation is best accomplished through
careful risk selection and continuous evaluation of underwriting guidelines relative to loss experience. We are committed to a
consistent and thorough review of new underwriting opportunities and our portfolio and product mix as a whole.
Underwriting, Pricing and Risk Management, and Actuarial Capabilities
We establish premium rates for insurance products based upon an analysis of expected losses using historical experience and
anticipated future trends. Our product team develops the product and manages our underwriting tolerances. Our actuarial team uses
a detailed actuarial analysis to establish the necessary rate level for a given product and territory to achieve our targeted return. For
risks which fall within our underwriting tolerances, we establish a price by matching rate to risk at a detailed level of segmentation.
We determine the individual risk using predictive modeling developed by our analytics team with a level of precision that we believe
is superior to the traditional loss cost pricing used by many of our competitors. We believe that effective collaboration among the
product, analytics and actuarial teams enhances our ability to price risks appropriately and achieve our targeted rates of return.
To assist us in profitably underwriting our P&C products, our predictive analytics team has developed our RAD 5.0 underwriting
pricing tool. The RAD 5.0 underwriting pricing tool offers significant advantages over our current pricing tools by employing
numerous additional components and pricing strategies such as supplemental risk and improved credit modeling. We expect the
RAD 5.0 underwriting pricing tool will facilitate better pricing over the lifetime of a policy by employing lifetime value modeling,
elasticity modeling and optimized pricing. We believe that RAD 5.0 provides us with a competitive advantage for pricing our
products relative to other auto insurers of our size.
Our actuarial group is central to the pricing and risk management process. The group carries out a number of functions
including developing, tracking, and reporting on accident year loss results, monitoring and addressing national, state and channel-
specific profit trends and establishing actuarial rate level needs and indications. Our actuarial group also helps ensure the integrity
of reported accident year results. We also engage an independent third-party actuary to perform an annual actuarial review.
Claims
Claims can be submitted by telephone, email or smartphone app by policyholders, producers or other parties directly to our
claims department. Upon notification of a claim, our claims call center creates a loss notice based on policy information in our
claims system, EPIC. The claim is then automatically assigned to a claim handler and to a field adjuster for a vehicle inspection, if
necessary. An initial reserve is established based on the type and location of the exposure and data from actuarial tables. A notice
to the adjuster is automatically generated immediately after a claim has been assigned. The claim handler’s manager receives a
status assignment 24 hours later to ensure the claim is being investigated in a timely manner. The claim handler evaluates coverage
and loss participants and investigates the loss. If the claim represents a loss exceeding $50,000, the claim handler will establish a
case-specific reserve based on the potential exposure. Claims with potential losses exceeding $75,000 are referred to the large loss
unit and handled by employees specially trained to handle these claims. Every claims employee is granted authority to reserve and
pay up to a specified claim level. If the potential claim amount claim exceeds the employee’s authority level, the request is
automatically forwarded through EPIC to the manager with the appropriate authority level. As part of the investigation, claim
handlers contact the parties to the loss and complete their investigations. Claim handlers record all investigation activities in EPIC,
which are reviewed periodically by the managers in the department to ensure proper claims handling. Once the claim investigation
has been completed, the claim handler works to close the claim as soon as possible. As of December 31, 2014, our Claims department
includes approximately 1,300 individuals.
We carefully monitor our claim performance to ensure efficient handling. Management teams perform weekly reviews of
open and aged claim reports. Through a combination of peer reviews, supervisor audits and monthly management information
system reports, we have established several mechanisms designed to maintain and improve our level of claim handling performance.
Competition
The property and casualty insurance market in the United State is highly competitive. We believe that our primary competition
comes not only from national companies or their subsidiaries, such as The Progressive Corporation, The Allstate Corporation, The
Travelers Companies, Inc., The Hanover Insurance Group, Inc., Selective Insurance Group, Inc., State Farm Mutual Automobile
5
Insurance Company, Farmers Insurance Group and GEICO, but also from nonstandard insurers such as Mercury General Corporation,
Infinity Property & Casualty Corporation and Direct General Corporation and independent agents that operate in a specific region
or single state in which we operate.
We rely heavily on technology and extensive data gathering and analysis to segment markets and price accurately according
to risk potential. We have remained competitive by refining our risk measurement and price segmentation skills, closely managing
expenses, and achieving operating efficiencies. Superior customer service and fair and accurate claims adjusting are also important
factors in our competitive strategy. With the implementation of our new policy administration system and our RAD 5.0 underwriting
pricing tool, we believe we will continue to operate well in the competitive environment. See “-Technology” for more information
regarding our new policy administration system and RAD 5.0 pricing tool.
P&C Acquisitions
Since we acquired our P&C insurance business in 2010, we have entered into a renewal rights transaction and have made
several acquisitions. These additional operations have increased our presence in our target markets and broadened our distribution
capabilities.
•
•
In July 2011, we acquired the renewal rights to a book of RV and trailer business (the “RV Business”) from American
Modern Home Insurance Company and its affiliates. We also assumed 100% of the in-force RV Business, net of external
reinsurance starting January 1, 2012. The primary states for this RV business are California, New Jersey, Texas, Florida,
New York and North Carolina.
In November 2011, we acquired 70% of the equity interests of ClearSide General Insurance Services, LLC, a California-
based general agency that specializes in personal and commercial property and casualty lines insurance products. In June
2012, we completed our acquisition of the remaining 30% of the equity interests of ClearSide General Insurance Services,
LLC.
• On April 1, 2014, we purchased Personal Express Insurance Company (“Personal Express”), a California domiciled personal
auto and home insurer from Sequoia Insurance Company, an affiliate of AmTrust Financial Services, Inc. (“AmTrust”).
The purchase price was approximately $21.5 million, subject to certain adjustments.
• On June 27, 2014, we purchased certain assets of Imperial Management Corporation ("Imperial"), including its underwriting
subsidiaries Imperial Fire & Casualty Insurance Company and National Automotive Insurance Company, its retail agency
subsidiary ABC Insurance Agencies, and its managing general agency subsidiary RAC Insurance Partners. The purchase
price was approximately $20.0 million. In connection with the Imperial transaction, we assumed certain debt of Imperial
and Imperial Fire & Casualty Insurance Company (see Note 15, "Debt" in the notes to our consolidated financial statements).
•
In July 2014, we reacquired Agent Alliance Insurance Company (“AAIC”), an Alabama-domiciled insurer focused on
private passenger auto business in North Carolina, which is also licensed as a surplus lines carrier in over 30 states, from
ACP Re for a purchase price equal to AAIC’s capital and surplus of approximately $17.3 million. After initially acquiring
AAIC in September 2011, we then sold AAIC to ACP Re in 2012, at which time we had continued to reinsure 100% of
its existing and renewal private passenger auto insurance.
• On September 15, 2014, ACP Re, a Bermuda reinsurer that is a subsidiary of The Michael Karfunkel 2005 Grantor Retained
Annuity Trust (the “Karfunkel GRAT”), completed the acquisition of 100% of the outstanding stock of Tower Group
International, Ltd. ("Tower") and caused its subsidiary to merge into Tower (the "Merger") pursuant to a merger agreement,
dated January 3, 2014, by and between ACP Re Ltd. ("ACP Re") and Tower. In connection with the Merger, we acquired
two management companies from ACP Re for $7.5 million. The management companies are the attorneys-in-fact for the
Reciprocal Exchanges. We also agreed to pay ACP Re contingent consideration in the form of a three year earn-out of 3%
of the gross premium written of the Tower personal lines business written or assumed by us following the merger, capped
at $30.0 million over the three year period. We estimated the fair value of the Contingent Payments to be approximately
$26.1 million at the acquisition date.
A&H Segment
Established in 2012, our A&H segment provides supplemental accident and health insurance products. The key to our overall
strategy revolves around distribution. We have multiple ways to reach the consumer through established channels including:
•
directly to the consumer through our in-house general agency;
to independent agents through our in-house general agency;
•
• wholesaling through other general agents and Managing General Underwriters (MGUs): and
•
through employers in the worksite.
6
We believe that our distribution is unique because it is not driven by “company stores” - outlets that only sell products
underwritten by us. In the markets where we choose not to underwrite, such as traditional individual major medical, we still sell
these products on behalf of third party carriers. This means that we can match the consumer to the product that the consumer needs,
whether it’s a product underwritten by us or a third party carrier. This one stop shopping element makes our distribution outlets
attractive for both consumers and agents and allows us to promote our supplemental/ancillary products in a single sale environment.
Our product focus in our A&H segment is offering solutions not covered by the Patient Protection and Affordable Care Act
("PPACA"), as well as economical and quality alternatives to the traditional group and individual insurance markets. PPACA has
created more access for the consumer by mandating individual coverage, eliminating underwriting barriers and providing subsidies.
Consumers are now compelled to purchase coverage. While individuals or groups who traditionally may have had issues in obtaining
coverage will benefit, a significant portion of the market will still have challenges in obtaining health insurance that balances depth
of coverage with affordability. Because of our far-reaching distribution capability and focused product portfolio, we believe we are
uniquely positioned to offer value to our consumers.
Our products fall into three broad categories: (1) supplemental/ancillary healthcare policies that mitigate exposure to high
out-of-pocket costs with some major medical policies; (2) specialty accident policies and short term individual major medical
policies specifically not regulated by PPACA that help a consumer obtain affordable healthcare as a bridge to more traditional forms
of insurance; and (3) self-insurance programs for small employers to assist employers who find self-insurance to be a more cost
effective solution to the group healthcare needs.
A&H Acquisitions
Principally through the following acquisitions that we recently completed in our A&H segment, we have built a platform to
market our and other carriers’ A&H products. This platform consists of the following operations:
•
•
•
•
•
•
In November 2012, we acquired National Health Insurance Company (“NHIC”), a Texas-domiciled life and health insurer
currently licensed in 48 states and the District of Columbia to write our A&H risks. NHIC was established as a life and
health insurer in 1979. We have filed and are in the process of receiving approvals for a significant number of our target
A&H insurance products for individuals and groups, which include life, accident, limited medical/hospital indemnity, short
term disability, short term recovery care, short-term medical, cancer/critical illness, and stop loss.
In February 2012, we acquired VelaPoint, LLC, a general agency that operates a call center with approximately 200 licensed
agents selling a full range of supplemental medical insurance products, as well as individual major medical policies
underwritten through a wide range of third-party insurance companies. For the year ended December 31, 2014, VelaPoint
produced approximately $130 million in premium on behalf of third parties. We expect a significant percentage of
VelaPoint’s sales of supplemental health products will transition to be written by NHIC.
In February 2012, we acquired America’s HealthCare Plan (“AHCP”), a managing general agent/program manager. AHCP
works with over 4,300 independent agents and general agents across the country to provide an array of insurance products,
including those offered by third-party insurers, and will serve as a significant method of distribution for NHIC’s products.
In September 2012, we acquired from the Coca-Cola Bottlers’ Association a health insurance administration company that
administers specialty self-insurance arrangements, offering ERISA qualified self-insured plans to employers in affinity
associations or trade groups and selling medical stop loss coverage to employers through captive insurers (collectively,
the “TABS” companies). We have subsequently expanded our distribution beyond the initial affinities and now also market
using NHIC products.
In January 2013, we assumed 100% of an in-force book of A&H business from an affiliate of AmTrust. This business also
focuses on smaller group stop loss programs.
In April 2013, we acquired EuroAccident, a European group life and health insurance managing general agent. The agency
distributes life and health insurance to groups as well as individuals. Distribution predominantly takes place through broker
channels and affinity partners. For the year ended December 31, 2014, EuroAccident produced approximately $99 million
in premium on behalf of third parties. Commencing January 1, 2014, our European insurance subsidiary began reinsuring
all business placed by EHC (the "EHC Business"). Commencing April 1, 2014, all new and renewal policies placed by
EHC are underwritten by our European insurance subsidiaries.
A&H Product Overview
We focus on products that will be sold outside of the PPACA framework to the emerging uninsured or underinsured individual
and group worksite markets, who we expect will consist largely of people with incomes above the level that qualify for government
subsidies. This emerging market includes groups and individuals who are seeing their out-of-pocket health insurance costs rise
under PPACA, and part-time employees and full-time employees who work for employers with fewer than 50 employees. Our
7
products include products packaged with other coverages or services to enhance the overall value proposition to the consumer, as
well as standalone products either purchased alone or as a supplement to major medical coverage. Target products for groups
(through employers) and individuals include:
• Accident/AD&D. This coverage pays a stated benefit to the insured or his/her beneficiary in the event of bodily injury or
death due to accidental means (other than natural causes). For our targeted young and uninsured population, accident
policies can provide basic insurance protection for those without coverage. These policies also serve as supplemental
policies underneath high deductible major medical plans.
• Hospital Indemnity. These plans serve as supplements to high deductible plans, helping mitigate high catastrophic
individual out of pocket expenses. They can also be sold as standalone programs to groups, offering basic insurance for
those that cannot afford or do not wish to pay for more expensive major medical coverage.
•
•
Short Term Recovery Care. These plans are designed to provide short term coverage post discharge from acute care/
rehab center to the nursing home setting.
Short-Term Medical. These plans offer comprehensive coverage to individuals for a prescribed short duration, generally
six months, but can be up to a year.
• Cancer/Critical Illness. Critical illness policies can provide coverage for many costs that are not covered by traditional
health insurance. This coverage can be sold on a guarantee and simplified issue (health questionnaire) basis either as a
standalone product or packaged with other products.
•
Stop Loss. We expect that increases in health insurance costs will cause an increase in the number of employers offering
self-insured plans. NHIC offers a wide array of stop loss programs for small and large employers, as permitted by state
law. We also package our non-major medical coverages with stop loss programs.
• Dental/Vision. These policies provide basic dental or vision coverage and can be sold on a stand-alone basis or packaged
with other products. They are frequently matched with discount plans.
Ratings
Financial strength ratings are an important factor in establishing the competitive position of insurance companies and are
important to our ability to market and sell our products. Rating organizations continually review the financial positions of insurers,
including us. A.M. Best has currently assigned our insurance subsidiaries a group rating of “A-” (Excellent) which is the fourth
highest out of fifteen ratings. According to A.M. Best, “A-” ratings are assigned to insurers that have an excellent ability to meet
their ongoing financial obligations to policyholders. This rating reflects A.M. Best’s opinion of our ability to pay claims and is not
an evaluation directed to investors regarding an investment in our common stock. This rating is subject to periodic review by, and
may be revised downward or revoked at the sole discretion of, A.M. Best. There can be no assurance that we will maintain our
current ratings. Future changes to our rating may adversely affect our competitive position. See Item 1A, “Risk Factors-Risks
Relating to our Business Generally-A downgrade in the A.M. Best rating of our insurance subsidiaries would likely reduce the
amount of business we are able to write and could materially adversely impact the competitive positions of our insurance subsidiaries.”
Loss Reserves
We record loss reserves for estimated losses under the insurance policies that we write and for LAE related to the investigation
and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and
unreported loss and loss adjustment expenses incurred and unpaid at any given point in time based on known facts and circumstances.
The process of establishing the liability for unpaid losses and loss adjustment expenses is complex and imprecise as it must
take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates
and judgments as to our ultimate exposure to losses are an important component of our loss reserving process.
Loss reserves include statistical reserves and case estimates for individual claims that have been reported and estimates for
claims that have been incurred but not reported at the balance sheet date as well as estimates of the expenses associated with
processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Estimates
are based upon past loss experience modified for current trends as well as economic, legal and social conditions. Loss reserves,
except life reserves, are not discounted to present value, which would involve recognizing the time value of money and offsetting
estimates of future payments by future expected investment income.
Incurred but not reported ("IBNR") reserve estimates are generally calculated by first projecting the ultimate cost of all claims
that have occurred and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss
8
expenses plus case reserves. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported,
some of which are not yet known to the insured, as well as a provision for future development on reported claims.
We regularly review our loss reserves using a variety of actuarial methods and available information. We update the reserve
estimates as historical loss experience develops, additional claims are reported and settled or as new information becomes available.
Any changes in estimates are reflected in financial results in the period in which the estimates are changed.
Our loss reserves are reviewed quarterly by internal actuaries and at least annually by our external actuaries. The actuarial
review may include an actual to expected loss analysis or more detailed reserve indications for segments with changes, as well as
the actuary’s reasonable reserve range compared to carried reserves. We review available actuarial indications and review carried
reserves compared to the reasonable reserve range to determine whether any reserve adjustments are warranted.
There is no one specific industry standard for determining reasonable reserve ranges. The internal actuarial reserve ranges
are established by considering projections using variations in the underlying actuarial assumptions, projections based on different
weightings of the individual actuarial methods, projections by statistical variability analysis, or by other appropriate reserve
considerations.
Our internal actuarial analysis of the historical data provides the factors we use in our actuarial analysis in estimating our loss
and LAE reserves. These factors are implicit measures over time of claims reported, average case incurred amounts, case
development, severity and payment patterns. However, these factors cannot be directly used as they do not take into consideration
changes in business mix, claims management, regulatory issues, medical trends, and other subjective factors. We generally use a
combination of actuarial factors and subjective assumptions in the development of up to seven of the following actuarial
methodologies:
•
•
•
•
Paid Development Method - uses historical, cumulative paid losses by accident year and develops those actual losses to
estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a
manner that is analogous to prior years.
Paid Generalized Cape Cod Method - combines the Paid Development Method with the expected loss method, where the
expected loss ratios are estimated from exposure and claims experience weighted across multiple accident periods. The
selected expected loss ratio for a given accident year is derived by giving some weight to all of the accident years in the
experience history rather than treating each accident year independently.
Paid Bornhuetter-Ferguson (“BF”) Method - a combination of the Paid Development Method and the Expected Loss
Method, the Paid BF Method estimates ultimate losses by adding actual paid losses and projected future unpaid losses.
The amounts produced are then added to cumulative paid losses to produce the final estimates of ultimate incurred losses.
Incurred Development Method - uses historical, cumulative incurred losses by accident year and develops those actual
losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate
cost in a manner that is analogous to prior years.
•
Incurred Generalized Cape Cod Method - combines the Incurred Development Method with the expected loss method,
where the expected loss ratios are estimated from exposure and claims experience weighted across multiple accident
periods. The selected expected loss ratio for a given accident year is derived by giving some weight to all of the accident
years in the experience history rather than treating each accident year independently.
Incurred Bornhuetter (“BF”) Method - a combination of the Incurred Development Method and the Expected Loss Method,
the Incurred BF Method estimates ultimate losses by adding actual incurred losses and projected future unreported losses.
The amounts produced are then added to cumulative incurred losses to produce an estimate of ultimate incurred losses.
• Expected Loss Method - utilizes an expected ultimate loss ratio based on historical experience adjusted for trends multiplied
•
by earned premium to project ultimate losses.
For each method, losses are projected to the ultimate amount to be paid. We then analyze the results and may emphasize or
deemphasize some or all of the outcomes to reflect actuarial judgment regarding their reasonableness in relation to supplementary
information and operational and industry changes. These outcomes are then aggregated to produce a single selected point estimate
that is the basis for the internal actuary’s point estimate for loss reserves.
In determining the level of emphasis that may be placed on some or all of the methods, internal actuaries periodically review
statistical information as to which methods are most appropriate, whether adjustments are appropriate within the particular methods,
and if results produced by each method include inherent bias reflecting operational and industry changes.
9
This supplementary information may include:
•
•
•
•
•
•
•
open and closed claim counts;
statistics related to open and closed claim count percentages;
claim closure rates;
changes in average case reserves and average loss and loss adjustment expenses incurred on open claims;
reported and ultimate average case incurred changes;
reported and projected ultimate loss ratios; and
loss payment patterns.
When reviewing reserves described in this section, we analyze historical data and estimate the impact of numerous factors
such as (1) individual claim information; (2) industry and the historical loss experience; (3) legislative enactments, judicial decisions,
legal developments in the imposition of damages, and changes in political attitudes; and (4) trends in general economic conditions,
including the effects of inflation. This process assumes that past experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for predicting future events. There is no precise method for subsequently evaluating the
impact of any specific factor on the adequacy of reserves, because the eventual deficiency or redundancy is affected by multiple
factors. The key assumptions we use in our determination of appropriate reserve levels include the underlying actuarial
methodologies, consideration of pricing and underwriting initiatives, an evaluation of reinsurance costs and retention levels, and
consideration of any claims handling impact on paid and incurred loss data trends embedded in the traditional actuarial methods.
With respect to estimating ultimate losses and LAE, the key assumptions remained consistent for the years ended December 31,
2014, 2013 and 2012 and our approach in establishing such assumptions remained consistent for newly underwritten lines. If
circumstances bear out our assumptions, losses incurred in 2014 should develop similarly to losses incurred in 2013 and prior years.
Thus, if for example, the Net Loss Ratio for auto insurance premiums written in a given accident year is 65.0%, we expect that the
Net Loss Ratio for auto insurance premiums written in that same accident year evolving in Year 2 would also be 65.0%. However,
due to the inherent uncertainty in the loss development factors, our actual liabilities may differ significantly from our original
estimates.
The reserve range below provides a sensitivity analysis regarding a range of reserve estimates considered to be reasonable
based on current information and normal variations in actual losses and assumptions. This range was developed based on actuarial
judgment of the potential variance in key loss reserve factors which influence ultimate frequency and severity that can cause favorable
or unfavorable development in loss reserves. However, due to the inherent uncertainty involved with projecting future loss events,
the reserve range does not include all possible outcomes, and our actual liabilities may differ significantly from our original reserve
estimates. Our analysis does not anticipate any extraordinary changes in the legal, social or economic environments that could affect
the ultimate outcome of claims, or the emergence of claims from causes not currently recognized in the historical data. Such
extraordinary changes or claim emergence may impact the level of required reserves in ways that are not presently quantifiable.
Thus, while we believe our reserve estimates are reasonable given the information currently available, it must be recognized that
actual emergence of losses could deviate, perhaps significantly, from our estimates and the amounts recorded by us.
As of December 31, 2014, 2013 and 2012, our reserves, net of reinsurance recoverables, were $650.4 million, $308.4 million
and $295.1 million, respectively. In calendar year 2014, unpaid loss reserves increased by $341.9 million, or 110.9% of the $308.4
million beginning net loss and LAE reserves at December 31, 2013, primarily due to growth caused by the Tower Cut-Through
Reinsurance Agreement, the EHC Reinsurance Agreement, Imperial and the Quota Share Runoff which increased net retained
reserve liabilities. In calendar year 2013, unpaid loss reserves increased by $13.3 million, or 4.5% of the $295.1 million beginning
net loss and LAE reserves at December 31, 2012.
There were no significant changes in the methodologies or key assumptions utilized in the analysis and calculations of our
loss reserves during the years ended December 31, 2012, 2013 and 2014. Irrespective of whether the exposure type was underwritten
during the entire three year period, our estimation methodologies and approaches to establishing key assumptions are reasonably
consistent from year to year for any given line of business.
10
NGHC
Reciprocal Exchanges
Total
Net Loss Reserves evaluated as of December 31, 2014
(amounts in thousands)
Range of Net Reserve Estimates
Low
Carried
High
$
$
517,789
81,645
599,434
$
$
562,090
88,265
650,355
$
$
596,446
97,091
693,537
The resulting range derived from this sensitivity analysis would have increased net reserves by approximately $43.2 million
or decreased net reserves by approximately $50.9 million, at December 31, 2014. The increase would have reduced net income and
stockholders’ equity by approximately $28.1 million. The decrease would have increased net income and stockholders equity by
approximately $33.1 million. A change in our reserves for net losses and loss adjustment expenses would not have an immediate
impact on our liquidity, but would affect cash flow in future periods as the losses are paid.
Given the numerous factors and assumptions used in our estimates of net reserves for losses and loss adjustment expenses,
and consequently this sensitivity analysis, we do not believe that it would be meaningful to provide more detailed disclosure regarding
specific factors and assumptions and the individual effects of these factors and assumptions on our net reserves. Furthermore, there
is no precise method for subsequently reevaluating the impact of any specific factor or assumption on the adequacy of reserves
because the eventual deficiency or redundancy is affected by multiple interdependent factors.
Reconciliation of Loss and Loss Adjustment Expense Reserves
The table below shows the reconciliation of loss reserves on a gross and net basis for the years ended December 31, 2014,
2013, and 2012, reflecting changes in losses incurred and paid losses:
(amounts in thousands)
Years Ended December 31,
2014
Reciprocal
Exchanges
Total
2013
Total
2012
Total
NGHC
Unpaid losses and LAE, gross of related
reinsurance recoverable at beginning of
year
Less: Reinsurance recoverables at
beginning of year
Net balance at beginning of year
Incurred losses and LAE related to:
Current year
Prior year
Total incurred
Paid losses and LAE related to:
Current year
Prior year
Total paid
Acquired outstanding loss and loss
adjustment reserve
Effect of foreign exchange rates
Net balance at end of year
Plus reinsurance recoverables at end of
year
Gross balance at end of year
$
1,259,241
$
— $
1,259,241
$
1,286,533
$
1,218,412
(950,828)
308,413
1,008,406
17,941
1,026,347
(645,826)
(187,010)
(832,836)
66,066
(5,900)
562,090
—
—
(950,828)
308,413
(991,447)
295,086
(920,719)
297,693
25,382
1,336
26,718
(20,715)
(12,429)
(33,144)
94,691
—
88,265
1,033,788
19,277
1,053,065
(666,541)
(199,439)
(865,980)
160,757
(5,900)
650,355
456,039
6,085
462,124
(265,907)
(182,890)
(448,797)
—
—
308,413
401,388
1,298
402,686
(279,178)
(136,426)
(415,604)
10,311
—
295,086
888,215
1,450,305
$
$
23,583
111,848
$
911,798
1,562,153
$
950,828
1,259,241
$
991,447
1,286,533
11
For the years ended December 31, 2014, 2013 and 2012, our gross reserves for loss and LAE were $1,562.2 million, $1,259.2
million and $1,286.5 million, respectively, of which our case reserves and our reserves for estimated losses that have been incurred
but not reported (IBNR) were broken down as follows:
(amounts in thousands)
December 31,
Case reserves for unpaid losses and LAE,
gross of related reinsurance recoverable
Incurred but not reported (IBNR) reserves
for unpaid losses and LAE, gross of
related reinsurance recoverable*
Unpaid losses and LAE, gross of related
reinsurance recoverable
Case reserves for unpaid losses and LAE,
net of related reinsurance recoverable
Incurred but not reported (IBNR) reserves
for unpaid losses and LAE, net of related
reinsurance recoverable
Unpaid losses and LAE, net of related
reinsurance recoverable
2014
Reciprocal
Exchanges
Total
2013
Total
2012
Total
NGHC
$
470,862
$
73,689
$
544,551
$
342,254
$
353,351
979,443
38,159
1,017,602
916,987
933,182
$
1,450,305
$
111,848
$
1,562,153
$
1,259,241
$
1,286,533
$
320,849
$
56,569
$
377,418
$
163,844
$
165,625
241,241
31,696
272,937
144,569
129,461
$
562,090
$
88,265
$
650,355
$
308,413
$
295,086
_________________
* Includes total reinsurance recoverables on unpaid losses as respects business subject to the Michigan Catastrophic Claims
Association ("MCCA") and the North Carolina Reinsurance Facility ("NCRF"). For additional information regarding reinsurance
recoverables on unpaid losses from MCCA and NCRF, see Item 7, "Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Reinsurance."
Prior Year Loss Development
Changes in loss reserve estimates are unavoidable because such estimates are subject to the outcome of future events. Loss
trends vary and time is required for changes in trends to be recognized and confirmed. Reserve changes that increase previous
estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that
decrease previous estimates of ultimate cost are referred to as favorable development or reserve releases.
The table below shows the net loss development for business written for each period presented. The table reflects the changes
in our loss and LAE reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding
year on a general accepted accounting principles (“GAAP”) basis.
The next section of the table sets forth the re-estimates in later years of incurred losses, including payments, for the years
indicated. The next section of the table shows, by year, the cumulative amounts of loss and LAE payments, net of amounts recoverable
from reinsurers, as of the end of each succeeding year.
The “cumulative redundancy (deficiency)” represents, as of December 31, 2014, the difference between the latest re-estimated
liability and the amounts as originally estimated. A redundancy or favorable development means that the original estimate was
higher than the current estimate. A deficiency or unfavorable development means that the current estimate is higher than the original
estimate.
12
Analysis of Loss and Loss Adjustment Expense Reserve Development
(amounts in thousands)
Gross Basis
Gross of Reinsurance Loss and
LAE Reserve
As Originally Estimated
Liability re-estimated as of:
One year later
Two years later
Three years later
Four years later
Cumulative deficiency
(redundancy)
Cumulative amount paid as of:
One year later
Two years later
Three years later
Four years later
Re-estimated Liability as % of
Original as of:
One year later
Two years later
Three years later
Four years later
Cumulative deficiency
(redundancy) on gross reserve
Loss and LAE cumulative paid as a
percentage of Originally Estimated
Liability:
One year later
Two years later
Three years later
Four years later
Period from
March 1, 2010
(Inception)
to
December 31,
Years Ended December 31,
2010
2011
2012
2013
2014
$
$
$
$
$
$
$
$
$
$
1,081,630
$ 1,218,412
1,190,512
$ 1,236,164
1,272,311
$ 1,211,144
1,227,800
$ 1,202,737
1,212,021
130,391
324,931
463,252
539,092
578,216
$
$
$
$
(15,675)
298,463
460,278
526,243
$
$
$
$
$
$
1,286,533
1,284,001
1,293,020
6,487
386,048
517,373
$
$
$
$
1,259,241
$
1,562,153
1,265,935
6,694
342,214
110.1%
117.6%
113.5%
112.1%
101.5 %
99.4 %
98.7 %
99.8%
100.5%
100.5%
12.1%
(1.3)%
0.5%
0.5%
30.0%
42.8%
49.8%
53.5%
24.5 %
37.8 %
43.2 %
30.0%
40.2%
27.2%
13
(amounts in thousands)
Net Basis
Net of Reinsurance Loss and LAE
Reserve
As Originally Estimated
Net Liability re-estimated as of:
One year later
Two years later
Three years later
Four years later
Cumulative deficiency
(redundancy)
Cumulative amount paid as of:
One year later
Two years later
Three years later
Four years later
Re-estimated Liability as % of
Original as of:
One year later
Two years later
Three years later
Four years later
Cumulative deficiency
(redundancy) on net reserve
Loss and LAE cumulative paid as a
percentage of Originally Estimated
Liability:
One year later
Two years later
Three years later
Four years later
Period from
March 1, 2010
(Inception)
to
December 31,
Years Ended December 31,
2010
2011
2012
2013
2014
$
$
$
$
$
$
$
$
$
$
386,607
364,678
396,514
384,464
390,973
$
$
$
$
297,693
298,991
305,447
310,389
$
$
$
295,086
301,171
308,605
$
$
308,413
$
650,355
327,690
4,366
$
12,696
$
13,519
$
19,277
198,970
277,463
326,373
336,693
$
$
$
136,447
231,703
266,135
$
$
182,890
$
199,439
251,355
94.3%
102.6%
99.4%
101.1%
100.4%
102.6%
104.3%
102.1%
104.6%
106.3%
1.1%
4.3%
4.6%
6.3%
51.5%
71.8%
84.4%
87.1%
45.8%
77.8%
89.4%
62.0%
85.2%
64.7%
Revisions to reserve estimates are generally the result of ongoing analysis of recent loss development trends and emerging
historical experience. Original estimates are increased or decreased as additional information becomes known regarding individual
claims.
The 2013 cumulative deficiency of $19.3 million ($17.9 million excluding the Reciprocal Exchanges) related to unfavorable
development on prior accident year loss and LAE reserves caused by loss emergence primarily attributable to the A&H segment
(including $6.8 million as a result of a loss portfolio transfer where we assumed business previously placed by EHC and $6.0 million
related to our domestic stop loss business). The remaining $5.1 million related to higher than expected losses attributable to claims
for private passenger automobile bodily injury liability and personal injury protection.
14
Technology
We rely heavily on technology and extensive data gathering and analysis to evaluate and price our products accurately according
to risk exposure. In order to provide our policyholders and producers with superior service and realize profitable growth, we have
substantially upgraded our information technology capabilities in recent years. In 2010, we started development on our new P&C
policy administration system named “NPS.” On a limited basis, we launched NPS in January 2011 and as of February 2014, all of
our P&C policies are administered on the system. NPS is based on advanced server-based technology allowing quicker processing
and the ability for enhanced scalability. This new system reduced cost by eliminating our three costly legacy mainframe based
systems and allows for increased straight-through automated processing, removing the need for expensive back office processes as
well as providing enhanced self-service functionality. Since inception, we have reduced our information technology operating
expenses significantly. We have integrated our new policy administration system across all lines of our P&C business, retired the
three legacy systems and have significantly incorporated our RAD 5.0 underwriting pricing tool into this system. Our goal is to
continue to make strategic investments in technology in order to develop sophisticated tools that enhance our customer service,
product management and data analysis capabilities.
RAD 5.0 is an underwriting pricing tool that more accurately prices specific risk exposures to assist us in profitably underwriting
our P&C products. Our RAD 5.0 technology offers significant advantages over our current underwriting pricing system by employing
numerous additional components and pricing strategies such as supplemental risk and improved credit modeling. We believe the
RAD 5.0 underwriting pricing tool will facilitate better pricing over the lifetime of a policy by employing lifetime value modeling,
elasticity modeling and optimized pricing. See “-P&C Segment-Underwriting, Pricing and Risk Management, and Actuarial
Capabilities.”
Consistent with our niche, technology-driven focus, we have an arrangement with a managing general agency that has developed
advanced vehicle telematics technology that monitors miles driven and other driver behavior, enabling us to leverage this technology
to offer lower cost, low mileage products with less exposure.
Regulation
General
We are subject to extensive regulation in the United States and to a lesser extent in Bermuda, Luxembourg and Sweden. We
have fifteen operating insurance subsidiaries domiciled in the United States: Integon Casualty Insurance Company, Integon General
Insurance Corporation, Integon Indemnity Corporation, Integon National Insurance Company (“Integon National”), Integon
Preferred Insurance Company, New South Insurance Company, MIC General Insurance Corporation, National General Insurance
Company, National General Assurance Company, National General Insurance Online, Inc., National Health Insurance Company,
Personal Express Insurance Company, Imperial Fire and Casualty Insurance Company, National Automotive Insurance Company
and Agent Alliance Insurance Company.
State Insurance Regulation
Insurance companies are subject to regulation and supervision by the department of insurance in the jurisdiction in which
they are domiciled and, to a lesser extent, other jurisdictions in which they are authorized to conduct business. The primary purpose
of such regulatory powers is to protect individual policyholders. State insurance authorities have broad regulatory, supervisory and
administrative powers, including, among other things, the power to (a) grant and revoke licenses to transact business, including
individual lines of authority, (b) set the standards of solvency to be met and maintained, (c) determine the nature of, and limitations
on, investments and dividends, (d) approve policy rules, rates and forms prior to issuance, (e) regulate and conduct specific
examinations regarding marketing, unfair trade, claims and fraud prevention and investigation practices, and (f) conduct periodic
comprehensive examinations of the financial condition of insurance companies domiciled in their state. In particular, commercial
policy rates and forms are closely regulated in all states.
Financial Oversight
Reporting Requirements
Our insurance subsidiaries are required to file detailed financial statements prepared in accordance with statutory accounting
principles and other reports with the departments of insurance in all states in which they are licensed to transact business. These
reports include details concerning claims reserves held by the insurer, specific investments held by the insurer, and numerous other
disclosures about the insurer’s financial condition and operations. These financial statements are subject to periodic examination
by the department of insurance in each state in which they are filed.
15
Investments
State insurance laws and insurance departments also regulate investments that insurers are permitted to make. Limitations are
placed on the amounts an insurer may invest in a particular issuer, as well as the aggregate amount an insurer may invest in certain
types of investments. Certain investments (such as real estate) are prohibited by certain jurisdictions.
Each of our domiciliary states has its own regulations and limitations on the amounts an insurer may invest in a particular
issuer and the aggregate amount an insurer may invest in certain types of investments. In general, investments may not exceed a
certain percentage of surplus, admitted assets or total investments. For example, the investments of Integon National, domiciled in
North Carolina, in stocks shall not exceed twenty-five percent of Integon National’s admitted assets and the stock of any one
corporation may not exceed three percent of their admitted assets. To ensure compliance in each state, we review our investment
portfolio quarterly based on each states regulations and limitations.
State Insurance Department Examinations
As part of their regulatory oversight process, state insurance departments conduct periodic detailed financial examinations of
insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in
cooperation with the insurance departments of other states under guidelines promulgated by the National Association of Insurance
Commissioners ("NAIC"). A second type of regulatory oversight examination of insurance companies involves a review by an
insurance department of an authorized company’s market conduct, which entails a review and examination of a company’s
compliance with laws governing marketing, underwriting, rating, policy-issuance, claims-handling and other aspects of its insurance
business during a specified period of time.
The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action
on the part of the company that is the subject of the examination or assessing fines or other penalties against that company.
Risk-Based Capital Regulations
Our insurance subsidiaries are required to report their risk-based capital based on a formula developed and adopted by the
NAIC that attempts to measure statutory capital and surplus needs based on the risks in the insurer’s mix of products and investment
portfolio. The formula is designed to allow insurance regulators to identify weakly-capitalized companies. Under the formula, a
company determines its “risk-based capital” by taking into account certain risks related to the insurer’s assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer’s liabilities (including underwriting risks related to the nature and
experience of its insurance business). The departments of insurance in our domiciliary states generally require a minimum total
adjusted risk-based capital equal to 200% of an insurance company’s authorized control level risk-based capital. Each of our insurance
subsidiaries had total adjusted risk-based capital substantially in excess of 200% of the authorized control level as of December 31,
2014.
Insurance Regulatory Information System Ratios
The NAIC Insurance Regulatory Information System, or IRIS, is part of a collection of analytical tools designed to provide
state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies
operating in their respective states. IRIS is intended to assist state insurance regulators in targeting resources to those insurers in
greatest need of regulatory attention. IRIS consists of two phases: statistical and analytical. In the statistical phase, the NAIC database
generates key financial ratio results based on financial information obtained from insurers’ annual statutory statements. The analytical
phase is a review of the annual statements, financial ratios and other automated solvency tools. The primary goal of the analytical
phase is to identify companies that appear to require immediate regulatory attention. A ratio result falling outside the usual range
of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system.
Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are
in themselves immaterial or because of certain reinsurance or pooling structures or changes in such structures.
In 2014, four of our insurance subsidiaries had more than three ratios departing from the usual range of values. Integon National
had five ratios with deviations primarily due to changes in the structure of the intercompany reinsurance program during prior years
and adding several new companies to the intercompany reinsurance program during 2014 as a result of acquisitions. Imperial Fire
and Casualty Insurance Company had four ratios with deviations as a result of new reinsurance programs and changes in invested
assets. National Automotive Insurance Company had five ratios with deviations primarily as a result of new reinsurance programs
and changes in invested assets. New South Insurance Company had four ratios with deviations primarily as a result of a dividend
16
and return of capital made during 2014 which was approved by the North Carolina Department of Insurance. All of the remaining
insurance subsidiaries had three or less ratios outside of the usual ranges. The insurance subsidiaries will respond to these variances
with no further inquiry expected from the NAIC. See Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources.”
Statutory Accounting Principles
Statutory accounting principles, or SAP, is a basis of accounting developed to assist insurance regulators in monitoring and
regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s solvency. Statutory
accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance
law and regulatory provisions applicable in each insurer’s domiciliary state.
Generally accepted accounting principles, or GAAP is concerned with a company’s solvency, but is also concerned with other
financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriately matching
revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets
and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with
GAAP as compared to SAP.
Some principal differences in SAP as compared to GAAP that relate to our operations are as follows:
(a) Admitted assets - the term admitted assets means the assets are stated at values that are permitted by the insurance departments
of the states of domicile. The increase or decrease in non-admitted assets is charged directly to unassigned surplus. Under
GAAP, the assets would be included in the balance sheet, net of any valuation allowances.
(b) Investments - are valued in accordance with the laws of the States of Domicile and the valuations prescribed by the Securities
Valuation Office (“SVO”) of the National Association of Insurance Commissioners (NAIC). Market values of certain
investments in bonds are based on values specified by the NAIC rather than on actual or estimated fair values under GAAP.
(c) Policy acquisition costs - costs of acquiring and renewing business are expensed when incurred under SAP rather than
capitalized and amortized over the terms of the related policies under GAAP.
(d) Reinsurance - commissions and allowances on reinsurance ceded are recognized in operations when incurred under SAP,
to the extent the amount does not exceed actual acquisition costs, rather than being deferred and amortized over the terms
of the respective reinsurance agreements under GAAP. Reserves for losses and LAE and unearned premiums are reported
net of the impact of reinsurance rather than reporting the gross amounts and recording assets for the amounts related to
reinsurance ceded as required by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
944.
(e) Unauthorized reinsurance - SAP require a liability for unauthorized reinsurance to be recorded representing reinsurance
recoverable on paid losses and LAE, unearned premiums and unpaid losses and LAE in excess of funds held, letters of credit
and trust accounts on business reinsured with insurance companies not qualified to do business in the state of domicile.
Changes in this liability are charged directly to unassigned surplus. Under GAAP, an allowance for amounts deemed
uncollectible would be established through a charge to earnings.
(f) Goodwill - under SAP, goodwill is calculated as the difference between the costs of acquiring the entity and the reporting
entity’s share of the historical book value of the acquired entity. In addition, goodwill is subject to certain limitations and
is amortized over 10 years or less, with a change to unrealized capital loss. Goodwill under GAAP is calculated as the
difference between the cost of the acquiring the entity and fair value of the assets received and liabilities assumed and are
not amortized.
(g) Income Taxes - under SAP, deferred tax assets are specifically limited to (1) the amount of federal income taxes paid in
prior years that can be recovered through loss carrybacks for existing temporary differences that reverse by the end of the
subsequent calendar year, plus (2) the lesser of the remaining gross deferred tax assets expected to be realized within one
year of the balance sheet date or 10% of capital and surplus excluding any net deferred tax assets, plus (3) the amount of
remaining gross deferred tax assets that can be offset against existing gross deferred tax liabilities. The remaining deferred
tax assets are non-admitted. The change in net admitted deferred income tax is credited or charged directly to surplus. Under
GAAP, the amount is charged or credited to income tax expense.
(h) Equalization reserve - Luxembourg domiciled insurance companies are allowed to record a catastrophe reserve in excess
of required reserves determined by a formula based on the volatility of the business ceded to the company. Under U.S. GAAP
this formula based catastrophe reserve is not recognized.
17
Credit for Reinsurance
State insurance laws permit U.S. insurance companies, as ceding insurers, to take financial statement credit for reinsurance
that is ceded, so long as the assuming reinsurer satisfies the state’s credit for reinsurance laws. The Nonadmitted and Reinsurance
Reform Act (“NRRA”) contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") provides
that if the state of domicile of a ceding insurer is an NAIC accredited state, or has financial solvency requirements substantially
similar to the requirements necessary for NAIC accreditation, and recognizes credit for reinsurance for the insurer’s ceded risk,
then no other state may deny such credit for reinsurance. Because all states are currently accredited by the NAIC, the Dodd-Frank
Act prohibits a state in which a U.S. ceding insurer is licensed but not domiciled from denying credit for reinsurance for the insurer’s
ceded risk if the cedant’s domestic state regulator recognizes credit for reinsurance. The ceding company in this instance is permitted
to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned
premium (which are that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves
and loss expense reserves to the extent ceded to the reinsurer.
Holding Company Regulation
We qualify as a holding company system under state-enacted legislation that regulates insurance holding company systems.
Each insurance company in a holding company system is required to register with the insurance regulatory agency of its state of
domicile and periodically furnish information concerning its operations and transactions, particularly with other companies within
the holding company system that may materially affect its operations, management or financial condition.
Transactions with Affiliates
The insurance laws in most of those states provide that all transactions among members of an insurance holding company
system must be fair and reasonable. These laws require disclosure of material transactions within the holding company system and,
in some cases, prior notice of or approval for certain transactions, including, among other things, (a) the payment of certain dividends,
(b) cost sharing agreements, (c) intercompany agency, service or management agreements, (d) acquisition or divestment of control
of or merger with domestic insurers, (e) sales, purchases, exchanges, loans or extensions of credit, guarantees or investments if such
transactions are equal to or exceed certain thresholds, and (f) reinsurance agreements. All transactions within a holding company
system affecting an insurer must have fair and reasonable terms and are subject to other standards and requirements established by
law and regulation.
Dividends
Our insurance subsidiaries are subject to statutory requirements as to maintenance of policyholders’ surplus and payment of
dividends. In general, the maximum amount of dividends that the insurance subsidiaries may pay in any 12-month period without
regulatory approval is the greater of adjusted statutory net income or 10% of statutory policyholders’ surplus as of the preceding
calendar year end. Adjusted statutory net income is generally defined for this purpose to be statutory net income, net of realized
capital gains, for the calendar year preceding the date of the dividend. Also, most states restrict an insurance company’s ability to
pay dividends in excess of its statutory unassigned surplus or earned surplus. In addition, state insurance regulators may limit or
restrict an insurance company’s ability to pay stockholder dividends or as a condition to issuance of a certificate of authority, as a
condition to a change of control approval or for other regulatory reasons.
Enterprise Risk and Other New Developments
In December 2010, the NAIC adopted amendments to the Model Insurance Holding Company System Regulation Act and
Regulation (the “Amended Model Act and Regulation”) to introduce the concept of “enterprise risk” within an insurance company
holding system. “Enterprise risk” is defined as any activity, circumstance, event or series of events involving one or more affiliates
of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity
of the insurer or its insurance holding company system as a whole. The Amended Model Act and Regulation imposes more extensive
informational requirements on an insurance holding company system in order to protect the licensed insurance companies from
enterprise risk, including requiring it to prepare an annual enterprise risk report that identifies the material risks within the insurance
company holding system that could pose enterprise risk to the licensed insurer. In addition, the Amended Model Act and Regulation
requires any controlling person of a domestic insurer seeking to divest its controlling interest in the domestic insurer to file a notice
of its proposed divestiture, which may be subject to approval by the insurance commissioner. To date, a number of states have
adopted some or all of the changes in the Amended Model Act and Regulation, including California and Texas, where some of our
insurance companies are domiciled or commercially domiciled. The NAIC has made certain sections of the amendments part of its
accreditation standards for state solvency regulation, which may motivate more states to adopt the amendments promptly.
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In September 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment ("ORSA") Model Act,
which requires insurers to maintain a framework for identifying, assessing, monitoring and reporting on the "material and relevant
risks" associated with the insurer's current business plans. Under the ORSA Model Act, an insurer must perform at least annually
a self-assessment of its current and future risks and must file a confidential report with the insurer's lead insurance regulator. The
ORSA report is required to be filed in 2015, subject to the various dates of adoption by states, and will describe our process for
assessing our own solvency.
Change of Control
State insurance holding company laws require prior approval by the respective state insurance departments of any change of
control of an insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of the company, whether through the ownership of voting securities, by contract or otherwise.
Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic
insurance company or any entity that controls a domestic insurance company. In addition, two of our insurance subsidiaries are
currently deemed to be commercially domiciled in Florida and, as such, are subject to regulation by the Florida Office of Insurance
Regulation (“OIR”). Florida insurance law prohibits any person from acquiring 5% or more of our outstanding voting securities or
those of any of our insurance subsidiaries without the prior approval of the Florida OIR. However, a party may acquire less than
10% of our voting securities without prior approval if the party files a disclaimer of affiliation and control. Any person wishing to
acquire control of us or of any substantial portion of our outstanding shares would first be required to obtain the approval of the
domestic regulators (including those asserting “commercial domicile”) of our insurance subsidiaries or file appropriate disclaimers.
Any future transactions that would constitute a change of control, including a change of control of us and/or any of our domestic
insurance subsidiaries, would generally require the party acquiring or divesting control to obtain the prior approval of the department
of insurance in the state in which the insurance company being acquired is domiciled (and in any other state in which the company
may be deemed to be commercially domiciled by reason of concentration of its insurance business within such state) and may also
require pre-notification in certain other states. Obtaining these approvals may result in the material delay of, or deter, any such
transaction.
In addition, insurance laws in many states contain provisions that require pre- and post-notification to the insurance departments
of a change of control of certain non-domestic insurance companies licensed in those states, as well as post-notification of a change
of control of certain agencies and third-party administrators.
These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including
through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.
Market Conduct
Regulation of Insurance Rates and Approval of Policy Forms
The insurance laws of most states in which we conduct business require insurance companies to file insurance rate schedules
and insurance policy forms for review and approval. If, as permitted in some states, we begin using new rates before they are
approved, we may be required to issue refunds or credits to the policyholders if the new rates are ultimately deemed excessive or
unfair and disapproved by the applicable state regulator. In other states, prior approval of rate changes is required and there may
be long delays in the approval process or the rates may not be approved. Accordingly, our ability to respond to market developments
or increased costs in that state can be adversely affected.
Underwriting
The use of credit in underwriting and rating is the subject of significant regulatory and legislative activity. Regulators and
legislators have expressed a number of concerns related to the use of credit, including: questions regarding the accuracy of credit
reports, perceptions that credit may have a disparate effect on the poor and certain minority groups, the perceived lack of a
demonstrated causal relationship between credit and insurance risk, the treatment of persons with limited or no credit, the impact
on credit of extraordinary life events (e.g., catastrophic injury or death of a spouse), and the credit attributes applied in the credit
scoring models used by insurers. A number of state insurance departments have issued bulletins, directives, or regulations that
regulate or prohibit the use of credit by insurers. In addition, a number of states are considering or have passed legislation to regulate
insurers’ use of credit information. The use of credit information continues to be a regulatory and legislative issue, and it is possible
that the U.S. Congress or one or more states may enact further legislation affecting its use in underwriting and rating limitations on
the ability to charge policy fees.
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Unfair Claims Practices
Generally, insurance companies, adjusting companies and individual claims adjusters are prohibited by state statutes from
engaging in unfair claims practices on a flagrant basis or with such frequency to indicate a general business practice. Unfair claims
practices include:
• misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;
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failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance
policies;
failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under
its policies;
failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;
attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was
entitled;
attempting to settle claims on the basis of an application that was altered without notice to or knowledge or consent of the
insured;
compelling insureds to institute suits to recover amounts due under policies by offering substantially less than the amounts
ultimately recovered in suits brought by them;
refusing to pay claims without conducting a reasonable investigation;
• making claim payments to an insured without indicating the coverage under which each payment is being made;
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delaying the investigation or payment of claims by requiring an insured, claimant or the physician of either to submit a
preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which
submissions contains substantially the same information;
failing, in the case of claim denials or offers of compromise or settlement, to promptly provide a reasonable and accurate
explanation of the basis for such actions; and
not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become
reasonably clear.
Guaranty Fund Assessments
Most, if not all, of the states where we are licensed to transact business require that property and casualty insurers doing
business within the state participate in a guaranty association, which is organized to pay contractual benefits owed pursuant to
insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on
all member insurers in a particular state on the basis of the proportionate share of the premiums written by the member insurers in
the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover
assessments paid through full or partial premium tax offsets.
Property and casualty insurance company insolvencies or failures may result in additional guaranty association assessments
to our insurance subsidiaries at some future date. At this time, we are unable to determine the impact, if any, that such assessments
may have on their financial positions or results of their operations. As of December 31, 2014, each of our insurance subsidiaries
has established accruals for guaranty fund assessments with respect to insurers that are currently subject to insolvency proceedings.
Assigned Risks
Automobile liability insurers in California are required to sell BI liability, property damage liability, medical expense, and
uninsured motorist coverage to a proportionate number (based on the insurer’s share of the California automobile casualty insurance
market) of those drivers applying for placement as “assigned risks.” Drivers seek placement as assigned risks because their driving
records or other relevant characteristics make them difficult to insure in the voluntary market. Many of the other states in which
we conduct business offer programs similar to that of California.
Restrictions on Withdrawal, Cancellation, and Nonrenewal
In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For
example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from
withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by the state insurance
department. The state insurance department may disapprove any proposed plan that may lead to market disruption. Laws and
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regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict
the ability of our insurance subsidiaries to exit unprofitable markets.
Required Licensing
Our insurance subsidiaries operate under licenses issued by the department of insurance in the states in which they sell
insurance. If a regulatory authority denies or delays granting a new license, our ability to offer new insurance products in that market
may be substantially impaired. In addition, if the department of insurance in any state in which one of our insurance subsidiaries
currently operates suspends, non-renews, or revokes an existing license, we would not be able to offer affected products in the state.
In addition, insurance agencies, producers, third-party administrators, claims adjusters and service contract providers and
administrators are subject to licensing requirements and regulation by insurance regulators in various states in which they conduct
business. Certain of our subsidiaries engage in these functions and are subject to licensing requirements and regulation by insurance
regulators in various states.
Federal and State Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals
that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in
lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which have been
enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. The NAIC has
undertaken a Solvency Modernization Initiative focused on updating the U.S. insurance solvency regulation framework, including
capital requirements, governance and risk management, group supervision, accounting and financial reporting and reinsurance. The
Amended Model Act and Regulation (discussed above) is a result of these efforts. Additional requirements are also expected. For
example, the NAIC has adopted the Risk Management and ORSA Model Act, which when adopted by the states, will require insurers
to perform an ORSA and, upon request of a state, file an ORSA Summary Report with the state. The ORSA Summary Report is
required in 2015, subject to the various dates of adoption by states, and will describe our process for assessing our own solvency.
On July 21, 2010, the President signed into law the Dodd-Frank Act that established a Federal Insurance Office ("FIO") within
the U.S. Department of the Treasury. The Federal Insurance Office initially is charged with monitoring all aspects of the insurance
industry (other than health insurance, certain long-term care insurance and crop insurance), gathering data, and conducting a study
on methods to modernize and improve the insurance regulatory system in the United States. On December 12, 2013, the FIO issued
a report (as required under the Dodd-Frank Act) entitled “How to Modernize and Improve the System of Insurance Regulation in
the United States” (the “Report”), which stated that, given the “uneven” progress the states have made with several near-term state
reforms, should the states fail to accomplish the necessary modernization reforms in the near term, “Congress should strongly
consider direct federal involvement.” The FIO continues to support the current state-based regulatory regime, but will consider
federal regulation should the states fail to take steps to greater uniformity (e.g., federal licensing of insurers). The Report also
appears to signal greater activity by the federal government in dealing with non-U.S. regulators and regulatory regimes, using the
authority expressly given by the Dodd-Frank Act to Treasury and the United States Trade Representative to negotiate “covered
agreements” with foreign authorities.
In addition, the Dodd-Frank Act gives the Federal Reserve supervisory authority over a number of financial services companies,
including insurance companies, if they are designated by a two-thirds vote of a Financial Stability Oversight Council as “systemically
important.” If an insurance company is designated as systemically important, the Federal Reserve’s supervisory authority could
include the ability to impose heightened financial regulation upon that insurance company and could impact requirements regarding
its capital, liquidity and leverage as well as its business and investment conduct.
The Dodd-Frank Act also incorporates the NRRA, which became effective on July 21, 2011. Among other things, the NRRA
establishes national uniform standards on how states may regulate and tax surplus lines insurance and sets national standards
concerning the regulation of reinsurance. In particular, the NRRA gives regulators in the home state of an insured exclusive authority
to regulate and tax surplus lines insurance transactions, and regulators in a ceding insurer’s state of domicile the sole responsibility
for regulating the balance sheet credit that the ceding insurer may take for reinsurance recoverables.
As noted above, new guidance and regulations continue to be issued under PPACA. If we are unable to adapt our A&H
business to current and/or future requirements of PPACA, or if significant uncertainty continues with respect to implementation of
PPACA, our A&H business could be materially adversely affected. Furthermore, should Congress extend the scope of PPACA to
include some or all of our current and proposed A&H products, such a development could have a material adverse effect on our
A&H business.
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Other possible federal regulatory developments include the introduction of legislation in Congress that would repeal the
McCarran-Ferguson Act antitrust exemption for the insurance industry. The antitrust exemption allows insurers to compile and
share loss data, develop standard policy forms and manuals and predict future loss costs with greater reliability, among other things.
The ability of the industry, under the exemption permitted in the McCarran-Ferguson Act, to collect loss cost data and build a
credible database as a means of predicting future loss costs is an important part of cost-based pricing. If the ability to collect this
data were removed, the predictability of future loss costs and the reliability of pricing could be undermined.
Privacy Regulations
In 1999, Congress enacted the Gramm-Leach-Bliley Act, which, among other things, protects consumers from the unauthorized
dissemination of certain personal information. Subsequently, states have implemented additional regulations to address privacy
issues. Certain aspects of these laws and regulations apply to all financial institutions, including insurance and finance companies,
and require us to maintain appropriate policies and procedures for managing and protecting certain personal information of our
policyholders. We may also be subject to future privacy laws and regulations, which could impose additional costs and impact our
results of operations or financial condition. In 2000, the NAIC adopted the Privacy of Consumer Financial and Health Information
Model Regulation, which assisted states in promulgating regulations to comply with the Gramm-Leach-Bliley Act. In 2002, to
further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer
Information Model Regulation. Several states have now adopted similar provisions regarding the safeguarding of policyholder
information.
Telephone Sales Regulations
The United States Congress, the Federal Communications Commission and various states have promulgated and enacted
rules and laws that govern telephone solicitations. There are numerous state statutes and regulations governing telephone sales
activities that do or may apply to our operations, including the operations of our call center insurance agencies. For example, some
states place restrictions on the methods and timing of calls and require that certain mandatory disclosures be made during the course
of a telephone sales call. Federal and state “Do Not Call” regulations must be followed for us to engage in telephone sales activities.
Offices
Our principal executive offices are located at 59 Maiden Lane, 38th Floor, New York New York 10038, and our telephone
number at that location is (212) 380-9500. Our website is www.nationalgeneral.com. Our internet website and the information
contained therein or connected thereto are not intended to be incorporated by reference into the Annual Report on Form 10-K.
Employees
As of December 31, 2014, we have approximately 2,980 employees, including part-time employees, none of whom are covered
by collective bargaining arrangements.
Emerging Growth Company
As a company with over $1.0 billion in revenue for the year ended December 31, 2014, we no longer qualify as an “emerging
growth company” in 2015 as defined in the Jumpstart our Business Startups Act of 2012, commonly known as the JOBS Act.
Available Information
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on
Schedule 14A and all amendments to those reports as required by the U.S. Securities and Exchange Commission (the “SEC”). You
may read or obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at http://www.sec.gov. Our internet website
address is www.nationalgeneral.com. You can also obtain on our website’s Investor Relations page, free of charge, a copy of our
annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those
reports, as soon as reasonably practicable after we electronically file such reports or amendments with, or furnish them to, the SEC.
