2019
A N N U A L R E P O R T
6
5
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20
15
10
5
0
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350
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200
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100
90
80
70
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50
40
30
20
10
0
6
5
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3
2
1
0
Gross Written
Premium
($ in billions)
Net Written
Premium
($ in billions)
Net Earned Premium
($ in billions)
Operating Return
on Average Equity
$5.0
$5.1
NATIONAL GENERAL HOLDINGS CORP., headquartered in New York
$4.4
City, is a specialty personal lines insurance holding company. National
$3.5
$3.5
$3.4
$3.6
$4.0
$3.9
General provides personal automobile, homeowners, umbrella, health,
16.1%
14.6%
7.9%
’17
and other niche insurance products. The group traces its roots back to
’17
1939, and has a financial strength rating of A– (excellent) from A.M. Best.
’19
’19
’19
’18
’18
’18
’17
’17
’18
’19
Net Investment
Income
($ in millions)
Net Income
($ in millions)
Diluted Operating EPS
Fully Diluted Book
Value Per Share
$314
$175
$19.06
$13.86
$15.25
$2.75
$120
$142
$102
Profitable Growth
$1.09
$74
’19
’19
’19
’18
’18
’18
’17
’17
’17
’17
$2.09
’18
’19
GWP and Combined Ratio
GWP (in billions)
Combined Ratio (percent)
LOW GROWTH DURING
TECHNOLOGY BUILD (NPS)
86%
$0.9
’10*
95%
$1.2
’11
99%
$1.4
’12
95%
$1.3
’13
2 6 %
C A G R :
$4.4
$3.3
$5.0
$5.1
$2.1
$2.3
93%
92%
94%
96%
93%
91%
’14
’15
’16
’17
’18
’19
*Period from March 1, 2010 (Inception) to December 31, 2010
Combined ratios exclude amortization and impairment (non-GAAP)
• 1 •
We are focused on continually strengthening our analytical and technology advantages
in order to reinforce profitable growth across our P&C and A&H business segments.
Our core products focus on lines of business in specialty niches with short-tail risks
where our technology, analytics, and distribution advantages help us underwrite to
an attractive return.
Gross Written
Premium
($ in billions)
Net Written
Premium
($ in billions)
Net Earned Premium
($ in billions)
Operating Return
on Average Equity
$5.0
$5.1
$4.4
Gross Written
Premium
($ in billions)
’17
’18
$5.0
$4.4
Net Investment
Income
($ in millions)
’19
$5.1
’17
’18
’19
$142
$120
Net Investment
$102
Income
($ in millions)
’17
’18
Combined Ratio
91%
$3.4
$3.6
$4.0
Net Written
Premium
($ in billions)
$3.5
$3.5
$3.9
Net Earned Premium
($ in billions)
16.1%
14.6%
7.9%
Operating Return
on Average Equity
’17
’18
’19
’17
’18
’19
’17
’18
’19
Net Income
($ in millions)
$3.6
$3.4
’17
’18
$175
Net Income
($ in millions)
$74
$4.0
Operating ROE
Diluted Operating EPS
$3.9
$3.5
$3.5
14.6%
Growth in Diluted
Book Value Per Share
Fully Diluted Book
Value Per Share
16.1%
16.1%
$314
’19
’17
’18
’19
7.9%
25%
’17
$13.86
’18
$15.25
$19.06
’19
$2.75
$2.09
Diluted Operating EPS
$1.09
Fully Diluted Book
Value Per Share
’19
’17
’18
’19
’17
’18
’19
’17
’18
’19
$102
$120
$142
$314
$175
$74
$1.09
$2.75
$2.09
$19.06
$13.86
$15.25
GWP and Combined Ratio
’19
’18
’17
’17
GWP (in billions)
Combined Ratio (percent)
GWP and Combined Ratio
LOW GROWTH DURING
TECHNOLOGY BUILD (NPS)
95%
99%
86%
$1.4
GWP (in billions)
$1.2
$0.9
Combined Ratio (percent)
’18
’19
’17
’18
’19
’17
’18
’19
2 6 %
C A G R :
$4.4
$3.3
$5.0
$5.1
$2.1
$2.3
93%
92%
94%
96%
’14
’15
’16
C A G R :
2 6 %
’17
$4.4
93%
’18
$5.0
91%
’19
$5.1
93%
92%
94%
96%
93%
91%
’14
’15
’16
’17
’18
’19
95%
$1.3
’13
95%
$1.3
’13
’10*
’11
’12
86%
$0.9
’10*
95%
$1.2
’11
99%
$1.4
’12
*Period from March 1, 2010 (Inception) to December 31, 2010
LOW GROWTH DURING
Combined ratios exclude amortization and impairment (non-GAAP)
TECHNOLOGY BUILD (NPS)
$3.3
$2.1
$2.3
*Period from March 1, 2010 (Inception) to December 31, 2010
Combined ratios exclude amortization and impairment (non-GAAP)
6
5
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90
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0
National General Holdings Corp. 2019 Annual Report
• 2 •
Fellow
Shareholders,
MESSAGE FROM CO-CHAIRMEN OF THE BOARD
It is our pleasure to report another record year
at National General. We have now completed
nearly a decade of continuous profitable growth.
Throughout this time, we have been able to gen-
erate strength from diversified but complementary
business activities, and we have continued to
invest in our long-term success. Specifically in
2019, we were able to achieve a 16% return on
equity and 25% growth in diluted book value per
share. This is another remarkable result which
demonstrates the strength of our capabilities.
National General’s strength continues to manifest
from our advantage in analytics. It allows us to
use segmentation to appropriately price complex
products and markets. For this reason, we continue
to focus our efforts on short-tail, niche lines of
business that can be easily modeled and have a
limited level of reserving volatility.
Combining this product focus with our proprietary
technology platforms is what allows us to generate
and analyze data, and therefore gain underwriting
insight that many insurance companies cannot
replicate. More specifically, our integrated technol-
ogies allow us to extrapolate and map discrete data
points to better predict factors associated with future
insurance losses. We can then share these predictive
insights across products and business lines to power
continuous improvement in underwriting, pricing,
marketing, sales, claims, and operations.
Our culture of data and analytics also keeps us
agile. We strive to quickly identify and adapt to
changing market conditions and capture new
opportunities. Additionally, it gives us confidence
to scale quickly while preserving margin and
remaining efficient in what we do.
Furthermore, we continue to invest in R&D to
consolidate this analytical advantage. We are
developing applications for Artificial Intelligence,
robotic process automation, and real-time
analytics—each of which shows promise in
improving our technological capabilities in ways
that cannot be easily replicated by others.
The result of this investment in analytics and
segmentation is particularly evident in our P&C
segment across 2019. We saw a soft and compet-
itive market emerge in auto insurance this year.
Despite the challenge this represents, especially
for sales via independent agents, we segmented
the market, preserved margin, and grew. We’ve
done this by rolling out and refining new product
and pricing tools, designed specifically to give us
more levers of calibration and segmentation, and
therefore a pricing advantage. We’ve also used
this analytical skill to combine marketing and
pricing models, such that we can deliver targeted
marketing and drive profitable growth in our
direct-to-consumer channels. Our view is that by
focusing on efficiency and preserving margin in
this soft market, we prepare ourselves to outper-
form when the market inevitably hardens.
National General Holdings Corp. 2019 Annual Report
• 2 •
• 3 •
2019 was a great year for our A&H segment, and
demonstrated the combined strength of these
product categories. We began in A&H by acquiring
distribution and marketing assets as well as as-
sociated technology businesses that enables our
distribution partners to quote multiple carriers,
purchase leads and manage their books of
business. Since then, we applied our analytical
tools and product expertise to create a business
of unique value. Total underwriting revenues
for the division grew by over 14% in 2019, and
delivered a combined ratio of 78.2%. This perfor-
mance was driven, in particular, by our release
of new individual health insurance products
with more refined pricing factors. Additionally,
our A&H distribution businesses also made big
steps forward in 2019, with our Medicare agency
doubling its volume and our technology services
beginning to mature.
2019 also saw us close the acquisition of Farmers
Union Insurance in August and divest EuroAccident
in December. With Farmers Union, we identified
a business whose underlying value we believe
can be increased considerably with the benefit
of our technology and analytical capabilities. On
the other hand, the divestiture of EuroAccident
presents us with the opportunity to focus our
attention and our capital on our domestic A&H
division which is performing so well.
We continue to focus on building this business
for the long term. After a decade as an indepen-
dent insurance group, National General now
has two powerful and complementary business
segments—each consistently growing, profitable,
and performing well. But perhaps more importantly,
each is developing insight, sharing learnings and
driving the other into continuous improvement.
All of this is made possible by our continued
investment in proprietary operating technologies
and our culture of analytics, which we see as the
foundation of National General today and into
the future.
Continuing to deliver record financial results
doesn’t happen on its own. It is our honor to
work with thousands of talented and passionate
employees across National General, who are
motivated to keep delivering and outperforming
the expectations of shareholders. What excites us
about our team is that they continually strive to be
the best and blaze their own path implementing
improvements that many of our peers aren’t even
thinking about.
Finally, on that note, we would like to express our
gratitude to all of the shareholders who supported
us in 2019. We couldn’t be more excited about
what is yet to come.
Barry Karfunkel
Chief Executive Officer
Co-Chairman of the Board
Robert Karfunkel
President
Co-Chairman of the Board
National General Holdings Corp. 2019 Annual Report
• 4 •
Strategic
Advantage
National General deploys proprietary technologies
to create an analytical advantage.
We focus on insurance products with short-tail risks in niche lines of business which have
a limited level of reserving volatility. Applying our technology to these products creates
analytical insight, which we use to segment the market and outperform competitors. From
this we have demonstrated a series of strategic advantages that make National General
uniquely valuable.
National General Holdings Corp. 2019 Annual Report
• 4 •
• 5 •
Technology
Our business infrastructure is built upon
proprietary technologies that are designed to
yield operational efficiencies and enable a
culture of analytical insight. Building and
managing these technologies in-house increases
our speed to market while lowering expenses.
Growth
We continue to grow organically across the
business. As we roll out new products,
underwriting frameworks, and analytical tools,
we have demonstrated an ability to produce
products that meet market needs.
Profitability
Despite continued growth, we maintain a
prudent focus on the bottom line. This allows us
to weather the cycle of hard and soft markets
while delivering strong returns for shareholders.
Short-Tail Niches
Operating in selective niche markets, with
short-tail risks, allows us to build and maintain
a data advantage over much larger competitors
while also having a diversified range of products.
Flexibility
Having our operational infrastructure embedded
in proprietary technologies continues to offer us
new ways to analyze data, share insights across
segments and assess opportunities. It also gives
us confidence in our ability to scale while
maintaining operational efficiency.
Conservative
We maintain a conservative approach to
managing our capital which is exemplified by our
conservative investment portfolio and our
balanced use of reinsurance.
National General Holdings Corp. 2019 Annual Report
• 6 •
Property
& Casualty
Our Property & Casualty segment achieved
another strong year of performance, despite soft-
ening market conditions across the auto insurance
market. While Gross Written Premium only grew
by 2% for the year, underwriting income grew by
39% driven by a combined ratio of 93.5%. This
is the result of our continued focus on products in
specialty niches where we can leverage our
technology to segment risk in a way that produces
robust underwriting performance when others are
seeing margin pressure.
Total gross written premium for auto insurance was
$3.2 billion, comprised of personal auto, recreational
vehicle, and small business auto. Within this set of
products, our primary focus remained monoline
non-standard auto insurance sold through indepen-
dent agents and directly to consumers (the latter
under our Direct Auto brand). While traditionally
seen as a difficult market to underwrite, we found
consistent success through investing in our
analytical capabilities and market segmentation
to develop profitable products that the market
demands. We continue to innovate and explore
new analytics tools and products to reinforce our
competitive advantage for the long term.
Our homeowners insurance business grew by
4.3% to $719 million of gross written premium in
2019. The year also saw us begin the roll out of
a new homeowners product designed to build
upon the strength of our analytics platform and
help segment homeowners risks with increased
accuracy. We closed the acquisition of Farmers
Union Insurance in August, giving us access to
new niches and new data, which will complement
the wider business.
National General Holdings Corp. 2019 Annual Report
• 6 •
• 7 •
39.0%
GROWTH IN
UNDERWRITING INCOME
93.5%
Personal Auto
Small Business Auto
RV/Package
Homeowners
Lender-placed
Other
62%
7%
5%
16%
8%
1%
COMBINED RATIO BEFORE
AMORTIZATION AND IMPAIRMENT
(NON-GAAP)
2019
P&C GWP BY PRODUCT
2019
P&C GWP BY STATE
62%
7%
5%
16%
8%
1%
Personal Auto
Small Business Auto
RV/Package
Homeowners
Lender-placed
Other
2019
P&C GWP
BY PRODUCT
16%
14%
12%
11%
4%
4%
4%
3%
3%
3%
26%
North Carolina
New York
California
Florida
Texas
Louisiana
New Jersey
Virginia
Michigan
Alabama
Other
2019
P&C GWP
BY PRODUCT
2019
P&C GWP
BY STATE
16%
14%
12%
11%
4%
4%
4%
3%
3%
3%
26%
North Carolina
New York
California
Florida
Texas
Louisiana
New Jersey
Virginia
Michigan
Alabama
Other
2019
P&C GWP
BY STATE
39%
34%
27%
Individual
Group
Managed (3rd Party)
2019
P&H PREMIUM
BY CATEGORY
Individual
Group
39%
34%
27%
Managed (3rd Party)
2019
P&H PREMIUM
BY CATEGORY
National General Holdings Corp. 2019 Annual Report
• 8 •
Accident
& Health
Our Accident & Health segment achieved organic
growth of 10.1% in gross written premiums for
the year, but drove a 34.2% increase in under-
writing income from a combined ratio of 78.5%.
This success is further validation of the strategy
we used to build our presence in this space.
We began by acquiring selective distribution
assets and technology businesses to enable our
distribution partners to quote multiple carriers,
purchase leads and manage their books of busi-
ness. We then deployed our analytics capabilities
and segmentation expertise to refine key insur-
ance products to the point where they are now
yielding highly impressive results.
Gross written premium from our group health
products grew by over 20% during the year. These
group products are primarily small employer
self-funded benefits programs, where we can pro-
vide a stop-loss and well as administrative support
to maintain cost efficiency for clients. Groups are
underwritten from the bottom-up—a powerful fit
for our analytical underwriting capabilities.
For individual health insurance products, gross
written premium rose by over 10% for the year.
Similarly to group products, we effectively
segmented risk and improved underwriting
performance—while continuing to ensure that
products offer value and quality to our customers
in smaller and underserved markets.
Another notable function of our A&H segment is
the broad distribution network built and grown
within National General. As a result, we are an
important distribution provider of third party
carriers. We also provide a range of technology
and operational support services, which collectively
represent a valuable stream of income.
62%
Personal Auto
Small Business Auto
7%
5%
16%
8%
1%
RV/Package
Homeowners
Lender-placed
Other
2019
P&C GWP
BY PRODUCT
National General Holdings Corp. 2019 Annual Report
• 8 •
34.2%
GROWTH IN
UNDERWRITING INCOME
• 9 •
16%
14%
12%
11%
4%
4%
4%
3%
3%
3%
26%
North Carolina
New York
California
Florida
Texas
Louisiana
New Jersey
Virginia
Michigan
Alabama
Other
2019
P&C GWP
BY STATE
78.5%
COMBINED RATIO BEFORE
AMORTIZATION AND IMPAIRMENT
(NON-GAAP)
2019
A&H PREMIUM BY CATEGORY
39%
34%
27%
Individual
Group
Managed (3rd Party)
2019
P&H PREMIUM
BY CATEGORY
SUMMARY INCOME STATEMENT $ in thousands (Unaudited)
• 10 •
REVENUES:
Gross written premium
Net written premium
Net earned premium
Ceding commission income
Service and fee income
Net investment income
Net gain (loss) on investments
Other income
Total revenues
Year Ended December 31, 2019
Year Ended December 31, 2018
NGHC
RECIPROCAL
EXCHANGES
CONSOLIDATED
NGHC
RECIPROCAL
EXCHANGES
CONSOLIDATED
$ 5,135,633
3,990,149
3,907,811
174,952
705,006
142,174
13,603
26,428
$ 447,447
234,472
210,231
63,501
5,755
8,638
(130)
—
$ 5,583,080(A)
4,224,621
4,118,042
238,453
641,965 (A)
141,233 (B)
13,473
26,428
$4,969,517
3,644,148
3,545,441
167,948
625,463
119,852
(26,179)
—
$448,923
183,565
186,761
56,749
5,751
8,875
(3,366)
—
$5,416,839 (G)
3,827,713
3,732,202
224,697
561,583(H)
119,034(I)
(29,545)
—
4,969,974
287,995
5,179,594 (C)
4,432,525
254,770
4,607,971(J)
EXPENSES:
Loss and loss adjustment expense
Acquisition and other underwriting expenses
General and administrative expenses
Interest expense
2,677,356
177,112
2,854,468
2,499,508
162,718
2,662,226
782,328
1,024,574
51,544
45,039
85,994
9,579
827,367
1,041,772 (D)
51,544 (E)
693,283
923,921
51,425
41,983
83,756
9,693
735,266
938,046 (K)
51,425 (L)
Total expenses
4,535,802
317,724
4,775,151 (F)
4,168,137
298,150
4,386,963(M)
Income (loss) before provision (benefit) for income taxes
Provision (benefit) for income taxes
Net income (loss) before noncontrolling interest and
dividends on preferred shares
Less: net income (loss) attributable to
noncontrolling interest
Net income before dividends on preferred shares
Less: dividends on preferred shares
434,172
86,103
(29,729)
(9,090)
404,443
77,013
264,388
57,034
(43,380)
(3,550)
221,008
53,484
348,069
(20,639)
327,430
207,354
(39,830)
167,524
—
348,069
33,600
(20,639)
—
—
(20,639)
348,069
33,600
—
207,354
32,492
(39,830)
—
—
(39,830)
207,354
32,492
Net income available to common stockholders
$ 314,469
$
—
$
314,469
$ 174,862
$ —
$ 174,862
Operating earnings (1)
$ 319,174
$ 231,495
Consolidated column includes eliminations as follows: (A) $ (68,796), (B) $ (9,579), (C) $ (78,375), (D) $ (68,796), (E) $ (9,579), (F) $ (78,375), (G) $ (1,601), (H) $ (69,631), (I) $ (9,693), (J) $ (79,324),
(K) $ (69,631), (L) $ (9,693) and (M) $ (79,324).
(1) References to operating earnings and basic and diluted operating earnings per share (“EPS”) are non-GAAP financial measures defined by the Company as net income/loss and basic and diluted
earnings per share excluding after-tax net gain or loss on investments (including foreign exchange gain or loss), other-than-temporary impairment losses, earnings or losses of equity method invest-
ments (related parties), deferred tax asset impairment, non-cash impairment of goodwill and non-cash amortization of intangible assets, and any significant non-recurring or infrequent items that may
not be indicative of ongoing operations. The Company believes operating earnings and basic and diluted operating EPS are relevant measures of the Company’s profitability because operating earnings
and basic and diluted operating EPS contain the components of net income upon which the Company’s management has the most influence and exclude factors outside management’s direct control and
non-recurring items. Other companies may calculate these measures differently, and therefore, their measures may not be comparable to those used by National General. Please see the Non-GAAP
reconciliation table on the next page for the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure.
Trailing twelve-month operating return on average equity is the ratio of the previous twelve months operating earnings (non-GAAP) to average shareholders’ equity for the same twelve-month period.
Average shareholders’ equity is the sum of the shareholders’ equity excluding preferred stock at the beginning and end of the period divided by two. In the opinion of the Company’s management, this
ratio is an important indicator of how well management creates value for its shareholders through its operating activities and capital management. Other companies may calculate these measures dif-
ferently, and therefore, their measures may not be comparable to those used by National General. Please see the Non-GAAP reconciliation table on the next page for the reconciliation of net income to
operating earnings, which is the Non-GAAP component of the operating return on average equity.
• 10 •
• 11 •
BALANCE SHEET $ in thousands (Unaudited)
December 31, 2019
December 31, 2018
NGHC
RECIPROCAL
EXCHANGES CONSOLIDATED
NGHC
RECIPROCAL
EXCHANGES
CONSOLIDATED
ASSETS:
Total investments
Cash and cash equivalents, including restricted cash
Premiums and other receivables, net
Reinsurance balance
Intangible assets, net
Goodwill
Other
$4,632,960
163,480
1,373,089
1,745,036
362,598
179,328
798,675
$329,494
983
55,859
225,019
3,225
—
29,070
$4,854,998 (A)
164,463
1,428,948
1,970,055
365,823
179,328
792,919(B)
$4,013,699
233,383
1,338,485
2,023,911
376,532
180,183
739,068
$314,411
200
61,327
253,501
3,405
—
27,879
$4,226,806(H)
233,583
1,399,812
2,277,412
379,937
180,183
741,547(I)
Total assets
9,255,166
643,650
9,756,534(C)
8,905,261
660,723
9,439,280(J)
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Unpaid loss and loss adjustment expense reserves
Unearned premiums and other revenue
Reinsurance payable
Accounts payable and accrued expenses
Debt
Other
2,680,628
2,059,688
527,155
306,869
686,006
345,366
205,786
252,553
35,689
43,323
107,456
30,803
2,886,414
2,312,241
562,844
315,366(D)
686,006(E)
376,169
2,778,689
2,014,965
615,872
390,338
705,795
178,764
178,470
265,763
40,393
33,120
101,304
61,640
2,957,159
2,280,728
656,265
398,058(K)
705,795(L)
240,404
Total liabilities
6,605,712
675,610
7,139,040 (F)
6,684,423
680,690
7,238,409(M)
STOCKHOLDERS’ EQUITY
Common stock
Preferred stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total National General Holdings
Corp. stockholders’ equity
1,134
450,000
1,065,634
74,548
1,058,138
2,649,454
—
—
—
—
—
—
1,134
450,000
1,065,634
74,548
1,058,138
1,129
450,000
1,057,783
(52,130)
764,056
2,649,454
2,220,838
—
—
—
—
—
—
1,1290
450,000
1,057,783
(52,130)
764,056
2,220,838
Noncontrolling interest
—
(31,960)
(31,960)
—
(19,967)
(19,967)
Total stockholders’ equity
2,649,454
(31,960)
2,617,494
2,220,838
(19,967)
2,200,871
Total liabilities and stockholders’ equity
$9,255,166
$643,650
$9,756,534(G)
$8,905,261
$660,723
$9,439,280(N)
Consolidated column includes eliminations as follows: (A) $ (107,456), (B) $ (34,826), (C) $ (142,282), (D) $ (34,826), (E) $ (107,456), (F) $ (142,282), (G) $ (142,282), (H) $ (101,304), (I) $ (25,400),
(J) $ (126,704), (K) $ (25,400), (L) $ (101,304), (M) $ (126,704) and (N) $ (126,704).
RECONCILIATION OF NET INCOME TO OPERATING EARNINGS (NON–GAAP)(1) $ in thousands, except per share data (Unaudited)
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
Add (subtract):
Equity in earnings of equity method investments
Net (gain) loss on investments and gain on sale of a business
Non-cash amortization of intangible assets
Arbitration award/Litigation settlement
Income tax expense (benefit)
Year Ended December 31, 2019 Year Ended December 31, 2018
$314,469
$174,862
(2,951)
(40,031)
34,665
14,273
(1,251)
(165)
26,179
31,323
10,000
(10,704)
Operating earnings attributable to NGHC (non-GAAP) (1)
$ 319,174
$ 231,495
Operating earnings per common share (non-GAAP) (1)
Basic operating earnings per common share (non-GAAP) (1)
Diluted operating earnings per common share (non-GAAP) (1)
$
$
2.82
2.75
$
$
2.15
2.09
CORPORATE INFORMATION
SENIOR MANAGEMENT
Barry Karfunkel
Chief Executive Officer
Co-Chairman of the Board
Robert Karfunkel
President
Co-Chairman of the Board
Michael Weiner
Executive Vice President
Chief Financial Officer
Jeffrey Weissmann
Executive Vice President
General Counsel and Secretary
Peter Rendall
Executive Vice President
Chief Operating Officer
Tom Newgarden
Executive Vice President
Business Development
Doug Hanes
Executive Vice President
Vehicle
Andrew McGuire
Executive Vice President
National General Preferred
Brenda Castellano
Executive Vice President
Sales & Strategy
Art Castner
President
National General Lender Services
Aaron Goddard
Executive Vice President
Accident and Health Agencies
and Sales
Mike Bentz
Executive Vice President
Accident and Health Product
• 12 •
George Hall
Executive Vice President
Chief Claims Officer
Sam Rea
Executive Vice President
Chief Information Officer
Jodi Swartz
Executive Vice President
Chief Marketing Officer
Aaron Kuluk
Executive Vice President
Retail Distribution
Jim McCoy
Senior Vice President
Chief Actuary
Lawrence J. Moloney
Senior Vice President
Chief Accounting Officer
Deb Franklin
Senior Vice President
Preferred & Premier Sales
Nicole Pemberton
Senior Vice President
Human Resources
BOARD OF DIRECTORS
Barry Karfunkel
Chief Executive Officer and
Co-Chairman
National General Holdings Corp.
Robert Karfunkel
President and
Co-Chairman
National General Holdings Corp.
Barry Zyskind
Director
Chairman, and Chief Executive Officer
AmTrust Financial Services, Inc.
INDEPENDENT DIRECTORS
John Marshaleck
Former Chief Financial Officer
Maiden Holdings, Ltd.
Donald DeCarlo
Former Chairman and
Commissioner
New York State Insurance Fund
Patrick Fallon
Managing Director and
Chief Operating Officer
CSG Partners
Jay Nichols
Former Chief Executive Officer
AXIS Re
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
Ernst & Young LLP
5 Times Square
New York, NY 10036
Investor Contact
Paul Anderson
Director of Investor Relations
(212) 380-9462
Paul.Anderson@NGIC.com
2019
F O R M 1 0 - K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2019
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)
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
Delaware
27-1046208
59 Maiden Lane, 38th Floor
New York, New York 10038
(Address of Principal Executive Offices) (Zip Code)
(212) 380-9500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
7.50% Non-Cumulative Preferred Stock, Series A
Title of Each Class
Depositary Shares, Representing 1/40th of a Share of 7.50% Non-Cumulative Preferred Stock, Series B
Depositary Shares, Representing 1/40th of a Share of 7.50% Non-Cumulative Preferred Stock, Series C
7.625% Subordinated Notes due 2055
Trading
Symbol(s)
Name of Each Exchange on
Which Registered
NGHC
NGHCP
NGHCO
NGHCN
NGHCZ
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
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 every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
As of June 28, 2019, 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 $1,510,076,014. As of February 18, 2020, the number of common shares of the registrant outstanding was 113,474,549.
Documents incorporated by reference: Portions of the Proxy Statement for the 2020 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.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder 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. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Page
2
21
38
38
38
38
39
41
44
71
72
72
73
76
77
77
77
78
78
79
81
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 potential effect of changes in LIBOR reporting practices,
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 investments,
development of claims and the effect on 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
acquired businesses, the effect of general economic conditions, state and federal legislation, the effects of tax reform,
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 vendors 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.
1
Item 1. Business
Legal Organization
National General Holdings Corp., a Delaware corporation, is a specialty personal lines insurance holding company.
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. and all of its consolidated subsidiaries unless the context requires otherwise.
Business Overview
We are a specialty personal lines insurance holding company that, through our subsidiaries, provides a variety of
insurance products, including personal and small business automobile, homeowners, umbrella, recreational vehicle,
motorcycle, lender-placed, supplemental health 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.
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 from auto accidents. Our
homeowners and umbrella insurance products protect our customers against losses to dwellings and their 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 42,300 independent agents, a number of affinity partners and through
direct-response marketing programs and retail storefronts. We have approximately 4.2 million P&C policyholders.
Our accident and health (“A&H”) business provides accident and health insurance products not subject to the
Patient Protection and Affordable Care Act (“PPACA”) and targets uninsured or underinsured individuals and employers
who are interested in an alternative to PPACA-compliant major medical coverage or who are looking for supplemental
insurance options to help cover out of pocket costs. We market our and other carriers’ A&H insurance products through
a multi-pronged distribution platform that includes a network of over 46,200 independent agents, our in-house agencies,
direct-to-consumer marketing, wholesaling, worksite marketing and the internet.
We are licensed to operate in 50 states and the District of Columbia, but focus on niche markets. Approximately
73.7% of our P&C premium written is originated in ten core states: North Carolina, New York, California, Florida,
Texas, Louisiana, New Jersey, Virginia, Michigan and Alabama.
For the years ended December 31, 2019, 2018 and 2017, our gross premium written was $5,583 million,
$5,417 million and $4,756 million, net premium written was $4,225 million, $3,828 million and $3,578 million and
total consolidated revenues were $5,180 million, $4,608 million and $4,422 million, respectively.
Our company 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
Inc.), which operations date back to 1939. We acquired this business on March 1, 2010.
Our wholly-owned subsidiaries include twenty-two regulated domestic insurance companies, of which twenty
write primarily P&C insurance and two write A&H insurance. Our insurance subsidiaries have an “A-” (Excellent)
rating by A.M. Best Company, Inc. (“A.M. Best”). We currently conduct a limited amount of business outside the
United States, primarily in Bermuda.
Two of our wholly-owned subsidiaries that we acquired in 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” or “Exchanges”). We do not own
the Reciprocal Exchanges but are paid a fee to manage their business operations through our wholly-owned management
companies.
2
Business Segments
We are a specialty national carrier with regional focuses. We manage our business through two segments:
• Property and Casualty - Our P&C segment operates its business through three primary distribution channels:
agency, affinity and direct. Our agency channel focuses primarily on writing standard, preferred and
nonstandard auto coverage and homeowners and umbrella coverage through our network of approximately
42,300 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. Our direct channel is operated through approximately 490 store fronts,
web/mobile, phone sales centers and kiosks. In addition, we operate our lender-placed services through long-
term distribution agreements with certain mortgage lenders.
• Accident and Health - Our A&H segment provides accident and non-major medical health insurance products
targeting our existing policyholders and uninsured or underinsured individuals. Through a number of
acquisitions of both carriers and general agencies, including VelaPoint, LLC, our call center general agency
(“Velapoint”), National Health Insurance Company, a life and health insurance carrier (“NHIC”), Quotit
Corporation, an application service provider for health insurance, HealthCompare Insurance Services, Inc., a
call center agency, and Healthcare Solutions Team, LLC, a healthcare insurance managing general agency
(“HST”), we have assembled a multi-pronged distribution platform that includes direct-to-consumer marketing
through our call center agency, selling through approximately 46,200 independent agents, wholesaling
insurance products through large general agencies/program managers and, through our affinity relationships,
worksite marketing through employers and the internet.
P&C Segment
Distribution and Marketing
Agency Distribution Channel
Our agency channel focuses on writing automobile insurance, including standard, preferred and nonstandard
insurance, as well as preferred homeowners and umbrella insurance, through independent insurance agents and brokers.
We have established a broad geographic presence throughout the United States and have a significant market presence
in our ten largest states, namely, North Carolina, New York, California, Florida, Texas, Louisiana, New Jersey, Virginia,
Michigan and Alabama.
Relationships with our Independent Agents. We have built a strong network of approximately 42,300 independent
insurance agents and brokers and provide them with competitive compensation, a user-friendly technology platform
and superior service. In order to provide quick and responsive service to our agents, we operate an agency customer
service call center staffed by experienced and highly-trained employees. Our focus on building and maintaining a strong
agency network has created an effective variable cost distribution platform and is integral to the long-term success of
our agency channel.
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, 2019, in North Carolina, we
generated $770.3 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 liability 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.
3
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 relationships are generally long-term in nature. In general, an
affinity partner relationship consists of a partnership agreement 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
to provide recreational vehicle, or RV, insurance, of which we believe we are one of the largest writers in the U.S. In
2019, we acquired National Farmers Union Property and Casualty Company (“Farmers Union Insurance”), which
maintains a long-term relationship with the National Farmers Union to sell personal lines insurance to its members.
Direct Distribution Channel
Through our acquisition of Direct General Corporation (“Direct General”) in 2016, we obtained a direct
distribution channel that primarily sells nonstandard auto policies. Our direct channel includes approximately 490 retail
store fronts, web/mobile capabilities, phone contact centers and kiosks. The diversity of the channel supports growth
through changing customer preferences, and gives National General a foothold in the industry’s fastest growing channel.
Local retail stores placed in high traffic areas are central to the omni-channel strategy, and are a key component to the
marketing and brand awareness efforts in our direct distribution channel. The omni-channel approach also creates a
seamless customer experience, regardless of the channel or device that is used.
Lender-placed Insurance Business
We offer lender-placed insurance products and related services to mortgage lenders and servicers (“LPI Business”).
P&C 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, small business vehicle,
homeowners and umbrella products. Through our affinity channel, we primarily underwrite and market standard and
preferred auto and RV insurance.
• 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 have higher renewal retention 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 several factors, including
their driving record, limited driving experience and claims history, among other factors, and consequently
their premiums are generally higher than those for drivers who qualify for standard or preferred coverage.
• 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 offer additional personal
umbrella coverage to the homeowner.
• 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.
• Small business automobile insurance. These policies include liability and physical damage coverage for
light-to-medium duty commercial vehicles, focused on artisan vehicles, with an average of two vehicles per
policy.
4
• 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.
• Lender-placed insurance. Through the lender-placed insurance platform, we offer a full suite of lender-
placed insurance products to customers, including fire, home and flood products, as well as collateral protection
insurance and guaranteed asset protection products for automobiles.
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 insufficient 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. For the year ended December 31, 2019, our P&C segment generated
$392.5 million in revenue from policy service fees.
P&C Gross Premium Written by State
We are licensed to operate in 50 states and the District of Columbia. For the year ended December 31, 2019 our
top ten states represented 73.7% 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:
Year Ended December 31,
2019
2018
2017
(amounts in thousands, except percentages)
North Carolina
$
770,349
16.0% $
729,426
15.5% $
633,948
New York
California
Florida
Texas
Louisiana
New Jersey
Virginia
Michigan
Alabama
Other States
Total
672,439
582,240
517,456
214,209
173,237
171,330
162,008
147,022
133,108
14.0%
12.1%
10.7%
4.4%
3.6%
3.6%
3.4%
3.1%
2.8%
694,736
720,284
499,430
218,410
142,483
174,234
148,806
139,642
119,462
14.7%
15.3%
10.6%
4.6%
3.0%
3.7%
3.2%
3.0%
2.5%
1,271,065
26.3%
1,131,817
23.9%
617,270
635,020
515,723
201,776
139,893
156,035
135,479
116,195
95,661
927,583
$ 4,814,463
100.0% $ 4,718,730
100.0% $ 4,174,583
15.2%
14.8%
15.2%
12.4%
4.8%
3.4%
3.7%
3.2%
2.8%
2.3%
22.2%
100.0%
Underwriting and Claims Management Philosophy
We believe that proactive and prompt claims management is essential to reducing losses and lowering loss
adjustment expense (“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 that
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 as well as our portfolio and product mix as a whole.
5
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. By utilizing a detailed actuarial analysis, our actuarial team establishes 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 a rate to a 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.
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.
To assist us in profitably underwriting our P&C products, our predictive analytics team has developed our RAD
underwriting pricing tool. The RAD underwriting pricing tool offers significant advantages over our prior pricing tools
by employing numerous additional components and pricing strategies such as supplemental risk and improved credit
modeling. We believe the RAD underwriting pricing tool facilitates better pricing over the lifetime of a policy by
employing lifetime value modeling, elasticity modeling and optimized pricing. We believe that our RAD underwriting
pricing tool provides us with a competitive advantage for pricing our products relative to other auto insurers of our
size.
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 within 24 hours 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 $100,000 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 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 with respect 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, 2019, our Claims department includes approximately 2,770 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 believe that we have established an efficient mechanism designed to
maintain and improve our level of claim handling performance.
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Competition
The property and casualty insurance market in the United States 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 Insurance Company, Farmers Insurance Group, Assurant, Inc. and GEICO, but
also from nonstandard auto focused insurers such as Mercury General Corporation, Kemper Corporation and
independent agents that operate in a specific region or single state in which we operate. See Item 1A, “Risk Factors -
Risks Relating to Our Insurance Operations - The insurance industry is highly competitive, and we may not be able to
compete effectively against larger companies.”
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 our policy administration system and our
advanced underwriting pricing tools, we believe we will continue to operate well in the competitive environment.
P&C Acquisitions
Since we acquired our P&C insurance business, we have made several acquisitions and entered into a number of
renewal rights transactions. These additional operations have increased our presence in our target markets and broadened
our distribution capabilities. We believe that merger and acquisition transactions and their effective integration represent
a core competency and provide continued growth opportunities. For details of the impact of these acquisitions in our
results of operations, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Results of Operations.”
On August 1, 2019, we completed the acquisition of Farmers Union Insurance. This acquisition adds an affinity
distribution channel to the Company's auto and homeowners business and expands the Company's presence in this
product line in the Midwest. The purchase price for the transaction was approximately $52.8 million.
Quota Share Reinsurance
In 2017, we entered into an auto quota share agreement covering our auto line of business pursuant to which we
ceded 15.0% of net liability to an unaffiliated third party reinsurer. Under the auto quota share agreement, we retain
the flexibility, under certain conditions, to increase the cession percentage up to a maximum cession of 30.0% and to
decrease the cession percentage to a minimum cession of 5.0%. Effective January 1, 2019, we ceded 7.0% of net liability.
On July 1, 2019, we renewed our agreement for a two-year term. Effective July 1, 2019, we ceded 10.0% of net liability.
Effective January 1, 2020, we cede 5.0% of net liability under new and renewal auto policies written.
In 2017, we entered into a homeowners quota share agreement covering our homeowners line of business pursuant
to which we ceded 29.6% of net liability to unaffiliated third party reinsurers. Effective May 1, 2018, we ceded an
additional 12.4% of net liability for a total cession of 42.0%. On July 1, 2019, we renewed our agreements for a one-
year term. Effective July 1, 2019, we cede 40.0% of net liability under new and renewal homeowners policies written.
See Note 9, “Reinsurance” in the notes to our consolidated financial statements.
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A&H Segment
Our A&H segment provides supplemental accident and health insurance products. One of the keys to our overall
strategy revolves around distribution. We have multiple ways to reach the consumer through established channels,
including:
through independent agents;
• directly to the consumer through our in-house general agency;
•
• wholesaling through other general agents and Managing General Underwriters (“MGUs”); and
•
through employers in the worksite.
We believe that our A&H 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 and
group fully insured major medical, we still sell these products on behalf of third-party carriers, allowing us to match
consumers’ 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 enables us to promote our supplemental/
ancillary products in a single sale environment.
Our product focus in our A&H segment is offering economical and quality alternatives to the traditional group
and individual insurance markets. A significant portion of the market has challenges in obtaining health insurance that
balances depth of coverage with affordability. We believe we are uniquely positioned to offer greater value to our
consumers because of our far-reaching distribution and focused product portfolio.
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 subject to the PPACA for consumers seeking an alternative to more traditional
forms of major medical 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.
On December 2, 2019, we sold our Euro Accident Health and Care Insurance Sweden operation to a Swedish
investment company focused on Nordic healthcare investments.
A&H Product Overview
We focus on products that help individuals and employers address the ever increasing affordability challenges in
healthcare. Our products include those packaged with other coverages or services to enhance the overall value
proposition to the consumer, as well as standalone products. 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). These policies can serve as
supplemental policies underneath high deductible major medical plans that help reduce out of pocket expenses
for consumers that result from unexpected events.
• Hospital Indemnity. These plans provide a fixed benefit amount for specific healthcare services (e.g., office
visits, hospital stays, diagnostic care, etc.) with no deductibles or copays. They are designed for individuals
who are looking for coverage that reduces out of pocket costs not covered by major medical coverage.
• Short-Term Medical. These plans can bridge the timing gap between the annual open enrollment periods
(when traditional major medical insurance is available), and offers individuals financial protection for certain
unexpected medical bills and other health care expenses (e.g., office visits, emergency, care, hospital stays,
etc.). These plans have prescribed policy durations; typically the initial policy durations cannot exceed 12
months (or shorter durations in certain states).
• Cancer/Critical Illness. Critical illness policies provide benefits when specific diseases are first diagnosed.
These benefits are paid to the individual directly, who can use them to pay for other out of pocket costs that
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may arise. 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. Increases in health insurance costs in the group fully insured market has caused an increase in the
number of employers offering self-insured plans. NHIC offers a wide array of stop loss programs together
with self-insured program administration for small and large employers, as permitted by state law.
• Dental. These policies provide basic dental coverage and can be sold on a stand-alone basis or packaged with
other products. They are frequently matched with discount plans and/or dental networks.
• Medicare Supplement. Medicare Supplement insurance policies fills the “gaps” in Original Medicare Plan
coverage. These policies help pay some of the health care costs that the Original Medicare Plan doesn't cover
and have standardized plan designs.
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 rating of
“A-” (Excellent). 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 - 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 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.
The process of establishing the liability for unpaid losses and LAE 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 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.
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Our actuarial review includes 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.
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. In accordance with Actuarial Standards of Practice, we generally use multiple traditional
methods in determining our estimates of the ultimate unpaid claim liabilities. Each of these methods require actuarial
judgment and assumptions. The techniques can include, but are not limited to:
• 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 Method - a combination of the Paid Development Method and the Expected Loss
Method, the Paid Bornhuetter-Ferguson 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-Ferguson Method - a combination of the Incurred Development Method and the Expected
Loss Method, the Incurred Bornhuetter-Ferguson 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.
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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 LAE incurred on open claims;
•
•
•
reported and ultimate average case incurred changes;
reported and projected ultimate loss ratios; and
loss payment patterns.
When reviewing reserves, 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 in determining the net reserves, 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, 2019, 2018 and 2017 and our approach in establishing such assumptions remained consistent for newly
underwritten lines. If circumstances bear out our assumptions, losses incurred in 2019 should develop similarly to losses
incurred in 2018 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.
See Note 8, “Unpaid Losses and Loss Adjustment Expense Reserves” for more information about short-duration
insurance contracts and claims development tables in the notes to our consolidated financial statements.
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
2017, we acquired ownership of our personal lines policy administration system (“NPS”) and the related intellectual
property, which we previously licensed. NPS has been fully transferred to our operating environment and the purchase
price has been fully paid. NPS is based on advanced server-based technology allowing quicker processing and the
ability for enhanced scalability. This 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. 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.