Also available at the “Corporate Governance” section of the Investor Relations page of our website, free of charge, are copies
of our Code of Business Conduct and Ethics, and the charters for our Audit, Compensation, and Nominating and Corporate
Governance Committees. Copies of our Code of Business Conduct and Ethics, and Charters are also available in print free of charge,
upon request by any shareholder. You can obtain such copies in print by contacting Investor Relations by mail at our corporate
office. We intend to disclose on our website any amendment to, or waiver of, any provision of our Code of Business Conduct and
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Ethics applicable to our directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC
or NASDAQ.
Item 1A. Risk Factors
You should carefully consider the following risks and all of the other information set forth in this report, including our
consolidated financial statements and the notes thereto. The following discussion of risk factors includes forward-looking
statements and our actual results may differ substantially from those discussed in such forward-looking statements. See “Note on
Forward-Looking Statements.”
Risks Relating to Our Business
If we are unable to accurately underwrite risks and charge competitive yet profitable rates to our policyholders, our business,
financial condition and results of operations may be adversely affected.
In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all
of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our premium
rates. Establishing adequate premiums is necessary, together with investment income, to generate sufficient revenue to offset
losses, loss adjustment expenses and other underwriting costs and to earn a profit. If we do not accurately assess the risks that we
assume, we may not charge adequate premiums to cover our losses and expenses, which would negatively affect our results of
operations and our profitability. Alternatively, we could set our premiums too high, which could reduce our competitiveness and
lead to lower revenues.
Pricing involves the acquisition and analysis of historical loss data, and the projection of future trends, loss costs and expenses,
and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. In order to
accurately price our policies, we:
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collect and properly analyze a substantial volume of data from our insureds;
develop, test and apply appropriate actuarial projections and rating formulas;
closely monitor and timely recognize changes in trends; and
project both frequency and severity of our insureds’ losses with reasonable accuracy.
We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts
successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including:
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insufficient or unreliable data;
incorrect or incomplete analysis of available data;
uncertainties generally inherent in estimates and assumptions;
our failure to implement appropriate actuarial projections and rating formulas or other pricing methodologies;
regulatory constraints on rate increases;
unexpected escalation in the costs of ongoing medical treatment;
our failure to accurately estimate investment yields and the duration of our liability for loss and LAE; and
unanticipated court decisions, legislation or regulatory action.
If we are unable to establish and maintain accurate loss reserves, our business, financial condition and results of operations
may be materially adversely affected.
Our financial statements include loss reserves, which represent our best estimate of the amounts that our insurance subsidiaries
ultimately will pay on claims that have been incurred, and the related costs of adjusting those claims, as of the date of the financial
statements. There is inherent uncertainty in the process of establishing insurance loss reserves.
As a result of these uncertainties, the ultimate paid loss and loss adjustment expenses may deviate, perhaps substantially,
from the point-in-time estimates of such losses and expenses, as reflected in the loss reserves included in our financial statements.
To the extent that loss and LAE exceed our estimates, we will be required to immediately recognize the unfavorable development
and increase loss reserves, with a corresponding reduction in our net income in the period in which the deficiency is identified.
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Consequently, ultimate losses paid could materially exceed reported loss reserves and have a materially adverse effect on our
business, financial condition and results of operations.
In 2013, we transitioned our advertising and marketing to our new brand name, “National General Insurance” from our prior
name “GMAC Insurance.”
Since we acquired our P&C business from GMAC in March 2010, we marketed many of our products and services using
the “GMAC Insurance” brand name and logo. During 2013 we decided to transition to our new brand name “National General
Insurance” and did not extend our license to use the “GMAC Insurance” brand. Effective July 1, 2013, we transitioned our marketing
materials, operating materials and legal entity names containing “GMAC Insurance” to our new brand name, “National General.”
We currently market under several of our own and our affinity partners’ brand names, and do not believe that brand name is a
significant component in our customers’ decision to purchase insurance. Nonetheless, it is possible that our association with the
“GMAC Insurance” brand may have provided us with some brand recognition among certain of our agents, affinity partners and
insureds and this change could adversely affect our business, financial condition and results of operation.
Ongoing economic uncertainty could materially and adversely affect our business, our liquidity and financial condition.
In recent years, global economies and financial markets have experienced significant volatility and disruption including,
relatively high and sustained unemployment, reduced consumer spending, lower residential and commercial real estate prices,
U.S. debt ceiling and budget deficit concerns, and the relatively low availability of credit. Such conditions may potentially affect
(among other aspects of our business) the demand for and claims made under our products, the ability of customers, counterparties
and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital
resources and our investment performance. In the event that these conditions persist and result in a prolonged period of economic
uncertainty, our results of operations, our financial condition and/or liquidity, our prospects and competitor landscape could be
materially and adversely affected.
Our business is dependent on the efforts of our executive officers and other personnel. If we are unsuccessful in our efforts to
attract, train and retain qualified personnel, our business may be materially adversely affected.
Our success is dependent on the efforts of our executive officers because of their industry expertise, knowledge of our
markets, and relationships with our independent agents. Should any of our executive officers cease working for us, we may be
unable to find acceptable replacements with comparable skills and experience in the specialty P&C and A&H sectors that we
target. In addition, our business is also dependent on skilled underwriters and other skilled employees. We cannot assure you that
we will be able to attract, train and retain, on a timely basis and on anticipated economic and other terms, experienced and capable
senior management, underwriters and support staff. We intend to pay competitive salaries, bonuses and equity-based rewards in
order to attract and retain such personnel, but we may not be successful in such endeavors. The loss of key personnel, or the
inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition
or operating results. We do not currently maintain life insurance policies with respect to our executive officers or other employees.
Revenues and operating profits from our P&C segment depend on our production in several key states and adverse developments
in these key states could have a material adverse effect on our business, financial condition and results of operations.
For the year ended December 31, 2014, our P&C segment derived 84% of its gross premium written from the following
eleven states: New York (20.4%); North Carolina (19.0%); California (15.4%); Michigan (5.1%); New Jersey (4.7%); Florida
(4.3%); Connecticut (3.3%); Texas (3.1%); Louisiana (3.0%); Virginia (2.9%) and Massachusetts (2.4%). As a result, our financial
results are subject to prevailing regulatory, legal, economic, demographic, competitive, and other conditions in these states. Adverse
developments relating to any of these conditions could have a material adverse impact on our business, financial condition and
results of operations.
If we cannot sustain our business relationships, including our relationships with independent agents and agencies, we may be
unable to compete effectively and operate profitably.
We market our P&C segment products primarily through a network of approximately 19,000 independent agents. Our
relationships with our agents are generally governed by agreements that may be terminated on short notice. Independent agencies
generally are not obligated to promote our products and may sell insurance offered by our competitors. As a result, our ability to
compete and remain profitable depends, in part, on our maintaining our business relationship with our independent agents and
agencies, the marketing efforts of our independent agents and agencies and on our ability to offer insurance products and maintain
financial strength ratings that meet the requirements and preferences of our independent agents and agencies and their policyholders.
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Any failure on our part to be effective in any of these areas could have a material adverse effect on our business and results of
operations.
Our affinity channel depends on a relatively small number of affinity partner relationships for a significant percentage of the
net premium revenue that it generates, and the loss of one of these significant affinity partner relationships could have a
material adverse effect on our business, financial condition and results of operations.
Our affinity channel operates primarily through relationships with affinity partners, which include major retailers and
membership organizations. See Item 1, “Business-P&C Segment-Distribution and Marketing-Affinity Distribution Channel.” Our
top five affinity relationships collectively represent 80.9% of our affinity channel written premium. Although our relationships
with these and most of our other affinity partners are long-standing, in the event of the termination of any of our significant affinity
partner relationships, our net earned premium could be adversely affected.
If we, together with our affiliates and the other third parties that we contract with, are unable to maintain our technology
platform or our technology platform fails to operate properly, or meet the technological demands of our customers with respect
to the products and services we offer, our business and financial performance could be significantly harmed.
In 2010, we engaged AmTrust to develop a new policy administration system to replace our three legacy mainframe systems.
This system is now integrated across all lines of our P&C business. In addition, we recently developed our new RAD 5.0 underwriting
pricing tool, which allows us to more accurately evaluate specific risk exposures in order to assist us in profitably underwriting
our P&C products. However, we have not yet fully implemented our RAD 5.0 technology. There can be no assurance that the
implementation of this tool will be completed successfully or within the time frame that we contemplate. Our inability to successfully
complete its implementation could cause disruptions in our business and have a material adverse effect on our ability to conduct
our business profitably.
If we are unable to properly maintain our policy administration system and the remainder of our technology systems or if
our technology systems otherwise fail to perform in the manner we currently contemplate, our ability to effectively underwrite
and issue policies, process claims and perform other business functions could be significantly impaired and our business and
financial performance could be significantly harmed. In addition, the success of our business is dependent on our ability to resolve
any issues identified with our technology arrangements during operations and make any necessary improvements in a timely
manner. Further, we will need to match or exceed the technological capabilities of our competitors over time. We cannot predict
with certainty the cost of such maintenance and improvements, but failure to make such improvements could have an adverse
effect on our business. See Item 1, "Business-Technology".
Also, we use e-commerce and other technology to provide, expand and market our products and services. Accordingly, we
believe that it will be essential to continue to invest resources in maintaining electronic connectivity with customers and, more
generally, in e-commerce and technology. Our business may suffer if we do not maintain these arrangements or keep pace with
the technological demands of customers.
If we experience security breaches or other disruptions involving our technology, our ability to conduct our business could be
adversely affected, we could be liable to third parties and our reputation could suffer, which could have a material adverse
effect on our business.
Our business is dependent upon the uninterrupted functioning of our information technology and telecommunication systems.
We rely upon our systems, as well as the systems of our vendors, for all our business operations, including underwriting and issuing
policies, processing claims, providing customer service, complying with insurance regulatory requirements and performing
actuarial and other analytical functions necessary for underwriting, pricing and product development. Our operations are dependent
upon our ability to timely and efficiently maintain and improve our information and telecommunications systems and protect them
from physical loss, telecommunications failure or other similar catastrophic events, as well as from security breaches. A shut-
down of, or inability to access, one or more of our facilities, a power outage or a failure of one or more of our information technology,
telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. In the
event of a disaster such as a natural catastrophe, terrorist attack or industrial accident, or due to a computer virus, our systems
could be inaccessible for an extended period of time. While we have implemented business contingency plans and other reasonable
and appropriate internal controls to protect our systems from interruption, loss or security breaches, a sustained business interruption
or system failure could adversely impact our ability to process our business, provide customer service, pay claims in a timely
manner or perform other necessary business functions.
Our operations depend on the reliable and secure processing, storage and transmission of confidential and other information
in our computer systems and networks. Computer viruses, hackers, employee misconduct and other external hazards could expose
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our data systems to security breaches, cyber-attacks or other disruptions. In addition, we routinely transmit and receive personal,
confidential and proprietary information by electronic means. We have implemented security measures designed to protect against
breaches of security and other interference with our systems and networks resulting from attacks by third parties, including hackers,
and from employee or advisor error or malfeasance. We also assess and monitor the security measures of our third-party business
partners, who in the provision of services to us are provided with or process information pertaining to our business or our customers.
Despite these measures, we cannot assure that our systems and networks will not be subject to breaches or interference. Any such
event may result in operational disruptions as well as unauthorized access to or the disclosure or loss of our proprietary information
or our customers’ information, which in turn may result in legal claims, regulatory scrutiny and liability, reputational damage, the
incurrence of costs to eliminate or mitigate further exposure, the loss of customers or affiliated advisors or other damage to our
business. In addition, the trend toward broad consumer and general public notification of such incidents could exacerbate the harm
to our business, financial condition and results of operations. Even if we successfully protect our technology infrastructure and
the confidentiality of sensitive data, we could suffer harm to our business and reputation if attempted security breaches are
publicized. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit
vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments
will not compromise or breach the technology or other security measures protecting the networks and systems used in connection
with our business.
We may not be able to successfully acquire or integrate additional businesses or manage the growth of our operations, which
could make it difficult for us to compete and could adversely affect our profitability.
Since our formation in 2009, we have grown our business primarily through a number of acquisitions of insurance companies,
agencies or books of business. Part of our growth strategy is to continue to grow our business through acquisitions. This strategy
of growing through acquisitions subjects us to numerous risks, including risks associated with:
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our ability to identify profitable geographic markets for entry;
our ability to identify potential acquisition targets and successfully acquire them on acceptable terms and in a timely
manner;
our ability to integrate acquired businesses smoothly and efficiently;
our ability to achieve expected synergies, profitability and return on our investment;
the diversion of management’s attention from the day-to-day operations of our business;
our ability to attract and retain qualified personnel for expanded operations;
encountering unforeseen operating difficulties or incurring unforeseen costs and liabilities;
our ability to manage risks associated with entering into geographic and product markets with which we are less familiar;
our ability to obtain necessary regulatory approvals;
our ability to expand existing agency relationships; and
our ability to augment our financial, administrative and other operating systems to accommodate the growth of our
business.
Due to any of the above risks, we cannot assure you that (i) we will be able to successfully identify and acquire additional
businesses on acceptable terms or at all, (ii) we will be able to successfully integrate any business we acquire, (iii) we will be able
effectively manage our growth or (iv) any new business that we acquire or enter into will be profitable. Our failure in any of these
areas could have a material adverse effect on our business, financial condition and results of operations.
Recently we have diversified our insurance business by expanding into the A&H segment through several acquisitions. The
A&H insurance business is a relatively new business for us, and we have a limited operating history in this market. As a result,
the risks described above with respect to growing our business by expanding into new product markets are particularly relevant
with respect to our A&H business. Our inability to successfully continue to implement our business plan for our A&H segment
could have a material adverse effect on our financial condition and results of operations.
In addition, we recently acquired the rights for new and renewal business for the Tower personal lines insurance operations.
Our inability to successfully continue to integrate the Tower Personal Lines transaction and related assets into our P&C business
could have a material adverse effect on our financial condition and results of operations.
If our businesses, including businesses we have acquired, do not perform well, we may be required to recognize an impairment
of our goodwill or other intangible assets, which could have a material adverse effect on our financial condition and results
of operations.
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As of December 31, 2014, we had $70.8 million of goodwill recorded on our balance sheet. Goodwill represents the excess
of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition.
We are required to perform goodwill impairment tests at least annually and whenever events or circumstances indicate that the
carrying value may not be recoverable from estimated future cash flows. If we determine that the goodwill has been impaired, we
would be required to write down the goodwill by the amount of the impairment, with a corresponding charge to net income. Such
write-downs could have a material adverse effect on our financial condition and results of operations.
As of December 31, 2014, we had $248.8 million aggregate amount of intangible assets, excluding goodwill, recorded on
our balance sheet. Intangible assets represent the amount of fair value assigned to certain assets when we acquire a subsidiary or
a book of business. Intangible assets are classified as having either a finite or an indefinite life. We test the recoverability of our
intangible assets at least annually. We test the recoverability of finite life intangibles whenever events or changes in circumstances
indicate that the carrying value of a finite life intangible may not be recoverable. We recognize an impairment if the carrying value
of an intangible asset is not recoverable and exceeds its fair value, in which circumstances we must write down the intangible
asset by the amount of the impairment with a corresponding charge to net income. In connection with the Tower Transaction, we
acquired two management companies that are attorneys-in-fact for two reciprocal exchanges. If the reciprocal business does not
perform well or the reciprocal exchanges are downgraded, we may be required to recognize an impairment of our intangible assets.
Such write downs could have a material adverse effect on our financial condition and results of operations.
Our relationship with AmTrust and its subsidiaries may present, and make us vulnerable to, difficult conflicts of interest, related
party transactions, business opportunity issues and legal challenges.
AmTrust is a publicly-traded insurance holding company controlled by Michael Karfunkel, Leah Karfunkel, as the sole
trustee of the Karfunkel GRAT, George Karfunkel, Michael Karfunkel’s brother, and Barry Zyskind. AmTrust beneficially owns
or controls approximately 13.2% of our outstanding shares of common stock. Mr. Zyskind is the chief executive officer of AmTrust,
the son-in-law of Michael Karfunkel and is a member of our board of directors. Also, AmTrust (through a subsidiary) was a
reinsurer under our quota share reinsurance treaty (“Personal Lines Quota Share”) pursuant to which we historically ceded 50%
of our P&C gross premium written and related losses (excluding premium ceded to state-run reinsurance facilities) to our quota
share reinsurers. AmTrust received 10% of such ceded premium and assumed 10% of the related losses solely with respect to
policies in effect as of July 31, 2013.
We are party to a number of other arrangements with AmTrust and its affiliates, including, among others, an asset management
agreement pursuant to which a subsidiary of AmTrust provides investment management services to us; a master services agreement
pursuant to which AmTrust provides us and our affiliates with information technology development services in connection with
the development and licensing of our policy administration system; a consulting and marketing agreement pursuant to which a
subsidiary of AmTrust provides certain consulting and marketing services to promote our captive insurance program; joint
investments in entities owning life settlement contracts; a joint investment in an entity owning an office building in Cleveland,
Ohio; and an aircraft timeshare agreement with a subsidiary of AmTrust. Conflicts of interest could arise with respect to any of
our contractual arrangements with AmTrust and its affiliates, as well as any other business opportunities that could be advantageous
to AmTrust or its subsidiaries, on the one hand, and disadvantageous to us or our subsidiaries, on the other hand. AmTrust’s interests
may be different from the interests of our company and the interests of our other stockholders.
Our relationship with Maiden and its subsidiaries may present, and make us vulnerable to, difficult conflicts of interest, related
party transactions, business opportunity issues and legal challenges.
Maiden Holdings, Ltd. ("Maiden") is a publicly-held Bermuda insurance holding company of which Michael Karfunkel,
our founder, major stockholder and chairman and chief executive officer, was a founding stockholder. As of December 31, 2014,
Michael Karfunkel, Leah Karfunkel, as the sole trustee of the Karfunkel GRAT, George Karfunkel and Barry Zyskind owned or
controlled approximately 6.1%, 7.5%, 9.3% and 5.1%, respectively, of the issued and outstanding capital stock of Maiden.
Mr. Zyskind serves as the non-executive chairman of Maiden’s board of directors. Maiden Insurance Company, Ltd. (“Maiden
Insurance”), a wholly owned subsidiary of Maiden, is a Bermuda reinsurer.
Maiden Insurance was the primary reinsurer under the Personal Lines Quota Share pursuant to which we historically ceded
50% of our P&C gross premium written and related losses (excluding premium ceded to state-run reinsurance facilities) from our
P&C business to our quota share reinsurers. Maiden Insurance received 25% of the ceded premium and assumed 25% of the related
losses solely with respect to policies in effect as of July 31, 2013. Conflicts of interest could arise with respect to matters relating
to the Personal Lines Quota Share, as well as business opportunities that could be advantageous to Maiden or its subsidiaries, on
the one hand, and disadvantageous to us or our subsidiaries, on the other hand.
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Our relationship with ACP Re may present, and make us vulnerable to, difficult conflicts of interest, related party transactions,
business opportunity issues and legal challenges.
ACP Re is a Bermuda reinsurer that is a subsidiary of the Karfunkel GRAT. ACP Re was a reinsurer under the Personal
Lines Quota Share pursuant to which we historically ceded 50% of our P&C gross premium written and related losses (excluding
premium ceded to state-run reinsurance facilities) to our quota share reinsurers. ACP Re received 15% of the ceded premium and
assumed 15% of the related losses under this agreement solely with respect to policies in effect as of July 31, 2013. We also provide
management services to ACP Re pursuant to a services agreement we entered into effective November 1, 2012. In addition, we
acquired the renewal rights of the personal lines insurance operations of Tower Group International, Ltd., following ACP Re’s
acquisition of Tower. As part of the Tower Transaction, we and AmTrust provided ACP Re with financing in an aggregate amount
of up to $250 million ($125 million each). In addition, as part of the Tower Transaction, we and AmTrust issued a $250 million
aggregate stop loss reinsurance agreement to Tower pursuant to which we each, as reinsurers, provide, severally, $125 million of
stop loss coverage. This stop loss coverage indemnifies Tower to the extent Tower’s ultimate paid net losses on insurance policies
covered thereunder exceed its reserves as of the consummation of the Tower Transaction, up to the liability limit ($125 million
for each of us and AmTrust). ACP Re entered into a retrocession agreement with us and AmTrust pursuant to which ACP Re will
reimburse any payments that we or AmTrust make to Tower under the stop loss reinsurance agreement. Conflicts of interest could
arise with respect to any of the contractual arrangements between us and ACP Re, as well as business opportunities that could be
advantageous to ACP Re, on the one hand, and disadvantageous to us or our subsidiaries, on the other hand.
There can be no assurance that ACP Re will have sufficient assets or liquidity to pay its obligations under the terms of the
financing and the terms of the reinsurance provided to us and AmTrust with respect to the stop-loss coverage. ACP Re may need
to liquidate assets to fulfill these obligations. The majority of ACP Re's assets currently consist of publicly traded equity securities.
As a result of the Tower Transaction, we, through our subsidiary, have significant credit exposure to ACP Re. Although ACP Re
must reimburse us for any payments made by us pursuant to the stop loss agreement with Tower, this agreement nonetheless
exposes us to Tower’s historical commercial and personal lines business. We did not underwrite this business and the risks we are
exposed to as a result of the Tower Transaction may differ from those we typically face in the operation of our business.
A downgrade in the A.M. Best rating of our insurance subsidiaries would likely reduce the amount of business we are able to
write and could materially adversely impact the competitive positions of our insurance subsidiaries.
Rating agencies evaluate insurance companies based on their ability to pay claims. A.M. Best Company, Inc. has currently
assigned our insurance subsidiaries a group rating of “A-” (Excellent), which is the fourth highest out of fifteen ratings. The ratings
of A.M. Best are subject to periodic review using, among other things, proprietary capital adequacy models, and are subject to
revision or withdrawal at any time. Our competitive position relative to other companies is determined in part by the A.M. Best
rating of our insurance subsidiaries. A.M. Best ratings are directed toward the concerns of policyholders and insurance agencies
and are not intended for the protection of investors or as a recommendation to buy, hold or sell securities.
There can be no assurances that our insurance subsidiaries will be able to maintain their current ratings or, in the case of
NHIC, obtain a favorable rating. Any downgrade in ratings would likely adversely affect our business through the loss of certain
existing and potential policyholders and the loss of relationships with independent agencies that might move to other companies
with higher ratings. We are not able to quantify the percentage of our business, in terms of premiums or otherwise, that would be
affected by a downgrade in our A.M. Best ratings.
Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial
results.
Our results are affected, in part, by the performance of our investment portfolio. Our investment portfolio contains interest
rate sensitive investments, such as fixed-income securities. As of December 31, 2014, our investment in fixed-income securities
was approximately $1,646.3 million, or 89.4% of our total investment portfolio, including cash and accrued interest. Increases in
market interest rates may have an adverse impact on the value of our investment portfolio by decreasing the value of fixed-income
securities. Conversely, declining market interest rates could have an adverse impact on our investment income as we invest positive
cash flows from operations and as we reinvest proceeds from maturing and called investments in new investments that could yield
lower rates than our investments have historically generated. Defaults in our investment portfolio may produce operating losses
and adversely impact our results of operations.
Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international
economic and political conditions, and other factors beyond our control. We may not be able to manage interest rate sensitivity
effectively. Despite our efforts to maintain a high quality portfolio and manage the duration of the portfolio to reduce the effect
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of interest rate changes, a significant change in interest rates could have a material adverse effect on our financial condition and
results of operations.
In addition, the performance of our investment portfolio generally is subject to other risks, including the following:
the risk of decrease in value due to a deterioration in the financial condition, operating performance or business prospects
of one or more issuers of our fixed-income securities;
the risk that our portfolio may be too heavily concentrated in the securities of one or more issuers, sectors or industries;
the risk that we will not be able to convert investment securities into cash on favorable terms and on a timely basis; and
general movements in the values of securities markets.
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If our investment portfolio were to suffer a substantial decrease in value due to market, sector or issuer-specific conditions,
our liquidity, financial condition and results of operations could be materially adversely affected. A decrease in value of an insurance
subsidiary’s investment portfolio could also put the subsidiary at risk of failing to satisfy regulatory minimum capital requirements
and could limit the subsidiary’s ability to write new business.
Our holding company structure and certain regulatory and other constraints, including adverse business performance, could
affect our ability to satisfy our obligations.
We are a holding company and conduct our business operations through our various subsidiaries. Our principal sources of
funds are dividends and other payments from our insurance subsidiaries, income from our investment portfolio and funds that
may be raised from time to time in the capital markets. We will be largely dependent on amounts from our insurance subsidiaries
to pay principal and interest on any indebtedness that we may incur, to pay holding company operating expenses, to make capital
investments in our other subsidiaries and to pay dividends on our common stock. In addition, our credit agreement contains
covenants that limit our ability to pay cash dividends to our stockholders under certain circumstances. See “-The covenants in our
credit agreement limit our financial and operational flexibility, which could have an adverse effect on our financial condition.”
Our insurance subsidiaries are subject to statutory and regulatory restrictions imposed on insurance companies by their states
of domicile, which limit the amount of cash dividends or distributions that they may pay to us unless special permission is received
from the insurance regulator of the relevant domiciliary state. In general, the maximum amount of dividends that the insurance
subsidiaries may pay in any 12-month period without regulatory approval is the greater of adjusted statutory net income or 10%
of statutory policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is generally defined for
this purpose to be statutory net income, net of realized capital gains, for the calendar year preceding the date of the dividend. In
addition, other states may limit or restrict our insurance subsidiaries’ ability to pay stockholder dividends generally or as a condition
to issuance of a certificate of authority. The aggregate amount of ordinary dividends that could be paid by our insurance subsidiaries
without prior approval by the various domiciliary states of our insurance subsidiaries was approximately $286.3 million as of
December 31, 2014, taking into account dividends paid in the prior twelve month period.
Our insurance subsidiaries are subject to minimum capital and surplus requirements. Our failure to meet these requirements
could subject us to regulatory action.
The laws of the states of domicile of our insurance subsidiaries impose risk-based capital standards and other minimum
capital and surplus requirements. Failure to meet applicable risk-based capital requirements or minimum statutory capital
requirements could subject us to further examination or corrective action imposed by state regulators, including limitations on our
writing of additional business, state supervision or liquidation. Any changes in existing risk-based capital requirements or minimum
statutory capital requirements may require us to increase our statutory capital levels, which we may be unable to do. See Item 1,
“Business-Regulation-State Insurance Regulation-Financial Oversight-Risk-Based Capital Regulations.”
The insurance industry is subject to extensive regulation, which may affect our ability to execute our business plan and grow
our business.
We are subject to comprehensive regulation and supervision by government agencies in each of the 8 states in which our
insurance subsidiaries are domiciled or commercially domiciled, as well as all states in which they are licensed, sell insurance
products, issue policies, or handle claims. Some states impose restrictions or require prior regulatory approval of specific corporate
actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow
our business profitably. These regulations provide safeguards for policyholders and are not intended to protect the interests of
stockholders. Our ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner
is, and will continue to be, critical to our success. Some of these regulations include:
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• Required Licensing. We operate under licenses issued by the insurance department in the states in which we sell insurance.
If a regulatory authority denies or delays granting a new license, our ability to enter that market quickly or offer new
insurance products in that market may be substantially impaired. In addition, if the insurance department in any state in
which we currently operate suspends, non-renews, or revokes an existing license, we would not be able to offer affected
products in that state.
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Transactions Between Insurance Companies and Their Affiliates. Transactions between us or other of our affiliates and
our insurance companies generally must be disclosed, and prior approval is required before any material or extraordinary
transaction may be consummated. Approval may be refused or the time required to obtain approval may delay some
transactions, which may adversely affect our ability to innovate or operate efficiently.
• Regulation of Insurance Rates and Approval of Policy Forms. The insurance laws of most states in which we conduct
business require insurance companies to file insurance rate schedules and insurance policy forms for review and approval.
If, as permitted in some states, we begin using new rates before they are approved, we may be required to issue refunds
or credits to the policyholders if the new rates are ultimately deemed excessive or unfair and disapproved by the applicable
insurance department. In other states, prior approval of rate changes is required and there may be long delays in the
approval process or the rates may not be approved. Accordingly, our ability to respond to market developments or increased
costs in that state could be adversely affected.
• Restrictions on Cancellation, Non-Renewal or Withdrawal. Many of the states in which we operate have laws and
regulations that limit our ability to exit a market. For example, some states limit a private passenger auto insurer’s ability
to cancel and refuse to renew policies and some prohibit insurers from withdrawing one or more lines of insurance business
from the state unless prior approval is received. In some states, these regulations extend to significant reductions in the
amount of insurance written, not just to a complete withdrawal. Laws and regulations that limit our ability to cancel and
refuse to renew policies in some states or locations and that subject withdrawal plans to prior approval requirements may
restrict our ability to exit unprofitable markets, which may harm our business, financial condition and results of operations.
• Other Regulations. We must also comply with regulations involving, among other matters:
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the use of non-public consumer information and related privacy issues;
the use of credit history in underwriting and rating policies;
limitations on the ability to charge policy fees;
limitations on types and amounts of investments;
restrictions on the payment of dividends by our insurance subsidiaries;
the acquisition or disposition of an insurance company or of any company controlling an insurance company;
involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations,
assessments and other governmental charges;
reporting with respect to financial condition; and
periodic financial and market conduct examinations performed by state insurance department examiners.
The failure to comply with these laws and regulations may also result in regulatory actions, fines and penalties, and in
extreme cases, revocation of our ability to do business in a particular jurisdiction. In the past we have been fined by state insurance
departments for failing to comply with certain laws and regulations. In addition, we may face individual and class action lawsuits
by insured and other parties for alleged violations of certain of these laws or regulations.
Our failure to accurately and timely pay claims could adversely affect our business, financial results and liquidity.
We must accurately and timely evaluate and pay claims that are made under our policies. Many factors affect our ability to
pay claims accurately and timely, including the training and experience of our claims representatives, our claims organization’s
culture and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems
to support our claims functions and other factors. Our failure to pay claims accurately and timely could lead to material litigation,
undermine our reputation in the marketplace and materially adversely affect our financial results and liquidity.
In addition, if we do not train new claims employees effectively or lose a significant number of experienced claims employees,
our claims department’s ability to handle an increasing workload could be adversely affected. In addition to potentially requiring
that growth be slowed in the affected markets, our business could suffer from decreased quality of claims work which, in turn,
could lower our operating margins.
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Regulation may become more extensive in the future, which may adversely affect our business, financial condition and results
of operations.
Compliance with applicable laws and regulations is time-consuming and personnel-intensive, and changes in these laws and
regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus adversely
affecting our business, financial condition and results of operations.
In the future, states may make existing insurance laws and regulation more restrictive or enact new restrictive laws. In such
event, we may seek to reduce our business in, or withdraw entirely from, these states. Additionally, from time to time, the United
States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether
federal regulation is necessary. Currently, the U.S. federal government does not directly regulate the P&C insurance business.
However, The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) established a Federal Insurance
Office (“FIO”) within the Department of the Treasury. The duties of the FIO include studying and reporting on how to modernize
and improve the system of insurance regulation in the United States considering the ability of any federal regulation or a federal
regulator to “provide robust consumer protection for policyholders” as well as “the potential consequences of subjecting insurers
to a federal resolution authority.” In December 2013, the FIO issued a report on proposals to modernize and improve the system
of insurance regulation in the United States. We cannot predict whether any of these proposals will be adopted, or what impact,
if any, these proposals or, if enacted, these laws may have on our business, financial condition and results of operations. See Item
1, “Business-Regulation.”
Reform of the health insurance industry could materially reduce the profitability of our A&H segment.
In March 2010, President Obama signed The Patient Protection and Affordable Care Act ("PPACA") into law. Provisions
of PPACA and related reforms have and will continue to become effective at various dates over the next several years and will
make significant changes to the U.S. health care system that are expected to significantly affect the health insurance industry. For
more information on PPACA and its impact on our A&H segment, see Item 1, “Business-A&H Segment.”
We continue to review our product offerings and make changes to adapt to the new environment and the opportunities
presented. However, we could be adversely affected if our plans for operating in the new environment are unsuccessful or if there
is less demand than we expect for our A&H products in the new environment. Uncertainty remains with respect to a number of
provisions of PPACA, including the mechanics of the public and private exchanges required by PPACA, the application of PPACA’s
requirements to various types of health insurance plans and the timing of the implementation of certain of PPACA’s requirements.
New guidance and regulations continue to be issued under PPACA and implementation dates for parts of PPACA have been
adjusted and may continue to be adjusted. If we are unable to adapt our A&H business to current and/or future requirements of
PPACA, or if significant uncertainty continues with respect to implementation of PPACA, our A&H business could be materially
adversely affected. Furthermore, should Congress extend the scope of PPACA to include some or all of our current and proposed
A&H products, such a development could have a material adverse effect on our A&H business.
Assessments and other surcharges for guaranty funds, second-injury funds, catastrophe funds, and other mandatory pooling
arrangements for insurers may reduce our profitability.
Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insured
parties as the result of impaired or insolvent insurance companies. These losses are funded by assessments that are levied by state
guaranty associations, up to prescribed limits, on all member insurance companies in the state based on their proportionate share
of premiums written in the lines of business in which the impaired or insolvent insurance companies are engaged. The assessments
levied on us may increase as we increase our written premium. In addition, as a condition to the ability to conduct business in
various states, our insurance subsidiaries must participate in mandatory property and casualty shared market mechanisms or pooling
arrangements, which provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase
that coverage from private insurers. The effect of these assessments and mandatory shared-market mechanisms or changes in them
could reduce our profitability in any given period or limit our ability to grow our business.
We will require additional capital in the future and such additional capital may not be available to us, or may only be available
to us on unfavorable terms.
To support our current and future policy writings or potential acquisitions, we may raise substantial additional capital using
a combination of debt and equity. Our future capital requirements depend on many factors, including our ability to write new
business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that the funds
generated by our ongoing operations and initial capitalization are insufficient to fund future operating requirements, we may need
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to raise additional funds through financings or curtail our growth and reduce our assets. We cannot be sure that we will be able to
raise equity or debt financing on terms favorable to us and our stockholders and in the amounts that we require, or at all. If we
cannot obtain adequate capital, our business and financial condition could be adversely affected. Issuances of stock may result in
dilution of our existing stockholders or a decrease in the per share price of our common stock.
In addition, the terms of a capital raising transaction could require us to agree to stringent financial and operating covenants
and to grant security interests on our assets to lenders or holders of our debt securities that could limit our flexibility in operating
our business or our ability to pay dividends on our common stock and could make it more difficult for us to obtain capital in the
future.
The covenants in our credit agreement limit our financial and operational flexibility, which could have an adverse effect on
our financial condition.
Our credit agreement contains covenants that limit our ability, among other things, to borrow money, sell assets, merge or
consolidate and make particular types of investments or other restricted payments, including the payment of cash dividends if an
event of default has occurred and is continuing or if we are out of compliance with our financial covenants. These covenants could
restrict our ability to achieve our business objectives, and therefore, could have an adverse effect on our financial condition. In
addition, this agreement also requires us to maintain specific financial ratios. If we fail to comply with these covenants or meet
these financial ratios, the lenders under our credit agreement could declare a default and demand immediate repayment of all
amounts owed to them, cancel their commitments to lend and/or issue letters of credit, any of which could have a material adverse
effect on our liquidity, financial condition and business in general.
Our operations and business activities outside of the United States are subject to a number of risks, which could have an adverse
effect on our business, financial condition and results of operations.
We currently conduct a limited amount of business outside the United States, primarily in Bermuda, Luxembourg and
Sweden. In these jurisdictions, we are subject to a number of significant risks in conducting such business. These risks include
restrictions such as price controls, capital controls, exchange controls and other restrictive government actions, which could have
an adverse effect on our business and our reputation. Investments outside the United States also subject us to additional domestic
and foreign laws and regulations, including the Foreign Corrupt Practices Act and similar laws in other countries that prohibit the
making of improper payments to foreign officials. In addition, some countries have laws and regulations that lack clarity and,
even with local expertise and effective controls, it can be difficult to determine the exact requirements of the local laws. Failure
to comply with local laws in a particular market could have a significant and negative effect not only on our business in that market
but also on our reputation generally.
We may be subject to taxes on our Luxembourg affiliates’ equalization reserves.
In 2012, we formed a Luxembourg holding company and acquired a Luxembourg-domiciled reinsurance company. In
connection with the acquisition, we acquired a licensed Luxembourg reinsurer together with its cash and associated equalization
reserves. An “equalization reserve” is a compulsory volatility or catastrophe reserve in excess of ordinary reserves determined by
a formula based on the volatility of the business ceded to the reinsurance company. Equalization reserves are required to be
established for Luxembourg statutory and tax purposes, but are not recognized under U.S. GAAP. Equalization reserves are
calculated on a line of business basis and are subject to a theoretical maximum amount, or cap, based on the expected premium
volume described in the business plan of the reinsurance company as approved by the Luxembourg regulators, which cap is
reassessed every five years. At the time we acquired our first Luxembourg reinsurer for a purchase price of approximately $125
million, it had cash of approximately $135 million, established equalization reserves of approximately $129.6 million, and was
subject to an equalization reserve cap of approximately $211 million. Each year, the Luxembourg reinsurer is required to adjust
its equalization reserves by an amount equal to its statutory net income or net loss, determined based on premiums and investment
income less incurred losses and other operating expenses. The yearly adjustment of the equalization reserve generally results in
zero pretax income on a Luxembourg statutory and tax basis, as follows: in a year in which the reinsurer’s operations result in a
statutory loss, the equalization reserves are taken down in an amount to balance the income statement to zero pretax income, and
in a year in which the operations result in a gain, the equalization reserves are increased in an amount to balance the income
statement to zero pretax income. If the reinsurer were to produce underwriting income in excess of the equalization reserve cap,
or if the cap were to be reduced below the amount of the carried equalization reserves, the reinsurer would incur Luxembourg tax
on the amount of such excess income or the amount by which the reserves exceeded the reduced cap, as applicable.
We have entered into a stop loss reinsurance agreement with the Luxembourg reinsurer under which we pay reinsurance
premiums and cede losses and expenses in excess of the attachment point to the reinsurer. Provided that we are able to cede losses
to the reinsurance company through this intercompany reinsurance agreement that are sufficient to utilize all of the reinsurance
32
company’s equalization reserves, Luxembourg would not, under laws currently in effect, impose any income, corporation or profits
tax on the reinsurance company. However, if the reinsurance company were to cease reinsuring business without exhausting the
equalization reserves, it would recognize income in the amount of the unutilized equalization reserves that would be taxed by
Luxembourg at a rate of approximately 30%. We must establish a deferred tax liability on our financial statements equal to
approximately 30% of the unutilized equalization reserves. We adjust the deferred tax liability each reporting period based on
premiums and investment income less losses and other expenses ceded to the Luxembourg reinsurer under the intercompany
reinsurance agreement. As of December 31, 2014, we had approximately $135.0 million of unutilized equalization reserves and
an associated deferred tax liability of approximately $40.5 million relating to our three Luxembourg reinsurers. Under our business
plan currently in effect, we expect that the ceded losses and expenses net of reinsurance premiums paid under the intercompany
reinsurance agreement will cause the equalization reserve to be fully utilized in three to five years at which point the deferred tax
liability relating to the equalization reserves will be extinguished. The effects of this intercompany reinsurance agreement are
appropriately eliminated in consolidation.
A portion of our financial assets consists of life settlement contracts that are subject to certain risks.
As of December 31, 2014, we have a 50% ownership interest in entities that hold certain life settlement contracts (the “LSC
Entities”), and the fair value of these contracts owned by the LSC Entities is $264.5 million, with our proportionate interest being
$132.3 million.
Estimates of fair value of the life settlement contracts held by the LSC Entities are subjective and based upon estimates of,
among other factors: (i) the life expectancy of the insured person, (ii) the projected premium payments on the contract, including
projections of possible rate increases from the related insurance carrier, (iii) the projected costs of administration relating to the
contract and (iv) the projected risk of non-payment, including the financial health of the related insurance carrier, the possibility
of legal challenges from such insurance carrier or others and the possibility of regulatory changes that may affect payment. The
actual value of any life settlement contract cannot be determined until the policy matures (i.e., the insured has died and the insurance
carrier has paid out the death benefit to the holder). A significant negative difference between the estimated fair value of a contract
and actual death benefits received at maturity for any life settlement contract could adversely affect our financial condition and
results of operations.
Some of the critical factors considered in determining the fair value of a life settlement contract are related to the discounted
value of future cash flows from death benefits and the discounted value of future premiums due on the contract. If the rate used
to discount the future death benefits or the future premiums changes, the value of the life settlement contract will also change.
Generally, if discount rates increase, the fair value of a life settlement contract decreases. If a life settlement contract is sold or
otherwise disposed of in the future under a relatively higher interest rate environment, the contract may have a lower value than
the value it had when it was acquired.
The life expectancy of an insured under a life insurance policy is a key element in determining the anticipated cash flow
associated with the policy and, ultimately, its value. For example, if an insured under a life insurance policy lives longer than
estimated, premiums on that policy will be required to be paid for a longer period of time than anticipated (and in a greater total
amount) in order to maintain the policy in force. Estimating life expectancies is inherently inexact and imprecise. Past mortality
experience is not an accurate indicator of future mortality rates, and it is possible for insureds under life insurance policies to
experience lower mortality rates in the future than those historically experienced by other persons having similar traits. The process
of developing an estimate of life expectancy may include, but is not necessarily limited to, subjective interpretation of lifestyle,
medical history, ancestry, educational background, improvements in mortality rates, wealth and access to and impact of changes
in medical techniques. Subjective interpretation of these and other variables leads to vast complexities which ultimately present
a degree of imprecision. In addition, the types of individuals who are insured under substantial life insurance policies may have
longer life expectancies than the general population as a result of such factors as better access to medical care and healthier
lifestyles. These factors may make it harder to correctly estimate their life expectancies.
Life expectancy providers have historically changed, and may in the future change, from time to time their respective
underwriting methodologies in an effort to improve the precision of their life expectancy estimates. For example, certain changes
effected by several leading life expectancy providers in 2008 and 2009 resulted in significantly longer life expectancies for many
insureds under policies in the life settlement market, which led to a meaningful reduction in the fair value of those policies. Future
changes by one or more life expectancy providers could similarly lengthen or shorten the life expectancy estimates of the insureds
under life insurance policies in which the LSC Entities have an interest and significantly impact the market value and/or liquidity
of the affected policies. Developments of this nature could have a material adverse effect on the value of our investment in the
LSC Entities holding the life settlements contracts.
33
In addition, our results of operations and earnings may fluctuate depending on the number of life settlement contracts held
by the LSC Entities in a given period and the fair value of those assets at the end of the applicable period. Any reduction in the
fair value of these assets will impact our income in the period in which the reduction occurs and could adversely affect our financial
results for that period.
Finally, the market for life settlement contracts is relatively illiquid when compared to that for other asset classes, and there
is currently no established trading platform or market by which investors in the life settlement market buy and sell life settlement
contracts. If any of the LSC Entities need to sell significant numbers of life settlement contracts in the secondary life settlement
market, it is possible that the lack of liquidity at that time could make the sale of such life settlement contract difficult or impossible.
Therefore, we bear the risks of any of the LSC Entities having to sell life settlement contracts at substantial discounts or not being
able to sell life settlement contracts in a timely manner or at all which may result in a material adverse effect on our financial
condition and results of operations.
Changes in accounting standards issued by the Financial Accounting Standards Board (the “FASB”) or other standard-setting
bodies may adversely affect our financial statements.
Our financial statements are subject to the application of accounting principles generally accepted in the United States of
America, which is periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised
accounting standards issued by recognized authoritative bodies, including the FASB. The impact of accounting pronouncements
that have been issued but not yet implemented is disclosed in our reports filed with the SEC. See Note 2 in the Notes to the
Consolidated Financial Statements included in this Annual Report on Form 10-K. An assessment of proposed standards, including
standards on insurance contracts and accounting for financial instruments, is not provided as such proposals are subject to change
through the exposure process and official positions of the FASB are determined only after extensive due process and deliberations.
Therefore, the effects on our financial statements cannot be meaningfully assessed. The required adoption of future accounting
standards could have a material adverse effect on our business, financial condition or results of operations, including on our net
income.
Risks Relating to Our Insurance Operations
The insurance industry is highly competitive, and we may not be able to compete effectively against larger companies.
The insurance industry is highly competitive and, except for regulatory considerations, there are relatively few barriers to
entry. We compete with both large national insurance providers and smaller regional companies on the basis of price, coverages
offered, claims handling, customer service, agent commissions, geographic coverage and financial strength ratings. Some of our
competitors have more capital, higher ratings and greater resources than we have, and may offer a broader range of products than
we offer. Many of our competitors invest heavily in advertising and marketing efforts and/or expanding their online service
offerings. Many of these competitors have better brand recognition than we have and have a significantly larger market share that
we do. As a result, these larger competitors may be better able to offer lower rates to consumers, to withstand larger losses, and
to more effectively take advantage of new marketing opportunities. Our ability to compete against these larger competitors depends
on our ability to deliver superior service and maintain our relationships with independent agents and affinity groups.
We may undertake strategic marketing and operating initiatives to improve our competitive position and drive growth. If
we are unable to successfully implement new strategic initiatives or if our marketing campaigns do not attract new customers, our
competitive position may be harmed, which could adversely affect our business, financial condition and results of operations.
We write a significant amount of business in the nonstandard auto insurance market, which could make us more susceptible
to unfavorable market conditions which have a disproportionate effect on that customer base.
A significant amount of our P&C premium currently is written in the nonstandard auto insurance market. As a result, adverse
developments in the economic, competitive or regulatory environment affecting the nonstandard customer base or the nonstandard
auto insurance industry in general may have a greater effect on us as compared to a more diversified auto insurance carrier with
a larger percentage of its business in other types of auto insurance products. Adverse developments of this type may have a material
adverse effect on our business.
We generate significant revenue from service fees generated from our P&C and A&H policyholders, which could be adversely
affected by additional insurance or consumer protection regulation.
For the year ended December 31, 2014, we generated $168.6 million in service and fee revenue from our P&C and A&H
policyholders, which included origination fees, installment fees relating to installment payment plans, late payment fees, policy
34
cancellation fees and reinstatement fees. The revenue we generate from these service fees could be reduced by changes in consumer
protection or insurance regulation that restrict or prohibit our ability to charge these fees. If our ability to charge fees for these
services were to be restricted or prohibited, there can be no assurance that we would be able to obtain rate increases or take other
action to offset the lost revenue and the direct and indirect costs associated with providing the services, which could adversely
affect our business, financial condition and results of operations.
The rates we charge under the policies we write are subject to prior regulatory approval in most of the states in which we
operate.
In most of the states in which we operate, we must obtain prior regulatory approval of insurance rates charged to our
customers, including any increases in those rates. If we are unable to receive approval for the rate changes we request, or if such
approval were delayed, our ability to operate our business in a profitable manner may be limited and our financial condition, results
of operations, and liquidity may be adversely affected.
The property and casualty insurance industry is cyclical in nature, which may affect our overall financial performance.
Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical
periods of price competition and excess capacity (known as a soft market) followed by periods of high premium rates and shortages
of underwriting capacity (known as a hard market). The profitability of most property and casualty insurance companies tends to
follow this cyclical market pattern. We cannot predict with certainty the timing or duration of changes in the market cycle because
the cyclicality is due in large part to the actions of our competitors and general economic factors beyond our control. These cyclical
patterns, the actions of our competitors, and general economic factors could cause our revenues and net income to fluctuate, which
may adversely affect our business.
Catastrophic losses or the frequency of smaller insured losses may exceed our expectations as well as the limits of our
reinsurance, which could adversely affect our financial condition and results of operations.
Our P&C insurance business is subject to claims arising from catastrophes, such as hurricanes, tornadoes, windstorms,
floods, earthquakes, hailstorms, severe winter weather, and fires, or other events, such as explosions, terrorist attacks, riots, and
hazardous material releases. The incidence and severity of such events are inherently unpredictable, and our losses from catastrophes
could be substantial.
Longer-term weather trends are changing and new types of catastrophe losses may be developing due to climate change, a
phenomenon that may be associated with extreme weather events linked to rising temperatures, including effects on global weather
patterns, sea, land and air temperature, sea levels, rain and snow. Climate change could increase the frequency and severity of
catastrophe losses we experience in both coastal and non-coastal areas.
In addition, it is possible that we may experience an unusual frequency of smaller losses in a particular period. In either
case, the consequences could be substantial volatility in our financial condition or results of operations for any fiscal quarter or
year, which could have a material adverse effect on our financial condition or results of operations and our ability to write new
business. Although we believe that our geographic and product mix creates limited exposure to catastrophic events and we attempt
to manage our exposure to these types of catastrophic and cumulative losses, including through the use of reinsurance, catastrophic
events are inherently unpredictable and the severity or frequency of these types of losses may exceed our expectations as well as
the limits of our reinsurance coverage.
We rely on the use of credit scoring in pricing and underwriting our auto insurance policies and any legal or regulatory
requirements which restrict our ability to access credit score information could decrease the accuracy of our pricing and
underwriting process and thus lower our profitability.
We use credit scoring as a factor in pricing and underwriting decisions where allowed by state law. Consumer groups and
regulators have questioned whether the use of credit scoring unfairly discriminates against some groups of people and are calling
for laws and regulations to prohibit or restrict the use of credit scoring in underwriting and pricing. Laws or regulations that
significantly curtail or regulate the use of credit scoring, if enacted in a large number of states in which we operate, could impact
the integrity of our pricing and underwriting process, which could, in turn, adversely affect our business, financial condition and
results of operations and make it harder for us to be profitable over time.
35
If market conditions cause our reinsurance to be more costly or unavailable, we may be required to bear increased risks or
reduce the level of our underwriting commitments.
As part of our overall risk and capacity management strategy, we purchase excess of loss catastrophic and casualty reinsurance
for protection against catastrophic events and other large losses. Market conditions beyond our control, in terms of price and
available capacity, may affect the amount of reinsurance we acquire and our profitability.
We may be unable to maintain our current reinsurance arrangements or to obtain other reinsurance in adequate amounts and
at favorable rates. Increases in the cost of reinsurance would adversely affect our profitability. In addition, if we are unable to
renew our expiring arrangements or to obtain new reinsurance on favorable terms, either our net exposure to risk would increase,
which would increase our costs, or, if we are unwilling to bear an increase in net risk exposures, we would have to reduce the
amount of risk we underwrite, which would reduce our revenues.
We have reduced our dependence on reinsurance and will retain a greater percentage of our premium writings, which increases
our exposure to the underlying policy risks.
We historically utilized quota share reinsurance arrangements with other insurance carriers to be able to generate a larger
premium volume, and larger resulting infrastructure, than otherwise would have been possible given our capital position. Effective
August 1, 2013, we terminated our cession of P&C premium to our quota share reinsurers and now retain 100% of such P&C
gross premium written and related losses with respect to all new and renewal P&C policies bound after August 1, 2013. The
increase in the percentage of premium writings retained provides us the opportunity to realize greater underwriting income and
investment income from our premium writing base. However, it also increases the risks to our business through greater exposure
to policy claims. In the event our actual product experience varies adversely from the assumptions we used to price our products,
our increased exposure to the underlying policy risks could have a material adverse effect on our financial condition and results
of operations.
We may not be able to recover amounts due from our reinsurers, which would adversely affect our financial condition.
Reinsurance does not discharge our obligations under the insurance policies we write; it merely provides us with a contractual
right to seek reimbursement on certain claims. We remain liable to our policyholders even if we are unable to make recoveries
that we are entitled to receive under our reinsurance contracts. As a result, we are subject to credit risk with respect to our reinsurers.
Losses are recovered from our reinsurers after underlying policy claims are paid. The creditworthiness of our reinsurers may
change before we recover amounts to which we are entitled. Therefore, if a reinsurer is unable to meet its obligations to us, we
would be responsible for claims and claim settlement expenses for which we would have otherwise received payment from the
reinsurer. If we were unable to collect these amounts from our reinsurers, our costs would increase and our financial condition
would be adversely affected. As of December 31, 2014, we had an aggregate amount of approximately $911.8 million of
recoverables from third-party reinsurers for unpaid losses.
Our largest reinsurance recoverables are from the NCRF and the MCCA. The NCRF is a non-profit organization established
to provide automobile liability reinsurance to those insurance companies that write automobile insurance in North Carolina. The
MCCA is a Michigan reinsurance mechanism that covers no-fault first party medical losses of retentions in excess of $530,000
in 2014. At December 31, 2014, the amount of reinsurance recoverable on unpaid losses from the NCRF and the MCCA was
approximately $84.2 million and $689.2 million, respectively. In addition, at December 31, 2014, the amount of reinsurance
recoverable on unpaid losses from Maiden Insurance, ACP Re, Technology Insurance and other reinsurers was approximately
$44.2 million, $26.5 million, $17.7 million and $26.5 million, respectively. If any of our principal reinsurers were unable to meet
its obligations to us, our financial condition and results of operations would be materially adversely affected. For additional
information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Reinsurance.”
The effects of emerging claim and coverage issues on our business are uncertain and negative developments in this area could
have an adverse effect on our business.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become
apparent until after we have issued insurance policies that are affected by the changes. As a result, the full extent of our liability
under an insurance policy may not be known until many years after the policy is issued. For example, medical costs associated
with permanent and partial disabilities may increase more rapidly or be higher than we currently expect. Changes of this nature
may expose us to higher claims than we anticipated when we wrote the underlying policy. Unexpected increases in our claim costs
many years after policies are issued may also result in our inability to recover from certain of our reinsurers the full amount that
36
they would otherwise owe us for such claims costs because certain of the reinsurance agreements covering our business include
commutation clauses that permit the reinsurers to terminate their obligations by making a final payment to us based on an estimate
of their remaining liabilities. In addition, the potential passage of new legislation designed to expand the right to sue, to remove
limitations on recovery, to deem by statute the existence of a covered occurrence, to extend the statutes of limitations or otherwise
repeal or weaken tort reforms could have an adverse impact on our business. The effects of these and other unforeseen emerging
claim and coverage issues are extremely hard to predict and could be harmful to our business and have a material adverse effect
on our results of operations.
The effects of litigation on our business are uncertain and could have an adverse effect on our business.
Although we are not currently involved in any material litigation with our customers, other members of the insurance industry
are the target of class action lawsuits and other types of litigation, some of which involve claims for substantial or indeterminate
amounts, and the outcomes of which are unpredictable. This litigation is based on a variety of issues, including insurance and
claim settlement practices. We cannot predict with any certainty whether we will be involved in such litigation in the future or
what impact such litigation would have on our business.
Changing climate conditions may adversely affect our financial condition or profitability.
There is an emerging scientific consensus that the earth is getting warmer. Climate change, to the extent it produces rising
temperatures and changes in weather patterns, may affect the frequency and severity of storms and other weather events, the
affordability, availability and underwriting results of homeowners and property insurance, and, if frequency and severity patterns
increase, could negatively affect our financial results.
Risks Related to an Investment in our Common Stock
Our revenues and results of operations may fluctuate as a result of factors beyond our control, which may cause volatility in
the price of our shares of common stock.
Our common stock is listed on the NASDAQ Global Market ("NASDAQ") under the symbol “NGHC.” Our performance,
as well as the risks discussed herein, government or regulatory action, tax laws, interest rates and general market conditions could
have a significant impact on the future market price of our common stock. The market price for shares of our common stock may
be subject to low volume and may be highly volatile and you may not be able to resell your shares of our common stock at or
above the price you paid to purchase the shares or at all. Some of the factors that could negatively affect our share price or result
in fluctuations in the price of our common stock include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our operating results in any future quarter not meeting or being anticipated not to meet the expectations of market analysts
or investors;
reductions in our earnings estimates by us or market analysts;
publication of negative research or other unfavorable publicity or speculation in the press or investment community about
our company, related companies or the insurance industry in general;
rising level of claims costs, changes in the frequency or severity of claims or new types of claims and new or changing
judicial interpretations relating to the scope of insurance company liability;
the financial stability of our third-party reinsurers, changes in the level of reinsurance capacity, termination of reinsurance
arrangements and changes in our capital capacity;
increases in interest rates causing investors to demand a higher yield or return on investment than an investment in our
common stock may be projected to provide;
changes in market valuations of other insurance companies;
adverse market reaction to any increased indebtedness we incur in the future;
fluctuations in interest rates or inflationary pressures and other changes in the investment environment that affect returns
on invested assets;
additions or departures of key personnel;
reaction to the sale or purchase of company stock by our principal stockholders or our executive officers;
changes in the economic or regulatory environment in the markets in which we operate;
changes in tax law; and
general market, economic and political conditions.
37
Our principal stockholders have the ability to control our business, which may be disadvantageous to other stockholders.
Michael Karfunkel, Leah Karfunkel, the wife of Michael Karfunkel and the sole trustee of the Karfunkel GRAT, and AmTrust,
collectively, beneficially own or control approximately 62.0% of our outstanding shares of common stock. As a result, these holders
have the ability to control all matters requiring approval by our stockholders, including the election and removal of directors,
amendments to our certificate of incorporation (other than changes to the rights of the common stock) and bylaws, any proposed
merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. These individuals may have
interests that are different from those of other stockholders.
In addition, we are a “controlled company” pursuant to NASDAQ Listing Rule 5615(c) because Michael Karfunkel, Leah
Karfunkel, as sole trustee of the Karfunkel GRAT, and AmTrust collectively own approximately 62.0% of our voting power. Our
common stock is listed on the NASDAQ Global Market. Therefore, we are exempt from the NASDAQ listing requirements with
respect to having a majority of the members of the board of directors be independent; having our Compensation Committee and
Nominating and Corporate Governance Committee be composed solely of independent directors; the compensation of our executive
officers determined by a majority of our independent directors or a Compensation Committee composed solely of independent
directors; and director nominees being selected or recommended for selection, either by a majority of our independent directors
or by a nominating committee composed solely of independent directors. We rely on these exemptions.
In addition, Michael Karfunkel, through entities that he controls, has entered into transactions with us and may from time
to time in the future enter into other transactions with us. As a result, he may have interests that are different from, or are in addition
to, his interest as a stockholder in our company. Such transactions may adversely affect our results or operations or financial
condition. See the next two risk factors immediately following this risk factor.
Our officers, directors and principal stockholders could delay or prevent an acquisition or merger of our company even if
the transaction would benefit other stockholders. Moreover, this concentration of share ownership makes it impossible for other
stockholders to replace directors and management without the consent of Michael Karfunkel, Leah Karfunkel and AmTrust. In
addition, this significant concentration of share ownership may adversely affect the price at which prospective buyers are willing
to pay for our common stock because investors often perceive disadvantages in owning stock in companies with controlling
stockholders.
In order to comply with the requirements of being a public company we are enhancing certain of our corporate processes,
which require significant company resources and management attention.
As a recently public company with listed equity securities, we need to comply with new laws, regulations and requirements,
certain corporate governance provisions of The Sarbanes-Oxley Act of 2002 (“SOX”), periodic reporting requirements of the
Exchange Act and other regulations of the SEC and the requirements of the NASDAQ Global Market, which we were not required
to comply with as a private company. In order to comply with these laws, rules and regulations, we have to enhance certain of our
corporate processes, which require us to incur significant legal, accounting and other expenses. These efforts also require a
significant amount of time from our board of directors and management, possibly diverting their attention from the implementation
of our business plan and growth strategy.
We have made, and will continue to make, changes to our corporate governance standards, disclosure controls, financial
reporting and accounting systems to meet our obligations as a public company. We cannot assure you that the changes we have
made and will continue to make to satisfy our obligations as a public company will be successful, and any failure on our part to
do so could subject us to delisting of our common stock, fines, sanctions and other regulatory action and potential litigation.
Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on our stock
price.
Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require an annual management
assessment of the effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal
control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able
to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If we cannot in the future
favorably assess the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our
financial reports may be adversely affected, which could have a material adverse effect on our common stock prices.
38
Future sales and issuances of shares of our capital stock may depress our share price.
We may in the future issue our previously authorized and unissued securities. We have an authorized capitalization of $150
million shares of common stock and $10 million shares of preferred stock with such designations, preferences and rights as are
contained in our charter or bylaws and as determined by our board of directors. Issuances of stock may result in dilution of our
existing stockholders or a decrease in the per share price of our common stock. It is not possible to state the actual effect of the
issuance of any shares of our preferred stock on the rights of holders of our common stock until our board of directors determines
the specific rights attached to that class or series of preferred stock.
We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sale, will
have on the price prospective buyers are willing to pay for our common stock. Sales of a substantial number of shares of our
common stock by us or our principal stockholders, or the perception that such sales could occur, may adversely affect the price
prospective buyers are willing to pay for our common stock and may make it more difficult for you to sell your shares at a time
and price that you determine appropriate.
Applicable insurance laws may make it difficult to effect a change of control of our company.
State insurance holding company laws require prior approval by the respective state insurance departments of any change
of control of an insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of the company, whether through the ownership of voting securities, by contract or
otherwise. Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities
of a domestic insurance company or any entity that controls a domestic insurance company. In addition, two of our insurance
subsidiaries are currently deemed to be commercially domiciled in Florida and, as such, are subject to regulation by the Florida
Office of Insurance Regulation (“OIR”). Florida insurance law prohibits any person from acquiring 5% or more of our outstanding
voting securities or those of any of our insurance subsidiaries without the prior approval of the Florida OIR. However, a party
may acquire less than 10% of our voting securities without prior approval if the party files a disclaimer of affiliation and control.
Any person wishing to acquire control of us or of any substantial portion of our outstanding shares would first be required to obtain
the approval of the domestic regulators (including those asserting “commercial domicile”) of our insurance subsidiaries or file
appropriate disclaimers.
These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including
through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.
Future issuance of debt or preferred stock, which would rank senior to our common stock upon our liquidation, and future
offerings of equity securities, which would dilute our existing stockholders, may adversely affect the market value of our
common stock.
In the future, we may attempt to increase our capital resources by issuing debt or making additional offerings of equity
securities, including bank debt, commercial paper, medium-term notes, senior or subordinated notes and classes of shares of
preferred stock. Upon liquidation, holders of our debt securities and preferred stock and lenders with respect to other borrowings
will receive a distribution of our available assets prior to the holders of shares of our common stock. Additional equity offerings
may dilute the holdings of our existing stockholders or reduce the market value of our common stock, or both. Future issuances
of preferred stock could have a preference on liquidating distributions or a preference on dividend payments that would limit
amounts available for distribution to holders of shares of our common stock. Because our decision to issue securities in any future
offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing
or nature of our future offerings. Thus, holders of shares of our common stock bear the risk of our future offerings reducing the
market value of our common stock and diluting their stockholdings in us.
39
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease an aggregate of approximately 551,000 square feet of office space in 57 locations. We have an ownership interest
in the entities that own the buildings in which we lease space at two of these locations, which represent an aggregate of approximately
178,000 square feet.
Item 3. Legal Proceedings
We are routinely involved in legal proceedings arising in the ordinary course of business, in particular in connection with
claims adjudication with respect to our policies. We believe we have recorded adequate reserves for these liabilities and that there
is no individual case pending that is likely to have a material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures
None.
40
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Shareholders
Our common shares began trading on the NASDAQ Global Market under the symbol “NGHC” on February 20, 2014. We
have one class of authorized common stock for 150,000,000 shares at a par value of $0.01 per share. As of March 4, 2015 there
were approximately 304 registered record holders of our common shares. This figure does not include beneficial owners who hold
shares in nominee name.
Price Range of Common Stock
The following table shows the high and low sales prices per share for our common shares and cash dividends declared with
respect to such shares:
2014
High
Low
First quarter (from February 20, 2014)
Second quarter
Third quarter
Fourth quarter
$
$
$
$
30.00 (2) $
$
18.69
19.45
19.71
$
$
Dividends Declared (1)
0.01
$
$
$
$
0.01
0.01
0.02
13.58
13.63
16.59
16.59
(1) Our board of directors declared a quarterly dividend of $0.01 per share for the third and fourth quarters of 2013.
(2) Represents opening trading price of 100 shares on February 20, 2014. High closing price for the first quarter was $14.25.
On March 4, 2015, the closing price per share of our common stock was $18.62.
Dividend Policy
Our board of directors currently intends to continue to authorize the payment of a nominal quarterly cash dividend to our
stockholders of record. Any declaration and payment of dividends by our board of directors will depend on many factors, including
general economic and business conditions, our strategic plans, our financial results and condition, legal and regulatory requirements
and other factors that our board of directors deems relevant.
National General Holdings Corp. is a holding company and has no direct operations. Our ability to pay dividends in the future
depends on the ability of our operating subsidiaries, including our insurance subsidiaries, to pay dividends to us. The laws of the
jurisdictions in which our insurance subsidiaries are organized regulate and restrict, under certain circumstances, their ability to
pay dividends to us. The aggregate amount of dividends that could be paid to us by our insurance subsidiaries without prior approval
by the various domiciliary states of our insurance subsidiaries was approximately $286.3 million as of December 31, 2014, taking
into account dividends paid in the prior twelve month period. Under the terms of our credit agreement, we are not prohibited from
paying cash dividends so long as no event of default has occurred and is continuing and we are not out of compliance with our
financial covenants. We may, however, enter into credit agreements or other debt arrangements in the future that will restrict our
ability to declare or pay cash dividends on our common stock.
Common Stock Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on our common stock for the period beginning
February 20, 2014 and ending on December 31, 2014 with the cumulative total return on the NASDAQ Global Market Index and
a peer group comprised of the NASDAQ Insurance Index. The graph shows the change in value of an initial $100 investment on
February 20, 2014. The stock price performance of the following graph is not necessarily indicative of future stock price
performance.
41
Comparative Cumulative Total Returns Since February 20, 2014 for National General Holdings Corp., NASDAQ
Composite Index and NASDAQ Insurance Index
February 20,
2014
March 31,
2014
June 30,
2014
September 30,
2014
December 31,
2014
National General Holdings
NASDAQ Composite Index
NASDAQ Insurance Index
$
$
$
100.00
100.00
100.00
$
$
$
98.32
98.39
103.90
$
$
$
122.25
103.30
105.97
$
$
$
118.74
105.29
101.06
$
$
$
130.95
110.98
113.76
This information is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section
18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act or the
Exchange Act.
Item 6. Selected Financial Data
The following tables set forth our selected historical consolidated financial and operating information for the periods ended
and as of the dates indicated. The income statement data for the years ended December 31, 2014, 2013 and 2012 and the balance
sheet data as of December 31, 2014 and 2013 are derived from our audited financial statements included elsewhere in this annual
report. These historical results are not necessarily indicative of results to be expected from any future period.
You should read the following selected consolidated financial information together with the other information contained in
this annual report, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and the consolidated financial statements and related notes included elsewhere in this annual report.
42
Year Ended December 31,
Period from
March 1,
2010
(Inception)
to
December
31,
2014
2013
2012
2011
2010
(Amounts in Thousands, Except Percentages and per Share Data)
$ 2,135,107
$ 1,338,755
$ 1,351,925
$ 1,178,891
$
911,991
(265,083)
(659,439)
(719,431)
(640,655)
(463,422)
$ 1,870,024
$
679,316
$
632,494
$
538,236
$
448,570
(236,804)
8,750
(58,242)
(40,026)
112,347
$ 1,633,220
$
688,066
$
574,252
$
498,210
$
560,917
12,430
168,571
52,426
(2,892)
(1,660)
87,100
127,541
30,808
(1,669)
16
89,360
93,739
30,550
16,612
3,728
77,475
66,116
28,355
4,775
—
49,656
53,539
25,391
3,293
33,238
Selected Income Statement Data(1)
Gross premium written
Ceded premiums(2)
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income (primarily related parties)
Service and fee income
Net investment income
Net realized gain (loss) on investments
Bargain purchase gain and other revenue
Total revenues
$ 1,862,095
$
931,862
$
808,241
$
674,931
$
726,034
Loss and LAE
Acquisition costs and other underwriting expenses(3)
General and administrative expenses(4)
Interest expense
Total expenses
Income before provision for income taxes and equity in
earnings (losses) of unconsolidated subsidiaries
Provision for income taxes
Income before equity in earnings (losses) of unconsolidated
subsidiaries
1,053,065
315,089
348,762
17,736
$ 1,734,652
$
127,443
23,876
$
103,567
Equity in earnings (losses) of unconsolidated subsidiaries
1,180
Net income
$
104,747
Less: Net loss (income) attributable to non-controlling interest
(2,504)
Net income attributable to National General Holdings Corp.
Dividends on preferred stock
Net income attributable to National General Holdings Corp.
common stockholders
Basic earnings per share(5)
Weighted average shares outstanding - basic
Diluted earnings per share
Weighted average shares outstanding - diluted
Insurance Ratios
Net loss ratio(6)
Net operating expense ratio (non-GAAP)(7)(8)
Net combined ratio (non-GAAP)(7)(9)
$
$
$
$
$
102,243
(2,291)
99,952
1.09
91,499
1.07
93,515
462,124
134,887
280,552
2,042
879,605
52,257
11,140
41,117
1,274
42,391
(82)
42,309
(2,158)
40,151
0.62
65,018
0.59
71,802
$
$
$
$
$
$
$
$
$
402,686
110,771
246,644
1,787
761,888
46,353
12,309
34,044
(1,338)
32,706
—
32,706
(4,674)
28,032
0.62
45,555
0.56
58,287
$
$
$
$
$
$
$
$
$
340,152
75,191
208,939
1,994
626,276
48,655
28,301
20,354
23,760
370,313
36,755
176,428
1,795
585,291
140,743
42,416
98,327
3,876
$
$
$
44,114
$
102,203
(14)
44,100
(4,328)
39,772
0.87
45,555
0.75
58,469
$
$
$
$
$
—
102,203
(3,537)
98,666
2.17
45,555
1.77
57,850
$
$
$
$
$
$
$
$
$
64.5%
29.6%
94.1%
67.2%
29.2%
96.4%
70.1%
30.4%
100.5%
68.3%
28.2%
96.5%
66.0%
19.6%
85.6%
43
Selected Balance Sheet Data
Investments
Cash and cash equivalents
Premiums and other receivables, net
Reinsurance recoverable on unpaid losses
Goodwill and Intangibles assets, net
Total assets
As of December 31,
2014
2013
2012
2011
2010
(Amounts in Thousands)
$ 1,866,105
$ 1,042,884
$
$
$
$
132,615
757,791
911,798
319,601
$
$
$
$
73,823
449,252
950,828
156,915
$
$
$
$
$
951,928
39,937
450,140
991,447
112,935
$
$
$
$
$
949,733
11,695
387,558
920,719
77,433
$
$
$
$
$
874,910
8,275
328,017
695,023
79,481
$ 4,439,987
$ 2,837,515
$ 2,713,323
$ 2,524,891
$ 2,178,229
Unpaid loss and loss adjustment expense reserves
$ 1,562,153
$ 1,259,241
$ 1,286,533
$ 1,218,412
$ 1,081,630
Unearned premiums
Deferred tax liability
Notes payable
Common stock and Additional paid-in capital
Preferred stock
Total stockholders' equity
$
$
$
$
$
864,436
67,535
304,005
691,670
55,000
$ 1,073,450
$
$
$
$
$
$
476,232
24,476
81,142
437,803
$
$
$
$
488,598
34,393
70,114
158,470
— $
53,054
642,867
$
413,042
$
$
$
$
$
$
449,598
17,262
85,550
159,940
53,054
361,596
$
$
$
$
$
$
436,375
6,742
90,000
212,214
53,054
310,090
(1) Results for a number of periods were affected by our various acquisitions from 2010 to 2014.
(2) Premiums ceded to related parties were $44,936, $501,067, $561,434, $491,689 and $246,909 for the years ended December
31, 2014, 2013, 2012, 2011 and the period from March 1, 2010 (inception) to December 31, 2010, respectively.
(3) Acquisition costs and other underwriting expenses include policy acquisition expenses, commissions paid directly to
producers, premium taxes and assessments, salary and benefits and other insurance general and administrative expenses
which represents other costs that are directly attributable to insurance activities.
(4) General and administrative expenses is composed of all other operating expenses, including various departmental salaries
and benefits expenses for employees that are directly involved in the maintenance of policies, information systems, and
accounting for insurance transactions, and other insurance expenses such as federal excise tax, postage, telephones and
Internet access charges, as well as legal and auditing fees and board and bureau charges. In addition, general and
administrative expenses includes those charges that are related to the amortization of tangible and intangible assets and
non-insurance activities in which we engage.
(5) No effect is given to the dilutive effect of outstanding stock options or restricted stock units during the relevant period.
(6) Net loss ratio is calculated by dividing the loss and LAE by net earned premiums.
(7) Net operating expense ratio and net combined ratio are considered non-GAAP financial measures under applicable SEC
rules because a component of those ratios, net operating expense, is calculated by offsetting acquisition costs and other
underwriting expenses and general and administrative expenses by ceding commission income and service and fee income.
Management uses net operating expense ratio (non-GAAP) and net combined ratio (non-GAAP) to evaluate financial
performance against historical results and establish targets on a consolidated basis. Other companies may calculate these
measures differently, and, therefore, their measures may not be comparable to those used by the Company’s management.
For a reconciliation showing the total amounts by which acquisition costs and other underwriting expenses and general
and administrative expenses were offset by ceding commission income and service and fee income, see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operation-Results of Operations-
Consolidated Results of Operations”.
(8) Net operating expense ratio (non-GAAP) is calculated by dividing the net operating expense by net earned premium. Net
operating expense consists of the sum of acquisition costs and other underwriting expenses and general and administrative
expenses less ceding commission income and service and fee income.
(9) Net combined ratio (non-GAAP) is calculated by adding net loss ratio and net operating expense ratio (non-GAAP) together.
44
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with
our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This Form 10-
K contains certain forward-looking statements that are intended to be covered by the safe harbors created by The Private Securities
Litigation Reform Act of 1995. See “Note on Forward-Looking Statements.”
Overview
We are a specialty personal lines insurance holding company. Through our subsidiaries, we provide a variety of insurance
products, including personal and commercial automobile, supplemental health, homeowners and umbrella, and other niche
insurance products. We sell insurance products with a focus on underwriting profitability through a combination of our customized
and predictive analytics and our technology driven low cost infrastructure.
We manage our business through two segments: P&C and A&H. We transact business primarily through our fifteen regulated
domestic insurance subsidiaries: Integon Casualty Insurance Company, Integon General Insurance Corporation, Integon Indemnity
Corporation, Integon National Insurance Company (“Integon National”), Integon Preferred Insurance Company, New South
Insurance Company, MIC General Insurance Corporation, National General Insurance Company, National General Assurance
Company, National General Insurance Online, Inc., National Health Insurance Company, Personal Express Insurance Company,
Imperial Fire and Casualty Insurance Company, National Automotive Insurance Company and Agent Alliance Insurance Company.
Our insurance subsidiaries have been assigned an "A-" (Excellent) group rating by A.M. Best.
The operating results of property and casualty insurance companies are subject to quarterly and yearly fluctuations due to
the effect of competition on pricing, the frequency and severity of losses, the effect of weather and natural disasters on losses,
general economic conditions, the general regulatory environment in states in which an insurer operates, state regulation of premium
rates, changes in fair value of investments, and other factors such as changes in tax laws. The property and casualty industry has
been highly cyclical with periods of high premium rates and shortages of underwriting capacity followed by periods of severe
price competition and excess capacity. While these cycles can have a large impact on a company’s ability to grow and retain
business, we have sought to focus on niche markets and regions where we are able to maintain premium rates at generally consistent
levels and maintain underwriting discipline throughout these cycles. We believe that the nature of our P&C insurance products,
including their relatively low limits, the relatively short duration of time between when claims are reported and when they are
settled, and the broad geographic distribution of our customers, have allowed us to grow and retain our business throughout these
cycles. In addition, we have limited our exposure to catastrophe losses through reinsurance. With regard to seasonality, we tend
to experience higher claims and claims expense in our P&C segment during periods of severe or inclement weather.
We evaluate our operations by monitoring key measures of growth and profitability, including net loss ratio, net combined
ratio (non-GAAP) and operating leverage. We target a net combined ratio (non-GAAP) of 95.0% or lower over the near term, and
between 90% and 95% over the long term, while seeking to maintain optimal operating leverage in our insurance subsidiaries
commensurate with our A.M. Best rating objectives. To achieve our targeted net combined ratio (non-GAAP) we continually seek
ways to reduce our operating costs and lower our expense ratio. For the year ended December 31, 2014, our operating leverage
(the ratio of net earned premium to average total stockholders’ equity) was 1.9x, which was within our planned target operating
leverage of between 1.5x and 2.0x.
Investment income is also an important part of our business. Because we often do not settle claims until several months or
longer after we receive the original policy premiums, we are able to invest cash from premiums for significant periods of time.
We invest our capital and surplus in accordance with state and regulatory guidelines. Our net investment income was $52.4 million,
$30.8 million and $30.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. We held 6.6% and 6.6%,
of total invested assets in cash and cash equivalents as of December 31, 2014 and 2013, respectively.
Our most significant balance sheet liability is our unpaid loss and loss adjustment expense (“LAE”) reserves. As of
December 31, 2014 and 2013, our reserves, net of reinsurance recoverables, were $650.4 million and $308.4 million, respectively.
We record reserves for estimated losses under insurance policies that we write and for LAE related to the investigation and
settlement of policy claims. Our reserves for loss and LAE represent the estimated cost of all reported and unreported loss and
LAE incurred and unpaid at any time based on known facts and circumstances. Our reserves, excluding life reserves, for loss and
LAE incurred and unpaid are not discounted using present value factors. Our loss reserves are reviewed quarterly by internal
actuaries and at least annually by our external actuaries. Reserves are based on estimates of the most likely ultimate cost of
individual claims. These estimates are inherently uncertain. Judgment is required to determine the relevance of our historical
experience and industry information under current facts and circumstances. The interpretation of this historical and industry data
45
can be impacted by external forces, principally frequency and severity of future claims, the length of time needed to achieve
ultimate settlement of claims, inflation of medical costs, insurance policy coverage interpretations, jury determinations and
legislative changes. Accordingly, our reserves may prove to be inadequate to cover our actual losses. If we change our estimates,
these changes would be reflected in our results of operations during the period in which they are made, with increases in our
reserves resulting in decreases in our earnings.
Acquisitions
Since we acquired our P&C insurance business in 2010, we have entered into a renewal rights transaction and have made
several acquisitions. These additional operations have increased our presence in our target markets and broadened our distribution
capabilities.
•
•
•
In July 2011, we acquired the renewal rights to a book of RV and trailer business (the “RV Business”) from American
Modern Home Insurance Company and its affiliates. We also assumed 100% of the in-force RV Business, net of external
reinsurance starting January 1, 2012. The primary states for this RV business are California, New Jersey, Texas, Florida,
New York and North Carolina.
In September 2011, we completed our acquisition of Agent Alliance Insurance Company (“AAIC”), an Alabama-
domiciled insurer focused on private passenger auto business in North Carolina. Following our 2012 sale of AAIC to
ACP Re, we had continued to reinsure 100% of its existing and renewal private passenger auto insurance. In July 2014,
we reacquired AAIC, which is also licensed as a surplus lines carrier in over 30 states, from ACP Re for a purchase price
equal to AAIC’s capital and surplus of approximately $17.3 million.
In November 2011, we acquired 70% of the equity interests of ClearSide General Insurance Services, LLC, a California-
based general agency that specializes in personal and commercial property and casualty lines insurance products. In June
2012, we completed our acquisition of the remaining 30% of the equity interests of ClearSide General Insurance Services,
LLC.
• On April 1, 2014, we purchased Personal Express Insurance Company (“Personal Express”), a California domiciled
personal auto and home insurer from Sequoia Insurance Company, an affiliate of AmTrust. The purchase price was
approximately $21.5 million, subject to certain adjustments.
• On June 27, 2014, we purchased certain assets of Imperial Management Corporation ("Imperial"), including its
underwriting subsidiaries Imperial Fire & Casualty Insurance Company and National Automotive Insurance Company,
its retail agency subsidiary ABC Insurance Agencies, and its managing general agency subsidiary RAC Insurance Partners.
The purchase price was approximately $20.0 million. In connection with the Imperial transaction, we assumed certain
debt of Imperial and Imperial Fire & Casualty Insurance Company (see Note 15, "Debt" in the notes to our consolidated
financial statements).
• On September 15, 2014, ACP Re, a Bermuda reinsurer that is a subsidiary of The Michael Karfunkel 2005 Grantor
Retained Annuity Trust (the “Karfunkel GRAT”), completed the acquisition of 100% of the outstanding stock of Tower
Group International, Ltd. ("Tower") and caused its subsidiary to merge into Tower (the "Merger") pursuant to a merger
agreement, dated January 3, 2014, by and between ACP Re and Tower. In connection with the Merger, we acquired two
management companies from ACP Re for $7.5 million. The management companies are the attorneys-in-fact for
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”). We also agreed to pay ACP Re
contingent consideration in the form of a three year earn-out of 3% of the gross premium written of the Tower personal
lines business written or assumed by us following the Merger. We estimated the fair value of the Contingent Payments
to be approximately $26.1 million at the acquisition date.
Principally through the following acquisitions that we recently completed in our A&H segment, we have built a platform to
market our and other carriers’ A&H products. This platform consists of the following operations:
•
•
In November 2012, we acquired National Health Insurance Company (“NHIC”), a Texas-domiciled life and health insurer
currently licensed in 48 states and the District of Columbia, to write our A&H risks. NHIC was established as a life and
health insurer in 1979. We have filed and are in the process of receiving approvals for a significant number of our target
A&H insurance products for individuals and groups, which include accident, limited medical/hospital indemnity, short-
term medical, cancer/critical illness, stop loss, travel accident/trip cancellation and dental/vision coverages.
In February 2012, we acquired VelaPoint, LLC ("VelaPoint"), a general agency that operates a call center with
approximately 200 licensed agents selling a full range of supplemental medical insurance products, as well as individual
46
•
•
•
•
major medical policies underwritten through a wide range of third-party insurance companies. For the year ended
December 31, 2014, VelaPoint produced approximately $130 million in premium on behalf of third parties. We expect
a significant percentage of VelaPoint’s sales of supplemental health products will transition to be written by NHIC.
In February 2012, we acquired America’s HealthCare Plan (“AHCP”), a managing general agent/program manager. AHCP
works with over 4,300 independent agents and general agents across the country to provide an array of insurance products,
including those offered by third-party insurers, and will serve as a significant method of distribution for NHIC’s products.
In September 2012, we acquired from the Coca-Cola Bottlers’ Association a health insurance administration company
that administers specialty self-insurance arrangements, offering ERISA qualified self-insured plans to employers in
affinity associations or trade groups and selling medical stop loss coverage to employers through captive insurers
(collectively, the “TABS” companies). We believe the TABS companies, which wrote approximately $19 million in stop
loss premium in 2014, have significant growth potential.
In January 2013, we assumed 100% of an in-force book of A&H business from Wesco Insurance Company, an affiliate
of AmTrust. In connection therewith, we acquired certain operating assets and hired the related program development
personnel who work with outside insurers and wholesalers/program managers to create programs for specialty A&H
products like travel, student and international business.
In April 2013, we acquired Euro Accident Health & Care Insurance Aktiebolag (“EuroAccident”), a European group life
and health insurance managing general agent. The agency distributes life and health insurance to groups as well as
individuals. Distribution predominantly takes place through broker channels and affinity partners. For the year ended
December 31, 2014, EuroAccident produced approximately $99 million in premium on behalf of third parties. We have
received the necessary licenses and approvals to enable us to write these products on our own behalf through two European
insurance companies.
On January 3, 2014, in connection with the agreement by ACP Re to acquire Tower, Integon National Insurance Company,
our wholly-owned subsidiary (“Integon”), entered into a reinsurance agreement (the “Cut-Through Reinsurance Agreement”) with
several Tower subsidiaries. Under the Cut-Through Reinsurance Agreement, Integon reinsured on a 100% quota share basis with
a cut-through endorsement all of Tower’s new and renewal personal lines business and assumed 100% of Tower’s unearned
premium reserves with respect to in-force personal lines policies, in each case, net of reinsurance already in effect. The agreement
was effective solely with respect to losses occurring on or after January 1, 2014. We paid a 20% ceding commission with respect
to unearned premium assumed and a 22% ceding commission with respect to new and renewal business after January 1, 2014 and
up to a 4% claims handling expense reimbursement to Tower on all Tower premium subject to the Cut-Through Reinsurance
Agreement. This Agreement remained in effect until the closing of the Tower Transaction on September 15, 2014, and is currently
in run-off.
Integon entered into the Personal Lines Quota Share Reinsurance Agreement (the "PL Reinsurance Agreement"), with
Tower’s ten statutory insurance companies (collectively, the “Tower Companies”), pursuant to which Integon reinsures 100% of
all losses under the Tower Companies’ new and renewal personal lines business written after September 15, 2014. The ceding
commission payable by Integon under the PL Reinsurance Agreement is equal to the sum of (i) reimbursement of the Tower
Companies’ acquisition costs in respect of the business covered, including commission payable to National General Insurance
Marketing, Inc., a subsidiary of the Company (“NGIM”), pursuant to the PL MGA Agreement (as defined below), and premium
taxes and (ii) 2% of gross written premium (net of cancellations and return premiums) collected pursuant to the PL MGA Agreement.
NGIM produces and manages all new and renewal personal lines business of the Tower Companies pursuant to a Personal
Lines Managing General Agency Agreement (the "PL MGA Agreement"). As described above, all post-September 15, 2014 personal
lines business written by the Tower Companies is reinsured by Integon pursuant to the PL Reinsurance Agreement. The Tower
Companies pay NGIM a 10% commission on all business written pursuant to the PL MGA Agreement. All payments by the Tower
Companies to NGIM pursuant to the PL MGA Agreement are netted out of the ceding commission payable by Integon to the Tower
Companies pursuant to the PL Reinsurance Agreement.
National General Re, Ltd., a subsidiary of the Company (“NG Re Ltd.”), along with AmTrust International Insurance, Ltd.,
an affiliate of the Company (“AII”), as reinsurers, entered into a $250 million Aggregate Stop Loss Reinsurance Agreement (the
"Stop-Loss Agreement") with an affiliated company, CastlePoint Reinsurance Company, Ltd. (“CP Re”). NG Re Ltd. and AII also
entered into an Aggregate Stop Loss Retrocession Contract (the "Retrocession Agreement") with ACP Re pursuant to which ACP
Re is obligated to reinsure the full amount of any payments that NG Re Ltd. and AII are obligated to make to CP Re under the
Stop-Loss Agreement. Pursuant to the Stop-Loss Agreement, each of NG Re Ltd. and AII provide, severally, $125 million of stop
loss coverage with respect to the run-off of the Tower business written on or before September 15, 2014. The reinsurers’ obligation
to indemnify CP Re under the Stop-Loss Agreement will be triggered only at such time as CP Re’s ultimate paid net loss related
to the run-off of the pre-September 15, 2014 Tower business exceeds a retention equal to the Tower Companies’ loss and loss
47
adjustment reserves and unearned premium reserves as of September 15, 2014. CP Re will pay AII and NG Re Ltd. total premium
of $56 million on the five-year anniversary of the Stop-Loss Agreement. The premium payable by NG Re Ltd. and AII to ACP
Re pursuant to the Retrocession Agreement will be $56 million in the aggregate, less a ceding commission of 5.5% to be retained
by NG Re Ltd. and AII.
On September 15, 2014, NG Re Ltd. entered into a credit agreement (the “ACP Re Credit Agreement”) by and among
AmTrust, as Administrative Agent, ACP Re and London Acquisition Company Limited, a wholly owned subsidiary of ACP Re,
as the borrowers (collectively, the “Borrowers”), ACP Re Holdings, LLC, as Guarantor, and AII and NG Re Ltd., as Lenders,
pursuant to which the Lenders made a $250 million loan ($125 million made by each Lender) to the Borrowers on the terms and
conditions contained within the ACP Re Credit Agreement. The ACP Re Credit Agreement has a maturity date of September 15,
2021. Outstanding principal under the ACP Re Credit Agreement bears interest at a fixed annual rate of seven percent (7%), payable
semi-annually on the last day of January and July. The obligations of the Borrowers are secured by (i) a first-priority pledge
of 100% of the stock of ACP Re and ACP Re’s U.S. subsidiaries and 65% of the stock of certain of ACP Re’s foreign subsidiaries
and (ii) a first-priority lien on all of the assets of the Borrowers and Guarantor and certain of the assets of ACP Re’s subsidiaries
(other than the Tower Companies).
Principal Revenue and Expense Items
Gross premium written. Gross premium written represents premium from each insurance policy that we write, including as
a servicing carrier for assigned risk plans, during a reporting period based on the effective date of the individual policy, prior to
ceding reinsurance to third parties.
Net premium written. Net premium written is gross premium written less that portion of premium that we cede to third-party
reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula
contained in the individual reinsurance agreement.
Change in unearned premium. Change in unearned premium is the change in the balance of the portion of premium that we
have written but have yet to earn during the relevant period because the policy is unexpired.
Net earned premium. Net earned premium is the earned portion of our net premium written. We generally earn insurance
premium on a pro rata basis over the term of the policy. At the end of each reporting period, premium written that is not earned
is classified as unearned premium, which is earned in subsequent periods over the remaining term of the policy. Our policies
typically have a term of six months or one year. For a six-month policy written on January 1, 2014, we would earn half of the
premium in the first quarter of 2014 and the other half in the second quarter of 2014.
Ceding commission income. Ceding commission income is a commission we receive based on the earned premium ceded
to third-party reinsurers to reimburse us for our acquisition, underwriting and other operating expenses. We earn commissions on
reinsurance premium ceded in a manner consistent with the recognition of the earned premium on the underlying insurance policies,
generally on a pro-rata basis over the terms of the policies reinsured. The portion of ceding commission income which represents
reimbursement of successful acquisition costs related to the underlying policies is recorded as an offset to acquisition and other
underwriting expenses. The ceding commission ratio is equal to ceding commission income divided by net earned premium.
Service and fee income. We currently generate policy service and fee income from installment fees, late payment fees, and
other finance and processing fees related to policy cancellation, policy reinstatement, and non-sufficient fund check returns. These
fees are generally designed to offset expenses incurred in the administration of our insurance business, and are generated as follows.
Installment fees are charged to permit a policyholder to pay premiums in installments rather than in a lump sum. Late payment
fees are charged when premiums are remitted after the due date and any applicable grace periods. Policy cancellation fees are
charged to policyholders when a policy is terminated by the policyholder prior to the expiration of the policy’s term or renewal
term, as applicable. Reinstatement fees are charged to reinstate a policy that has lapsed, generally as a result of non-payment of
premiums. Non-sufficient fund fees are charged when the customer’s payment is returned by the financial institution.
All fee income is recognized as follows. An installment fee is recognized at the time each policy installment bill is due. A
late payment fee is recognized when the customer’s payment is not received after the listed due date and any applicable grace
period. A policy cancellation fee is recognized at the time the customer’s policy is cancelled. A policy reinstatement fee is recognized
when the customer’s policy is reinstated. A non-sufficient fund fee is recognized when the customer’s payment is returned by the
financial institution. The amounts charged are primarily intended to compensate us for the administrative costs associated with
processing and administering policies that generate insurance premium; however, the amounts of fees charged are not dependent
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on the amount or period of insurance coverage provided and do not entail any obligation to return any portion of those funds. The
direct and indirect costs associated with generating fee income are not separately tracked.
We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party
insurance companies. We also collect management fees in connection with our management of the Reciprocal Exchanges. We do
not bear insurance underwriting risk with respect to these policies. Commission income and general agent fees are recognized,
net of an allowance for estimated policy cancellations, at the date the customer is initially billed or as of the effective date of the
insurance policy, whichever is later. The allowance for estimated third-party cancellations is periodically evaluated and adjusted
as necessary.
Net investment income and realized gains and (losses). We invest our statutory surplus funds and the funds supporting our
insurance liabilities primarily in cash and cash equivalents, fixed-maturity and equity securities. Our net investment income includes
interest and dividends earned on our invested assets. We report net realized gains and losses on our investments separately from
our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized
costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs,
as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We classify equity
securities and our fixed-maturity securities as available-for-sale. We report net unrealized gains (losses) on those securities classified
as available-for-sale separately within other comprehensive income.
Bargain purchase gain. We record bargain purchase gain in an amount equal to the excess of fair value of acquired net assets
over the fair value of consideration paid.
Loss and loss adjustment expenses. Loss and LAE represent our largest expense item and, for any given reporting period,
include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with
investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We
record loss and LAE related to estimates of future claim payments based on case-by-case valuations and statistical analyses. We
seek to establish all reserves at the most likely ultimate exposure based on our historical claims experience. It is typical for our
more serious bodily injury claims to take several years to settle, and we revise our estimates as we receive additional information
about the condition of claimants and the costs of their medical treatment. Our ability to estimate loss and LAE accurately at the
time of pricing our insurance policies is a critical factor in our profitability.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses consist of policy
acquisition and marketing expenses, salaries and benefits expenses. Policy acquisition expenses comprise commissions directly
attributable to those agents, wholesalers or brokers that produce premiums written on our behalf and promotional fees directly
attributable to our affinity relationships. Acquisition costs also include costs that are related to the successful acquisition of new
or renewal insurance contracts including comprehensive loss underwriting exchange reports, motor vehicle reports, credit score
checks, and policy issuance costs.
General and administrative expenses. General and administrative expenses is composed of all other operating expenses,
including various departmental salaries and benefits expenses for employees that are directly involved in the maintenance of
policies, information systems, and accounting for insurance transactions, and other insurance expenses such as federal excise tax,
postage, telephones and internet access charges, as well as legal and auditing fees and board and bureau charges. In addition,
general and administrative expenses includes those charges that are related to the amortization of tangible and intangible assets
and non-insurance activities in which we engage.
Interest expense. Interest expense represents amounts we incur on our outstanding indebtedness at the then-applicable interest
rates.
Income tax expense. We incur federal, state and local income tax expenses as well as income tax expenses in certain foreign
jurisdictions in which we operate.
Net operating expense. These expenses consist of the sum of general and administrative expenses and acquisition costs and
other underwriting expenses less ceding commission income and service and fee income.
Underwriting income. Underwriting income is a measure of an insurance company’s overall operating profitability before
items such as investment income, interest expense and income taxes. Underwriting income is calculated as net earned premium
plus ceding commission income and service and fee income less loss and LAE, acquisition costs and other underwriting expenses,
and general and administrative expenses.
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Equity in earnings (losses) from unconsolidated subsidiaries. This represents primarily our share in earnings or losses of
our investment in four companies that own life settlement contracts, which includes the gain realized upon a mortality event and
the change in fair value of the investments in life settlements as evaluated at the end of each reporting period. These unconsolidated
subsidiaries determine the fair value of life settlement contracts based upon an estimate of the discounted cash flow of the anticipated
death benefits incorporating a number of factors, such as current life expectancy assumptions, expected premium payment
obligations and increased cost assumptions, credit exposure to the insurance companies that issued the life insurance policies and
the rate of return that a buyer would require on the policies. The gain realized upon a mortality event is the difference between
the death benefit received and the recorded fair value of that particular policy.
Insurance Ratios
Net loss ratio. The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed
as a percentage, this is the ratio of loss and LAE incurred to net earned premiums.
Net operating expense ratio (non-GAAP). The net operating expense ratio (non-GAAP) is one component of an insurance
company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of net operating expense
to net earned premium.
Net combined ratio (non-GAAP). The net combined ratio (non-GAAP) is a measure of an insurance company’s overall
underwriting profit. This is the sum of the net loss and net operating expense ratio (non-GAAP). If the net combined ratio (non-
GAAP) is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable
if investment income is insufficient.
Net operating expense ratio and net combined ratio are considered non-GAAP financial measures under applicable SEC
rules because a component of those ratios, net operating expense, is calculated by offsetting acquisition costs and other underwriting
expenses and general and administrative expenses by ceding commission income and service and fee income, and is therefore a
non-GAAP measure. Management uses net operating expense ratio (non-GAAP) and net combined ratio (non-GAAP) to evaluate
financial performance against historical results and establish targets on a consolidated basis. Other companies may calculate these
measures differently, and, therefore, their measures may not be comparable to those used by the Company’s management. For a
reconciliation showing the total amounts by which acquisition costs and other underwriting expenses and general and administrative
expenses were offset by ceding commission income and service and fee income in the calculation of net operating expense, see
“-Results of Operations-Consolidated Results of Operations” below.
Personal Lines Quota Share
Effective March 1, 2010, Integon National entered into a 50% quota share reinsurance treaty (the “Personal Lines Quota
Share”), pursuant to which Integon National ceded 50% of the gross premium written of its P&C business (excluding premium
ceded to state-run reinsurance facilities) to a group of affiliated reinsurers consisting of a subsidiary of AmTrust, ACP Re and
Maiden Insurance. Quota share reinsurance refers to reinsurance under which the insurer (the “ceding company,” which under the
Personal Lines Quota Share is Integon National) transfers, or cedes, a fixed percentage of liabilities, premium and related losses
for each policy covered on a pro rata basis in accordance with the terms and conditions of the relevant agreement. The reinsurer
pays the ceding company a ceding commission on the premiums ceded to compensate the ceding company for various expenses,
such as underwriting and policy acquisition expenses, that the ceding company incurs in connection with the ceded business.
The Personal Lines Quota Share provided that the reinsurers, severally, in accordance with their participation percentages,
received 50% of our P&C gross premium written (excluding premium ceded to state-run reinsurance facilities) and assumed 50%
of the related losses and allocated LAE. The participation percentages were: Maiden Insurance, 25%; ACP Re, 15%; and AmTrust,
10%. The Personal Lines Quota Share had an initial term of three years and was renewed through March 1, 2016.
The Personal Lines Quota Share provided that the reinsurers pay a provisional ceding commission equal to 32.0% of ceded
earned premium, net of premiums ceded by Integon National for inuring third-party reinsurance, subject to adjustment to a maximum
of 34.5% if the loss ratio for the reinsured business is 60.0% or less and a minimum of 30.0% if the loss ratio is 64.5% or higher.
The Personal Lines Quota Share provides for the net settlement of claims and the provisional ceding commission on a quarterly
basis during the month following the end of each quarter. The net payments are based on earned premiums less paid losses and
LAE less the provisional ceding commission for the quarter. The adjustment to the provisional ceding commission is calculated
at the end of, and with respect to, each calendar year during the term of the Quota Share (an “adjustment period”), with the final
adjustment period following termination of the Quota Share ending at the end of the run-off period. The adjusted commission rate,
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which is calculated and reported by the reinsurers to the Company within 30 days after the end of each adjustment period, is
calculated by first determining the “actual loss ratio” for the adjustment period, which loss ratio is calculated in the same manner
as the net loss ratio as disclosed in this filing. The adjusted commission rate is set based on the actual loss ratio within a range
between 30.0% and 34.5%, and varies inversely with a range of actual loss ratios between 60.0% and 64.5%, such that the adjusted
commission rate will be higher than 32.0% if the actual loss ratio is lower than 62.5%, and lower than 32.0% if the actual loss
ratio is higher than 62.5%, subject to the caps described above. The Company accrues any adjustments to the provisional ceding
commission based on the loss experience of the ceded business on a quarterly basis. Remittance of any positive difference between
the adjusted commission rate over the provisional ceding commission is paid by the reinsurer to the Company, and any negative
difference is paid by the Company to the reinsurer within 12 months after the end of the final adjustment period (other than with
respect to the initial year of the agreement with respect to which initial remittance was made 24 months after the end of the first
adjustment period).
Effective August 1, 2013, as permitted by the Personal Lines Quota Share, we terminated our cession of P&C premium to
our quota share reinsurers and now retain 100% of such P&C gross premium written and related losses with respect to all new
and renewal P&C policies bound after August 1, 2013. We continued to cede 50% of P&C gross premium written and related
losses with respect to policies in effect as of July 31, 2013 to the quota share reinsurers until the expiration of such policies. This
retention of our P&C premium will provide us the opportunity to substantially increase our underwriting and investment income,
while also increasing our exposure to losses. See Item 1A, “Risk Factors-Risks Relating to Our Insurance Operations-We have
reduced our dependence on reinsurance and will retain a greater percentage of our premium writings, which increases our exposure
to the underlying policy risks.”
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial statements. These policies require
us to make estimates and assumptions. Our management has reviewed our financial policies and results. These reviews affect the
reported amounts of our assets, liabilities, revenues and expenses and the related disclosures. Some of the estimates result from
judgments that can be subjective and complex, and, consequently, actual results in future periods might differ significantly from
these estimates.
We believe that the most critical accounting policies relate to the reporting of reserves for loss and LAE, including losses
that have occurred but have not been reported prior to the reporting date, amounts recoverable from third-party reinsurers,
assessments, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities, goodwill and other
intangible assets.
The following is a description of our critical accounting policies.
Premium. We recognize earned premium on a pro rata basis over the terms of the policies, generally periods of six or twelve
months. Unearned premium represents the portion of premiums written applicable to the unexpired terms of the policies. Net
premium receivables represent premium written and not yet collected, net of an allowance for uncollectible premium. We regularly
evaluate premium and other receivables and adjust for uncollectible amounts as appropriate. Receivables specifically identified
as uncollectible are charged to expense in the period the determination is made.
Service and fee income. We currently generate policy service and fee income from installment fees, late payment fees, and
other finance and processing fees related to policy cancellation, policy reinstatement, and non-sufficient fund check returns. These
fees are generally designed to offset expenses incurred in the administration of our insurance business, and are generated as follows.
Installment fees are charged to permit a policyholder to pay premiums in installments rather than in a lump sum. Late payment
fees are charged when premiums are remitted after the due date and any applicable grace periods. Policy cancellation fees are
charged to policyholders when a policy is terminated by the policyholder prior to the expiration of the policy’s term or renewal
term, as applicable. Reinstatement fees are charged to reinstate a policy that has lapsed, generally as a result of non-payment of
premiums. Non-sufficient fund fees are charged when the customer’s payment is returned by the financial institution.
All fee income is recognized as follows. An installment fee is recognized at the time each policy installment bill is due. A
late payment fee is recognized when the customer’s payment is not received after the listed due date and any applicable grace
period. A policy cancellation fee is recognized at the time the customer’s policy is cancelled. A policy reinstatement fee is recognized
when the customer’s policy is reinstated. A non-sufficient fund fee is recognized when the customer’s payment is returned by the
financial institution. The amounts charged are primarily intended to compensate us for the administrative costs associated with
processing and administering policies that generate insurance premium; however, the amounts of fees charged are not dependent
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on the amount or period of insurance coverage provided and do not entail any obligation to return any portion of those funds. The
direct and indirect costs associated with generating fee income are not separately tracked.
We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party
insurance companies. We do not bear insurance underwriting risk with respect to these policies. Commission income and general
agent fees are recognized, net of an allowance for estimated policy cancellations, at the date the customer is initially billed or as
of the effective date of the insurance policy, whichever is later. The allowance for estimated third-party cancellations is periodically
evaluated and adjusted as necessary.
Management fees earned by the management companies for services provided to the Reciprocal Exchanges are eliminated
in consolidation.
Reserves for loss and loss adjustment expenses. We record reserves for estimated losses under insurance policies that we
write and for LAE related to the investigation and settlement of policy claims. Our reserves for loss and LAE represent the estimated
cost of all reported and unreported loss and LAE incurred and unpaid at any given point in time based on known facts and
circumstances.
Loss reserves include statistical reserves and case estimates for individual claims that have been reported and estimates for
claims that have been incurred but not reported at the balance sheet date as well as estimates of the expenses associated with
processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries.
Estimates are based upon past loss experience modified for current trends as well as economic, legal and social conditions. Loss
reserves, except life reserves, are not discounted to present value, which would involve recognizing the time value of money and
offsetting estimates of future payments by future expected investment income.
In establishing these estimates, we make various assumptions regarding a number of factors, including frequency and severity
of claims, the length of time needed to achieve ultimate settlement of claims, inflation of medical costs, insurance policy coverage
interpretations, jury determinations and legislative changes. Due to the inherent uncertainty associated with these estimates, and
the cost of incurred but unreported claims, our actual liabilities may be different from our original estimates. On a quarterly basis,
we review our reserves for loss and loss adjustment expenses to determine whether further adjustments are required. Any resulting
adjustments are included in the current period’s results.
Additional information regarding the judgments and uncertainties surrounding our estimated reserves for loss and loss
adjustment expenses can be found in Item 1, “Business-Loss Reserves.”
Reinsurance. We account for reinsurance premiums, losses and LAE ceded to other companies on a basis consistent with
those used in accounting for the original policies issued and the terms of the reinsurance contracts. Earned premiums and losses
and LAE incurred ceded to other companies have been recorded as a reduction of premium revenue and losses and LAE.
Commissions allowed by reinsurers on business ceded have been recorded as ceding commission revenue. Ceding commission
is a commission we receive based on the earned premium ceded to third party reinsurers to reimburse us for our unallocated LAE
and other operating expenses. We earn commissions on reinsurance premiums ceded in a manner consistent with the recognition
of the earned premium on the underlying insurance policies, on a pro rata basis over the terms of the policies reinsured. In connection
with the Personal Lines Quota Share, the amount we received is based on a contractual formula contained in the reinsurance
agreements and is based on the ceded losses as a percentage of ceded premium. Reinsurance recoverables are reported based on
the portion of reserves and paid losses and LAE that are ceded to other companies. Assessing whether or not a reinsurance contract
meets the condition for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums and
losses, and is based, in part, on the use of actuarial and pricing models and assumptions. If we determine that a reinsurance contract
does not transfer sufficient risk, we account for the contract under deposit accounting.
Deferred policy acquisition costs. Deferred acquisition costs include commissions, premium taxes, payments to affinity
partners, promotional fees, and other direct sales costs that vary and are directly related to the successful acquisition of insurance
policies. These costs are deferred and amortized to the extent recoverable over the policy period in which the related premiums
are earned. We consider anticipated investment income in determining the recoverability of these costs. Management believes that
these costs are recoverable in the near term. If management determined that these costs were not recoverable, then we could not
continue to record deferred acquisition costs as an asset and would be required to establish a liability for a premium deficiency
reserve.
Assessments related to insurance premiums. We are subject to a variety of insurance-related assessments, such as assessments
by state guaranty funds used by state insurance regulators to cover losses of policyholders of insolvent insurance companies and
for the operating expenses of such agencies. A typical obligating event would be the issuance of an insurance policy or the occurrence
52
of a claim. These assessments are accrued in the period in which they have been incurred. We use estimated assessment rates in
determining the appropriate assessment expense and accrual. We use estimates derived from state regulators and/or National
Association of Insurance Commissioners (“NAIC”) Tax and Assessments Guidelines.
Unearned premium reserves. Unearned premium reserves represent the portion of premiums written applicable to the
unexpired terms of the policies.
Cash and cash equivalents. Cash and cash equivalents are presented at cost, which approximates fair value. We consider all
highly liquid investments with original maturities of three months or less to be cash equivalents. We maintain our cash balances
at several financial institutions. The Federal Deposit Insurance Corporation insures accounts up to $250,000 at these institutions.
Management monitors balances in excess of insured limits and believes these balances do not represent a significant credit risk
to us.
Investments. We account for investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 320, “Investments - Debt and Equity Securities”, which requires that fixed-maturity and equity
securities that have readily determinable fair values be segregated into categories based upon our intention for those securities.
Except for our equity investments in unconsolidated subsidiaries, we have classified our investments as available-for-sale and
may sell our available-for-sale securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or
other factors. Available-for-sale securities are reported at their estimated fair values based on a recognized pricing service, with
unrealized gains and losses, net of tax effects, reported as a separate component of other comprehensive income in the consolidated
statement of comprehensive income.
Purchases and sales of investments are recorded on a trade date basis. Realized gains and losses are determined based on
the specific identification method. Net investment income is recognized when earned and includes interest and dividend income
together with amortization of market premiums and discounts using the effective yield method and is net of investment management
fees and other expenses. For mortgage-backed securities and any other holdings for which there is a prepayment risk, prepayment
assumptions are evaluated and revised as necessary. Any adjustments required due to the change in effective yields and maturities
are recognized on a prospective basis through yield adjustments.
We use a set of quantitative and qualitative criteria to evaluate the necessity of recording impairment losses for other-than-
temporary declines in fair value. These criteria include:
•
•
•
the current fair value compared to amortized cost;
the length of time that the security’s fair value has been below its amortized cost;
specific credit issues related to the issuer such as changes in credit rating or non-payment of scheduled interest payments;
• whether management intends to sell the security and, if not, whether it is not more likely than not that we will be required
to sell the security before recovery of its amortized cost basis;
•
•
•
the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect
its operations or earnings;
the occurrence of a discrete credit event resulting in the issuer defaulting on a material outstanding obligation or the issuer
seeking protection under bankruptcy laws; and
other items, including management, media exposure, sponsors, marketing and advertising agreements, debt restructurings,
regulatory changes, acquisitions and dispositions, pending litigation, distribution agreements and general industry trends.
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other
than temporary. We immediately write down investments that we consider to be impaired based on the foregoing criteria collectively.
In the event of the decline in fair value of a debt security, a holder of that security that does not intend to sell the debt security
and for whom it is not more likely than not that such holder will be required to sell the debt security before recovery of its amortized
cost basis is required to separate the decline in fair value into (a) the amount representing the credit loss and (b) the amount related
to other factors. The amount of total decline in fair value related to the credit loss shall be recognized in earnings as an other-than-
temporary impairment (“OTTI”) with the amount related to other factors recognized in accumulated other comprehensive income
or loss, net of tax. OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination
of OTTI is a subjective process, and different judgments and assumptions could affect the timing of the loss realization.
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Our investments include the following: short-term investments; fixed maturities and equity securities; mortgage and asset-
backed securities; limited partnership interests; securities sold under agreements to repurchase (repurchase agreements); securities
purchased under agreements to resell (reverse repurchase agreements); and securities sold but not yet purchased.
Repurchase and reverse repurchase agreements are used to earn spread income, borrow funds, or to facilitate trading activities.
Securities repurchase and resale agreements are generally short-term, and therefore, the carrying amounts of these instruments
approximate fair value.
Equity investments in unconsolidated subsidiaries. We use the equity method of accounting for investments in subsidiaries
in which our ownership interest enables us to influence operating or financial decisions of the subsidiary, but our interest does not
require consolidation. In applying the equity method, we record our investment at cost, and subsequently increase or decrease the
carrying amount of the investment by our proportionate share of the net earnings or losses and other comprehensive income of
the investee. Any dividends or distributions received are recorded as a decrease in the carrying value of the investment. Our
proportionate share of net income is reported in our consolidated statement of income.
Goodwill and intangible assets. We account for goodwill and intangible assets in accordance with ASC 350, “Intangibles -
Goodwill and Other.” A purchase price paid that is in excess of net assets (“goodwill”) arising from a business combination is
recorded as an asset and is not amortized. Intangible assets with a finite life are amortized over the estimated useful life of the
asset. Intangible assets with an indefinite useful life are not amortized. Goodwill and intangible assets are tested for impairment
on an annual basis or more frequently if changes in circumstances indicate that the carrying amount may not be recoverable. If
the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in
the consolidated statement of income.
Use of estimates and assumptions. The preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Our principal estimates include unpaid losses and LAE reserves; deferred acquisition costs; reinsurance recoverables, including
the provision for uncollectible premiums; the valuation of intangibles and the determination of goodwill; and income taxes. In
developing the estimates and assumptions, management uses all available evidence. Because of uncertainties associated with
estimating the amounts, timing and likelihood of possible outcomes, actual results could differ from estimates.
Business combinations. We account for business combinations under the acquisition method of accounting, which requires
us to record assets acquired, liabilities assumed and any non-controlling interest in the acquiree at their respective fair values as
of the acquisition date. We account for the insurance and reinsurance contracts under the acquisition method as new contracts,
which requires us to record assets and liabilities at fair value. We adjust the fair value loss and LAE reserves by recording the
acquired loss reserves based on our existing accounting policies and then discounting them based on expected reserve payout
patterns using a current risk-free rate of interest. This risk free interest rate is then adjusted based on different cash flow scenarios
that use different payout and ultimate reserve assumptions deemed to be reasonably possible based upon the inherent uncertainties
present in determining the amount and timing of payment of such reserves. The difference between the acquired loss and LAE
reserves and our best estimate of the fair value of such reserves at the acquisition date is recorded as either an intangible asset or
another liability, as applicable and is amortized proportionately to the reduction in the related loss reserves (i.e., over the estimated
payout period of the acquired loss and LAE reserves). We assign fair values to intangible assets acquired based on valuation
techniques including the income and market approaches. We record contingent consideration at fair value based on the terms of
the purchase agreement with subsequent changes in fair value recorded through earnings. The determination of fair value may
require management to make significant estimates and assumptions. The purchase price is the fair value of the total consideration
conveyed to the seller and we record the excess of the purchase price over the fair value of the acquired net assets, where applicable,
as goodwill. We expense costs associated with the acquisition of a business in the period incurred.
Non-controlling Interest. The ownership interest in consolidated subsidiaries of non-controlling interests is reflected as non-
controlling interest. Our consolidation principles also consolidate entities in which the Company is deemed a primary beneficiary.
Non-controlling interest income or loss represents such non-controlling interests in the earnings of that entity. We consolidate the
Reciprocal Exchanges as we have determined that these are variable interest entities and that we are the primary beneficiary.
Fair value of financial instruments. Our estimates of fair value for financial assets and financial liabilities are based on the
framework established in ASC 820, “Fair Value Measurements and Disclosures.” The framework is based on the inputs used in
valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the
valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant
inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest
priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect our
54
significant market assumptions. Additionally, valuation of fixed-maturity investments is more subjective when markets are less
liquid due to lack of market-based inputs, which may increase the potential that the estimated fair value of an investment is not
reflective of the price at which an actual transaction could occur. Fair values of other financial instruments approximate their
carrying values.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the
assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. Additionally, ASC 820 requires an entity to consider all aspects of
nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s
categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a
description of the three hierarchy levels:
Level 1-Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date. Additionally,
the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.
Level 2-Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets
for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by
correlation or other means for substantially the full term of the assets or liabilities.
Level 3-Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s
best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued
using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide
variety of factors, including, for example, the type of financial instrument, whether the financial instrument is new and not yet
established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models
or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized
in Level 3. We use prices and inputs that are current as of the measurement date. In periods of market dislocation, the observability
of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified between
levels.
For investments that have quoted market prices in active markets, we use the quoted market prices as fair value and include
these prices in the amounts disclosed in the Level 1 hierarchy. We receive the quoted market prices from nationally recognized
third-party pricing services (“pricing service”). When quoted market prices are unavailable, we utilize the pricing service to
determine an estimate of fair value. This pricing method is used, primarily, for fixed maturities. The fair value estimates provided
by the pricing services are included in the Level 2 hierarchy. The pricing service utilizes evaluated pricing models that vary by
asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and, when
available, loan performance data. The pricing service’s evaluated pricing applications apply available information as applicable
through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing, to prepare
evaluations. In addition, the pricing service uses model processes, such as the Option Adjusted Spread model, to assess interest
rate impact and develop prepayment scenarios. The market inputs that the pricing service normally seeks for evaluations of
securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
We typically utilize the fair values received from the pricing service. If we determine that the fair value estimate provided
by the pricing service does not represent fair value or if quoted market prices and an estimate from the pricing service are unavailable,
we produce an estimate of fair value based on dealer quotations for recent activity in positions with the same or similar characteristics
to that being valued or through consensus pricing of a pricing service. Depending on the level of observable inputs, we will then
determine if the estimate is Level 2 or Level 3 hierarchy. In the past we have not adjusted any pricing provided by the pricing
services based on the review performed by our investment managers.
To validate prices, we compare the fair value estimates to our knowledge of the current market and will investigate prices
that we consider not to be representative of fair value. In addition, our process to validate the market prices obtained from the
pricing service includes, but is not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain
55
prices. We also periodically perform testing, as appropriate, of the market to determine trading activity, or lack of trading activity,
as well as evaluating the variability of market prices.
The following describes the valuation techniques we used to determine the fair value of financial instruments held as of
December 31, 2014:
Equity securities - For publicly traded common and preferred stocks, we received prices from a nationally recognized pricing
service that were based on observable market transactions and included these estimates in the amount disclosed in Level 1. When
current market quotes in active markets are unavailable for certain non-redeemable preferred stocks held by us, we receive an
estimate of fair value from the pricing service that provided fair value estimates for our fixed-maturity securities because the
pricing service utilizes some of the same methodologies to price the non-redeemable preferred stocks as it does for the fixed-
maturity securities. We include the estimate of the fair value of the non-redeemable preferred stock in the amount disclosed in
Level 2 of the fair value hierarchy. We also hold certain equity securities that are issued by privately-held entity or direct equity
investments that do not have an active market. We estimate the fair value of these securities primarily based on inputs such as
third party broker quote, issuers' book value, market multiples, and other inputs. These equity securities are classified as Level 3
due to significant unobservable inputs used in the valuation.
U.S. Treasury and federal agencies - These investments are composed primarily of bonds issued by the U.S. Treasury, the
Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association and the
Federal National Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active
markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. Treasury securities is an actively
traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using
the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are
observable market inputs, the fair values of U.S. government agency securities are included in Level 2 of the fair value hierarchy.