Our RAD underwriting pricing tool accurately prices specific risk exposures to assist us in profitably underwriting
our P&C products. Our RAD technology offers significant advantages over our prior underwriting pricing system by
employing numerous additional components and pricing strategies such as supplemental risk and improved credit
modeling. We believe the RAD underwriting pricing tool will facilitate better pricing over the lifetime of a policy by
employing lifetime value modeling, elasticity modeling and optimized pricing.
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In our lender-placed insurance business, we use a proprietary insurance-tracking system to monitor the customers’
mortgage portfolios to verify the continuation of insurance coverage on each mortgaged property. We believe we can
leverage our technology expertise to operate the business under a more efficient cost structure.
Regulation
General
We are subject to extensive regulation in the United States and to a lesser extent in Bermuda. As of December 31,
2019, we had twenty-two 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, National General Premier Insurance Company, Imperial
Fire and Casualty Insurance Company, Agent Alliance Insurance Company, Century-National Insurance Company,
Standard Property and Casualty Insurance Company, Direct General Insurance Company, Direct General Insurance
Company of Mississippi, Direct General Life Insurance Company, Direct Insurance Company, Direct National Insurance
Company and National Farmers Union Property and Casualty Company. Our insurance subsidiaries have an
“A-” (Excellent) group rating by A.M. Best. We currently conduct a limited amount of business outside the United
States, primarily in Bermuda.
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.
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.
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
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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 its 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, 2019.
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.
Management does not anticipate regulatory action as a result of the 2019 IRIS ratio results for our U.S. Insurance
Subsidiaries. In all instances in prior years, regulators have been satisfied upon any follow-up that no regulatory action
was required.
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Statutory Accounting Principles
Statutory accounting principles, or SAP, are 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, like SAP, is concerned with a company’s solvency, but it 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.
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
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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
The Model Insurance Holding Company System Regulatory Act and Regulation (the “Amended Model Act and
Regulation”) adopted by the NAIC 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. To date, a number of states have adopted some or all of the changes
in the Amended Model Act and Regulation, including states where some of our insurance companies are domiciled or
commercially domiciled.
The Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act, adopted by the NAIC,
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 was filed in 2019 with the Company’s lead insurance regulator, as well as
with certain other state regulators, and describes 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. 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.
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 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.
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.
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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 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.
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,
2019, 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
Many states in which we conduct business require automobile liability insurers to sell bodily injury liability,
property damage liability, medical expense, and uninsured motorist coverage to a proportionate number (based on the
insurer’s share of the state’s 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.
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.
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On December 22, 2017, “H.R.1”, also known as the Tax Cuts and Jobs Act of 2017 (the “TCJA”), was signed
into law. The TCJA reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018, which
impacted the Company’s effective tax rate and after-tax earnings in the United States. The Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes, requires deferred tax assets
and liabilities to be adjusted for the effect of a change in tax laws or rates in the year of enactment, which is the year
in which the change was signed into law. Accordingly, the Company adjusted its deferred tax assets and liabilities
effective December 31, 2017, using the new corporate tax rate of 21 percent. The Company was also affected by certain
other aspects of the TCJA, including provisions regarding the one-time transition tax on undistributed foreign earnings
and profits, limitations on the deductibility of interest expense and executive compensation, deductibility of capital
expenditures, and, implementation of a minimum tax on the “global intangible low-taxed income” of a “United States
shareholder” of a “controlled foreign corporation.”
The Dodd-Frank Act established a Federal Insurance Office (“FIO”) within the U.S. Department of the Treasury.
The Federal Insurance Office 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.
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 the 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 regulations 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, among other things, 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 recoverable.
Existing and new laws and regulations affecting the health insurance industry, or changes to existing laws and
regulations, may transpire. The PPACA was signed into law in 2010, and, in recent years there have been several judicial
and congressional challenges and proposed amendments to the PPACA. The TCJA also repealed certain aspects of the
PPACA. If we are unable to adapt our A&H business to current and/or future requirements of the health insurance
legislation, our A&H business could be materially adversely affected.
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.
In recent years, the lender-placed insurance business has been subject to class action litigation and investigations
by state insurance regulators and federal regulatory agencies. Litigation and regulatory proceedings have included
allegations of excessive premium rates and inappropriate business transactions. Unfavorable outcomes of litigation or
regulatory investigations or significant problems in our relationships with regulators could adversely affect our results
of operations and financial condition, reputation, and ability to continue to do business. They could also expose us to
further investigations or litigation. In addition, certain of our customers in the mortgage industry are the subject of
various regulatory investigations and/or litigation regarding mortgage lending practices, which could indirectly affect
agreements with these clients and our business.
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Privacy Regulations
The Gramm-Leach-Bliley Act is a federal law which, among other things, protects consumers from the
unauthorized dissemination of certain personal information. States have also implemented additional regulations to
address privacy issues. For example, the California Consumer Privacy Act (“CCPA”) was signed into law on June 28,
2018 and took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for
businesses that collect personal information about California residents and affords those individuals new rights relating
to their personal information that may affect our ability to use personal information or share it with our business partners.
Regulations from the California Attorney General have not been finalized, and it is expected that additional amendments
to the CCPA will be introduced in 2020. We will continue to monitor and assess the impact of these state laws, which
may impose substantial penalties for violations, impose significant costs for investigations and compliance, allow
private class-action litigation and carry significant potential liability for our business. 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.
Additionally, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), The Health Information
Technology for Economic and Clinical Health Act (“HITECH”), and the more recent 2013 Omnibus Rule, dictates the
dissemination of an individual’s personal health information by covered entities and their business associates. These
laws and their implementing regulations apply to health care providers and health insurers, and thereby requires our
A&H business to maintain policies and procedures with regard to the storage, maintenance and disclosure of our
policyholders’ personal health information.
Cybersecurity Regulation
Insurance regulators have been focusing increased attention on data security during financial exams, and new
laws and regulations are pending that would impose new requirements and standards for protecting personally
identifiable information of insurance company policyholders. For example, the New York Department of Financial
Services enacted a comprehensive cybersecurity regulation that became effective during 2017, requiring insurance
companies and other entities to have a cybersecurity program designed to protect consumers’ private data; a written
policy that is approved by the board or a senior officer; a chief information security officer to help protect data and
systems; and controls and plans in place to help ensure the safety of New York’s financial services industry. In addition,
the NAIC has adopted the Roadmap for Cybersecurity Consumer Protections, a set of directives aimed at protecting
consumer data, and is working on a new model data security law that is expected to incorporate the directives and
impose additional requirements on insurance companies to the extent ultimately adopted by applicable state legislation.
The NAIC has also strengthened and enhanced the cybersecurity guidance included in its handbook for state insurance
examiners. We anticipate a continuing focus on new regulatory and legislative proposals at the state and federal levels
that further regulate practices regarding privacy and security of personal 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.
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Foreign Regulation
Classification
Our Bermuda subsidiary, National General Re Ltd. (“NG Re”), is registered as an insurer by the Bermuda Monetary
Authority (“BMA”) under the Insurance Act 1978 of Bermuda, as amended (the “Insurance Act - Bermuda”). The BMA
is responsible for the day-to-day supervision of insurers and monitors compliance with the solvency and liquidity
standards imposed by the Insurance Act - Bermuda. NG Re is registered as a Class 3A insurer. Accordingly, NG Re
can carry on general business, broadly including all types of insurance business other than long-term business.
Annual Financial Statements, Annual Statutory Financial Return and Annual Capital and Solvency Return
NG Re is required to file annually with the BMA financial statements, a statutory financial return and a capital
and solvency return. The statutory financial return for an insurer includes, among other matters, statutory financial
statements, a report of the approved auditor on the statutory financial statements, and a declaration of compliance
confirming compliance with various minimum criteria, including certifying the company meets the minimum solvency
margin. The capital and solvency return includes NG Re's Bermuda solvency capital return model for a Class 3A insurer,
a commercial insurer's solvency self-assessment, a reconciliation of net loss reserves, schedule of solvency, financial
condition report, an opinion of the company’s loss reserve specialist, a schedule of eligible capital and an economic
balance sheet. The capital and solvency return also includes a capital and solvency declaration that the return fairly
represents the financial condition of NG Re in all material respects.
Insurance Code of Conduct
The Insurance Code of Conduct prescribes the duties and standards with which registered insurers must adhere
and comply, to ensure that the registered insurer implements sound corporate governance, risk management and internal
controls. Failure to comply with these requirements is a factor considered by the BMA in determining whether an
insurer is conducting its business in a sound and prudent manner. Any failure to comply with the requirements of the
Insurance Code of Conduct could result in the BMA exercising its statutory powers of intervention.
Minimum Solvency Margin and Restrictions on Dividends and Distributions
Under the Insurance Act - Bermuda, the value of the general business assets of a registered Class 3A insurer, such
as NG Re, must exceed the amount of its general business liabilities by an amount greater than the prescribed minimum
solvency margin.
NG Re could not declare or pay dividends during any financial year if it is in breach of its minimum solvency
margin or minimum liquidity ratio or if it would fail to meet such margin or ratio as a result. In addition, BMA approval
would be required prior to declaring or paying dividends in any financial year NG Re failed to meet its minimum
solvency margin or minimum liquidity ratio on the last day of any financial year.
As a registered Class 3A insurer, NG Re is prohibited from declaring or paying dividends of more than 25% of
its previous year’s total statutory capital and surplus unless it files with the BMA an affidavit stating it will continue
to meet its minimum capital requirements. In addition, NG Re is prohibited, without the approval of the BMA, from
reducing by 15% or more its total statutory capital as set out in its previous year’s financial statements.
Minimum Liquidity Ratio
Under the Insurance Act - Bermuda, an insurer engaged in general business, such as NG Re, is required to maintain
the value of its relevant assets at not less than 75% of the amount of its relevant liabilities.
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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, 2019, we have approximately 9,200 employees, including part-time employees, none of
whom are covered by collective bargaining arrangements.
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 obtain our electronic filings by accessing the SEC’s website at http://www.sec.gov.
You can also obtain on our website’s Investor Relations page (www.nationalgeneral.com), 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 Ethics applicable to our directors and executive officers that
would otherwise be required to be disclosed under the rules of the SEC or Nasdaq.
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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, LAE 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:
• 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:
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;
•
• 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.
regulatory constraints on rate increases;
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. The process of estimating loss reserves involves a high degree of judgment and
is subject to a number of variables. These variables can be affected by both internal and external events, such as: changes
in claims handling procedures, adverse changes in loss cost trends, economic conditions (including general inflation),
legal trends and legislative changes, and varying judgments and viewpoints in the estimation process, among others.
The impact of many of these items on ultimate loss reserves is difficult to estimate.
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As a result of these uncertainties, the ultimate paid LAE 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. 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.
General economic conditions could materially and adversely affect our business, our liquidity and financial
condition.
General economic factors beyond our control that affect our business include unemployment rates, consumer
spending, residential and commercial real estate prices, U.S. debt ceiling and budget deficit concerns, tax rates and
policies, changes in interest rates and the 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 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 key employees. If we are unsuccessful
in our efforts to attract, train and retain qualified executive officers and key employees, our business may be materially
adversely affected.
Our success has developed from, and will continue to depend on, the efforts of our executive officers because of
their industry expertise, knowledge of our markets, and relationships with our independent agents and distribution
partners. 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, 2019, our P&C segment derived 73.7% of its gross premium written from the
following ten states: North Carolina (16.0%), New York (14.0%), California (12.1%), Florida (10.7%), Texas (4.4%),
Louisiana (3.6%), New Jersey (3.6%), Virginia (3.4%), Michigan (3.1%) and Alabama (2.8%). 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 effect on our business,
financial condition and results of operations.
If we cannot sustain our business relationships, including our relationships with independent agents, agencies and
other parties, we may be unable to compete effectively and operate profitably.
We market our products primarily through a network of independent agents and distribution partners. 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
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to offer insurance products and maintain financial strength ratings that meet the requirements and preferences of our
independent agents and agencies and their policyholders.
In connection with our lender-placed insurance business, we also have relationships with certain mortgage lenders
and servicers, and we insure properties securing mortgages serviced by the mortgage loan servicers with whom we do
business. If such lenders terminate important business arrangements with us, or renew contracts on terms less favorable
to us, our cash flows, results of operations and financial condition could be materially adversely affected. For example,
in our lender-placed insurance business, restrictions imposed by state regulators on us or by federal regulators on our
customers could affect our ability to do business with certain mortgage loan servicers or the volume or profitability of
such business. Furthermore, the transfer by mortgage servicer clients of loan portfolios to other carriers or the new
participation by other carriers in insuring or reinsuring lender-placed insurance risks could materially reduce our
revenues and profits from this business.
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. Our top two affinity relationships collectively represent 59% of our affinity channel
written premium. Although our relationships with these and most of our other affinity partners are long-standing with
long-term contracts, 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 we fail to 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.
We use our own policy administration system. We also use technology systems to more accurately evaluate
specific risk exposures in order to assist us in profitably underwriting our P&C products.
If we are unable to properly maintain our policy administration system and other 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 integration, maintenance and
improvements, but failure to make such improvements could have an adverse effect on our business.
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.
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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
or other form of cyberattacks, 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, phishing attempts, e-mail fraud,
employee misconduct and other external hazards could expose our data systems to security breaches, cyberattacks 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 adviser 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 you that our or third party systems and networks will not be
subject to breaches or interference. Any such event may result in operational disruptions, cause payments to be made
to an unintended recipient, or result in 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.
The regulatory environment surrounding information security and privacy is increasingly demanding. We are
subject to numerous U.S. federal and state laws and regulations in jurisdictions outside the U.S. governing the protection
of personal and confidential information of our clients or employees, including in relation to credit card data and
financial information. These laws and regulations are increasing in complexity and number and change frequently. If
any person, including any of our employees or those with whom we share such information, negligently disregards or
intentionally breaches our established controls with respect to our client or employee data, or otherwise mismanages
or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions,
fines and/or criminal prosecution in one or more jurisdictions.
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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, 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:
• 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;
the diversion of management’s attention from the day-to-day operations of our business;
• our ability to integrate acquired businesses smoothly and efficiently;
• our ability to achieve expected synergies, profitability and return on our investment;
•
• 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 to 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.
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.
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.
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. We own 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.
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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 an insurance holding company controlled by Leah Karfunkel, George Karfunkel and Barry Zyskind.
Because Leah Karfunkel beneficially owns 39.3% of our outstanding shares of common stock, AmTrust is a related
party.
We are party to arrangements with AmTrust and its affiliates, including, among others, a consulting and marketing
agreement pursuant to which a subsidiary of AmTrust provides certain consulting and marketing services to promote
our captive insurance program; a joint investment in an entity owning an investment in third party managed life settlement
contracts; and joint investments in entities owning office buildings in Ohio, Texas and Illinois. 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 ACP Re and ACP Re Holdings, LLC 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 Family Trust. We provide management
services to ACP Re pursuant to a services agreement. We and AmTrust provided ACP Re with financing in an aggregate
amount of $250.0 million ($125.0 million each), and in 2016, ACP Re Holdings, LLC, a Delaware limited liability
company owned by the Karfunkel Family Trust (“ACP Re Holdings”), became the borrower in the place of ACP Re.
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 Holdings will have sufficient assets or liquidity
to pay its obligations under the terms of the financing. The majority of ACP Re Holdings’ assets currently consist of
publicly traded equity securities. As a result of the financing, we, through our subsidiary, have significant credit exposure
to ACP Re Holdings.
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 has currently
assigned our insurance subsidiaries a group rating of “A-” (Excellent). 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. 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.
We may be adversely affected by changes in LIBOR reporting practices, the method in which LIBOR is determined
or the use of alternative reference rates.
As of December 31, 2019, our debt indentures, 2019 Credit Agreement and Series D Preferred Stock include
terms indexed to London Interbank Offered Rate (“LIBOR”). In July 2017, the United Kingdom regulator that regulates
LIBOR announced its intention to phase out LIBOR rates by the end of 2021. The Alternative Reference Rates Committee
("ARRC"), a steering committee comprised of large U.S. financial institutions, has proposed replacing U.S. Dollar-
LIBOR with a new index calculated by short-term repurchase agreements - the Secured Overnight Financing Rate
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("SOFR"). At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and
it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the
administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether
any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Such developments and any
other legal or regulatory changes in the method by which LIBOR is determined or the transition from LIBOR to a
successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay
in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market
participants from continuing to administer or to participate in LIBOR’s determination and, in certain situations, could
result in LIBOR no longer being determined and published. If a published U.S. dollar LIBOR rate is unavailable after
2021, the interest rates on our debt indentures, 2019 Credit Agreement and Series D Preferred Stock, which are indexed
to LIBOR will be determined using various alternative methods, any of which may result in interest obligations which
are more than or do not otherwise correlate over time with the payments that would have been made on such debt if
U.S. dollar LIBOR was available in its current form. Further, the same costs and risks that may lead to the unavailability
of U.S. dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine. Any
of these proposals or consequences could have a material adverse effect on our financing costs, and as a result, our
financial condition, operating results and cash flows.
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, 2019, our investment in fixed-
income securities was approximately $4,476.4 million, or 92.2% of our total investment portfolio. 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.
Our investment portfolio also contains floating rate instruments, which typically bear interest based on LIBOR.
Regulatory and industry initiatives to eliminate LIBOR as an interest rate benchmark may create uncertainty in our
LIBOR-based instruments, which may adversely impact both pricing and liquidity of such instruments.
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 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.
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.
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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 and other operating 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 and preferred 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 cash dividends and distributions that could be paid by our insurance subsidiaries
without prior approval by the various domiciliary states of our insurance subsidiaries was approximately $403.0 million
as of December 31, 2019, 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 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:
• 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.
• 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
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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 most of the states in which we operate,
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 and our ability to operate in a profitable manner may be limited.
• 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.
• Lender-placed insurance products. State departments of insurance and regulatory authorities may choose to
review the appropriateness of our premium rates for our lender-placed insurance products. If the reviews by
state departments of insurance lead to significant decreases in premium rates for our lender-placed insurance
products, our results of operations could be materially adversely affected.
• 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 surcharges for guaranty funds, second-injury funds,
catastrophe funds and other mandatory pooling arrangements;
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 department’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
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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.
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.” We cannot predict whether any proposals promulgated by FIO 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.
The PPACA was signed into law in 2010. In recent years there have been several judicial and congressional
challenges and proposed amendments to PPACA, and the Tax Cuts and Jobs Act of 2017 repealed certain aspects of
the PPACA. Congress may consider other legislation to repeal or replace elements of the PPACA.
We expect there may be additional challenges and amendments in the future. Due to the complexity and continued
uncertainty surrounding healthcare legislation, the impact from the PPACA or any amendments to the PPACA remains
difficult to predict and could significantly affect the health insurance industry. We continue to review our product
offerings and make changes to adapt to the current environment and the opportunities presented. However, we could
be adversely affected if our plans for operating in the current environment are unsuccessful or if there is less demand
than we expect for our A&H products.
If we are unable to adapt our A&H business to current and/or future requirements of the PPACA, or if significant
uncertainty continues with respect to implementation of the PPACA or other healthcare reform legislation, our A&H
business could be materially adversely affected. Furthermore, should Congress extend the scope of or repeal parts of
or all of the PPACA, such a development could have a material adverse effect on our A&H business. For more information
on the PPACA and its impact on our A&H segment, see Item 1, “Business - A&H Segment.”
We may 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
regulatory and rating agency requirements and 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 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.
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In addition, the terms of a capital raising transaction could require us to agree to stringent financial and operating
covenants 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. In this
jurisdiction, we are subject to a number of significant risks in conducting such business. These risks include restrictions
such as capital 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.
Changes in accounting standards issued by 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 are 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
anticipated impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our
reports filed with the SEC. See Note 2, “Significant Accounting Policies,” in the notes to our consolidated financial
statements. 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.
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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 than 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, distribution partners and affinity groups.
In our lender-placed insurance business, we use a proprietary insurance-tracking system to monitor the clients’
mortgage portfolios to verify the existence of insurance on each mortgaged property and identify those that are uninsured.
If, in addition to our current competitors, others in this industry develop a competing system or equivalent administering
capabilities, this could adversely affect our business 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, 2019, we generated $642.0 million in service and fee revenue from our P&C
and A&H policyholders, which included, among others, origination fees, installment fees relating to installment payment
plans, late payment fees, policy 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 insurance industry is cyclical in nature, which may affect our overall financial performance.
Historically, the financial performance of the 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 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, non-catastrophic weather and water
losses 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
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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.
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. We also rely on quota share insurance
agreements to cede a portion of the risk on the policies that we write. 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 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, 2019, we had an aggregate amount of approximately $1,394.3 million of reinsurance recoverable.
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 $0.6 million in 2019. At December 31, 2019, the amount of reinsurance recoverable from the
NCRF and the MCCA was approximately $191.3 million and $558.3 million, respectively. If any of our principal
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reinsurers were unable to meet its obligations to us, our financial condition and results of operations would be materially
adversely affected.
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 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.
We may from time to time be subject to a variety of legal actions relating to our current and past business operations
including, but not limited to, disputes over coverage or claims adjudication, including claims alleging that we have
acted in bad faith in the administration of claims by our policyholders, disputes with our agents or producers over
compensation and termination of contracts and related claims, disputes relating to certain business acquired or disposed
of by us and disputes with former employees. We also cannot determine with any certainty what new theories of recovery
may evolve or what their impact may be on our business.
Class action claims present additional exposure to substantial economic, non-economic or punitive damage
awards. The loss of even one of these claims, if it results in a significant damage award or a judicial ruling that was
otherwise detrimental, could create a precedent in the industry that could have an adverse effect on our business.
The effects of regulatory inquiries and litigation relating to our collateral protection insurance business are uncertain
and could have an adverse effect on us and our business.
We have been and continue to be subject to inquiries by regulatory and government agencies and class action
litigation concerning matters arising from our collateral protection insurance business with Wells Fargo. Although we
believe that our actions have at all times been in compliance with applicable requirements and that we have a meritorious
defense in the litigation pending against us, there can be no assurance as to the ultimate outcome of these matters and
we may be subject to fines, penalties or damages. Additionally, negative publicity relating to these claims, or unfavorable
outcomes in these matters, could adversely affect our business and results of operations and damage our reputation.
34
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;
reaction to the sale or purchase of company stock by our principal stockholders or our executive officers;
• additions or departures of key personnel;
•
• changes in the economic or regulatory environment in the markets in which we operate;
• changes in law; and
• general market, economic and political conditions.
Our principal stockholder has the ability to significantly impact our business, which may be disadvantageous to
other stockholders.
Leah Karfunkel beneficially owns or controls approximately 39.3% of our outstanding shares of common stock.
As a result, Mrs. Karfunkel has the ability to significantly impact 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. Mrs. Karfunkel may have interests that are different from those of other
stockholders.
In addition, members of the Karfunkel family, through entities that they control, have entered into transactions
with us and may from time to time in the future enter into other transactions with us. As a result, they may have interests
that are different from, or are in addition to, their interests as a stockholder in our company. Such transactions may
adversely affect our results or operations or financial condition.
Our officers, directors and principal stockholder 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
difficult for other stockholders to replace directors without the consent of Leah Karfunkel. 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 principal stockholders.
35
In order to comply with the requirements of being a public company we continually enhance certain of our corporate
processes, which require significant company resources and management attention.
As a public company with listed equity securities, we need to comply with the laws, regulations, requirements,
and corporate governance provisions of The Sarbanes-Oxley Act of 2002, periodic reporting requirements of the
Exchange Act and other regulations of the SEC and the requirements of the Nasdaq Global Market. In order to comply
with these laws, rules and regulations, we have to continually monitor and 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.
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 market 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. 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”)
36
of our insurance subsidiaries. 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.
37
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We use an aggregate of approximately 2.4 million square feet in approximately 60 office locations and
approximately 490 store fronts. 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 0.3 million 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.
On July 25, 2019, the City of North Miami Beach Police Officers’ and Firefighters’ Retirement Plan filed a
complaint in the U.S. District Court for the Central District of California against the Company and certain of its officers.
The plaintiff purports to represent a class of individuals and entities who purchased or otherwise acquired shares of the
Company’s common stock between August 5, 2015 and August 9, 2017. The complaint asserts claims under Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder based on allegedly false and misleading
statements made by the Company in its SEC filings in relationship to the Company’s involvement in the historical and
no longer existing Wells Fargo collateral protection insurance program. The complaint seeks damages in an amount to
be proven at trial. On November 19, 2019, the U.S. District Court for the Central District of California granted the
Company’s Motion to Transfer the case to the Southern District of New York. On January 10, 2020, lead plaintiffs
Town of Davie Police Officers Retirement System and Massachusetts Laborers’ Pension Fund filed an amended
Complaint alleging similar claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder on behalf of a purported class of individuals and entities who purchased or otherwise acquired shares of the
Company’s common stock between July 15, 2015 and August 9, 2017. We believe that the claims set forth in the
amended complaint are unfounded and without merit and intend to vigorously contest them. We note, however, that in
light of the inherent uncertainty in legal proceedings, we can give no assurance as to the ultimate resolution of the
matter, and an estimate of the possible loss or range of loss, if any, cannot be made at this time.
Item 4. Mine Safety Disclosures
None.
38
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
February 18, 2020 there were approximately 263 registered record holders of our common shares. This figure does not
include beneficial owners who hold shares in nominee name.
Dividend Policy
Our board of directors currently intends to continue to authorize the payment of a 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 transfer funds
to us in the form of a dividend. 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 cash dividends
and distributions that could be paid to us by our insurance subsidiaries without prior approval by the various domiciliary
states of our insurance subsidiaries was approximately $403.0 million as of December 31, 2019, 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, or would result from such payment,
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.
39
Common Stock Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on our common stock for the
five-year period (December 31, 2014 to December 31, 2019) 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 made on December 31, 2014. The stock price performance of the following graph is not
necessarily indicative of future stock price performance.
Comparative Cumulative Total Returns Since December 31, 2014 for National General Holdings Corp., Nasdaq
Composite Index and Nasdaq Insurance Index
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.
40
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, 2019, 2018
and 2017 and the balance sheet data as of December 31, 2019 and 2018 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.
Selected Income Statement Data(1)
(amounts in thousands, except percentages and per share data)
2019
2018
2017
2016
2015
Year Ended December 31,
Gross premium written
Ceded premiums(2)
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income
Service and fee income
Net investment income(3)
Net gain (loss) on investments
Other income (expense)
Total revenues
$
5,583,080
$
5,416,839
$
4,755,985
$
3,500,898
$
2,590,044
(1,358,459)
(1,589,126)
(1,178,390)
(428,202)
(403,502)
$
4,224,621
$
3,827,713
$
3,577,595
$
3,072,696
$
2,186,542
(106,579)
(95,511)
76,581
(77,525)
(56,436)
$
4,118,042
$
3,732,202
$
3,654,176
$
2,995,171
$
2,130,106
238,453
641,965
141,233
13,473
26,428
224,697
561,583
119,034
(29,545)
—
116,456
502,927
101,950
46,763
(198)
45,600
380,817
115,187
7,904
24,308
43,790
273,548
78,783
(11,095)
—
$
5,179,594
$
4,607,971
$
4,422,074
$
3,568,987
$
2,515,132
Loss and loss adjustment expense
2,854,468
2,662,226
2,626,082
2,092,280
1,485,320
Acquisition costs and other underwriting expenses(4)
General and administrative expenses(5)
Interest expense
Total expenses
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net (income) loss attributable to noncontrolling interest
Net income attributable to National General Holdings Corp.
Dividends on preferred stock
Net income attributable to National General Holdings Corp. common
stockholders
Per common share data:
Basic earnings per share
Weighted average shares outstanding - basic
Diluted earnings per share
Weighted average shares outstanding - diluted
Dividends declared per common share
Insurance Ratios
Net loss ratio(6)
Net operating expense ratio (non-GAAP)(7)(8)
Net combined ratio (non-GAAP)(7)(8)(9)
Insurance Ratios Before Amortization and Impairment (non-GAAP)
Net operating expense ratio before amortization and impairment
(non-GAAP)(10)
Net combined ratio before amortization and impairment
(non-GAAP)(10)(11)
827,367
1,041,772
51,544
4,775,151
404,443
77,013
327,430
20,639
348,069
(33,600)
314,469
2.78
113,200
2.73
116,097
0.18
$
$
$
$
$
$
$
$
735,266
938,046
51,425
4,386,963
221,008
53,484
167,524
39,830
207,354
(32,492)
174,862
1.62
107,660
1.59
110,822
0.16
$
$
$
$
$
$
$
$
672,429
912,996
47,086
4,258,593
163,481
61,273
102,208
3,637
105,845
(31,500)
74,345
0.70
106,588
0.68
108,752
0.16
$
$
$
$
$
$
$
$
497,007
709,148
40,180
3,338,615
230,372
33,998
196,374
(20,668)
175,706
(24,333)
151,373
1.43
105,952
1.40
108,278
0.14
$
$
$
$
$
$
$
$
406,662
426,976
28,885
2,347,843
167,289
16,176
151,113
(14,025)
137,088
(14,025)
123,063
1.25
98,242
1.22
100,724
0.09
$
$
$
$
$
$
$
$
69.3%
23.7%
93.0%
71.3%
23.5%
94.8%
71.9%
26.4%
98.3%
69.9%
26.0%
95.9%
69.7%
24.2%
93.9%
22.8%
22.7%
24.7%
23.6%
22.4%
92.1%
94.0%
96.6%
93.5%
92.1%
41
Selected Balance Sheet Data
Investments
Cash, cash equivalents and restricted cash
Premiums and other receivables, net
Reinsurance recoverable
Intangible assets, net and Goodwill
Total assets
Unpaid loss and loss adjustment expense reserves
Unearned premiums and other revenue
Debt
Total liabilities
Common stock and additional paid-in capital
Preferred stock
Noncontrolling interest
Total stockholders’ equity
2019
2018
2017
2016
2015
As of December 31,
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,854,998
164,463
1,428,948
1,394,308
545,151
9,756,534
2,886,414
2,312,241
686,006
7,139,040
1,066,768
450,000
(31,960)
2,617,494
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(amounts in thousands)
4,226,806
233,583
1,399,812
1,611,738
560,120
9,439,280
2,957,159
2,280,728
705,795
7,238,409
1,058,912
450,000
(19,967)
2,200,871
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,649,788
357,484
1,324,321
1,294,165
578,223
8,439,743
2,663,557
2,032,605
713,710
6,486,318
918,818
420,000
24,856
1,953,425
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,631,064
285,900
1,091,774
948,236
626,084
7,238,028
2,273,866
1,701,286
752,001
5,320,670
914,851
420,000
31,918
1,917,358
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,785,510
282,277
694,577
897,232
461,312
5,556,192
1,762,575
1,257,598
491,537
4,029,034
901,170
220,000
22,840
1,527,158
(1) Results of operations were affected by our various acquisitions and reinsurance transactions from 2015 to 2019, and
a disposition in 2019. Bargain purchase gain or gain on sale of a business is recorded in other income (expense).
(2) Premiums ceded to related parties were not material for the years ended December 31, 2019, 2018, 2017 and 2016,
and amounted to $1,578 for the year ended December 31, 2015.
(3) Earnings (losses) of equity method investments, including those with related parties, are recorded in net investment
income.
(4) 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 represent other costs that are directly attributable to insurance activities.
(5) General and administrative expenses are 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 include those charges that are related to the amortization of tangible and intangible
assets and non-insurance activities in which we engage.
(6) Net loss ratio is calculated by dividing the loss and loss adjustment expense 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, service
and fee income and other general and administrative expenses (arbitration award / litigation settlement expense).
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. We believe this presentation
enhances the understanding of our results by eliminating what we believe are volatile and unusual events and
presenting the ratios with what we believe are the underlying run rates of the business. 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 of net operating expense, 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, service and fee income and other general and administrative
expenses (arbitration award / litigation settlement expense).
(9) Net combined ratio (non-GAAP) is calculated by adding net loss ratio and net operating expense ratio (non-GAAP)
together.
42
(10) Net operating expense ratio before amortization and impairment (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 before non-cash amortization of intangible assets and non-cash impairment of goodwill to net
earned premium.
(11) The net combined ratio before amortization and impairment (non-GAAP) is a measure of an insurance company’s
overall underwriting profit. This is the sum of the net loss ratio and net operating expense ratio before amortization
and impairment (non-GAAP). If the net combined ratio before amortization and impairment (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. Management believes that this measure of underwriting profitability provides
a more useful comparison to the combined ratio of other insurance companies involved in fewer acquisitions.
43
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.”
The discussion of our financial condition and results of operations for the year ended December 31, 2017 included
in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual
Report on Form 10-K for the year ended December 31, 2018 is incorporated by reference into this MD&A.
Overview
We are a specialty personal lines insurance holding company that, through our subsidiaries, provides a variety
of insurance products, including personal and small business automobile, homeowners, umbrella, recreational vehicle,
motorcycle, lender-placed, supplemental health 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: Property and Casualty (“P&C”) and Accident and Health
(“A&H”). We transact business primarily through our twenty-two regulated domestic insurance subsidiaries:
Property and Casualty:
Agent Alliance Insurance Company
Century-National Insurance Company
Direct General Insurance Company
Direct General Insurance Company of Mississippi
Direct Insurance Company
Direct National Insurance Company
Imperial Fire and Casualty Insurance Company
Integon Casualty Insurance Company
Integon General Insurance Corporation
Integon Indemnity Corporation
Integon National Insurance Company
Integon Preferred Insurance Company
MIC General Insurance Corporation
National Farmers Union Property and Casualty Company
National General Assurance Company
National General Insurance Company
National General Insurance Online, Inc.
National General Premier Insurance Company
New South Insurance Company
Standard Property and Casualty Insurance Company
Accident and Health:
Direct General Life Insurance Company
National Health Insurance Company
Our insurance subsidiaries have an “A-” (Excellent) group rating by A.M. Best Company, Inc. (“A.M. Best”).
On September 5, 2019, A.M. Best affirmed our A- rating including our subsidiary National Farmers Union Property
44
and Casualty Company, which we acquired on August 1, 2019. We currently conduct a limited amount of business
outside the United States, primarily in Bermuda.
On December 2, 2019, we sold our Euro Accident Health and Care Insurance Sweden operation to a Swedish
investment company focused on Nordic healthcare investments.
Two of our wholly-owned subsidiaries 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” or “Exchanges”). We do not own the Reciprocal Exchanges
but are paid a fee to manage their business operations through our wholly-owned management companies. The
Reciprocal Exchanges are included in our P&C segment.
The operating results of 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 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 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. Our operating results for the year ended
December 31, 2019 have been negatively impacted by losses resulting from severe weather-related events.
We evaluate our operations by monitoring key measures of growth and profitability, including net combined ratio
(non-GAAP) and operating leverage. We target a net combined ratio (non-GAAP) in the low-to-mid 90s 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, 2019, our operating leverage (the ratio of net earned premium
to average total stockholders’ equity) was 1.7x, 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 $141.2 million, $119.0 million and $102.0 million for the years ended December 31, 2019, 2018 and 2017,
respectively. We held 3.3% and 5.2% in cash, cash equivalents and restricted cash of our total invested assets as of
December 31, 2019 and 2018, respectively.
Our most significant balance sheet liability is our unpaid loss and loss adjustment expense (“LAE”) reserves. As
of December 31, 2019 and 2018, our reserves, net of reinsurance recoverable on unpaid losses, were $1.8 billion and
$1.7 billion, 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 given point in time based on known facts and
circumstances. 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 can be impacted
by external forces, principally frequency and severity of future claims, length of time to achieve ultimate settlement of
claims, inflation of medical costs and wages, 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
45
estimates, such 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.
Critical Accounting Policies and Estimates
Our significant accounting policies are discussed in Note 2, “Significant Accounting Policies” in the notes to our
consolidated financial statements.
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 recoverable, including the provision for uncollectible amounts; recording of impairment
losses for other-than-temporary declines in fair value; determining the fair value of investments; determining the fair
value of stock-based awards for stock compensation; the valuation of intangibles and the determination of goodwill
and goodwill impairment; 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. 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 premiums receivable 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 insufficient 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. Insufficient 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 canceled. A policy
reinstatement fee is recognized when the customer’s policy is reinstated. An insufficient 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 on the amount or period of insurance coverage
provided and do not entail any obligation to return any portion of those funds. The costs associated with generating fee
income are not separately tracked. We estimate an allowance for doubtful accounts based on a percentage of fee income.
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 time when
the policy is sold. The allowance for estimated third-party cancellations is periodically evaluated and adjusted as
necessary.
46
Reserves for loss and loss adjustment expense. 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 LAE to determine whether further
adjustments are required. Any resulting adjustments are included in the period in which adjustments are determined.
Additional information regarding the judgments and uncertainties surrounding our estimated reserves for loss and LAE
can be found in Item 1, “Business-Loss Reserves.”
Reinsurance. We cede insurance risk under various reinsurance agreements. We seek 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. We remain 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 to the extent the ceding commission exceeds acquisition costs. Reinsurance recoverable is 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 acquisition costs. Deferred acquisition costs include commissions, premium taxes, payments to affinity
partners, and other direct sales costs that are directly related to the successful acquisition of insurance policies. These
costs, net of ceding allowances, are deferred and amortized to the extent recoverable, over the policy period in which
the related premiums are earned. Anticipated investment income is considered in determining the recoverability of
these costs. We believe that these costs are recoverable.
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 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.
47
Investments. We account for our investments in debt securities in accordance with the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, “Investments - Debt Securities,” and
certain equity investments with ASC 321, “Investments - Equity Securities.” In accordance with ASC 320, our debt
securities are classified as available for sale and are measured at fair value with unrealized gains and losses reported
as a separate component of comprehensive income. Equity investments (except those accounted for under the equity
method, and those that result in consolidation of the investee and certain other investments) are measured at fair value
with all gains and losses reported in net income in accordance with ASC 321. We may sell our available-for-sale and
equity securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors.
Available-for-sale and equity securities are reported at their estimated fair values based on quoted market prices or
recognized pricing services.
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.
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 an indefinite useful life are
not amortized. Goodwill and intangible assets are tested for impairment on an annual basis or more frequently if changes
48
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 statements of income.
Intangible assets that have finite lives, including but not limited to, agent and customer relationships and
trademarks, are amortized over the estimated useful life of the asset. For intangible assets with finite lives, impairment
is recognized if the carrying amount is not recoverable and exceeds the fair value of the intangible asset. Generally
intangible assets with finite lives are only tested for impairment if there are indicators of impairment (“triggers”)
identified. Triggers include, but are not limited to, a significant adverse change in the extent, manner or length of time
in which the intangible asset is being used or a significant adverse change in legal factors or in the business climate
that could affect the value of the other intangible asset.
Business combinations. We account for business combinations under the acquisition method of accounting, which
requires us to record assets acquired, liabilities assumed and any noncontrolling 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 of 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 (e.g., 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 purchase price is the fair
value of the total consideration conveyed to the seller and we record the excess (deficiency) of the purchase price over
the fair value of the acquired net assets, where applicable, as goodwill or bargain purchase gain. We expense costs
associated with the acquisition of a business in the period incurred.
Noncontrolling Interest. Non-redeemable noncontrolling interest is the portion of equity (net assets) not
attributable, directly or indirectly, to a parent. We have no ownership interest in the Reciprocal Exchanges. Therefore,
the difference between the value of their assets and liabilities represent the value of the noncontrolling interest.
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 significant market assumptions.
Level 3 assets are unobservable inputs 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 non-binding broker quotes, pricing models, discounted cash flow methodologies,
or similar techniques that require significant judgment or estimation.
Income taxes. We join our subsidiaries in the filing of a consolidated federal income tax return and are party to
federal income tax allocation agreement. The Reciprocal Exchanges are not party to federal income tax allocation
agreement 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 debt securities.
49
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 on 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 operate.
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 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, 2019,
we would earn half of the premium in the first quarter of 2019 and the other half in the second quarter of 2019.
Ceding commission income. Ceding commission income is 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 on a pro-rata basis over the terms of the policies reinsured. The portion of ceding
commission revenue which represents reimbursement of successful acquisition costs related to the underlying policies
is recorded as an offset to acquisition costs and other underwriting expenses.
Service and fee income. We also 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 insufficient 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. Insufficient 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 canceled. A policy
reinstatement fee is recognized when the customer’s policy is reinstated. An insufficient 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
50
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 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. Commission income and general agent fees are recognized, net of an allowance for estimated
policy cancellations, at the time when the policy is sold. The allowance for estimated third-party cancellations is
periodically evaluated and adjusted as necessary.
Net investment income. We invest our statutory surplus funds and the funds supporting our insurance liabilities
primarily in cash and cash equivalents, debt and equity securities. Our net investment income includes interest and
dividends earned on our invested assets and earnings or losses on our equity method investments.
Net gains and losses on investments. 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 loss. We report net unrealized gains (losses) on debt securities classified as available for
sale within accumulated other comprehensive income (loss) in our balance sheet. We report all gains (losses) on equity
securities within net gains (losses) on investments in our statement of income. Net gains and losses on investments
include foreign exchange gains and losses which are generated by the remeasurement of financial statement balances
that are denominated or stated in another currency into the functional currency.
Other income. Other income represents the bargain purchase gain or the gain on sale of a business.
Loss and loss adjustment expense. 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 attributable to those agents, wholesalers or brokers that produce premiums written on our behalf and
promotional fees 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 are composed of all other operating
expenses, including various departmental salaries and benefits expenses for employees that are 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 include 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 and interest
credited on funds held balances at the 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.
51
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, service and fee income and other general and
administrative expenses (arbitration award / litigation settlement expense).
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.
Insurance Ratios
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 ratio 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. Our definition of net loss ratio and net operating
expense ratio are as follows:
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 premium.
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 before amortization and impairment (non-GAAP). The net combined ratio before amortization
and impairment (non-GAAP) is a measure of an insurance company’s overall underwriting profit. This is the sum of
the net loss ratio and net operating expense ratio before amortization and impairment (non-GAAP). Management
believes that this measure of underwriting profitability provides a more useful comparison to the combined ratio of
other insurance companies involved in fewer acquisitions. Our definition of net operating expense ratio before
amortization and impairment is as follows:
Net operating expense ratio before amortization and impairment (non-GAAP). The net operating expense ratio
before amortization and impairment (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 before non-cash
amortization of intangible assets and non-cash impairment of goodwill to net earned premium.
Net operating expense ratio, net operating expense ratio before amortization and impairment, net combined ratio
and net combined ratio before amortization and impairment 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. We use net operating expense ratio (non-GAAP), net
operating expense ratio before amortization and impairment (non-GAAP), net combined ratio (non-GAAP) and net
combined ratio before amortization and impairment (non-GAAP) to evaluate financial performance against historical
results and establish targets on a consolidated basis. We believe this presentation enhances the understanding of our
results by eliminating what we believe are volatile and unusual events and presenting the ratios with what we believe
are the underlying run rates of the business. Other companies may calculate these measures differently, and, therefore,
their measures may not be comparable to those used by us. For a reconciliation of net operating expense, see “Results
of Operations - Consolidated Results of Operations” below.