States and political subdivision bonds - These investments are composed of bonds and auction rate securities issued by U.S.
state and municipal entities or agencies. The fair values of municipal bonds are generally priced by pricing services. The pricing
services typically use spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used
to price the municipal bonds are observable market inputs, these are classified within Level 2 of the fair value hierarchy. Municipal
auction rate securities are reported in our consolidated balance sheets at cost, which approximates their fair value.
Foreign government Comprised of bonds issued by foreign governments, and are generally priced by pricing services. As
the significant inputs used to price foreign government bonds are observable market inputs, the fair values of foreign government
bonds are included in the Level 2 fair value hierarchy.
Corporate bonds - These investments are composed of bonds issued by corporations and are generally priced by pricing
services. The fair values of short-term corporate bonds are priced, by the pricing services, using the spread above the London
Interbank Offering Rate (“LIBOR”) yield curve and the fair value of long-term corporate bonds are priced using the spread above
the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. Where pricing is
unavailable from pricing services, we obtain non-binding quotes from broker-dealers. As the significant inputs used to price
corporate bonds are observable market inputs, the fair values of corporate bonds are included in Level 2 of the fair value hierarchy.
Mortgage and asset-backed securities - These securities are composed of commercial and residential mortgage-backed
securities. These securities are priced by independent pricing services and brokers. The pricing provider applies dealer quotes and
other available trade information, prepayment spreads, yield curves and credit spreads to the valuation. As the significant inputs
used to price these securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value
hierarchy.
Premiums and other receivables - The carrying values reported in the accompanying balance sheets for these financial
instruments approximate their fair values due to the short-term nature of these assets.
Notes payable - The amount reported in the accompanying balance sheets for this financial instrument represents the carrying
value of the debt. The fair value of our 6.75% Notes was determined using market-based metrics and the magnitude and timing
of contractual interest and principal payments while the Imperial Surplus Notes were valued using the Black Derman-Toy interest
rate lattice model. The fair value of the Reciprocal Exchanges' Surplus Notes was determined by discounting the estimated interest
and principal payments by an appropriate yield. All these financial liabilities are classified as Level 3 in the financial hierarchy.
56
Stock compensation expense. We recognize compensation expense for our share-based awards over the estimated vesting
period based on estimated grant date fair value. Share-based payments include stock option grants and restricted stock units
("RSU") under our 2010 Equity Incentive Plan and our 2013 Equity Incentive Plan.
Earnings per share. Basic earnings per share are computed based on the weighted-average number of shares of common
stock outstanding. Dilutive earnings per share are computed using the weighted-average number of shares of common stock
outstanding during the period adjusted for the dilutive impact of share options and convertible preferred stock using the treasury
stock method.
Income taxes. We join our subsidiaries in the filing of a consolidated federal income tax return and are party to federal income
tax allocation agreements. Under the tax allocation agreements, we pay to or receive from our subsidiaries the amount, if any, by
which the group’s federal income tax liability was affected by virtue of inclusion of the subsidiary in the consolidated federal
return. The Reciprocal Exchanges are not party to federal income tax allocation agreements but file separate tax returns annually.
Deferred income taxes reflect the impact of temporary differences between the amount of our assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax asset and liability
primarily consists of book versus tax differences for earned premiums, loss and LAE reserve discounting, deferred acquisition
costs, earned but unbilled premiums, and unrealized holding gains and losses on fixed maturities. We record changes in deferred
income tax assets and liabilities that are associated with components of other comprehensive income, primarily unrealized
investment gains and losses, directly to other comprehensive income. We include changes in deferred income tax assets and
liabilities as a component of income tax expense.
In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that we will
generate future taxable income during the periods in which those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this
assessment. If necessary, we establish a valuation allowance to reduce the deferred tax assets to the amounts that are more likely
than not to be realized.
We recognize tax benefits only for tax positions that are more likely than not to be sustained upon examination by taxing
authorities. Our policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in our
income tax provision. We file our consolidated tax returns as prescribed by the tax laws of the jurisdictions in which we and our
subsidiaries operate.
57
Results of Operations
Consolidated Results of Operations
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income
Service and fee income
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting
expenses
General and administrative expenses
Total underwriting expenses
Underwriting income (loss)
Net investment income
Net realized gain (loss) on investments
Bargain purchase gain and other revenue
Equity in earnings (losses) of unconsolidated
subsidiaries
Interest expense
Income before provision for income taxes
Less: Provision for income taxes
Net income
Less: Net loss (income) attributable to non-
controlling interest
Net income attributable NGHC
Net loss ratio
Net operating expense ratio (non-GAAP)
Net combined ratio (non-GAAP)
Reconciliation of net operating expense ratio
(non-GAAP):
NGHC
Reciprocal
Exchanges
Year Ended December 31,
2014
Eliminations
Total
(Amounts in Thousands)
$
$
$
$
$
$
$
$
2,065,065
(248,117)
1,816,948
(231,350)
1,585,598
7,643
178,333
1,026,346
308,822
346,696
1,681,864
89,710
50,627
(2,892)
(1,660)
1,180
(12,012)
124,953
22,712
102,241
2
102,243
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
70,042
(16,966)
53,076
(5,454)
47,622
4,787
139
26,719
6,267
11,967
44,953
7,595
1,799
—
—
—
(5,724)
3,670
1,164
2,506
(2,506)
1,053,065
462,124
402,686
— $
2,135,107
—
(265,083)
— $
1,870,024
—
(236,804)
— $
1,633,220
$
$
$
—
(9,901)
—
—
(9,901)
12,430
168,571
315,089
348,762
(9,901)
$
1,716,916
— $
—
—
—
—
—
97,305
52,426
(2,892)
(1,660)
1,180
(17,736)
— $
128,623
—
23,876
— $
104,747
—
(2,504)
2013
Total
2012
Total
$
$
$
1,338,755
(659,439)
679,316
8,750
688,066
87,100
127,541
1,351,925
(719,431)
632,494
(58,242)
574,252
89,360
93,739
134,887
280,552
877,563
25,144
30,808
(1,669)
16
1,274
(2,042)
53,531
11,140
42,391
(82)
42,309
$
$
$
$
$
$
$
$
$
$
110,771
246,644
760,101
(2,750)
30,550
16,612
3,728
(1,338)
(1,787)
45,015
12,309
32,706
—
32,706
70.1%
30.4%
100.5%
— $
— $
102,243
64.7%
29.6%
94.3%
56.1%
27.9%
84.0%
64.5%
29.6%
94.1%
67.2%
29.2%
96.4%
Year Ended December 31,
2014
NGHC
Reciprocal
Exchanges
Eliminations
Total
(Amounts in Thousands)
2013
Total
2012
Total
Total expenses
$
1,693,876
$
Less: Loss and loss adjustment expense
1,026,346
Less: Interest expense
Less: Ceding commission income
Less: Service and fee income
Net operating expense
Net earned premium
12,012
7,643
178,333
469,542
1,585,598
$
$
$
$
50,677
26,719
5,724
4,787
139
13,308
47,622
$
(9,901)
$
1,734,652
$
879,605
$
—
—
—
(9,901)
— $
1,053,065
17,736
12,430
168,571
482,850
— $
1,633,220
$
$
462,124
2,042
87,100
127,541
200,798
688,066
$
$
$
$
761,888
402,686
1,787
89,360
93,739
174,316
574,252
Net operating expense ratio (non-GAAP)
29.6%
27.9%
29.6%
29.2%
30.4%
During 2011, we expanded into a number of states beyond the states where our core P&C business operated (the “P&C Non-
Core States”). This expansion significantly increased premium in 2012 but also reduced profitability. During 2012, we completed
58
a strategic review of this expansion into P&C Non-Core States and made the decision to exit, restrict, or initiate runoff in certain
of these unprofitable businesses. These actions improved our net loss ratio and combined ratio in 2013.
Our A&H segment, established in 2012, provides accident and health insurance through a number of businesses (the “A&H
Startup”). Since most of the acquisition activity occurred later in the year, comparisons between the years ended December 31,
2012 and 2013 for the A&H segment are not meaningful. Our 2012 results of operations were negatively impacted by expected
underwriting losses from our acquisition of the TABS companies in September 2012. At the time of acquisition we expected
underwriting losses for the remainder of 2012 and into 2013.
During 2013, we terminated the Personal Lines Quota Share on a run-off basis (the "Quota Share Runoff") pursuant to which
we historically ceded 50% of our P&C gross premium written and related losses (excluding premium ceded to state-run reinsurance
facilities) to our quota share reinsurers. Effective July 31, 2014, no additional premium is being ceded under the Personal Lines
Quota Share. Effective January 1, 2014, we entered into the Tower Cut-Through Reinsurance Agreement and effective September
15, 2014 we entered into the PL Reinsurance Agreement (such reinsurance agreements collectively, the "Tower Reinsurance
Agreements") under which during the year ended December 31, 2014 we assumed unearned premium relating to in-force personal
lines business and reinsured new and renewal personal lines policies written after January 1, 2014.
During 2014, we also continued our expansion into the A&H segment ("A&H Expansion"). In April 2013, we acquired Euro
Accident Health and Care Insurance Aktiebolag (“EHC”), a Swedish group life and health insurance provider focused on health.
EHC operates as a Managing General Agent, which means that it is a registered insurance intermediary and as such operates as a
non-risk bearing insurer. Commencing January 1, 2014, our European insurance subsidiary began reinsuring all business placed
by EHC (the "EHC Business"). Commencing April 1, 2014, all new and renewal policies placed by EHC are underwritten by our
European insurance subsidiaries.
As a result of the Quota Share Runoff, the Tower Reinsurance Agreements, the A&H Expansion and the financial impact of
the EHC Business, comparisons between our 2014 and 2013 results will be less meaningful.
Consolidated Results of Operations for the Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013
Gross premium written. Gross premium written increased by $796.4 million from $1,338.8 million for the year ended
December 31, 2013 to $2,135.1 million for the year ended December 31, 2014, due to an increase of $689.5 million in premiums
received from the P&C segment primarily as a result of the Tower Reinsurance Agreements (increase of $447.9 million), the
Imperial acquisition (increase of $108.3 million), the consolidation of the Reciprocal Exchanges (increase of $70.0 million) and
an increase of $106.9 million in premiums received from the A&H segment primarily as a result of the EHC Business.
Net premium written. Net premium written increased by $1,190.7 million from $679.3 million for the year ended December
31, 2013 to $1,870.0 million for the year ended December 31, 2014. Net premium written for the P&C segment increased by
$1,083.9 million for the year ended December 31, 2014 compared to the same period in 2013 primarily due to the Tower Reinsurance
Agreements (increase of $434.2 million), the Imperial acquisition (increase of $87.3 million), the Quota Share Runoff (increase
of $457.0 million) and the consolidation of the Reciprocal Exchanges (increase of $53.1 million). Primarily as a result of the EHC
Business, net premium written for the A&H segment increased by $106.8 million.
Net earned premium. Net earned premium increased by $945.2 million, or 137.4%, from $688.1 million for the year ended
December 31, 2013 to $1,633.2 million for the year ended December 31, 2014. The increase by segment was: P&C - $857.9
million and A&H - $87.3 million. The increase was primarily attributable to the Tower Reinsurance Agreements (increase of
$272.0 million), the Quota Share Runoff (increase of $457.0 million), the Imperial acquisition (increase of $66.9 million) and the
consolidation of the Reciprocal Exchanges (increase of $47.6 million). Primarily as a result of the EHC Business, net earned
premium for the A&H segment increased by $87.3 million.
Ceding commission income. Ceding commission income decreased from $87.1 million for the year ended December 31,
2013 to $12.4 million for the year ended December 31, 2014, reflecting the Quota Share Runoff. Our consolidated ceding
commission ratio, which includes the Reciprocal Exchanges, decreased from 12.7% to 0.8%. Excluding the Reciprocal Exchanges,
the ceding commission ratio was 0.5% for the year ended December 31, 2014. The Reciprocal Exchanges' ceding commission
ratio was 10.1% for the period ended December 31, 2014.
Service and fee income. Service and fee income increased by $41.0 million, or 32.2%, from $127.5 million for the year
ended December 31, 2013 to $168.6 million for the year ended December 31, 2014. The increase was primarily attributable to the
increase of $13.7 million in service and fee income related to our A&H segment as a result of the A&H Expansion and the EHC
59
Business and an increase of $27.4 million related to our P&C segment as a result of higher general agent fees and organic P&C
segment growth.
The components of service, fees and other income are as follows:
(amounts in thousands)
Installment fees
Commission revenue
General agent fees
Late payment fees
Finance and processing fees
Other
Total
Year Ended December 31,
2014
2013
Change
$
30,323
$
30,666
$
52,597
45,637
11,658
13,569
14,787
43,716
21,526
11,240
11,727
8,666
$
168,571
$
127,541
$
(343)
8,881
24,111
418
1,842
6,121
41,030
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $590.9 million, or 127.9%, from $462.1 million
for the year ended December 31, 2013 to $1,053.1 million for the year ended December 31, 2014, primarily reflecting the Quota
Share Runoff as well as the Tower Reinsurance Agreements and reinsurance of business previously placed by EHC. The changes
by segment were: P&C - increased $531.2 million and A&H - increased $59.8 million. Loss and LAE for 2014 included $19.3
million ($17.9 million excluding the Reciprocal Exchanges) of unfavorable development on prior accident year loss and LAE
reserves caused by loss emergence primarily attributable to the A&H segment (including $6.8 million as a result of a loss portfolio
transfer where we assumed business previously placed by EHC and $6.0 million related to our domestic stop loss business) and
the remaining $5.1 million related to higher than expected P&C losses attributable to claims for private passenger automobile
bodily injury liability and personal injury protection. Loss and LAE for 2013 included $6.1 million of unfavorable development
on prior accident year loss and LAE reserves primarily caused by higher than expected losses attributable to claims for private
passenger automobile bodily injury liability and personal injury protection. Our consolidated net loss ratio, which includes the
Reciprocal Exchanges, decreased from 67.2% for the year ended December 31, 2013 to 64.5% for the year ended December 31,
2014 primarily due to a lower loss ratio experienced with respect to business assumed under the Tower Reinsurance Agreements.
Excluding the Reciprocal Exchanges, the net loss ratio was 64.7% for the year ended December 31, 2014. The Reciprocal Exchanges'
net loss ratio was 56.1% for the period ended December 31, 2014, including $1.3 million of unfavorable development on prior
accident year loss and LAE reserves.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $180.2
million, or 133.6%, from $134.9 million for the year ended December 31, 2013 to $315.1 million for the year ended December
31, 2014 primarily due to the Tower Reinsurance Agreements, Quota Share Runoff, A&H Expansion expenses and the EHC
Business.
General and administrative expenses. General and administrative expenses increased by $68.2 million, or 24.3%, from
$280.6 million for the year ended December 31, 2013 to $348.8 million for the year ended December 31, 2014 primarily as a
result of the Tower Reinsurance Agreements, P&C segment organic growth, A&H Expansion expenses and the EHC Business.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $282.1 million, or
140.5% from $200.8 million for the year ended December 31, 2013 to $482.9 million for the year ended December 31, 2014. The
consolidated net operating expense ratio (non-GAAP), which includes the Reciprocal Exchanges, increased to 29.6% in the year
ended December 31, 2014 from 29.2% in the year ended December 31, 2013 primarily as a result of A&H Expansion expenses.
Excluding the Reciprocal Exchanges, the net operating expense ratio was 29.6% for the year ended December 31, 2014. The
Reciprocal Exchanges' net operating expense ratio was 27.9% for the period ended December 31, 2014.
Net investment income. Net investment income increased by $21.6 million, or 70.2%, from $30.8 million for the year ended
December 31, 2013 to $52.4 million for the year ended December 31, 2014 primarily due to an increase in average invested assets
as a result of our February 2014 common stock issuance, our May 2014 issuance of $250.0 million aggregate principal amount
of 6.75% notes, our June 2014 $55.0 million preferred stock issuance and an increase in cash flow provided by operating activities.
Net realized losses on investments. Net realized losses on investments increased by $1.2 million from a $1.7 million loss
for the year ended December 31, 2013 to a $2.9 million loss for the year ended December 31, 2014 primarily due to net realized
losses on the sale of investments for the year ended December 31, 2014 compared to net realized gains on the sale of investments
for the year ended December 31, 2013.
60
Equity in earnings of unconsolidated subsidiaries. Equity in earnings of unconsolidated subsidiaries, which primarily relates
to our 50% interest in life settlement entities, decreased $0.1 million, from $1.3 million in earnings for the year ended December
31, 2013 to $1.2 million in earnings for the year ended December 31, 2014, due to the change in fair market value of the life
settlement contracts.
Interest expense. Interest expense for the year ended December 31, 2014 and 2013 was $17.7 million and $2.0 million,
respectively, increasing primarily due to our May 2014 issuance of $250.0 million aggregate principal amount of 6.75% notes.
Provision for income taxes. Consolidated income tax expense, which includes the Reciprocal Exchanges, increased by $12.7
million, or 114.3%, from $11.1 million for the year ended December 31, 2013, reflecting an effective tax rate of 21.3%, to $23.9
million for the year ended December 31, 2014, reflecting an effective tax rate of 18.7%. Income tax expense included a tax benefit
of $21.2 million attributable to the reduction of the deferred tax liability associated with the equalization reserves of our Luxembourg
reinsurers. The effect of this tax benefit reduced the effective tax rate for the year ended December 31, 2014 by 16.7%.
NGHC, excluding the Reciprocal Exchanges, had income tax expense of $22.7 million for the year ended December 31,
2014, reflecting an effective tax rate of 18.3%.
The Reciprocal Exchanges had pre-tax income of $3.7 million for the period ended December 31, 2014. A full valuation
allowance is recorded on the Reciprocal Exchanges. The Reciprocal Exchanges' valuation allowance as of December 31, 2014
was $21.5 million.
Consolidated Results of Operations for the Year Ended December 31, 2013 Compared with the Year Ended December 31, 2012
Gross premium written. Gross premium written decreased by $13.1 million from $1,351.9 million for the year ended
December 31, 2012 to $1,338.8 million for the year ended December 31, 2013, due to a decrease of $38.4 million in premiums
received from the P&C segment as we exited or restricted business in the P&C Non-Core States, partially offset by an increase
of $25.2 million in premiums received from the A&H segment.
Net premium written. Net premium written increased by $46.8 million, or 7.4%, from $632.5 million for the year ended
December 31, 2012 to $679.3 million for the year ended December 31, 2013. Net premium written for the P&C segment increased
by $21.6 million for the year ended December 31, 2013 compared to the same period in 2012 primarily due to the termination of
the Personal Lines Quota Share (increase of $61.5 million), partially offset by our exit or restriction of business in the P&C Non-
Core States. In connection with the A&H Startup, net premium written for the A&H segment increased by $25.2 million.
Net earned premium. Net earned premium increased by $113.8 million, or 19.8%, from $574.3 million for the year ended
December 31, 2012 to $688.1 million for the year ended December 31, 2013. The increase by segment was: P&C - $88.6 million
and A&H - $25.2 million. The increase was primarily attributable to the termination of the Personal Lines Quota Share.
Ceding commission income. Ceding commission income decreased from $89.4 million for the year ended December 31,
2012 to $87.1 million for the year ended December 31, 2013, reflecting the runoff of the Personal Lines Quota Share. Our ceding
commission ratio decreased from 15.6% to 12.7%.
61
Service and fee income. Service and fee income increased by $33.8 million, or 36.1%, from $93.7 million for the year ended
December 31, 2012 to $127.5 million for the year ended December 31, 2013. The increase was primarily attributable to the increase
of $28.4 million in service and fee income related to a full year from our A&H segment. The components of service and fee income
are as follows:
(amounts in thousands)
Installment fees
Commission revenue
General agent fees
Late payment fees
Finance and processing fees
Other
Total
Year Ended December 31,
2013
2012
Change
$
30,666
$
38,340
$
43,716
21,526
11,240
11,727
8,666
16,502
13,233
10,962
8,363
6,339
(7,674)
27,214
8,293
278
3,364
2,327
$
127,541
$
93,739
$
33,802
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $59.4 million, or 14.8%, from $402.7 million
for the year ended December 31, 2012 to $462.1 million for the year ended December 31, 2013, primarily reflecting the runoff of
the Personal Lines Quota Share. The changes by segment were: P&C - increased $48.4 million and A&H -increased $11.0 million.
Loss and LAE for 2013 included $6.1 million of unfavorable development on prior accident year loss and LAE reserves primarily
caused by higher than expected losses attributable to claims for private passenger automobile bodily injury liability and personal
injury protection, while 2012 included $1.3 million of unfavorable development on prior accident year loss and LAE reserves
primarily caused by higher than expected losses attributable to claims for private passenger automobile bodily injury liability and
personal injury protection. Our net loss ratio decreased from 70.1% for the year ended December 31, 2012 to 67.2% for the year
ended December 31, 2013 primarily due to our decision to exit or restrict business in the P&C Non-Core States.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $24.1
million, or 21.8%, from $110.8 million for the year ended December 31, 2012 to $134.9 million for the year ended December 31,
2013 primarily due to A&H Startup expenses.
General and administrative expenses. General and administrative expenses increased by $33.9 million, or 13.7%, from
$246.6 million for the year ended December 31, 2012 to $280.6 million for the year ended December 31, 2013 primarily as a
result of the ongoing costs for our three legacy policy administration systems in addition to the costs of our new policy administration
system during 2013, the effect of the hiring of additional employees for the transition to our new operations center in Cleveland
and A&H Startup expenses.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $26.5 million, or
15.2%, from $174.3 million for the year ended December 31, 2012 to $200.8 million for the year ended December 31, 2013. The
net operating expense ratio (non-GAAP) decreased to 29.2% in 2013 from 30.4% in 2012 primarily as a result of the increase in
earned premium due to termination of the Personal Lines Quota Share.
Net investment income. Net investment income increased by $0.2 million, or 0.8%, from $30.6 million for the year ended
December 31, 2012 to $30.8 million for the year ended December 31, 2013 due to an increase in average invested assets partially
offset by a lower average yield. The average yield, net of investment expense, on our investment portfolio was 3.9% and 4.1%
for the years ended December 31, 2013 and 2012, respectively.
Net realized gains (losses) on investments. Net realized losses on investments increased by $18.3 million from a $16.6
million gain for the year ended December 31, 2012 to a $1.7 million loss for the year ended December 31, 2013 due to the decision
to sell more securities during the year ended December 31, 2012 than during the year ended December 31, 2013 and due to the
recognition of a $2.9 million OTTI charge relating to an investment in equity securities based on our qualitative and quantitative
OTTI review.
Equity in earnings (losses) of unconsolidated subsidiaries. Equity in earnings (losses) of unconsolidated subsidiaries, which
primarily relates to our 50% interest in entities that own life settlement contracts, increased by $2.6 million, from a $1.3 million
loss for the year ended December 31, 2012 to a $1.3 million gain for the year ended December 31, 2013, due primarily to an
increase in the value of the life settlement contracts.
62
Interest expense. Interest expense for the years ended December 31, 2013 and 2012 was $2.0 million and $1.8 million,
respectively, reflecting the scheduled interest payment on our bank line of credit and the interest due on the final deferred purchase
price payment made to Ally Financial Inc. (formerly GMAC Inc.) on February 28, 2012.
Provision for income taxes. Income tax expense decreased by $1.2 million, or 9.5%, from $12.3 million for the year ended
December 31, 2012, reflecting an effective tax rate of 27.3%, to $11.1 million for the year ended December 31, 2013, reflecting
an effective tax rate of 21.3%. Income tax expense included a tax benefit of $1.8 million attributable to the reduction of the deferred
tax liability associated with the equalization reserves of our Luxembourg reinsurer. The effect of this $1.8 million tax benefit
reduced the effective tax rate for the year ended December 31, 2013 by 3.4%.
P&C Segment - Results of Operations
NGHC
Reciprocal
Exchanges
Year Ended December 31,
2014
Eliminations
Total
(Amounts in Thousands)
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income
Service and fee income
Underwriting expenses:
$
$
$
$
$
$
1,924,666
(247,720)
1,676,946
(211,824)
1,465,122
7,643
119,876
Loss and loss adjustment expense
Acquisition costs and other underwriting
expenses
General and administrative expenses
940,457
254,130
290,079
Total underwriting expenses
Underwriting income
Net loss ratio
Net operating expense ratio (non-GAAP)
Net combined ratio (non-GAAP)
$
$
1,484,666
107,975
$
$
64.2%
28.4%
92.6%
$
$
$
$
$
70,042
(16,966)
53,076
(5,454)
47,622
4,787
139
26,719
6,267
11,967
44,953
7,595
56.1%
27.9%
84.0%
— $
1,994,708
—
(264,686)
— $
1,730,022
—
(217,278)
— $
1,512,744
$
$
$
—
(9,901)
—
—
(9,901)
12,430
110,114
260,397
292,145
(9,901)
$
1,519,718
— $
115,570
$
$
63.9%
28.4%
92.3%
Year Ended December 31,
2013
Total
2012
Total
1,305,254
(659,154)
646,100
8,749
654,849
87,100
82,752
$
$
$
1,343,658
(719,205)
624,453
(58,243)
566,210
89,360
77,373
110,509
252,345
798,843
25,858
66.6%
29.5%
96.1%
$
$
99,699
241,046
728,373
4,570
68.5%
30.7%
99.2%
967,176
435,989
387,628
Reconciliation of net operating expense ratio
(non-GAAP):
2014
NGHC
Reciprocal
Exchanges
Eliminations
Total
(Amounts in Thousands)
2013
Total
2012
Total
Total underwriting expenses
$
1,484,666
$
44,953
$
(9,901)
$
1,519,718
$
798,843
$
728,373
Less: Loss and loss adjustment expense
Less: Ceding commission income
Less: Service and fee income
Net operating expense
Net earned premium
Net operating expense ratio (non-GAAP)
940,457
7,643
119,876
416,690
1,465,122
28.4%
$
$
$
$
26,719
4,787
139
13,308
47,622
27.9%
$
$
—
—
(9,901)
— $
967,176
12,430
110,114
429,998
— $
1,512,744
28.4%
$
$
435,989
87,100
82,752
193,002
654,849
29.5%
$
$
387,628
89,360
77,373
174,012
566,210
30.7%
P&C Segment Results of Operations for the Year Ended December 31, 2014 Compared with the Year Ended December 31,
2013
Gross premium written. Gross premium written increased by $689.5 million, or 52.8%, from $1,305.3 million for the year
ended December 31, 2013 to $1,994.7 million for the year ended December 31, 2014 primarily as a result of the Tower Reinsurance
Agreements (increase of $447.9 million), the Imperial acquisition (increase of $108.3 million) and the consolidation of the
Reciprocal Exchanges (increase of $70.0 million).
63
Net premium written. Net premium written increased by $1,083.9 million from $646.1 million for the year ended December
31, 2013 to $1,730.0 million for the year ended December 31, 2014 primarily due to the Tower Reinsurance Agreements (increase
of $434.2 million), the Quota Share Runoff (increase of $457.0 million), the Imperial acquisition (increase of $87.3 million) and
the consolidation of the Reciprocal Exchanges (increase of $53.1 million).
Net earned premium. Net earned premium increased by $857.9 million, or 131.0%, from $654.8 million for the year ended
December 31, 2013 to $1,512.7 million for the year ended December 31, 2014 primarily as a result of the Tower Reinsurance
Agreements (increase of $272.0 million), the Quota Share Runoff (increase of $457.0 million), the Imperial acquisition (increase
of $66.9 million) and the consolidation of the Reciprocal Exchanges (increase of $47.6 million).
Ceding commission income. Our ceding commission income decreased by $74.7 million, or 85.7%, from $87.1 million for
the year ended December 31, 2013 to $12.4 million for the year ended December 31, 2014 reflecting the Quota Share Runoff. Our
P&C segment ceding commission ratio, which includes the Reciprocal Exchanges, decreased from 13.3% for the year ended
December 31, 2013 to 0.8% for the year ended December 31, 2014. Excluding the Reciprocal Exchanges, the ceding commission
ratio was 0.5% for the year ended December 31, 2014. The Reciprocal Exchanges' ceding commission ratio was 10.1% for the
period ended December 31, 2014.
Service and fee income. Service and fee income increased by $27.4 million, or 33.1%, from $82.8 million for the year ended
December 31, 2013 to $110.1 million for the year ended December 31, 2014 as a result of higher general agent fees and organic
P&C segment growth.
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $531.2 million, or 121.8%, from $436.0 million
for the year ended December 31, 2013 to $967.2 million for the year ended December 31, 2014 primarily reflecting the Quota
Share Runoff as well as the Tower Reinsurance Agreements. Our P&C segment net loss ratio, which includes the Reciprocal
Exchanges, decreased from 66.6% for the year ended December 31, 2013 to 63.9% for the year ended December 31, 2014 primarily
due to a lower loss ratio experienced on policies reinsured under the Tower Reinsurance Agreements. Excluding the Reciprocal
Exchanges, the net loss ratio was 64.2% for the year ended December 31, 2014. The Reciprocal Exchanges' net loss ratio was
56.1% for the period ended December 31, 2014.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $149.9
million from $110.5 million for the year ended December 31, 2013 to $260.4 million for the year ended December 31, 2014. The
increase was primarily due to the Tower Reinsurance Agreements and Quota Share Runoff.
General and administrative expenses. General and administrative expenses increased by $39.8 million from $252.3 million
for the year ended December 31, 2013 to $292.1 million for the year ended December 31, 2014 primarily as a result of the Tower
Reinsurance Agreements and P&C segment organic growth.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $237.0 million, or
122.8%, from $193.0 million for the year ended December 31, 2013 to $430.0 million for the year ended December 31, 2014. The
P&C segment net operating expense ratio (non-GAAP), which includes the Reciprocal Exchanges, decreased from 29.5% for the
year ended December 31, 2013 to 28.4% for the year ended December 31, 2014 primarily due to the lower expense ratio on policies
reinsured under the Tower Reinsurance Agreements. Excluding the Reciprocal Exchanges, the net operating expense ratio was
28.4% for the year ended December 31, 2014. The Reciprocal Exchanges' net operating expense ratio was 27.9% for the period
ended December 31, 2014.
Underwriting income. Underwriting income increased from $25.9 million for the year ended December 31, 2013 to $115.6
million for the year ended December 31, 2014 primarily as a result of the Tower Reinsurance Agreements and the Quota Share
Runoff. The P&C segment combined ratio, which includes the Reciprocal Exchanges, for the year ended December 31, 2014
decreased to 92.3% compared to 96.1% for the same period in 2013 primarily as the result of our lower net loss ratio and net
operating expense ratio experienced on policies reinsured under the Tower Reinsurance Agreements. Excluding the Reciprocal
Exchanges, the combined ratio was 92.6% for the year ended December 31, 2014. The Reciprocal Exchanges' combined ratio was
84.0% for the period ended December 31, 2014.
P&C Segment Results of Operations for the Year Ended December 31, 2013 Compared with the Year Ended December 31,
2012
Gross premium written. Gross premium written decreased by $38.4 million, or 2.9%, from $1,343.7 million for the year
ended December 31, 2012 to $1,305.3 million for the year ended December 31, 2013, primarily due to our exit or restriction of
business in the P&C Non-Core States.
64
Net premium written. Net premium written increased by $21.6 million, or 3.5%, from $624.5 million for the year ended
December 31, 2012 to $646.1 million for the year ended December 31, 2013, primarily due to the termination of the Personal
Lines Quota Share (increase of $61.5 million), partially offset by our exit or restriction of business in the P&C Non-Core States.
Net earned premium. Net earned premium increased by $88.6 million, or 15.7%, from $566.2 million for the year ended
December 31, 2012 to $654.8 million for the year ended December 31, 2013, primarily as a result of the termination of the Quota
Share Personal Lines.
Ceding commission income. Our ceding commission income decreased by $2.3 million, or 2.5%, from $89.4 million for the
year ended December 31, 2012 to $87.1 million for the year ended December 31, 2013 as a result of the termination of the Personal
Lines Quota Share. Our ceding commission ratio decreased from 15.8% in 2012 to 13.3% in 2013.
Service and fee income. Service and fee income increased by $5.4 million, or 7.0%, from $77.4 million for the year ended
December 31, 2012 to $82.8 million for the year ended December 31, 2013.
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $48.4 million, or 12.5%, from $387.6 million
for the year ended December 31, 2012, to $436.0 million for the year ended December 31, 2013 as a result of the termination of
the Personal Lines Quota Share. Our net loss ratio decreased from 68.5% for the year ended December 31, 2012 to 66.6% for the
year ended December 31, 2013. The loss and LAE and the net loss ratio in 2013 primarily reflect our decision to exit or restrict
business in the P&C Non-Core States.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $10.8
million from $99.7 million for the year ended December 31, 2012 to $110.5 million for the year ended December 31, 2013.
General and administrative expenses. General and administrative expenses increased by $11.3 million, or 4.7%, from $241.0
million for the year ended December 31, 2012 to $252.3 million for the year ended December 31, 2013 primarily as a result of
the ongoing costs for our three legacy policy administration systems in addition to the new policy administration system, the effect
of the hiring of additional employees in connection with our transition to our new operations center in Cleveland and related
expenses.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $19.0 million, or
10.9%, from $174.0 million for the year ended December 31, 2012 to $193.0 million for the year ended December 31, 2013. The
net operating expense ratio (non-GAAP) decreased from 30.7% in 2012 to 29.5% in 2013 primarily as a result of the increase in
earned premium due to the termination of the Personal Lines Quota Share.
Underwriting income. Underwriting income increased from $4.6 million for the year ended December 31, 2012 to $25.9
million for the year ended December 31, 2013. The combined ratio for the year ended December 31, 2013 decreased to 96.1%
compared to 99.2% for the same period in 2012 primarily as the result of our lower loss ratio due to our exit or restriction of
business in the P&C Non-Core States.
65
A&H Segment - Results of Operations
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Service and fee income
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Total underwriting expenses
Underwriting loss
Net loss ratio
Net operating expense ratio (non-GAAP)
Net combined ratio (non-GAAP)
Reconciliation of net operating expense ratio (non-GAAP):
Total underwriting expenses
Less: Loss and loss adjustment expense
Less: Service and fee income
Net operating expense
Net earned premium
Net operating expense ratio (non-GAAP)
Year Ended December 31,
2014
2013
2012
(Amounts in Thousands)
$
$
$
140,399
(397)
140,002
(19,526)
120,476
58,457
85,889
54,692
56,617
197,198
(18,265)
$
$
71.3%
43.9%
115.2%
$
$
$
$
$
33,501
(285)
33,216
1
33,217
44,789
26,135
24,378
28,207
78,720
(714)
78.7%
23.5%
102.2%
8,267
(226)
8,041
1
8,042
16,366
15,058
11,072
5,598
31,728
(7,320)
187.2%
3.8%
191.0%
Year Ended December 31,
2014
2013
2012
(Amounts in Thousands)
197,198
$
78,720
$
85,889
58,457
52,852
120,476
$
$
26,135
44,789
7,796
33,217
$
$
31,728
15,058
16,366
304
8,042
43.9%
23.5%
3.8%
$
$
$
$
$
$
$
$
A&H Segment Results of Operations for the Year Ended December 31, 2014 Compared with the Year Ended December 31,
2013
Gross premium written. Gross premium written increased by $106.9 million, from $33.5 million for the year ended December
31, 2013 to $140.4 million for the year ended December 31, 2014 primarily as a result of the EHC Business.
Net premium written. Net premium written increased by $106.8 million, from $33.2 million for the year ended December
31, 2013 to $140.0 million for the year ended December 31, 2014 primarily as a result of the EHC Business.
Net earned premium. Net earned premium increased by $87.3 million, from $33.2 million for the year ended December 31,
2013 to $120.5 million for the year ended December 31, 2014 primarily as a result of the EHC Business.
Service and fee income. Service and fee income increased by $13.7 million, or 30.5%, from $44.8 million for the year ended
December 31, 2013 to $58.5 million for the year ended December 31, 2014 as a result of the EHC Business and the A&H Expansion.
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $59.8 million, from $26.1 million for the year
ended December 31, 2013 to $85.9 million for the year ended December 31, 2014. Our net loss ratio decreased from 78.7% for
the year ended December 31, 2013 to 71.3% for the year ended December 31, 2014. The loss ratio in the year ended December
31, 2014 was positively affected by the EHC Business in 2014.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $30.3
million from $24.4 million for the year ended December 31, 2013 to $54.7 million for the year ended December 31, 2014 primarily
as a result of A&H Expansion expenses and the EHC Business.
66
General and administrative expenses. General and administrative expenses increased by $28.4 million from $28.2 million
for the year ended December 31, 2013 to $56.6 million for the year ended December 31, 2014 primarily as a result of A&H
Expansion expenses and the EHC Business.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $45.1 million from
$7.8 million for the year ended December 31, 2013 to $52.9 million for the year ended December 31, 2014. The net operating
expense ratio (non-GAAP) increased from 23.5% for the year ended December 31, 2013 to 43.9% for the year ended December
31, 2014 primarily as a result of the A&H Expansion expenses.
Underwriting loss. Underwriting loss increased from a loss of $0.7 million for the year ended December 31, 2013 to a loss
of $18.3 million for the year ended December 31, 2014 due to the A&H Expansion. The combined ratio for the year ended December
31, 2014 increased to 115.2% compared to 102.2% for the same period in 2013. The combined ratio was higher due to increased
premium volume in connection with the A&H Expansion.
A&H Segment Results of Operations for the Year Ended December 31, 2013 Compared with the Year Ended December 31,
2012
The variances for the A&H segment results of operations for the year ended December 31, 2013 compared with the year
ended December 31, 2012, unless noted otherwise, are primarily due to a full year of A&H operations in 2013 as well as organic
growth and strategic acquisitions.
Gross premium written. Gross premium written increased by $25.2 million, from $8.3 million for the year ended
December 31, 2012 to $33.5 million for the year ended December 31, 2013.
Net premium written. Net premium written increased by $25.2 million, from $8.0 million for the year ended December 31,
2012 to $33.2 million for the year ended December 31, 2013.
Net earned premium. Net earned premium increased by $25.2 million, from $8.0 million for the year ended December 31,
2012 to $33.2 million for the year ended December 31, 2013.
Service and fee income. Service and fee income increased by $28.4 million, or 173.7%, from $16.4 million for the year
ended December 31, 2012 to $44.8 million for the year ended December 31, 2013.
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $11.0 million, or 73.6%, from $15.1 million
for the year ended December 31, 2012, to $26.1 million for the year ended December 31, 2013. Our net loss ratio decreased from
187.2% for the year ended December 31, 2012 to 78.7% for the year ended December 31, 2013. The loss ratio in 2013 was
positively affected by the re-underwriting of the TABS book of business following the 2012 acquisition.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $13.3
million from $11.1 million for the year ended December 31, 2012 to $24.4 million for the year ended December 31, 2013.
General and administrative expenses. General and administrative expenses increased by $22.6 million from $5.6 million
for the year ended December 31, 2012 to $28.2 million for the year ended December 31, 2013.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $7.5 million from
$0.3 million for the year ended December 31, 2012 to $7.8 million for the year ended December 31, 2013. The net operating
expense ratio (non-GAAP) increased from 3.8% in 2012 to 23.5% in 2013.
Underwriting loss. Underwriting loss decreased from a loss of $7.3 million for the year ended December 31, 2012 to a loss
of $0.7 million for the year ended December 31, 2013. The combined ratio for the year ended December 31, 2013 decreased to
102.2% compared to 191.0% for the same period in 2012 primarily as the result of our lower loss ratio due to the re-underwriting
of the TABS book of business following the 2012 acquisition.
Investment Portfolio
Our investment strategy emphasizes, first, the preservation of capital and, second, maximization of an appropriate risk-
adjusted return. We seek to maximize investment returns using investment guidelines that stress prudent allocation among cash
and cash equivalents, fixed-maturity securities and, to a lesser extent, equity securities. Cash and cash equivalents include cash
67
on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90
days or less. Our fixed-maturity securities include obligations of the U.S. Treasury or U.S. government agencies, obligations of
U.S. and Canadian corporations, mortgages guaranteed by the Federal National Mortgage Association, the Government National
Mortgage Association, the Federal Home Loan Mortgage Corporation, Federal Farm Credit entities, and asset-backed securities
and commercial mortgage obligations. Our equity securities include preferred stock of U.S. and Canadian corporations.
The average yield on our investment portfolio was 3.8% and 3.9% and the average duration of the portfolio was 5.35 and
6.32 years for the years ended at December 31, 2014 and 2013, respectively.
The cost or amortized cost, fair value, and gross unrealized gains and losses on available-for-sale securities were as follows:
December 31, 2014
Equity securities:
Common stock
Preferred stock
Fixed maturities:
U.S. Treasury
Federal agencies
States and political subdivision bonds
Foreign government
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Total
Less: Securities pledged
Total net of Securities pledged
NGHC
Reciprocal Exchanges
Total
Cost or
Amortized
Cost
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(amounts in thousands)
Fair
Value
$
47,269
$
1,004
$
7,755
65
(7,349) $
(125)
40,924
7,695
37,446
98
172,617
6,194
839,436
459,596
79,579
5,461
1,655,451
47,546
1,607,905
1,430,578
224,873
1,655,451
$
$
$
$
$
$
$
$
1,536
—
4,961
—
36,525
11,132
1,602
—
56,825
1,910
54,915
55,031
1,794
56,825
$
$
$
$
(3)
—
(169)
(658)
(8,699)
(92)
(189)
(91)
(17,375) $
—
(17,375) $
(16,264) $
(1,111)
(17,375) $
38,979
98
177,409
5,536
867,262
470,636
80,992
5,370
1,694,901
49,456
1,645,445
1,469,345
225,556
1,694,901
68
December 31, 2013
Equity securities:
Common stock
Preferred stock
Fixed maturities:
U.S. Treasury and federal agencies
States and political subdivision bonds
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
Less: Securities pledged
Total net of Securities pledged
Cost or
Amortized
Cost
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(amounts in thousands)
Fair Value
$
$
$
$
1,939
5,000
— $
—
— $
(652)
1,939
4,348
30,655
101,105
477,442
272,820
8,179
897,140
133,013
764,127
$
$
920
1,681
21,397
4,136
—
28,134
3,884
24,250
$
$
—
(3,202)
(7,044)
(7,527)
(51)
(18,476) $
(2,975)
(15,501) $
31,575
99,584
491,795
269,429
8,128
906,798
133,922
772,876
The increase in gross unrealized losses from $15.5 million at December 31, 2013 to $17.4 million at December 31, 2014
resulted from fluctuations in market interest rates.
The tables below summarize the credit quality of our fixed maturities, securities pledged and preferred securities as of
December 31, 2014 and 2013, as rated by Standard & Poor’s.
NGHC
Reciprocal Exchanges
Cost or
Amortized
Cost
Fair Value
Percentage of
Fixed
Maturities
and Preferred
Securities
(amounts in thousands)
Cost or
Amortized
Cost
Percentage of
Fixed
Maturities
and Preferred
Securities
Fair Value
$
19,068
$
20,475
1.4% $
18,378
$
18,504
359,424
275,905
300,789
328,594
370,058
282,443
318,955
335,745
25.9%
19.8%
22.3%
23.5%
24,956
25,027
—
99,754
48,440
—
100,412
48,486
99,529
$1,383,309
100,745
$1,428,421
7.1%
33,345
100.0% $ 224,873
33,127
$ 225,556
8.2%
11.1%
—%
44.5%
21.5%
14.7%
100.0%
December 31, 2014
U.S. Treasury
AAA
AA, AA+, AA-
A, A+, A-
BBB, BBB+, BBB-
BB+ and lower
Total
69
December 31, 2013
U.S. Treasury and federal agencies
AAA
AA, AA+, AA-
A, A+, A-
BBB, BBB+, BBB-
BB+ and lower
Total
Cost or Amortized
Cost
Fair Value
(amounts in thousands)
$
$
30,656
$
69,893
377,956
170,879
207,764
38,053
895,201
$
31,575
69,616
374,479
181,621
210,336
37,232
904,859
Percentage of
Fixed-Maturity and
Preferred
Securities
3.5%
7.7%
41.4%
20.1%
23.2%
4.1%
100.0%
The tables below summarize the investment quality of our corporate bond holdings and industry concentrations as of
December 31, 2014 and 2013.
December 31, 2014
AAA
AA+,
AA,
AA-
A+,A,A-
BBB+,
BBB,
BBB-
(amounts in thousands)
BB+ or
Lower
Fair
Value
% of
Corporate
Bonds
Portfolio
Corporate Bonds:
Financial Institutions
Industrials
Utilities/Other
Total
NGHC
Reciprocal Exchanges
Total
1.4 %
— %
— %
1.4%
1.4 %
— %
1.4%
3.6 %
2.4 %
— %
6.0%
6.0 %
— %
6.0%
26.9 %
9.4 %
2.2 %
38.5%
34.0 %
4.5 %
38.5%
8.9 %
31.7 %
3.1 %
43.7%
38.6 %
5.1 %
43.7%
2.5 % $ 376,236
5.9 %
427,592
2.0 %
63,434
10.4% $ 867,262
8.3 % $ 762,822
2.1 %
104,440
10.4% $ 867,262
43.3 %
49.4 %
7.3 %
100.0%
88.3 %
11.7 %
100.0%
December 31, 2013
AAA
AA+,
AA,
AA-
A+,A,A-
BBB+,
BBB,
BBB-
(amounts in thousands)
BB+ or
Lower
Fair
Value
% of
Corporate
Bonds
Portfolio
Corporate Bonds:
Financial Institutions
Industrials
Utilities/Other
Total
2.5%
—%
—%
2.5%
12.1%
1.8%
—%
13.9%
28.7%
4.7%
0.7%
34.1%
13.9%
26.7%
2.2%
42.8%
0.5% $ 283,766
184,649
4.3%
1.9%
23,380
6.7% $ 491,795
57.7%
37.5%
4.8%
100.0%
70
The amortized cost and fair value of available-for-sale fixed maturities and securities pledged, held as of December 31,
2014, 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.
December 31, 2014
NGHC
Reciprocal Exchanges
Total
Cost or
Amortized
Cost
Fair
Value
Cost or
Amortized
Cost
Fair
Value
Cost or
Amortized
Cost
Fair
Value
(amounts in thousands)
Due in one year or less
$
12,445
$
12,542
$
9,035
$
9,030
$
21,480
$
21,572
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total
160,498
652,012
86,246
467,105
168,194
673,529
89,946
479,332
29,564
65,630
40,361
77,531
29,518
65,785
40,740
77,666
190,062
717,642
126,607
544,636
197,712
739,314
130,686
556,998
$1,378,306
$1,423,543
$ 222,121
$ 222,739
$1,600,427
$1,646,282
Gross Unrealized Losses. The tables below summarize the gross unrealized losses on equity securities and fixed maturities
by the length of time the security had continuously been in an unrealized loss position as of December 31, 2014 and 2013:
December 31, 2014
Common stock
Preferred stock
U.S. Treasury
States and political
subdivision bonds
Foreign government
Corporate bonds
Residential mortgage-
backed securities
Commercial mortgage-
backed securities
Asset-backed securities
Total
NGHC
Reciprocal Exchanges
Total
Less Than 12 Months
12 Months or More
Total
Fair
Market
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Market
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Market
Value
Unrealized
Losses
(amounts in thousands)
— $ 33,717
$ (7,349)
(125)
(3)
(169)
(658)
(8,699)
4,878
6,343
24,661
5,536
140,472
17,573
(92)
33,735
4,869
$ 271,784
$ 181,099
90,685
$ 271,784
(189)
(91)
$ (17,375)
$ (16,264)
(1,111)
$ (17,375)
1
—
8
—
10
3
—
—
22
22
—
22
—
(125)
—
(77)
—
(3,105)
(58)
—
—
$ (3,365)
$ (3,365)
—
$ (3,365)
$ 33,717
$ (7,349)
—
6,343
16,320
5,536
—
(3)
(92)
(658)
3
—
5
39
1
$
— $
4,878
—
8,341
—
116,880
(5,594)
108
23,592
15,598
(34)
17
1,975
33,735
4,869
$ 232,998
$ 142,313
90,685
$ 232,998
(189)
(91)
$ (14,010)
$ (12,899)
(1,111)
$ (14,010)
10
3
186
97
89
186
—
—
$ 38,786
$ 38,786
—
$ 38,786
71
December 31, 2013
Preferred Stock
States and political
subdivisions bonds
Corporate bonds
Residential mortgage-
backed securities
Commercial mortgage-
backed securities
Less Than 12 Months
12 Months or More
Total
Fair
Market
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Market
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Market
Value
Unrealized
Losses
(amounts in thousands)
$
4,348
$
(652)
1
$
— $
—
— $
4,348
$
(652)
32,770
128,362
(2,622)
(4,051)
176,491
(7,527)
8,128
(51)
18
39
6
2
2,600
41,673
(580)
(2,993)
2
9
35,370
170,035
(3,202)
(7,044)
—
—
—
— 176,491
(7,527)
—
$ (3,573)
—
11
8,128
$ 394,372
(51)
$ (18,476)
Total
$ 350,099
$ (14,903)
66
$ 44,273
There were 208 and 77 securities at December 31, 2014 and 2013, respectively, that account for the gross unrealized loss,
none of which we deemed to be an other-than-temporary impairment ("OTTI"). Significant factors influencing our determination
that none of the securities are OTTI included the magnitude of unrealized losses in relation to cost, the nature of the investment
and management’s intent not to sell these securities and our determination that it was more likely than not that we would not be
required to sell these investments before anticipated recovery of fair value to our cost basis.
During the year ended December 31, 2014, we recognized OTTI of $2.2 million on fixed maturities investments based on
our qualitative and quantitative OTTI review. During the year ended December 31, 2013, we recognized OTTI of $2.9 million on
an investment in equity securities based on our qualitative and quantitative OTTI review.
Restricted Cash and Investments. In order to conduct business in certain states, we are required to maintain letters of credit
or assets on deposit to support state-mandated regulatory requirements and certain third party agreements. We also utilize trust
accounts to collateralize business with our reinsurance counterparties. Assets held on deposit or in trust accounts are primarily in
the form of cash or certain high-grade securities. The fair values of our restricted assets as of December 31, 2014 and 2013 are as
follows:
December 31,
Restricted cash
Restricted investments - fixed maturities at fair value
Total restricted cash and investments
2014
2013
(amounts in thousands)
$
$
7,937
56,049
63,986
$
$
1,155
42,092
43,247
Other. We enter into reverse repurchase and repurchase agreements, which are accounted for as either collateralized lending
or borrowing transactions and are recorded at contract amounts which approximate fair value. For the collateralized borrowing
transactions (i.e., repurchase agreements), we receive cash or securities that we invest or hold in short-term or fixed income
securities.
As of December 31, 2014, we had collateralized borrowing transaction principal outstanding of $46.8 million at interest
rates between 0.30% and 0.35%. As of December 31, 2013, we had collateralized borrowing transaction principal outstanding of
$109.6 million at interest rates between 0.37% and 0.44%. Interest expense associated with the repurchase borrowing agreements
for the years ended December 31, 2014, 2013 and 2012 was $0.2 million, $0.3 million and $0.4 million, respectively. We had
approximately $49.5 million and $133.9 million of collateral pledged in support for these agreements as of December 31, 2014
and 2013, respectively.
As of December 31, 2014 and 2013, we had no collateralized lending transaction principal outstanding. Interest income
associated with lending agreements for the years ended December 31, 2014, 2013 and 2012 was $0, $61 and $11, respectively.
72
Investment in Entities Holding Life Settlement Contracts
A life settlement contract is a contract between the owner of a life insurance policy and a third party who obtains the ownership
and beneficiary rights of the underlying life insurance policy. During 2010, we formed Tiger Capital LLC (“Tiger”) with a subsidiary
of AmTrust for the purpose of acquiring certain life settlement contracts. In 2011, we formed AMT Capital Alpha, LLC (“AMT
Alpha”) with a subsidiary of AmTrust for the purpose of acquiring additional life settlement contracts. In the first quarter of 2013,
we acquired a 50% interest in AMT Capital Holdings, S.A. (“AMTCH”), the other 50% of which is owned by AmTrust. Additionally,
in December 2013, we formed AMT Capital Holdings II, S.A. ("AMTCH II") with AmTrust for the purpose of acquiring additional
life settlement contracts. We have a 50% ownership interest in each of Tiger, AMT Alpha, AMTCH and AMTCH II (collectively,
the “LSC Entities”). The LSC Entities may also acquire premium finance loans made in connection with the borrowers’ purchase
of life insurance policies that are secured by the policies. The LSC Entities acquire the underlying policies through the borrowers’
voluntary surrender of the policy in satisfaction of the loan or foreclosure. A third party serves as the administrator for two of the
life settlement contract portfolios, for which it receives an administrative fee. The third-party administrator is eligible to receive
a percentage of profits after certain time and performance thresholds have been met.
The LSC Entities account for investments in life settlements in accordance with ASC 325-30, "Investments in Insurance
Contracts", which states that an investor shall elect to account for its investments in life settlement contracts by using either the
investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. The
LSC Entities have elected to account for these investments using the fair value method. As no comparable market pricing is
available, the LSC Entities determine fair value based upon their estimate of the discounted cash flow related to policies (net of
the reserves for improvements in mortality, the possibility that the high net worth individuals represented in the portfolio may
have access to better health care, the volatility inherent in determining the life expectancy of insureds with significant reported
health impairments, the possibility that the issuer of the policy or a third party will contest the payment of the death benefit payable
to the LSC Entities, and the future expenses related to the administration of the portfolio), which incorporates current life expectancy
assumptions, premium payments, the credit exposure to the insurance company that issued the life settlement contracts and the
rate of return that a buyer would require on the contracts.
As of December 31, 2014, we have a 50% ownership interest in the LSC Entities that hold certain life settlement contracts,
and the fair value of these contracts owned by the LSC Entities is $264.5 million, with our proportionate interest being $132.3
million. Total capital contributions of approximately $36.1 million and $70.8 million were made to the LSC Entities during the
years ended December 31, 2014 and 2013, respectively, for which we contributed approximately $18.1 million and $35.4 million
in those same periods. The LSC Entities used the contributed capital to pay premiums and purchase policies.
As of December 31, 2014, the face value amounts of the 274 life insurance policies disclosed in the table below was
approximately $1.7 billion. As of December 31, 2014, the LSC Entities owned no premium finance loans.
73
The following table describes details of our investment in LSC Entities as of December 31, 2014. This table shows the gross
amounts for the portfolio of life insurance policies owned by the LSC Entities, in which we and AmTrust each own a 50% interest.
(amounts in thousands, except number of life settlement contracts)
Expected Maturity Term in Years
As of December 31, 2014
Number of
Life Settlement
Contracts
Fair Value(1)
Face Value
0 - 1
1 - 2
2 - 3
3 - 4
4 - 5
Thereafter
Total
— $
—
8
5
7
254
274
— $
—
43,593
10,081
14,335
—
—
70,500
22,500
49,000
196,508
1,596,209
$
264,517
$
1,738,209
(1) The LSC Entities determined the fair value as of December 31, 2014 based on 218 policies out of 274 policies, as the LSC
Entities assigned no value to 56 of the policies as of December 31, 2014. The LSC Entities estimated the fair value of a
life insurance policy using a cash flow model with an appropriate discount rate. In some cases, the cash flow model
calculates the value of an individual policy to be negative, and therefore the fair value of the policy is zero as no liability
exists when a negative value is calculated. The LSC Entities are not contractually bound to pay the premium on its life
settlement contracts and, therefore, would not pay a willing buyer to assume title of these contracts. Additionally, certain
of the LSC Entities' acquired policies were structured to have low premium payments at inception of the policy term, which
later escalate greatly towards the tail end of the policy term. At the current time, the LSC Entities expense all premiums
paid, even on policies with zero fair value. Once the premium payments escalate, the LSC Entities may allow the policies
to lapse. In the event that death benefits are realized in the time frame between initial acquisition and premium escalation,
it is a benefit to cash flow of the LSC Entities.
For the contracts where the LSC Entities determined the fair value to be negative and therefore assigned a fair value of
zero, the table below details the amount of premiums paid and the death benefits received for the year ended December 31,
2014:
(amounts in thousands, except number of life settlement contracts)
December 31, 2014
Number of policies with a negative value from discounted cash flow model
Premiums paid for the year ended
Death benefit received
$
$
56
5,693
4,950
Premiums to be paid by the LSC Entities, in which we have 50% ownership interests, for each of the five succeeding fiscal
years to keep the life insurance policies in force as of December 31, 2014, are as follows:
(amounts in thousands)
2015
2016
2017
2018
2019
Thereafter
Premiums
Due on Life
Settlement
Contracts
$
$
40,961
54,208
52,291
40,117
39,777
552,579
779,933
For additional information about the fair value of the life settlement contracts, see Note 6, "Equity Investments in
Unconsolidated Subsidiaries" in the notes to our consolidated financial statements. For additional information about the risks
inherent in determining the fair value of the portfolio of life insurance policies, see Item 1A, “Risk Factors-Risks Relating to Our
Business Generally-A portion of our financial assets consists of life settlement contracts that are subject to certain risks.”
74
Liquidity and Capital Resources
We are organized as a holding company with fifteen domestic insurance company subsidiaries, various foreign insurance
and reinsurance subsidiaries, as well as various other non-insurance subsidiaries. Our principal sources of operating funds are
premiums, service and fee income, investment income and proceeds from sales and maturities of investments. The primary sources
of cash for the management companies of the Reciprocal Exchanges are management fees for acting as the attorneys-in-fact for
the exchanges. Our primary uses of operating funds include payments of claims and operating expenses. Currently, we pay claims
using cash flow from operations and invest our excess cash primarily in fixed-maturity and, to a lesser extent, equity securities.
Except as set forth below, we expect that projected cash flows from operations, as well as the net proceeds from our debt and
equity issuances, will provide us with sufficient liquidity to fund our anticipated growth by providing capital to increase the surplus
of our insurance subsidiaries, as well as to pay claims and operating expenses, and to pay interest and principal on debt and debt
facilities and other holding company expenses for the foreseeable future. However, if our growth attributable to potential
acquisitions, internally generated growth, or a combination of these factors, exceeds our expectations, we may have to raise
additional capital. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support future growth
or operating requirements and, as a result, our business, financial condition and results of operations could be adversely affected.
To support our current and future policy writings, especially in light of the termination of the Personal Lines Quota Share Agreement,
and our entry into the Tower Reinsurance Agreements, we have raised substantial capital using a combination of debt and equity,
and we may raise additional capital over the next twelve months.
We may generate liquidity through the issuance of debt or equity securities or financing through borrowings under credit
facilities, or a combination thereof. During 2014, we closed the sale of $250.0 million aggregate principal amount of our 6.75%
notes due 2024 (the “6.75% Notes”) to certain purchasers in a private placement. A portion of the net proceeds from the issuance
was used to pay off the outstanding balance on our previous credit agreement of approximately $59.2 million and our loans payable
to ACP Re, an affiliated company, of approximately $18.7 million and the remaining net proceeds from the issuance were used
(i) to lend ACP Re $125 million in connection with its acquisition of Tower Group International, Ltd. and (ii) for general corporate
purposes. In addition, during 2014, we entered into a $135.0 million credit agreement under which there were no amounts
outstanding as of December 31, 2014. The proceeds of borrowings under the credit agreement may be used for working capital,
acquisitions and general corporate purposes. Also during 2014, we issued 2,200,000 shares of 7.50% Non-Cumulative Preferred
Stock in a public offering. The net proceeds we received from the issuance was approximately $53.2 million, after deducting the
issuance expenses payable by us. See "6.75% Notes due 2024", Preferred Stock" and "Revolving Credit Agreements" below.
Our insurance subsidiaries are subject to statutory and regulatory restrictions imposed on insurance companies by their states
of domicile which limit the amount of cash dividends or distributions that they may pay to us unless special permission is received
from the insurance regulator of the relevant domiciliary state. The aggregate limit imposed by the various domiciliary states of
our insurance subsidiaries was approximately $286.3 million and $61.1 million as of December 31, 2014 and 2013, respectively,
taking into account dividends paid in the prior twelve month periods. During the years ended December 31, 2014, 2013 and 2012,
there were $12.0 million, $24.0 million and $152.0 million, respectively, of dividends and return of capital paid by the insurance
subsidiaries to National General Management Corp. ("Management Corp.") or the Company. The 2012 dividend was paid in
response to a North Carolina Department of Insurance request to redistribute our insurance subsidiary capital after it approved
our plan to pool all of our P&C business at our subsidiary, Integon National. After receiving the dividend, in 2012, Management
Corp. paid $120.0 million in the form of a capital contribution to its subsidiary, Integon National. During 2012, the insurance
subsidiaries also paid to Management Corp. a return of capital of $18.5 million.
We forecast claim payments based on our historical experience. We seek to manage the funding of claim payments by actively
managing available cash and forecasting cash flows on both a short-term and long-term basis. Cash payments for claims were
$866.0 million, $448.8 million and $415.6 million in the years ended December 31, 2014, 2013 and 2012, respectively. Historically,
we have funded claim payments from cash flow from operations (principally premiums), net of amounts ceded to our third party
reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and
operating and capital expenditure needs. Our cash and investment portfolio has increased from $991.9 million at December 31,
2012 to $1,116.7 million at December 31, 2013 and increased to $1,998.7 million at December 31, 2014. We do not anticipate
selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would
require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and financial condition
and could reduce investment income in future periods.
Pursuant to an amended and restated management services agreement dated as of January 1, 2012 between Management
Corp., on one hand, and certain of our other direct and indirect subsidiaries, on the other hand, such subsidiaries have delegated
to Management Corp. underwriting duties, claims services, actuarial services, policyholder services, accounting, information
75
technology and certain other administrative functions. The subsidiaries that are party to this agreement pay to Management Corp.
a quarterly fee calculated as a percentage of the premium written by each such subsidiary, plus reimbursement for certain expenses.
During the years ended December 31, 2014, 2013 and 2012, Management Corp. was paid approximately $22.3 million, $26.2
million and $27.5 million, respectively, in management fees.
Pursuant to a tax allocation agreement by and among us and certain of our direct and indirect subsidiaries, we compute and
pay federal income taxes on a consolidated basis. Each subsidiary party to this agreement computes and pays to us its respective
share of the federal income tax liability primarily based on separate return calculations.
The LSC Entities in which we own a 50% interest also purchase life settlement contracts that require the LSC Entities to
make premium payments on individual life insurance policies in order to keep the policies in force. We presently expect to maintain
sufficient cash flow to make future capital contributions to the LSC Entities to permit them to make future premium payments.
The following table is a summary of our statement of cash flows:
(amounts in thousands)
Cash and Cash equivalents provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net Increase in Cash and Cash Equivalents
Comparison of Years Ended December 31, 2014 and 2013
Year Ended December 31,
2013
2012
2014
$
383,808
(656,484)
329,681
1,787
$
$
10,503
(153,311)
176,694
—
$
58,792
$
33,886
$
7,023
30,755
(9,536)
—
28,242
Net cash provided by operating activities was approximately $383.8 million for the year ended December 31, 2014, compared
with $10.5 million provided by operating activities for the same period in 2013. For the year ended December 31, 2014, net cash
provided by operating activities increased $373.3 million from the comparable period in 2013, primarily as a result of the Tower
Reinsurance Agreements and the Quota Share Runoff.
Net cash used in investing activities was $656.5 million for the year ended December 31, 2014, compared with net cash
used in investing activities of $153.3 million for the year ended December 31, 2013. For the year ended December 31, 2014, net
cash used in investing activities increased primarily due to a $131.2 million decrease in the proceeds from the sale of short-term
investments, an increase of $306.7 million in the purchases of fixed-maturity investments, a decrease in cash of $125.0 million
related to a loan made to ACP Re under the ACP Re Credit Agreement, an increase of $41.2 million in the purchases of equity
securities and an increase of $17.6 million in cash used for acquisitions, partially offset by a decrease of $57.1 million in the
purchases of short term investments and an increase of $48.3 million in the proceeds from the sale and maturity of fixed-maturity
investments.
Net cash provided by financing activities was $329.7 million for the year ended December 31, 2014, compared with net
cash provided by financing activities of $176.7 million for the year ended December 31, 2013. For the year ended December 31,
2014, cash provided by financing activities increased versus the comparable period in 2013 primarily due to: (i) the May 2014
sale of our $250.0 million aggregate principal amount of 6.75% Notes; and (ii) the June 2014 issuance of 2,200,000 shares of
7.50% Non-Cumulative Preferred Stock, partially offset by a lower amount of proceeds from the issuance of common stock in
2014 as compared to 2013.
Comparison of Years Ended December 31, 2013 and 2012
Net cash provided by operating activities was approximately $10.5 million for the year ended December 31, 2013, compared
with $7.0 million provided by operating activities for the same period in 2012. For the year ended December 31, 2013, net cash
provided by operating activities increased $3.5 million versus the comparable period in 2012, primarily as a result of the termination
of the Personal Lines Quota Share.
Net cash used in investing activities was $153.3 million for the year ended December 31, 2013, compared with net cash
provided by investing activities of $30.8 million for the year ended December 31, 2012. For the year ended December 31, 2013,
76
net cash used by investing activities increased primarily due to an increase of $161.3 million in the purchases of fixed-maturity
investments and a $139.0 million decrease in the proceeds from the sale of short-term investments, partially offset by a decrease
of $187.6 million in cash used in the purchases of short term investments compared to the similar period in 2012.
Net cash provided by financing activities was $176.7 million for the year ended December 31, 2013, compared with net
cash used in financing activities of $9.5 million for the year ended December 31, 2012. For the year ended December 31, 2013,
cash provided by financing activities increased versus the comparable period in 2012 primarily due to the issuance of common
stock in the June private placement.
77
Consolidating Balance Sheet Information
The following table presents the consolidating balance sheet as of December 31, 2014 (amounts in thousands):
Investments:
ASSETS
NGHC
December 31, 2014
Reciprocal
Exchanges
(unaudited)
Total
Fixed maturities, available-for-sale, at fair value
$
1,374,087
$
222,739
$
1,596,826
Equity securities, available-for-sale, at fair value
Short-term investments
Equity investment in unconsolidated subsidiaries
Other investments
Securities pledged
Total investments
Cash and cash equivalents
Accrued investment income
Premiums and other receivables, net
Deferred acquisition costs
Reinsurance recoverable on unpaid losses
Prepaid reinsurance premiums
Notes receivable from related party
Due from affiliate
Premises and equipment, net
Intangible assets, net
Goodwill
Prepaid and other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves
Unearned premiums
Unearned service contract and other revenue
Reinsurance payable
Accounts payable and accrued expenses
Due to affiliate
Securities sold under agreements to repurchase, at contract value
Deferred tax liability
Income tax payable
Notes payable
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock
Preferred stock
$
$
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total National General Holdings Corp. Stockholders' Equity
Non-controlling interest
Total stockholders’ equity
Total liabilities and stockholders' equity
$
78
45,802
50
155,900
4,764
49,456
2,817
10,490
—
—
—
48,619
10,540
155,900
4,764
49,456
1,630,059
236,046
1,866,105
123,178
12,553
699,553
121,514
888,215
75,837
125,000
5,129
30,583
237,404
70,764
48,083
9,437
1,898
58,238
4,485
23,583
26,924
—
—
—
11,433
—
71
132,615
14,451
757,791
125,999
911,798
102,761
125,000
5,129
30,583
248,837
70,764
48,154
4,067,872
$
372,115
$
4,439,987
1,450,305
744,438
8,527
97,830
299,778
—
46,804
29,133
29,532
255,631
46,114
3,008,092
934
55,000
690,736
20,192
292,832
1,059,694
86
1,059,780
4,067,872
$
$
$
111,848
119,998
—
13,811
17,691
1,552
—
38,402
1,059
48,374
5,710
358,445
—
—
—
—
—
—
13,670
13,670
372,115
$
1,562,153
864,436
8,527
111,641
317,469
1,552
46,804
67,535
30,591
304,005
51,824
3,366,537
934
55,000
690,736
20,192
292,832
1,059,694
13,756
1,073,450
4,439,987
Other Material Changes in Financial Position
(amounts in thousands)
Selected Assets:
Premiums and other receivables, net
Deferred acquisition costs
Prepaid reinsurance premiums
Goodwill and Intangible assets, net
Prepaid and other assets
Selected Liabilities:
Unpaid loss and loss adjustment expense reserves
Unearned premiums
Reinsurance payable
Accounts payable and accrued expenses
Deferred tax liability and Income tax payable
December 31,
2014
2013
$
$
$
$
$
$
$
$
$
$
757,791
125,999
102,761
319,601
48,154
1,562,153
864,436
111,641
317,469
98,126
$
$
$
$
$
$
$
$
$
$
449,252
60,112
50,878
156,915
9,240
1,259,241
476,232
93,534
91,143
26,463
During the year ended December 31, 2014, premiums and other receivables, net increased $308.5 million compared to
December 31, 2013 primarily due to the Tower Cut-Through and Quota Share Reinsurance Agreements, the EHC Reinsurance
Agreement, Personal Express and Imperial acquisitions, Reciprocal Exchanges and the Quota Share Runoff. Deferred acquisition
costs increased $65.9 million compared to December 31, 2013 primarily due to the Tower Cut-Through and Quota Share
Reinsurance Agreements, Imperial new and renewal business and Reciprocal Exchanges. Prepaid reinsurance premiums increased
$51.9 million compared to December 31, 2013 due to the Imperial acquisition and the Reciprocal Exchanges. Goodwill and
Intangible assets, net increased $162.7 million compared to December 31, 2013 due to the acquisitions of Anticimex Reinsurance
S.A., Personal Express, Imperial Fire & Casualty, Tower renewal rights and the management companies for the Reciprocal
Exchanges. Prepaid and other assets increased $38.9 million compared to December 31, 2013 due to the Tower business.
Unpaid loss and loss adjustment expense reserves increased $302.9 million compared to December 31, 2013 primarily due
to the Tower Cut-Through and Quota Share Reinsurance Agreements, the EHC Reinsurance Agreement, Imperial, Reciprocal
Exchanges and the Quota Share Runoff. Unearned premiums increased $388.2 million compared to December 31, 2013 primarily
due to the Tower Cut-Through and Quota Share Reinsurance Agreements, EHC Reinsurance, Personal Express, Imperial,
Reciprocal Exchanges and Quota Share Runoff. Reinsurance payable increased $18.1 million compared to December 31, 2013
primarily due to the Tower Cut-Through and Quota Share Reinsurance Agreements, Personal Express and Imperial acquisitions,
Reciprocal Exchanges and the Quota Share Runoff. Accounts payable and accrued expenses increased $226.3 million compared
to December 31, 2013 primarily due to the Tower Cut-Through and Quota Share Reinsurance Agreements, Personal Express and
Imperial acquisitions, and Reciprocal Exchanges. Deferred tax liability and Income tax payable increased $71.7 million compared
to December 31, 2013 primarily due to the acquisition of Anticimex Reinsurance SA and the corresponding deferred tax liability
associated with the acquired equalization reserves, and the acquisition of the management companies, as well as the increase in
taxable income year over year. All other balances remained within the expected range.
Reinsurance
Our insurance subsidiaries utilize reinsurance agreements to transfer portions of the underlying risk of the business we write
to various affiliated and third-party reinsurance companies. Reinsurance does not discharge or diminish our obligation to pay
claims covered by the insurance policies we issue; however, it does permit us to recover certain incurred losses from our reinsurers
and our reinsurance recoveries reduce the maximum loss that we may incur as a result of a covered loss event. We believe it is
important to ensure that our reinsurance partners are financially strong and they generally carry at least an A.M. Best rating of
‘‘A-’’ (Excellent) at the time we enter into our reinsurance agreements. We also enter reinsurance relationships with third-party
captives formed by agents as a mechanism for sharing risk and profit. The total amount, cost and limits relating to the reinsurance
coverage we purchase may vary from year to year based upon a variety of factors, including the availability of quality reinsurance
at an acceptable price and the level of risk that we choose to retain for our own account.
79
We assume and cede insurance risks under various reinsurance agreements, on both a pro rata basis and an excess of loss
basis. We purchase reinsurance to mitigate the volatility of direct and assumed business, which may be caused by the aggregate
value or the concentration of written exposures in a particular geographic area or business segment and may arise from catastrophes
or other events. As part of our overall risk and capacity management strategy, we purchase excess of loss catastrophic and casualty
reinsurance for protection against catastrophic events and other large losses. The property catastrophe program provides a total
of $550 million in coverage in excess of a $50 million retention, with one reinstatement and the casualty program provides $45
million in coverage in excess of a $5 million retention. We pay a premium as consideration for ceding the risk.
Our reinsurance transactions include premiums written under state-mandated involuntary plans for commercial vehicles and
premiums ceded to state-provided reinsurance facilities such as the Michigan Catastrophic Claims Association (the “MCCA”),
and the North Carolina Reinsurance Facility (the “NCRF”) (collectively, “State Plans”), for which we retain no loss indemnity
risk. Prepaid reinsurance premiums are earned on a pro rata basis over the period of risk, based on a daily earnings convention,
which is consistent with premiums written.
All automobile insurers doing business in Michigan are required to participate in the MCCA. The MCCA is a reinsurance
mechanism that covers no-fault first party medical losses of retentions in excess of a set limit. Insurers are reimbursed for their
covered losses in excess of a $530,000 threshold, which was increased from $460,000 to $480,000 on July 1, 2010, was increased
to $500,000 in 2011 and remained at the $500,000 level through June 30, 2013. Policies effective after July 1, 2013 have a threshold
of $530,000. For policies effective after July 1, 2015 through June 30, 2017, the retention will be $545,000. We currently have
claims with retentions ranging from $250,000 to $530,000. Funding for the MCCA comes from assessments against automobile
insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan
automobile policyholders.
The following is a summary of premium and related losses ceded to the MCCA for the years ended December 31, 2014,
2013 and 2012:
Year Ended December 31, (amounts in thousands)
Ceded earned premiums
Ceded Loss and LAE
2014
2013
2012
$
12,968
12,529
$
12,882
$
9,037
10,485
17,275
Reinsurance recoverables from the MCCA as of December 31, 2014 and 2013 are as follows:
December 31, (amounts in thousands)
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
2014
2013
$
8,482
$
689,202
9,685
694,885
The NCRF is a non-profit organization established to provide automobile liability reinsurance to those insurance companies
that write automobile insurance in North Carolina. Companies licensed to write automobile insurance in the state must be members
of the NCRF and must offer liability coverage to any eligible North Carolina resident applicant for coverages and limits which
may be ceded to the NCRF. The NCRF accepts cession of liability for bodily injury and property damage, medical payments,
uninsured and combined uninsured/underinsured motorist coverages. Funding for the NCRF comes from premiums collected from
automobile insurers based upon the amounts of coverage provided with respect to insured automobiles in the state. North Carolina
law provides that cumulative losses incurred by the NCRF are recoverable either through direct surcharges to North Carolina
motorists or indirectly by assessments of member companies, which recoup the costs from individual policyholders.
The following is a summary of premium and related losses ceded to the NCRF for the years ended December 31, 2014,
2013 and 2012:
Year Ended December 31, (amounts in thousands)
Ceded earned premiums
Ceded Loss and LAE
$
2014
151,744
130,265
$
2013
138,473
111,185
$
2012
145,200
130,524
80
Reinsurance recoverables from the NCRF as of December 31, 2014 and 2013 are as follows:
December 31, (amounts in thousands)
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
2014
2013
$
22,050
$
84,152
21,153
74,891
We believe that we are unlikely to incur any material loss as a result of non-payment of amounts owed to us by the MCCA
and the NCRF because the payment obligations are extended over many years, resulting in relatively small current payment
obligations; both the MCCA and the NCRF are supported by assessments permitted by statute; and we have not historically incurred
losses as a result of non-payment by either MCCA or NCRF. Accordingly, we believe that we have no significant exposure to
uncollectible reinsurance balances from these entities.
In addition to the reinsurance programs described above, until July 31, 2013, we used the Personal Lines Quota Share
reinsurance arrangement to limit our maximum loss, provide greater diversification of risk and minimize exposure on larger risks.
For further discussion on the Personal Lines Quota Share arrangement, see Note 16, “Related Party Transactions” in the notes to
our consolidated financial statements.
We have a concentration of credit risk associated with the MCCA, the NCRF and the reinsurance under the Personal Lines
Quota Share arrangement. Reinsurance recoverables on unpaid losses from these entities at December 31, 2014 and 2013 are as
follows:
December 31, (amounts in thousands)
MCCA
NCRF
Maiden Insurance Company
ACP Re Ltd
Technology
Other reinsurers' balances - each less than 5% of total
Subtotal
Reciprocal Exchanges
Total
A.M.
Best
Rating
N/R
N/R
A-
A-
A
2014
2013
$
689,202
$
694,885
84,152
44,205
26,523
17,682
26,451
$
$
888,215
23,583
911,798
$
$
74,891
88,054
52,833
35,222
4,943
950,828
—
950,828
We also have reinsurance with ACP Re and Maiden Insurance that requires the reinsurers to provide collateral to mitigate
any risk of default. As of December 31, 2014, ACP Re and Maiden Insurance had provided collateral in the amounts of $31.0
million and $58.5 million, respectively. As of December 31, 2013, ACP Re and Maiden Insurance had provided collateral in the
amounts of $58.0 million and $104.8 million, respectively.
As of July 1, 2014, a reinsurance property catastrophe excess of loss program went into effect protecting the Reciprocal
Exchanges against accumulations of losses resulting from a catastrophic event. The program provides a total of $190 million in
coverage in excess of a $10 million retention, with one reinstatement.
6.75% Notes due 2024
On May 23, 2014, we sold $250.0 million aggregate principal amount of our 6.75% Notes due 2024 to certain purchasers
in a private placement.
The 6.75% Notes bear interest at a rate equal to 6.75% per year, payable semiannually in arrears on May 15th and November
15th of each year, beginning on November 15, 2014. The 6.75% Notes are our general unsecured obligations and rank equally in
right of payment with our other existing and future senior unsecured indebtedness and senior in right of payment to any of our
indebtedness that is contractually subordinated to the 6.75% Notes. The 6.75% Notes are also effectively subordinated to any of
our existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness and are structurally
81
subordinated to the existing and future indebtedness of our subsidiaries (including trade payables). The 6.75% Notes mature on
May 15, 2024, unless earlier redeemed or purchased by us.
The Indenture contains customary covenants, such as reporting of annual and quarterly financial results, and restrictions on
certain mergers and consolidations. The Indenture also includes covenants relating to the incurrence of debt if our consolidated
leverage ratio would exceed 0.35 to 1.00, a limitation on liens, a limitation on the disposition of stock of certain of our subsidiaries
and a limitation on transactions with certain of our affiliates. We were in compliance with all covenants contained in the Indenture
as of December 31, 2014.
The net proceeds we received from the issuance was approximately $245.0 million, after deducting the issuance expenses. We
used a portion of the net proceeds from the issuance to repay all amounts outstanding under (A) the credit agreement, dated as of
February 20, 2013, by and among us, JPMorgan Chase Bank, N.A., as Administrative Agent, Key Bank National Association, as
Syndication Agent, and First Niagara Bank, N.A., as Documentation Agent, and (B) our promissory note to ACP Re.
Interest expense on the 6.75% Notes for the year ended December 31, 2014 was $10.2 million.
Preferred Stock
On June 25, 2014, we issued 2,200,000 shares of 7.50% Non-Cumulative Preferred Stock ("Series A Preferred Stock") in a
public offering. Dividends on the Series A Preferred Stock when, as and if declared by the Company's Board of Directors (the
"Board") or a duly authorized committee of the Board, will be payable on the liquidation preference amount of $25.00 per share,
on a non-cumulative basis, quarterly in arrears on the 15th day of January, April, July and October of each year (each, a "dividend
payment date"), commencing on October 15, 2014, at an annual rate of 7.50%. Dividends on the Series A Preferred Stock are not
cumulative. Accordingly, in the event dividends are not declared on the Series A Preferred Stock for payment on any dividend
payment date, then those dividends will not accumulate and will not be payable. If the Company has not declared a dividend before
the dividend payment date for any dividend period, the Company will have no obligation to pay dividends for that dividend period,
whether or not dividends on the Series A Preferred Stock are declared for any future dividend payment. The net proceeds we
received from the issuance was approximately $53.2 million, after deducting the underwriting discount and issuance expenses.
Revolving Credit Agreements
During the first quarter of 2013, we entered into a credit agreement to establish a secured $90.0 million line of credit with
JPMorgan Chase Bank, N.A. Interest payments were required to be paid monthly on any unpaid principal at a rate of LIBOR plus
2.50%. The credit agreement had a maturity date of February 20, 2016. The outstanding balance on the line of credit of $59.2
million was repaid and the credit facility was terminated in the second quarter of 2014 in connection with the issuance of the
6.75% Notes.
On May 30, 2014, we entered into a $135.0 million credit agreement (the “Credit Agreement”), among JPMorgan Chase
Bank, N.A., as Administrative Agent, KeyBank National Association as Syndication Agent, and Associated Bank, National
Association and First Niagara Bank, N.A., as Co-Documentation Agents. The credit facility is a revolving credit facility with a
letter of credit sublimit of $10.0 million and an expansion feature not to exceed $50.0 million.
The Credit Agreement contains certain restrictive covenants customary for facilities of this type (subject to negotiated
exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and
dispositions. There are also financial covenants that require us to maintain a minimum consolidated net worth, a maximum
consolidated leverage ratio, a minimum fixed charge coverage ratio, a minimum risk-based capital and a minimum statutory
surplus. The Credit Agreement also provides for customary events of default, with grace periods where customary, including
failure to pay principal when due, failure to pay interest or fees within three business days after becoming due, failure to comply
with covenants, breaches of representations and warranties, default under certain other indebtedness, certain insolvency or
receivership events affecting us and our subsidiaries, the occurrence of certain material judgments, or a change in control of the
Company. Upon the occurrence and during the continuation of an event of default, the administrative agent, upon the request of
the requisite percentage of the lenders, may terminate the obligations of the lenders to make loans and to issue letters of credit
under the Credit Agreement, declare the Company’s obligations under the Credit Agreement to become immediately due and
payable and/or exercise any and all remedies and other rights under the Credit Agreement. The Credit Agreement has a maturity
date of May 30, 2018.
82
Borrowings under the Credit Agreement bear interest at either the Alternate Base Rate ("ABR") or LIBOR. ABR borrowings
(which are borrowings bearing interest at a rate determined by reference to the ABR) under the Credit Agreement will bear interest
at (x) the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5 percent or
(c) the adjusted LIBOR for a one-month interest period on such day plus 1 percent, plus (y) a margin that is adjusted on the basis
of our consolidated leverage ratio. Eurodollar borrowings under the Credit Agreement will bear interest at the adjusted LIBOR
for the interest period in effect plus a margin that is adjusted on the basis of our consolidated leverage ratio. Fees payable by us
under the Credit Agreement include a letter of credit participation fee (the margin applicable to Eurodollar borrowings), a letter
of credit fronting fee with respect to each letter of credit (0.125%) and a commitment fee on the available commitments of the
lenders (a range of 0.20% to 0.30% based on our consolidated leverage ratio, and which rate was 0.25% as of December 31, 2014).
As of December 31, 2014, there was no outstanding balance on the line of credit. Interest expense for our existing and repaid
lines of credit for the years ended December 31, 2014, 2013 and 2012 was $1.2 million, $1.3 million and $0.5 million, respectively.
We were in compliance with all of the covenants under the Credit Agreement as of December 31, 2014.
Imperial-related Debt
In connection with the Imperial transaction, we assumed $3.5 million in principal amount of Senior Notes due 2034 ("Imperial-
related Notes") previously issued by Imperial Management Corporation. The notes bore interest at an annual rate equal to LIBOR
plus 3.95%, payable quarterly. The notes were redeemed by us at a redemption price equal to 100% of their principal amount plus
accrued interest on September 15, 2014. Interest expense on the Imperial-related Notes for the year ended December 31, 2014
was $37.0 thousand. In addition, Imperial Fire and Casualty Insurance Company is the issuer of $5.0 million principal amount of
Surplus Notes due 2034 ("Imperial Surplus Notes"). The notes bear interest at an annual rate equal to LIBOR plus 4.05%, payable
quarterly. The notes are redeemable by us at a redemption price equal to 100% of their principal amount. Interest expense on the
Imperial Surplus Notes for the year ended December 31, 2014 was $0.1 million. (See Note 7, "Acquisitions" in the notes to our
consolidated financial statements).
Reciprocal Exchanges' Surplus Notes
ACP Re (or subsidiaries thereunder), a related party, holds the surplus notes issued by the Reciprocal Exchanges ("Reciprocal
Exchanges' Surplus Notes") when they were originally capitalized. The obligation to repay principal and interest on these 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 these surplus notes are payable only with regulatory approval. Interest expense
on the Reciprocal Exchanges' Surplus Notes for the period ended December 31, 2014 was $5.7 million, which includes amortization
of discount of $3.8 million. (See Note 16, "Related Party Transactions" in the notes to our consolidated financial statements).
Securities Sold (Purchased) Under Agreements to Repurchase (Sell), at Contract Value
We enter into reverse repurchase and repurchase agreements, which are accounted for as either collateralized lending or
borrowing transactions and are recorded at contract amounts which approximate fair value. For the collateralized borrowing
transactions (i.e., repurchase agreements), we receive cash or securities that we invest or hold in short-term or fixed income
securities.
As of December 31, 2014, we had collateralized borrowing transaction principal outstanding of $46.8 million at interest
rates between 0.30% and 0.35%. As of December 31, 2013, we had collateralized borrowing transaction principal outstanding of
$109.6 million at interest rates between 0.37% and 0.44%. Interest expense associated with the repurchase borrowing agreements
for the years ended December 31, 2014, 2013 and 2012 was $0.2 million, $0.3 million and $0.4 million, respectively. We had
approximately $49.5 million and $133.9 million of collateral pledged in support for these agreements as of December 31, 2014
and 2013, respectively.
As of December 31, 2014 and 2013, we had no collateralized lending transaction principal outstanding. Interest income
associated with lending agreements for the years ended December 31, 2014, 2013 and 2012 was $0, $61 and $11, respectively.
83
Deferred Purchase Obligation
On April 15, 2013, we acquired Euro Accident Health & Care Insurance Aktiebolag (“EHC”) for an initial purchase price
of approximately $23.6 million in cash. The transaction also includes a deferred purchase price arrangement whereby, once EBITDA
(including EBITDA of a Company affiliate which underwrites products sold by EHC) when combined with EHC’s equity at closing
exceeds the initial purchase price, the seller will be entitled to receive an amount corresponding to fifty percent of EHC’s EBITDA
(including EBITDA of a Company affiliate which underwrites products sold by EHC) for each of the fiscal years 2015, 2016,
2017 and 2018. We currently estimate the total purchase price including the deferred arrangement to be approximately $37.3
million. EHC is a limited liability company incorporated and registered under the laws of Sweden and primarily administers
accident and health business in that region.
Contractual Obligations and Commitments
The following table sets forth certain of our contractual obligations as of December 31, 2014:
(amounts in thousands)
Payment Due by Period
Loss and LAE(1)
Operating lease obligations
Employment agreement obligations
Contributions to LSC Entities related to life
settlement contracts(2)
Debt and interest(3)
Contingent Payments(4)
Deferred purchase price arrangement(5)
Total
Total
$ 1,562,153
Less than
1 Year
611,454
$
1 – 3 Years
388,031
$
3 – 5 Years
157,081
$
More than
5 Years
405,587
$
68,712
8,253
389,967
418,550
30,000
13,700
$ 2,491,335
8,619
5,022
20,481
17,759
10,873
— $
15,552
3,231
53,250
34,190
19,127
6,700
674,208
$
520,081
$
$
13,959
30,582
—
—
39,947
34,190
—
7,000
$
276,289
332,411
—
—
252,177
$ 1,044,869
$
$
(1) The loss and LAE payments due by period in the table above are based upon the loss and LAE estimates as of December 31,
2014 and actuarial estimates of expected payout patterns and are not contractual liabilities with finite maturities. Our
contractual liability is to provide benefits under the policy. As a result, our calculation of loss and LAE payments due by
period is subject to the same uncertainties associated with determining the level of loss and LAE generally and to the
additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been
reported to us) will be paid. For a discussion of our loss and LAE estimate process, see Item 1, “Business-Loss Reserves.”
Actual payments of loss and LAE by period will vary, perhaps materially, from the table above to the extent that current
estimates of loss and LAE vary from actual ultimate claims amounts and as a result of variations between expected and
actual payout patterns. See Item 1A, “Risk Factors-Risks Relating to Our Business Generally-If we are unable to establish
and maintain accurate loss reserves, our business, financial condition and results of operations may be materially adversely
affected” for a discussion of the uncertainties associated with estimating loss and LAE.
(2) As of as of December 31, 2014, we had a 50% ownership interests in the LSC Entities which in turn owned 274 life
settlement contracts with a carrying value of $264.5 million. In order to derive the economic benefit of the face value of
these policies, the LSCs are required to make these premium payments.
(3) The debt and interest contractual obligations of the Reciprocal Exchanges are excluded from the table since we do not own
the Reciprocal Exchanges. The interest related to our debt by period as of December 31, 2014 was as follows: $17.1 million
- less than 1 year, $34.2 million - 1 - 3 years, $34.2 million - 3 - 5 years and $77.4 million- more than 5 years.
(4) On July 23, 2014, we and ACP Re entered into the Amended and Restated Personal Lines Master Agreement (the "Master
Agreement"). The Master Agreement provides for the implementation of the various transactions associated with the
acquisition of Tower by ACP Re. In addition, the Master Agreement requires us to pay ACP Re contingent consideration
in the form of a three-year earn-out (the "Contingent Payments") of 3% of gross premium written of the Tower personal
lines business written or assumed by us following the Merger. The Contingent Payments are subject to a maximum of
$30.0 million, in the aggregate, over the three-year period. The expected Contingent Payments as of December 31, 2014
are $30.0 million. (See Note 16, "Related Party Transactions" in the notes to our consolidated financial statements).
84
(5) On April 15, 2013, we acquired EHC. The transaction includes a deferred purchase price arrangement whereby, once
EBITDA (including EBITDA of a Company affiliate which underwrites products sold by EHC) when combined with
EHC’s equity at closing exceeds the initial purchase price, the seller will be entitled to receive an amount corresponding
to fifty percent of EHC’s EBITDA (including EBITDA of a Company affiliate which underwrites products sold by EHC)
for each of the fiscal years 2015, 2016, 2017 and 2018. We currently estimate the deferred purchase price arrangement
will be approximately $13.7 million.
Inflation
We establish property and casualty insurance premiums before we know the amount of losses and LAE or the extent to
which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves,
especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation.
Inflation in excess of the levels we have assumed could cause loss and LAE to be higher than we anticipated, which would require
us to increase reserves and reduce earnings. Fluctuations in rates of inflation also influence interest rates, which in turn impact
the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits,
are also usually affected by inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Liquidity Risk. Liquidity risk represents our potential inability to meet all payment obligations when they become due. We
maintain sufficient cash and marketable securities to fund claim payments and operations. We purchase reinsurance coverage to
mitigate the risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The availability,
amount and cost of reinsurance depend on market conditions and may vary significantly.
Credit Risk. Credit risk is the potential loss arising principally from adverse changes in the financial condition of the issuers
of our fixed-maturity securities and the financial condition of our third party reinsurers. Additionally, we have counter-party credit
risk with our repurchase agreement counter-parties.
We address the credit risk related to the issuers of our fixed-maturity securities by investing primarily in fixed-maturity
securities that are rated “BBB-” or higher by Standard & Poor’s. We also independently monitor the financial condition of all
issuers of our fixed-maturity securities. To limit our risk exposure, we employ diversification policies that limit the credit exposure
to any single issuer or business sector.
We are subject to credit risk with respect to our third party reinsurers. Although our third party reinsurers are obligated to
reimburse us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks we have ceded. As a
result, reinsurance contracts do not limit our ultimate obligations to pay claims covered under the insurance policies we issue and
we might not collect amounts recoverable from our reinsurers. We address this credit risk by selecting reinsurers that have an A.M.
Best rating of “A-” (Excellent) or better at the time we enter into the agreement and by performing, along with our reinsurance
broker, periodic credit reviews of our reinsurers. If one of our reinsurers suffers a credit downgrade, we may consider various
options to lessen the risk of asset impairment, including commutation, novation and letters of credit. See Item 7, "Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Reinsurance.”
Counter-party credit risk with our repurchase agreement counter-parties is mitigated by obtaining collateral. We obtain
collateral in the amount of 105-110% of the value of the securities we have sold with agreement to repurchase. Additionally,
repurchase agreements are only transacted with pre-approved counter-parties.
Market Risk. Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of
financial instruments. The major components of market risk affecting us are interest rate risk and equity price risk.
Interest Rate Risk. We had fixed-maturity securities and preferred stock with a fair value of $1,654.0 million and an amortized
cost of $1,608.2 million as of December 31, 2014 that are subject to interest rate risk. Interest rate risk is the risk that we may
incur losses due to adverse changes in interest rates. Fluctuations in interest rates have a direct impact on the market valuation of
our fixed-maturity securities. We manage our exposure to interest rate risk through a disciplined asset and liability matching and
capital management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows
are critical elements. These risks are assessed regularly and balanced within the context of our liability and capital position.
85
The table below summarizes the interest rate risk by illustrating the sensitivity of the fair value and carrying value of our
fixed-maturity securities as of December 31, 2014 to selected hypothetical changes in interest rates, and the associated impact on
our stockholders’ equity. We anticipate that we will continue to meet our obligations out of income. We classify our fixed-maturity
and equity securities as available-for-sale. Temporary changes in the fair value of our fixed-maturity securities impact the carrying
value of these securities and are reported in our stockholders’ equity as a component of other comprehensive income, net of deferred
taxes.
The selected scenarios with our fixed-maturity securities, excluding $7.7 million of preferred stock, in the table below are
not predictions of future events, but rather are intended to illustrate the effect such events may have on the fair value and carrying
value of our fixed-maturity securities and on our stockholders’ equity, each as of December 31, 2014.
Hypothetical Change in Interest Rates
200 basis point increase
100 basis point increase
No change
100 basis point decrease
200 basis point decrease
Fair Value
$
1,480,008
1,560,675
1,646,282
1,735,181
1,832,312
Estimated
Change in
Fair Value
Hypothetical Percentage
Increase (Decrease) in
Stockholders’ Equity
$
(Amounts in Thousands)
(166,274)
(85,607)
—
88,899
186,030
(10.1)%
(5.2)
—
5.4
11.3
Changes in interest rates would affect the fair market value of our fixed-rate debt instruments but would not have an impact
on our earnings or cash flow. We currently have $304.0 million of debt instruments of which $250.6 million are fixed-rate debt
instruments. A fluctuation of 100 basis points in interest on our variable-rate debt instruments, which are tied to LIBOR, would
affect our earnings and cash flows by $0.5 million before income tax, on an annual basis, but would not affect the fair market
value of the variable-rate debt.
Off Balance Sheet Risk. As of December 31, 2014 we did not have any off-balance sheet arrangements that have or are likely
to have a material effect on our financial condition or results of operations.
Item 8. Financial Statements and Supplementary Data
The financial statements and financial statement schedules required to be filed pursuant to this Item 8 are listed in the
accompanying Index to Consolidated Financial Statements and Schedules at page F-1 and are filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with participation and under the supervision of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15
(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of
such period, our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is timely recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and accumulated and communicated to our management, including our principal executive
officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
86
Management Report on Internal Control Over Financial Reporting
We, as management of the Company, are responsible for establishing and maintaining adequate internal control over financial
reporting. Pursuant to the rules and regulations of the SEC, internal control over financial reporting is a process designed by, or
under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and
effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management has
evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the control criteria
established in a report entitled Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on such evaluation, we have concluded that our internal control over financial
reporting is effective as of December 31, 2014.
This annual report does not include an attestation report of the Company's registered public accounting firm due to a transition
period established by rules of the Securities and Exchange Commission for newly public companies.
Changes in Internal Controls Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2014 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
87
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by Item 10 of Form 10-K is incorporated by reference to the information contained in our Proxy
Statement for our Annual Meeting of Stockholders to be held May 8, 2015 (the “Proxy Statement”) under the captions “Proposal
1: Election of Directors,” “Executive Officers,” “Corporate Governance — Code of Business Conduct and Ethics,” “Corporate
Governance — Board Committees — Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The
Proxy Statement, or an amendment to this Annual Report on Form 10-K containing the information, will be filed with the SEC
on or before April 30, 2015.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in our Proxy
Statement under the captions “Executive Compensation,” “Compensation of Directors,” “Compensation Discussion and Analysis,”
“Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.” The Proxy Statement,
or an amendment to this Annual Report on Form 10-K containing the information, will be filed with the SEC on or before April
30, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
A portion of the information required by Item 12 of Form 10-K is incorporated by reference to the information contained in
our Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners” and “Security Ownership of
Management.” The Proxy Statement, or an amendment to this Annual Report on Form 10-K containing the information, will be
filed with the SEC on or before April 30, 2015.
Equity Compensation Plan Information
The table below shows information regarding awards outstanding and shares of common stock available for issuance as of
December 31, 2014 under our 2010 Equity Incentive Plan and 2013 Equity Incentive Plan.
Plan Category
Equity Compensation Plans Approved by
Security Holders
Equity Compensation Plans Not Approved by
Security Holders
Total
Number of Securities to
Be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights(1)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights(2)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans
5,438,148
$
—
5,438,148
$
8.88
—
8.88
1,839,470
—
1,839,470
(1) Includes restricted stock unit awards that, upon vesting, provide the holder with the right to receive common shares on a one-
to-one basis. For further discussion of these awards, see Note 24, “Share Based Compensation” in the notes to our consolidated
financial statements.
(2) Only applies to outstanding options, as restricted stock units do not have exercise prices.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in our Proxy
Statement under the captions “Certain Relationships and Related Transactions” and “Corporate Governance — Independence of
Directors.” The Proxy Statement, or an amendment to this Annual Report on Form 10-K containing the information, will be filed
with the SEC on or before April 30, 2015.
88
Item 14. Principal Accounting Fees and Services
The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in our Proxy
Statement under the caption “Proposal 2: Ratification of Independent Registered Public Accounting Firm.” The Proxy Statement,
or an amendment to this Annual Report on Form 10-K containing the information, will be filed with the SEC on or before April
30, 2015.
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a) Documents filed as part of this report: The financial statements and financial schedules listed in the accompanying Index
to Consolidated Financial Statements and Schedules are filed as part of this report. The exhibits listed in the accompanying
Index to Exhibits are filed as part of this report.
(b) Exhibits: See Item 15(a).
(c) Schedules: See Item 15(a).
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
89
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
March 9, 2015
NATIONAL GENERAL HOLDINGS CORP.
By:
/s/ Michael Weiner
Name: Michael Weiner
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
/s/ Michael Karfunkel
Michael Karfunkel
Title
Chairman, President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Michael Weiner
Michael Weiner
Chief Financial Officer
(Principal Financial Officer)
Date
March 9, 2015
March 9, 2015
/s/ Donald Bolar
Donald Bolar
Chief Accounting Officer (Principal Accounting Officer)
March 9, 2015
/s/ Barry Karfunkel
Director
Barry Karfunkel
/s/ Barry Zyskind
Barry Zyskind
Director
/s/ Donald DeCarlo
Director
Donald DeCarlo
/s/ Patrick Fallon
Patrick Fallon
/s/ Barbara Paris
Barbara Paris
/s/ Ephraim Brecher
Ephraim Brecher
Director
Director
Director
90
March 9, 2015
March 9, 2015
March 9, 2015
March 9, 2015
March 9, 2015
March 9, 2015
NATIONAL GENERAL HOLDINGS CORP.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Audited Annual Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to the Consolidated Financial Statements
Schedules required to be filed under the provisions of Regulation S-X Article 7:
Summary of Investments — Other than Investments in Related Parties (Schedule I)
Condensed Financial Information of Registrant (Schedule II)
Supplementary Insurance Information (Schedule III)
Reinsurance (Schedule IV)
Valuation and Qualifying Accounts (Schedule V)
Supplemental Information Concerning Property-Casualty Insurance Operations (Schedule VI)
Page
F-2
F-3
F-5
F-6
F-7
F-8
F-10
S-1
S-2
S-5
S-6
S-7
S-8
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors
National General Holdings Corp.
New York, New York
We have audited the accompanying consolidated balance sheets of National General Holdings Corp. as of December 31, 2014 and
2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows
for the years ended December 31, 2014, 2013 and 2012. In connection with our audits of the financial statements, we have also
audited the financial statement schedules listed in the accompanying index. These financial statements and schedules are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of National General Holdings Corp. at December 31, 2014 and 2013, and the results of its operations and its cash flows for the
years ended December 31, 2014, 2013 and 2012, in conformity with accounting principles generally accepted in the United States
of America.
Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ BDO USA, LLP
New York, New York
March 9, 2015
F-2
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
December 31,
2014
2013
Investments - NGHC
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost $1,330,760 and $757,188)
$ 1,374,087
$
766,589
Equity securities, available-for-sale, at fair value (cost $52,272 and $6,939)
Short-term investments
Equity investment in unconsolidated subsidiaries
Other investments
Securities pledged (amortized cost $47,546 and $133,013)
Investments - Exchanges
Fixed maturities, available-for-sale, at fair value (amortized cost $222,121)
Equity securities, available-for-sale, at fair value (cost $2,752)
Short-term investments
Total investments
Cash and cash equivalents (Exchanges - $9,437 and $0)
Accrued investment income (Exchanges - $1,898 and $0)
Premiums and other receivables, net (Related parties $14,603 and $74,006) (Exchanges - $58,238 and $0)
Deferred acquisition costs (Exchanges - $4,485 and $0)
Reinsurance recoverable on unpaid losses (Related parties - $88,970 and $176,241) (Exchanges - $23,583 and
$0)
Prepaid reinsurance premiums (Exchanges - $26,924 and $0)
Notes receivable from related party
Due from affiliate
Premises and equipment, net
Intangible assets, net (Exchanges - $11,433 and $0)
Goodwill
Prepaid and other assets (Exchanges - $71 and $0)
Total assets
Liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
45,802
50
155,900
4,764
49,456
222,739
2,817
10,490
6,287
—
133,193
2,893
133,922
—
—
—
1,866,105
1,042,884
132,615
14,451
757,791
125,999
911,798
102,761
125,000
5,129
30,583
248,837
70,764
48,154
73,823
9,263
449,252
60,112
950,828
50,878
—
4,785
29,535
86,564
70,351
9,240
$ 4,439,987
$ 2,837,515
Unpaid loss and loss adjustment expense reserves (Exchanges - $111,848 and $0)
$ 1,562,153
$ 1,259,241
Unearned premiums (Exchanges - $119,998 and $0)
Unearned service contract and other revenue
Reinsurance payable (Related parties - $26,241 and $76,360) (Exchanges - $13,811 and $0)
Accounts payable and accrued expenses (Related parties - $178,444 and $10,216) (Exchanges - $17,691 and
$0)
Due to affiliate (Exchanges - $1,552 and $0)
Securities sold under agreements to repurchase, at contract value
Deferred tax liability (Exchanges - $38,402 and $0)
Income tax payable (Exchanges - $1,059 and $0)
Notes payable (Exchanges owed to related party - $48,374 and $0)
Other liabilities (Exchanges - $5,710 and $0)
Total liabilities
Commitments and contingencies (Note 18)
864,436
8,527
111,641
317,469
1,552
46,804
67,535
30,591
304,005
51,824
476,232
7,319
93,534
91,143
—
109,629
24,476
1,987
81,142
49,945
3,366,537
2,194,648
See accompanying notes to consolidated financial statements.
F-3
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
Stockholders’ equity:
Common stock, $0.01 par value - authorized 150,000,000 shares, issued and outstanding 93,427,382 shares -
2014; authorized 150,000,000 shares, issued and outstanding 79,731,800 shares - 2013
Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,200,000 shares -
2014; authorized 10,000,000 shares, issued and outstanding 0 shares - 2013
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total National General Holdings Corp. Stockholders' Equity
Non-controlling interest (Exchanges - $13,670 and $0)
Total stockholders’ equity
Total liabilities and stockholders' equity
934
55,000
690,736
20,192
292,832
1,059,694
13,756
797
—
437,006
7,425
197,552
642,780
87
1,073,450
642,867
$ 4,439,987
$ 2,837,515
See accompanying notes to consolidated financial statements.
F-4
NATONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Shares and Per Share Data)
Revenues:
Premium income:
Gross premium written
Ceded premiums (related parties - $44,936, $501,067 and $561,434 in 2014,
2013 and 2012, respectively)
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income (primarily related parties)
Service and fee income
Net investment income
Net realized gain (loss) on investments
Bargain purchase gain and other revenue
Total revenues
Expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Interest expense
Total expenses
Income before provision for income taxes and equity in earnings (losses) of
unconsolidated subsidiaries
Provision for income taxes
Income before equity in earnings (losses) of unconsolidated subsidiaries
Equity in earnings (losses) of unconsolidated subsidiaries
Net income
Less: Net loss (income) attributable to non-controlling interest
Net income attributable to National General Holdings Corp. ("NGHC")
Dividends on preferred stock
Net income attributable to NGHC common stockholders
Earnings per common share:
Basic earnings per share
Diluted earnings per share
Dividends declared per common share
Weighted average common shares outstanding:
Basic
Diluted
Net realized gain (loss) on investments:
Other than temporary impairment loss
Portion of loss recognized in other comprehensive income
Net impairment losses recognized in earnings
Other net realized gain (loss) on investments
Net realized gain (loss) on investments
Years Ended December 31,
2014
2013
2012
$
2,135,107
$
1,338,755
$
1,351,925
(265,083)
1,870,024
(236,804)
1,633,220
12,430
168,571
52,426
(2,892)
(1,660)
1,862,095
1,053,065
315,089
348,762
17,736
1,734,652
127,443
23,876
103,567
1,180
104,747
(2,504)
102,243
(2,291)
99,952
1.09
1.07
0.05
$
$
$
$
$
(659,439)
679,316
8,750
688,066
87,100
127,541
30,808
(1,669)
16
931,862
462,124
134,887
280,552
2,042
879,605
52,257
11,140
41,117
1,274
42,391
(82)
42,309
(2,158)
40,151
0.62
0.59
0.01
$
$
$
$
$
(719,431)
632,494
(58,242)
574,252
89,360
93,739
30,550
16,612
3,728
808,241
402,686
110,771
246,644
1,787
761,888
46,353
12,309
34,044
(1,338)
32,706
—
32,706
(4,674)
28,032
0.62
0.56
—
91,499,122
93,515,417
65,017,579
71,801,613
45,554,570
58,286,700
(2,244) $
(2,869) $
—
(2,244)
(648)
—
(2,869)
1,200
(2,892) $
(1,669) $
—
—
—
16,612
16,612
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-5
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
Unrealized holding gain (loss) on securities, net of tax expense of $10,059,
$(16,242) and $9,962 in 2014, 2013 and 2012, respectively
Reclassification adjustment for securities sold during the year, net of tax
expense of $(33), $2,558 and $1,710 in 2014, 2013 and 2012, respectively
Other comprehensive income (loss), net of tax
Comprehensive income
Less: Comprehensive loss (income) attributable to non-controlling interest
Comprehensive income attributable to NGHC
Years Ended December 31,
2014
104,747
$
2013
2012
$
42,391
$
32,706
(5,171)
365
—
18,681
(30,164)
18,342
(61)
13,449
118,196
(3,186)
115,010
$
4,750
(25,049)
17,342
(82)
17,260
$
3,175
21,517
54,223
—
$
54,223
See accompanying notes to consolidated financial statements.
F-6
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Shares)
Years Ended December 31, 2014, 2013 and 2012
Common Stock
Preferred Stock
Shares
$
Shares
$
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Non-
controlling
Interest in
Subsidiary
Total
53,054
$ 53,054
$
159,485
$ 136,333
$
10,957
$
1,312
$ 361,596
Balance December 31, 2011
45,554,570
$
Net income
Change in unrealized gain on
investments, net of tax
Return of capital
Purchase of non-controlling
interest
Stock-based compensation
—
—
—
—
—
Balance December 31, 2012
45,554,570
Net income
Foreign currency translation
adjustment, net of tax
Change in unrealized loss on
investments, net of tax
Preferred stock dividends
Common stock dividends
—
—
—
—
—
Conversion of preferred stock
12,295,430
Issuance of common stock
21,881,800
Capital contributions
Stock-based compensation
—
—
Balance December 31, 2013
79,731,800
Net income
Foreign currency translation
adjustment, net of tax
Change in unrealized gain on
investments, net of tax
Reciprocal Exchanges' equity
on September 15, 2014, date
of consolidation
Preferred stock dividends
Common stock dividends
—
—
—
—
—
—
455
—
—
—
—
—
455
—
—
—
—
—
123
219
—
—
797
—
—
—
—
—
—
Issuance of common stock
13,570,000
136
—
—
—
—
—
—
—
—
—
—
—
—
(1,359)
—
(111)
32,706
—
—
—
—
—
21,517
—
—
—
53,054
53,054
158,015
169,039
32,474
—
—
—
—
—
—
—
—
—
—
(53,054)
(53,054)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
52,931
213,058
10,275
2,727
42,309
—
—
(12,202)
(1,594)
—
—
—
—
437,006
197,552
—
—
—
—
—
—
177,697
(1,836)
74,215
795
2,859
102,243
—
—
—
(2,291)
(4,672)
—
—
—
—
—
—
365
(25,414)
—
—
—
—
—
—
7,425
—
(5,171)
17,938
—
—
—
—
—
—
—
—
—
—
—
(1,307)
—
5
82
—
—
—
—
—
—
—
—
87
2,504
—
—
11,165
—
—
—
—
—
—
—
32,706
21,517
(1,359)
(1,307)
(111)
413,042
42,391
365
(25,414)
(12,202)
(1,594)
—
213,277
10,275
2,727
642,867
104,747
(5,171)
17,938
11,165
(2,291)
(4,672)
177,833
53,164
74,215
796
2,859
Issuance of preferred stock
Capital contributions
—
—
Exercises of stock options
125,582
Stock-based compensation
—
— 2,200,000
55,000
—
1
—
—
—
—
—
—
—
Balance December 31, 2014
93,427,382
$
934
2,200,000
$ 55,000
$
690,736
$ 292,832
$
20,192
$
13,756
$1,073,450
See accompanying notes to consolidated financial statements.
F-7
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Cash flows from operating activities:
Net income
Reconciliation of net income to net cash provided by (used in) operating activities:
$
104,747
$
42,391
$
32,706
Years Ended December 31,
2014
2013
2012
Depreciation, amortization and goodwill impairment
Net amortization of premium on fixed maturities
Net amortization of discount on debt
Stock compensation expense
Equity in (earnings) losses of unconsolidated subsidiaries
Net realized loss (gain) on investments
Other than temporary impairment loss
Realized loss (gain) on premise and equipment disposals
Bad debt expense
Foreign currency translation adjustment, net of tax
Bargain purchase gain
Changes in assets and liabilities:
Accrued investment income
Premiums and other receivables
Deferred acquisition costs, net
Reinsurance recoverable on unpaid losses
Prepaid reinsurance premiums
Prepaid expenses and other assets
Unpaid loss and loss adjustment expense reserves
Unearned premiums
Unearned service contract and other revenue
Reinsurance payable
Accounts payable
Income tax payable
Deferred tax liability
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Investment in unconsolidated subsidiaries
Distributions from unconsolidated subsidiaries
Purchases of other investments
Acquisition of consolidated subsidiaries, net of cash obtained
Purchases of short term investments
Notes receivable from related party
Proceeds from sale of short-term investments
Proceeds from sale of equity securities
Purchases of premises and equipment
Proceeds from sale of premises and equipment
Purchases of equity securities
Purchases of fixed maturities
Proceeds from sale and maturity of fixed maturities
Net cash provided by (used in) investing activities
43,905
2,596
3,774
2,859
(1,180)
648
2,244
(271)
29,133
(1,655)
—
(2,591)
(236,128)
(65,626)
78,578
13,095
(38,586)
133,531
212,577
1,208
21,536
3,870
—
2,727
(1,274)
(2,645)
2,869
96
22,484
365
—
(245)
(12,980)
122
40,619
3,617
963
(27,289)
(12,366)
3,147
(17,147)
(41,426)
148,456
30,116
(65,507)
5,032
383,808
(440)
(5,960)
(10,712)
(18,966)
10,503
23,499
5,946
—
(111)
1,338
(16,612)
—
—
19,966
—
(3,728)
(680)
(86,986)
(2,515)
(71,118)
19,256
2,145
57,552
38,987
(628)
25,981
1,267
12,611
(30,979)
(20,874)
7,023
(21,647)
(47,729)
(13,653)
—
(14,604)
(36,200)
—
(125,000)
—
2,829
—
(2,193)
(18,555)
(57,068)
—
1,851
(392)
4,404
(244,636)
—
131,197
270,239
—
—
(15,307)
(10,873)
(18,593)
1,046
(45,970)
—
—
(4,808)
(5,000)
(746,338)
(439,673)
(278,417)
344,707
296,391
(656,484)
(153,311)
314,952
30,755
See accompanying notes to consolidated financial statements.
F-8
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Cash flows from financing activities:
Securities sold under agreements to repurchase, net
Securities sold but not yet purchased, net
Return of capital
Notes payable repayments
Proceeds from notes payable
Issuance of common stock
Issuance of preferred stock, net of fees
Exercises of stock options
Dividends paid to preferred shareholders
Dividends paid to common shareholders
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
Non-cash capital contributions
(62,825)
—
—
22,885
(56,700)
—
(84,427)
(58,435)
250,000
177,833
53,164
796
(1,260)
(3,600)
329,681
1,787
58,792
73,823
132,615
54,031
17,144
74,215
$
$
69,463
213,277
—
—
(12,202)
(1,594)
176,694
—
33,886
39,937
73,823
24,500
1,256
10,275
$
$
(21,949)
30,914
(1,359)
(30,780)
13,638
—
—
—
—
—
(9,536)
—
28,242
11,695
39,937
32,500
396
—
$
$
See accompanying notes to consolidated financial statements.
F-9
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
1. Organization
National General Holdings Corp. (the “Company” or “NGHC”) is an insurance holding company formed under the laws of
the state of Delaware. The Company provides, through its wholly-owned subsidiaries, a variety of insurance products, including
personal and commercial automobile, supplemental health, homeowners and umbrella, and other niche products. The insurance
is sold through a network of independent agents, relationships with affinity partners, and direct-response marketing programs. The
Company is licensed to operate throughout the fifty states and the District of Columbia as well as the European Union.
2. Significant Accounting Policies
Basis of Reporting
The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in the consolidated
financial statements. The consolidated financial statements as of December 31, 2014 and for the year ended 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. The results of the Reciprocal Exchanges and the management companies are
included in the Company's Property and Casualty segment.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company’s principal estimates
include unpaid losses and loss adjustment expense reserves; deferred acquisition costs; reinsurance recoverables, including the
provision for uncollectible premiums; the valuation of intangibles and the determination of goodwill; and income taxes. In
developing the estimates and assumptions, management uses all available evidence. Because of uncertainties associated with
estimating the amounts, timing and likelihood of possible outcomes, actual results could differ from estimates.
Premiums and Other Receivables
The Company recognizes earned premiums on a pro rata basis over the terms of the policies, generally periods of six or
twelve months. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of the policies.
Net premium receivables represent premiums written and not yet collected, net of an allowance for uncollectible premiums. The
Company regularly evaluates premiums and other receivables and adjusts its allowance for uncollectible amounts as appropriate.
Receivables specifically identified as uncollectible are charged to expense in the year the determination is made.
Cash and Cash Equivalents
The Company considers all highly liquid investment securities with original maturities of 90 days or less to be cash equivalents.
Certain securities with original maturities of 90 days or less that are held as a portion of longer-term investment portfolios are
classified as short-term investments. The Company maintains cash balances at Federal Deposit Insurance Corporation (“FDIC”)
insured institutions. FDIC insures accounts up to $250 at these institutions. Management monitors balances in excess of insured
limits and believes that these balances do not represent a significant credit risk to the Company.
F-10
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Deferred Acquisition Costs
Deferred acquisition costs include commissions, premium taxes, payments to affinity partners, promotional fees, and other
direct sales costs that vary with and are directly related to successful contract acquisition of insurance policies. These costs are
deferred and amortized to the extent recoverable, over the policy period in which the related premiums are earned. The Company
considers anticipated investment income in determining the recoverability of these costs. Management believes that these costs
are recoverable in the near term.