52
Results of Operations
Consolidated Results of Operations
Year Ended December 31,
2019
2018
NGHC
Reciprocal
Exchanges
Eliminations
Total
NGHC
Reciprocal
Exchanges
Eliminations
Total
Underwriting revenues:
Gross premium written
Ceded premiums
Net premium written
$ 5,135,633
(1,145,484)
$ 3,990,149
Change in unearned premium
(82,338)
Net earned premium
$ 3,907,811
Ceding commission income
Service and fee income
174,952
705,006
$
$
$
$
$
$
447,447
(212,975)
234,472
(24,241)
210,231
63,501
5,755
(amounts in thousands)
— $ 5,583,080
$ 4,969,517
—
(1,358,459)
(1,325,369)
— $ 4,224,621
$ 3,644,148
—
(106,579)
(98,707)
— $ 4,118,042
$ 3,545,441
$
$
$
—
(68,796)
238,453
641,965
167,948
625,463
$
$
$
448,923
(265,358)
183,565
3,196
186,761
56,749
5,751
(1,601)
$ 5,416,839
1,601
(1,589,126)
— $ 3,827,713
—
(95,511)
— $ 3,732,202
—
(69,631)
224,697
561,583
Total underwriting revenues
$ 4,787,769
$
279,487
$
(68,796)
$ 4,998,460
$ 4,338,852
$
249,261
$
(69,631)
$ 4,518,482
—
—
(69,631)
2,662,226
735,266
938,046
(69,631)
$ 4,335,538
— $
182,944
(9,693)
119,034
—
—
(29,545)
—
Underwriting expenses:
Loss and loss adjustment expense
2,677,356
177,112
Acquisition costs and other
underwriting expenses
782,328
General and administrative expenses
1,024,574
45,039
85,994
—
—
2,854,468
2,499,508
162,718
827,367
(68,796)
1,041,772
693,283
923,921
41,983
83,756
Total underwriting expenses
$ 4,484,258
Underwriting income (loss)
$
303,511
$
$
308,145
(28,658)
$
$
(68,796)
$ 4,723,607
$ 4,116,712
— $
274,853
$
222,140
$
$
288,457
(39,196)
$
$
Net investment income
Net gain (loss) on investments
Other income
Interest expense
Income (loss) before provision
(benefit) for income taxes
Provision (benefit) for income taxes
Net income (loss)
Net loss attributable to
noncontrolling interest
142,174
13,603
26,428
8,638
(130)
—
(9,579)
141,233
—
—
13,473
26,428
119,852
(26,179)
—
8,875
(3,366)
—
(51,544)
(9,579)
9,579
(51,544)
(51,425)
(9,693)
9,693
(51,425)
$
$
434,172
86,103
348,069
$
$
(29,729)
$
— $
404,443
(9,090)
—
77,013
(20,639)
$
— $
327,430
$
$
264,388
57,034
207,354
$
$
(43,380)
$
— $
221,008
(3,550)
—
53,484
(39,830)
$
— $
167,524
—
20,639
—
20,639
—
39,830
—
39,830
Net income attributable to NGHC
$
348,069
$
— $
— $
348,069
$
207,354
$
— $
— $
207,354
Dividends on preferred stock
(33,600)
—
—
(33,600)
(32,492)
—
—
(32,492)
Net income attributable to NGHC
common stockholders
$
314,469
$
— $
— $
314,469
$
174,862
$
— $
— $
174,862
53
Year Ended December 31,
2019
2018
NGHC
Reciprocal
Exchanges
Eliminations
Total
NGHC
Reciprocal
Exchanges
Eliminations
Total
(amounts in thousands, except percentages)
68.5%
84.2%
23.4%
91.9%
29.4%
113.6%
—%
—%
—%
69.3%
70.5%
87.1%
23.7%
93.0%
23.0%
93.5%
33.9%
121.0%
—%
—%
—%
71.3%
23.5%
94.8%
Underwriting ratios:
Net loss ratio
Net operating expense ratio (non-
GAAP)
Net combined ratio (non-GAAP)
Underwriting ratios before
amortization and impairment (non-
GAAP):
Net loss ratio
68.5%
84.2%
—%
69.3%
70.5%
87.1%
—%
71.3%
Net operating expense ratio before
amortization and impairment (non-
GAAP)
Net combined ratio before
amortization and impairment (non-
GAAP)
Reconciliation of net operating
expense ratio (non-GAAP):
22.5%
29.4%
—%
22.8%
22.1%
33.8%
—%
22.7%
91.0%
113.6%
—%
92.1%
92.6%
120.9%
—%
94.0%
Total expenses
$4,535,802
$ 317,724
$
(78,375)
$4,775,151
$4,168,137
$ 298,150
$
(79,324)
$4,386,963
Less: Loss and loss adjustment
expense
Less: Interest expense
Less: Ceding commission income
Less: Service and fee income
Less: Other general and
administrative expenses
2,677,356
177,112
—
2,854,468
2,499,508
162,718
—
2,662,226
51,544
174,952
705,006
9,579
63,501
5,755
(9,579)
—
(68,796)
51,544
238,453
641,965
51,425
167,948
625,463
9,693
56,749
5,751
(9,693)
—
(69,631)
51,425
224,697
561,583
Less: Non-cash amortization of
intangible assets
Net operating expense before
amortization and impairment
Net operating expense
$ 912,671
$
61,777
Net earned premium
$3,907,811
$ 210,231
$
$
— $ 974,448
$ 813,793
$
63,239
— $4,118,042
$3,545,441
$ 186,761
$
$
14,273
—
—
14,273
10,000
—
—
10,000
— $ 877,032
— $3,732,202
Net operating expense ratio (non-
GAAP)
23.4%
29.4%
—%
23.7%
23.0%
33.9%
—%
23.5%
Net operating expense
$ 912,671
$
61,777
$
— $ 974,448
$ 813,793
$
63,239
$
— $ 877,032
34,665
71
—
34,736
31,323
44
—
31,367
Net earned premium
$3,907,811
$ 210,231
$ 878,006
$
61,706
$
$
— $ 939,712
$ 782,470
$
63,195
— $4,118,042
$3,545,441
$ 186,761
$
$
— $ 845,665
— $3,732,202
Net operating expense ratio before
amortization and impairment (non-
GAAP)
22.5%
29.4%
—%
22.8%
22.1%
33.8%
—%
22.7%
54
On August 1, 2019, we completed the acquisition of National Farmers Union Property and Casualty Company
(“Farmers Union Insurance”). The purchase price for the transaction was approximately $52.8 million.
In 2017, we entered into an Auto Quota Share Agreement (the “Auto Quota Share Agreement”) covering our auto
line of business. Effective January 1, 2019, we ceded 7.0% of net liability. On July 1, 2019, we renewed our Auto Quota
Share Agreement for a two-year term. Effective July 1, 2019, we ceded 10.0% of net liability with the ability to increase
the cession to up to 30.0% and decrease the cession down to 5.0% under certain conditions. We receive a 31.2%
provisional ceding commission on premiums ceded to the reinsurer during the term of the Auto Quota Share Agreement,
subject to a sliding scale adjustment to a maximum of 32.8% if the loss ratio for the reinsured business is 64.7% or less
and a minimum of 30.0% if the loss ratio is 67.5% or higher. Effective January 1, 2020, we cede 5.0% of net liability
under new and renewal auto policies written.
In 2017, we entered into a Homeowners Quota Share Agreement (the “HO Quota Share Agreement”) covering
our homeowners line of business. On July 1, 2019, we renewed our HO Quota Share Agreement for a one-year term.
Effective July 1, 2019, we cede 40.0% of net liability and receive a 36.0% ceding commission on new and renewal
business and a portion of the in-force business. A portion of the in-force business is being run-off under the prior
agreements. The weighted average expected ceding commission for all in-force business and new and renewal
homeowners business is 37.5% over the contract term.
On December 2, 2019, we sold our Euro Accident Health and Care Insurance Sweden operation (“Euroaccident”)
to an investor group focused on Nordic healthcare investments. The sale price for this transaction was $139.0 million
and resulted in a $26.4 million gain recorded in other income.
Farmers Union Insurance, and the Auto Quota Share and the HO Quota Share Agreements (collectively, the “Quota
Shares”) impacted our P&C segment. The sale of Euroaccident impacted our A&H segment. As a result of these
transactions, comparisons between the 2019 and 2018 results will be less meaningful.
Consolidated Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31,
2018
Gross premium written. Gross premium written increased by $166.2 million, or 3.1%, from $5,416.8 million for
the year ended December 31, 2018 to $5,583.1 million for the year ended December 31, 2019, due to an increase of
$95.7 million from the P&C segment, primarily driven by the acquisition of Farmers Union Insurance ($77.3 million);
and an increase of $70.5 million from the A&H segment primarily as a result of growth in our small group self-funded
and individual products ($81.4 million), partially offset by the fourth quarter sale of our international business.
Net premium written. Net premium written increased by $396.9 million, or 10.4%, from $3,827.7 million for the
year ended December 31, 2018 to $4,224.6 million for the year ended December 31, 2019. Net premium written for
the P&C segment increased by $362.8 million for the year ended December 31, 2019 compared to the same period in
2018, primarily as a result of decreased ceded premium to the Quota Shares ($232.0 million) upon commencement of
the reduced Auto Quota Share Agreement cession in 2019, the acquisition of Farmers Union Insurance ($71.8 million)
and decreased ceded premium by the Reciprocal Exchanges ($50.9 million). Net premium written for the A&H segment
increased by $34.1 million for the year ended December 31, 2019 compared to the same period in 2018, primarily as
a result of growth in our small group self-funded and individual products ($66.0 million), partially offset by the fourth
quarter sale of our international business.
Net earned premium. Net earned premium increased by $385.8 million, or 10.3%, from $3,732.2 million for the
year ended December 31, 2018 to $4,118.0 million for the year ended December 31, 2019. The change by segment
was: P&C increased by $339.2 million and A&H increased by $46.6 million. The increase in the P&C segment was
attributable to organic growth ($185.1 million), decreased ceded earned premium to the Quota Shares ($57.2 million),
the acquisition of Farmers Union Insurance ($73.4 million), and an increase in the Reciprocal Exchanges ($23.5 million).
The increase in the A&H segment was primarily due to growth in our small group self-funded and individual products
($66.3 million), partially offset by the fourth quarter sale of our international business.
55
Ceding commission income. Ceding commission income increased by $13.8 million, from $224.7 million for the
year ended December 31, 2018 to $238.5 million for the year ended December 31, 2019.
Service and fee income. Service and fee income increased by $80.4 million, or 14.3%, from $561.6 million for
the year ended December 31, 2018 to $642.0 million for the year ended December 31, 2019, primarily driven by our
group administration fees and third party technology services fees.
The components of service and fee income are as follows:
Commission revenue
Finance and processing fees
Group health administrative fees
Installment fees
Late payment fees
Other service and fee income
Total
Year Ended December 31,
2019
2018
Change
% Change
(amounts in thousands)
$
170,962
$
163,321
$
134,499
100,951
97,997
34,519
103,037
125,593
79,411
92,785
33,851
66,622
$
641,965
$
561,583
$
7,641
8,906
21,540
5,212
668
36,415
80,382
4.7%
7.1%
27.1%
5.6%
2.0%
54.7%
14.3%
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $192.2 million, or 7.2%, from
$2,662.2 million for the year ended December 31, 2018 to $2,854.5 million for the year ended December 31, 2019,
primarily reflecting decreased ceded losses to the Quota Shares ($94.2 million), the acquisition of Farmers Union
Insurance ($54.1 million) and unfavorable prior year loss development. The changes by segment were: P&C increased
by $202.9 million and A&H decreased by $10.7 million. Losses related to P&C weather-related events, excluding the
Reciprocal Exchanges, were $51.2 million in 2019 compared to $128.7 million in 2018, a decrease of $77.5 million
year over year.
Loss and LAE for the year ended December 31, 2019 included $5.2 million of unfavorable development on prior
accident year loss and LAE reserves. The development was composed of $50.5 million of unfavorable development
in the P&C segment (including $3.9 million of unfavorable development for the Reciprocal Exchanges) primarily
driven by the small business auto product line, and $45.4 million of favorable development in the A&H segment
primarily driven by overall improvement in loss ratio estimates. Loss and LAE for the year ended December 31, 2018
included $34.0 million of favorable development on prior accident year loss and LAE reserves. The development was
composed of $3.1 million of favorable development in the P&C segment (including $1.7 million of unfavorable
development for the Reciprocal Exchanges), and $31.0 million of favorable development in the A&H segment primarily
driven by favorable development in the domestic A&H stop loss and short-term medical products.
Our consolidated net loss ratio decreased from 71.3% for the year ended December 31, 2018 to 69.3% for the
year ended December 31, 2019.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased
by $92.1 million, or 12.5%, from $735.3 million for the year ended December 31, 2018 to $827.4 million for the year
ended December 31, 2019, due to an increase of $54.5 million in the P&C segment and an increase of $37.6 million
in the A&H segment, primarily due to premium growth.
General and administrative expenses. General and administrative expenses increased by $103.7 million, or 11.1%,
from $938.0 million for the year ended December 31, 2018 to $1,041.8 million for the year ended December 31, 2019,
primarily due to an increase of $47.1 million in the P&C segment, and an increase of $52.4 million in the A&H segment.
The increase in the P&C segment was primarily driven by the acquisition of Farmers Union Insurance, while the increase
in the A&H segment was primarily due to domestic organic growth.
56
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased
by $97.4 million, or 11.1%, from $877.0 million for the year ended December 31, 2018 to $974.4 million for the year
ended December 31, 2019, due to an increase of $74.8 million from the P&C segment and an increase of $22.6 million
from the A&H segment. The increase in the P&C segment was primarily driven by increased general and administrative
expenses, the acquisition of Farmers Union Insurance and decreased cession to the Quota Shares in 2019.
The consolidated net operating expense ratio increased from 23.5% for the year ended December 31, 2018 to
23.7% for the year ended December 31, 2019. Excluding the Reciprocal Exchanges, the net operating expense ratio
was 23.4% and 23.0% for the years ended December 31, 2019 and 2018, respectively. The Reciprocal Exchanges’ net
operating expense ratio was 29.4% and 33.9% for the years ended December 31, 2019 and 2018, respectively.
Net investment income. Net investment income increased by $22.2 million, or 18.6%, from $119.0 million for
the year ended December 31, 2018 to $141.2 million for the year ended December 31, 2019. The increase was primarily
due to increased income from our debt securities.
Net gain (loss) on investments. Net gain (loss) on investments increased by $43.0 million, from a $29.5 million
loss for the year ended December 31, 2018 to a $13.5 million gain for the year ended December 31, 2019. The increase
was mainly attributable to sales at gain from repositioning our debt securities portfolio.
Interest expense. Interest expense for the years ended December 31, 2019 and 2018 was $51.5 million and
$51.4 million, respectively.
Provision for income taxes. Income tax expense increased by $23.5 million, from $53.5 million for the year ended
December 31, 2018, reflecting an effective tax rate of 24.2%, to $77.0 million for the year ended December 31, 2019,
reflecting an effective tax rate of 19.0%.
57
P&C Segment - Results of Operations
Year Ended December 31,
2019
2018
NGHC
Reciprocal
Exchanges
Eliminations
Total
NGHC
Reciprocal
Exchanges
Eliminations
Total
Underwriting revenues:
(amounts in thousands, except percentages)
Gross premium written
$4,367,016
$ 447,447
Ceded premiums
(1,037,473)
(212,975)
Net premium written
$3,329,543
$ 234,472
Change in unearned premium
(84,751)
(24,241)
Net earned premium
$3,244,792
$ 210,231
$
$
$
— $4,814,463
$4,271,408
$ 448,923
—
(1,250,448)
(1,253,799)
(265,358)
— $3,564,015
$3,017,609
$ 183,565
—
(108,992)
(88,581)
3,196
— $3,455,023
$2,929,028
$ 186,761
$
$
$
(1,601)
$4,718,730
1,601
(1,517,556)
— $3,201,174
—
(85,385)
— $3,115,789
Ceding commission income
Service and fee income
164,013
455,519
63,501
5,755
—
(68,796)
227,514
392,478
160,945
439,483
56,749
5,751
—
(69,631)
217,694
375,603
Total underwriting revenues
$3,864,324
$ 279,487
$
(68,796)
$4,075,015
$3,529,456
$ 249,261
$
(69,631)
$3,709,086
Underwriting expenses:
Loss and loss adjustment expense
2,366,676
177,112
Acquisition costs and other
underwriting expenses
General and administrative expenses
559,980
756,093
45,039
85,994
—
—
(68,796)
2,543,788
2,178,163
162,718
605,019
773,291
508,557
712,113
41,983
83,756
Total underwriting expenses
$3,682,749
$ 308,145
Underwriting income (loss)
$ 181,575
$
(28,658)
$
$
(68,796)
$3,922,098
$3,398,833
$ 288,457
— $ 152,917
$ 130,623
$
(39,196)
—
—
(69,631)
2,340,881
550,540
726,238
$
$
(69,631)
$3,617,659
— $
91,427
Underwriting ratios:
Net loss ratio
Net operating expense ratio (non-
GAAP)
Net combined ratio (non-GAAP)
Underwriting ratios before
amortization and impairment (non-
GAAP):
72.9%
84.2%
21.5%
94.4%
29.4%
113.6%
—%
—%
—%
73.6%
74.4%
87.1%
21.9%
95.5%
21.2%
95.6%
33.9%
121.0%
—%
—%
—%
75.1%
21.9%
97.0%
Net loss ratio
72.9%
84.2%
—%
73.6%
74.4%
87.1%
—%
75.1%
Net operating expense ratio before
amortization and impairment (non-
GAAP)
Net combined ratio before
amortization and impairment (non-
GAAP)
Reconciliation of net operating
expense ratio (non-GAAP):
20.6%
29.4%
—%
21.1%
20.4%
33.8%
—%
21.2%
93.5%
113.6%
—%
94.7%
94.8%
120.9%
—%
96.3%
Total expenses
$3,682,749
$ 308,145
$
(68,796)
$3,922,098
$3,398,833
$ 288,457
$
(69,631)
$3,617,659
Less: Loss and loss adjustment
expense
Less: Ceding commission income
Less: Service and fee income
2,366,676
177,112
164,013
455,519
63,501
5,755
—
—
(68,796)
2,543,788
2,178,163
162,718
227,514
392,478
160,945
439,483
56,749
5,751
—
—
(69,631)
2,340,881
217,694
375,603
Net operating expense
$ 696,541
$
61,777
Net earned premium
$3,244,792
$ 210,231
$
$
— $ 758,318
$ 620,242
$
63,239
— $3,455,023
$2,929,028
$ 186,761
$
$
— $ 683,481
— $3,115,789
Net operating expense ratio (non-
GAAP)
21.5%
29.4%
—%
21.9%
21.2%
33.9%
—%
21.9%
Net operating expense
$ 696,541
$
61,777
$
— $ 758,318
$ 620,242
$
63,239
$
— $ 683,481
Less: Non-cash amortization of
intangible assets
Net operating expense before
amortization and impairment
27,920
71
—
27,991
23,960
44
—
24,004
Net earned premium
$3,244,792
$ 210,231
$ 668,621
$
61,706
$
$
— $ 730,327
$ 596,282
$
63,195
— $3,455,023
$2,929,028
$ 186,761
$
$
— $ 659,477
— $3,115,789
Net operating expense ratio before
amortization and impairment (non-
GAAP)
20.6%
29.4%
—%
21.1%
20.4%
33.8%
—%
21.2%
58
P&C Segment Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended
December 31, 2018
Gross premium written. Gross premium written increased by $95.7 million, or 2.0%, from $4,718.7 million for
the year ended December 31, 2018 to $4,814.5 million for the year ended December 31, 2019, primarily driven by the
acquisition of Farmers Union Insurance ($77.3 million).
Net premium written. Net premium written increased by $362.8 million, or 11.3%, from $3,201.2 million for the
year ended December 31, 2018 to $3,564.0 million for the year ended December 31, 2019, primarily as a result of
decreased ceded premium to the Quota Shares ($232.0 million) upon commencement of the reduced Auto Quota Share
Agreement cession in 2019, the acquisition of Farmers Union Insurance ($71.8 million) and decreased ceded premium
by the Reciprocal Exchanges ($50.9 million).
Net earned premium. Net earned premium increased by $339.2 million, or 10.9%, from $3,115.8 million for the
year ended December 31, 2018 to $3,455.0 million for the year ended December 31, 2019, attributable to organic growth
($185.1 million), decreased ceded earned premium to the Quota Shares ($57.2 million), the acquisition of Farmers
Union Insurance ($73.4 million), and an increase in the Reciprocal Exchanges ($23.5 million).
Ceding commission income. Ceding commission income increased by $9.8 million, from $217.7 million for the
year ended December 31, 2018 to $227.5 million for the year ended December 31, 2019.
Service and fee income. Service and fee income increased by $16.9 million, from $375.6 million for the year
ended December 31, 2018 to $392.5 million for the year ended December 31, 2019.
The components of service and fee income are as follows:
Year Ended December 31,
2019
2018
Change
% Change
(amounts in thousands)
Finance and processing fees
$
128,302
$
121,058
$
Installment fees
Commission revenue
Late payment fees
Other service and fee income
Total
97,997
87,486
34,210
44,483
92,785
93,235
33,765
34,760
$
392,478
$
375,603
$
7,244
5,212
(5,749)
445
9,723
16,875
6.0 %
5.6 %
(6.2)%
1.3 %
28.0 %
4.5 %
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $202.9 million, or 8.7%, from
$2,340.9 million for the year ended December 31, 2018 to $2,543.8 million for the year ended December 31, 2019,
primarily reflecting decreased ceded losses to the Quota Shares ($94.2 million), the acquisition of Farmers Union
Insurance ($54.1 million) and unfavorable prior year loss development. Losses related to weather-related events,
excluding the Reciprocal Exchanges, were $51.2 million in 2019 compared to $128.7 million in 2018, a decrease of
$77.5 million year over year.
Our P&C segment net loss ratio, which includes the Reciprocal Exchanges, decreased from 75.1% for the year
ended December 31, 2018 to 73.6% for the year ended December 31, 2019. Excluding the Reciprocal Exchanges, the
net loss ratio was 72.9% and 74.4% for the years ended December 31, 2019 and 2018, respectively. The Reciprocal
Exchanges’ net loss ratio was 84.2% and 87.1% for the years ended December 31, 2019 and 2018, respectively.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased
by $54.5 million, from $550.5 million for the year ended December 31, 2018 to $605.0 million for the year ended
December 31, 2019. The increase was primarily due to premium growth.
59
General and administrative expenses. General and administrative expenses increased by $47.1 million, from
$726.2 million for the year ended December 31, 2018 to $773.3 million for the year ended December 31, 2019. The
increase was primarily driven by organic growth and the acquisition of Farmers Union Insurance.
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased
by $74.8 million, or 10.9%, from $683.5 million for the year ended December 31, 2018 to $758.3 million for the year
ended December 31, 2019. The increase was primarily driven by increased general and administrative expenses, the
acquisition of Farmers Union Insurance and decreased cession to the Quota Shares in 2019. Our P&C segment net
operating expense ratio was 21.9% for the year ended December 31, 2018 compared to 21.9% for the year ended
December 31, 2019.
Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $61.5 million, or
67.3%, from $91.4 million for the year ended December 31, 2018 to $152.9 million for the year ended December 31,
2019. The increase was primarily driven by organic growth, partially offset by decreased cession to the Quota Shares
in 2019. Our P&C segment net combined ratio decreased from 97.0% for the year ended December 31, 2018 to 95.5%
for the year ended December 31, 2019. The decrease in net combined ratio was driven by lower net loss ratio.
60
A&H Segment - Results of Operations
Underwriting revenues:
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income
Service and fee income
Total underwriting revenues
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Total underwriting expenses
Underwriting income
Underwriting ratios:
Net loss ratio
Net operating expense ratio (non-GAAP)
Net combined ratio (non-GAAP)
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio
Net operating expense ratio before amortization and impairment (non-GAAP)
Net combined ratio before amortization and impairment (non-GAAP)
Reconciliation of net operating expense ratio (non-GAAP):
Total expenses
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)
Net operating expense
Less: Non-cash amortization of intangible assets
Net operating expense before amortization and impairment
Net earned premium
Year Ended December 31,
2019
2018
(amounts in thousands, except percentages)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
768,617
(108,011)
660,606
2,413
663,019
10,939
249,487
923,445
$
310,680
222,348
254,208
787,236
136,209
$
$
46.9%
32.6%
79.5%
46.9%
31.6%
78.5%
787,236
$
310,680
10,939
249,487
216,130
663,019
32.6%
216,130
6,745
209,385
663,019
$
$
$
$
$
698,109
(71,570)
626,539
(10,126)
616,413
7,003
185,980
809,396
321,345
184,726
201,808
707,879
101,517
52.1%
31.4%
83.5%
52.1%
30.2%
82.3%
707,879
321,345
7,003
185,980
193,551
616,413
31.4%
193,551
7,363
186,188
616,413
Net operating expense ratio before amortization and impairment (non-GAAP)
31.6%
30.2%
61
A&H Segment Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended
December 31, 2018
Gross premium written. Gross premium written increased by $70.5 million, or 10.1%, from $698.1 million for
the year ended December 31, 2018 to $768.6 million for the year ended December 31, 2019, primarily as a result of
growth in our small group self-funded and individual products ($81.4 million), partially offset by the fourth quarter
sale of our international business.
Net premium written. Net premium written increased by $34.1 million, or 5.4%, from $626.5 million for the year
ended December 31, 2018 to $660.6 million for the year ended December 31, 2019, primarily as a result of growth in
our small group self-funded and individual products ($66.0 million), partially offset by the fourth quarter sale of our
international business.
Net earned premium. Net earned premium increased by $46.6 million, or 7.6%, from $616.4 million for the year
ended December 31, 2018 to $663.0 million for the year ended December 31, 2019, primarily due to growth in our
small group self-funded and individual products ($66.3 million), partially offset by the fourth quarter sale of our
international business.
Service and fee income. Service and fee income increased by $63.5 million, or 34.1%, from $186.0 million for
the year ended December 31, 2018 to $249.5 million for the year ended December 31, 2019, primarily driven by our
group administration fees and third party technology services fees.
The components of service and fee income are as follows:
Group health administrative fees
Commission revenue
Finance and processing fees
Other service and fee income
Total
Year Ended December 31,
2019
2018
Change
% Change
(amounts in thousands)
100,951
$
79,411
$
83,476
6,197
58,863
70,086
4,535
31,948
249,487
$
185,980
$
$
$
21,540
13,390
1,662
26,915
63,507
27.1%
19.1%
36.6%
84.2%
34.1%
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $10.7 million, from $321.3 million
for the year ended December 31, 2018 to $310.7 million for the year ended December 31, 2019. Our A&H net loss
ratio decreased from 52.1% for the year ended December 31, 2018 to 46.9% for the year ended December 31, 2019.
The loss ratio decrease was primarily as a result of favorable prior year loss development of $45.4 million in 2019,
compared to a $31.0 million favorable prior year loss development in 2018.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased
by $37.6 million, or 20.4%, from $184.7 million for the year ended December 31, 2018 to $222.3 million for the year
ended December 31, 2019, primarily from domestic organic growth.
General and administrative expenses. General and administrative expenses increased by $52.4 million, or 26.0%,
from $201.8 million for the year ended December 31, 2018 to $254.2 million for the year ended December 31, 2019,
primarily from domestic organic growth.
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased
by $22.6 million, or 11.7%, from $193.6 million for the year ended December 31, 2018 to $216.1 million for the year
ended December 31, 2019. Our A&H net operating expense ratio increased from 31.4% for the year ended December 31,
2018 to 32.6% for the year ended December 31, 2019.
62
Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $34.7 million, or
34.2%, from $101.5 million for the year ended December 31, 2018 to $136.2 million for the year ended December 31,
2019. The increase was primarily due to domestic organic growth. Our A&H net combined ratio decreased from 83.5%
for the year ended December 31, 2018 to 79.5% for the year ended December 31, 2019. The net combined ratio decrease
was primarily due to lower net loss ratio due to higher favorable prior year loss development in 2019 compared to 2018,
partially offset by higher operating expense ratio.
63
Balance Sheets
Investments:
ASSETS
(amounts in thousands)
December 31, 2019
NGHC
Reciprocal
Exchanges
Eliminations
Total
Debt securities, available-for-sale, at fair value
$
4,152,109
$
324,249
$
— $
4,476,358
Equity securities, at fair value
Short-term investments
Other investments
Total investments
Cash and cash equivalents
Restricted cash and cash equivalents
Accrued investment income
Premiums and other receivables, net
Deferred acquisition costs
Reinsurance recoverable
Prepaid reinsurance premiums
Property and equipment, net
Intangible assets, net
Goodwill
Prepaid and other assets
Total assets
5,257
62,108
413,486
4,632,960
134,983
28,497
63,752
1,373,089
240,216
1,275,183
469,853
403,586
362,598
179,328
91,121
—
5,245
—
329,494
959
24
2,001
55,859
23,307
119,125
105,894
241
3,225
—
3,521
—
—
(107,456)
(107,456)
—
—
(34,826)
—
—
—
—
—
—
—
—
5,257
67,353
306,030
4,854,998
135,942
28,521
30,927
1,428,948
263,523
1,394,308
575,747
403,827
365,823
179,328
94,642
$
9,255,166
$
643,650
$
(142,282) $
9,756,534
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves
$
2,680,628
$
205,786
$
— $
2,886,414
Unearned premiums and other revenue
Reinsurance payable
Accounts payable and accrued expenses
Debt
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
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
2,059,688
527,155
306,869
686,006
345,366
6,605,712
1,134
450,000
1,065,634
74,548
1,058,138
2,649,454
$
$
252,553
35,689
43,323
107,456
30,803
—
—
(34,826)
(107,456)
—
2,312,241
562,844
315,366
686,006
376,169
675,610
$
(142,282) $
7,139,040
— $
— $
—
—
—
—
—
1,134
450,000
1,065,634
74,548
1,058,138
2,649,454
(31,960)
—
—
—
—
—
—
—
(31,960)
$
$
2,649,454
9,255,166
$
$
(31,960) $
— $
2,617,494
643,650
$
(142,282) $
9,756,534
64
Investments:
ASSETS
(amounts in thousands)
Debt securities, available-for-sale, at fair value
$
3,263,949
$
297,083
$
— $
3,561,032
December 31, 2018
NGHC
Reciprocal
Exchanges
Eliminations
Total
Equity securities, at fair value
Short-term investments
Other investments
Total investments
Cash and cash equivalents
Restricted cash and cash equivalents
Accrued investment income
Premiums and other receivables, net
Deferred acquisition costs
Reinsurance recoverable
Prepaid reinsurance premiums
Property and equipment, net
Intangible assets, net
Goodwill
Prepaid and other assets
Total assets
10,949
331,221
407,580
4,013,699
193,858
39,525
50,981
1,338,485
231,401
1,494,670
529,241
306,309
376,532
180,183
150,377
—
17,328
—
314,411
—
200
1,596
61,327
20,007
117,068
136,433
1,695
3,405
—
4,581
—
—
(101,304)
(101,304)
—
—
(25,400)
—
—
—
—
—
—
—
—
10,949
348,549
306,276
4,226,806
193,858
39,725
27,177
1,399,812
251,408
1,611,738
665,674
308,004
379,937
180,183
154,958
$
8,905,261
$
660,723
$
(126,704) $
9,439,280
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves
$
2,778,689
$
178,470
$
— $
2,957,159
Unearned premiums and other revenue
Reinsurance payable
Accounts payable and accrued expenses
Debt
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock
Preferred stock
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
2,014,965
615,872
390,338
705,795
178,764
6,684,423
1,129
450,000
1,057,783
(52,130)
764,056
$
$
$
$
Total National General Holdings Corp. Stockholders’ Equity
2,220,838
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
265,763
40,393
33,120
101,304
61,640
—
—
(25,400)
(101,304)
—
2,280,728
656,265
398,058
705,795
240,404
680,690
$
(126,704) $
7,238,409
— $
— $
—
—
—
—
—
1,129
450,000
1,057,783
(52,130)
764,056
2,220,838
(19,967)
—
—
—
—
—
—
—
(19,967)
$
$
2,220,838
8,905,261
$
$
(19,967) $
— $
2,200,871
660,723
$
(126,704) $
9,439,280
65
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, debt securities and, to a lesser extent, other investments. Cash and cash equivalents
include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an
original maturity of 90 days or less. Our debt securities include obligations of the U.S. Treasury or U.S. government
agencies, obligations of local governments, U.S. denominated corporate obligations, mortgages guaranteed by the
Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan
Mortgage Corporation, Federal Farm Credit entities, commercial mortgage obligations, and structured securities
primarily consisting of collateralized loan and debt obligations.
The average yield on our investment portfolio was 3.1% for both years ended December 31, 2019 and 2018, and
the average duration of the portfolio was 4.2 years as of December 31, 2019 and 2018.
For more information related to our investments, see Note 3, “Investments” in the notes to our consolidated
financial statements.
Liquidity and Capital Resources
We are organized as a holding company with twenty-two domestic insurance company subsidiaries and 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. 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 debt securities and, to a lesser
extent, other investments. 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, we have raised capital using a combination of debt and equity, and entered into third party
quota share reinsurance agreements. We may raise additional capital over the next twelve months or obtain additional
capital support in the form of third party quota share reinsurance.
We may generate liquidity through the issuance of debt or equity securities or financing through borrowings
under credit facilities, or a combination thereof. We also have a $340.0 million credit agreement, under which there
was $140.0 million outstanding as of December 31, 2019. The proceeds of borrowings under the credit agreement may
be used for working capital, acquisitions and general corporate purposes.
Our insurance subsidiaries are subject to statutory and regulatory restrictions imposed on insurance companies
by their place 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 domicile. The aggregate limit imposed by
the various domiciliary regulatory authorities of our insurance subsidiaries was approximately $403.0 million and
$287.9 million as of December 31, 2019 and 2018, respectively, taking into account dividends paid in the prior twelve
month periods. During the years ended December 31, 2019, 2018 and 2017, there were $7.0 million, $156.7 million
and $339.4 million, respectively, of dividends or return of capital paid by our insurance subsidiaries.
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 $2.8 billion, $2.5 billion and $2.5 billion in the years ended December 31, 2019, 2018 and 2017,
66
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 cash equivalents
(including restricted cash) and total investments increased from $4.0 billion at December 31, 2017 to $4.5 billion at
December 31, 2018, and increased to $5.0 billion at December 31, 2019. 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.
We file a consolidated Federal income tax return and participate in a Federal income tax allocation agreement.
Under the tax allocation agreement, each subsidiary computes and pays to the Company its respective share of the
federal income tax liability primarily based on separate return calculations. The Reciprocal Exchanges are not a party
to the tax allocation agreement and file separate tax returns.
The following table is a summary of our statement of cash flows:
Year Ended December 31,
2019
2018
Change
% Change
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
(amounts in thousands)
$
521,611
$
598,133
$
(76,522)
(498,251)
(790,774)
(89,361)
(3,119)
73,463
(4,723)
292,523
(162,824)
1,604
54,781
(12.8)%
(37.0)%
(221.6)%
(34.0)%
(44.2)%
Net (decrease) increase in cash, cash equivalents, and restricted cash
$
(69,120) $
(123,901) $
Comparison of Years Ended December 31, 2019 and 2018
Net cash provided by operating activities decreased by $76.5 million, primarily due to higher claim payments
and settlement of reinsurance balances in 2019.
Net cash used in investing activities decreased by $292.5 million, primarily due to increased cash received from
sales of investments and sale of a business in 2019 compared to 2018.
Net cash provided by financing activities decreased by $162.8 million, primarily due to cash received from
issuance of common and preferred stock in 2018 compared to 2019.
Off-Balance Sheet Arrangements
As of December 31, 2019 we did not have any off-balance sheet arrangements that have or are likely to have a
material effect on our financial condition, results of operations, liquidity or capital resources.
Reinsurance
We utilize various excess of loss, quota share, state-based industry pools or facilities, and catastrophe reinsurance
programs to limit our exposure. Reinsurance agreements transfer portions of the underlying risk of the business we
write. 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) or the recoverables are fully collateralized. 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.
67
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 large loss events.
For more information about our reinsurance agreements, see Note 9 “Reinsurance” in the notes to our consolidated
financial statements.
Debt
6.75% Notes due 2024
We have $350.0 million aggregate principal amount outstanding of our 6.75% Notes due 2024 (the “6.75% Notes”).
The 6.75% Notes bear interest at a rate equal to 6.75% per year, payable semiannually in arrears on May 15 and
November 15 of each year. 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 mature on May 15, 2024, unless earlier redeemed
or purchased by us. Interest expense on the 6.75% Notes for the years ended December 31, 2019, 2018 and 2017 was
$23.6 million, $23.6 million and $23.7 million, respectively.
7.625% Subordinated Notes due 2055
We have $100.0 million aggregate principal amount outstanding of our 7.625% subordinated notes due 2055 (the
“7.625% Notes”). The 7.625% Notes bear interest at a rate equal to 7.625% per year, payable quarterly in arrears on
March 15, June 15, September 15 and December 15 of each year. The 7.625% Notes are our subordinated unsecured
obligations and are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of
our subsidiaries. The 7.625% Notes mature on September 15, 2055, unless earlier redeemed or purchased by us. Interest
expense on the 7.625% Notes for the years ended December 31, 2019, 2018 and 2017 was $7.6 million, $7.6 million
and $7.5 million, respectively.
Subordinated Debentures
We have junior subordinated debentures (the “Subordinated Debentures”) relating to the issuance of trust preferred
securities. The Subordinated Debentures require interest-only payments to be made on a quarterly basis, with principal
due at maturity. The Subordinated Debentures’ principal amounts of $41.2 million and $30.9 million mature in 2035
and 2037, respectively, and bear interest at an annual rate equal to LIBOR plus 3.40% and LIBOR plus 4.25%,
respectively. The Subordinated Debentures are redeemable by us at a redemption price equal to 100% of their principal
amount. Interest expense on the Subordinated Debentures for the years ended December 31, 2019, 2018 and 2017, was
$4.5 million, $4.3 million and $3.8 million, respectively.
68
Revolving Credit Agreement
On February 25, 2019 we refinanced our existing credit agreement and entered into a new credit agreement (the
“2019 Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, KeyBank National Association
and Fifth Third Bank, as Co-Syndication Agents, and the various lending institutions party thereto. The 2019 Credit
Agreement is currently a $340.0 million base revolving credit facility with a letter of credit sublimit of $150.0 million
and an expansion feature of up to $50.0 million. Borrowings under the 2019 Credit Agreement bear interest at either
the Alternate Base Rate (“ABR”) or the LIBO rate. ABR borrowings under the 2019 Credit Agreement will bear interest
at 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 LIBO rate for a one-month interest period on such day plus 1 percent. Eurodollar borrowings under
the 2019 Credit Agreement will bear interest at the adjusted LIBO rate plus the Eurodollar spread for the interest period
in effect. Fees payable by us under the 2019 Credit Agreement include a letter of credit participation fee, 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 0.175% to 0.25% based on our consolidated leverage ratio, which rate was 0.225% as of
December 31, 2019). The 2019 Credit Agreement has a maturity date of February 25, 2023. As of December 31, 2019,
there was $140.0 million outstanding under the 2019 Credit Agreement.
For more information about our debt, including other outstanding debt, ranking and restrictive covenants, refer
to Note 11, “Debt” in the notes to our consolidated financial statements.
Preferred Stock
For information about our preferred stock, refer to Note 15, “Stockholders’ Equity” in the notes to our consolidated
financial statements.
Contractual Obligations and Commitments
The following table sets forth certain of our contractual obligations as of December 31, 2019:
Loss and LAE reserves(1)
Debt and interest(2)
Operating leases
Finance lease obligations
Employment agreement obligations
Contributions to partnerships
Payment Due by Period
Total
Less than
1 Year
1 – 3
Years
3 – 5
Years
More than
5 Years
(amounts in thousands)
$ 2,886,414
$ 1,490,041
$
788,438
$
228,816
$
379,119
1,131,457
146,414
22,930
12,639
6,213
47,153
28,913
7,547
5,560
2,301
83,964
48,344
9,184
5,021
1,530
546,728
34,857
3,438
2,058
650
453,612
34,300
2,761
—
1,732
Total
$ 4,206,067
$ 1,581,515
$
936,481
$
816,547
$
871,524
(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, 2019, 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 - If we are unable to establish and maintain accurate loss reserves, our business, financial condition
69
and results of operations may be materially adversely affected” for a discussion of the uncertainties associated with
estimating loss and LAE.
(2) The interest related to our debt by period as of December 31, 2019 was as follows: $40.8 million - less than 1 year,
$81.0 million - 1 - 3 years, $56.7 million - 3 - 5 years and $281.4 million - more than 5 years.
Inflation
We establish 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.
70
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 debt securities and the financial condition of our reinsurers.
We address the credit risk related to the issuers of our debt securities by investing primarily in debt securities that
are rated “BBB-” or higher by Standard & Poor’s. We also monitor the financial condition of all issuers of our debt
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 reinsurers. Although our 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 generally carry at least an A.M. Best rating of “A-” (Excellent) or the recoverables are fully collateralized, 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.”
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 debt securities with a fair value of $4.5 billion as of December 31, 2019, 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 debt 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.
The table below summarizes the interest rate risk by illustrating the sensitivity of the fair value and carrying value
of our debt securities as of December 31, 2019, 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 debt securities primarily as available for sale. Temporary changes in the fair value of our debt securities
impact the carrying value of these securities and are reported in our stockholders’ equity as a component of accumulated
other comprehensive income, net of taxes.
71
The selected scenarios with our debt securities 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 debt securities and
on our stockholders’ equity, each as of December 31, 2019.
Hypothetical Change in Interest Rates
Fair Value
Estimated
Change in
Fair Value
Hypothetical Percentage
Increase (Decrease) in
Stockholders’ Equity
200 basis point increase
100 basis point increase
No change
100 basis point decrease
200 basis point decrease
(amounts in thousands)
$
4,101,463
$
4,289,067
4,476,358
4,663,380
4,848,120
(374,895)
(187,291)
—
187,022
371,762
(11.3)%
(5.7)
—
5.6
11.2
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. As of December 31, 2019, we held $662.2 million principal amount of debt
instruments (excluding finance lease and other liabilities), of which $450.0 million were 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 $2.1 million before income tax, on an annual basis, but would not affect the fair
market value of the variable-rate debt.
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
Not applicable.
72
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”),
has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), as of the end of the period covered by this
Annual Report on Form 10-K. Based on such evaluation, our CEO and CFO have concluded that as of December 31,
2019, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide
reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our
management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Our assessment of the effectiveness of disclosure controls and procedures excludes the operations and related
assets of the National Farmers Union Property and Casualty Company, which closed on July 31, 2019. We are in the
process of evaluating internal control over financial reporting for National Farmers Union Property and Casualty
Company and, accordingly, have excluded its controls from our evaluation of disclosure controls and procedures. For
the year ended December 31, 2019, National Farmers Union Property and Casualty Company’s revenues related to
operations represented 1.5% of our consolidated total revenues. As of December 31, 2019, the National Farmers Union
Property and Casualty Company’s assets related to operations represented less than 2.1% of our consolidated total
assets.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the
criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework). Based on the assessment, management has concluded that its internal
control over financial reporting was effective as of December 31, 2019, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Our
independent registered public accounting firm, Ernst & Young LLP, has issued an audit report with respect to our
internal control over financial reporting.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in Management’s evaluation
pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of 2019 that materially affected
or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and
procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that
management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to
their costs.
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
National General Holdings Corp.:
Opinion on Internal Control over Financial Reporting
We have audited National General Holdings Corp.’s internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, National General
Holdings Corp. (the “Company”) maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2019, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of National Farmers Union Property and Casualty Company, which is included in the 2019 consolidated
financial statements of the Company and constituted 2.1% of total assets, as of December 31, 2019 and 1.5% of revenues,
for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an
evaluation of the internal control over financial reporting of National Farmers Union Property and Casualty Company.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of National General Holdings Corp. as of December 31, 2019 and
2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and
cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the financial
statement schedules listed in the Index at Item 15(a), and our report dated February 20, 2020 expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) 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 (3) provide reasonable assurance regarding prevention or timely
74
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 of compliance with the policies or procedures may
deteriorate.
/s/ Ernst & Young LLP
New York, New York
February 20, 2020
75
Item 9B. Other Information
None.
76
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 April 29, 2020 (the “Proxy Statement”) under
the captions “Proposal 1: Election of Directors,” “Information About our Executive Officers,” “Certain Relationships
and Related Transactions — Family Relationships,” “Corporate Governance — Code of Business Conduct and Ethics,”
“Corporate Governance — Audit Committee,” “Corporate Governance — Board Committees” and “Security
Ownership of Management — Delinquent Section 16(a) Reports.” The Proxy Statement, or an amendment to this
Annual Report on Form 10-K containing the information, will be filed with the SEC before April 29, 2020.
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,” “Corporate Governance — Oversight of Risk Management,” “Corporate Governance —
Compensation Committee Interlocks and Insider Participation,” “CEO Compensation Pay Ratio” 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 before April 29, 2020.
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 before April 29, 2020.
Equity Compensation Plan Information
The table below shows information regarding awards outstanding and shares of common stock available for
issuance as of December 31, 2019, under our equity incentive plans.
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
4,059,218
$
—
4,059,218
$
9.83
—
9.83
2,462,558
—
2,462,558
(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 18, “Stock-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.
77
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 before April 29, 2020.
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 before April 29, 2020.
78
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. 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.
(b) Schedules: See Item 15(a).
(c) Exhibits Index
Exhibit No.
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Exhibit Description
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)
Certificate of Designations of 7.50% Non-Cumulative Preferred Stock, Series B (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 27, 2015)
Certificate of Designations of 7.50% Non-Cumulative Preferred Stock, Series C (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 7, 2016)
Certificate of Designations of Fixed/Floating Rate Non-Cumulative Convertible Preferred Stock, Series D
(incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 9, 2018)
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
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)
Form of stock certificate evidencing 7.50% Non-Cumulative Preferred Stock, Series B (incorporated by
reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on March 27, 2015)
Form of stock certificate evidencing 7.50% Non-Cumulative Preferred Stock, Series C (incorporated by
reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on July 7, 2016)
Form of 6.750% Notes due 2024 (included as Exhibit A to Exhibit 4.10) (incorporated by reference to Exhibit
4.2 to the Company’s Current Report on Form 8-K filed on May 28, 2014)
Form of 7.625% Subordinated Notes due 2055 (included as Exhibit A to Exhibit 4.11) (incorporated by
reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 18, 2015)
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)
Second Supplemental Indenture, dated as of August 18, 2015, by and between the Company 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 August 18, 2015)
79
Exhibit No.
4.12
Exhibit Description
Deposit Agreement, dated March 27, 2015, among National General Holdings Corp., American Stock Transfer
& Trust Company, LLC and the holders from time to time of the depositary receipts described therein
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27,
2015)
4.13
4.14
4.15
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13
10.14
21.1
23.1
31.1
Deposit Agreement, dated July 7, 2016, among National General Holdings Corp., American Stock Transfer &
Trust Company, LLC and the holders from time to time of the depositary receipts described therein
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 7, 2016)
Form of depositary receipt (included as Exhibit A to Exhibit 4.12) (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed on March 27, 2015)
Form of depositary receipt (included as Exhibit A to Exhibit 4.13) (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed on July 7, 2016)
National General Holdings Corp. 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on May 6, 2019)
Form of Non-Qualified Stock Option Agreement under the NGHC 2019 Omnibus Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 6, 2019)
Form of Restricted Share Unit Agreement under the NGHC 2019 Omnibus Incentive Plan (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on May 6, 2019)
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)
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
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)
Credit Agreement, dated February 25, 2019, among the Company, JPMorgan Chase Bank, N.A., as
Administrative Agent, KeyBank National Association and Fifth Third Bank as Co-Syndication Agents, and
Associated Bank, National Association and The Bank of Nova Scotia, as Co-Documentation Agents, and the
various lending institutions party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on February 25, 2019)
Amended and Restated Credit Agreement, dated September 20, 2016, among AmTrust Financial Services, Inc.
as Administrative Agent, ACP Re Holdings, LLC, the Michael Karfunkel Family 2005 Trust, and AmTrust
International Insurance, Ltd. and National General Re Ltd., as Lenders (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed on September 21, 2016)
List of subsidiaries of the Company (filed herewith)
Consent of Ernst & Young 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)
80
Exhibit No.
31.2
32.1
32.2
101.INS
101.SCH
Exhibit Description
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)
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document (filed herewith)
Inline XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104
The Cover Page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,
formatted in Inline XBRL contained in Exhibit 101
* Management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary
None.
81
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
Date
February 20, 2020
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
Title
Date
Chief Executive Officer, Co-Chairman and Director
(Principal Executive Officer)
February 20, 2020
/s/ Barry Karfunkel
Barry Karfunkel
/s/ Michael Weiner
Michael Weiner
Chief Financial Officer
(Principal Financial Officer)
/s/ Lawrence J. Moloney
Lawrence J. Moloney
Chief Accounting Officer
(Principal Accounting Officer)
February 20, 2020
February 20, 2020
/s/ Robert Karfunkel
President, Co-Chairman and Director
February 20, 2020
Robert Karfunkel
/s/ Barry Zyskind
Barry Zyskind
/s/ Donald DeCarlo
Donald DeCarlo
/s/ Patrick Fallon
Patrick Fallon
/s/ Barbara Paris
Barbara Paris
/s/ John Marshaleck
John Marshaleck
/s/ John Nichols
John Nichols
Director
Director
Director
Director
Director
Director
82
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
NATIONAL GENERAL HOLDINGS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Audited Annual Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to the Consolidated Financial Statements
1. Organization
2. Significant Accounting Policies
3. Investments
4. Fair Value of Financial Instruments
5. Deferred Acquisition Costs
6. Property and Equipment
7. Goodwill and Intangible Assets
8. Unpaid Losses and Loss Adjustment Expense Reserves
9. Reinsurance
10. Income Taxes
11. Debt
12. Leases
13. Related Party Transactions
14. Commitments and Contingencies
15. Stockholders’ Equity
16. Benefits Plan
17. Statutory Financial Data, Risk-Based Capital and Dividend Restrictions
18. Stock-Based Compensation
19. Earnings Per Share
20. Segment Information
21. Selected Quarterly Financial Data (Unaudited)
22. Business Disposition
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)
F-1
Page
F-2
F-4
F-6
F-7
F-8
F-10
F-12
F-12
F-12
F-21
F-30
F-34
F-34
F-35
F-38
F-52
F-56
F-60
F-62
F-64
F-66
F-67
F-70
F-71
F-73
F-75
F-76
F-82
F-83
S-1
S-2
S-6
S-7
S-8
S-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
National General Holdings Corp.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of National General Holdings Corp. (the “Company”)
as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes
in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the
related notes and the financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) and our report dated February 20, 2020 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
F-2
Critical Audit Matter
Description of
the Matter
Valuation of incurred but not reported reserves
At December 31, 2019, the Company’s unpaid losses and loss adjustment expense reserves were
$2,886 million of which a significant portion is incurred but not reported reserves. As explained
in Note 8 of the consolidated financial statements, the unpaid loss and loss adjustment expense
reserves represent management’s estimate of the ultimate liability for claims that have been
reported, claims that have been incurred but not reported, and expenses associated with processing
and settling claims. Incurred but not reported reserves includes a provision for claims that have
occurred but have not yet been reported, as well as a provision for future development on reported
claims. There is significant uncertainty inherent in determining management’s estimate of the
ultimate cost of all claims that have occurred which is used to determine the incurred but not
reported reserves. In particular, the estimate is sensitive to the selection and weighting of actuarial
methodologies applied to project the ultimate costs and the selection of assumptions such as
severity, frequency, payment patterns that are used to determine loss factors and initial expected
loss ratios.
Auditing management’s estimate of incurred but not reported reserves was complex due to the
highly judgmental nature of the significant assumptions used in the valuation of the estimate. The
significant judgment was primarily due to the sensitivity of management’s estimate to the actuarial
methods applied and the assumptions used in the determination of the loss factors and ultimate
costs.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of
controls over the Company’s incurred but not reported reserving process. This included, among
others, controls over the review and approval processes that management has in place for the
methods and assumptions used in estimating the incurred but not reported reserves.
To test the Company’s estimate of incurred but not reported reserves, our audit procedures included
among others, the assistance of our actuarial specialists to assess the selection and the weighting
of actuarial methods used by management with those methods and weightings used in prior periods
and those used in the industry. To evaluate the assumptions used in the actuarial methods, we
compared the significant assumptions, including severity, frequency, payment patterns and
expected loss ratios to factors historically used and current industry benchmarks. We also performed
a review of historical results of the development of the loss and loss adjustment expense reserves
related to prior years. In addition, we developed a range of reasonable reserve estimates including
performing independent projections for a sample of lines of business and compared the range of
reserve estimates to the Company’s recorded reserves.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2017.
New York, New York
February 20, 2020
F-3
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
Investments:
ASSETS
Debt securities, available-for-sale, at fair value (Exchanges - $324,249 and $297,083)
$
4,476,358
$
3,561,032
December 31,
2019
2018
Equity securities, at fair value
Short-term investments (Exchanges - $5,245 and $17,328)
Other investments (related parties - $238,841 and $233,723)
Total investments
Cash and cash equivalents (Exchanges - $959 and $0)
Restricted cash and cash equivalents (Exchanges - $24 and $200)
Accrued investment income (related parties - $2,391 and $2,362)
(Exchanges - $2,001 and $1,596)
Premiums and other receivables, net (Exchanges - $55,859 and $61,327)
Deferred acquisition costs (Exchanges - $23,307 and $20,007)
Reinsurance recoverable (related parties - $0 and $7,425)
(Exchanges - $119,125 and $117,068)
Prepaid reinsurance premiums (Exchanges - $105,894 and $136,433)
Property and equipment, net (Exchanges - $241 and $1,695)
Intangible assets, net (Exchanges - $3,225 and $3,405)
Goodwill
Prepaid and other assets (Exchanges - $3,521 and $4,581)
5,257
67,353
306,030
4,854,998
135,942
28,521
30,927
1,428,948
263,523
10,949
348,549
306,276
4,226,806
193,858
39,725
27,177
1,399,812
251,408
1,394,308
1,611,738
575,747
403,827
365,823
179,328
94,642
665,674
308,004
379,937
180,183
154,958
Total assets
$
9,756,534
$
9,439,280
See accompanying notes to consolidated financial statements.
F-4
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
December 31,
2019
2018
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves (Exchanges - $205,786 and $178,470)
$
2,886,414
$
2,957,159
Unearned premiums and other revenue (Exchanges - $252,553 and $265,763)
Reinsurance payable (Exchanges - $35,689 and $40,393)
Accounts payable and accrued expenses (related parties - $639 and $69,874)
(Exchanges - $8,497 and $7,720)
Debt
Other liabilities (Exchanges - $30,803 and $61,640)
Total liabilities
Commitments and contingencies (Note 14)
2,312,241
562,844
315,366
686,006
376,169
2,280,728
656,265
398,058
705,795
240,404
$
7,139,040
$
7,238,409
Stockholders’ equity:
Common stock, $0.01 par value - authorized 150,000,000 shares, issued and outstanding
113,368,811 shares - 2019; authorized 150,000,000 shares, issued and outstanding
112,940,595 shares - 2018.
Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding
2,565,120 shares - 2019; authorized 10,000,000 shares, issued and outstanding 2,565,120
shares - 2018.
Aggregate liquidation preference $450,000 - 2019, $450,000 - 2018.
Additional paid-in capital
Accumulated other comprehensive income:
Unrealized foreign currency translation adjustment, net of tax
Unrealized gains (losses) on investments, net of tax
Total accumulated other comprehensive income (loss)
Retained earnings
Total National General Holdings Corp. Stockholders’ Equity
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
1,134
$
1,129
450,000
1,065,634
450,000
1,057,783
(202)
74,750
74,548
1,058,138
2,649,454
(31,960)
$
$
2,617,494
9,756,534
$
$
(14,461)
(37,669)
(52,130)
764,056
2,220,838
(19,967)
2,200,871
9,439,280
See accompanying notes to consolidated financial statements.
F-5
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Shares and Per Share Data)
Revenues:
Net earned premium
Ceding commission income
Service and fee income
Net investment income
Net gain (loss) on investments
Other income (expense)
Total revenues
Expenses:
Year Ended December 31,
2019
2018
2017
$
4,118,042
$
3,732,202
$
3,654,176
238,453
641,965
141,233
13,473
26,428
224,697
561,583
119,034
(29,545)
—
116,456
502,927
101,950
46,763
(198)
5,179,594
4,607,971
4,422,074
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
Provision for income taxes
Net income
Net loss attributable to noncontrolling interest
Net income attributable to NGHC
Dividends on preferred stock
Net income attributable to NGHC common stockholders
Earnings per common share (“EPS”):
Basic EPS
Diluted EPS
$
$
$
2,854,468
827,367
1,041,772
51,544
4,775,151
404,443
77,013
327,430
20,639
348,069
2,662,226
2,626,082
735,266
938,046
51,425
672,429
912,996
47,086
4,386,963
4,258,593
221,008
53,484
167,524
39,830
207,354
163,481
61,273
102,208
3,637
105,845
(31,500)
74,345
(33,600)
(32,492)
314,469
$
174,862
$
2.78
2.73
$
$
1.62
1.59
$
$
0.70
0.68
See accompanying notes to consolidated financial statements.
F-6
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Year Ended December 31,
2019
2018
2017
$
327,430
$
167,524
$
102,208
(8,425)
1,774
(6,651)
(71,936)
15,107
(56,829)
18,270
—
(3,837)
14,433
(62,091)
13,044
(49,047)
118,477
44,823
(6,317)
827
(5,490)
41,477
(8,710)
32,767
(63,298)
25
13,288
(49,985)
(28,113)
5,405
(22,708)
79,500
6,758
86,258
Net income
Other comprehensive income:
Foreign currency translation adjustment
Income tax effect
Total foreign currency translation adjustment, net of tax
Gross unrealized gain (loss) on investments before reclassifications
Income tax effect
Total change in net unrealized gain (loss) on investments, net of tax
Reclassification adjustments for investments gain/loss to net income:
Net realized (gain) loss on investments
Other-than-temporary impairment loss
Income tax effect
18,055
(3,796)
14,259
172,968
(36,323)
136,645
(19,721)
—
4,141
Total (gain) loss on investments reclassifications to net income, net of tax
(15,580)
Other comprehensive income (loss) before income tax effect
Income tax effect
Other comprehensive income (loss), net of tax
Comprehensive income
Comprehensive loss attributable to noncontrolling interest
171,302
(35,978)
135,324
462,754
11,993
Comprehensive income attributable to NGHC
$
474,747
$
163,300
$
See accompanying notes to consolidated financial statements.
F-7
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Shares)
Years Ended December 31, 2019, 2018 and 2017
Common Stock
Preferred Stock
Shares
$
Shares
$
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Noncontrolling
Interest
Total
Balance January 1, 2017
106,428,092
$ 1,064
2,565,000
$ 420,000
$ 913,787
$
11,475
$ 539,114
$
31,918
$1,917,358
Cumulative-effect
adjustment of change to
AOCI related to tax reform
Net income (loss)
Foreign currency translation
adjustment, net of tax
Change in unrealized loss
on investments, net of tax
Purchase of noncontrolling
interest
Common stock dividends
declared
Preferred stock dividends
declared
Common stock issued under
employee stock plans and
exercises of stock options
Shares withheld related to
net share settlement
Stock-based compensation
Balance December 31,
2017
Cumulative-effect
adjustment of change in
accounting principles
Net income (loss)
Foreign currency translation
adjustment, net of tax
Change in unrealized loss
on investments, net of tax
—
—
—
—
—
—
—
347,809
(78,253)
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,843)
—
—
1,256
(1,773)
8,324
—
—
1,438
105,845
(61)
1,377
(3,637)
102,208
(5,490)
(14,097)
—
—
—
—
—
—
—
—
—
(17,034)
(31,500)
—
—
—
—
(5,490)
(3,121)
(17,218)
(243)
(4,086)
—
—
—
—
—
(17,034)
(31,500)
1,259
(1,773)
8,324
106,697,648
1,067
2,565,000
420,000
917,751
(8,112)
597,863
24,856
1,953,425
—
—
—
—
—
—
—
—
58
—
—
—
4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
132,172
120
30,000
(110)
—
—
—
—
—
—
—
—
—
—
—
—
1,974
(3,024)
9,020
36
—
8,794
207,354
—
8,830
(39,830)
167,524
(6,651)
(37,403)
—
—
—
—
—
—
—
—
—
—
—
(17,463)
(32,492)
—
—
—
—
(6,651)
(4,993)
(42,396)
—
—
—
—
—
—
—
132,230
29,890
(17,463)
(32,492)
1,978
(3,024)
9,020
Issuance of common stock
5,750,000
Issuance of preferred stock
Common stock dividends
declared
Preferred stock dividends
declared
Common stock issued under
employee stock plans and
exercises of stock options
Shares withheld related to
net share settlement
—
—
—
618,147
(125,200)
Stock-based compensation
—
Balance December 31,
2018
112,940,595
$ 1,129
2,565,120
$ 450,000
$ 1,057,783
$
(52,130)
$ 764,056
$
(19,967)
$2,200,871
See accompanying notes to consolidated financial statements.
F-8
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Shares)
Years Ended December 31, 2019, 2018 and 2017
Common Stock
Preferred Stock
Shares
$
Shares
$
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Noncontrolling
Interest
Total
Balance January 1, 2019
112,940,595
$ 1,129
2,565,120
$ 450,000
$ 1,057,783
$
(52,130)
$ 764,056
$
(19,967)
$2,200,871
Net income (loss)
Foreign currency translation
adjustment, net of tax
Change in unrealized loss
on investments, net of tax
Common stock dividends
declared
Preferred stock dividends
declared
Common stock issued under
employee stock plans and
exercises of stock options
Shares withheld related to
net share settlement
—
—
—
—
—
578,201
(149,985)
Stock-based compensation
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
589
(3,734)
10,996
—
348,069
(20,639)
327,430
14,259
112,419
—
—
—
—
—
—
—
(20,387)
(33,600)
—
—
—
—
14,259
8,646
121,065
—
—
—
—
—
(20,387)
(33,600)
594
(3,734)
10,996
Balance December 31,
2019
113,368,811
$ 1,134
2,565,120
$ 450,000
$ 1,065,634
$
74,548
$1,058,138
$
(31,960)
$2,617,494
See accompanying notes to consolidated financial statements.
F-9
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Net (gain) loss on investments and gain on sale of a business
Bad debt expense
Depreciation, amortization and goodwill impairment
Stock-based compensation expense
Other, net
Changes in assets and liabilities:
Accrued investment income
Premiums and other receivables
Deferred acquisition costs
Reinsurance recoverable
Prepaid reinsurance premiums
Prepaid expenses and other assets
Unpaid loss and loss adjustment expense reserves
Unearned premiums and other revenue
Reinsurance payable
Accounts payable and accrued expenses
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of:
Debt securities
Equity securities
Short-term investments
Other investments
Property and equipment
Proceeds from:
Sale of debt securities, available-for-sale
Maturity of debt securities, available-for-sale
Sale of equity securities
Sale of short-term investments
Sale and return of other investments
Sale of a business, net of cash and cash equivalents sold
Other investing activities, net
Net cash used in investing activities
Year Ended December 31,
2019
2018
2017
$
327,430
$
167,524
$
102,208
(39,901)
88,247
96,279
10,996
3,644
(5,553)
(112,627)
(15,055)
194,648
93,257
58,086
(62,965)
(21,474)
(42,355)
(7,983)
(43,063)
521,611
29,545
74,214
86,346
9,020
11,685
(7,568)
(168,445)
(38,713)
(318,344)
(148,552)
(17,785)
302,730
265,102
259,699
98,276
(6,601)
598,133
(46,763)
63,819
103,303
8,324
30,220
5,129
(276,557)
4,751
(347,848)
(360,152)
(17,543)
382,299
328,753
298,925
(82,188)
120,621
317,301
(2,140,359)
(1,802,668)
(2,144,879)
—
(1,297)
(33,374)
(2,773,361)
(2,919,422)
(5,728,031)
(5,848)
(91,664)
(37,722)
(102,390)
(59,384)
(95,668)
974,474
347,948
1,700
3,066,577
15,033
92,290
14,959
1,010,339
2,078,119
314,685
28,384
2,610,788
121,982
—
(13,453)
27,805
22,207
5,707,331
73,778
—
(19,376)
$
(498,251) $
(790,774) $
(171,472)
See accompanying notes to consolidated financial statements.
F-10
NATIONAL GENERAL HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Cash flows from financing activities:
Proceeds from debt
Payments of debt issuance costs
Repayments of debt, principal payments under capital leases obligations and
purchase of noncontrolling interests
Issuance of common stock, net (fees $0 - 2019, $5,770 - 2018, and $0 - 2017)
Issuance of preferred stock, net (fees $0 - 2019, $110 - 2018, and $0 - 2017)
Issuance of common stock — employee share options
Taxes paid related to net share settlement of equity awards
Dividends paid to common shareholders
Dividends paid to preferred shareholders
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of the year
Cash, cash equivalents, and restricted cash at end of the year
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplemental disclosures of non-cash financing activities:
Accrued common stock dividends
Accrued preferred stock dividends
Year Ended December 31,
2019
2018
2017
$
— $
— $
140,000
—
—
(1,134)
(32,306)
—
—
594
(3,734)
(19,239)
(33,542)
(89,361)
(3,119)
(69,120)
233,583
(39,000)
132,230
29,890
1,978
(3,024)
(17,111)
(31,500)
73,463
(4,723)
(123,901)
357,484
$
$
164,463
$
233,583
$
38,723
$
26,763
$
42,159
44,884
5,669
8,925
4,518
8,867
(172,839)
—
—
1,259
(1,773)
(17,050)
(31,500)
(81,903)
7,658
71,584
285,900
357,484
20,800
49,498
4,268
7,875
See accompanying notes to consolidated financial statements.
F-11
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 small business automobile, homeowners, umbrella, recreational vehicle, motorcycle,
lender-placed, supplemental health and other niche insurance products. The insurance is sold through a network of
independent agents, relationships with affinity partners, direct-response marketing programs and retail storefronts. The
Company is licensed to operate throughout the fifty states and the District of Columbia.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial
statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (“VIEs”)
of which the Company is the primary beneficiary. All significant intercompany transactions and accounts have been
eliminated in consolidation.
As of December 31, 2018, the Company reclassified finance lease liabilities in the amount of $30,346 from “Other
liabilities” to “Debt” on the consolidated balance sheets to conform to the current-year presentation.
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 recoverable, including the provision for uncollectible amounts; recording of impairment losses for
other-than-temporary declines in fair value; determining the fair value of investments; determining the fair value of
stock-based awards for stock compensation; the valuation of intangibles and the determination of goodwill and goodwill
impairment; 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.
Significant Accounting Policies
Premiums and Other Receivables
The Company recognizes earned premium 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 premiums receivable 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 period the determination is made.
Cash and Cash Equivalents
The Company’s cash and cash equivalents include cash on hand, money market instruments and other debt
instruments with a maturity of 90 days or less when purchased. Certain securities with original maturities of 90 days
or less that are held as a portion of fixed maturity portfolios are classified as short-term investments.
F-12
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents balances relate primarily to deposits in certain states in order to conduct
business and certain third-party agreements. The Company also utilizes trust accounts to collateralize business with its
reinsurance counterparties. Amounts described as restricted cash and restricted cash equivalents are included with cash
and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows.
Short-term Investments
Short-term investments include commercial paper, U.S. Treasury bills and money market funds with maturities
between 91 days and less than one year at the date of acquisition.
Deferred Acquisition Costs
Deferred acquisition costs include commissions, premium taxes, payments to affinity partners, and other direct
sales costs that are directly related to successful acquisition of insurance policies. These costs, net of ceding allowances,
are deferred and amortized to the extent recoverable, over the policy period in which the related premiums are earned.
Anticipated investment income is considered in determining the recoverability of these costs. Management believes
that these costs are recoverable.
Ceding Commission Revenue
Commissions on reinsurance premiums ceded are earned in a manner consistent with the recognition of the costs
to acquire the underlying policies on a pro-rata basis over the terms of the policies reinsured. The portion of ceding
commission which represents reimbursement of acquisition costs related to the underlying policies is recorded as an
offset to acquisition costs and other underwriting expenses. Commission in excess of acquisition costs is recorded as
ceding commission income over the terms of the policies. Certain reinsurance agreements contain provisions whereby
the ceding commission rates vary based on the loss experience of the policies covered by the agreements. The Company
records ceding commission revenue based on its current estimate of losses on the reinsured policies subject to variable
commission rates. The Company records adjustments to the ceding commission revenue in the period that changes in
the estimated losses are determined.
Loss and Loss Adjustment Expense
Loss and loss adjustment expense (“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. Insurance liabilities are based on estimates, and the ultimate liability may vary
from such estimates. These estimates are regularly reviewed and adjustments are included in the period in which
adjustments are determined.
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 noncontrolling 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 of 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
F-13
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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 (net loss reserve discount) or another liability (net loss reserve plus a risk
premium), as applicable and is amortized proportionately to the reduction in the related loss reserves (e.g., 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 purchase price is the fair value of the total consideration conveyed to the seller and we record
the excess (deficiency) of the purchase price over the fair value of the acquired net assets, where applicable, as goodwill
or bargain purchase gain. 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 the 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 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 general and administrative expenses in the consolidated statements of income.
Intangible assets that have finite lives, including but not limited to, agent and customer relationships and
trademarks, are amortized over the estimated useful life of the asset. For intangible assets with finite lives, impairment
is recognized if the carrying amount is not recoverable and exceeds the fair value of the intangible asset. Generally
intangible assets with finite lives are only tested for impairment if there are indicators of impairment (“triggers”)
identified. Triggers include, but are not limited to, a significant adverse change in the extent, manner or length of time
in which the intangible asset is being used or a significant adverse change in legal factors or in the business climate
that could affect the value of the other intangible asset.
Investments
The Company accounts for its investments in accordance with ASC 320, “Investments - Debt Securities,” and
certain equity investments with ASC 321, “Investments - Equity Securities.” In accordance with ASC 320, the Company
has classified its debt securities as available for sale measured at fair value with unrealized gains and losses reported
as a separate component of comprehensive income. Equity investments (except those accounted for under the equity
method, and those that result in consolidation of the investee and certain other investments) are measured at fair value
with all gains and losses reported in net income in accordance with ASC 321. The Company may sell its available-for-
sale and equity securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other
factors. Available-for-sale and equity securities are reported at their estimated fair values based on quoted market prices
or recognized pricing services.
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.
Quarterly, the Company evaluates each security that has an unrealized loss as of the end of the subject reporting
period for other-than-temporary-impairment (“OTTI”). The Company generally considers an investment to be impaired
when it has been in a significant unrealized loss position for over 12 months. In addition, the Company uses a set of
quantitative and qualitative criteria to review the investment portfolio to evaluate the necessity of recording impairment
F-14
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
losses for other-than-temporary declines in the fair value of the Company’s investments. The criteria the Company
primarily considers 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.
Based on guidance in ASC 320-10-35, 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 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.
As of December 31, 2019 and 2018, the Company had the following major types of investments:
(i) Debt securities are classified as available-for-sale and are carried at fair value. Unrealized gains or losses on
available-for-sale securities are reported as a component of accumulated other comprehensive income.
(ii) Mortgage and structured securities are carried at fair value. 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 debt securities, available-for-sale in the consolidated balance sheets.
(iii) Equity securities consisted of common stock carried at fair value. Gains or losses on equity securities are reported
within net gain (loss) on investments.
(iv) 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. Income from short-term
investments is reported within net investment income.
(v) Other investments consisted of equity method investments, in which the company has the power to influence the
operating or financial decisions but does not require consolidation; notes receivable; long-term certificates of
deposits; and other instruments carried at fair value and at cost or amortized cost. Income from other investments
is reported within net investment income.
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
F-15
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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 debt securities
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 which are short-term in nature approximate their carrying values.
Equity Method Investments
The Company uses the equity method of accounting for investments in which its ownership interest enables the
Company to influence operating or financial decisions of the investee, 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 net investment income.
Stock Compensation Expense
The Company recognizes stock-based compensation expense including stock options and Restricted Stock Units
(“RSUs”), to be measured based on the grant date fair value of the awards, with the resulting expense recognized on a
straight-line basis over the period during which the employee is required to perform service in exchange for the award.
The majority of the Company’s awards are earned over a service period of three or four years.
Earnings Per Share
Basic earnings per share are computed by dividing income available to common stockholders by the number of
weighted average common shares outstanding. Dilutive earnings per share are computed by dividing income available
to common stockholders, adjusted for the effects of the presumed issuance of potential common shares, by the number
of weighted average common shares outstanding, plus potentially issuable shares, such as options, unvested stock-
based payment awards and convertible securities.
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.
Income Taxes
The Company joins its subsidiaries in the filing of a consolidated Federal income tax return and is party to a
Federal income tax allocation agreement. Under the tax allocation agreement, the Company pays to or receives from
its 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 the tax allocation
agreement and file separate tax returns.
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 debt securities.
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.
F-16
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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 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.
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 to the extent the ceding commission exceeds acquisition costs. Reinsurance recoverable is reported based on
the portion of reserves and paid losses and LAE that are ceded to other companies. If the Company determines that a
reinsurance contract does not transfer sufficient risk, it accounts for the contract under deposit accounting.
Property and Equipment
Property 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
Other equipment
Hardware and software
30 years
Remaining lease term
3 to 20 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.
Variable Interest Entities
A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional
subordinated financial support or is structured such that equity investors lack the ability to make significant decisions
relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the
entity. The Company’s consolidation principles require the inclusion of VIEs in which the Company is deemed the
primary beneficiary. The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE
that most significantly affect that entity’s economic performance and (2) the obligation to absorb losses or the right to
receive benefits that could be potentially significant to the VIE.
The consolidated financial statements 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, the “Reciprocal Exchanges” or “Exchanges”), VIEs of which the Company is the primary beneficiary. The
Company does not own the Reciprocal Exchanges but is paid a fee to manage them.
F-17
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The Company consolidates the Reciprocal Exchanges as it has determined that these are VIEs of which the
Company is the primary beneficiary. The Company manages the business operations of the Reciprocal Exchanges and
has the ability to direct their activities. The Company receives a management fee for the services provided to the
Reciprocal Exchanges. The Reciprocal Exchanges are insurance carriers organized as unincorporated associations. 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 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 as primary beneficiary. The results of operations
of the Reciprocal Exchanges and the management companies are included in the Company’s Property and Casualty
(“P&C”) segment.
Noncontrolling Interest
Non-redeemable noncontrolling interest is the portion of equity (net assets) not attributable, directly or indirectly,
to a parent. The Company has no ownership interest in the Reciprocal Exchanges. Therefore, the difference between
the value of their assets and liabilities represent the value of the noncontrolling interest.
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, 2019 and 2018, 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, see Note 9, “Reinsurance” for additional information about concentration of credit risk.
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.
Foreign Currency Remeasurement and Translation
Financial statement accounts in currencies other than an operation's functional currency are remeasured into the
functional currency and the resulting foreign exchange gains and losses are reflected in Net gains (losses) on investments.
Functional currency assets and liabilities expressed in foreign currencies are translated into U.S. dollars using period
end exchange rates. The related translation adjustments are recorded as a separate component of Accumulated Other
Comprehensive Income (“AOCI”), net of any related taxes. Income statement amounts expressed in functional
currencies are translated using average exchange rates.
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 insufficient 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 renewal term, as applicable. Reinstatement fees are
charged to reinstate a policy that has lapsed, generally as a result of non-payment of premiums. Insufficient fund fees
are charged when the customer’s payment is returned by the financial institution.
F-18
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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 canceled. A policy
reinstatement fee is recognized when the customer’s policy is reinstated. An insufficient 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 estimates an allowance for doubtful
accounts based on a percentage of fee income.
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 time when the policy is sold. The allowance for estimated third-party cancellations is periodically
evaluated and adjusted as necessary.
The Company also collects service fees in the form of group health administrative fees by performing enrollment
and claims services for self-funded employer plans. The Company does not bear insurance underwriting risk in these
administrative activities. Group health administrative fees are recognized pro-rata over the term of the administrative
contract with the employer, which generally covers twelve months.
Accounting Standards
Recent Accounting Standards, Adopted
Standard
ASU 2016-02, Leases
(Topic 842) and related
amendments.
Date of Adoption
January 1, 2019
Description
This standard was issued to increase transparency and
comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing
arrangements. The standard establishes a right-of-use
(“ROU”) model that requires a lessee to record a ROU
asset and a lease liability on the balance sheet for all
leases with terms longer than 12 months. Leases will
be classified as either finance or operating, with
classification affecting the pattern of expense
recognition in the income statement.
Effect on the
Company
The Company adopted
the standard as of the
beginning of the year
of adoption using the
modified retrospective
transition approach
and did not adjust
prior comparative
periods. On January 1,
2019, the Company
recorded the
recognition of the
ROU asset and lease
liability net of
deferred rent,
inducement costs and
deferred tax impact of
$85,000, in both assets
and liabilities on its
consolidated balance
sheets. The adoption
of the standard did not
have a material effect
on the Company’s
results of operations
and had no impact on
cash flows. See Note
12, “Leases” for
additional information.
F-19
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Recent Accounting Standards, Not Yet Adopted
Effective Date
January 1, 2020
Effect on the
Company
The Company
estimates that the
credit allowance to be
a reduction in opening
retained earnings of
less than $10,000, pre-
tax, driven by
premiums receivable
and reinsurance
recoverable as of the
adoption date. Upon
adoption, the standard
did not have a material
impact in the
Company’s other
financial assets and
certain other
instruments.
Standard
ASU 2016-13,
Financial Instruments-
Credit Losses (Topic
326): Measurement of
Credit Losses on
Financial Instruments,
and related
amendments.
Description
This standard significantly changes the impairment
model for most financial assets and certain other
instruments. ASU 2016-13 requires immediate
recognition of estimated credit losses expected to occur
over the remaining life of many financial assets, which
will generally result in earlier recognition of
allowances for credit losses on loans and other
financial instruments. Companies will now use
forward-looking information to better inform their
credit loss estimates. Many of the loss estimation
techniques applied today will still be permitted,
although the inputs to those techniques will change to
reflect the full amount of expected credit losses.
Companies will continue to use judgment to determine
which loss estimation method is appropriate for their
circumstances. The FASB issued ASU 2018-19,
Codification Improvements to Topic 326, Financial
Instruments-Credit Losses, which clarifies that
receivables arising from operating leases are not within
the scope of Topic 326 and impairment of receivables
arising from operating leases should be accounted for
in accordance with Topic 842, Leases. The FASB
issued ASU 2019-04, Codification Improvements to
Topic 326, Financial Instruments-Credit Losses, Topic
815, Derivatives and Hedging, and Topic 825,
Financial Instruments, which clarifies that an entity
should include recoveries when estimating the
allowance for credit losses. The FASB issued ASU
2019-05, Financial Instruments-Credit Losses (Topic
326): Targeted Transition Relief, which eases transition
to the credit losses standard by providing the option to
measure certain types of assets at fair value. The
standard requires using a modified retrospective
approach, recognizing a cumulative-effect adjustment
as of the beginning of the first reporting period in
which the standard is effective.
ASU 2017-04,
Intangibles-Goodwill
and Other (Topic 350):
Simplifying the Test for
Goodwill Impairment.
This standard establishes a one-step process for testing
the value of the goodwill which an entity carries. ASU
2017-04 requires the goodwill impairment to be
measured as the excess of the reporting unit’s carrying
amount over its fair value.
January 1, 2020
ASU 2019-12, Income
Taxes (Topic 740):
Simplifying the
Accounting for Income
Taxes.
This standard simplifies the accounting for income
taxes by eliminating some exceptions to the general
approach in Accounting Standards Codification
(“ASC”) 740, Income Taxes. It also clarifies certain
aspects of the existing guidance to promote more
consistent application, among other things.
January 1, 2021
January 1, 2022
ASU 2018-12,
Financial Services-
Insurance (Topic 944):
Targeted Improvements
to the Accounting for
Long-Duration
Contracts and related
amendments.
This standard makes targeted improvements to the
existing recognition, measurement, presentation and
disclosure requirements for long-duration contracts
issued by an insurance entity. The standard is intended
to: (i) improve the timeliness of recognizing changes in
the liability for future policy benefits and modify the
rate used to discount future cash flows, (ii) simplify
and improve the accounting for certain market-based
options or guarantees associated with deposit or
account balance contracts, (iii) simplify the
amortization of deferred acquisition costs and (iv)
improve the effectiveness of the required disclosures.
F-20
The adoption of the
standard did not have
a material impact on
the Company’s
consolidated financial
statements.
The Company is
currently evaluating
the impact this
guidance will have on
its consolidated
financial condition,
results of operations,
cash flows and
disclosures.
The Company is
currently evaluating
the impact this
guidance will have on
its consolidated
financial condition,
results of operations,
cash flows and
disclosures.
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
3. Investments
(a) Available-For-Sale Debt Securities
The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale debt securities were as
follows:
December 31, 2019
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
Structured securities
Total
NGHC
Reciprocal Exchanges
Total
December 31, 2018
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
Structured securities
Total
NGHC
Reciprocal Exchanges
Total
$
$
$
$
$
$
$
Amortized
Cost
Gross
Unrealized Gains
Gross
Unrealized Losses
Fair
Value
$
65,037
$
1,992
$
(23) $
(10,763) $
4,476,358
Amortized
Cost
Gross
Unrealized Gains
Gross
Unrealized Losses
Fair
Value
64,829
$
1,026
$
(262) $
3,907
298,345
1,762
1,859,736
1,265,830
585,044
74,465
222,565
4,376,691
4,057,501
319,190
4,376,691
8
4,778
40
59,184
15,747
27,261
1,194
226
$
$
$
110,430
104,951
5,479
110,430
$
$
$
37,842
274,367
151,443
1,283,061
944,365
548,192
60,563
249,947
3,614,609
3,311,639
302,970
3,614,609
$
$
$
22
1,369
993
3,094
716
3,757
705
99
11,781
11,206
575
11,781
$
$
$
—
(1,441)
—
(2,357)
(4,117)
(112)
(48)
(2,665)
(10,763) $
(10,343) $
(420)
(389)
(3,539)
(70)
(25,450)
(19,965)
(6,974)
(121)
(8,588)
(65,358) $
(58,896) $
(6,462)
67,006
3,915
301,682
1,802
1,916,563
1,277,460
612,193
75,611
220,126
4,476,358
4,152,109
324,249
65,593
37,475
272,197
152,366
1,260,705
925,116
544,975
61,147
241,458
3,561,032
3,263,949
297,083
(65,358) $
3,561,032
As of December 31, 2019 and 2018, the Company had no OTTI in AOCI related to available-for-sale debt
securities.
F-21
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The amortized cost and fair value of available-for-sale debt securities held as of December 31, 2019, 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, 2019
Due in one year or less
NGHC
Reciprocal Exchanges
Total
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
61,536
$
61,749
$
110
$
110
$
61,646
$
61,859
Due after one year through five years
879,910
904,718
115,566
117,815
995,476
1,022,533
Due after five years through ten years
1,043,657
1,072,865
Due after ten years
241,110
243,216
Mortgage-backed securities
1,831,288
1,869,561
92,236
17,227
94,051
93,239
17,382
95,703
1,135,893
1,166,104
258,337
260,598
1,925,339
1,965,264
Total
$ 4,057,501
$ 4,152,109
$
319,190
$
324,249
$ 4,376,691
$ 4,476,358
(b) Gross Unrealized Losses
The tables below summarize the gross unrealized losses on debt securities classified as available for sale, by
length of time the security has continuously been in an unrealized loss position.