Ceding Commission Revenue
Commissions on reinsurance premiums ceded are earned in a manner consistent with the recognition of the direct acquisition
costs of underlying insurance policies, generally on a pro rata basis over the terms of the policies reinsured. Certain reinsurance
agreements contain provisions whereby the ceding commission rates vary based on the loss experience under the agreements. The
Company records ceding commission revenue based on its current estimate of subject losses. The Company records adjustments
to the ceding commission revenue in the period that changes in the estimated losses are determined.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses (“LAE”) represent the estimated ultimate net costs of all reported and unreported losses
incurred through the period end. The reserves for unpaid losses and LAE represent the accumulation of estimates for both reported
losses and those incurred but not reported relating to direct insurance and assumed reinsurance agreements. Estimates for salvage
and subrogation recoverables are recognized at the time losses are incurred and netted against the provision for losses. Reserves
are established for each business at the lowest meaningful level of homogeneous data. Insurance liabilities are based on estimates,
and the ultimate liability may vary from such estimates. These estimates are regularly reviewed and adjustments, which can
potentially be significant, are included in the period in which they are deemed necessary.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting, which requires the Company
to record assets acquired, liabilities assumed and any non-controlling interest in the acquiree at their respective fair values as of
the acquisition date. The Company accounts for the insurance and reinsurance contracts under the acquisition method as new
contracts, which requires the Company to record assets and liabilities at fair value. The Company adjusts the fair value loss and
LAE reserves by recording the acquired loss reserves based on the Company’s existing accounting policies and then discounting
them based on expected reserve payout patterns using a current risk-free rate of interest. This risk free interest rate is then adjusted
based on different cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be reasonably possible
based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. The difference
between the acquired loss and LAE reserves and the Company’s best estimate of the fair value of such reserves at the acquisition
date is recorded as either an intangible asset or another liability, as applicable and is amortized proportionately to the reduction in
the related loss reserves (i.e., over the estimated payout period of the acquired loss and LAE reserves). The Company assigns fair
values to intangible assets acquired based on valuation techniques including the income and market approaches. The Company
records contingent consideration at fair value based on the terms of the purchase agreement with subsequent changes in fair value
recorded through earnings. The determination of fair value may require management to make significant estimates and assumptions.
The purchase price is the fair value of the total consideration conveyed to the seller and the Company records the excess of the
purchase price over the fair value of the acquired net assets, where applicable, as goodwill. The Company expenses costs associated
with the acquisition of a business in the period incurred.
Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets in accordance with Financial Accounting Standards Board
(“FASB”), Accounting Standards of Codification (“ASC”) 350, “Intangibles - Goodwill and Other.” A purchase price paid that is
in excess of net assets (“goodwill”) arising from a business combination is recorded as an asset and is not amortized. Intangible
assets with a finite life are amortized over the estimated useful life of the asset. Intangible assets with an indefinite useful life are
not amortized. Goodwill and intangible assets are tested for impairment on an annual basis or more frequently if changes in
circumstances indicate that the carrying amount may not be recoverable. If the goodwill or intangible asset is impaired, it is written
down to its realizable value with a corresponding expense reflected in the consolidated statement of income.
F-11
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Equalization Reserves
The Company owns several Luxembourg-domiciled reinsurance entities. In connection with these entities, the Company
acquires cash and statutory equalization reserves of the reinsurance companies. An equalization reserve is a catastrophe reserve
established in excess of required reserves as required by the laws of Luxembourg. The equalization reserves were originally
established by the seller of the reinsurance entities, and under Luxembourg law allowed the reinsurance company to reduce its
income tax paid. Equalization reserves are required to be established for Luxembourg statutory and tax purposes, but are not
recognized under U.S. GAAP. The Company establishes a deferred tax liability equal to approximately 30% of the unutilized
statutory equalization reserves. The deferred tax liability is adjusted each reporting period based primarily on amounts ceded to
the Luxembourg reinsurer under the intercompany reinsurance agreement.
Investments
The Company accounts for its investments in accordance with ASC 320, “Investments - Debt and Equity Securities”, which
requires that fixed maturities and equity securities that have readily determined fair values be segregated into categories based
upon the Company’s intention for those securities. The Company has classified its investments as available-for-sale. The Company
may sell its available-for-sale securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other
factors. Available-for-sale securities are reported at their estimated fair values based on a recognized pricing service, with unrealized
gains and losses, net of tax effects, reported as a separate component of other comprehensive income in the consolidated statement
of comprehensive income.
Purchases and sales of investments are recorded on a trade date basis. Realized gains and losses are determined based on the
specific identification method. Net investment income is recognized when earned and includes interest and dividend income
together with amortization of market premiums and discounts using the effective yield method and is net of investment management
fees and other expenses. For mortgage-backed securities and any other holdings for which there is a prepayment risk, prepayment
assumptions are evaluated and revised as necessary. Any adjustments required due to the change in effective yields and maturities
are recognized on a prospective basis through yield adjustments.
The Company uses a set of quantitative and qualitative criteria to evaluate the necessity of recording impairment losses for
other-than-temporary declines in fair value. These criteria include:
•
•
•
•
•
•
•
the current fair value compared to amortized cost;
the length of time the security’s fair value has been below its amortized cost;
specific credit issues related to the issuer such as changes in credit rating or non-payment of scheduled interest payments;
whether management intends to sell the security and, if not, whether it is more likely than not that the Company will be
required to sell the security before recovery of its amortized cost basis;
the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its
operations or earnings;
the occurrence of a discrete credit event resulting in the issuer defaulting on a material outstanding obligation or the issuer
seeking protection under bankruptcy laws; and
other items, including management, media exposure, sponsors, marketing and advertising agreements, debt restructurings,
regulatory changes, acquisitions and dispositions, pending litigation, distribution agreements and general industry trends.
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other
than temporary. The Company immediately writes down investments that it considers to be impaired based on the above criteria
collectively. For the years ended December 31, 2014, 2013 and 2012, the Company recorded an other-than-temporary impairment
charge of $2,244, $2,869, and $0, respectively.
In the event of the decline in fair value of a debt security, a holder of that security that does not intend to sell the debt security
and for whom it is more likely than not that such holder will be required to sell the debt security before recovery of its amortized
cost basis is required to separate the decline in fair value into (a) the amount representing the credit loss and (b) the amount related
to other factors. The amount of total decline in fair value related to the credit loss shall be recognized in earnings as an other-than-
temporary impairment (“OTTI”) with the amount related to other factors recognized in accumulated other comprehensive income
F-12
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
or loss, net of tax. OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination
of OTTI is a subjective process, and different judgments and assumptions could affect the timing of the loss realization.
The following are the types of investments the Company has:
(i)
(ii)
Short-term investments - Short-term investments are carried at amortized cost, which approximates fair value, and includes
investments with maturities between 91 days and less than one year at the date of acquisition. Short-term investments consist
primarily of money market investments and securities purchased under agreements to resell (reverse purchase agreements).
Fixed maturities and equity securities - Fixed maturities and equity securities (common stock, mutual funds, non-redeemable
preferred stock) are classified as available-for-sale and carried at fair value. Unrealized gains or losses on available-for-
sale securities are reported as a component of accumulated other comprehensive income.
(iii) Mortgage and asset-backed securities - For mortgage and asset-backed securities, the Company recognizes income using
the retrospective adjustment method based on prepayments and the estimated economic lives of the securities. The effective
yield reflects actual payments to date plus anticipated future payments. These investments are recorded as fixed maturities
on the consolidated balance sheets.
(iv) Limited partnerships - The Company uses the equity method of accounting for investments in limited partnerships in which
its ownership interest enables the Company to influence the operating or financial decisions of the investee company, but
the Company’s interest in the limited partnership does not require consolidation. The Company’s proportionate share of
equity in net income of these limited partnerships is reported in net investment income.
(v)
(vi)
Securities sold under agreements to repurchase (repurchase agreements), at contract value are accounted for as collateralized
borrowing and lending transactions and are recorded at their contracted repurchase amounts, plus accrued interest. The
Company minimizes the credit risk that counterparties might be unable to fulfill their contractual obligations by monitoring
exposure and collateral value and generally requiring additional collateral to be deposited with the Company when necessary.
Under repurchase agreements, the Company borrows cash from a counterparty at an agreed-upon interest rate for an agreed-
upon time frame and the Company transfers either corporate debt securities or U.S. government and government agency
securities (pledged collateral). For securities repurchase agreements, the cash received is typically invested in cash
equivalents, short-term investments or fixed maturities, with the offsetting obligation to repay the loan included as a liability
in the consolidated balance sheets. At the end of the agreement, the counterparty returns the collateral to the Company, and
the Company, in turn, repays a loan amount along with the agreed-upon interest.
Securities purchased under agreements to resell (reverse repurchase agreements) at contract value are generally treated as
collateralized receivables. The Company reports receivables arising from reverse repurchase agreements in short-term
investments in the consolidated balance sheets. These reverse repurchase agreements are recorded at the contracted resale
amounts plus accrued interest. The Company’s policy is to take possession of the securities purchased under agreements
to resell. The Company minimizes the risk that counterparties to transactions might be unable to fulfill their contractual
obligations by monitoring the counterparty credit exposure and collateral value and generally requiring additional collateral
to be deposited with the Company when necessary.
Repurchase and reverse repurchase agreements are used to earn spread income, borrow funds, or to facilitate trading
activities. Securities repurchase and resale agreements are generally short-term, and therefore, the carrying amounts of
these instruments approximate fair value.
(vii) Securities sold but not yet purchased - Securities sold but not yet purchased are accounted for as liabilities and are recorded
at prevailing market prices. These transactions result in off-balance sheet risk because the ultimate cost to deliver the
securities sold is uncertain.
Fair Value of Financial Instruments
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established
in ASC 820, “Fair Value Measurements and Disclosures”. The framework is based on the inputs used in valuation and gives the
highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available.
The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant inputs into the valuation are
observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted
quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market
assumptions. Additionally, valuation of fixed-maturity investments is more subjective when markets are less liquid due to lack of
market-based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price
at which an actual transaction could occur. Fair values of other financial instruments approximate their carrying values.
F-13
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the
assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. Additionally, ASC 820 requires an entity to consider all aspects of
nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s
categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a
description of the three hierarchy levels:
Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date. Additionally,
the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.
Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive
markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data
by correlation or other means for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s
best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued
using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
Investments in Unconsolidated Subsidiaries
The Company uses the equity method of accounting for investments in subsidiaries in which its ownership interest enables
the Company to influence operating or financial decisions of the subsidiary, but the Company’s interest does not require
consolidation. In applying the equity method, the Company records its investment at cost, and subsequently increases or decreases
the carrying amount of the investment by its proportionate share of the net earnings or losses and other comprehensive income of
the investee. Any dividends or distributions received are recorded as a decrease in the carrying value of the investment. The
Company’s proportionate share of net income is reported in the consolidated statement of income.
Stock Compensation Expense
The Company recognizes compensation expense for its share-based awards over the estimated vesting period based on
estimated grant date fair value. Share-based payments include stock option grants and restricted stock units ("RSU") under the
Company’s 2010 and 2013 Equity Incentive Plans.
Earnings Per Share
Basic earnings per share are computed based on the weighted-average number of common shares outstanding. Dilutive
earnings per share are computed using the weighted-average number of common shares outstanding during the period adjusted
for the dilutive impact of share options and convertible preferred stock using the treasury stock method.
Impairment of Long-lived Assets
The carrying value of long-lived assets is evaluated for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated undiscounted future cash flows expected to result
from its use and eventual disposition. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated
by discounted cash flows. No impairment was recognized in the years ended December 31, 2014, 2013 and 2012.
Income Taxes
The Company joins its subsidiaries in the filing of a consolidated Federal income tax return and is party to Federal income
tax allocation agreements. Under the tax allocation agreements, the Company pays to or receives from its subsidiaries the amount,
F-14
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
if any, by which the group’s Federal income tax liability was affected by virtue of inclusion of the subsidiary in the consolidated
Federal return. The Reciprocal Exchanges are not party to federal income tax allocation agreements but file separate tax returns
annually.
Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax asset and liability primarily consists
of book versus tax differences for earned premiums, loss and LAE reserve discounting, deferred acquisition costs, earned but
unbilled premiums, and unrealized holding gains and losses on fixed maturities. Changes in deferred income tax assets and liabilities
that are associated with components of other comprehensive income, primarily unrealized investment gains and losses, are recorded
directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component
of income tax expense.
In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that the
Company will generate future taxable income during the periods in which those temporary differences become deductible. The
Company considers the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income
in making this assessment. If necessary, the Company establishes a valuation allowance to reduce the deferred tax assets to the
amounts more likely than not to be realized.
The Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination
by taxing authorities. The Company’s policy is to prospectively classify accrued interest and penalties related to any unrecognized
tax benefits in its income tax provision. The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which
it operates.
Reinsurance
The Company cedes insurance risk under various reinsurance agreements. The Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other
insurance enterprises. The Company remains liable with respect to any insurance ceded if the assuming companies are unable to
meet their obligations under these reinsurance agreements.
Reinsurance premiums, losses and LAE ceded to other companies are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of the reinsurance contracts. Earned premiums and losses and LAE incurred
ceded to other companies have been recorded as a reduction of premium revenue and losses and LAE. Commissions allowed by
reinsurers on business ceded have been recorded as ceding commission revenue. Reinsurance recoverables are reported based on
the portion of reserves and paid losses and LAE that are ceded to other companies. Assessing whether or not a reinsurance contract
meets the condition for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums and
losses, and is based, in part, on the use of actuarial and pricing models and assumptions. If the Company determines that a reinsurance
contract does not transfer sufficient risk, it accounts for the contract under deposit accounting.
Premises and Equipment
Premises and equipment are recorded at cost. Maintenance and repairs are charged to operations as incurred. Depreciation
is computed on a straight-line basis over the estimated useful lives of the assets, as follows:
Buildings and improvements
Leasehold improvements
Hardware and software
Furniture and equipment
30 years
Remaining lease term
3 to 5 years
3 to 10 years
The Company capitalizes costs of computer software developed or obtained for internal use that is specifically identifiable,
has determinable lives and relates to future use.
F-15
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Assessments
Insurance-related assessments are accrued in the period in which they have been incurred. A typical obligating event would
be the issuance of an insurance policy or the occurrence of a claim. The Company is subject to a variety of assessments, such as
assessments by state guaranty funds used by state insurance regulators to cover losses of policyholders of insolvent insurance
companies and for the operating expenses of such agencies. The Company uses estimated assessment rates in determining the
appropriate assessment expense and accrual. The Company uses estimates derived from state regulators and/or National Association
of Insurance Commissioners (“NAIC”) Tax and Assessments Guidelines. Assessment expense for the years ended December 31,
2014, 2013 and 2012 was $6,267, $6,866 and $5,971, respectively.
Non-controlling Interest and Variable Interest Entities
The ownership interest in consolidated subsidiaries of non-controlling interests is reflected as non-controlling interest. The
Company’s consolidation principles also consolidates entities in which the Company is deemed a primary beneficiary. Non-
controlling interest income or loss represents such non-controlling interests in the earnings of that entity. The Company consolidates
the Reciprocal Exchanges as it has determined that these are variable interest entities and that the Company is the primary beneficiary
(see Note 3, "Reciprocal Exchanges"). All significant transactions and account balances between the Company and its subsidiaries
are eliminated during consolidation.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk are primarily cash and cash
equivalents, investments and premiums and other receivables. Investments are diversified through many industries and geographic
regions through the use of an investment manager who employs different investment strategies. The Company limits the amount
of credit exposure with any one financial institution and believes that no significant concentration of credit risk exists with respect
to cash and investments. At December 31, 2014 and 2013, the outstanding premiums and other receivables balance was generally
diversified due to the Company’s diversified customer base. To reduce credit risk, the Company performs ongoing evaluations for
uncollectible amounts. The Company also has receivables from its reinsurers. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company periodically evaluates the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. It is the policy of management to review all outstanding receivables at
period end as well as the bad debt write-offs experienced in the past and establish an allowance for uncollectible accounts, if
deemed necessary.
Reclassifications
Certain accounts in the prior years’ consolidated financial statements have been reclassified for comparative purposes to
conform to the current year’s presentation. This did not have any impact on the net income of the Company.
Foreign Currency Transactions
The functional currency of the Company and many of its subsidiaries is the U.S. dollar. For these companies, the Company
translates monetary assets and liabilities denominated in foreign currencies at year-end exchange rates, with the resulting foreign
exchange gains and losses recognized in the consolidated statements of income. Revenues and expenses in foreign currencies are
converted at average exchange rates during the year. Monetary assets and liabilities include investments, cash and cash equivalents,
reinsurance balances receivable, reserve for loss and loss adjustment expenses and accrued expenses and other liabilities. Accounts
that are classified as non-monetary, such as deferred commission and other acquisition expenses and unearned premiums, are not
revalued.
Service and Fee Income
The Company currently generates policy service and fee income from installment fees, late payment fees, and other finance
and processing fees related to policy cancellation, policy reinstatement and non-sufficient funds check returns. These fees are
generally designed to offset expenses incurred in the administration of the Company’s insurance business, and are generated as
follows. Installment fees are charged to permit a policyholder to pay premiums in installments rather than in a lump sum. Late
payment fees are charged when premiums are remitted after the due date and any applicable grace periods. Policy cancellation
fees are charged to policyholders when a policy is terminated by the policyholder prior to the expiration of the policy’s term or
F-16
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
renewal term, as applicable. Reinstatement fees are charged to reinstate a policy that has lapsed, generally as a result of non-
payment of premiums. Non-sufficient fund fees are charged when the customer’s payment is returned by the financial institution.
All fee income is recognized as follows. An installment fee is recognized at the time each policy installment bill is due. A
late payment fee is recognized when the customer’s payment is not received after the listed due date and any applicable grace
period. A policy cancellation fee is recognized at the time the customer’s policy is cancelled. A policy reinstatement fee is recognized
when the customer’s policy is reinstated. A non-sufficient fund fee is recognized when the customer’s payment is returned by the
financial institution. The amounts charged are primarily intended to compensate the Company for the administrative costs associated
with processing and administering policies that generate insurance premium; however, the amounts of fees charged are not dependent
on the amount or period of insurance coverage provided and do not entail any obligation to return any portion of those funds. The
direct and indirect costs associated with generating fee income are not separately tracked.
The Company also collects service fees in the form of commission and general agent fees by selling policies issued by third-
party insurance companies. The Company does not bear insurance underwriting risk with respect to these policies. Commission
income and general agent fees are recognized, net of an allowance for estimated policy cancellations, at the date the customer is
initially billed or as of the effective date of the insurance policy, whichever is later. The allowance for estimated third-party
cancellations is periodically evaluated and adjusted as necessary.
Management fees earned by the management companies for services provided to the Reciprocal Exchanges are eliminated
in consolidation.
Year Ended December 31,
Installment fees
Commission revenue
General agent fees
Late payment fees
Finance and processing fees
Other
Recent Accounting Literature
2014
2013
2012
$
30,323
$
30,666
$
52,597
45,637
11,658
13,569
14,787
43,716
21,526
11,240
11,727
8,666
38,340
16,502
13,233
10,962
8,363
6,339
$
168,571
$
127,541
$
93,739
In July 2013, the FASB, issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): "Presentation
of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists," which provides guidance on the presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carry-
forward, a similar tax loss, or a tax credit carry-forward exists. Under the ASU, an entity must present an unrecognized tax benefit,
or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a NOL carry-forward, similar tax loss, or a
tax credit carry-forward. There are two exceptions to this form of presentation as follows:
• To the extent a NOL carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date
under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance
of a tax position; and
• The entity does not intend to use the deferred tax asset for this purpose.
If either of these conditions exists, an entity should present an unrecognized benefit in the financial statements as a liability
and should net the unrecognizable tax benefit with a deferred tax asset. The amendments in this update are effective for fiscal
years, and interim periods within those years, beginning after December 31, 2013. The Company adopted ASU 2013-11 on January
1, 2014 and the implementation of the standard did not have an impact on the Company's results of operations, financial condition
or liquidity.
F-17
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
In March 2013, the FASB issued ASU 2013-05, "Parent’s Accounting for the Cumulative Translation Adjustment Upon
Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity" to
standardize the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its
investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary. ASU 2013-05 is applied prospectively
and is effective for annual reporting periods beginning after December 15, 2013, and interim periods within those years. The
Company adopted ASU 2013-05 on January 1, 2014 and the implementation of the standard did not have an impact on the Company’s
results of operations, financial position or liquidity.
Recently Issued Accounting Standards Update - Not Yet Adopted
In June 2013, the FASB issued Exposure Draft Insurance Contracts Topic 834. The exposure draft would impact all entities
that write insurance contracts. If adopted, the guidance would supersede the requirements in ASC Topic 944, Financial Services
- Insurance which currently apply to insurance entities. The guidance in the exposure draft would require a property and casualty
insurer to measure its insurance contracts under the premium allocation approach, which would require an entity to record revenue
over the coverage period on the basis of the expected timing of incurred claims. If adopted, entities would be required to adopt
this standard retrospectively. The Company is currently studying this exposure draft and the impact on the Company's results of
operations, financial position or liquidity.
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 adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial
position or liquidity.
In May 2014, the FASB issued guidance on recognizing revenue in contracts with customers. The objective of the new
guidance as issued by the FASB in ASU 2014-09, “Revenue from Contracts with Customers”, is to remove inconsistencies and
weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability of
revenue recognition practices, and provide for improved disclosure requirements. The core principle of the guidance is that an
entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which an entity expects to be entitled in exchange for those goods and services. To achieve that core principle,
an entity applies the following five steps: (1) identifies the contract(s) with a customer; (2) identifies the performance obligations
in the contract; (3) determines the transaction price; (4) allocates the transaction price to the performance obligations in the contract;
and (5) recognizes revenue when (or as) the entity satisfies the performance obligations. The new guidance also includes a
comprehensive set of qualitative and quantitative disclosure requirements including information about: (i) contracts with customers-
including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and
performance obligations; (ii) significant judgments in determining the satisfaction of performance obligations, determining the
transaction price, and amounts allocated to performance obligations; and (iii) assets recognized from the costs to obtain or fulfill
a contract. For a public entity, the amendments in this Update are effective for annual reporting periods beginning after December
15, 2016, including interim periods within that reporting period. Early application is not permitted. While the guidance specifically
excludes revenues from insurance contracts, investments and financial instruments from the scope of the new guidance, the guidance
will be applicable to the Company’s other forms of revenue not specifically exempted from the guidance. 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.
In June 2014, the FASB issued ASU No. 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
F-18
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
to as off-balance-sheet accounting. ASU No. 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: (1) the carrying amount of assets derecognized (sold) as of
the date of derecognition; (2) the amount of gross proceeds received by the transferor at the time of derecognition for the assets
derecognized; (3) the information about the transferor’s ongoing exposure to the economic return on the transferred financial
assets; and (4) the amounts that are reported in the statement of financial position arising from the transaction, such as those
represented by derivative contracts. ASU No. 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: (1) a
disaggregation of the gross obligation by the class of collateral pledged; (2) the remaining contractual time to maturity of the
agreements; and (3) 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 adoption of this guidance is not expected to have a material effect on the Company’s results of
operations, financial position or liquidity.
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
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 this Update 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. Early adoption, including adoption
in an interim period, is permitted. If an entity early adopts the amendments in an interim period, any adjustments are to be reflected
as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2014-16 is not expected to have a
material effect 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 adoption of this guidance is
not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
F-19
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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.
For the period from September 15, 2014 to December 31, 2014, the Reciprocal Exchanges recognized total revenues, total
expenses and net income of $54,347, $51,841 and $2,506, respectively.
For the period from September 15, 2014 to December 31, 2014, the Company earned management fees from the Reciprocal
Exchanges in the amount of $9,901. Such amount is eliminated in our consolidated earnings.
F-20
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE 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
Accrued investment income
Premiums receivables
Reinsurance recoverable on unpaid losses
Prepaid reinsurance premiums
Intangible assets, net
Income tax receivable
Other assets
Total assets
Liabilities:
Unpaid loss and loss adjustment expense reserves
Unearned premiums
Reinsurance payable
Accounts payable and accrued expenses
Deferred tax liability
Notes payable
Due to affiliate
Other liabilities
Total liabilities
Stockholders’ equity:
Non-controlling interest
Total stockholders’ equity
Total liabilities and stockholders' equity
$
235,684
1,975
62,412
19,137
27,166
13,901
819
124
361,218
113,828
114,786
5,167
10,120
39,238
44,600
17,808
4,506
350,053
11,165
11,165
361,218
$
$
$
F-21
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE 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:
December 31, 2014
Equity securities:
Common stock
Preferred stock
Fixed maturities:
U.S. Treasury
Federal agencies
States and political subdivision bonds
Foreign government
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Total
Less: Securities pledged
Total net of Securities pledged
NGHC
Reciprocal Exchanges
Total
December 31, 2013
Equity securities:
Common stock
Preferred stock
Fixed maturities:
U.S. Treasury and federal agencies
States and political subdivision bonds
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
Less: Securities pledged
Total net of Securities pledged
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
47,269
$
1,004
$
7,755
65
(7,349) $
(125)
40,924
7,695
37,446
98
172,617
6,194
839,436
459,596
79,579
5,461
1,655,451
47,546
1,607,905
1,430,578
224,873
1,655,451
$
$
$
$
1,536
—
4,961
—
36,525
11,132
1,602
—
56,825
1,910
54,915
55,031
1,794
56,825
$
$
$
$
(3)
—
(169)
(658)
(8,699)
(92)
(189)
(91)
(17,375) $
—
(17,375) $
(16,264) $
(1,111)
(17,375) $
38,979
98
177,409
5,536
867,262
470,636
80,992
5,370
1,694,901
49,456
1,645,445
1,469,345
225,556
1,694,901
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
1,939
5,000
— $
—
— $
(652)
1,939
4,348
30,655
101,105
477,442
272,820
8,179
897,140
133,013
764,127
$
$
920
1,681
21,397
4,136
—
28,134
3,884
24,250
$
$
—
(3,202)
(7,044)
(7,527)
(51)
(18,476) $
(2,975)
(15,501) $
31,575
99,584
491,795
269,429
8,128
906,798
133,922
772,876
$
$
$
$
$
$
$
The amortized cost and fair value of available-for-sale fixed maturities and securities pledged, held as of December 31, 2014,
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.
F-22
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
December 31, 2014
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total
(b) Investment Income
NGHC
Reciprocal Exchanges
Total
Cost or
Amortized
Cost
12,445
$
$
160,498
652,012
86,246
467,105
Fair
Value
12,542
168,194
673,529
89,946
479,332
Cost or
Amortized
Cost
Fair
Value
$
9,035
$
9,030
Cost or
Amortized
Cost
21,480
$
$
29,564
65,630
40,361
77,531
29,518
65,785
40,740
77,666
190,062
717,642
126,607
544,636
Fair
Value
21,572
197,712
739,314
130,686
556,998
$1,378,306
$1,423,543
$ 222,121
$ 222,739
$1,600,427
$1,646,282
The components of net investment income consisted of the following:
Interest
Cash and short term investments
Equity securities
Fixed maturities
Reverse Repurchase Agreements
Investment Income
Investment expense
Repurchase Agreements interest expense
Other Income (1)
Net Investment Income
NGHC
Reciprocal Exchanges
Net Investment Income
Year Ended December 31,
2013
2012
2014
$
$
$
$
$
114
349
$
14
—
52,008
—
52,471
(2,629)
(236)
2,820
52,426
50,627
1,799
52,426
$
$
$
33,936
61
34,011
(2,927)
(276)
—
30,808
30,808
—
30,808
$
$
$
60
—
32,047
11
32,118
(1,152)
(416)
—
30,550
30,550
—
30,550
(1) Includes interest income of approximately $2,601 for the year ended December 31, 2014, under the ACP Re Credit Agreement
(see Note 16, "Related Party Transactions").
(c) Realized Gains and Losses
Proceeds from sales of equity securities and fixed maturities during the years ended December 31, 2014 and 2013 were
$218,496 and $296,391, respectively. For the year ended December 31, 2014, the Company recognized OTTI of $2,244 on fixed
maturities investments based on our qualitative and quantitative OTTI review. For the year ended December 31, 2013, the Company
recognized OTTI of $2,869 on a common stock investment based on our qualitative and quantitative OTTI review.
F-23
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The tables below indicate the gross realized gains and losses (including any OTTI loss) for the years ended December 31,
2014, 2013 and 2012.
Year Ended December 31, 2014
Equity securities
Fixed maturities
Other Than Temporary Impairment Loss
Total gross realized gains and losses
NGHC
Reciprocal Exchanges
Total gross realized gains and losses
Year Ended December 31, 2013
Fixed maturities
Other Than Temporary Impairment Loss
Total gross realized gains and losses
Year Ended December 31, 2012
Fixed maturities
Total gross realized gains and losses
(d) Unrealized Gains and Losses
Gross Gains
Gross Losses
Net Gains
(Losses)
$
$
$
$
34
$
151
—
185
185
—
185
$
$
$
(613) $
(220)
(2,244)
(3,077) $
(3,077) $
—
(3,077) $
(579)
(69)
(2,244)
(2,892)
(2,892)
—
(2,892)
Gross Gains
Gross Losses
Net Gains
(Losses)
$
$
8,865
—
8,865
$
$
(7,665) $
(2,869) $
(10,534) $
1,200
(2,869)
(1,669)
Gross Gains
Gross Losses
Net Gains
(Losses)
$
$
18,342
18,342
$
$
(1,730) $
(1,730) $
16,612
16,612
Unrealized gains (losses) on equity securities, fixed maturities and securities sold but not yet purchased consisted of the
following:
Net unrealized loss on common stock
Net unrealized loss on preferred stock
Net unrealized gains on fixed maturities
Net unrealized loss on short sales
Net unrealized loss on other
Deferred income tax expense
Net unrealized gains, net of deferred income tax expense
NGHC
Reciprocal Exchanges
Net unrealized gains, net of deferred income tax expense
Non-controlling interest
NGHC net unrealized gains, net of deferred income tax expense
NGHC change in net unrealized gains, net of deferred income tax expense
F-24
Year Ended December 31,
2013
2012
2014
$
$
$
$
$
(6,345) $
(60)
45,855
—
18
(13,787)
25,681
$
24,998
683
25,681
(683)
24,998
17,938
$
$
$
— $
(652)
10,310
—
—
(2,598)
7,060
7,060
—
7,060
—
7,060
$
$
$
—
(28)
54,806
(4,732)
—
(17,572)
32,474
32,474
—
32,474
—
32,474
(25,414) $
21,517
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
(e) Gross Unrealized Losses
The tables below summarize the gross unrealized losses on equity securities and fixed maturities by length of time the security
has continuously been in an unrealized loss position as of December 31, 2014 and December 31, 2013:
Less Than 12 Months
12 Months or More
Total
No. of
Positions
Held
Fair
Market
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Market
Value
December 31, 2014
Common stock
Preferred stock
U.S. Treasury
States and political
subdivision bonds
Foreign government
Corporate bonds
Residential mortgage-
backed securities
Commercial mortgage-
backed securities
Asset-backed securities
Total
Fair
Market
Value
$ 33,717
Unrealized
Losses
$ (7,349)
—
6,343
16,320
5,536
—
(3)
(92)
(658)
3
—
5
39
1
$
— $
4,878
—
8,341
—
116,880
(5,594)
108
23,592
15,598
(34)
17
1,975
33,735
(189)
4,869
$ 232,998
(91)
$ (14,010)
10
3
186
—
—
$ 38,786
NGHC
$ 142,313
$ (12,899)
97
$ 38,786
Reciprocal Exchanges
Total
90,685
$ 232,998
(1,111)
$ (14,010)
89
186
—
$ 38,786
—
(125)
—
(77)
—
(3,105)
(58)
—
—
$ (3,365)
$ (3,365)
—
$ (3,365)
— $ 33,717
Unrealized
Losses
$ (7,349)
(125)
(3)
(169)
(658)
(8,699)
4,878
6,343
24,661
5,536
140,472
17,573
(92)
33,735
4,869
$ 271,784
$ 181,099
90,685
$ 271,784
(189)
(91)
$ (17,375)
$ (16,264)
(1,111)
$ (17,375)
1
—
8
—
10
3
—
—
22
22
—
22
December 31, 2013
Preferred Stock
States and political
subdivisions bonds
Corporate bonds
Residential mortgage-
backed securities
Commercial mortgage-
backed securities
Total
Less Than 12 Months
12 Months or More
Total
Fair
Market
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Market
Value
Unrealized
Losses
No. of
Positions
Held
Fair
Market
Value
Unrealized
Losses
$
4,348
$
(652)
1
$
— $
—
— $
4,348
$
(652)
32,770
128,362
(2,622)
(4,051)
176,491
(7,527)
8,128
$ 350,099
(51)
$ (14,903)
18
39
6
2
66
2,600
41,673
(580)
(2,993)
2
9
35,370
170,035
(3,202)
(7,044)
—
—
— 176,491
(7,527)
—
$ 44,273
—
$ (3,573)
—
11
8,128
$ 394,372
(51)
$ (18,476)
There were 208 and 77 securities at December 31, 2014 and 2013, respectively, that account for the gross unrealized loss,
none of which are deemed by the Company to be an other-than-temporary impairment ("OTTI"). Significant factors influencing
the Company’s determination that none of the securities are OTTI included the magnitude of unrealized losses in relation to cost,
the nature of the investment and management’s intent not to sell these securities and it being more likely than not that the Company
will not be required to sell these investments before anticipated recovery of fair value to the Company’s cost basis.
F-25
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
(f) Credit Quality of Investments
The table below summarizes the credit quality of our fixed maturities, securities pledged and preferred stock securities as of
December 31, 2014 and 2013, as rated by Standard & Poor’s.
NGHC
Reciprocal Exchanges
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
$
19,068
$
20,475
1.4% $
18,378
$
359,424
275,905
300,789
328,594
99,529
370,058
282,443
318,955
335,745
100,745
25.9%
19.8%
22.3%
23.5%
7.1%
24,956
—
99,754
48,440
33,345
18,504
25,027
—
100,412
48,486
33,127
8.2%
11.1%
—%
44.5%
21.5%
14.7%
$ 1,383,309
$1,428,421
100.0% $ 224,873
$ 225,556
100.0%
Cost or Amortized
Cost
Fair Value
$
$
30,656
$
69,893
377,956
170,879
207,764
38,053
895,201
$
31,575
69,616
374,479
181,621
210,336
37,232
904,859
Percentage of
Fixed Maturities
and Preferred
Securities
3.5%
7.7%
41.4%
20.1%
23.2%
4.1%
100.0%
December 31, 2014
U.S. Treasury
AAA
AA, AA+, AA-
A, A+, A-
BBB, BBB+, BBB-
BB+ and lower
Total
December 31, 2013
U.S. Treasury and federal agencies
AAA
AA, AA+, AA-
A, A+, A-
BBB, BBB+, BBB-
BB+ and lower
Total
The tables below summarize the investment quality of our corporate bond holdings and industry concentrations as of
December 31, 2014 and 2013.
December 31, 2014
Corporate Bonds:
Financial Institutions
Industrials
Utilities/Other
Total
NGHC
Reciprocal Exchanges
Total
AA+,
AA,
AA-
BBB+,
BBB,
BBB-
A+,A,A-
AAA
BB+ or
Lower
Fair
Value
1.4 %
— %
— %
1.4%
1.4 %
— %
1.4%
3.6 %
2.4 %
— %
6.0%
6.0 %
— %
6.0%
26.9 %
9.4 %
2.2 %
38.5%
34.0 %
4.5 %
38.5%
8.9 %
31.7 %
3.1 %
43.7%
38.6 %
5.1 %
43.7%
2.5 % $ 376,236
427,592
5.9 %
63,434
2.0 %
10.4% $ 867,262
8.3 % $ 762,822
2.1 %
104,440
10.4% $ 867,262
% of
Corporate
Bonds
Portfolio
43.3 %
49.4 %
7.3 %
100.0%
88.3 %
11.7 %
100.0%
F-26
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
AA+,
AA,
AA-
BBB+,
BBB,
BBB-
A+,A,A-
AAA
BB+ or
Lower
Fair
Value
% of
Corporate
Bonds
Portfolio
2.5%
—%
—%
2.5%
12.1%
1.8%
—%
13.9%
28.7%
4.7%
0.7%
34.1%
13.9%
26.7%
2.2%
42.8%
0.5% $ 283,766
4.3%
1.9%
184,649
23,380
57.7%
37.5%
4.8%
6.7% $ 491,795
100.0%
December 31, 2013
Corporate Bonds:
Financial Institutions
Industrials
Utilities/Other
(g) Restricted Cash and Investments
The Company, in order to conduct business in certain states, is required to maintain letters of credit or assets on deposit to
support state mandated regulatory requirements and certain third party agreements. The Company also utilizes trust accounts to
collateralize business with its reinsurance counterparties. These assets held are primarily in the form of cash or certain high grade
securities. The fair values of our restricted assets as of December 31, 2014 and 2013 are as follows:
December 31,
Restricted cash
Restricted investments - fixed maturities at fair value
Total restricted cash and investments
(h) Other
2014
2013
$
$
7,937
56,049
63,986
$
$
1,155
42,092
43,247
The Company enters into reverse repurchase and repurchase agreements, which are accounted for as either collateralized
lending or borrowing transactions and are recorded at contract amounts, which approximate fair value. For the collateralized
borrowing transactions (i.e., repurchase agreements), the Company receives cash or securities that it invests or holds in short-term
or fixed income securities.
As of December 31, 2014, the Company had collateralized borrowing transaction principal outstanding of $46,804 at interest
rates between 0.30% and 0.35%. As of December 31, 2013, the Company had collateralized borrowing transaction principal
outstanding of $109,629 at interest rates between 0.37% and 0.44%. Interest expense associated with the repurchase borrowing
agreements for the years ended December 31, 2014, 2013 and 2012 was $236, $276 and $416, respectively. The Company has
approximately $49,456 and $133,922 of collateral pledged in support for these agreements as of December 31, 2014 and 2013,
respectively.
As of December 31, 2014 and 2013, the Company had no collateralized lending transaction principal outstanding. Interest
income associated with lending agreements for the years ended December 31, 2014, 2013 and 2012 was $0, $61 and $11,
respectively.
5. Fair Value of Financial Instruments
ASC 820, “Fair Value Measurements and Disclosures”, provides a definition of fair value, establishes a framework for
measuring fair value, and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires
or allows assets or liabilities to be measured at fair value; therefore, it does not expand the use of fair value in any new circumstance.
The Company utilized a pricing service to estimate fair value measurements for approximately 100.0% of its fixed maturities.
For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and
includes these prices in the amounts disclosed in Level 1 of the fair value hierarchy. The Company receives the quoted market
prices from nationally recognized third-party pricing services (“pricing services”). When quoted market prices are unavailable,
the Company utilizes a pricing service to determine an estimate of fair value. This pricing method is used, primarily, for fixed
maturities. The fair value estimates provided by the pricing service are included in Level 2 of the fair value hierarchy. If the
F-27
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Company determines that the fair value estimate provided by the pricing service does not represent fair value or if quoted market
prices and an estimate from pricing services are unavailable, the Company produces an estimate of fair value based on dealer
quotations of the bid price for recent activity in positions with the same or similar characteristics to that being valued or through
consensus pricing of a pricing service. Depending on the level of observable inputs, the Company will then determine if the estimate
is in Level 2 or Level 3 of the fair value hierarchy.
The following describes the valuation techniques used by the Company to determine the fair value of financial instruments
held as of December 31, 2014.
Equity Securities The Company utilized a pricing service to estimate the fair value of the majority of its available for sale
and trading equity securities. The pricing service utilizes market quotations for equity securities that have quoted market prices in
active markets and their respective quoted prices are provided as fair value. The Company classifies the values of these equity
securities as Level 1. The pricing service also provides fair value estimates for certain equity securities whose fair value is based
on observable market information rather than market quotes. The Company classifies the value of these equity securities as Level
2. The Company also holds certain equity securities that are issued by privately-held entity or direct equity investments that do
not have an active market. The Company estimates the fair value of these securities primarily based on inputs such as third party
broker quote, issuers' book value, market multiples, and other inputs. These equity securities are classified as Level 3 due to
significant unobservable inputs used in the valuation.
U.S. Treasury and Federal Agencies Comprised of primarily bonds issued by the U.S. Treasury, the Federal Home Loan
Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association and the Federal National
Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active markets, and are
included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded
market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the
spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable
market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.
States and Political Subdivision Bonds Comprised of bonds and auction rate securities issued by U.S. state and municipality
entities or agencies. The fair values of municipal bonds are generally priced by pricing services. The pricing services typically use
spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipal
bonds are observable market inputs, these are classified within Level 2. Municipal auction rate securities are reported in the
consolidated balance sheets at cost which approximates their fair value.
Foreign Government Comprised of bonds issued by foreign governments, and are generally priced by pricing services. As
the significant inputs used to price foreign government bonds are observable market inputs, the fair values of foreign government
bonds are included in the Level 2 fair value hierarchy.
Corporate Bonds Comprised of bonds issued by corporations and are generally priced by pricing services. The fair values
of short-term corporate bonds are priced, by the pricing services, using the spread above the London Interbank Offering Rate
("LIBOR") yield curve and the fair value of long-term corporate bonds are priced using the spread above the risk-free yield curve.
The spreads are sourced from broker-dealers, trade prices and the new issue market. Where pricing is unavailable from pricing
services, the Company obtains non-binding quotes from broker-dealers. As the significant inputs used to price corporate bonds
are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.
Mortgage and Asset-backed Securities Comprised of commercial and residential mortgage-backed securities. These
securities are priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available
trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the significant inputs used to price are
observable market inputs, the fair value of these securities are included in the Level 2 fair value hierarchy.
Premiums and other receivable - The carrying values reported in the accompanying balance sheets for these financial
instruments approximate their fair values due to the short term nature of these assets.
Notes Payable - The amount reported in the accompanying balance sheets for this financial instrument represents the carrying
value of the debt. As of December 31, 2014, the current fair value of the Company's 6.75% Notes and Imperial Surplus Notes,
which are not publicly traded, were $276,014 and $4,982, respectively. The fair value of the Company’s 6.75% Notes was determined
using market-based metrics and the magnitude and timing of contractual interest and principal payments. The Imperial Surplus
F-28
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Notes were valued using the Black Derman-Toy interest rate lattice model. In addition, as of December 31, 2014, the current fair
value of the Reciprocal Exchanges' Surplus Notes, which are not publicly traded, was $42,000. The fair value of the Reciprocal
Exchanges' Surplus Notes was determined by discounting the estimated interest and principal payments by an appropriate yield.
All these financial liabilities are classified as Level 3 in the financial hierarchy.
In accordance with ASC 820, assets and liabilities measured at fair value on a recurring basis are as follows:
December 31, 2014
Recurring Fair Value Measures
Level 1
Level 2
Level 3
Total
$
6,535
$
— $
34,389
$
Assets
Equity securities:
Common stock
Preferred stock
Fixed maturities:
U.S. Treasury
Federal agencies
States and political subdivision bonds
Foreign government
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Short term investments
Total assets
NGHC
Reciprocal Exchanges
Total assets
Liabilities
Securities sold under agreements to repurchase
Total liabilities
$
$
$
$
$
—
—
—
—
—
—
—
—
—
40,924
7,695
38,979
98
177,409
5,536
867,262
470,636
80,992
5,370
—
34,389
34,389
—
34,389
$
$
$
10,540
1,705,441
1,469,395
236,046
1,705,441
— $
— $
46,804
46,804
—
7,695
38,979
—
—
—
—
—
—
—
—
45,514
45,514
—
45,514
$
$
$
—
98
177,409
5,536
867,262
470,636
80,992
5,370
10,540
1,625,538
1,389,492
236,046
1,625,538
— $
— $
46,804
46,804
$
$
$
$
$
F-29
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
December 31, 2013
Assets
Equity securities:
Common stock
Preferred stock
Fixed maturities:
U.S. Treasury and federal agencies
States and political subdivision bonds
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total assets
Liabilities
Securities sold under agreements to repurchase
Total liabilities
$
$
$
Recurring Fair Value Measures
Level 1
Level 2
Level 3
Total
$
1,939
$
—
31,575
—
—
—
—
— $
4,348
—
99,584
491,795
269,429
8,128
— $
—
—
—
—
—
—
33,514
$
873,284
$
— $
1,939
4,348
31,575
99,584
491,795
269,429
8,128
906,798
— $
— $
109,629
109,629
$
$
— $
— $
109,629
109,629
The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets for the year
ended December 31, 2014:
Balance as of
January 1,
2014
Net
income
(loss)
Other
comprehensive
income (loss)
Purchases
and
issuances
Sales and
settlements
Net transfers
into (out of)
Level 3
Balance as of
December 31,
2014
Common stock
Total
$
$
— $
— $
— $
— $
(7,328) $
(7,328) $
41,717
41,717
$
$
— $
— $
— $
— $
34,389
34,389
There have not been any transfers between Level 1 and Level 2, or Level 2 and Level 3, respectively, during the periods
represented by these Consolidated Financial Statements.
The Company does not measure any assets or liabilities at fair value on a nonrecurring basis at December 31, 2014. The
carrying value of the Company’s cash and cash equivalents, premium and other receivables, accrued interest, accounts payable
and accrued expenses approximates fair value given the short-term nature of such items.
F-30
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
6. Equity Investments in Unconsolidated Subsidiaries
In 2010, the Company and AmTrust Financial Services, Inc. (“AmTrust”) formed Tiger Capital LLC (“Tiger”) for the purposes
of acquiring certain life settlement contracts whereby each holds a 50% ownership interests in Tiger. In 2011, the Company, through
its wholly-owned subsidiary, American Capital Acquisition Investments, Ltd. (“ACAI”), formed AMT Capital Alpha, LLC (“AMT
Alpha”) with AmTrust for the purposes of acquiring additional life settlement contracts.
On March 28, 2013, the Company entered into a Stock Purchase Agreement with ACP Re Ltd. ("ACP Re") to acquire 50%
of the issued and outstanding shares of AMT Capital Holdings S.A. (“AMTCH”), a Luxembourg Societe Anonyme, for a cash
contribution in the amount of $12,136. ACP Re and the Company are majority owned and controlled by a common parent and the
transaction was accounted for as between entities under common control. AMTCH’s primary purpose is to acquire certain life
settlement contracts. AmTrust owns the remaining 50% of AMTCH. The Company accounts for AMTCH using the equity method
of accounting. The Company’s 50% equity interest in AMTCH at the acquisition date was approximately $22,411. The difference
between the equity interest and consideration paid was recorded as additional paid-in capital of $10,275.
In December 2013, ACAI and AmTrust formed AMT Capital Holdings II S.A (“AMTCH II”). The company is equally owned
by both parties and was established for the purpose of acquiring additional life settlement contracts.
A life settlement contract is a contract between the owner of a life insurance policy and a third party who obtains the ownership
and beneficiary rights of the underlying life insurance policy. The Company, along with AmTrust, is obligated to pay premiums
on these life insurance policies as they come due. A third party serves as the administrator for two of the life settlement contract
portfolios, for which it receives an administrative fee. The third-party administrator is eligible to receive a percentage of profits
after certain time and performance thresholds have been met.
Tiger, AMT Alpha, AMTCH and AMTCH II are considered to be variable interest entities (“VIE”), for which the Company
is not a primary beneficiary. In determining whether it is the primary beneficiary of a VIE, the Company considered qualitative
and quantitative factors, including, but not limited to, activities that most significantly impact the VIE's economic performance
and which party controls such activities. The Company does not have the ability to direct the activities of Tiger, AMT Alpha,
AMTCH and AMTCH II that most significantly impact its economic performance. The Company’s maximum exposure to a loss
as a result of its involvement with the unconsolidated VIE is limited to its recorded investment plus additional capital commitments.
The Company uses the equity method of accounting to account for its investments in Tiger, AMT Alpha, AMTCH and AMTCH
II (collectively, “LSC Entities”).
The Company currently has a fifty percent ownership interest in the LSC Entities. AmTrust owns the remaining fifty percent
interest in the LSC Entities.
The following tables present the investment activity in the LSC Entities.
Year Ended December 31,
Balance at beginning of year
Distributions
Contributions
Acquisition of interest
Equity in earnings (losses) of unconsolidated subsidiaries
Change in equity method investments
Balance at end of year
2014
126,186
—
18,056
—
1,847
19,903
146,089
$
$
$
$
2013
2012
66,484
—
35,391
22,411
1,900
59,702
126,186
$
$
58,636
(619)
10,028
—
(1,561)
7,848
66,484
F-31
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following tables summarize total assets and total liabilities as of December 31, 2014, 2013 and 2012 and the results of
operations for the Company’s unconsolidated equity method investment in the LSC Entities for the years ended December 31,
2014, 2013 and 2012.
Condensed balance sheet data
As of December 31,
2014
2013
2012
Investments in life settlement contracts at fair value
$
264,517
$
233,024
$
211,764
Total assets
Total liabilities
Members' equity
NGHC's 50% ownership interest
Condensed results of operations
Year Ended December 31,
Revenue, net of commission
Total expenses
Net income (loss)
NGHC's 50% ownership interest
318,598
26,420
292,178
270,758
18,387
252,371
211,925
78,958
132,967
$
146,089
$
126,186
$
66,484
2014
2013
2012
$
$
$
50,447
46,753
3,694
1,847
$
$
$
7,828
4,029
3,799
1,900
$
$
$
1,707
4,829
(3,122)
(1,561)
The LSC Entities account for investments in life settlements in accordance with ASC 325-30, "Investments in Insurance
Contracts", which states that an investor shall elect to account for its investments in life settlement contracts by using either the
investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. The
LSC Entities have elected to account for these policies using the fair value method. As no comparable market pricing is available,
the LSC Entities determine fair value based upon their estimate of the discounted cash flow related to policies (net of the reserves
for improvements in mortality, the possibility that the high net worth individuals represented in their portfolios may have access
to better health care, the volatility inherent in determining the life expectancy of insureds with significant reported health
impairments, the possibility that the issuer of the policy or a third party will contest the payment of the death benefit payable to
the LSC Entities, and the future expenses related to the administration of the portfolio), which incorporates current life expectancy
assumptions, premium payments, the credit exposure to the insurance company that issued the life settlement contracts and the
rate of return that a buyer would require on the contracts.
The fair value of life settlement contracts as well as life settlement profit commission liability is based on information available
to the LSC Entities at the end of the reporting period. The LSC Entities consider the following factors in their fair value estimates:
cost at date of purchase, recent purchases and sales of similar investments (if available and applicable), financial standing of the
issuer, changes in economic conditions affecting the issuer, maintenance cost, premiums, benefits, standard actuarially developed
mortality tables and life expectancy reports prepared by nationally recognized and independent third party medical underwriters.
The LSC Entities estimate the fair value of a life insurance policy by applying an investment discount rate based on the cost of
funding their life settlement contracts as compared to returns on investments in asset classes with comparable credit quality, which
the LSC Entities have determined to be 7.5% to the expected cash flow generated by the policies in the life settlement portfolio
(death benefits less premium payments), net of policy specific adjustments and reserves. In order to confirm the integrity of their
calculation of fair value, the LSC Entities, quarterly, retain an independent third-party actuary to verify that the actuarial modeling
used by the LSC Entities to determine fair value was performed correctly and that the valuation, as determined through the LSC
Entities’ actuarial modeling, is consistent with other methodologies. The LSC Entities consider this information in their assessment
of the reasonableness of the life expectancy and discount rate inputs used in the valuation of these investments.
The LSC Entities adjust the standard mortality for each insured for the insured’s life expectancy based on reviews of the
insured’s medical records. The LSC Entities establish policy specific reserves for the following uncertainties: improvements in
mortality, the possibility that the high net worth individuals represented in their portfolios may have access to better health care,
the volatility inherent in determining the life expectancy of insureds with significant reported health impairments, the possibility
that the issuer of the policy or a third party will contest the payment of the death benefit payable to the LSC Entities, and the future
expenses related to the administration of the portfolio. The application of the investment discount rate to the expected cash flow
F-32
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
generated by the portfolio, net of the policy specific reserves, yields the fair value of the portfolio. The effective discount rate
reflects the relationship between the fair value and the expected cash flow gross of these reserves.
The following summarizes data utilized in estimating the fair value of the portfolio of life insurance policies as of December 31,
2014 and 2013 and, only includes data for policies to which the LSC Entities assigned value at those dates:
Average age of insured
Average life expectancy, months(1)
Average face amount per policy
Effective discount rate(2)
December 31, 2014
December 31, 2013
81.1 years
121
6,624
$
14.0%
80.1 years
131
6,611
14.2%
$
(1) Standard life expectancy as adjusted for specific circumstances.
(2) Effective Discount Rate ("EDR") is the LSC Entities estimated internal rate of return on its life settlement contract portfolio
and is determined from the gross expected cash flows and valuation of the portfolio. The valuation of the portfolio is calculated
net of all reserves using a 7.5% discount rate. The EDR is implicit of the reserves and the gross expected cash flows of the portfolio.
The LSC Entities anticipate that the EDR's range is between 12.5% and 17.5% and reflects the uncertainty that exists surrounding
the information available as of the reporting date. As the accuracy and reliability of information improves (declines), the EDR will
decrease (increase). The change in the EDR from December 31, 2013 to December 31, 2014 resulted from routine updating of life
expectancies and other factors relating to operational risk.
The LSC Entities' assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be
significant. The fair value measurements used in estimating the present value calculation are derived from valuation techniques
generally used in the industry that include inputs for the asset that are not based on observable market data. The extent to which
the fair value could reasonably vary in the near term has been quantified by evaluating the effect of changes in significant underlying
assumptions used to estimate the fair value amount. If the life expectancies were increased or decreased by 4 months and the
discount factors were increased or decreased by 1% while all other variables were held constant, the carrying value of the investment
in life insurance policies would increase or (decrease) by the unaudited amounts summarized below as of December 31, 2014 and
2013:
Investment in life policies:
December 31, 2014
December 31, 2013
Change in life expectancy
Plus 4 Months
Minus 4 Months
$(34,686)
$(29,537)
$36,486
$31,313
Change in discount rate(1)
Plus 1%
Minus 1%
Investment in life policies:
December 31, 2014
December 31, 2013
(1) Discount rate is a present value calculation that considers legal risk, credit risk and liquidity risk and is a component of EDR.
$(22,705)
$(20,055)
$25,456
$22,605
The Company and AmTrust are committed to providing additional capital support to the LSC Entities to keep the life settlement
policies in-force. The Company and AmTrust, each, are committed to provide 50% of the additional required capital. Below is a
summary of total premiums to be paid for each of the five succeeding fiscal years to keep the existing life insurance policies in
force as of December 31, 2014. The actual capital commitment may differ from the amounts shown based on policy lapses and
terminations, death benefits received and other operating cash flows of the LSC Entities:
F-33
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
2015
2016
2017
2018
2019
Thereafter
Total
Premiums Due on Life
Settlement Contracts
$
$
40,961
54,208
52,291
40,117
39,777
552,579
779,933
In August 2011, the Company formed 800 Superior, LLC with AmTrust, for the purposes of acquiring an office building in
Cleveland, Ohio. The cost of the building was approximately $7,500. AmTrust has been appointed managing member of 800
Superior, LLC. The Company and AmTrust each have a 50% ownership interest in 800 Superior, LLC for which the Company is
not the primary beneficiary. Additionally, in 2012, the Company entered into an office lease with 800 Superior, LLC for
approximately 134,000 square feet (see Note 16, "Related Party Transactions"). The lease period is for 15 years and the Company
paid 800 Superior, LLC $2,243, $2,143 and $1,391 for the years ended December 31, 2014, 2013 and 2012, respectively.
In September 2012, the Company formed East Ninth & Superior, LLC and 800 Superior NMTC Investment Fund II, LLC
with AmTrust (collectively “East Ninth & Superior”) (see Note 16, "Related Party Transactions"). The Company and AmTrust
each have a 50% ownership interest in East Ninth and Superior, LLC and a 24.5% ownership interest in 800 Superior NMTC
Investment Fund II, LLC for which the Company is not a primary beneficiary.
The Company’s equity interest in 800 Superior, LLC for the years ended December 31, 2014 and 2013 was $2,140 and
$2,863, respectively. For the years ended December 31, 2014, 2013 and 2012, the Company recorded equity in earnings (losses)
from 800 Superior, LLC of $(737), $(558), and $142, respectively. The Company’s equity interest in East Ninth & Superior for
the years ended December 31, 2014 and 2013 was $4,079 and $4,009, respectively. For the years ended December 31, 2014, 2013
and 2012, the Company recorded equity in earnings (losses) from East Ninth & Superior of $70, $(57), and $81, respectively.
The Company also has a 34.74% ownership interest in American Tax Credit Georgia Fund III, LLC (“ATC”) which in turn
is an investor in apartment complexes that qualify for credits under Georgia Affordable Housing Act. Unrelated third parties own
the remaining 65.26% interest in ATC. The Company’s interest in ATC as of December 31, 2014 and 2013 was $0 and $135,
respectively. For the years ended December 31, 2014, 2013 and 2012, the Company recorded equity in losses from ATC in the
amount of $(135), $(260) and $(260), respectively.
7. Acquisitions
On September 15, 2014, ACP Re, a Bermuda reinsurer that is a subsidiary of The Michael Karfunkel 2005 Grantor Retained
Annuity Trust (the “Karfunkel GRAT”), completed the acquisition of 100% of the outstanding stock of Tower Group International,
Ltd. ("Tower") and caused its subsidiary to merge into Tower (the "Merger") pursuant to a merger agreement, dated January 3,
2014, by and between ACP Re and Tower.
In connection with the Merger, the Company acquired two management companies from ACP Re for $7,500. The management
companies (together, the “Management Companies”) are the attorneys-in-fact for Adirondack Insurance Exchange, a New York
reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer. The Company also agreed to
pay ACP Re contingent consideration in the form of a three year earn-out (the "Contingent Payments") of 3% of the gross premium
written of the Tower personal lines business written or assumed by the Company following the Merger, capped at payments in the
amount of $30,000 in the aggregate. The fair value of the Contingent Payments was estimated to be $26,100 at the acquisition
date. As the Company purchased the Management Companies and renewal rights from a commonly controlled company, the excess
of carryover basis of net assets acquired over the purchase price was recorded as a capital contribution.
F-34
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the acquisition date:
September 2014
Assets
Cash
Fee receivable
Intangible assets
Total Assets
Liabilities
Due to related party
Deferred tax liability
Total Liabilities
Net assets purchased
Purchase price
Additional paid-in capital
$
$
70
3,010
144,700
147,780
26,100
39,965
66,065
81,715
7,500
74,215
The intangible assets related to the acquisition of the Management Companies were assigned to the Property and Casualty
segment.
On July 1, 2014, the Company reacquired Agent Alliance Insurance Company (“AAIC”), an Alabama-domiciled insurer
focused on private passenger auto business in North Carolina which is also licensed as a surplus lines carrier in over 30 states,
from ACP Re for a purchase price equal to AAIC’s capital and surplus of approximately $17,343. Following the Company's 2012
sale of AAIC to ACP Re, the Company had continued to reinsure 100% of its existing and renewal private passenger auto insurance.