December 31, 2019
U.S. Treasury
States and political subdivision bonds
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Structured securities
Total
NGHC
Reciprocal Exchanges
Total
December 31, 2018
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
Structured securities
Total
NGHC
Reciprocal Exchanges
Total
Less Than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
19,903
$
(23) $
500
$
— $
20,403
$
(23)
106,103
586,817
410,484
18,250
5,406
40,979
(1,415)
(2,253)
(4,074)
(105)
(29)
(94)
2,580
5,976
3,983
748
920
(26)
(104)
(43)
(7)
(19)
108,683
592,793
414,467
18,998
6,326
109,880
(2,571)
150,859
$ 1,187,942
$ 1,104,244
83,698
$ 1,187,942
$
$
$
(7,993) $ 124,587
(7,654) $ 117,681
(339)
6,906
(7,993) $ 124,587
$
$
$
(2,770) $ 1,312,529
(2,689) $ 1,221,925
(81)
90,604
(2,770) $ 1,312,529
$
$
$
(1,441)
(2,357)
(4,117)
(112)
(48)
(2,665)
(10,763)
(10,343)
(420)
(10,763)
Less Than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
474
$
(2) $
21,540
$
(260) $
22,014
$
23,729
57,090
45,748
586,359
234,396
13,229
25,978
222,154
(351)
(902)
(70)
(12,891)
(1,637)
(239)
(78)
(8,136)
1,493
119,759
—
321,115
551,623
148,700
1,494
6,167
(38)
25,222
(2,637)
176,849
—
(12,559)
(18,328)
(6,735)
(43)
(452)
45,748
907,474
786,019
161,929
27,472
228,321
$ 1,209,157
$ 1,115,823
93,334
$ 1,209,157
$
$
$
(24,306) $ 1,171,891
(22,668) $ 1,018,975
(1,638)
152,916
(24,306) $ 1,171,891
$
$
$
(41,052) $ 2,381,048
(36,228) $ 2,134,798
(4,824)
246,250
(41,052) $ 2,381,048
$
$
$
(262)
(389)
(3,539)
(70)
(25,450)
(19,965)
(6,974)
(121)
(8,588)
(65,358)
(58,896)
(6,462)
(65,358)
F-22
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The Company’s debt securities portfolio is sensitive to interest rate fluctuations, which impact the fair value of
individual securities. Unrealized losses on debt securities reported above were primarily caused by the effects of the
interest rate environment. Therefore, the Company does not believe the unrealized losses represent an OTTI as of
December 31, 2019 and 2018.
There were 1,337 and 1,662 individual security lots at December 31, 2019 and 2018, respectively, that accounted
for the gross unrealized loss, none of which are deemed by the Company to be other-than-temporary impairments. As
of December 31, 2019 and 2018, of the $2,770 and $41,052, respectively, of unrealized losses in unrealized loss positions
for a period of twelve or more consecutive months, none of those securities were greater than or equal to 25% of its
amortized cost.
Factors influencing management’s determination that none of these securities were OTTI included the length of
time and/or magnitude of unrealized losses in relation to cost, the nature of the investment, the current financial condition
of the issuer and its future prospects, the ability to recover to cost in the near term, 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. The Company regularly monitors its investments that
have fair values less than cost or amortized cost for indicators of OTTI, an assessment that requires management
judgment regarding the evidence known. Such judgments could change in the future as more information becomes
known, which could negatively impact the amounts reported.
Among the factors that management considers for debt securities are the financial condition of the issuer including
receipt of scheduled principal and interest cash flows, and intent to sell, including if it is more likely than not that the
Company will be required to sell the investments before recovery. When a debt security has been determined to have
an other-than-temporary impairment and the Company does not have the intention to sell, the impairment charge is
separated into an amount representing the credit loss, which is recognized in earnings as a realized loss, and the amount
related to non-credit factors, which is recognized in AOCI. Future increases or decreases in fair value, if not other-than-
temporary, are included in AOCI. For the years ended December 31, 2019, 2018 and 2017, the Company did not
recognize any impairment charges due to non-credit factors.
The Company considers different factors to determine the amount of projected future cash flows and discounting
methods for corporate bonds and residential and commercial mortgage-backed or structured securities. For corporate
bond securities, the split between the credit and non-credit losses is driven by assumptions regarding the amount and
timing of projected future cash flows. The net present value is calculated by discounting the Company’s best estimate
of projected future cash flows at the effective interest rate implicit in the security at the date of acquisition. For residential
and commercial mortgage-backed and structured securities, cash flow estimates, including prepayment assumptions,
are based on data from third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow
estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes
in value. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows
at the effective interest rate implicit in the debt security prior to impairment at the balance sheet date. The discounted
cash flows become the new amortized cost basis of the debt security.
(c) Equity Securities
The fair values of equity securities were as follows:
Common stock
Total
NGHC
Reciprocal Exchanges
Total
F-23
December 31,
2019
2018
5,257
5,257
5,257
—
5,257
$
$
$
$
10,949
10,949
10,949
—
10,949
$
$
$
$
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
(d) Net Investment Income
The components of net investment income consisted of the following:
Year Ended December 31,
2019
2018
2017
Cash and short-term investments
$
4,075
$
1,659
$
Debt securities
Equity securities
Other, net (1)
Investment income
Investment expenses
Net investment income
NGHC
Reciprocal Exchanges
Net investment income
124,379
6
17,347
145,807
(4,574)
141,233
132,595
8,638
141,233
$
$
$
107,077
665
13,932
123,333
(4,299)
119,034
110,159
8,875
119,034
$
$
$
$
$
$
1,506
106,002
345
2,289
110,142
(8,192)
101,950
92,625
9,325
101,950
(1) Includes $7,718, $4,876, and $(4,141), income (expense) from related parties, for the years ended December 31,
2019, 2018 and 2017, respectively.
(e) Net Gain (Loss) on Investments
The table below indicates realized gains and losses on investments. Purchases and sales of investments are recorded
on a trade date basis. Realized gains and losses are determined based on the specific identification method.
Debt securities, available-for-sale:
Gross gains
Gross losses
Net gain (loss) on debt securities, available-for-sale
Equity securities
OTTI on investments
Other, net
Net gain (loss) on investments
NGHC
Reciprocal Exchanges
Net gain (loss) on investments
Year Ended December 31,
2019
2018
2017
$
19,870
$
4,590
$
(3,457)
16,413
(3,992)
—
1,052
13,473
13,603
(130)
13,473
$
$
$
(22,860)
(18,270)
(12,305)
(3,000)
4,030
(29,545) $
(26,179) $
(3,366)
(29,545) $
$
$
$
58,405
(3,754)
54,651
(9,562)
(25)
1,699
46,763
40,640
6,123
46,763
F-24
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Net gains and losses recognized during the reporting period on equity securities and debt securities classified as
trading still held at the reporting date were as follows:
Net losses recognized during the year
Less: Net losses recognized during the year on securities sold
during the year
Net losses recognized during the reporting period on securities
still held at the reporting date
$
$
(f) Credit Quality of Investments
Year Ended December 31,
2019
2018
2017
Equity
Securities
Equity
Securities
Equity Securities
and Debt
Securities
(3,992) $
(12,305) $
(20,096)
—
(864)
(11,851)
(3,992) $
(11,441) $
(8,245)
The tables below summarize the credit quality of debt securities, as rated by Standard & Poor’s (“S&P”). If a
security is not rated by S&P, an S&P equivalent is determined based on ratings from similar rating agencies. Securities
that are not rated are included in the “BB+ and lower” category.
December 31, 2019
Amortized
Cost
U.S. Treasury
$
52,108
$
AAA
AA, AA+, AA-
A, A+, A-
BBB, BBB+, BBB-
BB+ and lower
515,869
1,677,787
954,312
795,594
61,831
NGHC
Fair
Value
53,599
537,508
1,697,220
976,468
823,239
64,075
Reciprocal Exchanges
Percentage
Amortized
Cost
Fair
Value
Percentage
1.3% $
12,929
$
12.9%
40.9%
23.5%
19.8%
1.6%
20,947
120,113
116,747
48,021
433
13,407
21,555
121,720
119,041
48,093
433
4.1%
6.6%
37.5%
36.7%
14.8%
0.3%
Total
$
4,057,501
$
4,152,109
100.0% $
319,190
$
324,249
100.0%
December 31, 2018
Amortized
Cost
U.S. Treasury
$
52,122
$
AAA
AA, AA+, AA-
A, A+, A-
BBB, BBB+, BBB-
BB+ and lower
586,639
1,385,709
591,219
653,645
42,305
NGHC
Fair
Value
52,759
589,078
1,358,528
581,106
641,554
40,924
Reciprocal Exchanges
Percentage
Amortized
Cost
Fair
Value
Percentage
1.6% $
12,707
$
18.0%
41.6%
17.8%
19.7%
1.3%
18,335
142,525
118,535
10,834
34
12,834
18,109
140,114
115,618
10,374
34
4.3%
6.1%
47.2%
38.9%
3.5%
—%
Total
$
3,311,639
$
3,263,949
100.0% $
302,970
$
297,083
100.0%
F-25
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The tables below summarize the investment quality of the corporate bond holdings and industry concentrations.
December 31, 2019
AAA
Financial Institutions
Industrials
Utilities/Other
Total
NGHC
Reciprocal Exchanges
Total
—%
0.7%
—%
0.7%
0.3%
0.4%
0.7%
AA+,
AA,
AA-
A+,A,A-
BBB+,
BBB,
BBB-
BB+ or
Lower
Fair
Value
3.6%
2.7%
—%
6.3%
5.1%
1.2%
6.3%
25.0%
24.1%
1.0%
50.1%
44.0%
6.1%
50.1%
12.1%
29.0%
1.4%
42.5%
40.0%
2.5%
42.5%
0.3% $
785,910
0.1% 1,083,959
—%
46,694
0.4% $ 1,916,563
0.4% $ 1,720,962
—%
195,601
0.4% $ 1,916,563
December 31, 2018
AAA
AA+,
AA,
AA-
A+,A,A-
BBB+,
BBB,
BBB-
BB+ or
Lower
Fair
Value
Financial Institutions
Industrials
Utilities/Other
Total
NGHC
Reciprocal Exchanges
Total
—%
0.4%
—%
0.4%
—%
0.4%
0.4%
4.3%
6.1%
—%
10.4%
6.3%
4.1%
10.4%
23.1%
21.5%
1.8%
46.4%
37.3%
9.1%
46.4%
14.2%
26.7%
0.4%
41.3%
40.6%
0.7%
41.3%
0.9% $
535,373
0.6%
—%
697,324
28,008
1.5% $ 1,260,705
1.4% $ 1,079,099
0.1%
181,606
1.5% $ 1,260,705
% of
Corporate
Bonds
Portfolio
41.0%
56.6%
2.4%
100.0%
89.8%
10.2%
100.0%
% of
Corporate
Bonds
Portfolio
42.5%
55.3%
2.2%
100.0%
85.6%
14.4%
100.0%
(g) Cash and Cash Equivalents, Restricted Cash and Restricted 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 are held primarily in the form
of cash or certain high grade securities.
Cash, cash equivalents, and restricted cash are as follows:
Cash and cash equivalents
Restricted cash and cash equivalents
Total cash, cash equivalents and restricted cash
Restricted investments are as follows:
Securities on deposit with state regulatory authorities
Restricted investments to trusts in certain reinsurance transactions
Total restricted investments
F-26
December 31,
2019
2018
135,942
28,521
164,463
$
$
193,858
39,725
233,583
December 31,
2019
2018
74,061
49,502
123,563
$
$
73,119
70,470
143,589
$
$
$
$
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
(h) Other Investments
The table below summarizes the composition of other investments:
Equity method investments (related parties - $109,612 and $106,031)
Notes receivable (related parties - $129,229 and $127,692) (1)
Long-term Certificates of Deposit (CDs), at cost
Investments, at fair value
Investments, at cost or amortized cost
Total
(1) See Note 13, “Related Party Transactions” for additional information.
December 31,
2019
2018
$
143,511
$
129,299
20,150
4,108
8,962
142,921
128,893
20,252
6,542
7,668
$
306,030
$
306,276
Equity method investments represent limited liability companies and limited partnership investments in real estate.
Investments at fair value primarily represent the Company’s right to receive the excess servicing spread related to
servicing rights, for which the Company has elected the fair value option with changes in fair value recorded in earnings.
Investments at cost or amortized cost, represent limited partnerships, loans and trusts. The Company believes its exposure
to risk associated with these investments is generally limited to the investment carrying amounts.
The Company’s other investments are assessed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the investment might not be recoverable. During the years ended December 31,
2019, 2018 and 2017, the Company recorded OTTI on other investments of $0, $3,000 and $0, respectively.
Equity Method Investments - Related Parties
The significant shareholder of the Company has an ownership interest in AmTrust Financial Services, Inc.
(“AmTrust”) and ACP Re Ltd. (“ACP Re”).
Limited Liability Companies and Limited Partnerships
The following entities are VIEs, for which the Company is not the primary beneficiary. The Company accounts
for these entities using the equity method of accounting. The Company believes its exposure to risk associated with
these investments is generally limited to the investment carrying amounts.
LSC Entity
The Company has a 50% ownership interest in an entity (the “LSC Entity”) initially formed to acquire life
settlement contracts, with AmTrust owning the remaining 50%. The LSC Entity used the contributed capital to pay
premiums and purchase policies. 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 LSC
Entity has a 30% noncontrolling equity interest in a limited partnership managed by a third party. As of December 31,
2019, the LSC Entity directly held one life settlement contract. The life settlement contract is accounted for using the
fair value method.
F-27
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following table presents the Company’s 50% investment activity in the LSC Entity:
Balance, beginning of the year
Distributions
Contributions
Equity in earnings (losses)
Change in equity method investments
Balance, end of the year
800 Superior, LLC
Year Ended December 31,
2019
2018
2017
$
48,324
$
160,683
$
(2,500)
(118,635)
258
3,395
1,153
2,000
4,276
(112,359)
$
49,477
$
48,324
$
185,992
(45,127)
21,040
(1,222)
(25,309)
160,683
The Company holds an investment in 800 Superior, LLC, a limited liability company that owns an office building
in Cleveland, Ohio, with AmTrust. AmTrust has been appointed managing member of 800 Superior, LLC. The Company
and AmTrust each have a 50% ownership interest in 800 Superior, LLC. Previously, the Company and AmTrust each
also had a 50% ownership interest in East Ninth & Superior, LLC and a 24.5% ownership interest in 800 Superior
NMTC Investment Fund II, LLC. During the third quarter of 2019, the net assets of East Ninth & Superior, LLC were
combined with 800 Superior, LLC and East Ninth & Superior, LLC and 800 Superior NMTC Investment Fund II, LLC
were dissolved.
The Company’s equity interest in 800 Superior, LLC as of December 31, 2019 and 2018 was $9,365 and $5,125,
respectively. For the years ended December 31, 2019, 2018 and 2017, the Company recorded equity in earnings (losses)
from 800 Superior, LLC of $1,953, $(531) and $(12), respectively, and made contributions of $2,287, $0 and $0,
respectively. Additionally, the Company has a lease agreement with 800 Superior, LLC. The Company paid 800 Superior,
LLC $2,967, $2,889 and $2,812 in rent for the years ended December 31, 2019, 2018 and 2017, respectively.
North Dearborn Building Company, L.P.
The Company holds an investment in North Dearborn Building Company, L.P. (“North Dearborn”), a limited
partnership that owns an office building in Chicago, Illinois. AmTrust is also a limited partner in North Dearborn, and
the general partner is NA Advisors GP LLC (“NA Advisors”), a related party, owned by Karfunkel family members
which is managed by an unrelated third party. The Company and AmTrust each hold a 45% limited partnership interest
in North Dearborn, while NA Advisors holds a 10% general partnership interest and a 10% profit interest, which NA
Advisors pays to the unrelated third-party manager. North Dearborn appointed NA Advisors as the general manager to
oversee the day-to-day operations of the office building.
The Company’s equity interest in North Dearborn as of December 31, 2019 and 2018 was $5,317 and $6,214,
respectively. For the years ended December 31, 2019, 2018 and 2017, the Company recorded equity in earnings (losses)
from North Dearborn of $(357), $(243) and $(812), respectively, and received distributions of $540, $1,125 and $0,
respectively.
4455 LBJ Freeway, LLC
The Company holds an investment in 4455 LBJ Freeway, LLC, a limited liability company that owns an office
building in Dallas, Texas, with AmTrust. AmTrust has been appointed managing member of 4455 LBJ Freeway, LLC.
The Company and AmTrust each have a 50% ownership interest in 4455 LBJ Freeway, LLC.
The Company’s equity interest in 4455 LBJ Freeway, LLC as of December 31, 2019 and 2018 was $1,074 and
$793, respectively. For the years ended December 31, 2019, 2018 and 2017, the Company recorded equity in earnings
(losses) from 4455 LBJ Freeway, LLC of $281, $53 and $(160), respectively. Additionally, the Company has a lease
agreement with 4455 LBJ Freeway, LLC. The Company paid 4455 LBJ Freeway, LLC $2,422, $2,225 and $2,303 in
rent for the years ended December 31, 2019, 2018 and 2017, respectively.
F-28
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Illinois Center Building, L.P.
The Company holds an investment in Illinois Center Building, L.P. (“Illinois Center”), a limited partnership that
owns an office building in Chicago, Illinois. AmTrust and ACP Re are also limited partners in Illinois Center and the
general partner is NA Advisors. The Company and AmTrust each hold a 37.5% limited partnership interest in Illinois
Center, while ACP Re holds a 15.0% limited partnership interest. NA Advisors holds a 10.0% general partnership
interest and a 10.0% profit interest, which NA Advisors pays to the unrelated third-party manager. Illinois Center
appointed NA Advisors as the general manager to oversee the day-to-day operations of the office building.
The Company’s equity interest in Illinois Center as of December 31, 2019 and 2018 was $44,379 and $45,575,
respectively. For the years ended December 31, 2019, 2018 and 2017, the Company recorded equity in earnings (losses)
from Illinois Center of $(2,321), $(3,390) and $(6,645), respectively, and made contributions of $1,125, $2,250 and
$5,625, respectively.
F-29
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
4. Fair Value of Financial Instruments
The Company carries certain financial instruments at fair value. Assets and liabilities recorded at fair value in the
consolidated balance sheets are measured and classified in accordance with a fair value hierarchy consisting of three
“levels” based on the observability of valuation inputs:
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 following describes the valuation techniques used by the Company to determine the fair value measurements
on a recurring basis of financial instruments held as of December 31, 2019 and 2018. The Company utilizes a pricing
service (“pricing service”) to estimate fair value measurements for all its debt and equity securities.
Level 1 measurements:
• U.S. Treasury and federal agencies. The fair values of U.S. government securities are based on quoted market
prices in active markets. The Company believes the market for U.S. government securities is an actively traded
market given the high level of daily trading volume.
• Common stock. The pricing service utilizes market quotations for equity securities that have quoted market
•
prices in active markets and their respective quoted prices are provided at fair value.
Short-term investments. Comprised of money market funds that are traded in active markets and fair values
are based on quoted market prices.
Level 2 measurements:
•
States and political subdivision bonds, and foreign government. The primary inputs to the valuation include
quoted prices for identical or similar assets in markets that are not active.
• Corporate bonds. Comprised of bonds issued by corporations, public and privately placed. The fair values of
short-term corporate bonds are priced 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. The
primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not
active.
• Residential and commercial mortgage-backed securities, asset-backed securities and structured securities. The
primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not
active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit
spreads.
Level 3 measurements:
•
States and political subdivision bonds. The Company holds certain municipal bonds that finance economic
development, infrastructure and environmental projects which do not have an active market. These bonds are
valued based on non-binding broker quotes where the inputs have not been corroborated to be market
observable.
F-30
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
• Corporate bonds. The Company holds certain structured notes and term loans that do not have an active market.
These bonds are valued based on non-binding broker quotes where the inputs have not been corroborated to
be market observable.
• Common stock and preferred stock. From time to time, the Company also holds certain equity securities that
are issued by privately-held entities 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 quotes, issuers’
book value, market multiples, and other inputs. These bonds are valued based on non-binding broker quotes
where the inputs have not been corroborated to be market observable.
• Other investments, at fair value. Comprised of the Company’s right to receive the Excess Servicing Spread
(“ESS”) related to servicing rights. The Company uses a discounted cash flow method to estimate their fair
value. The key inputs used in the estimation of ESS include prepayment speed and discount rate. Changes in
the fair value of the ESS are recorded in earnings.
Assets measured at fair value on a recurring basis are as follows:
Available-for-sale debt securities:
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
Structured securities
December 31, 2019
Level 1
Level 2
Level 3
Total
$
67,006
$
3,915
— $
—
—
—
—
—
—
—
—
298,582
1,802
1,908,235
1,277,460
612,193
75,611
220,126
— $
—
3,100
—
8,328
—
—
—
—
67,006
3,915
301,682
1,802
1,916,563
1,277,460
612,193
75,611
220,126
Total available-for-sale debt securities
70,921
4,394,009
11,428
4,476,358
Equity securities:
Common stock
Total equity securities
Short-term investments
Other investments
Total
NGHC
Reciprocal Exchanges
Total
4,881
4,881
59,953
—
135,755
116,602
19,153
135,755
$
$
$
—
—
7,400
—
$
$
$
4,401,409
4,091,068
310,341
4,401,409
$
$
$
376
376
—
4,108
15,912
15,912
—
15,912
$
$
$
5,257
5,257
67,353
4,108
4,553,076
4,223,582
329,494
4,553,076
F-31
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Available-for-sale debt securities:
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
Structured securities
December 31, 2018
Level 1
Level 2
Level 3
Total
$
65,593
$
37,475
— $
—
—
—
—
—
—
—
—
268,601
152,366
1,248,938
925,116
544,975
61,147
241,458
— $
—
3,596
—
11,767
—
—
—
—
65,593
37,475
272,197
152,366
1,260,705
925,116
544,975
61,147
241,458
Total available-for-sale debt securities
103,068
3,442,601
15,363
3,561,032
Equity securities:
Common stock
Total equity securities
Short-term investments
Other investments
Total
NGHC
Reciprocal Exchanges
Total
9,898
9,898
348,549
—
461,515
429,502
32,013
461,515
$
$
$
—
—
—
—
$
$
$
3,442,601
3,160,203
282,398
3,442,601
$
$
$
1,051
1,051
—
6,542
22,956
22,956
—
22,956
$
$
$
10,949
10,949
348,549
6,542
3,927,072
3,612,661
314,411
3,927,072
During the years ended December 31, 2019 and 2018, there were no transfers between Level 2 and Level 3. The
following tables provide a reconciliation of recurring fair value measurements of the Level 3 financial assets:
Balance as of January 1, 2019
Transfers into Level 3
Transfers out of Level 3
Total gains (losses) for the period:
Included in earnings
Included in other comprehensive income
Sales
Balance as of December 31, 2019
Change in unrealized gains (losses) for the period included in net
income for assets held at the end of the reporting period
Change in unrealized gains (losses) for the period included in other
comprehensive income for assets held at the end of the reporting
period
States and
political
subdivision
bonds
Corporate
bonds
Common
stock
Other
investments
Total
$
3,596
$
11,767
$
1,051
$
6,542
$
22,956
—
—
—
(496)
—
—
—
—
(3,439)
—
3,100
$
8,328
$
—
—
(675)
—
—
376
— $
— $
(675)
$
$
—
—
(1,176)
—
(1,258)
4,108
(1,176)
$
$
—
—
(1,851)
(3,935)
(1,258)
15,912
(1,851)
(496)
$
(3,439)
$
— $
— $
(3,935)
$
$
$
F-32
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
States and
political
subdivision
bonds
Corporate
bonds
Common
stock
Preferred
stock
Other
investments
Total
Balance as of January 1, 2018
$
4,081
$
24,545
$
5,052
$
270
$
10,782
$
44,730
Transfers into Level 3
Transfers out of Level 3
Total gains (losses) for the period:
Included in earnings
Included in other comprehensive income
Sales
Balance as of December 31, 2018
Change in unrealized gains (losses) for the period
included in net income for assets held at the end
of the reporting period
Change in unrealized gains (losses) for the period
included in other comprehensive income for assets
held at the end of the reporting period
$
$
$
—
—
—
(485)
—
—
—
—
(12,778)
—
—
—
(4,001)
—
—
—
—
(270)
—
—
—
—
1,057
—
(5,297)
3,596
$
11,767
$
1,051
$
— $
6,542
$
—
—
(3,214)
(13,263)
(5,297)
22,956
— $
— $
(4,001)
$
(270)
$
606
$
(3,665)
(485)
$
(12,778)
$
— $
— $
— $
(13,263)
At December 31, 2019 and 2018, the carrying values of the Company’s cash and cash equivalents, premiums and
other receivables, and accounts payable approximate the fair value given their short-term nature and were classified as
Level 1. Other than goodwill, the Company did not measure any assets or liabilities at fair value on a nonrecurring
basis at December 31, 2019 and 2018. Goodwill is classified as Level 3 in the fair value hierarchy. See Note 7, “Goodwill
and Intangible Assets” for additional information on how the Company tested goodwill for impairment.
Fair value information about financial liabilities not measured at fair value
Debt - The amount reported in the accompanying consolidated balance sheets for these financial instruments
represents the carrying value of the debt. See Note 11, “Debt” for additional information.
The following table presents the carrying amount and estimated fair value of debt not carried at fair value, excluding
finance lease and other liabilities, as well as the input level used to determine the fair value:
Input Level
Carrying amount
Fair value
Carrying amount
Fair value
December 31, 2019
December 31, 2018
7.625% Notes
Level 2
$
96,928
$
103,560
$
96,842
$
90,400
6.75% Notes
Subordinated Debentures
2016 Credit Agreement
2019 Credit Agreement
Level 3
Level 3
Level 3
Level 3
347,091
72,168
—
140,000
371,366
72,103
—
148,272
346,439
72,168
160,000
—
353,756
72,109
163,222
—
F-33
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
5. Deferred Acquisition Costs
The following table reflects the amounts of policy acquisition costs deferred and amortized:
Year Ended December 31,
Property
and
Casualty
2019
Accident
and
Health
Property
and
Casualty
Total
2018
Accident
and
Health
Property
and
Casualty
Total
2017
Accident
and
Health
Total
Balance, beginning of the year $ 226,188
$
25,220
$ 251,408
$ 198,283
$
18,106
$ 216,389
$ 207,597
$
13,325
$ 220,922
Additions
Amortization
Disposition
Change in DAC
End of the year
NGHC
Reciprocal Exchanges
552,921
39,491
592,412
522,914
22,898
545,812
478,426
26,930
505,356
(539,816)
(37,541)
(577,357)
(495,009)
(15,784)
(510,793)
(487,740)
(22,149)
(509,889)
—
13,105
$ 239,293
$ 215,986
23,307
(2,940)
(990)
(2,940)
12,115
—
27,905
—
7,114
—
—
35,019
(9,314)
—
4,781
—
(4,533)
$
$
$
24,230
$ 263,523
$ 226,188
24,230
$ 240,216
$ 206,181
—
23,307
20,007
24,230
$ 263,523
$ 226,188
$
$
$
25,220
$ 251,408
$ 198,283
25,220
$ 231,401
$ 177,446
—
20,007
20,837
25,220
$ 251,408
$ 198,283
$
$
$
18,106
$ 216,389
18,106
$ 195,552
—
20,837
18,106
$ 216,389
Balance, end of the year
$ 239,293
6. Property and Equipment
The composition of property and equipment consisted of the following:
December 31,
2019
2018
Cost
Accumulated
Depreciation
Net
Value
Cost
Accumulated
Depreciation
Net
Value
Land
Buildings
Leasehold improvements
Other equipment
Hardware and software
Finance lease right-of-use assets
Operating lease right-of-use assets
Total
NGHC
Reciprocal Exchanges
Total
$
$
$
$
5,788
$
— $
5,788
$
6,073
$
— $
24,997
34,238
24,627
387,618
37,515
119,934
634,717
625,658
9,059
634,717
$
$
$
(2,669)
(12,372)
(3,044)
(196,294)
(16,511)
—
(230,890) $
(222,072) $
(8,818)
22,328
21,866
21,583
191,324
21,004
119,934
403,827
403,586
241
(230,890) $
403,827
31,489
35,469
28,774
(2,554)
(9,152)
(5,670)
6,073
28,935
26,317
23,104
385,059
(161,484)
223,575
—
—
486,864
477,804
9,060
486,864
$
$
$
—
—
(178,860) $
(171,495) $
(7,365)
—
—
308,004
306,309
1,695
(178,860) $
308,004
$
$
$
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2019,
2018 and 2017 was $61,965, $55,928 and $39,323, respectively.
F-34
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
7. Goodwill and Intangible Assets
Goodwill and intangible assets, net of amortization, are recorded as a consequence of business acquisitions.
Goodwill represents the excess, if any, of the purchase price over the fair value of their net assets as of the date of
acquisition. Intangible assets are recorded at their fair value as of the acquisition date. Intangible assets that are not
deemed to have an indefinite useful life are amortized over their estimated useful lives. Goodwill and intangible assets
that have an indefinite useful life are not subject to amortization.
Goodwill and intangible assets deemed to have an indefinite useful life are tested annually in the fourth quarter
of every year for impairment. Goodwill and intangible assets are also tested whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable. If it is determined that an asset has been
impaired, the asset is written down by the amount of the impairment, with a corresponding charge to earnings.
With respect to goodwill, a qualitative assessment is first made to determine whether it is necessary to perform
quantitative testing. This initial assessment includes, among other factors, consideration of: (i) past, current and
projected future earnings and equity; (ii) recent trends and market conditions; and (iii) valuation metrics involving
similar companies that are publicly-traded and acquisitions of similar companies, if available. If this initial qualitative
assessment indicates that the fair value of an operating segment may be less than its carrying amount, a second step is
taken, involving a comparison between the estimated fair values of the Company’s operating subsidiary with its
respective carrying amount including goodwill. If the carrying value exceeds estimated fair value, there is an indication
of impairment. As of December 31, 2019, there were no circumstances that indicate that the carrying amount of goodwill
and intangible assets deemed to have an indefinite useful life may not be recoverable.
During the year ended December 31, 2019, the Company purchased certain intangible assets and completed
several business acquisitions, as well as a business disposition, that were not material to the Company’s consolidated
financial statements, either individually or in the aggregate.
The changes in the carrying amounts of goodwill by segments are as follows:
Balance as of January 1, 2019
Acquisitions
Disposition
Balance as of December 31, 2019
Property
and
Casualty
Accident
and
Health
Total
$
$
100,888
$
79,295
$
180,183
1,414
—
5,312
(7,581)
6,726
(7,581)
102,302
$
77,026
$
179,328
F-35
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The composition of intangible assets and loss reserve premium consisted of the following:
December 31, 2019
Gross
Balance
Accumulated
Amortization
Net Value
Weighted-average
amortization period
Agent/Customer relationships
$
175,157
$
(76,156) $
Renewal rights
Other intangibles
Total intangible assets subject to amortization
Management contracts
State licenses
Trademarks
Total intangible assets
NGHC
Reciprocal Exchanges
Total intangible assets
Net loss reserve plus a risk premium (1)
Total
NGHC
Reciprocal Exchanges
Total
December 31, 2018
Agent/Customer relationships
Renewal rights
Other intangibles
Total intangible assets subject to amortization
Management contracts
State licenses
Trademarks
Total intangible assets
NGHC
Reciprocal Exchanges
Total intangible assets
Net loss reserve plus a risk premium (1)
Total
NGHC
Reciprocal Exchanges
$
$
$
$
$
$
$
$
$
$
$
$
$
$
48,566
49,511
273,234
118,600
89,325
30,000
511,159
507,259
3,900
511,159
(41,257)
(27,923)
(145,336)
—
—
—
$
$
$
(145,336) $
(144,661) $
(675)
(145,336) $
(17,266) $
(17,266) $
(13,253) $
(4,013)
(17,266) $
9,947
9,947
6,017
3,930
9,947
$
$
$
$
13.6 years
5.8 years
7.8 years
12.2 years
indefinite life
indefinite life
indefinite life
6.1 years
99,001
7,309
21,588
127,898
118,600
89,325
30,000
365,823
362,598
3,225
365,823
(7,319)
(7,319)
(7,236)
(83)
(7,319)
Gross
Balance
Accumulated
Amortization
Net Value
184,617
$
(72,876) $
111,741
51,057
33,901
269,575
118,600
85,825
30,000
504,000
500,100
3,900
504,000
$
$
$
(6,203) $
(6,203) $
(2,190) $
(4,013)
(36,342)
(14,845)
(124,063)
—
—
—
(124,063) $
(123,568) $
(495)
14,715
19,056
145,512
118,600
85,825
30,000
379,937
376,532
3,405
(124,063) $
379,937
5,659
5,659
1,839
3,820
5,659
$
$
$
$
(544)
(544)
(351)
(193)
(544)
Total
(6,203) $
(1) Net loss reserve plus a risk premium is recorded as a liability.
$
F-36
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The changes in the carrying amounts of intangibles assets are as follows:
Gross
Balance
Accumulated
Amortization
Net Value
Balance as of January 1, 2019
$
504,000
$
(124,063) $
Acquisitions
Amortization
Reclassification
Disposition
35,421
—
(11,837)
(16,425)
—
(39,024)
6,924
10,827
379,937
35,421
(39,024)
(4,913)
(5,598)
Balance as of December 31, 2019
$
511,159
$
(145,336) $
365,823
Intangible assets amortization expense consisted of the following:
Amortization
Amortization of loss reserve premium
Total
NGHC
Reciprocal Exchanges
Total
Year Ended December 31,
2019
2018
2017
$
$
$
$
39,024
(4,288)
34,736
34,665
71
34,736
$
$
$
$
31,999
(632)
31,367
31,323
44
31,367
$
$
$
$
59,868
(1,257)
58,611
51,729
6,882
58,611
The estimated aggregate amortization expense for each of the next five years and thereafter is:
Year ending
2020
2021
2022
2023
2024
Thereafter
Total
NGHC
Reciprocal
Exchanges
Total
$
20,385
$
131
$
16,259
14,559
12,385
11,451
45,398
23
(9)
(2)
(1)
—
20,516
16,282
14,550
12,383
11,450
45,398
$
120,437
$
142
$
120,579
F-37
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
8. Unpaid Losses and Loss Adjustment Expense Reserves
The unpaid losses and loss adjustment expense (“LAE”) reserves is an estimate of the Company’s liability from
incurred claims at the reporting period. The unpaid losses and loss adjustment expense reserves are 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 standard 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 losses and LAE.
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.
The following tables present a reconciliation of beginning and ending balances for unpaid losses and LAE:
Gross balance at beginning of the year
$
2,507,409
$
271,280
$
2,778,689
$
178,470
$
2,957,159
Less: Reinsurance recoverable at beginning of the year
(1,182,588)
(24,575)
(1,207,163)
(77,979)
(1,285,142)
Year Ended December 31, 2019
Property
and
Casualty
Accident
and
Health
NGHC
Reciprocal
Exchanges
Total
Net balance at beginning of the 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 losses and LAE reserves
Disposed losses and LAE reserves
Net balance at end of the year
Plus: Reinsurance recoverable at end of the year
1,324,821
246,705
1,571,526
100,491
1,672,017
2,320,053
356,036
2,676,089
173,215
2,849,304
46,623
(45,356)
1,267
3,897
5,164
2,366,676
310,680
2,677,356
177,112
2,854,468
(1,430,072)
(219,234)
(1,649,306)
(111,380)
(1,760,686)
(841,613)
(109,653)
(951,266)
(44,611)
(995,877)
(2,271,685)
(328,887)
(2,600,572)
(155,991)
(2,756,563)
92,574
—
1,512,386
1,016,368
—
(87,890)
140,608
11,266
92,574
(87,890)
1,652,994
1,027,634
—
—
121,612
84,174
92,574
(87,890)
1,774,606
1,111,808
Gross balance at end of the year
$
2,528,754
$
151,874
$
2,680,628
$
205,786
$
2,886,414
F-38
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Gross balance at beginning of the year
$
2,270,551
$
249,653
$
2,520,204
$
143,353
$
2,663,557
Less: Reinsurance recoverable at beginning of the year
(1,067,495)
(9,840)
(1,077,335)
(52,408)
(1,129,743)
Year Ended December 31, 2018
Property
and
Casualty
Accident
and
Health
NGHC
Reciprocal
Exchanges
Total
Net balance at beginning of the 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
Unrealized foreign exchange gain
Net balance at end of the year
Plus: Reinsurance recoverable at end of the year
1,203,056
239,813
1,442,869
90,945
1,533,814
2,182,923
352,322
2,535,245
161,015
2,696,260
(4,760)
(30,977)
(35,737)
1,703
(34,034)
2,178,163
321,345
2,499,508
162,718
2,662,226
(1,336,359)
(188,014)
(1,524,373)
(110,053)
(1,634,426)
(720,039)
(117,653)
(837,692)
(43,119)
(880,811)
(2,056,398)
(305,667)
(2,362,065)
(153,172)
(2,515,237)
—
(8,786)
(8,786)
—
(8,786)
1,324,821
1,182,588
246,705
24,575
1,571,526
1,207,163
100,491
77,979
1,672,017
1,285,142
Gross balance at end of the year
$
2,507,409
$
271,280
$
2,778,689
$
178,470
$
2,957,159
Gross balance at beginning of the year
$
1,936,391
$
200,400
$
2,136,791
$
137,075
$
2,273,866
Less: Reinsurance recoverable at beginning of the year
(827,672)
(10,933)
(838,605)
(42,192)
(880,797)
Year Ended December 31, 2017
Property
and
Casualty
Accident
and
Health
NGHC
Reciprocal
Exchanges
Total
Net balance at beginning of the 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
Unrealized foreign exchange loss
Net balance at end of the year
Plus: Reinsurance recoverable at end of the year
1,108,719
189,467
1,298,186
94,883
1,393,069
2,172,506
327,289
2,499,795
118,938
2,618,733
15,273
(8,826)
6,447
902
7,349
2,187,779
318,463
2,506,242
119,840
2,626,082
(1,364,011)
(166,669)
(1,530,680)
(81,371)
(1,612,051)
(729,431)
(107,992)
(837,423)
(42,407)
(879,830)
(2,093,442)
(274,661)
(2,368,103)
(123,778)
(2,491,881)
—
1,203,056
1,067,495
6,544
239,813
9,840
6,544
1,442,869
1,077,335
—
90,945
52,408
6,544
1,533,814
1,129,743
Gross balance at end of the year
$
2,270,551
$
249,653
$
2,520,204
$
143,353
$
2,663,557
Gross unpaid losses and loss adjustment expense reserves at December 31, 2019 decreased by $70,745 from
December 31, 2018, primarily reflecting lower reserves from catastrophic events. Gross unpaid losses and loss
adjustment expense reserves at December 31, 2018 increased by $293,602 from December 31, 2017, primarily reflecting
increases from organic growth in the property and casualty segment.
Prior year loss development, net of reinsurance
Prior year development is based upon numerous estimates by line of business and accident year. No additional
premiums or return premiums have been accrued as a result of the prior year effects.
2019. Loss and LAE for the year ended December 31, 2019 included $5,164 of unfavorable development on prior
accident year loss and LAE reserves. The $50,520 of unfavorable development in the property and casualty segment
(including $3,897 of unfavorable development for the Reciprocal Exchanges) was primarily driven by adverse
F-39
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
development in the small business auto product line, while the $45,356 of favorable development in the accident and
health segment was primarily driven by overall improvement in loss ratio estimates.
2018. Loss and LAE for the year ended December 31, 2018 included $34,034 of favorable development on prior
accident year loss and LAE reserves driven by $3,057 of favorable development in the property and casualty segment
(including $1,703 of unfavorable development for the Reciprocal Exchanges), and $30,977 of favorable development
in the accident and health segment primarily driven by favorable development in the domestic accident and health stop
loss and short-term medical products.
2017. Loss and LAE for the year ended December 31, 2017 included $7,349 of unfavorable development on prior
accident year loss and LAE reserves. The $16,175 of unfavorable development in the property and casualty segment
(including $902 of unfavorable development for the Reciprocal Exchanges) was primarily driven by higher than
expected development in auto liability coverages, while the $8,826 of favorable development in the accident and health
segment was primarily driven by favorable development in the Company’s domestic products.
Short-duration contracts
The following is information by reserving subgroups within segments about incurred and paid claims development
as of December 31, 2019, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-
reported liabilities (“IBNR”) plus expected development on reported claims included within the net incurred claims
amounts. The information about incurred and paid claims development for the years ended prior to December 31, 2019,
is presented as unaudited supplementary information.