The following table summarizes the carrying value of assets acquired and liabilities assumed at the acquisition date:
July 2014
Assets
Cash and invested assets
Accrued interest
Premium receivable
Reinsurance recoverable
Prepaid reinsurance
Intangible assets
Goodwill
Income tax receivable
Total Assets
Liabilities
Unpaid loss and loss adjustment expense reserves
Accounts payable and accrued expenses
Unearned premiums
Reinsurance payable
Notes payable
Deferred tax
Total Liabilities
Net assets purchased
F-35
$
$
15,535
138
992
6,966
1,608
900
1,005
84
27,228
6,867
323
1,608
397
350
340
9,885
17,343
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The intangible assets related to the acquisition of AAIC were assigned to the Property and Casualty segment.
On June 27, 2014, the Company purchased certain assets of Imperial Management Corporation ("Imperial"), including its
underwriting subsidiaries Imperial Fire & Casualty Insurance Company and National Automotive Insurance Company, its retail
agency subsidiary ABC Insurance Agencies, and its managing general agency subsidiary RAC Insurance Partners. The purchase
price was approximately $20,000. In connection with the Imperial transaction, the Company assumed certain debt of Imperial and
Imperial Fire & Casualty Insurance Company (see Note 15, "Debt").
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the acquisition date:
June 2014
Assets
Cash and invested assets
Accrued interest
Premium receivable
Reinsurance recoverable
Prepaid reinsurance
Premises and equipment
Intangible assets
Income tax receivable
Other
Total Assets
Liabilities
Unpaid loss and loss adjustment expense reserves
Accounts payable and accrued expenses
Unearned premiums
Reinsurance payable
Notes payable
Total Liabilities
Net assets purchased
Purchase price
Goodwill recorded
$
$
61,011
484
37,348
13,445
36,203
1,893
15,100
104
214
165,802
42,796
17,253
50,178
29,223
8,916
148,366
17,436
20,000
2,564
The goodwill and intangible assets related to the Imperial acquisition were assigned to the Property and Casualty segment.
On April 1, 2014, the Company purchased Personal Express Insurance Company (“Personal Express”), a California domiciled
personal auto and home insurer from Sequoia Insurance Company, an affiliate of AmTrust. The purchase price was $21,496.
F-36
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the acquisition date:
April 2014
Assets
Cash and invested assets
Premium receivable
Deferred tax
Intangible assets
Other assets
Total Assets
Liabilities
Unpaid loss and loss adjustment expense reserves
Unearned premiums
Reinsurance payable
Accounts payable and accrued expenses
Total Liabilities
Net assets purchased
Purchase price
Goodwill recorded
$
$
28,725
2,915
119
2,700
729
35,188
4,472
8,352
816
3,186
16,826
18,362
21,496
3,134
The goodwill and intangible assets related to the Personal Express acquisition were assigned to the Property and Casualty
segment.
On January 16, 2014, the Company through its wholly-owned subsidiary, National General Holdings Luxembourg, acquired
a 100% equity interest of a Luxembourg reinsurer, Anticemex Reinsurance S.A., for approximately $62,973. The entity was
renamed National General Beta Re (“Beta”). Beta is a reinsurer incorporated in Luxembourg that allows the Company to obtain
the benefits of its capital and utilization of its existing and future loss reserves through a series of reinsurance agreements with
one of the Company’s subsidiaries.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the acquisition date:
January 2014
Assets
Cash and invested assets
Prepaid assets
Loan receivable
Intangible assets
Total Assets
Liabilities
Accounts payable and accrued expenses
Deferred tax liability
Total Liabilities
Net assets purchased
Purchase price
Goodwill recorded
$
$
6,393
1
62,973
132
69,499
20
19,123
19,143
50,356
62,973
12,617
The goodwill and intangible assets related to the Beta acquisition were assigned to the Accident and Health segment.
F-37
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
In December 2013, the Company acquired all of the issued and outstanding stock of Ikano Re S.A for $35,741. The entity
was renamed National General Alpha Re (“Alpha”). Alpha is a reinsurer incorporated in Luxembourg that allows the Company
to obtain the benefits of its capital and utilization of its existing and future loss reserves through a series of reinsurance agreements
with one of the Company’s subsidiaries.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the acquisition date:
December 2013
Assets
Cash and invested assets
Prepaid assets
Intangible assets
Total Assets
Liabilities
Accounts payable and accrued expenses
Deferred tax liability
Total Liabilities
Net assets purchased
Purchase price
Goodwill recorded
$
$
39,542
196
132
39,870
57
10,241
10,298
29,572
35,741
6,169
The goodwill and intangible assets related to the Alpha acquisition were assigned to the Property and Casualty segment.
On April 15, 2013, the Company acquired Euro Accident Health & Care Insurance Aktiebolag (“EHC”) for an initial purchase
price of approximately $23,640 in cash and $19,200 in deferred purchase obligations. The transaction includes a deferred purchase
price arrangement whereby, once EBITDA (including EBITDA of a Company affiliate which will underwrite products sold by
EHC) which when combined with EHC’s equity at closing exceeds the initial purchase price, the Company shall pay the seller an
amount corresponding to fifty percent of EHC’s EBITDA (including EBITDA of a Company affiliate which will underwrite
products sold by EHC) for each of the fiscal years 2015, 2016, 2017 and 2018. The Company originally estimated the total purchase
price, including the fair value of the deferred arrangement, to be approximately $42,840. EHC is a limited liability company
incorporated and registered under the laws of Sweden and primarily administers accident and health business in that region.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the acquisition date:
April 2013
Assets
Cash and invested assets
Receivables
Intangible assets
Premises and equipment
Prepaid and other assets
Total Assets
Liabilities
Accounts payable and accrued expenses
Deferred tax liability
Total liabilities
Net assets purchased
Purchase price
Goodwill recorded
F-38
$
$
873
10,786
20,100
1,731
146
33,636
10,706
5,720
16,426
17,210
42,840
25,630
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The goodwill and intangible assets related to the acquisition of EHC are assigned to the Accident and Health segment.
8. Goodwill and Intangible Assets, Net
Goodwill
Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired. The Company performs an
annual impairment analysis to identify potential goodwill impairment and measures the amount of a goodwill impairment loss to
be recognized. This annual test is performed during the fourth quarter of each year, or more frequently, if events or circumstances
change in a way that requires the Company to perform the impairment analysis on an interim basis. Goodwill impairment testing
requires an evaluation of the estimated fair value of each reporting unit to its carrying value, including goodwill. An impairment
charge is recorded if the estimated fair value is less than the carrying amount of the reporting unit.
Intangible Assets
Intangible assets consist of finite and indefinite life assets. Finite life intangible assets include customer and producer
relationships and trademarks. Insurance company licenses and managements contracts are considered indefinite life intangible
assets subject to annual impairment testing.
The composition of goodwill and intangible assets at December 31, 2014 and December 31, 2013 consisted of the following:
December 31, 2014
Trademarks
Loss reserve discount
Agent relationships
Affinity partners
Operating lease
Non-compete
Value in policies-in-force
Renewal rights
Management contracts
State licenses
Goodwill
Total
NGHC
Reciprocal Exchanges
Total
2,463
380
Useful Life
5 years
7 years
34,050
11 - 17 years
11 years
4.6 years
5 years
1 year
7 years
indefinite life
indefinite life
indefinite life
437
—
83
6,033
24,626
118,600
62,165
70,764
319,601
308,168
11,433
319,601
Gross
Balance
Accumulated
Amortization
Net Value
$
8,200
$
5,737
$
12,451
43,652
800
3,508
2,500
8,501
26,100
118,600
62,165
70,764
357,241
343,339
13,902
357,241
$
$
$
$
$
$
12,071
9,602
363
3,508
2,417
2,468
1,474
—
—
—
37,640
35,171
2,469
37,640
$
$
$
F-39
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Gross
Balance
Accumulated
Amortization
Net Value
$
5,900
$
4,757
$
12,451
31,850
800
3,508
2,500
54,715
70,351
11,672
3,591
289
2,934
1,917
—
—
1,143
779
Useful Life
5 years
7 years
28,259
11 - 17 years
511
574
583
11 years
4.6 years
5 years
54,715
70,351
indefinite life
indefinite life
$
182,075
$
25,160
$
156,915
December 31, 2013
Trademarks
Loss reserve discount
Agent relationships
Affinity partners
Operating lease
Non-compete
State licenses
Goodwill
Total
Goodwill and intangible assets are subject to annual impairment testing or on an interim basis whenever events or changes
in circumstances indicate that the carrying value of a reporting unit may not be recoverable. Finite-lived intangible assets are
amortized under the straight-line method, except for loss reserve discounts, which the Company amortizes using an accelerated
method, which approximates underlying claim payments. The Company also uses the accelerated method of amortization for
affinity partners and agents’ relationships based on the estimated attrition of those relationships. For the years ended December 31,
2014, 2013 and 2012, the Company amortized approximately $13,791, $6,420, and $6,031, respectively, related to its intangible
assets with a finite life, which includes amortization relating to intangibles owned by the Reciprocal Exchanges of $2,468 for the
year ended December 31, 2014. Included in the Company’s amortization expense for the year ended December 31, 2014 is an
impairment charge of $812 related to certain agent relationship intangible assets.
The estimated aggregate amortization expense for each of the next five years and thereafter is:
Year ending
2015
2016
2017
2018
2019
Thereafter
NGHC
Reciprocal
Exchanges
Total
$
9,812
$
6,493
$
16,305
10,329
10,330
6,325
5,585
17,358
59,739
$
460
460
460
460
—
8,333
$
$
10,789
10,790
6,785
6,045
17,358
68,072
F-40
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The changes in the carrying amount of goodwill by segment for the years ended December 31, 2014, 2013 and 2012 are as
follows:
Balance as of January 1, 2012
Goodwill additions
Sale of subsidiary
Impairment
Balance as of January 1, 2013
Goodwill additions
Impairment
Balance as of January 1, 2014
Goodwill additions
Foreign currency adjustments
Impairment
Balance as of December 31, 2014
Property and
Casualty
Accident and
Health
Total
$
$
$
$
4,727
$
— $
29,035
(1,005)
(4,683)
28,074
6,169
(1,445)
32,798
6,703
—
(9,419)
30,082
$
$
$
12,125
—
—
12,125
$
25,428
—
37,553
$
12,819
(3,317)
(6,373)
40,682
$
4,727
41,160
(1,005)
(4,683)
40,199
31,597
(1,445)
70,351
19,522
(3,317)
(15,792)
70,764
The Company performs an impairment analysis at the reporting unit level using a two-step impairment test. In evaluating
goodwill for potential impairment, management compares the fair value of the reporting unit to the carrying value. If the carrying
value of the reporting unit exceeds the fair value, the goodwill is considered impaired, and a second test is performed to measure
the amount of impairment loss. In the case of each Luxembourg reporting unit (“RU”), a step 1 analysis was performed to determine
whether impairment existed using a December 31 measurement date. Since Luxembourg reinsurers are regularly bought and sold
between third parties and the transaction data information is available, the Guideline Transactions Method of the Market Approach
was utilized to determine the fair value of the RU. The Guideline Transactions Method is based on valuation multiples derived
from actual transactions for comparable companies and were used to develop an estimate of value for the subject company. In
applying this method, valuation multiples are derived from historical data of selected transactions, then evaluated and adjusted, if
necessary, based on the strengths and weaknesses of the subject company relative to the derived market data. In the case of the
RU, the most appropriate multiple to utilize was determined to be a Price to Invested Assets (“P/IA”) multiple, since invested
assets and the corresponding regulatory reserves are metrics utilized by market participants to negotiate the purchase price of the
transaction. These P/IA multiples are then applied to the appropriate invested assets of the subject company to arrive at an indication
of fair value. Step 1 of the impairment test indicated that RU’s carrying value exceeded its fair value. Accordingly the Company
performed a Step 2 impairment test and recorded in General and administrative expenses in our Consolidated Statements of Income,
non-cash goodwill impairment charges of $15,792, $1,445 and $4,683 as of December 31, 2014, 2013 and 2012, respectively. As
of December 31, 2014, approximately $25,900 of the Company's goodwill balance was related to the Company's Luxembourg
reinsurer subsidiaries.
F-41
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
9. Premiums and Other Receivables, Net
Premiums and other receivables, net at December 31, 2014 and 2013 consisted of the following:
December 31,
Premiums receivable
Reinsurance recoverable on paid losses and loss adjustment expenses (Related parties -
$14,603 and $74,006)
Commission receivables
Investment receivables
Other receivables
Allowance for uncollectible amounts
Total premiums and other receivables, net
NGHC
Reciprocal Exchanges
Total premiums and other receivables, net
10. Premises and Equipment, Net
2014
2013
$
653,922
$
332,196
59,318
14,234
19,072
20,973
(9,728)
757,791
699,553
58,238
757,791
$
$
$
104,619
13,197
1,353
3,951
(6,064)
449,252
449,252
—
449,252
$
$
$
The composition of premises and equipment as of December 31, 2014 and 2013 consisted of the following:
December 31, 2014
Land
Buildings
Leasehold improvements
Furniture and equipment
Hardware and software
Work-in-process systems and software
December 31, 2013
Buildings
Leasehold improvements
Furniture and equipment
Hardware and software
Work-in-process systems and software
$
Cost
287
4,013
4,505
581
70,104
2,091
Accumulated
Depreciation
$
— $
208
228
133
50,429
—
Net Value
287
3,805
4,277
448
19,675
2,091
$
81,581
$
50,998
$
30,583
Cost
3,758
2,847
367
64,318
329
71,619
$
$
Accumulated
Depreciation
197
$
2,406
77
39,404
—
42,084
$
$
$
Net Value
3,561
441
290
24,914
329
29,535
Depreciation and amortization expense related to premises and equipment for the years ended December 31, 2014, 2013
and 2012 was $14,457, $13,685 and $13,958, respectively.
F-42
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
11. Income Taxes
The Company files a consolidated Federal income tax return. The Reciprocal Exchanges are not included in the Company's
consolidated tax return as the Company does not have an ownership interest in the Reciprocal Exchanges, and they are not a part
of the consolidated tax sharing agreement.
Federal income tax expense attributable to income from continuing operations consisted of the following:
Current expense (benefit)
Federal
Foreign
Total current tax expense
Deferred expense (benefit)
Federal
Foreign
Total deferred tax expense (benefit)
Provision for income taxes
Year Ended December 31,
2014
Reciprocal
Exchanges
Total
2013
Total
2012
Total
NGHC
$
$
$
$
86,250
—
86,250
$
$
(42,301) $
(21,237)
(63,538)
22,712
$
$
$
$
1,020
—
1,020
144
—
144
1,164
$
87,270
—
87,270
$
$
18,446
—
18,446
$
$
47,958
—
47,958
(42,157) $
(21,237)
(63,394)
23,876
$
(5,519) $
(1,787)
(7,306)
11,140
$
(30,651)
(4,998)
(35,649)
12,309
The domestic and foreign components of income before taxes and equity in earnings of unconsolidated subsidiaries for the
years ended December 31, 2014, 2013 and 2012 are as follows:
Domestic
Foreign
Total
Year Ended December 31,
2014
Reciprocal
Exchanges
Total
2013
Total
2012
Total
NGHC
$
$
195,148
(71,375)
123,773
$
$
3,670
—
3,670
$
$
198,818
(71,375)
127,443
$
$
33,873
18,384
52,257
$
$
70,674
(24,321)
46,353
F-43
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Deferred income taxes are recognized for the future tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. The tax effects of temporary differences that give rise to the net deferred
tax liability are presented below:
Deferred tax assets:
Accrued expenses
Unearned premiums
Bad debt
Depreciation
Contingent commissions
Loss reserve discounting
Suspended Subpart F losses
Net operating loss carryforwards
Capital loss carryforwards
Partnership Activity
Impairments
Goodwill
Unearned revenue
APIC Stock Compensation
Alternative minimum tax credits
Other
Gross deferred tax assets
Less: Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Deferred acquisition costs
Investments items
Intangible assets
Premises and equipment
Statutory equalization reserves
Unrealized capital gains
Surplus Note Interest
Other
Gross deferred tax liabilities
Deferred tax liability, net
December 31,
2014
Reciprocal
Exchanges
Total
2013
Total
NGHC
$
24,772
$
1,915
$
26,687
$
50,128
6,611
56,739
3,212
982
9,102
7,310
34,309
3,042
1,247
706
786
539
2,662
2,204
1,112
2,174
144,287
—
144,287
42,830
1,366
69,267
4,759
40,872
13,848
—
478
173,420
29,133
$
90
—
—
1,233
—
15,159
62
—
—
—
—
—
611
562
3,302
982
9,102
8,543
34,309
18,201
1,309
706
786
539
2,662
2,204
1,723
2,736
26,243
(21,518)
4,725
170,530
(21,518)
149,012
1,525
364
2,908
—
—
2,256
36,074
—
43,127
38,402
44,355
1,730
72,175
4,759
40,872
16,104
36,074
478
216,547
67,535
$
$
$
8,275
31,563
2,118
3,018
10,746
2,548
7,934
3,331
692
1,017
238
—
—
—
—
2,307
73,787
—
73,787
21,946
730
24,810
4,759
42,965
2,598
—
455
98,263
24,476
Excluding the Reciprocal Exchanges, there were no deferred tax asset valuation allowances at December 31, 2014 and 2013.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this assessment. Management believes that it is more likely than not
that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
F-44
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The earnings of certain of the Company's foreign subsidiaries have been indefinitely reinvested in foreign operations.
Therefore, no provision has been made for any U.S. taxes or foreign withholding taxes that may be applicable upon any repatriation
or disposition. At December 31, 2014, 2013 and 2012, the undistributed earnings of the Company’s foreign affiliates were
approximately $9,966, $8,417 and $1,570, respectively. It should be noted that the total cumulative earnings for the Company’s
foreign subsidiaries is negative for 2012, 2013 and 2014. The determination of any unrecognized deferred tax liability for temporary
differences related to investments in certain of the Company’s foreign subsidiaries is not practicable.
Excluding the Reciprocal Exchanges, the Company has net operating carryforwards of $8,693, $9,517 and $7,042 available
for tax purposes for the years December 31, 2014, 2013 and 2012, respectively. The net operating loss carryforwards expire between
December 31, 2029 and December 31, 2034.
Total income tax expense is different from the amount determined by multiplying earnings before income taxes by the
statutory Federal tax rate of 35.00%. The reasons for such differences are as follows:
Year Ended December 31, 2014
Income (loss) before taxes
Tax rate
Computed "expected" tax expense
Increase (decrease) in actual tax reported resulting from:
Tax-exempt interest
Non-deductible meals and entertainment
Exempt foreign income
Goodwill impairment
Statutory equalization reserves
State tax
Other permanent items
Total income tax reported
Year Ended December 31, 2013
Income before taxes
Tax rate
Computed "expected" tax expense
Increase (decrease) in actual tax reported resulting from:
Tax-exempt interest
Non-deductible meals and entertainment
Exempt foreign income
Goodwill impairment
Statutory equalization reserves
State tax
Return to provision
Other permanent items
Total income tax reported
NGHC
Amount
Reciprocal
Exchanges
Total
Amount
Amount
Tax Rate
$ 123,773
35.00%
$
43,321
$
$
3,670
$ 127,443
35.00%
35.00%
1,285
$
44,606
35.00%
(978)
273
(4,304)
5,527
(21,237)
2,453
(2,343)
22,712
$
(86)
—
—
—
—
—
(35)
1,164
$
$
(1,064)
273
(4,304)
5,527
(21,237)
2,453
(2,378)
23,876
(0.83)
0.21
(3.38)
4.34
(16.66)
1.92
(1.86)
18.74%
Total
Amount
Tax Rate
$
$
$
52,257
35.00%
18,290
(903)
129
(4,201)
413
(1,787)
3,309
(2,479)
(1,631)
11,140
35.00%
(1.73)
0.25
(8.04)
0.79
(3.42)
6.33
(4.74)
(3.12)
21.32%
F-45
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
In 2013, the Company recorded a return to provision (RTP) adjustment of $(2,479), of which $(2,011) was related to a true
up of estimated permanent items on the Company’s separate company federal tax return for its subsidiary National Health Insurance
Company. The Company acquired additional information with regard to these permanent items following the completion of its
2012 financial statements. These adjustments were not material to the 2013 or 2012 financial statements.
Year Ended December 31, 2012
Income before taxes
Tax rate
Computed “expected” tax expense
Increase (decrease) in actual tax reported resulting from:
Tax-exempt interest
Non-deductible meals and entertainment
Exempt foreign income
Loss on sale of company
State tax
Goodwill impairment
Statutory equalization reserves
Prior year deferral adjustment
Other permanent items
Total income tax reported
Total
Amount
45,015
35.00%
15,755
(1,030)
128
(547)
(1,305)
1,172
1,696
(4,998)
2,164
(726)
12,309
$
$
$
Tax Rate
35.00%
(2.29)
0.28
(1.22)
(2.90)
2.60
3.77
(11.10)
4.81
(1.61)
27.34%
In 2012, the Company recorded a net prior year adjustment of $2,164, of which $3,001 was related to deferred tax return to
provision adjustments from the 2010 tax return that were not properly incorporated into the 2011 income tax provision and $(837)
was due to a misstatement in the actual 2011 pre-tax income as compared to the pre-tax income used for the income tax provision
in 2011. These adjustments were not material to the 2012 or 2011 financial statements.
The Company owns a number of Luxembourg licensed reinsurers. Luxembourg reinsurers record a statutory equalization
reserve which is a compulsory volatility or catastrophe reserve in excess of ordinary reserves determined by a formula based on
the volatility of the business ceded to the reinsurance company. Equalization reserves are required to be established for Luxembourg
statutory and tax purposes, but are not recognized under U.S. GAAP. Each year, the Luxembourg reinsurer is required to adjust
its equalization reserves by an amount equal to statutory net income or loss, determined based on premiums and investment income
less incurred losses and operating expenses. The yearly adjustment of the equalization reserve generally results in zero pretax
income on a Luxembourg statutory and tax basis. Luxembourg does not, under laws currently in effect, impose any income,
corporation or profits tax on the reinsurance company. However, if the reinsurance company were to cease reinsuring business
without exhausting the equalization reserves, it would recognize income in the amount of the unutilized equalization reserves that
would be taxed by Luxembourg at a rate of approximately 30%.
The Company establishes deferred tax liabilities equal to approximately 30% of the unutilized statutory equalization reserves
carried at its Luxembourg reinsurance companies. The deferred tax liability is adjusted each reporting period based primarily on
amounts ceded to the Luxembourg reinsurer under the intercompany reinsurance agreements. As the income or loss of the
Luxembourg entity is primarily from intercompany activity, the impact on the consolidated pre-tax income for the consolidated
group is generally zero. Accordingly, the reduction of the deferred tax liability for the utilization of equalization reserves creates
a deferred tax benefit reflected in the income tax provision in the accompanying consolidated statements of income. As there is
no net effect on the consolidated pre-tax income from the intercompany reinsurance activity, the impact of these transactions
reduces the worldwide effective tax rate of the Company. As of December 31, 2014 and 2013, the Company had approximately
$134,975 and $141,690 of unutilized equalization reserves and an associated deferred tax liability of approximately $40,493 and
$42,507, respectively. For the years ended December 31, 2014, 2013 and 2012, income tax expense included a tax benefit of
$21,237, $1,787 and $4,998, respectively, attributable to the reduction of the deferred tax liability associated with the utilization
of equalization reserves of our Luxembourg reinsurers. The effect of this tax benefit reduced the effective tax rate by 16.66%,
3.42% and 11.10% for the years ended December 31, 2014, 2013 and 2012, respectively.
F-46
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
There were no unrecognized tax benefits at December 31, 2014, 2013 and 2012, that if recognized, would affect the Company’s
effective tax rate. The Company did not have any unrecognized tax benefits at December 31, 2014, 2013, or 2012.
The Company recognizes interest expense related to unrecognized tax benefits in tax expense, net of Federal income tax.
There were no accrued interest and penalties recognized in the Company’s consolidated statements of comprehensive income for
the years ended December 31, 2014, 2013 and 2012. During the years ended December 31, 2014, 2013 and 2012 there was no
interest related to unrecognized tax expense in the consolidated statements of comprehensive income. The Company has no penalties
included in calculating its provision for income taxes. All tax liabilities are payable to the Internal Revenue Service (“IRS”) and
various state and local taxing agencies.
Excluding the Reciprocal Exchanges, the Company’s subsidiaries are currently open to audit by the IRS for the years ended
December 31, 2011 and thereafter for Federal tax purposes.
12. Reinsurance
The Company's insurance subsidiaries utilize reinsurance agreements to transfer portions of the underlying risk of the business
the Company writes to various affiliated and third-party reinsurance companies. Reinsurance does not discharge or diminish the
Company's obligation to pay claims covered by the insurance policies it issues; however, it does permit the Company to recover
certain incurred losses from its reinsurers and the Company's reinsurance recoveries reduce the maximum loss that it may incur
as a result of a covered loss event. The Company believes it is important to ensure that its reinsurance partners are financially
strong and they generally carry at least an A.M. Best rating of ‘‘A-’’ (Excellent) at the time it enters into the Company's reinsurance
agreements. The Company also enters reinsurance relationships with third-party captives formed by agents as a mechanism for
sharing risk and profit. The total amount, cost and limits relating to the reinsurance coverage the Company purchases may vary
from year to year based upon a variety of factors, including the availability of quality reinsurance at an acceptable price and the
level of risk that the Company chooses to retain for its own account.
The Company assumes and cedes insurance risks under various reinsurance agreements, on both a pro rata basis and excess
of loss basis. The Company purchases reinsurance to mitigate the volatility of direct and assumed business, which may be caused
by the aggregate value or the concentration of written exposures in a particular geographic area or business segment and may arise
from catastrophes or other events. The Company pays a premium as consideration for ceding the risk. The following is a summary
of effects of reinsurance on premiums and losses for the years ended December 31, 2014, 2013 and 2012.
Premium:
Direct
Assumed
Total Gross Premium
Ceded
Net Premium
2014
2013
2012
Written
Earned
Written
Earned
Written
Earned
Year Ended December 31,
$ 1,558,612
576,495
2,135,107
(265,083)
$ 1,870,024
$ 1,496,709
414,410
1,911,119
(277,899)
$ 1,633,220
$ 1,315,162
23,593
1,338,755
(659,439)
679,316
$
$ 1,325,251
25,870
1,351,121
(663,055)
688,066
$
$ 1,334,225
17,700
1,351,925
(719,431)
632,494
$
$ 1,294,736
16,300
1,311,036
(736,784)
574,252
$
Loss and LAE
Year Ended December 31,
2014
2013
2012
Assumed
$
229,013
$
Ceded
211,433
Assumed
$
14,154
$
Ceded
442,251
Assumed
$
8,601
$
Ceded
729,920
F-47
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Unpaid Loss and LAE reserves
Unearned premiums
As of December 31,
2014
2013
Assumed
Ceded
Assumed
Ceded
$
106,568
$
911,798
$
6,298
$
950,828
160,984
102,761
2,529
50,878
The Company’s reinsurance transactions include premiums written under state-mandated involuntary plans for commercial
vehicles and premiums ceded to state-provided reinsurance facilities such as Michigan Catastrophic Claims Association (“MCCA”)
and North Carolina Reinsurance Facility (“NCRF” or “the Facility”) (collectively, “State Plans”), for which it retains no loss
indemnity risk. Prepaid reinsurance premiums are earned on a pro-rata basis over the period of risk, based on a daily earnings
convention, which is consistent with premiums written.
MCCA is a reinsurance mechanism that covers no-fault first party medical losses of retentions in excess of $530 in 2014.
The Company currently has claims with retentions from $250 to $530. All automobile insurers doing business in Michigan are
required to participate in MCCA. Insurers are reimbursed for their covered losses in excess of this threshold, which increased from
$460 to $480 on July 1, 2010, and increased to $500 in 2011 and remained at this amount until June 30, 2013. Policies effective
after July 1, 2013 have a threshold of $530. For policies effective after July 1, 2015 through June 30, 2017, the retention will be
$545. Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in
the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders.
The following is a summary of premiums and losses ceded to MCCA for the years ended December 31, 2014, 2013 and
2012:
Ceded earned premiums
Ceded Loss and LAE
Year Ended December 31,
2014
2013
2012
$
12,968
$
12,529
12,882
$
9,037
10,485
17,275
Reinsurance recoverables from MCCA as of December 31, 2014, and 2013 are as follows:
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
As of December 31,
2014
2013
$
8,482
$
689,202
9,685
694,885
NCRF is a mechanism for pooling of insurance risks for insureds who cannot obtain coverage by ordinary methods. Under
the Facility law, licensed and writing carriers and agents must accept and insure any eligible applicant for coverages and limits
which may be ceded to the Facility. The Facility accepts cession of bodily injury and property damage liability, medical payments,
and uninsured and combined uninsured/underinsured motorist's coverages. Funding for the NCRF comes from collected premiums
from automobile insurers based upon the provided coverage of the insured automobiles in the state. The following is a summary
of premiums and losses ceded to NCRF for the years ended December 31, 2014, 2013 and 2012:
Ceded earned premiums
Ceded Loss and LAE
Year Ended December 31,
2014
2013
2012
$
$
151,744
130,265
$
138,473
111,185
145,200
130,524
F-48
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Reinsurance recoverables from NCRF as of December 31, 2014 and 2013 are as follows:
As of December 31,
2014
2013
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
$
22,050
$
84,152
21,153
74,891
The Company believes that it is unlikely to incur any material loss as a result of non-payment of amounts owed to the
Company by MCCA and NCRF because (i) the payment obligations are extended over many years, resulting in relatively small
current payment obligations, (ii) both MCCA and NCRF are supported by assessments permitted by statute, and (iii) the Company
has not historically incurred losses as a result of non-payment. Because MCCA and NCRF are supported by assessments permitted
by statute, and there have been no significant and uncollectible balances from NCRF and MCCA, the Company believes that it
has no significant exposure to uncollectible reinsurance balances from these entities.
In addition to the reinsurance programs described above, until July 31, 2013, the Company used the Personal Lines Quota
Share reinsurance arrangement to limit maximum loss, provide greater diversification of risk and minimize exposure on larger
risks. For further discussion on the Personal Lines Quota Share arrangement (see Note 16, “Related Party Transactions”).
The Company has a concentration of credit risk associated with MCCA and NCRF, related to risks ceded in accordance with
Michigan insurance law and the Company’s market share in North Carolina, respectively, and the reinsurance under the Personal
Lines Quota Share arrangement. Reinsurance recoverables on unpaid losses at December 31, 2014 and 2013 are as follows:
MCCA
NCRF
Maiden Insurance Company
ACP Re Ltd
Technology
Other reinsurers' balances - each less than 5% of total
Subtotal
Reciprocal Exchanges
Total
As of December 31,
2014
2013
689,202
$
84,152
44,205
26,523
17,682
26,451
888,215
23,583
911,798
$
$
694,885
74,891
88,054
52,833
35,222
4,943
950,828
—
950,828
$
$
$
The Company also has unauthorized reinsurance with ACP Re Ltd. and Maiden Insurance Company that requires the reinsurers
to provide collateral to mitigate any risk of default.
As of July 1, 2014, the Company's new reinsurance program went into effect with respect to excess of loss catastrophic and
casualty reinsurance for protection against catastrophic and other large losses. The property catastrophe program provides a total
of $550,000 in coverage in excess of a $50,000 retention, with one reinstatement and the casualty program provides $45,000 in
coverage in excess of a $5,000 retention.
As of July 1, 2014, a reinsurance property catastrophe excess of loss program went into effect protecting the Reciprocal
Exchanges against accumulations of losses resulting from a catastrophic event. The program provides a total of $190,000 in
coverage in excess of a $10,000 retention, with one reinstatement.
F-49
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
13. Other Liabilities
Other liabilities at December 31, 2014 and 2013 consisted of the following:
December 31,
Bank overdrafts
Advance premiums
Deferred revenue
Premium and other taxes and assessments
Total
NGHC
Reciprocal Exchanges
Total
14. Accounts Payable and Accrued Expenses
2014
29,265
8,046
11,354
3,159
51,824
46,114
5,710
51,824
$
$
$
$
2013
30,256
5,250
10,509
3,930
49,945
49,945
—
49,945
$
$
$
$
Accounts payable and accrued expenses at December 31, 2014 and 2013 consisted of the following:
December 31,
Escheats payable
Accrued expenses related to employees
Accounts payable related to commissions
Premiums payable
Information technology payable
Deferred purchase price
Dividends payable
Refundable tax credits
Loss reserve fair value
Investments payable
Other
Subtotal
Related Parties:
Accounts payable related to commissions
License fee payable
Information technology payable
Printing fee payable
Renewal rights
Other
Subtotal
Total
NGHC
Reciprocal Exchanges
Total
F-50
2014
2013
$
8,720
$
16,029
6,824
3,324
1,190
15,325
2,901
3,360
4,013
33,517
43,822
139,025
140,577
9,148
1,312
3,100
23,499
808
178,444
317,469
299,778
17,691
317,469
$
$
$
$
$
$
9,292
13,429
18,316
3,101
5,128
19,718
797
—
—
—
11,146
80,927
—
7,610
777
1,389
—
440
10,216
91,143
91,143
—
91,143
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
15. Debt
6.75% Notes due 2024
On May 23, 2014, the Company sold $250,000 aggregate principal amount of the Company’s 6.75% notes due 2024 (the
“6.75% Notes”) to certain purchasers in a private placement.
The 6.75% Notes bear interest at a rate equal to 6.75% per year, payable semiannually in arrears on May 15th and November
15th of each year, beginning on November 15, 2014. The 6.75% Notes are the Company’s general unsecured obligations and rank
equally in right of payment with its other existing and future senior unsecured indebtedness and senior in right of payment to any
of its indebtedness that is contractually subordinated to the 6.75% Notes. The 6.75% Notes are also effectively subordinated to
any of the Company’s existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness
and are structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries (including trade payables).
The 6.75% Notes mature on May 15, 2024, unless earlier redeemed or purchased by the Company.
The Indenture contains customary covenants, such as reporting of annual and quarterly financial results, and restrictions on
certain mergers and consolidations. The Indenture also includes covenants relating to the incurrence of debt if the Company’s
consolidated leverage ratio would exceed 0.35 to 1.00, a limitation on liens, a limitation on the disposition of stock of certain of
the Company’s subsidiaries and a limitation on transactions with certain of the Company’s affiliates. The Company was in
compliance with all of the covenants contained in the Indenture as of December 31, 2014.
The net proceeds the Company received from the issuance was approximately $245,000, after deducting the issuance
expenses. The Company used a portion of the net proceeds from the issuance to repay all amounts outstanding under (A) the
Company's prior credit agreement, dated as of February 20, 2013, by and among the Company, JPMorgan Chase Bank, N.A., as
Administrative Agent, Key Bank National Association, as Syndication Agent, and First Niagara Bank, N.A., as Documentation
Agent, and (B) the Company’s promissory note to ACP Re, Ltd ("ACP Re"). Interest expense on the 6.75% Notes for the year
ended December 31, 2014 was $10,218.
Promissory Notes
As part of the Company’s acquisition of Reliant Financial Group, LLC, the Company has an outstanding promissory note
as of December 31, 2014 of $600 payable to Access Plans, Inc. (“VelaPoint Note #1”). The original note was issued on February 22,
2012 in the amount of $1,500 and any outstanding balance bears interest at a rate of 5.00% per annum. Three payments of $400,
$500 and $600 are due and payable thirty days after the anniversary date beginning in 2013. Interest expense on this note for the
years ended December 31, 2014, 2013 and 2012 was $39, $59 and $63, respectively.
Revolving Credit Agreements
During the first quarter of 2013, the Company entered into a credit agreement to establish a secured $90,000 line of credit
with JPMorgan Chase Bank, N.A. Interest payments were required to be paid monthly on any unpaid principal at a rate of LIBOR
plus 2.50%. The credit agreement had a maturity date of February 20, 2016. The outstanding balance on the line of credit of $59,200
was repaid and the credit facility was terminated in the second quarter of 2014 in connection with the issuance of the 6.75% Notes.
On May 30, 2014, the Company entered into a $135,000 credit agreement (the “Credit Agreement”), among JPMorgan Chase
Bank, N.A., as Administrative Agent, KeyBank National Association as Syndication Agent, and Associated Bank, National
Association and First Niagara Bank, N.A., as Co-Documentation Agents. The credit facility is a revolving credit facility with a
letter of credit sublimit of $10,000 and an expansion feature not to exceed $50,000.
The Credit Agreement contains certain restrictive covenants customary for facilities of this type (subject to negotiated
exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and
dispositions. There are also financial covenants that require the Company to maintain a minimum consolidated net worth, a
maximum consolidated leverage ratio, a minimum fixed charge coverage ratio, a minimum risk-based capital and a minimum
statutory surplus. The Credit Agreement also provides for customary events of default, with grace periods where customary,
including failure to pay principal when due, failure to pay interest or fees within three business days after becoming due, failure
to comply with covenants, breaches of representations and warranties, default under certain other indebtedness, certain insolvency
or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in
F-51
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
control of the Company. Upon the occurrence and during the continuation of an event of default, the administrative agent, upon
the request of the requisite percentage of the lenders, may terminate the obligations of the lenders to make loans and to issue letters
of credit under the Credit Agreement, declare the Company’s obligations under the Credit Agreement to become immediately due
and payable and/or exercise any and all remedies and other rights under the Credit Agreement. The Credit Agreement has a maturity
date of May 30, 2018.
Borrowings under the Credit Agreement bear interest at either the Alternate Base Rate ("ABR") or LIBOR. ABR borrowings
(which are borrowings bearing interest at a rate determined by reference to the ABR) under the Credit Agreement will bear interest
at (x) the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5 percent or (c)
the adjusted LIBOR for a one-month interest period on such day plus 1 percent, plus (y) a margin that is adjusted on the basis of
the Company’s consolidated leverage ratio. Eurodollar borrowings under the Credit Agreement will bear interest at the adjusted
LIBOR for the interest period in effect plus a margin that is adjusted on the basis of the Company’s consolidated leverage ratio.
Fees payable by the Company under the Credit Agreement include a letter of credit participation fee (the margin applicable to
Eurodollar borrowings), a letter of credit fronting fee with respect to each letter of credit (0.125%) and a commitment fee on the
available commitments of the lenders (a range of 0.20% to 0.30% based on the Company’s consolidated leverage ratio, and which
rate was 0.25% as of December 31, 2014).
As of December 31, 2014, there was no outstanding balance on the line of credit. Interest expense for the Company's existing
and repaid lines of credit for the years ended December 31, 2014, 2013 and 2012 was $1,162, $1,254 and $488, respectively.
The Company was in compliance with all of the covenants under the Credit Agreement as of December 31, 2014.
Imperial-related Debt
In connection with the Imperial transaction, the Company assumed $3,500 in principal amount of Senior Notes due 2034
("Imperial-related Notes") previously issued by Imperial Management Corporation. The notes bore interest at an annual rate equal
to LIBOR plus 3.95%, payable quarterly. The notes were redeemed by the Company at a redemption price equal to 100% of their
principal amount plus accrued interest on September 15, 2014. Interest expense on the Imperial-related Notes for the year ended
December 31, 2014 was $37. In addition, Imperial Fire and Casualty Insurance Company is the issuer of $5,000 principal amount
of Surplus Notes due 2034 ("Imperial Surplus Notes"). The notes bear interest at an annual rate equal to LIBOR plus 4.05%,
payable quarterly. The notes are redeemable by the Company at a redemption price equal to 100% of their principal amount. Interest
expense on the Imperial Surplus Notes for the year ended December 31, 2014 was $110. (See Note 7, "Acquisitions").
Reciprocal Exchanges' Surplus Notes
ACP Re (or subsidiaries thereunder), a related party, holds the surplus notes issued by the Reciprocal Exchanges ("Reciprocal
Exchanges' Surplus Notes") when they were originally capitalized. The obligation to repay principal and interest on these 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 these surplus notes are payable only with regulatory approval. Interest expense
on the Reciprocal Exchanges' Surplus Notes for the period ended December 31, 2014 was $5,724, which includes amortization
of discount of $3,774. (See Note 16, "Related Party Transactions").
Maturities of the Company's debt for the five years subsequent to December 31, 2014 are as follows:
December 31,
6.75% Notes
VelaPoint Note #1
Imperial Surplus Notes
Reciprocal Exchanges' Surplus Notes
2015
2016
2017
2018
2019
$
— $
631
—
—
631
$
$
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
—
—
— $
Thereafter
— $ 250,000
—
—
5,000
—
48,374
—
Total
$ 250,000
631
5,000
48,374
— $ 303,374
$ 304,005
As of December 31, 2014 and December 31, 2013, the Company had outstanding letters of credit of approximately $12,142
and $0, respectively.
F-52
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
16. Related Party Transactions
The founding and significant shareholder of the Company has an ownership interest in AmTrust, Maiden Holdings Ltd.
(“Maiden”) and ACP Re. The Company provides and receives services from these related entities as follows:
Agreements with AmTrust and Affiliated Entities
Asset Management Agreement
Pursuant to an Asset Management Agreement among NGHC and AII Insurance Management Limited (“AIIM”), a subsidiary
of AmTrust, the Company pays AIIM a fee for managing the Company’s investment portfolio. Pursuant to the asset management
agreement, AIIM provides investment management services for a quarterly fee of 0.05% of the average value of assets under
management if the average value of the account for the previous calendar quarter is less than or equal to $1 billion, and 0.0375%
of the average value of assets under management if the average value of the account for the previous calendar quarter is greater
than $1 billion. Following the initial one-year term, the agreement may be terminated upon 30 days written notice by either party.
The amounts charged for such expenses were $1,916, $1,612 and $1,571 for the years ended December 31, 2014, 2013 and 2012,
respectively. As of December 31, 2014 and 2013, there was a payable to AIIM related to these services in the amount of $564 and
$439, respectively.
Master Services Agreement
AmTrust provides postage and billing services to the Company for premiums written on the Company’s new policy system
pursuant to a Master Services Agreement with National General Management Corp., a wholly owned subsidiary of the Company.
The agreement is effective for ten years from the acceptance of all phases of the initial work statement and can be automatically
renewed thereafter for subsequent five-year terms. The agreement is cancellable for material breach of contract that is not cured
within thirty days, if either party fails to perform obligations under contract, if either party is declared bankrupt or insolvent, and
in the event of a proposed change of control by either party to a competitor. The services are charged on a work-per-piece basis
and are billed to the Company at cost. The Company has the right to audit the books and records as appropriate. The amounts
charged for such expenses were $7,070, $4,551 and $2,939 for the years ended December 31, 2014, 2013 and 2012, respectively.
As of December 31, 2014 and 2013, there was a payable for these services in the amount of $3,099 and $1,389, respectively.
AmTrust also provides the Company information technology development services in connection with the development of
a policy management system at cost pursuant to a Master Services Agreement with National General Management Corp. The
amounts charged for such expenses were $4,431, $3,803 and $5,231 for the years ended December 31, 2014, 2013 and 2012,
respectively, of which amounts capitalized in property and equipment were $3,350, $3,478 and $4,476 for the years ended
December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014 and 2013, there was a payable for these services in
the amount of $1,312 and $777, respectively.
In addition, as consideration for a license for the Company to use that system, AmTrust receives a license fee in the amount
of 1.25% of gross premium of NGHC and its affiliates written on the system plus the costs for support services. The amounts
charged for such fees were $15,434, $14,244 and $8,171 for the years ended December 31, 2014, 2013 and 2012, respectively. As
of December 31, 2014 and 2013, there were payables for these services in the amount of $9,148 and $7,610, respectively.
In 2014, AmTrust began providing the Company services in managing the premium receipts from its lockbox facilities at a
fixed cost per item processed. The amounts charged for such expenses were $137 for the year ended December 31, 2014. As of
December 31, 2014, there was a payable for these services in the amount of $62.
Reinsurance Agreements
On July 1, 2012, a wholly-owned subsidiary, Integon National, entered into an agreement with an AmTrust subsidiary, Risk
Services, LLC (“RSL”). RSL provides certain consulting and marketing services to promote the Company’s captive insurance
program to potential agents. RSL receives 1.5% of all net premiums written generated to the program. The amounts charged for
such fees for the years ended December 31, 2014, 2013 and 2012 were $99, $134 and $15, respectively. As of December 31, 2014
and 2013, there was a payable for these services in the amount of $31 and $26, respectively.
F-53
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
On March 22, 2012, Integon National entered into a reinsurance agreement with an AmTrust subsidiary, Agent Alliance
Reinsurance Company (“AARC”), whereby the Company cedes 25% of the business written by certain agents who are members
of the Company’s captive agent program along with 25% of any related losses. The Company receives a ceding commission of
25% of the associated ceded premiums. Each party may terminate the agreement by providing 90 days written notice.
On January 1, 2013, the Company entered into a quota share agreement with Wesco Insurance Company (“Wesco”), a
subsidiary of AmTrust, to assume 100% of the accident and health business written before January 1, 2013. The Company reinsures
100% of the existing obligations with respect to the accident and health program, including a loss portfolio transfer of 100% of
loss and LAE reserves and unearned premium as of the effective date in exchange for an amount equal to 100% of the loss and
LAE reserves and unearned premium reserves related to the existing contracts and 100% of the business fronted by Wesco on
behalf of the Company after the effective date less the fronted ceded commission of 5% of premiums written, plus the related
fronting acquisition costs and fronting inuring reinsurance costs, both meaning the actual costs paid by Wesco to the third parties
with respect to those transactions.
On November 9, 2012, Integon National entered into a reinsurance agreement with an affiliated company, AAIC, whereby
AAIC cedes 100% of the total written premiums, acquisition costs and incurred losses and LAE on business with effective dates
before and after November 9, 2012. The agreement had an indefinite term. In July 2014, the Company reacquired AAIC from ACP
Re (see Note 7, "Acquisitions").
The amounts related to these reinsurance treaties are as follows:
December 31, 2014
Wesco
AARC
December 31, 2013
AAIC
Wesco
AARC
Year Ended December 31, 2014
Wesco
AARC
Year Ended December 31, 2013
AAIC
Wesco
AARC
Year Ended December 31, 2012
AAIC
AARC
Recoverable (Payable)
on Paid and Unpaid
Losses and LAE
Commission
Receivable
Premium
Receivable
(Payable)
$
(3,987) $
706
— $
94
(638)
(350)
Recoverable (Payable)
on Paid and Unpaid
Losses and LAE
Commission
Receivable
Premium
Receivable
(Payable)
$
$
$
$
(200) $
836
$
(1,067)
457
—
78
1,359
13
(281)
Assumed (Ceded)
Earned Premiums
Commission
Income (Expense)
Assumed (Ceded)
Losses and LAE
17,843
$
(4,134) $
14,852
(1,317)
369
(811)
Assumed (Ceded)
Earned Premiums
Commission
Income (Expense)
Assumed (Ceded)
Losses and LAE
4,103
$
(631) $
14,681
(1,197)
(4,175)
390
2,445
8,556
(750)
Assumed (Ceded)
Earned Premiums
Commission
Income (Expense)
Assumed (Ceded)
Losses and LAE
826
$
(132)
(407) $
47
587
(85)
F-54
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
NGHC Quota Share Agreement
The Company participated in a quota share reinsurance treaty with the related entities listed below whereby it ceded 50% of
the total net earned premiums and net incurred losses and LAE on business with effective dates after March 1, 2010 (“NGHC
Quota Share”).
On August 1, 2013, the Company provided notice to parties of the NGHC Quota Share agreement that it was terminating
the agreement. The Company no longer cedes any net earned premiums and net incurred losses and LAE on business with effective
dates after July 31, 2013. The termination is on a run-off basis, meaning the Company continued to cede 50% of the net premiums
and the related net losses with respect to policies in force as of July 31, 2013 through the expiration of such policies, the last of
which expired on July 31, 2014.
The NGHC Quota Share provided that the reinsurers pay a provisional ceding commission equal to 32.5% of ceded earned
premium, net of premiums ceded by the Company for inuring reinsurance, subject to adjustment. The ceding commission is subject
to adjustment to a maximum of 34.5% if the loss ratio for the reinsured business is 60.0% or less and a minimum of 30.5% if the
loss ratio is 64.5% or greater. Effective October 1, 2012, the parties amended the NGHC Quota Share to decrease the provisional
ceding commission from 32.5% to 32.0% of ceded earned premium, net of premiums ceded by the Company for inuring reinsurance,
subject to adjustment. The ceding commission is subject to adjustment to a minimum of 30.0% (changed from 30.5%), if the loss
ratio is 64.5% or greater. The Company believes that the terms, conditions and pricing of the NGHC Quota Share have been
determined by arm's length negotiations and reflect market terms and conditions.
The percentage breakdown by reinsurer of such 50% is as follows:
Name of Insurer
ACP Re Ltd.
Maiden Insurance Company, a subsidiary of Maiden
Technology Insurance Company, a subsidiary of AmTrust
The amounts related to this reinsurance treaty are as follows:
Quota Share
Percentage
15%
25%
10%
Year Ended December 31, 2014
ACP Re Ltd.
Maiden Insurance Company
Technology Insurance Company
Total
Year Ended December 31, 2013
ACP Re Ltd.
Maiden Insurance Company
Technology Insurance Company
Total
Ceded Earned Premiums
Ceding Commission
Income
Ceded Losses and
LAE
$
$
$
$
12,850
$
3,703
$
21,416
8,567
6,115
2,455
42,833
$
12,273
$
11,486
19,130
7,671
38,287
Ceded Earned
Premiums
Ceding Commission
Income
Ceded Losses and
LAE
149,954
$
46,943
$
249,924
99,970
78,224
31,181
94,802
158,004
63,201
499,848
$
156,348
$
316,007
F-55
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Year Ended December 31, 2012
ACP Re Ltd.
Maiden Insurance Company
Technology Insurance Company
Total
Ceded Earned
Premiums
Ceding Commission
Income
Ceded Losses and
LAE
$
$
168,395
$
50,971
$
280,657
112,264
85,363
34,046
117,510
195,850
78,345
561,316
$
170,380
$
391,705
Included in ceding commission income was $5,076, $86,514 and $95,616 which represented recovery of successful acquisition
cost of the reinsured contracts for the years ended December 31, 2014, 2013 and 2012, respectively. These amounts have been
netted against acquisition costs and other underwriting expenses in the accompanying consolidated statements of income.
December 31, 2014
ACP Re Ltd.
Maiden Insurance Company
Technology Insurance Company
Total
December 31, 2013
ACP Re Ltd.
Maiden Insurance Company
Technology Insurance Company
Total
Reinsurance
Recoverable on Paid
and Unpaid Losses and
LAE
Ceded Commission
Payable
Ceded Premium
Payable
$
$
30,517
$
50,861
20,345
$
3
5
2
101,723
$
10
$
7,792
12,987
5,195
25,974
Reinsurance
Recoverable on Paid
and Unpaid Losses and
LAE
Ceded Commission
Receivable
Ceded Premium
Payable
$
$
74,997
$
7,669
$
124,995
49,998
12,782
4,958
30,604
51,021
20,408
249,990
$
25,409
$
102,033
The Company nets the ceded commission receivable against ceded premium payable in the consolidated balance sheets as
the NGHC Quota Share Agreement allows for net settlement. The agreement also stipulates that if the Company would be denied
full statutory credit for reinsurance ceded pursuant to the credit for reinsurance laws or regulations in any applicable jurisdiction,
the reinsurers will secure an amount equal to that obligation through a letter of credit; assets held in trust for the benefit of the
Company or cash. ACP Re and Maiden Insurance Company held assets in trust in the amount of $31,044 and $58,513, respectively,
as of December 31, 2014 and $57,959 and $104,824, respectively, as of December 31, 2013.
The Company and AmTrust have formed the LSC Entities for the purposes of acquiring certain life settlement contracts. For
further discussion on the LSC Entities' arrangements (see Note 6, “Equity Investments in Unconsolidated Subsidiaries”).
800 Superior, LLC
As described in Note 6, "Equity Investments in Unconsolidated Subsidiaries", the Company formed 800 Superior, LLC along
with AmTrust, whereby each entity owns a 50% interest. In 2012, the Company also entered into a lease agreement with 800
Superior, LLC for a period of 15 years whereby the Company leased approximately 134,000 square feet. The Company paid 800
Superior, LLC $2,243, $2,143 and $1,391 for the years ended December 31, 2014, 2013 and 2012, respectively.
In September 2012, 800 Superior, LLC received $19,400 in net proceeds from a financing transaction the Company and
AmTrust entered into with Key Community Development Corporation (“KCDC”) related to a capital improvement project for the
office building in Cleveland, Ohio owned by 800 Superior, LLC. The Company, AmTrust and KCDC collectively made capital
contributions (net of allocation fees) and loans to 800 Superior NMTC Investment Fund II and 800 Superior NMTC Investment
Fund I LLC (collectively, the “Investment Funds”) under a qualified New Markets Tax Credit (“NMTC”) program. The NMTC
F-56
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment
in qualified lower income communities. The Act permits taxpayers to claim credits against their Federal income taxes for up to
39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment
institutions that are certified to make qualified low-income community investments (“QLICIs”).
In addition to the capital contributions and loans from the Company, AmTrust and KCDC, as part of the transaction, the
Investment Funds received, directly and indirectly, proceeds of approximately $8,000 through two loans originating from state
and local governments of Ohio. These loans are each for a period of 15 years and have an average interest rate of 1.7% per annum.
The Investment Funds then contributed the loan proceeds and capital contributions of $19,400 to two CDEs, which, in turn,
loaned the funds on similar terms to 800 Superior, LLC. The proceeds of the loans from the CDEs (including loans representing
the capital contribution made by KCDC, net of allocation fees) will be used to fund the capital improvement project. As collateral
for these loans, the Company has granted a security interest in the assets acquired with the loan proceeds.
The Company and AmTrust are each entitled to receive an equal portion of 49% of the benefits derived from the NMTCs
generated by 800 Superior Investment Fund II LLC, while KCDC is entitled to the remaining 51%. The NMTC is subject to 100%
recapture for a period of seven years as provided in the Internal Revenue Code. During this seven years compliance period, the
entities involved are required to be in compliance with various regulations and contractual provisions that apply to the NMTC
arrangement. Non-compliance with applicable requirements could result in the projected tax benefits not being realized and,
therefore, could require the Company to indemnify KCDC for any loss or recapture of NMTCs related to the financing until such
time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required
in connection with this arrangement. In addition, this transaction includes a put/call provision whereby the Company may be
obligated or entitled to repurchase KCDC's interest in the Investment Funds in September 2019 at the end of the recapture period.
Management believes that KCDC will exercise its put option and, therefore, attributed an insignificant value to the put/call.
Agreements with ACP Re and Affiliated Entities
In connection with the acquisition of Tower by ACP Re, the Company entered into the agreements described below.
Personal Lines Master Agreement
On July 23, 2014, the Company and ACP Re entered into the Amended and Restated Personal Lines Master Agreement (the
"Master Agreement"). The Master Agreement provided for the implementation of the various transactions associated with the
acquisition of Tower by ACP Re. In addition, the Master Agreement requires the Company to pay ACP Re contingent consideration
in the form of a three-year earn-out (the "Contingent Payments") of 3% of gross premium written of the Tower personal lines
business written or assumed by the Company following the Merger. The Contingent Payments are subject to a maximum of $30,000,
in the aggregate, over the three-year period.
PL Reinsurance Agreement and the Personal Lines Cut-Through Quota Share Reinsurance Agreement
Integon National Insurance Company, a wholly-owned subsidiary of the Company ("Integon"), entered into the Personal
Lines Quota Share Reinsurance Agreement (the "PL Reinsurance Agreement"), with Tower’s ten statutory insurance companies
(collectively, the “Tower Companies”), pursuant to which Integon reinsures 100% of all losses under the Tower Companies’ new
and renewal personal lines business written after September 15, 2014. The ceding commission payable by Integon under the PL
Reinsurance Agreement is equal to the sum of (i) reimbursement of the Tower Companies’ acquisition costs in respect of the
business covered, including commission payable to National General Insurance Marketing, Inc., a subsidiary of the Company
(“NGIM”), pursuant to the PL MGA Agreement (as defined below), and premium taxes and (ii) 2% of gross premium written (net
of cancellations and return premiums) collected pursuant to the PL MGA Agreement. In connection with the execution of the PL
Reinsurance Agreement, the Personal Lines Cut-Through Quota Share Reinsurance Agreement, dated January 3, 2014, by and
among the Tower Companies and Integon (the “Cut-Through Reinsurance Agreement”), was terminated on a run-off basis, with
the reinsurance of all policies reinsured under such agreement remaining in effect.
As a result of the PL Reinsurance Agreement and the Cut-Through Reinsurance Agreement, the Company assumed $439,578
of premium from the Tower Companies and recorded $110,490 of ceding commission expense during the year ended December
31, 2014. As of December 31, 2014, there was a ceding commission payable of $101,664 related to the PL Reinsurance Agreement.
During the year ended December 31, 2014, the Company earned premium of approximately $284,480 under these reinsurance
F-57
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
agreements. During the year ended December 31, 2014, the Company incurred losses and loss adjustment expenses of $154,577
under these reinsurance agreements.
PL MGA Agreement
NGIM produces and manages all new and renewal personal lines business of the Tower Companies pursuant to a Personal
Lines Managing General Agency Agreement (the "PL MGA Agreement"). As described above, all post-September 15, 2014 personal
lines business written by the Tower Companies is reinsured by Integon pursuant to the PL Reinsurance Agreement. The Tower
Companies pay NGIM a 10% commission on all business written pursuant to the PL MGA Agreement. All payments by the Tower
Companies to NGIM pursuant to the PL MGA Agreement are netted out of the ceding commission payable by Integon to the Tower
Companies pursuant to the PL Reinsurance Agreement. The Company recorded $8,826 of commission income during the period
ended December 31, 2014 as a result of the PL MGA Agreement.
PL Administrative Services Agreement
National General Management Corp., a subsidiary of the Company ("NGMC"), the Tower Companies and an affiliated
company, CastlePoint Reinsurance Company, Ltd (“CP Re”), entered into the Personal Lines LPTA Administrative Services
Agreement (the "PL Administrative Agreement"), pursuant to which NGMC administers the run-off of CP Re’s and the Tower
Companies’ personal lines business written prior to September 15, 2014 at cost. CP Re and the Tower Companies reimburse NGMC
for its actual costs, including costs incurred in connection with claims operations, out-of-pocket expenses, costs incurred in
connection with any required modifications to NGMC's claims systems and an allocated portion of the claims service expenses
paid by Integon to the Tower Companies pursuant to the Cut-Through Reinsurance Agreement. As a result of the PL Administrative
Agreement, the Company was reimbursed $0 during the year ended December 31, 2014. As of December 31, 2014, there was a
receivable related to the PL Administrative Agreement of $1,546.