F-40
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Property and Casualty - auto liability, including recreational vehicles and motorcycles:
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (A)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (B)
December 31, 2019
Total of IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$596,995
$ 593,187
$ 592,353
$ 593,992
$ 594,348
$ 595,763
$ 595,337
$ 595,157
$ 595,215
$
595,609
$
490,230
485,762
489,010
494,922
493,873
497,109
497,324
496,408
511,797
522,296
529,140
527,386
528,090
527,531
529,885
544,833
556,262
556,290
563,834
567,410
572,538
740,531
759,577
760,566
766,640
779,992
820,213
838,040
849,051
872,064
497,424
531,887
575,521
783,869
892,244
932,350
940,849
976,749
1,005,184
929,211
912,370
941,837
1,047,041
1,033,488
1,162,750
$ 8,019,813
270
566
196
1,637
1,293
6,218
23,596
33,880
131,044
436,809
241,703
238,315
249,877
250,090
270,033
291,691
301,660
295,454
306,943
386,846
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$287,058
$ 474,640
$ 534,107
$ 562,918
$ 579,237
$ 590,417
$ 592,932
$ 594,168
$ 594,696
$
594,914
224,676
385,749
442,365
468,059
482,861
489,191
494,145
495,833
242,285
413,018
470,515
501,819
518,079
523,703
527,695
259,665
440,751
504,569
540,497
559,064
567,949
342,710
601,980
694,002
728,256
757,933
385,592
679,461
761,150
820,007
400,052
737,927
855,407
392,084
706,151
429,231
496,680
530,570
571,643
773,124
864,226
937,997
832,553
777,888
470,341
$ 6,849,936
1,186
$ 1,171,063
Unpaid loss and allocated loss adjustment expense reserves before 2010, net of reinsurance (C)
Unpaid loss and allocated loss adjustment expense reserves, net of reinsurance (A) - (B) + (C)
Years
1
2
3
4
5
6
7
8
9
10
Average Annual Percentage Payout of Accident Year Incurred Claims by Age, Net of Reinsurance
(unaudited)
Property and Casualty - auto liability,
including recreational vehicles and
motorcycles
42.8%
33.3%
11.4%
5.9%
3.6%
1.6%
0.7%
0.4%
0.1%
0.2%
F-41
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Property and Casualty - auto physical damage, including recreational vehicles, motorcycles and lender placed auto:
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (A)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (B)
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
December 31, 2019
Total of IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$389,966
$ 382,067
$ 381,499
$ 381,748
$ 381,818
$ 381,826
$ 381,795
$ 381,410
$ 381,138
$
381,113
$
315,273
308,729
308,298
308,486
308,760
308,512
308,536
308,249
308,056
298,208
295,984
296,257
296,050
295,970
295,026
335,454
329,049
328,748
328,284
328,262
328,010
496,227
487,302
486,206
486,383
486,373
541,008
544,097
544,769
544,510
626,643
622,456
621,717
600,813
570,699
548,063
308,132
294,710
327,506
486,156
544,684
620,546
567,411
526,092
577,970
$ 4,634,320
—
—
—
—
—
—
(550)
1,180
(5,823)
43,820
309,114
298,034
292,486
285,748
311,595
329,097
337,775
384,794
359,565
349,043
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$351,865
$ 382,575
$ 381,955
$ 381,926
$ 381,829
$ 381,811
$ 381,789
$ 381,425
$ 381,129
$
381,109
283,501
308,824
308,634
308,608
308,578
308,571
308,557
308,266
268,989
298,381
295,978
295,975
296,029
295,995
294,975
291,064
328,832
328,456
328,299
328,280
327,976
430,998
487,531
486,364
486,309
486,251
478,268
544,754
544,707
544,485
542,970
622,930
621,529
533,907
568,639
483,149
308,131
294,702
327,510
486,108
544,699
621,181
566,918
532,083
512,074
$ 4,574,515
4
$
59,809
Unpaid loss and allocated loss adjustment expense reserves before 2010, net of reinsurance (C)
Unpaid loss and allocated loss adjustment expense reserves, net of reinsurance (A) - (B) + (C)
Years
1
2
3
4
5
6
7
8
9
10
Average Annual Percentage Payout of Accident Year Incurred Claims by Age, Net of Reinsurance
(unaudited)
Property and Casualty - auto physical damage,
including recreational vehicles, motorcycles
and lender placed auto
90.1%
10.3%
(0.3)%
—%
—%
—%
—%
(0.1)%
—%
—%
F-42
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Property and Casualty - homeowners & other property, including lender placed homeowners:
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (A)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (B)
December 31, 2019
Total of IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$422,123
$ 414,378
$ 413,664
$ 413,623
$ 412,187
$ 411,689
$ 411,304
$ 410,997
$ 411,290
$
411,263
$
506,352
499,170
498,050
498,184
497,244
495,246
494,825
495,170
485,454
480,353
478,880
477,577
476,538
474,649
476,166
306,761
300,868
299,561
296,618
296,907
296,756
318,488
306,471
303,925
304,496
304,237
357,023
349,559
351,747
353,688
350,737
341,762
340,711
402,798
365,092
327,462
495,148
475,792
296,760
304,350
351,305
343,525
370,068
328,721
247,760
$ 3,624,692
—
3
—
77
34
1,935
1,109
11,847
13,210
43,234
86,466
107,869
112,053
75,904
73,477
69,874
60,954
58,961
72,612
60,676
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$247,802
$ 370,301
$ 393,226
$ 404,490
$ 408,195
$ 409,781
$ 410,875
$ 410,994
$ 411,249
$
411,243
314,139
457,480
485,054
489,778
493,408
494,198
494,525
494,904
300,271
452,589
466,266
471,084
473,190
473,781
475,765
219,937
279,743
289,302
293,101
295,332
296,383
198,781
278,255
289,456
297,640
301,742
233,264
319,284
336,921
342,156
227,650
320,564
331,102
258,234
338,065
227,908
494,922
475,762
296,442
303,100
345,257
337,889
349,600
298,212
172,462
$ 3,484,889
225
$
140,028
Unpaid loss and allocated loss adjustment expense reserves before 2010, net of reinsurance (C)
Unpaid loss and allocated loss adjustment expense reserves, net of reinsurance (A) - (B) + (C)
Years
1
2
3
4
5
6
7
8
9
10
Average Annual Percentage Payout of Accident Year Incurred Claims by Age, Net of Reinsurance
(unaudited)
Property and Casualty - homeowners & other
property, including lender placed homeowners
66.3%
26.0%
4.3%
2.0%
0.8%
0.4%
0.2%
—%
—%
—%
F-43
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Accident and Health
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
December 31, 2019
Total of IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (A)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (B)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$
4,847
$
4,731
$
4,703
$
4,703
$
4,703
$
4,703
$
4,703
$
4,703
$
4,703
$
4,703
$
4,804
4,483
4,400
4,481
4,227
23,253
4,481
4,161
28,578
52,245
4,481
4,161
26,457
52,694
4,481
4,161
26,361
52,311
4,481
4,110
26,272
52,026
4,481
4,110
26,274
52,022
176,104
184,586
181,536
181,740
215,097
200,817
202,155
211,293
186,415
234,558
4,481
4,110
26,274
52,034
181,717
201,722
182,865
205,152
256,745
$ 1,119,803
—
—
—
—
—
21
173
1,346
3,695
98,399
10,115
8,139
7,630
34,176
69,799
242,784
320,530
297,140
272,136
215,703
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
3,604
$
4,742
$
4,703
$
4,703
$
4,703
$
4,703
$
4,703
$
4,703
$
4,703
$
(unaudited)
2,528
4,469
3,330
4,481
4,095
15,421
4,481
4,110
25,754
31,765
4,481
4,110
26,327
52,053
4,481
4,161
26,242
52,405
4,481
4,110
26,154
52,147
4,481
4,110
26,155
52,140
123,576
178,918
181,459
181,719
125,845
196,421
201,720
104,809
178,047
126,269
4,703
4,481
4,110
26,155
52,153
181,696
201,549
181,519
201,457
158,345
Unpaid loss and allocated loss adjustment expense reserves before 2010, net of reinsurance (C)
Unpaid loss and allocated loss adjustment expense reserves, net of reinsurance (A) - (B) + (C)
$ 1,016,168
—
$
103,635
Years
1
2
3
4
5
6
7
8
9
10
Average Annual Percentage Payout of Accident Year Incurred Claims by Age, Net of Reinsurance
(unaudited)
Accident and Health
62.1%
35.9%
1.8%
0.2%
—%
—%
(0.3)%
0.3%
—%
—%
F-44
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Reciprocal Exchanges - auto liability:
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (A)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (B)
December 31, 2019
Total of IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$ 61,956
$
59,169
$
57,079
$
56,991
$
57,453
$
57,268
$
57,218
$
57,222
$
57,568
$
57,605
$
47,666
47,834
44,834
47,459
47,275
43,684
48,841
48,044
44,341
38,656
51,107
48,665
45,479
40,850
35,573
50,898
50,370
50,180
45,930
33,409
24,619
50,998
50,767
51,263
48,246
34,390
24,460
26,214
51,161
50,303
49,854
49,168
34,615
26,109
28,762
32,339
51,247
50,538
50,595
49,369
34,268
24,310
28,804
33,891
49,757
$
430,384
—
—
—
—
—
303
604
4,229
7,325
23,246
5,822
5,065
4,999
5,097
4,871
4,333
4,001
4,919
6,068
5,882
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$ 18,879
$
32,181
$
41,020
$
49,764
$
53,635
$
55,155
$
55,700
$
56,522
$
56,961
$
57,232
15,857
26,603
13,568
35,911
29,286
14,683
41,931
37,241
29,218
13,925
46,559
42,768
35,105
26,070
11,910
49,570
46,358
41,787
32,382
19,501
7,516
50,481
48,990
47,449
39,328
24,614
13,478
9,111
50,979
49,836
48,449
46,001
29,538
16,994
17,136
10,755
51,121
50,090
49,605
48,389
31,587
20,567
19,529
19,471
15,504
$
363,095
42
$
67,331
Unpaid loss and allocated loss adjustment expense reserves before 2010, net of reinsurance (C)
Unpaid loss and allocated loss adjustment expense reserves, net of reinsurance (A) - (B) + (C)
Years
1
2
3
4
5
6
7
8
9
10
Average Annual Percentage Payout of Accident Year Incurred Claims by Age, Net of Reinsurance
(unaudited)
Reciprocal Exchanges - auto liability
30.6%
25.3%
14.1%
13.5%
8.9%
4.1%
1.3%
0.9%
0.4%
0.7%
F-45
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Reciprocal Exchanges - auto physical damage:
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (A)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (B)
December 31, 2019
Total of IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$ 29,664
$
24,572
$
24,652
$
24,700
$
24,682
$
24,665
$
24,659
$
24,653
$
24,653
$
24,651
$
26,936
26,055
25,752
26,022
26,459
23,375
26,060
26,189
25,214
29,240
26,037
25,914
25,292
27,424
21,247
26,029
25,842
24,709
25,806
18,592
12,270
26,023
25,841
24,703
25,588
18,673
12,921
15,301
26,028
25,845
24,704
25,882
18,789
12,985
15,410
19,146
26,028
25,842
24,704
26,074
18,842
13,213
15,612
19,272
27,212
$
221,450
—
—
—
—
—
—
(12)
112
26
(1,625)
12,374
12,041
11,301
11,066
11,526
10,280
8,742
10,674
13,598
13,652
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$ 25,583
$
24,873
$
24,725
$
24,701
$
24,681
$
24,665
$
24,661
$
24,654
$
24,653
$
24,651
28,274
26,269
23,760
26,106
26,651
22,651
26,056
26,172
25,088
24,528
26,037
25,914
24,549
26,165
19,080
26,033
25,854
24,725
25,772
18,797
12,579
26,027
25,850
24,716
25,427
18,750
13,147
15,438
26,028
25,845
24,704
25,685
18,748
13,080
16,141
18,925
26,028
25,842
24,704
25,946
18,719
13,137
15,500
19,246
27,974
$
221,747
—
$
(297)
Unpaid loss and allocated loss adjustment expense reserves before 2010, net of reinsurance (C)
Unpaid loss and allocated loss adjustment expense reserves, net of reinsurance (A) - (B) + (C)
Years
1
2
3
4
5
6
7
8
9
10
Average Annual Percentage Payout of Accident Year Incurred Claims by Age, Net of Reinsurance
(unaudited)
Reciprocal Exchanges - auto physical damage
98.8%
2.3%
(1.3)%
0.2%
—%
—%
—%
—%
—%
—%
F-46
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Reciprocal Exchanges - homeowners & other property:
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (A)
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total (B)
December 31, 2019
Total of IBNR
Plus Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$ 38,125
$
37,831
$
37,161
$
36,347
$
36,691
$
35,788
$
35,723
$
35,639
$
35,181
$
35,737
$
38,470
28,869
25,289
28,511
20,625
22,638
28,209
21,184
21,232
27,706
27,954
19,971
20,132
24,846
30,081
27,950
20,403
20,309
25,625
21,031
36,838
28,002
20,876
20,615
26,614
21,527
35,274
48,222
28,075
20,251
20,367
27,141
22,007
34,851
50,871
76,925
28,095
20,301
23,109
27,231
21,881
34,501
51,852
78,166
65,888
$
386,761
—
—
—
—
—
72
306
2,089
3,836
11,427
5,066
6,652
8,427
3,165
4,231
5,448
4,786
8,817
12,950
11,311
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(unaudited)
$ 23,881
$
31,051
$
32,488
$
34,587
$
35,265
$
35,428
$
35,388
$
35,497
$
35,101
$
35,574
21,474
24,997
11,087
25,799
18,021
11,277
26,700
19,367
17,435
15,344
27,661
19,847
18,107
22,834
12,979
27,656
19,961
19,104
23,820
18,518
20,978
27,692
20,668
19,653
25,230
19,834
30,615
33,166
27,758
20,121
19,626
26,170
20,339
31,632
46,003
55,519
27,803
20,256
20,232
27,003
20,733
32,933
47,517
69,672
45,432
$
347,155
1,907
$
41,513
Unpaid loss and allocated loss adjustment expense reserves before 2010, net of reinsurance (C)
Unpaid loss and allocated loss adjustment expense reserves, net of reinsurance (A) - (B) + (C)
Years
1
2
3
4
5
6
7
8
9
10
Average Annual Percentage Payout of Accident Year Incurred Claims by Age, Net of Reinsurance
(unaudited)
Reciprocal Exchanges - homeowners & other
property
64.9%
22.1%
3.1%
3.6%
1.9%
1.4%
1.0%
0.8%
0.5%
0.8%
F-47
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The reconciliation of the net incurred and paid claims development tables to the liability for unpaid loss and loss
adjustment expense reserves is as follows:
Net outstanding liabilities:
Property and Casualty - Auto Liability
Property and Casualty - Auto Physical Damage
Property and Casualty - Homeowners and Other Property
Accident and Health
Reciprocal Exchanges - Auto Liability
Reciprocal Exchanges - Auto Physical Damage
Reciprocal Exchanges - Homeowners and Other Property
Net reserve for claims and allocated claim adjustment expenses
Reinsurance recoverable:(1)
Property and Casualty - Auto Liability
Property and Casualty - Auto Physical Damage
Property and Casualty - Homeowners and Other Property
Accident and Health
Reciprocal Exchanges - Auto Liability
Reciprocal Exchanges - Auto Physical Damage
Reciprocal Exchanges - Homeowners and Other Property
Reinsurance recoverable on unpaid claims and allocated claim adjustment expenses
Insurance lines other than short-duration
Acquisition
Unallocated claims adjustment expenses (“ULAE”)
Subtotal
Gross reserve for claims and claim adjustment expenses
December 31, 2019
$
1,171,063
59,809
140,028
103,635
67,331
(297)
41,513
1,583,082
848,885
11,873
155,610
11,266
33,022
297
50,855
1,111,808
32,032
61,589
97,903
191,524
2,886,414
$
$
$
$
$
$
(1) Includes $548,370 from MCCA and $146,496 from NCRF. See Note 9, “Reinsurance” for additional information.
F-48
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The reconciliation of the net incurred and paid loss information in the loss reserve rollforward table and
development tables with respect to the current accident year is as follows:
2019 - Current Accident Year Incurred
2019 - Current Accident Year Paid
Rollforward table
Development tables
Variance
Long-duration contracts
Acquisition
Sale of Euroaccident
Variance
Unallocated claims adjustment expenses $
287,425
Property
and
Casualty
Accident
and
Health
Reciprocal
Exchanges
Total
Property
and
Casualty
Accident
and
Health
Reciprocal
Exchanges
Total
$ 2,320,053
$
356,036
$
173,215
$ 2,849,304
$ 1,430,072
$
219,234
$
111,380
$ 1,760,686
1,988,480
$
331,573
—
44,148
$
$
256,745
99,291
12,912
32,859
—
$
$
142,857
2,388,082
1,154,877
30,358
$
461,222
$
275,195
30,358
$
330,695
$
221,095
—
—
—
32,859
44,148
53,520
—
54,100
$
$
158,345
60,889
8,211
17,851
—
$
$
—
53,520
—
34,827
88,910
1,402,132
22,470
$
358,554
22,470
$
251,776
—
—
—
17,851
54,100
34,827
$
331,573
$
99,291
$
30,358
$
461,222
$
275,195
$
60,889
$
22,470
$
358,554
The reconciliation of the net incurred and paid loss information in the loss reserve rollforward table and
development tables with respect to the prior accident year is as follows:
2019 - Prior Accident Year Incurred
2019 - Prior Accident Year Paid
Property
and
Casualty
Accident
and
Health
Reciprocal
Exchanges
Total
Property
and
Casualty
Accident
and
Health
Reciprocal
Exchanges
Total
Rollforward table
Development tables
Variance
$
$
46,623
$
(45,356)
$
3,897
$
5,164
$
841,613
$
109,653
53,726
(33,400)
6,748
27,074
763,888
(7,103)
$
(11,956)
$
(2,851)
$
(21,910)
$
77,725
563
—
—
—
—
89
—
(269)
(6,583)
—
(5,193)
136
—
—
—
—
699
(269)
(6,583)
874
—
—
—
21,575
(5,193)
—
18,663
$
$
78,479
31,174
5,339
—
(269)
7,441
—
$
$
$
44,611
$
995,877
40,360
882,727
4,251
$
113,150
3,902
$
64,517
349
—
—
—
—
1,223
(269)
7,441
21,575
18,663
Unallocated claims adjustment expenses $
(7,666)
$
$
(2,987)
$
(10,564)
$
55,276
Accident years prior to 2011
Delaware captive subsidiaries
Long-duration contracts
Acquisition
Sale of Euroaccident
Variance
$
(7,103)
$
(11,956)
$
(2,851)
$
(21,910)
$
77,725
$
31,174
$
4,251
$
113,150
The $53,726 of unfavorable prior year development for Property and Casualty on a combined basis for the incurred
development tables relates to Loss and Allocated Claims Adjustment Expenses (“ALAE”), which does not include
ULAE and other items excluded from the development tables as identified in the reconciliation table and further
identified in the prior accident year incurred reconciliation table above. The reserve rollforward table shows prior year
development for Loss and LAE, which includes development from ULAE and other items excluded from the
development tables as identified in the reconciliation table and further identified in the prior accident year incurred
reconciliation table above. Favorable prior year development of $7,103 in total attributable to liabilities excluded from
the incurred development tables resulted in total P&C Loss and LAE unfavorable prior year development of $46,623
shown in the reserve rollforward table.
The $33,400 of favorable prior year development for Accident and Health shown in the incurred development
table relates to Loss and ALAE, which does not include ULAE and other items excluded from the development tables
as identified in the reconciliation table and further identified in the prior accident year incurred reconciliation table
above. The reserve rollforward table shows prior year development for Loss and LAE, which includes prior year
development from ULAE and other items excluded from the development tables as identified in the reconciliation table
and further identified in the prior accident year incurred reconciliation table above. Favorable prior year development
of $11,956 in total attributable to liabilities excluded from the incurred development table resulted in total Accident
and Health Loss and LAE favorable prior year development of $45,356 shown in the reserve rollforward table.
F-49
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The $6,748 of unfavorable prior year development for the Reciprocal Exchanges on a combined basis for the
incurred development tables relates to Loss and ALAE, which does not include ULAE and other items excluded from
the development tables as identified in the reconciliation table and further identified in the prior accident year incurred
reconciliation table above. The reserve rollforward table shows prior year development for Loss and LAE, which
includes development from ULAE and other items excluded from the development tables as identified in the
reconciliation table and further identified in the prior accident year incurred reconciliation table above. Favorable prior
year development of $2,851 in total attributable to liabilities excluded from the incurred development tables resulted
in total Reciprocal Exchanges Loss and LAE unfavorable prior year development of $3,897 shown in the reserve
rollforward table.
Methodology for Estimating Incurred-But-Not-Reported Reserves
Loss and loss adjustment expense reserves represent management's estimate of the ultimate liability for claims
that have been reported and claims that have been incurred but not yet reported as of the balance sheet date. Because
the establishment of loss and loss adjustment expense reserves is a process involving estimates and judgment, currently
estimated reserves may change. The Company reflects changes to the reserves in the results of operations for the period
during which the estimates are changed.
Incurred-but-not-reported 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 expenses plus case reserves. Therefore, the IBNR also includes provision for expected development
on reported claims.
The Company’s internal actuarial analysis of the historical data provides the factors the Company uses in its
actuarial analysis in estimating its 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. In accordance with Actuarial Standards of Practice, the Company
generally uses multiple traditional methods in determining our estimates of the ultimate unpaid claim liabilities. Each
of these methods require actuarial judgment and assumptions. The techniques can include, but are not limited to:
• 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 Method - a combination of the Paid Development Method and the Expected Loss
Method, the Paid Bornhuetter-Ferguson 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 - Ferguson Method - a combination of the Incurred Development Method and the
Expected Loss Method, the Incurred Bornhuetter-Ferguson 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.
•
•
F-50
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
• 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. The Company then analyzes 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.
Methodology for Determining Cumulative Number of Reported Claims
When the Company is notified of an incident of potential liability that may lead to demand for payment(s), a
claim file is created. Methods used to summarize claim counts have not changed significantly over the time periods
reported in the tables above. The methodology of counting claims for each of the Company’s segments may be
summarized as follows:
Property and Casualty
The Company’s P&C claims are counted by claim number assigned to each claimant per insured event. However,
if an insured event occurs and demand for payment is made with respect to more than one coverage (e.g., an automobile
claim arising from the same incident demanding separate payment for liability and physical damage), there would be
one claim counted for each coverage for which a demand for payment was made. Claims closed without payment are
included in the cumulative number of reported P&C claims.
Accident and Health
The Company’s A&H claims are counted by claim number assigned to each claimant per illness, injury or death,
regardless of number of services rendered for each incident. Claims closed without payment are not included in the
cumulative number of reported A&H claims.
Reciprocal Exchanges
The Company’s Reciprocal Exchanges claims are counted by claim number assigned to each claimant per insured
event. However, if an insured event occurs and demand for payment is made with respect to more than one statutory
annual statement line of business (e.g., an automobile claim arising from the same incident demanding separate payment
for liability and physical damage), there would be one claim counted for each line of business for which a demand for
payment was made. Claims closed without payment are not included in the cumulative number of reported Reciprocal
Exchanges claims.
F-51
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
9. Reinsurance
The Company utilizes various excess of loss, quota share, state-based industry pools or facilities, and catastrophe
reinsurance programs to limit its exposure. Reinsurance agreements transfer portions of the underlying risk of the
business the Company writes. 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’s reinsurers generally carry at least an A.M. Best rating of “A-” (Excellent) or the
recoverables are fully collateralized. 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.
Reinsurance recoverable consists of the following:
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
Reinsurance recoverable
December 31,
2019
2018
$
$
282,500
1,111,808
1,394,308
$
$
326,596
1,285,142
1,611,738
The following is the effect of reinsurance on unpaid loss and LAE reserves and unearned premiums:
December 31,
2019
2018
Assumed
Ceded
Assumed
Ceded
Unpaid loss and LAE reserves
$
50,884
$
1,111,808
$
84,469
$
1,285,142
Unearned premiums
15,278
575,747
21,015
665,674
The following is the effect of reinsurance on premiums and loss and LAE:
Premium:
Direct
Assumed
Year Ended December 31,
2019
2018
2017
Written
Earned
Written
Earned
Written
Earned
$ 5,508,245
$ 5,486,835
$ 5,317,742
$ 5,049,512
$ 4,637,911
$ 4,233,184
74,835
80,572
99,097
123,265
118,074
239,230
Total Gross Premium
5,583,080
5,567,407
5,416,839
5,172,777
4,755,985
4,472,414
Ceded
(1,358,459)
(1,449,365)
(1,589,126)
(1,440,575)
(1,178,390)
(818,238)
Net Premium
$ 4,224,621
$ 4,118,042
$ 3,827,713
$ 3,732,202
$ 3,577,595
$ 3,654,176
Year Ended December 31,
2019
2018
2017
Assumed
Ceded
Assumed
Ceded
Assumed
Ceded
Loss and LAE
$
32,745
$
801,041
$
29,290
$ 1,041,286
$
128,418
$
790,524
F-52
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Quota Share Agreements
In 2017, the Company entered into an Auto Quota Share Agreement (the “Auto Quota Share Agreement”) covering
the Company’s auto line of business. Effective January 1, 2019, the Company ceded 7.0% of net liability. On July 1,
2019, the Company renewed its Auto Quota Share Agreement for a two-year term. Effective July 1, 2019, the Company
ceded 10.0% of net liability with the ability to increase the cession to up to 30.0% and decrease the cession down to
5.0% under certain conditions. The Company receives a 31.2% provisional ceding commission on premiums ceded to
the reinsurer during the term of the Auto Quota Share Agreement, subject to a sliding scale adjustment to a maximum
of 32.8% if the loss ratio for the reinsured business is 64.7% or less and a minimum of 30.0% if the loss ratio is 67.5%
or higher. Effective January 1, 2020, the Company cedes 5.0% of net liability under new and renewal auto policies
written.
In 2017, the Company entered into a Homeowners Quota Share Agreement (the “HO Quota Share Agreement”)
covering the Company’s homeowners line of business. On July 1, 2019, the Company renewed its HO Quota Share
Agreement for a one-year term. Effective July 1, 2019, the Company cedes 40.0% of net liability and receives a 36.0%
ceding commission on new and renewal business and a portion of the in-force business. A portion of the in-force business
is being run-off under the prior agreements. The weighted average expected ceding commission for all in-force business
and new and renewal homeowners business is 37.5% over the contract term.
Effective July 1, 2019, the Reciprocal Exchanges entered into a personal lines quota share agreement for a one-
year term. The Reciprocal Exchanges cede 28.5% of net liability on new and renewal homeowners multiple peril,
dwelling fire, and automobile physical damage (comprehensive only) policies written in the states of New Jersey and
New York.
Catastrophe Reinsurance
Effective May 1, 2019, the Company’s reinsurance property catastrophe excess of loss program, protecting the
Company against catastrophic events and other large losses, provides a total of $650,000 in coverage with one
reinstatement with a $70,000 retention for the first event and $50,000 for the second event. As of July 1, 2018, the
casualty program provides $35,000 in coverage in excess of a $5,000 retention. Effective October 1, 2019, the Company
renewed the casualty program, for which coverage and retention will remain in effect and unchanged. The Company
pays a premium as consideration for ceding the risk.
Effective July 1, 2019, the Reciprocal Exchanges renewed their property catastrophe excess of loss program
providing a total of $480,000 in coverage with a $20,000 retention, with one reinstatement.
Industry Pools and Facilities
The Company’s reinsurance programs include premiums written under state-mandated involuntary plans for
automobile, motorcycle and commercial vehicles and premiums ceded to state-provided reinsurance facilities such as
Michigan Catastrophic Claims Association (“MCCA”) and North Carolina Reinsurance Facility (“NCRF”)
(collectively, “State Plans”), for which the Company 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 $555
in the first half of 2019 and $580 until June 30, 2021. Insurers are reimbursed for their covered losses in excess of this
threshold. All automobile insurers doing business in Michigan are required to participate in MCCA. 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.
F-53
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Reinsurance recoverable from MCCA are as follows:
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
Reinsurance recoverable
The following is a summary of premiums and losses ceded to MCCA:
December 31,
2019
2018
$
$
9,940
548,370
558,310
$
$
7,470
590,188
597,658
Ceded earned premiums
Ceded Loss and LAE
Year Ended December 31,
2019
2018
2017
$
9,867
$
9,676
$
(23,616)
(54,105)
9,323
14,304
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.
Reinsurance recoverable from NCRF are as follows:
Reinsurance recoverable on paid losses
Reinsurance recoverable on unpaid losses
Reinsurance recoverable
The following is a summary of premiums and losses ceded to NCRF:
December 31,
2019
2018
$
$
44,759
146,496
191,255
$
$
36,418
134,916
171,334
Ceded earned premiums
Ceded Loss and LAE
Year Ended December 31,
2019
2018
2017
$
234,370
$
232,270
$
222,796
210,297
190,809
186,051
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 MCCA and NCRF, the Company believes that it has no significant exposure to uncollectible reinsurance balances
from these entities.
F-54
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The Company has a concentration of credit risk associated with its reinsurance recoverable and premiums ceded
to reinsurers. The following tables present information for each reinsurer by reinsurance recoverable, prepaid reinsurance
and funds held balances:
December 31, 2019
A.M. Best
Rating
Unpaid
Losses
Paid
Losses
Prepaid
Reinsurance
Funds Held
Net
Recoverable on
Reinsurer:
MCCA
NCRF
Hannover Ruck SE
Other reinsurers' balances -
each less than 5% of total (2)
Total
NGHC
Reciprocal Exchanges
Total
NR (1)
NR (1)
A+
—
$
548,370
$
9,940
$
3,927
$
— $
562,237
146,496
155,223
261,719
$
$
1,111,808
1,027,634
84,174
$
1,111,808
$
$
$
44,759
101,064
126,737
282,500
247,549
34,951
282,500
$
$
$
88,022
134,878
348,920
575,747
469,853
105,894
575,747
—
(254,558)
279,277
136,607
(4,884)
732,492
(259,442) $
1,710,613
(259,442) $
1,485,594
—
225,019
(259,442) $
1,710,613
$
$
$
December 31, 2018
A.M. Best
Rating
Unpaid
Losses
Paid
Losses
Prepaid
Reinsurance
Funds Held
Net
Recoverable on
Reinsurer:
MCCA
NCRF
Hannover Ruck SE
Other reinsurers' balances -
each less than 5% of total (2)
Total
NGHC
Reciprocal Exchanges
NR (1)
NR (1)
A+
—
$
590,188
$
7,470
$
3,894
$
— $
601,552
134,916
182,184
377,854
$
$
1,285,142
1,207,163
77,979
36,418
120,624
162,084
326,596
287,507
39,089
326,596
$
$
$
82,550
192,700
386,530
665,674
529,241
136,433
665,674
$
$
$
—
(282,129)
253,884
213,379
(4,861)
921,607
(286,990) $
1,990,422
(286,990) $
1,736,921
—
253,501
(286,990) $
1,990,422
$
$
$
Total
(1) NR - not rated by A.M. Best
(2) Rated A- or higher by A.M. Best or collateralized
$
1,285,142
Funds held for reinsurers are recorded within reinsurance payable in the consolidated balance sheets. Additionally,
collateral is available to the Company in the form of letters of credit and trust agreements in the amounts of $143,069
and $165,004, as of December 31, 2019 and 2018, respectively.
F-55
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
10. Income Taxes
The Company files a consolidated Federal income tax return and is a party to a Federal income tax allocation
agreement. Under the tax allocation agreement, each subsidiary computes and pays to the Company its respective share
of the federal income tax liability primarily based on separate return calculations. The Reciprocal Exchanges are not
a party to the tax allocation agreement and file separate tax returns.
Federal income tax expense consisted of the following:
2019
Reciprocal
Exchanges
NGHC
Total
NGHC
2018
Reciprocal
Exchanges
Total
NGHC
2017
Reciprocal
Exchanges
Total
Year Ended December 31,
Current tax
expense (benefit)
Federal
Foreign
Total current tax
expense (benefit)
Deferred tax
expense (benefit)
Federal
Foreign
Total deferred tax
expense (benefit)
Provision
(benefit) for
income taxes
$
69,985
$
(2,257) $
67,728
$
27,039
$
(2,290) $
24,749
$
13,876
$
2,840
$
16,716
2,621
—
2,621
1,376
—
1,376
2,057
—
2,057
$
72,606
$
(2,257) $
70,349
$
28,415
$
(2,290) $
26,125
$
15,933
$
2,840
$
18,773
$
13,497
$
(6,833) $
6,664
$
28,015
$
(1,260) $
26,755
$
59,304
$
(8,485) $
50,819
—
—
—
604
—
604
(8,319)
—
(8,319)
$
13,497
$
(6,833) $
6,664
$
28,619
$
(1,260) $
27,359
$
50,985
$
(8,485) $
42,500
$
86,103
$
(9,090) $
77,013
$
57,034
$
(3,550) $
53,484
$
66,918
$
(5,645) $
61,273
The domestic and foreign components of income before taxes are as follows:
2019
Reciprocal
Exchanges
NGHC
Total
NGHC
2018
Reciprocal
Exchanges
Total
NGHC
Year Ended December 31,
Domestic
Foreign
$ 358,079
$ (29,729) $ 328,350
$ 244,463
$ (43,380) $ 201,083
$ 221,833
76,093
—
76,093
19,925
—
19,925
(49,070)
Income (loss)
$ 434,172
$ (29,729) $ 404,443
$ 264,388
$ (43,380) $ 221,008
$ 172,763
2017
Reciprocal
Exchanges
Total
$
$
(9,282) $ 212,551
—
(49,070)
(9,282) $ 163,481
The Tax Cuts and Jobs Act was enacted on December 22, 2017 (the “TCJA”). The TCJA reduced the U.S. federal
corporate tax rate from 35% to 21%, and enacted other changes to the tax code impacting the Company and the overall
insurance industry.
The TCJA included provisions for Global Intangible Low-Taxed Income (“GILTI”), which imposes a minimum
tax on global intangible low-tax income, defined as the excess income of foreign subsidiaries over a 10 percent rate of
routine return on tangible business assets, and for Base Erosion and Anti-Abuse tax (“BEAT”) which imposes tax on
certain base eroding payments to affiliated foreign companies. Consistent with accounting guidance, the Company
treats both GILTI and BEAT as an in period tax charges when incurred in future periods for which no deferred taxes
need be provided. The Company analyzed the impact of both GILTI and BEAT on its operations for the period and
determined that for the year ended December 31, 2019, the Company was subject to GILTI but was not subject to the
BEAT.
F-56
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 asset or liability are presented below based upon the 2019 enacted rate of 21%.
2019
Reciprocal
Exchanges
NGHC
December 31,
Total
NGHC
2018
Reciprocal
Exchanges
Total
Deferred tax assets:
Accrued expenses
$
3,178
$
683
$
3,861
$
6,481
$
— $
Unearned premiums and other revenue
Bad debt
Loss reserve discount
64,155
4,876
10,355
5,146
114
1,042
69,301
4,990
11,397
Net operating loss carryforwards
102,535
13,962
116,497
4,128
222
767
11,403
—
1,236
805
18,561
(6,628)
11,933
4,201
918
—
—
12,355
—
255
6,481
61,701
4,243
10,669
98,860
—
11,249
15,327
208,530
(60,344)
148,186
51,616
43,182
3,007
18,920
12,355
—
1,345
57,573
4,021
9,902
87,457
—
10,013
14,522
189,969
(53,716)
136,253
47,415
42,264
3,007
18,920
—
—
1,090
112,696
2,081
—
9,740
196,920
(65,257)
131,663
49,828
36,495
4,204
28,922
—
19,870
11,671
150,990
—
—
4,882
25,829
(6,523)
19,306
4,894
700
—
—
13,828
1,062
81
20,565
2,081
—
14,622
222,749
(71,780)
150,969
54,722
37,195
4,204
28,922
13,828
20,932
11,752
171,555
Surplus note interest
Unrealized capital losses
Other
Gross deferred tax assets
Less: Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Deferred acquisition costs
Intangible assets
Goodwill
Property and equipment
Surplus note interest
Unrealized capital gains
Other
Gross deferred tax liabilities
Deferred tax asset
Deferred tax liability
$
$
— $
— $
— $
23,557
$
— $
23,557
(19,327) $
(1,259) $
(20,586) $
— $
(5,796) $
(5,796)
17,729
130,425
Excluding the Reciprocal Exchanges, there were $65,257 and $53,716 of deferred tax asset valuation allowances
as of December 31, 2019 and 2018, respectively. In assessing the reliability of gross deferred tax assets, management
considers whether it is more likely than not that some portion or all of the gross 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 not generate sufficient taxable income to realize all of the deferred tax assets related to the Net Operating
Loss (“NOL”) from foreign operations within a reasonable time period. For the year ended December 31, 2019, the
Company recorded a change in valuation allowance of $11,541 against these NOLs.
For the Reciprocal Exchanges, the Company had a partial valuation allowance against the net deferred tax assets
as of December 31, 2019 and 2018, respectively, and no tax benefit from consolidated pre-tax losses generated for the
years ended December 31, 2019 and 2018, was recognized. For the year ended December 31, 2019, New Jersey Skylands
Insurance Association (“NJSIA”), has negative evidence in the form of a multi-year history of net operating losses for
tax purposes that supported the determination that the realized net deferred tax asset should have a full valuation
allowance recorded against it. Further, NJSIA did not have sufficient existing taxable temporary differences that could
be considered as a source of taxable income to provide assurance of the realization of their deferred tax asset.
Excluding the Reciprocal Exchanges, the Company had U.S. federal NOLs of $67,406, $58,082 and $64,795
available for tax purposes for the years ended December 31, 2019, 2018 and 2017, respectively. The NOLs expire
between December 31, 2029 and December 31, 2037.
F-57
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The Reciprocal Exchanges had NOLs of $66,484, $54,300 and $18,592 available for the years ended December 31,
2019, 2018 and 2017, respectively. The NOLs expire between December 31, 2020 and December 31, 2039.
The Company’s income tax expense (benefit) differs from the statutory U.S. federal amount computed by applying
the federal income tax rate of 21% for the years ended December 31, 2019 and 2018, and 35% for the year ended
December 31, 2017. The reasons for such differences are as follows:
Income (loss) before provision for income taxes $
434,172
Tax rate
21.0%
NGHC
Tax Rate
Year Ended December 31, 2019
Reciprocal
Exchanges
$
(29,729)
21.0%
Tax Rate
Total
Tax Rate
$
404,443
21.0%
Computed “expected” tax expense
$
91,176
21.0% $
(6,243)
21.0% $
84,933
21.0%
Tax effects resulting from:
Tax-exempt interest
Effect of foreign operations
State taxes
Change in valuation allowance
Benefits of operating loss carryforwards
Other permanent items
(810)
(1,192)
(2,357)
11,541
(11,541)
(714)
(0.2)
(0.3)
(0.5)
2.7
(2.7)
(0.2)
(28)
—
210
(105)
—
(2,924)
0.1
—
(0.7)
0.4
—
9.8
(838)
(1,192)
(2,147)
11,436
(11,541)
(3,638)
(0.2)
(0.3)
(0.5)
2.8
(2.9)
(0.9)
Provision (benefit) for income taxes
$
86,103
19.8% $
(9,090)
30.6% $
77,013
19.0%
Income (loss) before provision for income taxes $
264,388
Tax rate
21.0%
NGHC
Tax Rate
Year Ended December 31, 2018
Reciprocal
Exchanges
$
(43,380)
21.0%
Tax Rate
Total
Tax Rate
$
221,008
21.0%
Computed “expected” tax expense
$
55,521
21.0% $
(9,110)
21.0% $
46,411
21.0%
Tax effects resulting from:
Tax-exempt interest
Effect of foreign operations
State taxes
Change in valuation allowance
Benefits of operating loss carryforwards
Effects of TCJA
Other permanent items
(910)
2,807
4,578
53,716
(53,716)
(951)
(4,011)
(0.3)
1.1
1.7
20.3
(20.3)
(0.4)
(1.5)
(30)
—
—
1,218
—
(366)
4,738
0.1
—
—
(2.8)
—
0.8
(10.9)
(940)
2,807
4,578
54,934
(53,716)
(1,317)
727
(0.4)
1.3
2.1
24.9
(24.3)
(0.6)
0.2
Provision (benefit) for income taxes
$
57,034
21.6% $
(3,550)
8.2% $
53,484
24.2%
F-58
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Income before provision for income taxes
$
172,763
Tax rate
35.0%
NGHC
Tax Rate
Year Ended December 31, 2017
Reciprocal
Exchanges
$
(9,282)
35.0%
Tax Rate
Total
Tax Rate
$
163,481
35.0%
Computed “expected” tax expense
$
60,467
35.0% $
(3,249)
35.0% $
57,218
35.0%
Tax effects resulting from:
Tax-exempt interest
Effect of foreign operations
Goodwill impairment
Statutory equalization reserves
Change in valuation allowance
Effects of TCJA
Other permanent items
(2,634)
(4,940)
1,709
(8,319)
—
25,783
(5,148)
(1.5)
(2.9)
1.0
(4.8)
—
14.9
(3.0)
(110)
—
—
—
(1,725)
(5,194)
4,633
1.2
—
—
—
18.6
56.0
(50.0)
(2,744)
(4,940)
1,709
(8,319)
(1,725)
20,589
(515)
(1.7)
(3.0)
1.0
(5.1)
(1.1)
12.6
(0.2)
Provision (benefit) for income taxes
$
66,918
38.7% $
(5,645)
60.8% $
61,273
37.5%
As permitted by ASC 740, “Income Taxes,” the Company recognizes interest and penalties, if any, related to
unrecognized tax positions in its income tax provision. The Company has not recorded an unrecognized tax position
and has not recorded any related interest and penalties for any of the years ended December 31, 2019, 2018 and 2017.
All tax liabilities are payable to the Internal Revenue Service (“IRS”) and various state and local taxing agencies.
The Company’s subsidiaries are not currently under audit by the IRS, but remain open to audit years for the tax year
2016 and thereafter for federal tax purposes. For state and local tax purposes, the Company is open to audit for tax
years ended December 31, 2014 forward, depending on jurisdiction.
F-59
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
11. Debt
The following table represents the Company’s debt:
Fixed-rate:
6.75% Notes
7.625% Notes
Floating-rate:
Subordinated Debentures I (1)
Subordinated Debentures II (2)
2016 Credit Agreement (3)
2019 Credit Agreement (4)
Finance lease liabilities
Other
Unamortized debt issuance costs and
unamortized discount
Interest Rate
Maturity
2019
2018
December 31,
6.75%
7.625%
LIBOR + 3.40%
LIBOR + 4.25%
LIBOR + 2.00%
LIBOR + 1.75%
2024
2055
2035
2037
—
2023
Various
3.5%
Various
Various
$
350,000
$
100,000
41,238
30,930
—
140,000
20,477
9,342
350,000
100,000
41,238
30,930
160,000
—
14,824
15,522
(5,981)
686,006
$
(6,719)
705,795
Total carrying amount of debt
(1) Interest rate was 5.29% and 6.19%, as of December 31, 2019 and 2018, respectively.
(2) Interest rate was 6.14% and 7.04%, as of December 31, 2019 and 2018, respectively.
(3) Weighted-average interest rate was 4.58% as of December 31, 2018.
(4) Weighted-average interest rate was 3.59% as of December 31, 2019.
$
The following table presents the Company’s interest expense:
6.75% Notes
7.625% Notes
Subordinated Debentures
2016 Credit Agreement
2019 Credit Agreement
Year Ended December 31,
Interest Payment
Frequency
2019
2018
2017
Semiannually
$
23,625
$
23,625
$
23,688
Quarterly
Quarterly
Quarterly
Quarterly
7,625
4,536
1,211
5,340
7,625
4,346
7,491
—
7,454
3,768
4,229
—
Finance lease liabilities
Other(1)
Total interest expense
47,086
(1) Includes interest for other liabilities, interest credited on funds held balances and accretion of debt issuance costs.
Various
Various
51,425
51,543
1,176
7,717
8,030
7,053
621
894
$
$
$
Notes
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.
F-60
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The 7.625% Notes are the Company’s subordinated unsecured obligations and rank (i) senior in right of payment
to any future junior subordinated debt, (ii) equal in right of payment with any unsecured, subordinated debt that the
Company incurs in the future that ranks equally with the 7.625% Notes, and (iii) subordinate in right of payment to
any of the Company’s existing and future senior debt, including amounts outstanding under the Company’s revolving
credit facility, the Company’s 6.75% notes and certain of the Company’s other obligations. In addition, the 7.625%
Notes are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of the
Company’s subsidiaries. The 7.625% Notes mature on September 15, 2055, unless earlier redeemed or purchased by
the Company.
Subordinated Debentures
The Company, through a subsidiary, is the issuer of junior subordinated debentures (the “Subordinated
Debentures”) relating to the issuance of trust preferred securities. The Subordinated Debentures require interest-only
payments to be made on a quarterly basis, with principal due at maturity. The Subordinated Debentures’ principal
amounts of $41,238 and $30,930 mature in 2035 and 2037, respectively, and bear interest at an annual rate equal to
LIBOR plus 3.40% and LIBOR plus 4.25%, respectively. The Subordinated Debentures are redeemable by the
Company at a redemption price equal to 100% of their principal amount.