Stop-Loss and Retrocession Agreements
National General Re, Ltd., a subsidiary of the Company (“NG Re Ltd.”), along with AmTrust International Insurance, Ltd.,
an affiliate of the Company (“AII”), as reinsurers, entered into a $250,000 Aggregate Stop Loss Reinsurance Agreement (the "Stop-
Loss Agreement") with CP Re. NG Re Ltd. and AII also entered into an Aggregate Stop Loss Retrocession Contract (the
"Retrocession Agreement") with ACP Re pursuant to which ACP Re is obligated to reinsure the full amount of any payments that
NG Re Ltd. and AII are obligated to make to CP Re under the Stop-Loss Agreement. Pursuant to the Stop-Loss Agreement, each
of the NG Re Ltd. and AII provide, severally, $125,000 of stop loss coverage with respect to the run-off of the Tower business
written on or before September 15, 2014. The reinsurers’ obligation to indemnify CP Re under the Stop-Loss Agreement will be
triggered only at such time as CP Re’s ultimate paid net loss related to the run-off of the pre-September 15, 2014 Tower business
exceeds a retention equal to the Tower Companies’ loss and loss adjustment reserves and unearned premium reserves as of September
15, 2014. CP Re will pay AII and NG Re Ltd. total premium of $56,000 on the five-year anniversary of the Stop-Loss Agreement.
The premium payable by NG Re Ltd. and AII to ACP Re pursuant to the Retrocession Agreement will be $56,000 in the aggregate,
less a ceding commission of 5.5% to be retained by NG Re Ltd. and AII. The Company will record this reinsurance transaction
under the deposit method of accounting.
Credit Agreement
On September 15, 2014, NG Re Ltd. entered into a credit agreement (the “ACP Re Credit Agreement”) by and among
AmTrust, as Administrative Agent, ACP Re and London Acquisition Company Limited, a wholly owned subsidiary of ACP Re,
as the borrowers (collectively, the “Borrowers”), ACP Re Holdings, LLC, as Guarantor, and AII and NG Re Ltd., as Lenders,
pursuant to which the Lenders made a $250,000 loan ($125,000 made by each Lender) to the Borrowers on the terms and conditions
contained within the ACP Re Credit Agreement.
The ACP Re Credit Agreement has a maturity date of September 15, 2021. Outstanding principal under the ACP Re Credit
Agreement bears interest at a fixed annual rate of seven percent (7%), payable semi-annually on the last day of January and July.
The obligations of the Borrowers are secured by (i) a first-priority pledge of 100% of the stock of ACP Re and certain of ACP Re’s
U.S. subsidiaries and 65% of the stock of certain of ACP Re’s foreign subsidiaries and (ii) a first-priority lien on the assets of the
Borrowers and Guarantor and certain of the assets of ACP Re’s subsidiaries (other than the Tower Companies).
F-58
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The Company recorded interest income of approximately $2,601 for the year ended December 31, 2014, under the ACP Re
Credit Agreement.
Surplus Notes of the Reciprocal Exchanges
ACP Re, an affiliate of the Company, holds the surplus notes carried at $48,374 issued by the Reciprocal Exchanges. The
obligation to repay principal and interest on the Reciprocal Exchanges’ Surplus Notes is subordinated to the Reciprocal Exchanges’
other liabilities. Principal and interest on the Reciprocal Exchanges’ Surplus Notes are payable only with regulatory approval (see
Note 15, “Debt”).
Agreements of the Reciprocal Exchanges
The Reciprocal Exchanges and their subsidiaries entered into a Casualty Excess of Loss Reinsurance Contract, effective
January 1, 2014, among the Reciprocal Exchanges and Tower Insurance Company of New York ("TICNY"), pursuant to which
TICNY will reinsure certain excess liability which may accrue to the Reciprocal Exchanges’ and their subsidiaries’ policies,
contracts and binders of insurance and reinsurance in force at the effective date or issued or renewed on or after that date, and
classified by the Reciprocal Exchanges as Casualty.
The Reciprocal Exchanges and their subsidiaries entered into a Property Per Risk Reinsurance Contract, effective January
1, 2014, with TICNY, pursuant to which TICNY will reinsure certain excess liability which may accrue under the Reciprocal
Exchanges’ and their subsidiaries’ policies, contracts and binders of insurance and reinsurance in force at the effective date or
issued or renewed on or after that date, and classified by the Reciprocal Exchanges as Personal Property.
The Reciprocal Exchanges and their subsidiaries entered into a Property Catastrophe Excess of Loss program, effective July
1, 2011, with CP Re, pursuant to which CP Re reinsures certain excess liability which may accrue under the Reciprocal Exchanges
and their subsidiaries' policies, contracts and binders of insurance and reinsurance during the term of the contract under all policies
classified by the Company as Property business.
AIBD Health Plan
On September 1, 2012 the Company purchased The Association Benefits Solution companies. As part of the purchase, the
Company is now affiliated with AIBD Health Plan which is a welfare benefit plan for several member groups. As of December 31,
2014 and 2013, the Company had a receivable of $5,377 and $4,955, respectively. Also, as part of this plan, the Company utilizes
an employer trust to administer additional claims. As of December 31, 2014, the Company had a payable to the employer trust in
the amount of $605.
F-59
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
17. Unpaid Losses and Loss Adjustment Expenses
Activity in the reserves for unpaid losses and LAE is presented below:
Unpaid losses and LAE, gross of related
reinsurance recoverable at beginning of year
Less: Reinsurance recoverables at beginning of
year
Net balance at beginning of year
Incurred losses and LAE related to:
Current year
Prior year
Total incurred
Paid losses and LAE related to:
Current year
Prior year
Total paid
Acquired outstanding loss and loss adjustment
reserve
Effect of foreign exchange rates
Net balance at end of year
Plus reinsurance recoverables at end of year
Year Ended December 31,
2014
Reciprocal
Exchanges
Total
2013
Total
2012
Total
NGHC
$ 1,259,241
$
— $ 1,259,241
$ 1,286,533
$ 1,218,412
(950,828)
308,413
1,008,406
17,941
1,026,347
(645,826)
(187,010)
(832,836)
66,066
(5,900)
562,090
888,215
—
—
(950,828)
308,413
(991,447)
295,086
(920,719)
297,693
25,382
1,336
26,718
(20,715)
(12,429)
(33,144)
94,691
—
88,265
23,583
1,033,788
19,277
1,053,065
456,039
6,085
462,124
401,388
1,298
402,686
(666,541)
(199,439)
(865,980)
160,757
(5,900)
650,355
911,798
(265,907)
(182,890)
(448,797)
(279,178)
(136,426)
(415,604)
—
—
308,413
950,828
10,311
—
295,086
991,447
Gross balance at end of year
$ 1,450,305
$
111,848
$ 1,562,153
$ 1,259,241
$ 1,286,533
These revised reserve estimates are generally the result of ongoing analysis of recent loss development trends and emerging
historical experience. Original estimates are increased or decreased as additional information becomes known regarding individual
claims. In setting its reserves, the Company reviews its loss data to estimate expected loss development. Management believes
that its use of sound actuarial methodology applied to its analyses of its historical experience provides a reasonable estimate of
future losses. However, actual future losses may differ from the Company’s estimate, and future events beyond the control of
management, such as changes in law, judicial interpretations of law and inflation, may favorably or unfavorably impact the ultimate
settlement of the Company’s loss and LAE. For additional information regarding reserve development attributable to prior years,
see Item 1, "Business - Prior Year Loss Development”.
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. In addition to
inflation, the average severity of claims is affected by a number of factors that may vary by types and features of policies written.
Future average severities are projected from historical trends, adjusted for implemented changes in underwriting standards and
policy provisions, and general economic trends. These estimated trends are monitored and revised as necessary based on actual
development.
F-60
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
18. Commitments and Contingencies
Lease Commitments
The Company is obligated under approximately 24 leases for office space expiring at various dates through 2026. The lease
expense for the years ended December 31, 2014, 2013 and 2012 was $12,131, $11,958, and$10,591, respectively. Future minimum
lease commitments as of December 31, 2014 under non-cancellable operating leases for each of the next five years and thereafter
are as follows:
Year Ending December 31,
2015
2016
2017
2018
2019
Thereafter
Total
Litigation
$
$
8,619
7,948
7,604
7,779
6,180
30,582
68,712
The Company’s insurance subsidiaries are named as defendants in various legal actions arising principally from claims made
under insurance policies and contracts. Those actions are considered by the Company in estimating the loss and LAE reserves.
The Company’s management believes the resolution of those actions will not have a material adverse effect on the Company’s
financial position or results of operations.
Employment Agreements
The Company has entered into employment agreements with certain individuals. The employment agreements provide for
option awards, executive benefits and severance payments under certain circumstances. Amounts payable under these agreements
for the next five years are as follows:
Year Ending December 31,
2015
2016
2017
2018
2019
Personal Lines Master Agreement
$
$
5,022
2,882
349
—
—
8,253
On July 23, 2014, the Company and ACP Re entered into the Amended and Restated Personal Lines Master Agreement (the
"Master Agreement"). The Master Agreement provides for the implementation of the various transactions associated with the
acquisition of Tower by ACP Re. In addition, the Master Agreement requires the Company to pay ACP Re contingent consideration
in the form of a three-year earn-out (the "Contingent Payments") of 3% of gross premium written of the Tower personal lines
business written or assumed by the Company following the Merger. The Contingent Payments are subject to a maximum of $30,000,
in the aggregate, over the three-year period. (See Note 16, "Related Party Transactions").
F-61
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
19. Stockholders' Equity
In 2010, the Company issued to AmTrust for an initial purchase consideration of approximately $53,053, which was equal
to 25% of the capital initially required by the Company, 53,054 shares of Series A Preferred Stock (the “Preferred Stock”). The
Preferred Stock provided an 8% cumulative dividend, was non-redeemable and was convertible, at the holders’ option, into 21.25%
of the issued and outstanding common stock of the Company. On June 5, 2013, the Company converted the issued and outstanding
53,054 shares of Preferred Stock into 42,959 shares of common stock. Upon the conversion of the Preferred Stock, the Company
paid AmTrust all undeclared cumulative dividends totaling $12,202.
On June 6, 2013, the Company sold 21,850,000 shares of common stock in a private placement in reliance on exemptions
from registration under the Securities Act of 1933. The shares of common stock were sold to investors at a price of $10.50 per
share, except for 485,532 shares that were sold to FBR Capital Markets & Co. (“FBR”) and an affiliate of FBR, which were sold
at a price of $9.765 per share representing the offering price per share sold to other investors less the amount of the initial purchaser
discount or placement agent fee per share in the private placement. The cost of issuance of stock of approximately $1,093 is charged
directly to additional paid-in capital. The net proceeds to the Company after expenses were approximately $213,277.
On February 19, 2014, the Company sold an additional 13,570,000 shares of common stock in a private placement in reliance
on exemptions from registration under the Securities Act of 1933 at a price of $14.00 per share, subject to a placement fee of
$0.840 per share. The Company recorded the cost of obtaining new capital as a reduction of the related proceeds. The cost of
issuance of stock of approximately $12,146 is charged directly to additional paid-in capital. The net proceeds to the Company after
expenses were approximately $177,833.
On June 25, 2014, the Company issued 2,200,000 shares of 7.50% Non-Cumulative Preferred Stock ("Series A Preferred
Stock") in a public offering. Dividends on the Series A Preferred Stock when, as and if declared by the Company's Board of
Directors (the "Board") or a duly authorized committee of the Board, will be payable on the liquidation preference amount of
$25.00 per share, on a non-cumulative basis, quarterly in arrears on the 15th day of January, April, July and October of each year
(each, a "dividend payment date"), commencing on October 15, 2014, at an annual rate of 7.50%. Dividends on the Series A
Preferred Stock are not cumulative. Accordingly, in the event dividends are not declared on the Series A Preferred Stock for payment
on any dividend payment date, then those dividends will not accumulate and will not be payable. If the Company has not declared
a dividend before the dividend payment date for any dividend period, the Company will have no obligation to pay dividends for
that dividend period, whether or not dividends on the Series A Preferred Stock are declared for any future dividend payment. The
net proceeds the Company received from the issuance was approximately $53,164, after deducting the underwriting discount and
issuance expenses.
20. Benefits Plan
A significant number of the Company’s employees participate in a defined contribution plan. Employer contributions vary
based on criteria specific to the plan. Contribution expense was $2,265, $1,816 and $1,931 for the years ended December 31, 2014,
2013 and 2012, respectively.
F-62
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
21. Statutory Financial Data
Applicable insurance department regulations require the Company’s insurance subsidiaries to prepare statutory financial
statements in accordance with Statutory Accounting Practices ("SAP") prescribed or permitted by the Department of Insurance of
the state of domicile. Statutory net income (loss) for the years ended December 31, 2014, 2013 and 2012 and statutory capital and
surplus as per the annual financial statements of the Company’s insurance subsidiaries as of December 31 were as follows:
Year Ended December 31, 2014
Integon Indemnity Corporation
National General Insurance Company
Integon Preferred Insurance Company
Integon National Insurance Company
MIC General Insurance Corporation
National General Assurance Company
Integon Casualty Insurance Company
New South Insurance Company
Integon General Insurance Corporation
National General Insurance Company Online, Inc.
National Health Insurance Company
Personal Express Insurance Company
Imperial Fire and Casualty Insurance Company
National Automotive Insurance Company
Agent Alliance Insurance Company
National General Re Ltd.
National General Insurance Luxembourg, S.A.
National General Life Insurance Europe, S.A.
Year Ended December 31, 2013
Integon Indemnity Corporation
National General Insurance Company
Integon Preferred Insurance Company
Integon National Insurance Company
MIC General Insurance Corporation
National General Assurance Company
Integon Casualty Insurance Company
New South Insurance Company
Integon General Insurance Corporation
National General Insurance Company Online, Inc.
National Health Insurance Company
National General Re Ltd.
Statutory Capital
and Surplus
Required Statutory
Capital and Surplus
Statutory Net
Income (Loss)
$
32,879
$
2,228
$
27,923
9,324
332,405
19,800
17,490
11,453
6,890
11,310
10,878
11,536
15,520
41,018
7,013
16,464
442,400
14,638
15,000
261
173
98,974
222
891
178
101
261
106
161
65
6,599
487
321
112,810
2,500
3,700
18
527
(66)
11,397
50
195
135
321
353
(53)
1,169
789
178
1,502
(147)
54,688
402
(354)
Statutory Capital
and Surplus
Required Statutory
Capital and Surplus
Statutory Net
Income (Loss)
$
32,767
$
2,787
$
25,800
8,394
159,752
20,234
15,764
10,256
15,621
10,555
9,939
10,340
133,088
370
127
61,897
369
183
192
288
246
49
698
40,389
2,967
4,498
1,482
(33,202)
1,086
2,017
1,550
4,091
4,895
1,294
(1,246)
4,232
F-63
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Year Ended December 31, 2012
Integon Indemnity Corporation
National General Insurance Company
Integon Preferred Insurance Company
Integon National Insurance Company
MIC General Insurance Corporation
National General Assurance Company
Integon Casualty Insurance Company
New South Insurance Company
Integon General Insurance Corporation
National General Insurance Company Online, Inc.
National Health Insurance Company
National General Re Ltd.
Statutory Capital
and Surplus
Required Statutory
Capital and Surplus
Statutory Net
Income (Loss)
$
34,686
$
3,275
$
34,770
6,962
139,706
20,807
19,672
9,143
13,196
22,747
10,027
9,103
30,758
407
104
51,216
881
123
110
146
386
48
56
6,312
26,313
12,574
3,573
(34,275)
6,250
4,864
4,790
11,317
15,816
3,049
(751)
(2,923)
For the Company's U.S. insurance subsidiaries, the required statutory capital and surplus amount is equal to 1.5 times of
authorized control level of risk based capital as defined by NAIC or the minimum amount required to avoid regulatory oversight.
For National General Re Ltd., the amount is equal to the minimum capital required by Bermuda Monetary Authority.
Reciprocal Exchanges
The Reciprocal Exchanges prepare their statutory basis financial statements in accordance with SAP.
For the year ended December 31, 2014, the Reciprocal Exchanges had combined SAP net loss of $3,646. At December 31,
2014, the Reciprocal Exchanges had combined statutory capital and surplus of $74,952.
The Reciprocal Exchanges are required to maintain minimum capital and surplus in accordance with regulatory requirements.
As of December 31, 2014, the capital and surplus levels of the Reciprocal Exchanges exceeded such required levels.
The Reciprocal Exchanges are not owned by the Company, but managed through management agreements. Accordingly, the
Reciprocal Exchanges’ net assets are not available to the Company. In addition, no dividends can be paid from the Reciprocal
Exchanges to the Company.
22. Dividend Restrictions
The Company’s insurance subsidiaries are subject to statutory and regulatory restrictions, applicable to insurance companies,
imposed by the states of domicile, which limit the amount of cash dividends or distributions that they may pay unless special
permission is received from the state of domicile. This limit was approximately $286,346 and $79,286 as of December 31, 2014
and 2013, respectively. During the years ended December 31, 2014, 2013 and 2012, there were $12,000, $24,015 and $151,960
of dividends and return of capital paid by the insurance subsidiaries to the parent company, respectively. The Company obtained
permission from the states of domicile before the dividends were paid. Thereafter, the parent company paid $141,566, $54,105
and $120,000 in the form of a capital contribution to its subsidiary, Integon National Insurance Company as of December 31, 2014,
2013 and 2012, respectively. During 2013, National Health Insurance Company received a capital contribution from its parent
Integon Indemnity Corporation of $3,000.
F-64
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
23. Risk-Based Capital
Property and casualty insurance companies in the United States are subject to certain risk-based capital (“RBC”) requirements
as specified by the National Association of Insurance Commissioners. Under such requirements, the amount of capital and surplus
maintained by a property and casualty insurance company is to be determined on various risk factors. As of December 31, 2014
and 2013, the capital and surplus of the Company’s insurance subsidiaries exceeded the RBC requirements.
24. Share-Based Compensation
The Company currently has two equity incentive plan (the “Plans”). The Plans authorize up to an aggregate of 7,435,000
shares of Company stock for awards of options to purchase shares of the Company’s common stock, stock appreciation rights,
restricted stock, restricted stock units ("RSU"), unrestricted stock and other performance awards. The aggregate number of shares
of common stock for which awards may be issued may not exceed 7,435,000 shares, subject to the authority of the Company’s
Board of Directors to adjust this amount in the event of a consolidation, reorganization, stock dividend, stock split, recapitalization
or similar transaction affecting the Company’s common stock. As of December 31, 2014, approximately 1,839,470 shares of
Company common stock remained available for grants under the Plan.
The Company recognizes compensation expense under ASC 718-10-25 for its share-based payments based on the fair value
of the awards. The Company grants stock options at exercise prices equal to the fair market value of the Company’s stock on the
dates the options are granted. The options have a maximum term of ten years from the date of grant and vest primarily in equal
annual installments over a range of one to five years period following the date of grant for employee options. If a participant’s
employment relationship ends, the participant’s vested awards will remain exercisable for the shorter of a period of 30 days or the
period ending on the latest date on which such award could have been exercisable. The fair value of each option grant is separately
estimated for each grant date. The fair value of each option is amortized into compensation expense on a straight-line basis between
the grant date for the award and each vesting date. The Company has estimated the fair value of all stock option awards as of the
date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation
model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The Company
grants RSUs with a grant date value equal to the closing stock price of the Company’s stock on the dates the units are granted and
the RSUs generally vest over a period of four years.
The fair value for stock options was estimated at the date of grant with the following weighted average assumptions for the
years ended December 31, 2014, 2013 and 2012:
Volatility
Risk-free interest rate
Weighted average expected life in years
Forfeiture rate
Dividend rate
2014
Low-End High End
35.00%
2.26%
7.00
10.00%
0.40%
27.00%
1.74%
5.50
10.00%
0.40%
2013
Low-End High End
39.00%
2.27%
6.50
19.20%
—%
36.00%
0.95%
6.25
19.00%
—%
2012
39.50%
2.00%
6.50
16.00%
—%
Expected Price Volatility - this is a measure of the amount by which a price has fluctuated or is expected to fluctuate. For the years
ended December 31, 2013 and 2012, it was not possible to use actual experience to estimate the expected volatility of the price of
the common shares in estimating the value of the options granted because the Company's common shares were not traded on a
public exchange. As a substitute for such estimate, the Company used a set of comparable companies in the industry in which the
Company operates.
Risk-Free Interest Rate - this is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the
option. An increase in the risk-free interest rate will increase compensation expense.
F-65
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Expected Lives - this is the period of time over which the options granted are expected to remain outstanding giving consideration
to vesting schedules, historical exercise and forfeiture patterns. The Company uses the simplified method outlined in SEC Staff
Accounting Bulletin No. 107 to estimate expected lives for options granted during the period as historical exercise data is not
available and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of ten years. An
increase in the expected life will increase compensation expense.
Forfeiture Rate - this is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming
fully vested. An increase in the forfeiture rate will decrease compensation expense.
Dividend Yield - this is calculated by dividing the expected annual dividend by the share price of the Company at the valuation
date. An increase in the dividend yield will decrease compensation expense.
A summary of the Company’s stock option activity for the years ended December 31, 2014, 2013 and 2012 is shown below:
Year Ended December 31,
2014
2013
2012
Outstanding at beginning of year
Granted
Forfeited
Exercised
Shares
5,058,363
$
195,000
(17,188)
(125,582)
Outstanding at end of year
5,110,593
$
Weighted
Average
Exercise
Price
8.48
17.63
7.52
6.43
8.88
Weighted
Average
Exercise
Price
5.89
10.33
6.69
—
8.48
$
Shares
2,339,601
2,990,353
(271,591)
—
5,058,363
$
Weighted
Average
Exercise
Price
3.71
7.02
4.03
—
5.89
Shares
2,554,082
$
1,711,928
(1,926,409)
—
2,339,601
$
The weighted average grant date fair value of options granted was $6.76, $4.20 and $2.45 in 2014, 2013 and 2012, respectively.
The Company had approximately $5,999 and $7,670 of unrecognized compensation cost related to unvested stock options as of
December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, all option grants outstanding had an approximate
weighted average remaining life of 7.9 and 8.8 years, respectively. As of December 31, 2014 and 2013, there were approximately
2,347,412 and 853,554 exercisable shares with a weighted-average exercise price of $7.81 and $5.28, respectively.
The intrinsic value of stock options exercised during the years ended December 31, 2014, 2013 and 2012 was $1,325, $0
and $0, respectively. The intrinsic value of stock options that were outstanding as of December 31, 2014 and 2013 was $49,854
and $19,778, respectively.
Cash received from options exercised was $796, $0 and $0 during the years ended December 31, 2014, 2013 and 2012
respectively. The excess tax benefit from award exercises was approximately $0, $0 and $0 for the years ended December 31,
2014, 2013 and 2012, respectively.
A summary of the Company's RSU activity for the years ended December 31, 2014, 2013 and 2012 is shown below:
Year Ended December 31,
2014
2013
2012
Non-vested at beginning of year
Granted
Vested
Forfeited
Non-vested at end of year
RSUs
— $
330,555
—
(3,000)
327,555
Weighted
Average
Grant Date
Fair Value
—
17.45
—
18.02
17.44
$
F-66
RSUs
Weighted
Average
Grant Date
Fair Value
—
—
— $
—
—
—
— $
—
—
—
RSUs
Weighted
Average
Grant Date
Fair Value
—
—
— $
—
—
—
— $
—
—
—
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Compensation expense for all share-based compensation under ASC 718-10-30 was $2,859, $2,727 and $(111) during 2014,
2013 and 2012, respectively.
25. Earnings Per Share
The following is a summary of the elements used in calculating basic and diluted earnings per common share:
Net income attributable to common NGHC stockholders - basic
Effect of potentially dilutive securities:
Convertible preferred stock dividends
Net income attributable to common NGHC stockholders - diluted
$
$
Year Ended December 31,
2013
2014
2012
99,952
$
40,151
$
28,032
—
2,158
99,952
$
42,309
$
4,674
32,706
Weighted average number of common shares outstanding – basic
91,499,122
65,017,579
45,554,570
Potentially dilutive securities:
Share options
Restricted stock units
Convertible preferred stock
1,495,315
436,700
1,868,171
148,124
—
—
5,288,719
—
12,295,430
58,286,700
Weighted average number of common shares outstanding – diluted
93,515,417
71,801,613
Basic earnings per share attributable to NGHC common
stockholders
Diluted earnings per share attributable to NGHC common
stockholders
$
$
1.09
1.07
$
$
0.62
0.59
$
$
0.62
0.56
As of December 31, 2014, 2013 and 2012, 2,674,014, 3,643,552 and 1,902,860 share options, respectively, were excluded
from diluted earnings per common share as they were anti-dilutive.
F-67
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
26. Segment Information
The Company currently operates two business segments, Property and Casualty and Accident and Health. The “Corporate
and Other” column represents the activities of the holding company, as well as income from the Company’s investment portfolio.
The Company evaluates segment performance based on segment profit separately from the results of our investment portfolio.
Other operating expenses allocated to the segments are called General and Administrative expenses which are allocated on an
actual basis except salaries and benefits where management’s judgment is applied. In determining total assets by segment, the
Company identifies those assets that are attributable to a particular segment such as deferred acquisition cost, reinsurance
recoverable, goodwill, intangible assets and prepaid reinsurance while the remaining assets are allocated to Corporate and Other
segment.
The Property and Casualty Segment, which includes the Reciprocal Exchanges and the Management Companies, reports the
management fees earned by NGHC from the Reciprocal Exchanges for underwriting, investment management and other services
as service and fee income for the Company. The effects of these management fees between NGHC and the Reciprocal Exchanges
are eliminated in consolidation to derive consolidated net income.
The following tables summarize the underwriting results of the Company’s operating segments:
Year Ended December 31, 2014
Underwriting revenue:
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income (primarily related
parties)
Service and fee income
Total underwriting revenue
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Total underwriting expenses
Underwriting income (loss)
Net investment income
Net realized losses on investments
Other revenue
Equity in earnings of unconsolidated subsidiaries
Interest expense
Provision for income taxes
Net loss (income) attributable to non-controlling
interest
Net income (loss) attributable NGHC
NGHC
Reciprocal Exchanges
Net income (loss) attributable NGHC
$
$
$
$
Property and
Casualty
Accident and
Health
Corporate and
Other
Total
$
1,994,708
(264,686)
1,730,022
(217,278)
1,512,744
12,430
110,114
1,635,288
967,176
260,397
292,145
1,519,718
115,570
—
—
—
—
—
—
140,399
(397)
140,002
(19,526)
120,476
—
58,457
178,933
85,889
54,692
56,617
197,198
(18,265)
—
—
—
—
—
—
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
52,426
(2,892)
(1,660)
1,180
(17,736)
(23,876)
—
115,570
107,975
7,595
115,570
$
$
$
—
(18,265) $
(18,265) $
—
(18,265) $
(2,504)
4,938
4,938
—
4,938
$
$
$
F-68
2,135,107
(265,083)
1,870,024
(236,804)
1,633,220
12,430
168,571
1,814,221
1,053,065
315,089
348,762
1,716,916
97,305
52,426
(2,892)
(1,660)
1,180
(17,736)
(23,876)
(2,504)
102,243
94,648
7,595
102,243
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Property and
Casualty
Accident and
Health
Corporate and
Other
Total
33,501
(285)
33,216
1
33,217
—
44,789
78,006
26,135
24,378
28,207
78,720
(714)
—
—
—
—
—
—
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
30,808
(1,669)
16
1,274
(2,042)
(11,140)
—
(714) $
(82)
17,165
$
1,338,755
(659,439)
679,316
8,750
688,066
87,100
127,541
902,707
462,124
134,887
280,552
877,563
25,144
30,808
(1,669)
16
1,274
(2,042)
(11,140)
(82)
42,309
Year Ended December 31, 2013
Underwriting revenue:
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income (primarily related
parties)
Service and fee income
Total underwriting revenue
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Total underwriting expenses
Underwriting income (loss)
Net investment income
Net realized losses on investments
Other revenue
Equity in earnings of unconsolidated subsidiaries
Interest expense
Provision for income taxes
Net loss (income) attributable to non-controlling
interest
$
$
1,305,254
(659,154)
646,100
8,749
654,849
87,100
82,752
824,701
435,989
110,509
252,345
798,843
25,858
—
—
—
—
—
—
—
Net income (loss) attributable NGHC
$
25,858
$
F-69
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Property and
Casualty
Accident and
Health
Corporate and
Other
Total
$
— $
Year Ended December 31, 2012
Underwriting revenue:
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income (primarily related
parties)
Service and fee income
Total underwriting revenue
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Total underwriting expenses
Underwriting income (loss)
Net investment income
Net realized gains on investments
Bargain purchase gain
Equity in losses of unconsolidated subsidiaries
Interest expense
Provision for income taxes
$
$
1,343,658
(719,205)
624,453
(58,243)
566,210
89,360
77,373
732,943
387,628
99,699
241,046
728,373
4,570
—
—
—
—
—
—
Net income (loss) attributable NGHC
$
4,570
$
8,267
(226)
8,041
1
8,042
—
16,366
24,408
15,058
11,072
5,598
31,728
(7,320)
—
—
—
—
—
—
(7,320) $
—
—
—
—
—
—
—
—
—
—
—
—
30,550
16,612
3,728
(1,338)
(1,787)
(12,309)
35,456
$
1,351,925
(719,431)
632,494
(58,242)
574,252
89,360
93,739
757,351
402,686
110,771
246,644
760,101
(2,750)
30,550
16,612
3,728
(1,338)
(1,787)
(12,309)
32,706
The following tables summarize the financial position of the Company's operating segments as of December 31, 2014 and
2013:
December 31, 2014
Premiums and other receivables, net
Deferred acquisition costs
Reinsurance recoverable on unpaid losses
Prepaid reinsurance premiums
Goodwill and Intangible assets, net
Corporate and other assets
Total assets
Property and
Casualty
Accident and
Health
Corporate and
Other
$
$
687,328
119,167
911,790
102,761
260,739
—
2,081,785
$
$
70,463
6,832
8
—
58,862
—
136,165
$
$
— $
—
—
—
—
2,222,037
2,222,037
$
Total
757,791
125,999
911,798
102,761
319,601
2,222,037
4,439,987
F-70
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
December 31, 2013
Property and
Casualty
Accident and
Health
Corporate and
Other
Total
Premiums and other receivables, net
$
434,433
$
14,819
$
— $
Deferred acquisition costs
Reinsurance recoverable on unpaid losses
Prepaid reinsurance premiums
Goodwill and Intangible assets, net
Corporate and other assets
Total assets
59,048
950,828
50,878
93,769
—
1,064
—
—
63,146
—
—
—
—
—
449,252
60,112
950,828
50,878
156,915
1,169,530
1,169,530
$
1,588,956
$
79,029
$
1,169,530
$
2,837,515
The following table shows an analysis of the Company's gross and net premiums written and net earned premium by
geographical location for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31,
2014
Reciprocal
Exchanges
Total
2013
Total
2012
Total
NGHC
Gross premium written - North America
$ 1,965,942
$
70,042
$ 2,035,984
$ 1,338,755
$ 1,351,925
Gross premium written - Europe
Net premium written - North America
Net premium written - Bermuda
Net premium written - Europe
Net earned premium - North America
Net earned premium - Bermuda
Net earned premium - Europe
99,123
927,760
750,065
139,123
715,906
750,065
119,627
—
53,076
—
—
47,622
—
—
99,123
980,836
750,065
139,123
763,528
750,065
119,627
—
382,358
267,263
29,695
391,108
267,263
29,695
—
583,912
40,082
8,500
525,670
40,082
8,500
F-71
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following tables show an analysis of the Company's gross premium written, net premium written and net earned premium
by product type for the years ended December 31, 2014, 2013 and 2012:
Gross Premium Written
Property & Casualty
Personal Auto
Homeowners
RV/Packaged
Commercial Auto
Other
P&C Total
Accident & Health Total
NGHC Total
Reciprocal Exchanges
Personal Auto
Homeowners
Other
Reciprocal Exchanges Total
Total
Net Premium Written
Property & Casualty
Personal Auto
Homeowners
RV/Packaged
Commercial Auto
Other
P&C Total
Accident & Health Total
NGHC Total
Reciprocal Exchanges
Personal Auto
Homeowners
Other
Reciprocal Exchanges Total
Total
Year Ended December 31,
2014
2013
2012
$
1,241,575
$
1,016,728
$
1,076,587
366,997
153,553
146,124
16,417
1,389
158,300
116,774
12,063
—
161,153
89,214
16,704
1,924,666
140,399
2,065,065
$
$
1,305,254
33,501
1,338,755
$
$
1,343,658
8,267
1,351,925
32,436
$
— $
33,028
4,578
—
—
70,042
$
— $
—
—
—
—
2,135,107
$
1,338,755
$
1,351,925
$
$
$
$
$
Year Ended December 31,
2014
2013
2012
$
1,047,795
$
487,311
$
488,957
333,586
148,456
132,002
15,107
1,389
88,553
61,163
7,684
1,676,946
140,002
1,816,948
$
$
646,100
33,216
679,316
$
$
—
84,208
43,206
8,082
624,453
8,041
632,494
32,075
$
— $
17,127
3,874
—
—
53,076
$
— $
—
—
—
—
1,870,024
$
679,316
$
632,494
$
$
$
$
$
F-72
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Net Earned Premium
Property & Casualty
Personal Auto
Homeowners
RV/Packaged
Commercial Auto
Other
P&C Total
Accident & Health Total
NGHC Total
Reciprocal Exchanges
Personal Auto
Homeowners
Other
Reciprocal Exchanges Total
Total
27. Condensed Quarterly Financial Data (Unaudited)
The following tables summarize the Company's quarterly financial data:
Year Ended December 31,
2014
2013
2012
$
979,082
$
502,160
$
442,250
204,285
147,587
118,759
15,409
444
88,494
54,913
8,838
1,465,122
120,476
1,585,598
$
$
654,849
33,217
688,066
$
$
—
80,044
35,415
8,501
566,210
8,042
574,252
28,405
$
— $
15,779
3,438
—
—
47,622
$
— $
—
—
—
—
1,633,220
$
688,066
$
574,252
$
$
$
$
$
Total revenues
Net income
Net income attributable to NGHC common shareholders
Comprehensive income - attributable to NGHC
shareholders
Basic earnings per common share attributable to NGHC
shareholders
Diluted earnings per common share attributable to
NGHC shareholders
Total revenues
Net income
Net income attributable to NGHC common shareholders
Comprehensive income (loss) - attributable to NGHC
shareholders
Basic earnings per common share attributable to NGHC
shareholders
Diluted earnings per common share attributable to
NGHC shareholders
March 31,
June 30,
$
409,149
$
442,930
September 30,
496,463
$
December 31,
$
513,553
2014
26,424
26,392
34,566
0.31
0.30
$
$
30,296
30,334
46,597
0.32
0.32
$
$
2013
32,550
32,060
22,330
0.34
0.33
$
$
15,477
11,166
11,517
0.12
0.12
March 31,
June 30,
212,862
7,716
6,410
7,843
0.14
0.13
$
$
$
217,121
13,950
13,054
$
September 30,
232,575
12,747
12,747
(10,687)
12,581
0.24
0.22
$
$
0.16
0.16
December 31,
$
$
$
269,304
7,978
7,940
7,523
0.10
0.10
$
$
$
$
$
F-73
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
28. Subsequent Events
On January 23, 2015, the Company closed its acquisition of Healthcare Solutions Team, LLC (“HST”), an Illinois based
healthcare insurance general agency. The Company paid approximately $15,000 on the acquisition date and agreed to pay potential
future earn out payments based on the overall profitability of HST and the business underwritten by the Company's insurance
subsidiaries which is produced by HST.
F-74
NATIONAL GENERAL HOLDINGS CORP.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(In Thousands)
December 31, 2014
Cost(1)
Value
Fixed Maturities:
Bonds:
Schedule I
Amount
at which
shown in the
Balance Sheet
U.S. government and government agencies and authorities
$
37,544
$
39,077
$
States, municipalities and political subdivisions
Foreign governments
Public utilities
Convertibles and bonds with warrants attached
All other corporate bonds (2)
Certificates of deposit
Redeemable preferred stock
Total Fixed Maturities
Equity Securities:
Common stock:
172,617
6,194
62,901
—
177,409
5,536
63,434
—
39,077
177,409
5,536
63,434
—
1,321,171
1,360,826
1,360,826
—
—
—
—
—
—
1,600,427
1,646,282
1,646,282
Public utilities, banks, trust and insurance companies
Industrial, miscellaneous and all other
Nonredeemable preferred stocks
Total Equity Securities
Other Investments (3)
Other Short-term Investments (3)
Total Investments (other than investments in related parties)
5,552
41,717
7,755
55,024
4,764
10,540
6,535
34,389
7,695
48,619
4,764
10,540
6,535
34,389
7,695
48,619
4,764
10,540
$
1,670,755
$
1,710,205
$
1,710,205
(1) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums
or accrual of discounts.
(2) Includes asset-backed securities, residential and commercial mortgage-backed securities.
(3) Approximates market value.
S-1
NATIONAL GENERAL HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS — PARENT COMPANY ONLY
(In Thousands, Except Shares and Par Value per Share)
Schedule II
December 31,
2014
2013
Assets
Investments:
Equity securities, available-for-sale, at fair value
$
— $
Fixed maturities, available-for-sale, at fair value (amortized cost $15,427 and $63,702)
Equity investments in subsidiaries
Total investments
Accrued interest
Cash and cash equivalents
Deferred tax asset
Income tax receivable
Other assets
Due from affiliates
Total Assets
Liabilities and Stockholders' Equity
Liabilities:
Due to affiliates - net
Notes payable
Line of credit
Income tax payable
Other liabilities
Total Liabilities
Stockholders' Equity:
Common stock, $0.01 par value - authorized 150,000,000 shares, issued and
outstanding 93,427,382 shares - 2014; authorized 150,000,000 shares, issued and
outstanding 79,731,800 shares - 2013
Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and
outstanding 2,200,000 shares - 2014; authorized 10,000,000 shares, issued and
outstanding 0 shares - 2013
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total National General Holdings Corp. Stockholders' Equity
Non-controlling interest
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
S-2
15,844
1,339,161
1,355,005
163
1,282
9,575
—
4,923
—
1,939
61,476
620,474
683,889
188
1,157
1,227
138
—
16,267
$
1,370,948
$
702,866
$
9,266
$
250,000
—
6,616
31,616
297,498
—
—
59,200
—
799
59,999
934
797
55,000
690,736
20,192
292,832
1,059,694
13,756
1,073,450
1,370,948
$
$
—
437,006
7,425
197,552
642,780
87
642,867
702,866
NATIONAL GENERAL HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME — PARENT COMPANY ONLY
(In Thousands)
Schedule II
Income:
Investment income (loss)
Net realized loss on investments
Other than temporary impairment loss
Equity in undistributed net income of consolidated subsidiaries
and partially-owned companies
Total Income
Expenses:
Interest expense
Federal income tax benefit
Other
Total Expenses
Net Income
Less: Net loss (income) attributable to non-controlling interest
Net income attributable to NGHC
Dividends on preferred stock
Net income attributable to NGHC common stockholders
Year Ended December 31,
2014
2013
2012
$
$
$
$
$
3,416
(2,489)
—
$
1,842
(2,830)
(2,869)
112,850
113,777
11,753
(2,996)
273
9,030
104,747
(2,504)
102,243
(2,291)
99,952
$
$
$
46,826
42,969
1,916
(1,981)
643
578
42,391
(82)
42,309
(2,158)
40,151
$
$
$
(819)
—
—
34,660
33,841
1,775
(719)
79
1,135
32,706
—
32,706
(4,674)
28,032
S-3
NATIONAL GENERAL HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS — PARENT COMPANY ONLY
(In Thousands)
Schedule II
Year Ended December 31,
2014
2013
2012
$
102,243
$
42,309
$
32,706
(116,366)
2,596
2,489
—
(1,655)
2,859
25
(4,923)
25,533
(19,537)
6,754
28,714
28,732
(102,191)
173,804
(517,953)
(446,340)
230,997
796
—
(59,200)
250,000
(4,860)
417,733
125
1,157
1,282
$
(46,744)
(62)
2,830
2,869
—
2,727
(188)
—
(25,986)
(448)
(138)
867
(21,964)
(200,587)
102,279
(89,583)
(187,891)
213,277
—
—
(57,570)
68,700
(13,796)
210,611
756
401
1,157
$
(7,308)
—
—
—
—
(111)
570
—
—
—
—
316
26,173
—
—
—
—
—
—
(1,359)
(31,368)
6,945
—
(25,782)
391
10
401
Cash Flows From Operating Activities:
Net income
Reconciliation of net income to net cash provided by (used in)
operating activities:
Equity in earnings of unconsolidated subsidiaries
Net amortization of discount on investments
Realized capital losses on sale of investments
Realized loss on other than temporary impairment
Foreign currency translation adjustment, net of tax
Stock compensation expenses
Changes in assets and liabilities:
Accrued interest
Other assets
Due to/from affiliates
Deferred tax asset
Income tax receivable
Other liabilities
Net Cash Provided By (Used in) Operating Activities
Cash Flows From Investing Activities:
Purchases of fixed maturities
Proceeds from sale of fixed maturities
Investment in consolidated subsidiaries
Net Cash Used In Investing Activities
Cash Flows From Financing Activities:
Proceeds from issuances of common and preferred stock
Exercises of stock options
Return of capital
Notes payable repayments
Proceeds from notes payable
Dividends paid
Net Cash Provided By (Used In) Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
$
S-4
NATIONAL GENERAL HOLDINGS CORP.
SUPPLEMENTARY INSURANCE INFORMATION
(In Thousands)
Schedule III
Years Ended December 31,
Deferred
Policy
Acquisition
Costs
Unpaid
Loss and
Loss
Adjustment
Expense
Reserves
Unearned
Premiums
Net Earned
Premium
Net
Investment
Income
Loss and
Loss
Adjustment
Expense
Incurred
Deferred
Acquisition
Costs
Amortization
Other
Operating
Expenses
Net
Written
Premium
Segment
2014
Property and casualty
$ 119,167
$ 1,521,134
$ 851,875
$1,512,744
$
— $ 967,176
$
171,693
$
88,704
$1,730,022
Accident and health
Corporate and other
6,832
—
41,019
12,561
120,476
—
85,889
—
—
—
52,426
—
Total
2013
$ 125,999
$ 1,562,153
$ 864,436
$1,633,220
Property and casualty
$
59,048
$ 1,253,516
$ 476,220
$ 654,849
Accident and health
Corporate and other
1,064
—
5,725
—
12
—
33,217
—
Total
2012
Property and casualty
Accident and health
Corporate and other
$
$
60,112
$ 1,259,241
$ 476,232
$ 688,066
60,234
$ 1,276,700
$ 488,585
$ 566,210
—
—
9,833
—
13
—
8,042
—
$
$
$
$
52,426
$ 1,053,065
— $ 435,989
—
26,135
30,808
—
30,808
$ 462,124
— $ 387,628
—
15,058
30,550
—
$
$
$
$
32,624
—
204,317
64,694
425
—
65,119
58,095
—
—
$
$
$
$
22,068
140,002
—
—
110,772
$1,870,024
45,815
$ 646,100
23,953
33,216
—
—
69,768
$ 679,316
41,604
$ 624,453
11,072
—
8,041
—
Total
$
60,234
$ 1,286,533
$ 488,598
$ 574,252
$
30,550
$ 402,686
$
58,095
$
52,676
$ 632,494
S-5
NATIONAL GENERAL HOLDINGS CORP.
REINSURANCE
(In Thousands)
Schedule IV
Years Ended December 31,
2014
Premiums
2013
Premiums
2012
Premiums
Gross
Amount
Ceded to
Other
Companies
Assumed
Other
Companies
Net Amount
Percent of
Amount
Assumed to
Net
$ 1,496,709
$ 1,325,251
$ 1,294,736
$
$
$
(277,899) $
414,410
$ 1,633,220
25.4%
(663,055) $
25,870
(736,784) $
16,300
$
$
688,066
574,252
3.8%
2.8%
S-6
NATIONAL GENERAL HOLDINGS CORP.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Schedule V
Years Ended December 31,
Description
2014
Premiums and other receivables:
Allowance for uncollectible accounts
2013
Premiums and other receivables:
Allowance for uncollectible accounts
2012
Premiums and other receivables:
Allowance for uncollectible accounts
Additions
Balance at
beginning of
the year
Charged to
costs and
expenses
Charged to
other
accounts
Deductions
Balance at
end of the
year
$
$
$
6,064
$
29,133
$
— $
(25,469) $
9,728
6,573
$
22,484
$
— $
(22,993) $
6,064
4,164
$
19,966
$
— $
(17,557) $
6,573
S-7
NATIONAL GENERAL HOLDINGS CORP.
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(In Thousands)
Losses and Loss Adjustment
Expenses Incurred Related to
Schedule VI
Paid Losses
and
Loss
Adjustment
Expenses
Prior Years
19,277
6,085
1,298
$
$
$
865,980
448,797
415,604
Years Ended December 31,
2014
2013
2012
Current Year
1,033,788
$
$
$
456,039
401,388
$
$
$
S-8
INDEX TO EXHIBITS
The following documents are filed as exhibits to this report:
Exhibit
No.
Description
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Second Amended and Restated Certificate of Incorporation of National General Holdings Corp. (the
"Company") (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form
S-1 (No. 333-190454) filed on August 7, 2013)
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s
Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Certificate of Designations for 7.50% Non-Cumulative Preferred Stock, Series A (incorporated by reference
to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed on August 11, 2014)
Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the
Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Registration Rights Agreement, dated as of October 16, 2009, by and among the Company, The Michael
Karfunkel 2005 Grantor Retained Annuity Trust, Michael Karfunkel and AmTrust International Insurance,
Ltd., as assignee of AmTrust Financial Services, Inc. (incorporated by reference to Exhibit 4.2 to the
Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Form of Stock Certificate evidencing 7.50% Non-Cumulative Preferred Stock, Series A (incorporated by
reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2014)
Indenture, dated as of May 23, 2014, by and between the Company, as Issuer, and The Bank of New York
Mellon, as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
filed on May 28, 2014)
First Supplemental Indenture, dated as of May 23, 2014, by and between the Company, as Issuer, and The
Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K filed on May 28, 2014)
Personal and Commercial Automobile Quota Share Reinsurance Agreement between Integon National
Insurance Company and Technology Insurance Company, Inc., Maiden Insurance Company Ltd., and ACP
Re, Ltd., effective March 1, 2010 (incorporated by reference to Exhibit 10.4 to the Company’s Registration
Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Addendum No. 1 to Personal and Commercial Automobile Quota Share Reinsurance Agreement between
Integon National Insurance Company and Technology Insurance Company, Inc., Maiden Insurance
Company Ltd., and ACP Re, Ltd., effective October 1, 2012 (incorporated by reference to Exhibit 10.5 to the
Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Master Services Agreement between AmTrust North America, Inc. and National General Management
Corp., dated February 22, 2012 (incorporated by reference to Exhibit 10.6 to the Company’s Registration
Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
American Capital Acquisition Corporation 2010 Equity Incentive Plan (incorporated by reference to Exhibit
10.7 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Form of Statutory Time-Based Stock Option Agreement for the American Capital Acquisition Corporation
2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration
Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Amendment to Form of Statutory Time-Based Stock Option Agreement for the American Capital
Acquisition Corporation 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the
Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Registration
Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Form of Non-Qualified Stock Option Award Agreement for the NGHC 2013 Equity Incentive Plan
(incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (No.
333-190454) filed on August 7, 2013)
Form of Incentive Stock Option Award Agreement for the NGHC 2013 Equity Incentive Plan (incorporated
by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed
on August 7, 2013)
Exhibit
No.
10.10*
10.11*
10.12*
10.13*
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Description
Form of Restricted Stock Unit Agreement for the NGHC 2013 Equity Incentive Plan (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on August 11, 2014)
Form of Indemnification Agreement for Directors and Certain Officers (incorporated by reference to Exhibit
10.14 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Employment Agreement, dated as of January 1, 2013, by and between National General Management Corp.
and Byron Storms (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on
Form S-1 (No. 333-190454) filed on August 7, 2013)
Employment Agreement, dated as of January 1, 2013, by and between National General Management Corp.
and Michael Weiner (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on
Form S-1 (No. 333-190454) filed on August 7, 2013)
Portfolio Transfer and Quota Share Agreement, dated as of January 1, 2013, by and between Wesco
Insurance Company and National Health Insurance Comp (incorporated by reference to Exhibit 10.17 to the
Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
Amended and Restated Marketing Agreement, dated as of December 21, 2012, by and among Good Sam
Enterprises, LLC, Camping World, Inc., CWI, Inc. and National General Insurance Marketing, Inc.
(incorporated by reference to Exhibit 10.18 to Amendment No. 1 to the Company’s Registration Statement
on Form S-1 (No. 333-190454) filed on September 24, 2013) (confidential treatment granted under Rule
24b-2 as to certain portions which are omitted and filed separately with the SEC)
Personal Lines Cut-Through Quota Share Reinsurance Agreement, dated as of January 3, 2014, by and
among Tower Insurance Company of New York, Castle Point National Insurance Company, Tower National
Insurance Company, Hermitage Insurance Company, Castle Point Florida Insurance Company, Kodiak
Insurance Company, North East Insurance Company, York Insurance Company of Maine, Massachusetts
Homeland Insurance Company, Preserver Insurance Company and Castle Point Insurance Company, as
Ceding Companies, and Integon National Insurance Company, as Reinsurer (incorporated by reference to
Exhibit 10.21 to the Company’s Amendment No. 3 to the Registration Statement on Form S-1 (No.
333-190454) filed on January 31, 2014)
Amendment No. 1 to Personal Lines Cut-Through Quota Share Reinsurance Agreement, dated as of January
3, 2014, by and among Tower Insurance Company of New York, Castle Point National Insurance Company,
Tower National Insurance Company, Hermitage Insurance Company, Castle Point Florida Insurance
Company, Kodiak Insurance Company, North East Insurance Company, York Insurance Company of Maine,
Massachusetts Homeland Insurance Company, Preserver Insurance Company and Castle Point Insurance
Company, as Ceding Companies, and Integon National Insurance Company, as Reinsurer (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014)
Amendment No. 2 to Personal Lines Cut-Through Quota Share Reinsurance Agreement, dated as of January
3, 2014, by and among Tower Insurance Company of New York, Castle Point National Insurance Company,
Tower National Insurance Company, Hermitage Insurance Company, Castle Point Florida Insurance
Company, Kodiak Insurance Company, North East Insurance Company, York Insurance Company of Maine,
Massachusetts Homeland Insurance Company, Preserver Insurance Company and Castle Point Insurance
Company, as Ceding Companies, and Integon National Insurance Company, as Reinsurer (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014)
Amended and Restated Personal Lines Stock and Asset Purchase Agreement, effective as of April 8, 2014,
by and between ACP Re, Ltd and the Company (incorporated by reference to Exhibit 10.20 to the
Company’s Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-195262) filed on April
30, 2014)
Amended and Restated Personal Lines Master Agreement, dated as of July 23, 2014, by and between ACP
Re Ltd. and the Company (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q filed on August 11, 2014)
Credit Agreement, dated September 15, 2014, among the Company as Administrative Agent, ACP Re Ltd.
and London Acquisition Company Limited as Borrowers, ACP Re Holdings, LLC as Guarantor, and
AmTrust International Insurance, Ltd. and National General Re Ltd. as Lenders (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 17, 2014)
Exhibit
No.
10.22
12.1
21.1
23.1
31.1
31.2
32.1
32.2
101.1
Description
Personal Lines Quota Share Reinsurance Agreement, dated as of September 15, 2014, by and among Tower
Insurance Company of New York, CastlePoint National Insurance Company, Tower National Insurance
Company, Hermitage Insurance Company, Castle Point Florida Insurance Company, North East Insurance
Company, York Insurance Company of Maine, Massachusetts Homeland Insurance Company, Preserver
Insurance Company and Castle Point Insurance Company, as Ceding Companies, and Integon National
Insurance Company, as Reinsurer (incorporated by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on September 17, 2014)
Computation of Ratio of Earnings to Fixed Charges (filed herewith)
List of subsidiaries of the Company (filed herewith)
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm, relating to the Financial
Statements of the Company (filed herewith)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification of Chief Executive Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
Certification of Chief Financial Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31,
2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as
of December 31, 2014 and 2013; (ii) the Consolidated Statements of Income for the years ended December
31, 2014, 2013 and 2012; (iii) the Consolidated Statements of Comprehensive Income for the years ended
December 31, 2014, 2013 and 2012; (iv) the Consolidated Statements of Changes in Stockholders’ Equity
for the years ended December 31, 2014, 2013 and 2012; (v) the Consolidated Statements of Cash Flows for
the years ended December 31, 2014, 2013 and 2012; and (vi) the Notes to the Consolidated Financial
Statements (submitted electronically herewith)
* Management contract or compensatory plan or arrangement.
National General Holdings Corp.
Computation of Ratio of Earnings to Fixed Charges
(Amounts in Thousands)
EXHIBIT 12.1
Fiscal Year Ended
Period from
March 1, 2010
(inception) to
December 31,
2014
2013
2012
2011
2010
$ 127,443
17,736
$ 145,179
$
$
52,257
2,042
54,299
$
$
46,353
1,787
48,140
$
$
48,655
1,994
50,649
$
$
140,743
1,795
142,538
$
— $
— $
— $
— $
(2)
(2)
$ 145,181
82
82
—
—
14
14
$
54,217
$
48,140
$
50,635
$
142,538
—
—
—
1,795
—
1,795
79.41
Earnings
Pretax income from continuing operations before
adjustment for income or loss from equity investees
Fixed charges
Less:
Interest capitalized
Non-controlling interest in pre-tax income of
subsidiaries that have not incurred fixed charges
Total Earnings
Fixed Charges:
Interest expensed and capitalized, and amortized
premiums, discounts and capitalized expenses
related to indebtedness
Expense of the interest within rental expense(1)
Total Fixed Charges
17,736
—
2,042
—
1,787
—
1,994
—
$
17,736
$
2,042
$
1,787
$
1,994
$
Ratio of Earnings to Fixed Charges
8.19
26.55
26.94
25.39
(1) Deemed to be immaterial
EXHIBIT 21.1
SUBSIDIARIES
Entity Name
Jurisdiction of Incorporation or Formation
1100 Compton, LLC
ABC Agency Network, Inc.
ABC Agency Network of Texas
Adirondack AIF, LLC
Agent Alliance Insurance Company
AIBD Insurance Company IC
Alliance of Professional Service Organizations, LLC
Allied Producers Reinsurance Company, Ltd
American Auto Insurance Agency, Inc.
Delaware
Louisiana
Texas
Delaware
Alabama
Delaware
Delaware
Bermuda
Louisiana
American Capital Acquisition Investments S.A.
Luxembourg
America’s Health Care/RX Plan Agency, Inc.
Association of Independent Beverage Distributors, LLC
Care Financial of Texas, LLC
Clearside General Insurance Services, LLC
Distributor Innovations and Benefit Savings Solutions, LLC
Distributors Insurance Company PCC
Euro Accident Health and Care Insurance Aktiebolag
GM Motor Club, Inc.
Healthcare Solutions Team, LLC
Imperial Fire and Casualty Insurance Company
Imperial General Agency of Texas, Inc.
Imperial Insurance Managers, LLC
Imperial Marketing Corporation
Integon Casualty Insurance Company
Integon General Insurance Corporation
Integon Indemnity Corporation
Integon National Insurance Company
Integon Preferred Insurance Company
Integrity Underwriters, Inc.
Louisiana General Agency, Inc.
MIC General Insurance Corporation
National Automotive Insurance Company
National General Alpha Re
National General Assurance Company
National General Beta Re
National General Holdings BM, Ltd
National General Holdings Luxembourg, s.a.r.l.
National General Insurance Company
National General Insurance Luxembourg, S.A
National General Insurance Management Ltd
Delaware
Delaware
Texas
California
Delaware
Delaware
Sweden
North Carolina
Illinois
Louisiana
Texas
Texas
Louisiana
North Carolina
North Carolina
North Carolina
North Carolina
North Carolina
Louisiana
Louisiana
Michigan
Louisiana
Luxembourg
Missouri
Luxembourg
Bermuda
Luxembourg
Missouri
Luxembourg
Bermuda
Entity Name
Jurisdiction of Incorporation or Formation
National General Insurance Marketing, Inc.
National General Insurance Online, Inc.
National General Life Insurance Europe, S.A.
National General Lux RE I S.A.
National General Management Corp.
National General Re, Ltd
National General Reinsurance Broker, Ltd
National Health Insurance Company
New Jersey Skylands Management, LLC
New South Insurance Company
Personal Express Insurance Company
Personal Express Insurance Services, Inc.
Professional Services Captive Corporation IC
RAC Insurance Partners, LLC
Red Partners Operating Solutions, LLC
Reliant Financial Group, LLC
The Association Benefits Solution, LLC
Velapoint, LLC
Missouri
Missouri
Luxembourg
Luxembourg
Delaware
Bermuda
Bermuda
Texas
New Jersey
North Carolina
Alabama
California
Delaware
Florida
Delaware
Oregon
Delaware
Washington
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
National General Holdings Corp.
New York, New York
We hereby consent to the incorporation by reference in the Registration Statement on Form S-1 (No.
333-198273) and Registration Statement on Form S-8 (No. 333-194493) of National General Holdings
Corp. of our report dated March 9, 2015, relating to the consolidated financial statements and financial
statement schedules, which appears in this Form 10-K.
/s/ BDO USA, LLP
New York, New York
March 9, 2015
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Karfunkel, certify that:
1.
I have reviewed this Annual Report on Form 10-K of National General Holdings Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 9, 2015
By:
/s/ Michael Karfunkel
Michael Karfunkel
Chairman, President and Chief Executive
Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Weiner, certify that:
1.
I have reviewed this Annual Report on Form 10-K of National General Holdings Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 9, 2015
By:
/s/ Michael Weiner
Michael Weiner
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael
Karfunkel, Chairman and Chief Executive Officer (Principal Executive Officer) of National General Holdings Corp. (the
“Company”), hereby certify, that, to my knowledge:
1. The Annual Report on Form 10-K for the year ended December 31, 2014 (the “Report”) of the Company fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 9, 2015
By:
/s/ Michael Karfunkel
Michael Karfunkel
Chairman, President and Chief Executive
Officer
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael
Weiner, Chief Financial Officer (Principal Financial Officer) of National General Holdings Corp. (the “Company”), hereby
certify, that, to my knowledge:
1. The Annual Report on Form 10-K for the year ended December 31, 2014 (the “Report”) of the Company fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 9, 2015
By:
/s/ Michael Weiner
Michael Weiner
Chief Financial Officer
(Principal Financial Officer)
Inside Front Cover
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59 Maiden Lane, 38th Floor
New York, NY 10038
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