Credit Agreement
On February 25, 2019, the Company refinanced its existing credit agreement and entered into a new credit
agreement (the “2019 Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, KeyBank
National Association and Fifth Third Bank, as Co-Syndication Agents, and the various lending institutions party thereto.
The 2019 Credit Agreement is currently a $340,000 base revolving credit facility with a letter of credit sublimit of
$150,000 and an expansion feature of up to $50,000. Borrowings under the 2019 Credit Agreement bear interest at
either the Alternate Base Rate (“ABR”) or the LIBO rate. ABR borrowings under the 2019 Credit Agreement will bear
interest at 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 LIBO rate for a one-month interest period on such day plus 1 percent. Eurodollar
borrowings under the 2019 Credit Agreement will bear interest at the adjusted LIBO rate plus the Eurodollar spread
for the interest period in effect. Fees payable by the Company under the 2019 Credit Agreement include a letter of
credit participation fee, 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 0.175% to 0.25% based on the Company’s consolidated
leverage ratio; as of December 31, 2019, the rate was 0.225%). The 2019 Credit Agreement has a maturity date of
February 25, 2023.
Maturities of the Company’s debt for the years subsequent to December 31, 2019 are as follows:
6.75% Notes
7.625% Notes
Subordinated Debentures I
Subordinated Debentures II
2019 Credit Agreement
Finance lease liabilities
Other
2020
2021
2022
2023
2024
Thereafter
Total
$
— $
— $
— $
— $ 350,000
$
— $ 350,000
—
—
—
—
6,653
6,399
—
—
—
—
5,278
2,943
—
—
—
—
2,997
—
—
—
—
140,000
1,750
—
—
—
—
—
1,242
—
100,000
100,000
41,238
30,930
41,238
30,930
—
140,000
2,557
—
20,477
9,342
Total principal amount of debt
$
13,052
$
8,221
$
2,997
$ 141,750
$ 351,242
$ 174,725
$ 691,987
Unamortized debt issuance costs and
unamortized discount
Carrying amount of debt
(5,981)
$ 686,006
F-61
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Covenants and Compliance
The indenture relating to the 6.75% Notes and 7.625% Notes contains customary covenants, such as reporting of
annual and quarterly financial results, and restrictions on certain mergers and consolidations, as well as 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 2019 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 risk-based capital and a minimum rating.
The 2019 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 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 2019 Credit Agreement, declare the
Company’s obligations under the 2019 Credit Agreement to become immediately due and payable and/or exercise any
and all remedies and other rights under the 2019 Credit Agreement.
As of December 31, 2019, the Company was in compliance with the covenants contained in the Company’s debt
agreements.
12. Leases
The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and operating
leases liabilities are recognized based on the present value of the future minimum lease payments over the lease term
at commencement date. The Company uses an incremental borrowing rate at commencement date in determining the
present value of future payments. The Company has lease agreements with lease and non-lease components, which are
generally accounted for separately. The Company elected the package of practical expedients permitted under the
transition guidance within the new standard. Application of the package of practical expedients allowed the Company
not to reassess a) whether any expired or existing contracts contain leases, b) existing lease classification, c) initial
direct cost for existing leases, and d) land easements that existed before the Company's adoption of the new standard.
The Company leases certain retail stores, office space, land, and equipment. Leases with an initial term of 12
months or less are not recorded on the balance sheets; the Company recognizes lease expense for these leases over the
lease term.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to
five years or more. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include
options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the
expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Certain of the Company's lease agreements include rental payments adjusted periodically for inflation. The
Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company rents or subleases certain real estate to third parties.
F-62
$
$
$
$
9,068
7,660
4,276
21,004
119,276
658
119,934
140,938
20,477
124,960
145,437
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Supplemental balance sheet information related to leases is as follow:
Leases
Classification
December 31, 2019
Assets:
Finance
Finance
Finance
Buildings and improvements
Vehicle
Hardware, software and other equipment
Total finance leases
Finance lease right-of-use assets
Operating
Operating
Buildings
Hardware, software and other equipment
Total operating leases
Operating lease right-of-use assets
Total lease right-of-use assets
Property and equipment
Liabilities:
Finance
Operating
Total lease liabilities
Debt
Other liabilities
The components of lease cost are as follows:
Lease Cost
Finance lease cost:
Classification
Year Ended
December 31, 2019
Amortization of leased assets
General and administrative expenses
Interest on lease liabilities
Interest expense
Finance lease cost
Operating lease cost
General and administrative expenses
$
$
$
7,859
1,176
9,035
32,901
Maturities of the Company’s lease liabilities for the years subsequent to December 31, 2019 are as follows:
Operating Leases
Finance Leases
Total
28,913
$
7,547
$
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
$
$
$
5,817
3,367
2,010
1,428
2,761
36,460
32,062
25,466
20,551
17,744
37,061
22,930
$
169,344
(2,453)
20,477
26,245
22,099
18,541
16,316
34,300
146,414
(21,454)
124,960
$
$
F-63
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Supplemental information related to term and discount rate are as follow:
Leases
Classification
December 31, 2019
Weighted-average remaining lease term:
Finance
Finance
Finance
Operating
Weighted-average discount rate:
Finance
Finance
Finance
Operating
Buildings and improvements
Vehicle
Hardware, software and other equipment
Operating lease right-of-use assets
Buildings and improvements
Vehicle
Hardware, software and other equipment
Operating lease right-of-use assets
7.2 years
2.8 years
1.6 years
6.0 years
5.9%
4.1%
3.9%
5.3%
Supplemental cash flow information related to leases is as follow:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases
Financing cash flows from finance leases
Operating cash flows from operating leases
Leased assets obtained in exchange for new finance lease liabilities
Leased assets obtained in exchange for new operating lease liabilities
13. Related Party Transactions
Year Ended
December 31, 2019
$
990
5,664
23,105
11,317
35,456
The significant shareholder of the Company has an ownership interest in AmTrust, Maiden Holdings Ltd.
(“Maiden”) and ACP Re. The Company entered in the following transactions with these related entities:
NGHC Quota Share Agreement
The Company participated in a quota share reinsurance treaty with ACP Re, Maiden and AmTrust, whereby the
Company ceded 50% of the total net earned premiums, net of a ceding commission, and net incurred losses and LAE
on business with effective dates after March 1, 2010 (“NGHC Quota Share”) through August 2013, when the Company
terminated the NGHC Quota Share agreement on a run-off basis. In October 2019, the NGHC Quota Share Agreement
was commuted based on the then-current reserves and no gain or loss was recorded. The net reinsurance recoverable
was $7,425 at December 31, 2018. Ceded losses and LAE under the agreement was $624, $2,157 and $3,356 during
the years ended December 31, 2019, 2018 and 2017, respectively.
Equity Method Investments
The Company has an ownership interest in an LSC Entity, limited liability companies and limited partnerships
with related parties. See Note 3, “Investments - Equity Method Investments - Related Parties” for additional information.
F-64
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Agreements with ACP Re
Credit Agreement
The Company is party to a credit agreement (the “ACP Re Credit Agreement”) by and among AmTrust, as
administrative agent, ACP Re Holdings, LLC, a Delaware limited liability company owned by a related party trust, the
Michael Karfunkel Family 2005 Trust (the “Trust”), as borrower, and AmTrust and the Company, as lenders of $250,000
($125,000 each lender). The amounts borrowed are secured by equity interests, cash and, other investments held by
ACP Re Holdings, LLC in an amount equal to 115% of the outstanding loan balance. The maturity date of the loan is
September 20, 2036. The interest rate on the outstanding principal balance is a fixed annual rate of 3.7%, provided that
up to 1.2% thereof may be paid in kind. The Trust is required to cause ACP Re Holdings, LLC to maintain assets having
a value greater than 115% of the outstanding loan balance, and if there is a shortfall, the Trust will make a contribution
to ACP Re Holdings, LLC of assets having a market value of at least the shortfall (the “Maintenance Covenant”).
Commencing on September 20, 2026, and for each year thereafter, two percent of the then outstanding principal balance
of the loan (inclusive of any amounts previously paid in kind) is due and payable. A change of control of greater than
50% and an uncured breach of the Maintenance Covenant are included as events of default.
As of December 31, 2019 and 2018 the Company had a receivable for the principal amount related to the ACP
Re Credit Agreement of $129,229 and $127,692, respectively. The Company recorded interest income of $4,767, $4,711
and $4,654 for the years ended December 31, 2019, 2018 and 2017, respectively, under the ACP Re Credit Agreement.
Management determined no impairment reserve was needed for the carrying value of the loan at December 31, 2019
and 2018 based on the collateral levels maintained.
Other Related Party Transactions
Lease Agreements
The Company leases office space at 59 Maiden Lane in New York, New York from 59 Maiden Lane Associates
LLC, an entity that is wholly-owned by the Karfunkel family. The lease term is through 2022. The Company paid $830,
$830 and $783 in rent for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company leases office space at 30 North LaSalle Street, Chicago, Illinois from 30 North LaSalle Street
Partners LLC, an entity that is wholly-owned by the Karfunkel family. The lease term is through 2025. The Company
paid $309, $302 and $297 in rent for the years ended December 31, 2019, 2018 and 2017, respectively.
F-65
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
14. Commitments and Contingencies
Lease Commitments
The Company leases certain retail stores, office space, land, and equipment. See Note 12, “Leases” for additional
information.
Employment Agreements
The Company has entered into employment agreements with certain individuals. The employment agreements
provide for bonuses, executive benefits and severance payments under certain circumstances. Amounts payable under
these agreements for the next five years are as follows:
December 31,
2020
2021
2022
2023
2024
Total
Litigation
$
$
5,560
2,601
2,420
1,285
773
12,639
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.
On July 25, 2019, the City of North Miami Beach Police Officers’ and Firefighters’ Retirement Plan filed a
complaint in the U.S. District Court for the Central District of California against the Company and certain of its officers.
The plaintiff purports to represent a class of individuals and entities who purchased or otherwise acquired shares of the
Company’s common stock between August 5, 2015 and August 9, 2017. The complaint asserts claims under Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder based on allegedly false and misleading
statements made by the Company in its SEC filings in relationship to the Company’s involvement in the historical and
no longer existing Wells Fargo collateral protection insurance program. The complaint seeks damages in an amount to
be proven at trial. On November 19, 2019, the U.S. District Court for the Central District of California granted the
Company’s Motion to Transfer the case to the Southern District of New York. On January 10, 2020, lead plaintiffs
Town of Davie Police Officers Retirement System and Massachusetts Laborers’ Pension Fund filed an amended
Complaint alleging similar claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder on behalf of a purported class of individuals and entities who purchased or otherwise acquired shares of the
Company’s common stock between July 15, 2015 and August 9, 2017. Management believes that the claims set forth
in the amended complaint are unfounded and without merit and intend to vigorously contest them. The Company note,
however, that in light of the inherent uncertainty in legal proceedings, the Company can give no assurance as to the
ultimate resolution of the matter, and an estimate of the possible loss or range of loss, if any, cannot be made at this
time.
F-66
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
15. Stockholders’ Equity
Preferred Stock
In 2014, the Company completed a public offering of 2,200,000 shares of 7.50% Non-Cumulative Preferred Stock,
Series A, $0.01 par value per share (the “Series A Preferred Stock”). Dividends will be payable on the liquidation
preference amount of $25 per share, on a non-cumulative basis, when, as and if declared by the Board of Directors,
quarterly in arrears on the 15th day of January, April, July and October of each year 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 Series A Preferred Stock is not redeemable prior to
July 15, 2019. After that date, the Company may redeem at its option, in whole or in part, the Series A Preferred Stock
at a redemption price of $25 per share, plus any declared and unpaid dividends for prior dividend periods and accrued
but unpaid dividends (whether or not declared) for the then current dividend period.
In 2015, the Company completed a public offering of 6,600,000 of its depositary shares, each representing a
1/40th interest in a share of its 7.50% Non-Cumulative Preferred Stock, Series B, $0.01 par value per share (the “Series
B Preferred Stock”), with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Each
depositary share entitles the holder to a proportional fractional interest in all rights and preferences of the Series B
Preferred Stock represented thereby (including any dividend, liquidation, redemption and voting rights). Dividends on
the Series B Preferred Stock represented by the depositary shares will be payable on the liquidation preference amount,
on a non-cumulative basis, when, as and if declared by the Company’s Board of Directors, at a rate of 7.50% per annum,
quarterly in arrears, on January 15, April 15, July 15, and October 15 of each year. Dividends on the Series B Preferred
Stock are not cumulative. Accordingly, in the event dividends are not declared on the Series B 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 B Preferred Stock
are declared for any future dividend payment. The Series B Preferred Stock represented by the depositary shares is not
redeemable prior to April 15, 2020. After that date, the Company may redeem at its option, in whole or in part, the
Series B Preferred Stock represented by the depositary shares at a redemption price of $1,000 per share (equivalent to
$25 per depositary share) plus any declared and unpaid dividends for prior dividend periods and accrued but unpaid
dividends (whether or not declared) for the then current dividend period. A total of 6,600,000 depositary shares
(equivalent to 165,000 shares of Series B Preferred Stock) were issued.
In 2016, the Company completed a public offering of 8,000,000 of its depositary shares, each representing a
1/40th interest in a share of its 7.50% Non-Cumulative Preferred Stock, Series C, $0.01 par value per share (the “Series
C Preferred Stock”), with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Each
depositary share entitles the holder to a proportional fractional interest in all rights and preferences of the Series C
Preferred Stock represented thereby (including any dividend, liquidation, redemption and voting rights). Dividends on
the Series C Preferred Stock represented by the depositary shares will be payable on the liquidation preference amount,
on a non-cumulative basis, when, as and if declared by the Company’s Board of Directors, at a rate of 7.50% per annum,
quarterly in arrears, on January 15, April 15, July 15, and October 15 of each year. Dividends on the Series C Preferred
Stock are not cumulative. Accordingly, in the event dividends are not declared on the Series C 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 C Preferred Stock
are declared for any future dividend payment. The Series C Preferred Stock represented by the depositary shares is not
redeemable prior to July 15, 2021. After that date, the Company may redeem at its option, in whole or in part, the Series
C Preferred Stock represented by the depositary shares at a redemption price of $1,000 per share (equivalent to $25
per depositary share) plus any declared and unpaid dividends for prior dividend periods and accrued but unpaid dividends
(whether or not declared) for the then current dividend period. A total of 8,000,000 depositary shares (equivalent to
200,000 shares of Series C Preferred Stock) were issued.
F-67
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
In 2018, the Company completed a private placement of 120 shares of a new series of preferred stock, par value
$0.01 per share, designated as its Fixed/Floating Rate Non-Cumulative Convertible Preferred Stock, Series D (the
“Series D Preferred Stock”), with a liquidation preference of $250,000 per share, for aggregate proceeds of $30,000.
Holders of Series D Preferred Stock will be entitled to receive, when, as and if declared by the Company’s board of
directors, non-cumulative cash dividends per share at the per annum rate of 7.00% prior to July 15, 2023, and thereafter
at the annual rate of six-month LIBOR plus 5.4941%. Dividends will be payable semi-annually in arrears on the 15th
day of January and July of each year, commencing on January 15, 2019. On or after July 15, 2023 (or in the event of
a fundamental change of the Company, at any time), the Series D Preferred Stock may be converted at the holder’s
option into shares of the Company’s common stock at a conversion rate of 6,578.9474 shares of common stock for
each share of Series D Preferred Stock, subject to adjustment, which equates to an initial conversion price of $38 per
share. In lieu of converting any shares of Series D Preferred Stock, the Company may, at its option, redeem such shares
as described below.
On or after July 15, 2023 (or in the event of a fundamental change of the Company at any time), the Company
will have the right to redeem the Series D Preferred Stock in whole or from time to time in part at a cash redemption
price equal to the redemption amount specified in the Certificate of Designations governing the Series D Preferred
Stock plus the sum of declared and unpaid dividends for prior dividend periods, if any, and accrued but unpaid dividends
for the then-current dividend period (whether or not declared) to the redemption date. In addition, if the Company fails
to pay a declared dividend on the Series D Preferred Stock when due and payable, a holder of the Series D Preferred
Stock may require the Company to redeem its Series D Preferred Stock in whole or in part. In the case of any redemption,
the redemption amount will equal the liquidation preference of the shares of Series D Preferred Stock to be redeemed
unless (i) the accumulated earned premium produced under the business collaboration agreement entered into between
the Company and the purchaser of the Series D Preferred Stock equals or exceeds $50,000 at the time of redemption
and (ii) the trading price of the Company’s common stock equals or exceeds the then-applicable conversion price of
the Series D Preferred Stock. In such case, the redemption amount will be a cash amount equal to the conversion value
of the shares issuable upon conversion of the Series D Preferred Stock. The Series D Preferred Stock ranks senior to
the common stock and on parity with the Company’s Series A, B and C preferred stock and all other parity classes of
preferred stock that may be issued by the Company in the future.
A summary description of the terms of these series of preferred stock is presented in the table below:
Dividend rate
per year
Shares of preferred
stock issued
Depositary shares
issued
Liquidation
preference (Per
Share)
Aggregate
liquidation
preference
2,200,000
165,000
200,000
— $
6,600,000
8,000,000
$
$
25
1,000
1,000
$
$
$
55,000
165,000
200,000
Series
A
B
C
7.50%
7.50%
7.50%
Fixed/ Floating(1)
D
30,000
(1) Dividend rate is fixed at 7.00% prior to July 15, 2023 and floating at six-month LIBOR plus 5.4941% thereafter.
250,000
— $
120
$
F-68
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Common Stock and Preferred Stock Dividends
Dividends are payable on the Company’s common and preferred stock only when, as and if declared by the
Company’s Board of Directors in its discretion, from funds legally available for this purpose. The following tables
present the class of stock, declaration date and dividends paid per share in 2019, 2018 and 2017:
Class of Stock
Common stock
Common stock
Common stock
Common stock
Preferred stock Series A
Preferred stock Series A
Preferred stock Series A
Preferred stock Series A
Preferred stock Series B and Series C
Preferred stock Series B and Series C
Preferred stock Series B and Series C
Preferred stock Series B and Series C
Preferred stock Series D
Preferred stock Series D
Class of Stock
Common stock
Common stock
Common stock
Common stock
Preferred stock Series A
Preferred stock Series A
Preferred stock Series A
Preferred stock Series A
Preferred stock Series B and Series C
Preferred stock Series B and Series C
Preferred stock Series B and Series C
Preferred stock Series B and Series C
Preferred stock Series D
Declaration Date
October 30, 2019
July 29, 2019
May 6, 2019
February 25, 2019
October 30, 2019
July 29, 2019
May 6, 2019
February 25, 2019
October 30, 2019
July 29, 2019
May 6, 2019
February 25, 2019
October 30, 2019
May 6, 2019
Declaration Date
October 29, 2018
August 6, 2018
May 7, 2018
February 26, 2018
October 29, 2018
August 6, 2018
May 7, 2018
February 26, 2018
October 29, 2018
August 6, 2018
May 7, 2018
February 26, 2018
October 29, 2018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Dividend
Per Share
Dividend Per
Depositary Share
0.05
0.05
0.04
0.04
0.46875
0.46875
0.46875
0.46875
18.75
18.75
18.75
18.75
$
$
$
$
8,750.00
8,750.00
0.46875
0.46875
0.46875
0.46875
Dividend
Per Share
Dividend Per
Depositary Share
0.04
0.04
0.04
0.04
0.46875
0.46875
0.46875
0.46875
18.75
18.75
18.75
18.75
$
$
$
$
8,263.89
0.46875
0.46875
0.46875
0.46875
F-69
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Class of Stock
Common stock
Common stock
Common stock
Common stock
Preferred stock Series A
Preferred stock Series A
Preferred stock Series A
Preferred stock Series A
Preferred stock Series B and Series C
Preferred stock Series B and Series C
Preferred stock Series B and Series C
Preferred stock Series B and Series C
16. Benefits Plan
Declaration Date
November 6, 2017
August 7, 2017
May 9, 2017
February 24, 2017
November 6, 2017
August 7, 2017
May 9, 2017
February 24, 2017
November 6, 2017
August 7, 2017
May 9, 2017
February 24, 2017
$
$
$
$
$
$
$
$
$
$
$
$
Dividend
Per Share
Dividend Per
Depositary Share
0.04
0.04
0.04
0.04
0.46875
0.46875
0.46875
0.46875
18.75
18.75
18.75
18.75
$
$
$
$
0.46875
0.46875
0.46875
0.46875
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 $10,212, $9,292 and $8,049 for the
years ended December 31, 2019, 2018 and 2017, respectively.
F-70
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
17. Statutory Financial Data, Risk-Based Capital and Dividend Restrictions
The Company’s insurance subsidiaries file financial statements in accordance with statutory accounting practices
(“SAP”) prescribed or permitted by domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance with GAAP vary between domestic and
foreign jurisdictions. The principal differences relate to: (1) acquisition costs incurred in connection with acquiring
new business which are charged to expense under SAP but under GAAP are deferred and amortized as the related
premiums are earned; (2) ceding commission revenues are earned when ceded premiums are written except for ceding
commission revenues in excess of anticipated acquisition costs, which are deferred and amortized as ceded premiums
are earned. GAAP requires that all ceding commission revenues be earned as the underlying ceded premiums are earned
over the term of the reinsurance agreements; (3) certain assets including certain receivables, a portion of the net deferred
tax asset, prepaid expenses and furniture and equipment are not admitted; (4) limitation on net deferred tax assets
created by the tax effects of temporary differences; (5) unpaid losses and loss expense, and unearned premium reserves
are presented gross of reinsurance with a corresponding asset recorded; and (6) debt securities portfolios that are carried
at fair value and changes in fair value are reflected directly in unassigned surplus, net of related deferred taxes.
Risk-Based Capital
Insurance companies in the U.S. are subject to certain Risk-Based Capital (“RBC”) requirements as specified by
the National Association of Insurance Commissioners (“NAIC”). Under such requirements, the amount of statutory
capital and surplus maintained by an insurance company is to be determined on asset risk, underwriting risk and other
risk factors. As of December 31, 2019 and 2018, the statutory capital and surplus of all of the Company’s insurance
subsidiaries domiciled in the U.S. exceeded the RBC requirements.
National General Re Ltd., the Company’s foreign reinsurance subsidiary, is a Class 3A insurer. As a result, the
revised regulations require that the available statutory capital and surplus be equal to or exceed the value of both its
Minimum Margin of Solvency (“MMS”) and the Enhanced Capital Requirement (“ECR”). The capital and solvency
return will be filed with the Bermuda monetary authority on April 30, 2020 and the ECR based on the economic balance
sheet will not be available until this filing is completed. The capital and surplus requirement is based on the statutory
capital MMS prior to the ECR and the 25% of ECR criteria being calculated. The required MMS on this basis was
$255,393 and $227,544 as of December 31, 2019 and 2018, respectively.
Statutory Financial Data
During 2019, the Company acquired one domestic property and casualty insurance company and sold one foreign
life insurance company. The following tables present the statutory capital and surplus, and net income under SAP:
Statutory capital and surplus
Property and Casualty Insurance Companies:
Domestic
Foreign
Total
Life Insurance Companies:
Domestic
December 31,
2019
2018
$
$
$
1,547,091
755,545
2,302,636
53,334
$
$
$
1,305,640
583,872
1,889,512
40,813
F-71
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Statutory net income (loss)
Property and Casualty Insurance Companies:
Domestic
Foreign
Total
Life Insurance Companies:
Domestic
Reciprocal Exchanges
Year Ended December 31,
2019
2018
2017
$
$
$
156,404
102,584
258,988
7,232
$
$
$
16,737
64,810
81,547
9,827
$
$
$
194,677
9,275
203,952
8,987
The Reciprocal Exchanges prepare their statutory basis financial statements under SAP. As of December 31, 2019
and 2018, the Reciprocal Exchanges had combined statutory capital and surplus of $87,421 and $103,582, respectively.
For the years ended December 31, 2019, 2018 and 2017, the Reciprocal Exchanges had combined SAP net income
(loss) of $(22,237), $(24,194) and $1,411, respectively. The Reciprocal Exchanges are required to maintain minimum
capital and surplus in accordance with regulatory requirements. As of December 31, 2019 and 2018, 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.
Due to the finalization of the Company’s combined statutory filings, amounts for 2018 and 2017 have changed
compared to the previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018.
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 $402,970 and
$287,896 as of December 31, 2019 and 2018, respectively. During the years ended December 31, 2019, 2018 and 2017,
there were $7,000, $156,660 and $339,398 of dividends and return of capital paid by the Company’s insurance
subsidiaries to their parent company or the Company, respectively.
F-72
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
18. Stock-Based Compensation
Effective May 6, 2019, the Company’s stockholders approved the 2019 Omnibus Incentive Plan (the “2019 Plan”).
The 2019 Plan authorizes up to 2.5 million shares of the Company’s stock for awards of stock options, stock appreciation
rights, restricted stock, restricted stock units, performance share units, performance units, cash-based awards or other
stock-based awards. The number of shares of common stock for which awards may be issued may not exceed 2.5 million
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, recapitalization or similar transaction affecting the Company’s common stock. The
2019 Plan serves as a successor of the Company’s prior equity incentive plans. Outstanding awards under the prior
plans continue to be outstanding and subject to their terms and conditions. As of December 31, 2019, approximately
2.5 million shares of the Company’s common stock remained available for grants under the 2019 Plan.
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. RSUs vest over three or four years. RSUs are net share settled. Under the net share
settlement procedures, upon each settlement date, RSUs were withheld to cover the required withholding tax, which
is based on the value of the RSUs on the settlement date as determined by the closing price of the Company’s common
stock on the trading day immediately preceding the applicable settlement date. The remaining amounts are delivered
to the recipient as shares of the Company’s common stock. The amount remitted to the tax authorities for the employees’
tax obligation to the tax authorities is reflected as a financing activity in the consolidated statements of cash flows.
These shares withheld by the Company as a result of the net settlement of RSUs are no longer considered outstanding
on a diluted basis, thereby reducing the Company’s diluted shares used to calculate earnings per share.
Stock Options
A summary of the stock option awards granted under the prior plans is shown below:
Shares Subject to Options Outstanding
Year Ended December 31, 2019
Outstanding at beginning of year
Exercised
Number
of
Shares
Weighted-
Average
Exercise Price
3,184,352
$
(158,765)
9.53
3.76
Weighted-
Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value (1)
Outstanding and exercisable at end of year
(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option
awards and the closing price of the Company’s common stock of $22.10, as reported on the Nasdaq Global Market on
December 31, 2019.
3,025,587
37,122
3.15
9.83
$
$
No options were granted, forfeited or expired during the year ended December 31, 2019. The total intrinsic value
of the options exercised during the years ended December 31, 2019, 2018 and 2017 was $3,105, $5,011 and $1,782,
respectively. The total fair value of stock options vested for the years ended December 31, 2019, 2018 and 2017 was
$239, $783 and $501, respectively.
F-73
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Restricted Stock Units
A summary of the RSUs is shown below:
Year Ended December 31, 2019
Non-vested at beginning of year
Granted
Vested
Forfeited
Non-vested at end of year
RSUs
Number of RSUs
Weighted-Average
Grant Date Fair Value
938,795
$
538,741
(419,436)
(24,469)
1,033,631
$
22.28
25.42
22.07
23.29
23.98
The weighted-average grant-date fair value of RSUs for the years ended December 31, 2019, 2018 and 2017 was
$25.42, $21.36 and $24.06, respectively. The total fair value of the RSUs vested for the years ended December 31,
2019, 2018 and 2017 was $9,259, $7,068 and $3,661, respectively.
Stock-Based Compensation Expense
Stock-based compensation expense, included in general and administrative expenses, for all stock-based
compensation plans was $10,996, $9,020 and $8,324 for the years ended December 31, 2019, 2018 and 2017,
respectively.
As of December 31, 2019, the Company had approximately $16,205 of stock-based compensation expense related
to nonvested awards not yet recognized, all of which was related to RSUs. This stock-based compensation expense is
expected to be recognized over a weighted-average period of approximately 1.4 years.
F-74
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
19. Earnings Per Share
The following is a summary of the elements used in calculating basic and diluted earnings per common share:
Year Ended December 31,
2019
2018
2017
Numerator:
Net income attributable to NGHC
$
348,069
$
207,354
$
Preferred stock dividends - nonconvertible
Preferred stock dividends - convertible
Numerator for basic EPS
Effect of dilutive securities:
(31,500)
(2,100)
314,469
(31,500)
(992)
174,862
Preferred stock dividends - convertible
2,100
992
Numerator for diluted EPS - after assumed conversions
$
316,569
$
175,854
$
105,845
(31,500)
—
74,345
—
74,345
Denominator:
Denominator for basic EPS - weighted-average shares outstanding
113,199,501
107,659,813
106,588,402
Effect of dilutive securities:
Employee stock options
RSUs
Convertible preferred stock
Dilutive potential common shares
1,833,736
2,053,681
274,262
789,473
319,089
789,473
1,947,546
216,314
—
2,897,471
3,162,243
2,163,860
Denominator for diluted EPS - weighted-average shares outstanding
and assumed conversions
116,096,972
110,822,056
108,752,262
Basic EPS
Diluted EPS
$
$
2.78
2.73
$
$
1.62
1.59
$
$
0.70
0.68
F-75
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
20. 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 profits attributable to the performance of activities
within the segment separately from the results of the Company’s investment portfolio. Other operating expenses
allocated to the segments are called “General and administrative expenses” which are allocated on an actual basis except
corporate 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 premiums receivable, deferred
acquisition costs, reinsurance recoverable, prepaid reinsurance premiums, intangible assets and goodwill, while the
remaining assets are allocated to Corporate and Other.
The Property and Casualty segment, which includes the Reciprocal Exchanges and the management companies,
reports the management fees earned by the Company from the Reciprocal Exchanges for underwriting, investment
management and other services as service and fee income. The effects of these transactions between the Company and
the Reciprocal Exchanges are eliminated in consolidation to derive consolidated net income. However, the management
fee income is reported in net income attributable to NGHC and included in the basic and diluted earnings per share.
The following tables summarize the results of operations of the operating segments:
Underwriting revenues:
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income
Service and fee income
Total underwriting revenues
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Total underwriting expenses
Underwriting income
Net investment income
Net gain on investments
Other income
Interest expense
Provision for income taxes
Net loss attributable to noncontrolling interest
Year Ended December 31, 2019
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
$
4,814,463
$
768,617
$
— $
5,583,080
(1,250,448)
(108,011)
3,564,015
(108,992)
3,455,023
227,514
392,478
4,075,015
2,543,788
605,019
773,291
3,922,098
152,917
—
—
—
—
—
—
660,606
2,413
663,019
10,939
249,487
923,445
310,680
222,348
254,208
787,236
136,209
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,273
14,273
(14,273)
141,233
13,473
26,428
(51,544)
(77,013)
20,639
(1,358,459)
4,224,621
(106,579)
4,118,042
238,453
641,965
4,998,460
2,854,468
827,367
1,041,772
4,723,607
274,853
141,233
13,473
26,428
(51,544)
(77,013)
20,639
Net income attributable to NGHC
$
152,917
$
136,209
$
58,943
$
348,069
F-76
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Underwriting revenues:
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income
Service and fee income
Total underwriting revenues
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Total underwriting expenses
Underwriting income
Net investment income
Net loss on investments
Interest expense
Provision for income taxes
Net loss attributable to noncontrolling interest
Year Ended December 31, 2018
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
$
4,718,730
$
698,109
$
— $
5,416,839
(1,517,556)
3,201,174
(85,385)
3,115,789
217,694
375,603
3,709,086
2,340,881
550,540
726,238
3,617,659
91,427
—
—
—
—
—
(71,570)
626,539
(10,126)
616,413
7,003
185,980
809,396
321,345
184,726
201,808
707,879
101,517
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,000
10,000
(10,000)
119,034
(29,545)
(51,425)
(53,484)
39,830
(1,589,126)
3,827,713
(95,511)
3,732,202
224,697
561,583
4,518,482
2,662,226
735,266
938,046
4,335,538
182,944
119,034
(29,545)
(51,425)
(53,484)
39,830
Net income attributable to NGHC
$
91,427
$
101,517
$
14,410
$
207,354
F-77
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Underwriting revenues:
Gross premium written
Ceded premiums
Net premium written
Change in unearned premium
Net earned premium
Ceding commission income
Service and fee income
Total underwriting revenues
Underwriting expenses:
Loss and loss adjustment expense
Acquisition costs and other underwriting expenses
General and administrative expenses
Total underwriting expenses
Underwriting income
Net investment income
Net gain on investments
Other expense
Interest expense
Provision for income taxes
Net loss attributable to noncontrolling interest
Year Ended December 31, 2017
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
$
4,174,583
$
581,402
$
— $
4,755,985
(1,132,284)
3,042,299
78,594
3,120,893
115,443
348,313
3,584,649
2,307,619
517,550
741,499
3,566,668
17,981
—
—
—
—
—
—
(46,106)
535,296
(2,013)
533,283
1,013
154,614
688,910
318,463
154,879
171,497
644,839
44,071
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
101,950
46,763
(198)
(47,086)
(61,273)
3,637
(1,178,390)
3,577,595
76,581
3,654,176
116,456
502,927
4,273,559
2,626,082
672,429
912,996
4,211,507
62,052
101,950
46,763
(198)
(47,086)
(61,273)
3,637
Net income attributable to NGHC
$
17,981
$
44,071
$
43,793
$
105,845
The following tables summarize the financial position of the operating segments:
Property
and
Casualty
December 31, 2019
Accident
and
Health
Corporate
and
Other
Total
Premiums and other receivables, net
$
1,292,813
$
131,877
$
4,258
$
1,428,948
Deferred acquisition costs
Reinsurance recoverable
Prepaid reinsurance premiums
Intangible assets, net and Goodwill
Prepaid and other assets
Corporate and other assets
Total assets
239,293
1,377,284
575,712
436,724
56,960
—
24,230
17,024
35
108,427
32,852
—
—
—
—
4,830
263,523
1,394,308
575,747
545,151
94,642
—
5,454,215
5,454,215
$
3,978,786
$
314,445
$
5,463,303
$
9,756,534
F-78
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Property
and
Casualty
December 31, 2018
Accident
and
Health
Corporate
and
Other
Total
Premiums and other receivables, net
$
1,245,530
$
153,896
$
386
$
1,399,812
Deferred acquisition costs
Reinsurance recoverable
Prepaid reinsurance premiums
Intangible assets, net and Goodwill
Prepaid and other assets
Corporate and other assets
Total assets
226,188
1,585,008
665,660
443,163
20,941
—
25,220
26,730
14
116,957
22,472
—
—
—
—
—
111,545
4,795,570
251,408
1,611,738
665,674
560,120
154,958
4,795,570
$
4,186,490
$
345,289
$
4,907,501
$
9,439,280
The following table shows an analysis of the premiums by geographical location:
2019
Reciprocal
Exchanges
NGHC
Total
NGHC
2018
Reciprocal
Exchanges
Total
NGHC
2017
Reciprocal
Exchanges
Total
Year Ended December 31,
Gross premium
written - North
America
Gross premium
written -
Europe
$4,996,296
$ 447,447
$5,443,743
$4,817,658
$ 448,923
$5,266,581
$4,252,691
$ 383,773
$4,636,464
139,337
—
139,337
150,258
—
150,258
119,521
—
119,521
Total
$5,135,633
$ 447,447
$5,583,080
$4,967,916
$ 448,923
$5,416,839
$4,372,212
$ 383,773
$4,755,985
Net premium
written - North
America
Net premium
written -
Europe
$3,900,980
$ 234,472
$4,135,452
$3,523,060
$ 183,565
$3,706,625
$3,282,425
$ 175,649
$3,458,074
89,169
—
89,169
121,088
—
121,088
119,521
—
119,521
Total
$3,990,149
$ 234,472
$4,224,621
$3,644,148
$ 183,565
$3,827,713
$3,401,946
$ 175,649
$3,577,595
Net earned
premium -
North America
Net earned
premium -
Europe
Total
$3,816,441
$ 210,231
$4,026,672
$3,434,386
$ 186,761
$3,621,147
$3,367,695
$ 169,871
$3,537,566
91,370
—
91,370
111,055
—
111,055
116,610
—
116,610
$3,907,811
$ 210,231
$4,118,042
$3,545,441
$ 186,761
$3,732,202
$3,484,305
$ 169,871
$3,654,176
F-79
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following table summarizes service and fee income by source within each operating segment:
Year Ended December 31,
Property
and
Casualty
2019
Accident
and
Health
Property
and
Casualty
Total
2018
Accident
and
Health
Property
and
Casualty
Total
2017
Accident
and
Health
Total
Commission revenue
$
87,486
$
83,476
$ 170,962
$
93,235
$
70,086
$ 163,321
$
78,678
$
67,015
$ 145,693
Finance and
processing fees
Group health
administrative fees
Installment fees
Late payment fees
Other service and fee
income
128,302
6,197
134,499
121,058
4,535
125,593
117,122
7,183
124,305
—
100,951
100,951
—
79,411
97,997
34,210
—
309
97,997
34,519
92,785
33,765
—
86
79,411
92,785
33,851
—
62,217
83,883
27,184
—
121
62,217
83,883
27,305
44,483
58,554
103,037
34,760
31,862
66,622
41,446
18,078
59,524
Total
$ 392,478
$ 249,487
$ 641,965
$ 375,603
$ 185,980
$ 561,583
$ 348,313
$ 154,614
$ 502,927
NGHC
Reciprocal
Exchanges
$ 386,723
$ 249,487
$ 636,210
$ 369,852
$ 185,980
$ 555,832
$ 342,519
$ 154,614
$ 497,133
5,755
—
5,755
5,751
—
5,751
5,794
—
5,794
Total
$ 392,478
$ 249,487
$ 641,965
$ 375,603
$ 185,980
$ 561,583
$ 348,313
$ 154,614
$ 502,927
The following tables show an analysis of premiums and fee income by product line:
Gross Premium Written
Property and Casualty
Personal Auto
Homeowners
RV/Packaged
Small Business Auto
Lender-placed Insurance
Other
Total Property and Casualty
Accident and Health
Group
Individual
International
Total Accident and Health
Total NGHC
Reciprocal Exchanges
Personal Auto
Homeowners
Other
Total Reciprocal Exchanges
Total Gross Premium Written
Year Ended December 31,
2019
2018
2017
$
2,721,202
$
2,637,176
$
2,334,838
718,819
212,746
315,569
342,267
56,413
688,006
208,394
319,299
363,056
53,876
558,827
187,475
316,958
345,354
47,358
4,367,016
4,269,807
3,790,810
288,549
340,731
139,337
768,617
5,135,633
152,688
290,972
3,787
447,447
5,583,080
$
$
$
$
239,729
308,122
150,258
698,109
4,967,916
153,129
291,907
3,887
448,923
5,416,839
$
$
$
$
206,340
255,541
119,521
581,402
4,372,212
132,844
247,460
3,469
383,773
4,755,985
$
$
$
$
F-80
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Net Premium Written
Property and Casualty
Personal Auto
Homeowners
RV/Packaged
Small Business Auto
Lender-placed Insurance
Other
Total Property and Casualty
Accident and Health
Group
Individual
International
Total Accident and Health
Total NGHC
Reciprocal Exchanges
Personal Auto
Homeowners
Other
Total Reciprocal Exchanges
Total Net Premium Written
Net Earned Premium
Property and Casualty
Personal Auto
Homeowners
RV/Packaged
Small Business Auto
Lender-placed Insurance
Other
Total Property and Casualty
Accident and Health
Group
Individual
International
Total Accident and Health
Total NGHC
Reciprocal Exchanges
Personal Auto
Homeowners
Other
Total Reciprocal Exchanges
Total Net Earned Premium
Year Ended December 31,
2019
2018
2017
$
2,260,385
$
2,016,858
$
1,824,932
404,278
198,737
249,067
198,171
18,905
331,120
206,740
233,456
202,069
27,366
275,013
185,993
246,072
313,124
21,516
3,329,543
3,017,609
2,866,650
231,388
340,049
89,169
660,606
3,990,149
134,958
98,009
1,505
234,472
4,224,621
$
$
$
$
197,386
308,065
121,088
626,539
3,644,148
61,759
120,875
931
183,565
3,827,713
$
$
$
$
160,234
255,541
119,521
535,296
3,401,946
68,292
105,536
1,821
175,649
3,577,595
$
$
$
$
Year Ended December 31,
2019
2018
2017
$
2,190,748
$
1,927,667
$
1,828,304
405,306
195,639
252,359
182,231
18,509
329,850
197,258
237,587
215,811
20,855
349,709
175,888
251,576
321,995
23,550
3,244,792
2,929,028
2,951,022
231,398
340,251
91,370
663,019
3,907,811
106,549
101,964
1,718
210,231
4,118,042
$
$
$
$
197,406
307,952
111,055
616,413
3,545,441
59,923
125,806
1,032
186,761
3,732,202
$
$
$
$
160,280
256,393
116,610
533,283
3,484,305
66,565
101,648
1,658
169,871
3,654,176
$
$
$
$
F-81
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Fee Income
Property and Casualty
Service and Fee Income
Ceding Commission Income
Total Property and Casualty
Accident and Health
Service and Fee Income
Group
Individual
Third Party Fee
Total Service and Fee Income
Ceding Commission Income
Total Accident and Health
Total NGHC
Reciprocal Exchanges
Service and Fee Income
Ceding Commission Income
Total Reciprocal Exchanges
Total Fee Income
Year Ended December 31,
2019
2018
2017
$
386,723
$
369,852
$
164,013
550,736
160,945
530,797
134,206
9,650
105,631
249,487
10,939
260,426
811,162
5,755
63,501
69,256
880,418
$
$
$
$
104,504
9,304
72,172
185,980
7,003
192,983
723,780
5,751
56,749
62,500
786,280
$
$
$
$
$
$
$
$
342,519
55,263
397,782
76,173
14,392
64,049
154,614
1,013
155,627
553,409
5,794
60,180
65,974
619,383
21. Selected Quarterly Financial Data (Unaudited)
The following tables summarize quarterly financial data:
March 31,
June 30,
September 30,
December 31,
2019
Total revenues
Total expenses
Provision for income taxes
Net income
Net income attributable to NGHC
Net income attributable to NGHC common stockholders
Basic EPS
Diluted EPS
Total revenues
Total expenses
Provision for income taxes
Net income
Net income attributable to NGHC
Net income attributable to NGHC common stockholders
Basic EPS
Diluted EPS
$
1,232,665
$
1,269,652
$
1,308,172
$
1,124,820
1,170,353
1,231,186
22,506
85,339
91,758
83,883
0.74
0.72
March 31,
1,117,257
1,045,035
16,202
56,020
68,208
60,333
0.57
0.55
$
$
$
$
$
$
$
$
$
$
16,747
60,239
71,154
63,279
0.56
0.54
22,241
77,058
77,876
68,951
0.61
0.60
$
$
2018
September 30,
$
June 30,
1,135,106
1,091,655
6,541
36,910
44,548
36,673
0.34
0.34
$
$
1,168,843
1,097,096
15,518
56,229
68,382
60,507
0.56
0.55
1,369,105
1,248,792
15,519
104,794
107,281
98,356
0.87
0.85
December 31,
1,186,765
1,153,177
15,223
18,365
26,216
17,349
0.16
0.16
$
$
$
$
$
Due to changes in number of shares outstanding from quarter to quarter, the total earnings per share of the four
quarters may not necessarily equal the earnings per share for the year.
F-82
NATIONAL GENERAL HOLDINGS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
22. Business Disposition
Sale of Euro Accident Health and Care Insurance
On December 2, 2019, the Company sold its Euro Accident Health and Care Insurance Sweden operation to an
investor group focused on Nordic healthcare investments. The sale price for this transaction was $139,021 and resulted
in a $26,428 gain included in other income (expense). This transaction impacted the Company’s Accident and Health
segment.
The following table summarizes the carrying amounts transferred to the buyer in the connection of the sale:
Assets:
Debt securities, available-for-sale, at fair value
Cash and cash equivalents
Accrued investment income
Premiums and other receivables, net
Deferred acquisition costs
Reinsurance recoverable
Prepaid reinsurance premiums
Property and equipment, net
Prepaid and other assets
Total assets
Liabilities:
Unpaid loss and loss adjustment expense reserves
Unearned premiums and other revenue
Reinsurance payable
Accounts payable and accrued expenses
Other liabilities
Total liabilities
Net assets sold
Reconciliation of the gain on sale:
Cash received
Net assets sold
Realized AOCI
Other expenses
Goodwill and intangible assets disposition
Gain on sale
F-83
$
$
$
$
$
$
$
145,485
46,731
970
29,015
2,940
36,819
4,151
2,456
858
269,425
114,220
26,020
50,748
3,622
119
194,729
74,696
139,021
(74,696)
(21,126)
(3,592)
(13,179)
26,428
NATIONAL GENERAL HOLDINGS CORP.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(In Thousands)
Schedule I
Cost(1)
Value
Amount
at which
shown in the
Balance Sheet
December 31, 2019
Debt Securities:
Bonds:
U.S. government and government agencies and authorities
$
68,944
$
70,921
$
States, municipalities and political subdivisions
Foreign governments
Public utilities
All other corporate bonds(2)
Total Debt Securities
Equity Securities:
Common stock:
Industrial, miscellaneous and all other
Total Equity Securities
Other Investments(3)
Other Short-term Investments(3)
Total Investments (other than investments in related parties)
298,345
1,762
45,204
3,962,436
4,376,691
301,682
1,802
46,694
4,055,259
4,476,358
29,513
29,513
67,189
67,353
5,257
5,257
67,189
67,353
70,921
301,682
1,802
46,694
4,055,259
4,476,358
5,257
5,257
67,189
67,353
$
4,540,746
$
4,616,157
$
4,616,157
(1) Original cost of equity securities and, as to debt securities, original cost reduced by repayments and adjusted for
amortization of premiums or accrual of discounts.
(2) Includes structured 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)
Schedule II
December 31,
2019
2018
Investments:
ASSETS
Debt securities, available-for-sale, at fair value (amortized cost - $95,527 and $79,454)
$
98,187
$
Short-term investments
Other investments
Equity investment in subsidiaries
Total investments
Cash and cash equivalents
Accrued investment income
Property and equipment, net
Prepaid and other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities
Debt
Total liabilities
Stockholders’ equity:
Total stockholders’ equity
Total liabilities and stockholders’ equity
4,807
—
2,937,575
3,040,569
852
835
158,670
26,658
78,365
117,135
4,310
2,491,024
2,690,834
3,956
728
172,943
30,688
$
$
$
$
$
3,227,584
$
2,899,149
26,071
584,019
610,090
2,617,494
3,227,584
$
$
$
$
94,997
603,281
698,278
2,200,871
2,899,149
See accompanying notes to condensed financial statements.
S-2
NATIONAL GENERAL HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME — PARENT COMPANY ONLY
(In Thousands)
Schedule II
Revenues:
Service and fee income
Investment income
Net gain (loss) on investments
Equity in undistributed net income of subsidiaries
Total revenues
Expenses:
Interest expense
Other expense, net
Total expenses
Income before provision (benefit) for income taxes
Benefit for income taxes
Net income attributable to NGHC
Dividends on preferred stock
Net income attributable to NGHC common stockholders
Net income attributable to NGHC
Other comprehensive income (loss), net of tax
Comprehensive income attributable to NGHC
Year Ended December 31,
2019
2018
2017
$
48,781
$
44,932
$
3,929
1,026
365,932
419,668
38,670
38,499
77,169
342,499
(5,570)
348,069
(33,600)
314,469
348,069
126,678
474,747
$
$
$
1,205
(1,571)
232,101
276,667
39,380
30,847
70,227
206,440
(914)
207,354
(32,492)
174,862
207,354
(44,054)
163,300
$
$
$
$
$
$
9,256
3,004
4,032
116,367
132,659
40,954
7,236
48,190
84,469
(21,376)
105,845
(31,500)
74,345
105,845
(19,587)
86,258
See accompanying notes to condensed financial statements.
S-3
NATIONAL GENERAL HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS — PARENT COMPANY ONLY
(In Thousands)
Schedule II
Cash flows from operating activities:
Net income attributable to NGHC
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Net (gain) loss on investments
Depreciation and amortization
Net amortization of premium net of discount on debt securities
Stock-based compensation expense
Year Ended December 31,
2019
2018
2017
$
348,069
$
207,354
$
105,845
(1,026)
23,280
233
10,996
1,571
20,668
581
9,020
(4,032)
4,799
842
8,324
Equity in undistributed net income of subsidiaries
(365,932)
(232,101)
(116,367)
Changes in assets and liabilities:
Accrued investment income
Other assets
Other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of:
Debt securities, available-for-sale
Short-term investments
Property and equipment
Proceeds from:
Sale and maturity of debt securities, available-for-sale
Sale of short-term investments
Distributions received from subsidiaries
Acquisition of subsidiaries, net of cash
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from debt
Payments of debt issuance costs
Repayments of debt and return of capital
Issuances of common and preferred stock, net of fees
Issuance of common stock — employee share options
Taxes paid related to net share settlement of equity awards
Dividends paid to common and preferred shareholders
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
(108)
4,927
(1,728)
18,711
(46,832)
(284,875)
(75,673)
30,941
397,945
50,825
(17,091)
55,240
—
(1,134)
(20,000)
—
594
(3,734)
(52,781)
(77,055)
(3,104)
3,956
(500)
23,334
8,993
38,920
(70,308)
(342,137)
(73,563)
18,260
225,395
130,772
(9,875)
(121,456)
—
—
(30,000)
162,120
1,978
(3,024)
(48,611)
82,463
(73)
4,029
$
852
$
3,956
$
6
(13,007)
(6,057)
(19,647)
(235,837)
—
(58,181)
250,102
—
126,051
(210)
81,925
140,000
—
(172,794)
—
1,259
(1,773)
(48,550)
(81,858)
(19,580)
23,609
4,029
See accompanying notes to condensed financial statements.
S-4
NATIONAL GENERAL HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES — PARENT COMPANY ONLY
Schedule II
1. Basis of Presentation
In the parent-company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus
equity in undistributed earnings of subsidiaries since the date of acquisition. The Company’s share of net income of its
unconsolidated subsidiaries is included in consolidated income using the equity method. The parent-company-only
financial statements should be read in conjunction with the Company’s consolidated financial statements. Certain prior
period amounts have been reclassified to conform to the current-year presentation.
2. Debt
For information relating to debt, see Note 11, “Debt” in the notes to the Company’s consolidated financial
statements.
3. Dividends
For information relating to cash dividends paid to the registrant or the Company by its consolidated subsidiaries
and investees accounted for by the equity method, see Note 17, “Statutory Financial Data, Risk-Based Capital and
Dividend Restrictions” in the notes to the Company’s consolidated financial statements.
S-5
NATIONAL GENERAL HOLDINGS CORP.
SUPPLEMENTARY INSURANCE INFORMATION
(In Thousands)
Schedule III
As of December 31,
Year Ended December 31,
Unpaid
Loss and
Loss
Adjustment
Expense
Reserves
Deferred
Acquisition
Costs
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
2019
Property and Casualty
$
239,293
$
2,734,540
$2,210,851
$ 3,455,023
$
— $ 2,543,788
$
539,816
$
65,203
$3,564,015
Accident and Health
Corporate and Other
24,230
—
151,874
—
8,368
—
663,019
—
310,680
37,541
184,807
660,606
—
141,233
—
—
—
—
Total
2018
$
263,523
$
2,886,414
$2,219,219
$ 4,118,042
$
141,233
$ 2,854,468
$
577,357
$ 250,010
$4,224,621
Property and Casualty
$
226,188
$
2,685,879
$2,120,283
$ 3,115,789
$
— $ 2,340,881
$
495,009
$
55,531
$3,201,174
Accident and Health
Corporate and Other
25,220
—
271,280
36,554
616,413
—
321,345
15,784
168,942
626,539
—
—
—
119,034
—
—
—
—
Total
2017
$
251,408
$
2,957,159
$2,156,837
$ 3,732,202
$
119,034
$ 2,662,226
$
510,793
$ 224,473
$3,827,713
Property and Casualty
$
198,283
$
2,413,904
$1,886,359
$ 3,120,893
$
— $ 2,307,619
$
487,740
$
29,810
$3,042,299
Accident and Health
Corporate and Other
18,106
—
249,653
37,226
533,283
—
318,463
22,149
132,730
535,296
—
—
—
101,950
—
—
—
—
Total
$
216,389
$
2,663,557
$1,923,585
$ 3,654,176
$
101,950
$ 2,626,082
$
509,889
$ 162,540
$3,577,595
S-6
NATIONAL GENERAL HOLDINGS CORP.
REINSURANCE
(In Thousands)
Schedule IV
Year Ended December 31,
2019
Earned Premiums
2018
Earned Premiums
2017
Earned Premiums
$
$
$
Gross
Amount
Ceded to
Other
Companies
Assumed from
Other
Companies
Net
Amount
Percent of
Amount
Assumed to
Net
5,486,835
$
(1,449,365) $
80,572
$
4,118,042
2.0%
5,049,512
$
(1,440,575) $
123,265
$
3,732,202
3.3%
4,233,184
$
(818,238) $
239,230
$
3,654,176
6.5%
S-7
NATIONAL GENERAL HOLDINGS CORP.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Schedule V
Year Ended December 31,
2019
Additions
Balance at
beginning of
the year
Charge
(Benefit) to
costs and
expenses
Charge to
other
accounts
Deductions
Balance at
end of the
year
Allowance for uncollectible accounts
$
20,208
$
88,247
$
— $
(84,388) $
Valuation allowance for deferred taxes
60,344
11,436
—
—
2018
Allowance for uncollectible accounts
$
18,546
$
74,214
$
— $
(72,552) $
Valuation allowance for deferred taxes
5,410
54,934
—
—
2017
Allowance for uncollectible accounts
$
16,219
$
63,819
$
— $
(61,492) $
Valuation allowance for deferred taxes
7,135
(1,725)
—
—
24,067
71,780
20,208
60,344
18,546
5,410
S-8
NATIONAL GENERAL HOLDINGS CORP.
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(In Thousands)
Schedule VI
Year Ended December 31,
2019
Property and Casualty (1)
Accident and Health
Total
2018
Property and Casualty (1)
Accident and Health
Total
2017
Property and Casualty (1)
Accident and Health
Total
(1) Property and Casualty includes the Reciprocal Exchanges.
Losses and Loss Adjustment
Expenses Incurred Related to
Current Year
Prior Years
Paid Losses
and Loss
Adjustment
Expenses
$
$
$
$
$
$
2,493,268
356,036
2,849,304
2,343,938
352,322
2,696,260
2,291,444
327,289
2,618,733
$
$
$
$
$
$
50,520
(45,356)
5,164
$
$
2,427,676
328,887
2,756,563
(3,057) $
2,209,570
(30,977)
305,667
(34,034) $
2,515,237
16,175
(8,826)
7,349
$
$
2,217,220
274,661
2,491,881
S-9
DESCRIPTION OF SECURITIES
REGISTERED UNDER SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 4.1
The Company has five classes of securities registered under Section 12 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”): (1) our common stock, par value $0.01 per share, (2) our 7.50% Non-
Cumulative Preferred Stock, Series A, (3) our Depositary Shares, each Representing 1/40th of a Share of 7.50%
Non-Cumulative Preferred Stock, Series B, (4) our Depositary Shares, each Representing 1/40th of a Share of 7.50%
Non-Cumulative Preferred Stock, Series C and (5) our 7.625% Subordinated Notes due 2055.
DESCRIPTION OF COMMON STOCK
The following description set forth below of our common stock is only a summary and does not purport to be
complete. It is subject to and qualified in its entirety by reference to our certificate of incorporation (as amended and
restated, the “Certificate of Incorporation”) and our bylaws (as amended and restated, the “Bylaws”), each of which
are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part,
and applicable Delaware law. We encourage you to read our Certificate of Incorporation, our Bylaws and the
applicable provisions of Delaware law.
Our Certificate of Incorporation authorizes the issuance of 150,000,000 shares of common stock, $0.01 par
value per share.
Our common stock is listed on the Nasdaq Global Market under the symbol “NGHC.”
Voting Power
The holders of our common stock are entitled to one vote per share on any matter to be voted upon by
stockholders.
The holders of common stock are not entitled to cumulative voting rights with respect to the election of
directors, which means that the holders of a majority of the voting power of our common stock voted can elect all of
the directors then standing for election.
Dividend
Holders of shares of common stock are entitled to receive ratably the dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available therefor, subject to any contractual
restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of
any outstanding preferred stock or debt securities. As described below, holders of our 7.50% Non-
Cumulative Preferred Stock, Series A, 7.50% Non-Cumulative Preferred Stock, Series B, and 7.50% Non-
Cumulative Preferred Stock, Series C are entitled to receive dividends in preference to and in priority over dividends
on common stock and dividends on any future series of preferred stock may be cumulative or non-cumulative as
determined by our board of directors.
Preemptive or Other Rights
Holders of our common stock have no preemptive or conversion rights or other subscription rights and there
are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges
of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of our
outstanding 7.50% Non-Cumulative Preferred Stock, Series A, 7.50% Non-Cumulative Preferred Stock, Series B,
and 7.50% Non-Cumulative Preferred Stock, Series C, and the holders of shares of any series of preferred stock
which we may designate in the future.
Liquidation
In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share
ratably in the assets legally available for distribution to stockholders after the payment of all of our known debts and
liabilities and after adequate provision has been made for each class of stock then outstanding that has preference
over our common stock.
Certain Anti-Takeover Effects of Provisions of Our Bylaws and Delaware Law
Special Meetings of Stockholders
Our Certificate of Incorporation generally provides that special meetings of our stockholders may be called
only by the chairman of the board of directors, the chief executive officer, the president or by resolution of the board
of directors. Stockholders are not permitted to call a special meeting or require our board of directors to call a
special meeting. At any special meeting of our stockholders, only such business will be conducted as has been
specified in the notice of meeting given by or at the direction of our board of directors or otherwise properly brought
before the special meeting by or at the direction of our board of directors.
No Cumulative Voting
The Delaware General Corporation Law (the “DGCL”) provides that stockholders are not entitled to the right
to cumulate votes in the election of directors unless a corporation’s certificate of incorporation provides otherwise.
Our Certificate of Incorporation does not provide for cumulative voting in the election of directors.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
Our Bylaws provide that stockholders seeking to bring business before a meeting of stockholders, or to
nominate candidates for election as directors at a meeting of stockholders, must provide timely notice of their intent
in writing. To be timely, a stockholder’s notice must be delivered to our principal executive offices not less than 90
days nor more than 120 days prior to the one year anniversary of the date of the preceding year’s annual meeting of
stockholders. Our Bylaws also specify certain requirements as to the form and content of a stockholder’s notice,
including the stockholder’s ownership of the Company, synthetic equity transactions engaged in by the stockholder
related to the Company, any proxies or voting agreements pursuant to which such stockholder has a right to vote
shares of the Company, any stock borrowing agreements entered into by the stockholder related to the Company, any
performance related fees the stockholder is entitled to based on changes in the value of the stock of the Company
and any other information that would be required to be made in connection with a solicitation of proxies by such
stockholder pursuant to Section 14(a) of the Exchange Act. Our Bylaws also require that such stockholder provide
information concerning each item of business proposed by the stockholder and individuals nominated for election as
a director, as applicable. Failure to timely comply with these provisions may preclude our stockholders from
bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual
meeting of stockholders.
Stockholder-Initiated Bylaws Amendments
Our Bylaws may be adopted, amended, altered or repealed by stockholders only upon approval of at least a
majority of the voting power of all the then outstanding shares of our common stock. Additionally, our Bylaws may
be amended, altered or repealed by the board of directors by a majority vote.
Authorized but Unissued Shares
Our authorized but unissued shares of common stock are available for future issuances without stockholder
approval and can be utilized for a variety of corporate purposes, including future offerings to raise additional capital,
acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock
2
could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender
offer, merger or otherwise.
“Blank Check Preferred Stock”
Our board of directors is authorized, without further action by our stockholders, to issue shares of preferred
stock in one or more classes or series, and with respect to each series, to fix the number of shares constituting that
series, and establish the rights and terms of that series. The board of directors may also from time to time authorize
the issuance of additional shares of preferred stock, in one or more series, without stockholder action. The purpose
of authorizing the board of directors to issue preferred stock and determine its rights and preferences is to eliminate
delays and uncertainties associated with a stockholder vote on specific issuances. The issuance of preferred stock
while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or discourage a third party from acquiring, a
majority of our outstanding voting shares. Our board of directors may issue preferred stock with voting and
conversion rights that could adversely affect the voting power of the holders of our common stock.
Section 203 of the DGCL
We are subject to Section 203 of the DGCL. Subject to certain exceptions, Section 203 of the DGCL prohibits
a public Delaware corporation from engaging in a business combination (as defined in such section) with an
“interested stockholder” (defined generally as any person who beneficially owns 15% or more of the outstanding
voting stock of such corporation or any person affiliated with such person) for a period of three years following the
time that such stockholder became an interested stockholder, unless: (1) prior to such time the board of directors of
such corporation approved either the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such
corporation at the time the transaction commenced (excluding for purposes of determining the voting stock of such
corporation outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares
owned (a) by persons who are directors and also officers of such corporation and (b) by employee stock plans in
which employee participants do not have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (3) on or subsequent to such time, the business combination
is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the
interested stockholder.
Limitation of Liability and Indemnification Matters
As permitted by the DGCL, our Certificate of Incorporation includes provisions that limit or eliminate the
personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally
requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on
all material information reasonably available to them. Consequently, a director will not be personally liable to us or
our stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted
under Delaware law.
Our Certificate of Incorporation also authorizes us to indemnify our officers, directors and other agents to the
fullest extent permitted under Delaware law, and we may advance expenses to our directors, officers and employees
in connection with a legal proceeding, subject to limited exceptions. As permitted by the DGCL, our Certificate of
Incorporation provides that:
• we will indemnify our directors and officers to the fullest extent permitted by the DGCL, subject to limited
exceptions; and
3
• we may purchase and maintain insurance on behalf of our current or former directors, officers, employees
or agents against any liability asserted against them and incurred by them in any such capacity, or arising
out of their status as such.
In addition, we have entered into indemnification agreements with each of our executive officers and directors
pursuant to which each executive officer and director will be indemnified as described above (or furnished
contribution by us if indemnification is unavailable) and will be advanced costs and expenses subject to delivery of
an undertaking to repay any advanced amounts if it is ultimately determined that such executive officer or director is
not entitled to indemnification for such costs and expenses.
Forum
Our Bylaws provide that, subject to certain exceptions, unless we consent in writing to an alternative forum, a
state or federal court located in the State of Delaware will be the sole and exclusive forum for (i) any derivative
action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any
director, officer, employee or agent of the Company to the Company or our stockholders, (iii) any action asserting a
claim arising pursuant to any provision of the DGCL, our Certificate of Incorporation or our Bylaws, or (iv) any
action asserting a claim governed by the internal affairs doctrine. The Bylaws further provide that any person or
entity purchasing or otherwise acquiring an interest in our shares of capital stock is deemed to have notice of and
consented to the foregoing. Although we believe this provision benefits the Company by providing increased
consistency in the application of Delaware law in the types of lawsuits to which it applies, it may limit a
stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers or other employees, which may discourage such lawsuits against us and our directors, officers and
employees.
Transfer Agent
Our registrar and transfer agent for the shares is American Stock Transfer & Trust Company.
Insurance Regulations Concerning 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. Any purchase of our shares that would result in the purchaser owning more than 10%
of our voting securities will be presumed to result in the acquisition of control of our insurance subsidiaries and
require prior regulatory approval.
DESCRIPTION OF THE SERIES A PREFERRED STOCK
The following description set forth below of our 7.50% Non-Cumulative Preferred Stock, Series A (“Series A
Preferred Stock”) is only a summary and does not purport to be complete. It is subject to and qualified in its entirety
by reference to our Certificate of Incorporation and our Certificate of Designations for our 7.50% Non-Cumulative
Preferred Stock, Series A, each of which are incorporated by reference as an exhibit to the Annual Report on Form
10-K of which this Exhibit 4.1 is a part. You should refer to such certificate for specific information on the Series A
Preferred Stock.
4
General
The Certificate of Designations sets forth the specific rights, preferences, limitations and other terms of the
Series A Preferred Stock. The Series A Preferred Stock is a single series of authorized preferred stock consisting of
2,200,000 shares.
Our Certificate of Incorporation permits us to authorize the issuance of up to 10,000,000 shares of preferred
stock, in one or more series without stockholder action. The Series A Preferred Stock constitute a series of our
authorized preferred stock. We may from time to time, without notice to or the consent of holders of the Series A
Preferred Stock, issue shares of preferred stock that rank equally with or junior to the Series A Preferred Stock. We
may also from time to time, without notice to or consent of holders of the Series A Preferred Stock, issue additional
shares of the Series A Preferred Stock; provided, that any such additional shares of Series A Preferred Stock are not
treated as “disqualified preferred stock” within the meaning of Section 1059(f)(2) of the Internal Revenue Code (or
any successor provision) and such additional shares of Series A Preferred Stock are otherwise treated as fungible
with our already outstanding Series A Preferred Stock for U.S. federal income tax purposes. The additional shares of
Series A Preferred Stock would form a single series with our already outstanding Series A Preferred Stock. We have
the authority to issue fractional shares of Series A Preferred Stock.
The Series A Preferred Stock are fully paid and non-assessable. Holders of the Series A Preferred Stock do not
have preemptive or similar rights to acquire any of our capital stock. Holders do not have the right to convert Series
A Preferred Stock into, or exchange Series A Preferred Stock for, shares of any other class or series of shares or
other securities of ours. The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund,
retirement fund or purchase fund or other obligation of the Company to redeem or purchase the Series A Preferred
Stock.
Ranking
The Series A Preferred Stock rank senior to our common stock and any other junior stock with respect to the
payment of dividends and distributions of assets upon liquidation, dissolution or winding-up, equally with the Series
B Preferred Stock, the Series C Preferred Stock and each other series of our preferred stock that we may issue the
terms of which provide that they rank equally with the Series A Preferred Stock with respect to the payment of
dividends and distributions of assets upon liquidation, dissolution or winding-up and junior to each other series of
our preferred stock that we may issue in the future the terms of which provide that they rank senior to the Series A
Preferred Stock with respect to the payment of dividends and distributions of assets upon our liquidation, dissolution
or winding-up.
Dividends
Dividends on the Series A Preferred Stock are not mandatory. Holders of Series A Preferred Stock are entitled
to receive dividends only when, as and if declared by the Board of Directors of the Company or a duly authorized
committee of the Board, out of lawfully available funds for the payment of dividends, non-cumulative cash
dividends from the original issue date, quarterly on the 15th day of January, April, July and October of each year,
commencing on October 15, 2014. These dividends will accrue with respect to a particular dividend period on the
liquidation preference amount of $25.00 per share at an annual rate of 7.50%. In the event that we issue additional
Series A Preferred Stock after the original issue date, dividends on such additional shares may accrue from the
original issue date or any other date we specify at the time such additional shares are issued.
Dividends, if so declared, will be payable to holders of record of the Series A Preferred Stock as they appear
on our books on the applicable record date, which shall be January 1, April 1, July 1 and October 1, as applicable,
immediately preceding the applicable dividend payment date or such other record date fixed by our Board of
Directors (or a duly authorized committee of the Board) that is not more than 60 nor less than 10 days prior to such
dividend payment date (each, a “dividend record date”). These dividend record dates will apply regardless of
whether a particular dividend record date is a business day.
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A dividend period is the period from and including a dividend payment date to but excluding the next dividend
payment date. Dividends payable on the Series A Preferred Stock are computed on the basis of a 360-day year
consisting of twelve 30-day months. If any date on which dividends would otherwise be payable is not a business
day, then the dividend payment date will be the next succeeding business day with the same force and effect as if
made on the original dividend payment date, and no additional dividends shall accrue on the amount so payable
from such date to such next succeeding business day.
Dividends on the Series A Preferred Stock are not cumulative. Accordingly, if our Board of Directors, or a
duly authorized committee of the Board, does not declare a dividend on the Series A Preferred Stock payable in
respect of any dividend period before the related dividend payment date, such dividend will not accumulate and will
not be payable and we will have no obligation to pay a dividend for that dividend period on the dividend payment
date or at any future time or to pay interest with respect to such dividends, whether or not dividends are declared for
any future dividend period on the Series A Preferred Stock or any other parity stock we may issue in the future.
So long as any Series A Preferred Stock remain outstanding for any dividend period, unless the full dividends
for the latest completed dividend period on all outstanding Series A Preferred Stock and parity stock (as defined
below) have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside):
•
•
•
no dividend shall be paid or declared on our common stock, or any other junior stock (other than a dividend
payable solely in common stock or other junior stock);
no common stock or other junior stock shall be purchased, redeemed or otherwise acquired for
consideration by us, directly or indirectly (other than (1) as a result of a reclassification of junior stock for
or into other junior stock, or the exchange or conversion of one share of junior stock for or into another
share of junior stock, or (2) through the use of the proceeds of a substantially contemporaneous sale of
junior stock) nor shall any monies be paid to or made available for a sinking fund for the redemption of
such stock (it being understood that the provisions of this bullet point shall not apply to grants or
settlements of grants pursuant to any equity compensation plan adopted by us); and
no shares of Series A Preferred Stock or parity stock shall be repurchased, redeemed or otherwise acquired
for consideration by us other than pursuant to pro rata offers to purchase all, or a pro rata portion, of the
Series A Preferred Stock and such parity stock except by conversion into or exchange for junior stock.
As used in this Exhibit 4.1, “junior stock” means any class or series of our capital stock that ranks junior to the
Series A Preferred Stock either as to the payment of dividends or as to the distribution of assets upon our liquidation,
dissolution or winding-up. As of the date of this Exhibit 4.1, junior stock consists solely of our common stock.
As used in this Exhibit 4.1, “parity stock” means any class or series of our capital stock that ranks equally with
the Series A Preferred Stock with respect to the payment of dividends and in the distribution of assets on our
liquidation, dissolution or winding-up. As of the date of this Exhibit 4.1, parity stock consists of our Series B
Preferred Stock and Series C Preferred Stock.
When dividends are not paid (or duly provided for) in full on any dividend payment date (or, in the case of
parity stock having dividend payment dates different from the dividend payment dates pertaining to the Series A
Preferred Stock, on a dividend payment date falling within the related dividend period for the Series A Preferred
Stock) upon the Series A Preferred Stock and any parity stock, all dividends declared by our Board of Directors or a
duly authorized committee of the Board upon the Series A Preferred Stock and all such parity stock and payable on
such dividend payment date (or, in the case of parity stock having dividend payment dates different from the
dividend payment dates pertaining to the Series A Preferred Stock, on a dividend payment date falling within the
related dividend period for the Series A Preferred Stock) shall be declared by the Board or such committee pro rata
so that the respective amounts of such dividends shall bear the same ratio to each other as all declared dividends per
share of Series A Preferred Stock and all parity stock payable on such dividend payment date (or, in the case of
parity stock having dividend payment dates different from the dividend payment dates pertaining to the Series A
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Preferred Stock, on a dividend payment date falling within the related dividend period for the Series A Preferred
Stock) bear to each other.
Our ability to pay dividends on the Series A Preferred Stock may be limited by the terms of our agreements
governing our existing and future indebtedness and by the provisions of other existing and future agreements.
In addition, 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 capital stock, including the Series A Preferred Stock.
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.
Liquidation Rights
Upon our voluntary or involuntary liquidation, dissolution or winding-up, holders of the Series A Preferred
Stock and any parity stock are entitled to receive out of our assets available for distribution to stockholders, after
satisfaction of liabilities to creditors, if any, but before any distribution of assets is made to holders of our common
stock or any of our other junior stock, a liquidating distribution in the amount equal to the liquidation preference of
$25.00 per share of Series A Preferred Stock or the amount of the liquidation preference of such parity stock, as
applicable, plus any declared and unpaid dividends. Holders of the Series A Preferred Stock will not be entitled to
any other amounts from us after they have received their full liquidation preference plus any declared and unpaid
dividends.
In any such distribution, if our assets are not sufficient to pay the liquidation distributions in full to all holders
of the Series A Preferred Stock and all holders of any parity stock, the amounts paid to the holders of Series A
Preferred Stock and to the holders of any parity stock will be paid pro rata in accordance with the respective
aggregate liquidation distributions of those holders. In any such distribution, the liquidation distribution to any
holder of preferred stock means the amount payable to such holder in such distribution, including any declared but
unpaid dividends (and any unpaid, accrued cumulative dividends in the case of any holder of shares on which
dividends accrue on a cumulative basis). If the liquidation distributions have been paid in full to all holders of shares
of the Series A Preferred Stock and any holders of shares of parity stock and shares ranking senior to the Series A
Preferred Stock with respect to the distribution of assets upon liquidation, dissolution or winding-up, the holders of
our other classes of capital stock will be entitled to receive all of our remaining assets according to their respective
rights and preferences.
For purposes of this section, a consolidation or merger involving the Company with any other entity, including
the consolidation or merger in which the holders of Series A Preferred Stock receive cash, securities or other
property for their shares, or the sale or transfer of all or substantially all of the property and assets of the Company
for cash, securities or other property, will not be deemed to constitute a liquidation, dissolution or winding-up.
7
Redemption
The Series A Preferred Stock is not subject to any mandatory redemption, sinking fund, retirement fund,
purchase fund or other similar provisions.
As of July 15, 2019, the Series A Preferred Stock are redeemable at our option, in whole or in part, upon not
less than 30 days nor more than 60 days notice, at a redemption price equal to $25.00 per share plus declared and
unpaid dividends on the shares of Series A Preferred Stock called for redemption for prior dividend periods, if any,
plus accrued but unpaid dividends (whether or not declared) thereon for the then-current dividend period, to, but
excluding, the date of redemption, without accumulation of any other undeclared dividends. Holders of the Series A
Preferred Stock have no right to require the redemption of the Series A Preferred Stock.
The redemption price for any shares of Series A Preferred Stock shall be payable on the redemption date to the
holders of such shares against book entry transfer or surrender of the certificate(s) evidencing such shares to us or
our agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the dividend
record date for a dividend period shall not be paid to the holder entitled to receive the redemption price on the
redemption date, but rather shall be paid to the holder of record of the redeemed shares on such dividend record date
relating to the dividend payment date provided in “-Dividends” above.
If shares of the Series A Preferred Stock are to be redeemed, the notice of redemption shall be given by first
class mail to the holders of record of the Series A Preferred Stock to be redeemed, mailed not less than 30 days nor
more than 60 days prior to the date fixed for redemption thereof (provided that, if the Series A Preferred Stock is
held in book-entry form through The Depository Trust Company, or “DTC,” we may give such notice in any manner
permitted by DTC). Each notice of redemption will include a statement setting forth:
•
•
•
•
the redemption date;
the number of shares of Series A Preferred Stock to be redeemed and, if less than all the shares of Series A
Preferred Stock held by such holder are to be redeemed, the number of such shares of Series A Preferred
Stock to be redeemed from such holder;
the redemption price; and
that the shares should be delivered via book entry transfer or the place or places where holders may
surrender certificates evidencing the Series A Preferred Stock for payment of the redemption price.
If notice of redemption of any shares of Series A Preferred Stock has been given and if the funds necessary for
such redemption and to pay declared and unpaid dividends have been set aside by us for the benefit of the holders of
such shares of Series A Preferred Stock so called for redemption, then, from and after the redemption date, no
further dividends will be declared on such shares of Series A Preferred Stock, such shares of Series A Preferred
Stock shall no longer be deemed outstanding and all rights of the holders of such shares of Series A Preferred Stock
will terminate, except the right to receive the redemption price, without interest.
In case of any redemption of only part of the shares of Series A Preferred Stock at the time outstanding, the
shares of Series A Preferred Stock to be redeemed shall be selected either pro rata or in such other manner as we
may determine to be fair and equitable.
Our ability to redeem the Series A Preferred Stock as described above may be limited by the terms of our
agreements governing our existing and future indebtedness and by the provisions of other existing and future
agreements.
8
Voting Rights
Except as provided below or as otherwise may be required by applicable law, the holders of the Series A
Preferred Stock have no voting rights.
Whenever dividends on any Series A Preferred Stock shall have not been declared and paid for the equivalent
of six or more dividend periods, whether or not for consecutive dividend periods (a “nonpayment event”), the
holders of the Series A Preferred Stock, voting together as a single class with holders of any and all other series of
voting preferred stock (as defined below) then outstanding, will be entitled to vote for the election of a total of two
additional members of the Board of Directors of the Company (the “preferred stock directors”), provided that the
election of any such directors shall not cause us to violate the corporate governance requirement of any exchange on
which our securities may be listed or quoted that listed or quoted companies must have a majority of independent
directors. The number of preferred stock directors will not be more than two at any time. In the event of a non-
payment event the number of directors on our Board of Directors shall automatically increase by two and the new
directors shall be elected at a special meeting called at the request of the holders of record of at least 20% of the
aggregate voting power of the Series A Preferred Stock or of any other series of voting preferred stock (unless such
request is received less than 90 days before the date fixed for the next annual or special meeting of the stockholders
of the Company, in which event such election shall be held at such next annual or special meeting of stockholders),
and at each subsequent annual meeting.
As used in this Exhibit 4.1, “voting preferred stock” means, with regard to any election or removal of a
preferred stock director or any other matter as to which the holders of Series A Preferred Stock are entitled to vote,
any other class or series of our parity stock upon which like voting rights have been conferred and are exercisable.
Whether a plurality, majority or other portion of the Series A Preferred Stock and any other voting preferred stock
have been voted in favor of any matter shall be determined by reference to the aggregate voting power of the Series
A Preferred Stock and voting preferred stock voted.
If and when dividends for at least four consecutive dividend periods following a nonpayment event have been
paid in full (or declared and a sum sufficient for such payment shall have been set aside), the holders of the Series A
Preferred Stock shall be divested of the foregoing voting rights (subject to revesting in the event of each subsequent
nonpayment event) and, if such voting rights for all other holders of voting preferred stock have terminated, the term
of office of each preferred stock director so elected shall terminate and the number of directors on the Board of
Directors of the Company shall automatically decrease by two. In determining whether dividends have been paid for
four dividend periods following a nonpayment event, we may take account of any dividend we elect to pay for such
a dividend period after the regular dividend payment date for that period has passed.
Any preferred stock director may be removed at any time without cause by the holders of record of a majority
of the aggregate voting power, as determined under our Certificate of Incorporation, of the Series A Preferred Stock
and any other shares of voting preferred stock then outstanding (voting together as a single class) when they have
the voting rights described above. So long as a nonpayment event shall continue, any vacancy in the office of a
preferred stock director (other than prior to the initial election after a nonpayment event) may be filled by the written
consent of the preferred stock director remaining in office, or if none remains in office, by a vote of the holders of
record of a majority of the outstanding shares of Series A Preferred Stock and any other shares of voting preferred
stock then outstanding (voting together as a single class) when they have the voting rights described above. Any vote
of stockholders to remove, or to fill a vacancy in the office of, a preferred stock director may be taken at a special or
annual meeting of such stockholders, called as provided above for an initial election of preferred stock director after
a nonpayment event (unless such request is received less than 90 days before the date fixed for the next annual or
special meeting of the stockholders of the Company, in which event such election shall be held at such next annual
or special meeting of stockholders). The preferred stock directors shall each be entitled to one vote per director on
any matter. Each preferred stock director elected at any special or annual meeting of stockholders or by written
consent of the other preferred stock director shall hold office until the next annual meeting of the stockholders of the
Company if such office shall not have previously terminated as above provided.
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So long as any shares of Series A Preferred Stock remain outstanding and subject in all cases to any other vote
of stockholders required under applicable law or our Certificate of Incorporation:
• we will not, without the affirmative vote or consent of the holders of at least two-thirds of the voting power
of Series A Preferred Stock and all other series of voting preferred stock entitled to vote thereon, voting
together as a single class, given in person or by proxy, either in writing without a meeting or at a meeting,
authorize or create, or increase the authorized amount of, any specific class or series of capital stock
ranking senior to the Series A Preferred Stock with respect to the payment of dividends or the distribution
of our assets upon our liquidation, dissolution or winding up;
• we will not, without the affirmative vote or consent of the holders of at least two-thirds of the outstanding
shares of Series A Preferred Stock given in person or by proxy, either in writing without a meeting or at a
meeting:
•
•
amend, alter or repeal the provisions of our Certificate of Incorporation or the Certificate of Designations
for the Series A Preferred Stock so as to adversely affect the rights, preferences, privileges and voting
powers of the Series A Preferred Stock; or
consummate a binding share exchange or reclassification involving the Series A Preferred Stock or a
merger or consolidation of us with another entity, unless in each case (i) shares of Series A Preferred Stock
remain outstanding or, in the case of any such merger or consolidation with respect to which we are not the
surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or
resulting entity or its ultimate parent, in each case, that is an entity organized and existing under the laws of
the United States of America, any state thereof or the District of Columbia, and (ii) such shares of Series A
Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights,
preferences, privileges and voting powers and limitations and restrictions, taken as a whole, as are not less
favorable to the holders thereof than the rights, preferences, privileges and voting powers and limitations
and restrictions of the Series A Preferred Stock, taken as a whole, provided, however, that (1) any increase
in the amount of our authorized but unissued shares of preferred stock, (2) any increase in the authorized or
issued shares of Series A Preferred Stock, and (3) the creation and issuance, or an increase in the authorized
or issued amount, of other series of preferred stock ranking equally with or junior to the Series A Preferred
Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative)
and/or the distribution of assets upon our liquidation, dissolution or winding up, will not be deemed to
adversely affect the rights, preferences, privileges or voting powers of the Series A Preferred Stock.
Without the consent of the holders of the Series A Preferred Stock, so long as such action does not adversely
affect the rights, preferences, privileges and voting powers and limitations and restrictions of the Series A Preferred
Stock, the Board of Directors of the Company may, subject to any vote of our stockholders required by applicable
law or our Certificate of Incorporation, by resolution, amend, alter, supplement or repeal any terms of the Series A
Preferred Stock:
•
•
to cure any ambiguity, or to cure, correct or supplement any provision contained in the Certificate of
Designations for the Series A Preferred Stock that may be defective or inconsistent; or
to make any provision with respect to matters or questions arising with respect to the Series A Preferred
Stock that is not inconsistent with the provisions of the Certificate of Designations;
provided that any such amendment, alteration, supplement or repeal of any terms of the Series A Preferred Stock
effected in order to conform the terms thereof to the description of the terms of the Series A Preferred Stock set forth
under “Description of the Series A Preferred Stock” in this Exhibit 4.1 shall be deemed not to adversely affect the
rights, preferences, privileges and voting powers of the Series A Preferred Stock.
On each matter on which holders of Series A Preferred Stock are entitled to vote, each share of Series A
Preferred Stock will be entitled to one vote, and when shares of any other class or series of our preferred stock have
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the right to vote with the Series A Preferred Stock as a single class on any matter, the Series A Preferred Stock and
the shares of each such other class or series will have one vote for each $25.00 of liquidation preference (excluding
accrued and unpaid dividends).
The foregoing voting provisions will not apply with respect to the Series A Preferred Stock if, at or prior to the
time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding
Series A Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient funds
shall have been set aside by us for the benefit of the holders of Series A Preferred Stock to effect such redemption.
Conversion
Holders do not have the right to convert Series A Preferred Stock into, or exchange Series A Preferred Stock
for, any other securities or property of the Company.
Listing of the Series A Preferred Stock
The Series A Preferred Stock are listed on the Nasdaq Global Market under the symbol “NGHCP.”
Transfer Agent, Registrar, Dividend Disbursing Agent and Redemption Agent
American Stock Transfer & Trust Company is the transfer agent, registrar, dividend disbursing agent and
redemption agent for the Series A Preferred Stock.
Book-Entry; Delivery and Form
The Series A Preferred Stock are represented by one or more global securities that are deposited with and
registered in the name of DTC or its nominee. The global securities are issued to DTC, the depository for the Series
A Preferred Stock, who keeps a computerized record of its participants whose clients have purchased the Series A
Preferred Stock. Each participant will then keep a record of its clients. Unless exchanged in whole or in part for a
certificated security, a global security may not be transferred. However, DTC, its nominees, and their successors
may transfer a global security as a whole to one another. Beneficial interests in the global securities will be shown
on, and transfers of the global securities will be made only through, records maintained by DTC and its participants.
Purchases of Series A Preferred Stock through the DTC system must be made by or through a direct
participant, who receives credit for the Series A Preferred Stock on DTC’s records. The beneficial owner’s
ownership interest is only recorded in the direct (or indirect) participants’ records. DTC has no knowledge of the
beneficial owner’s individual ownership of the Series A Preferred Stock. DTC’s records only show the identity of
the direct participants and the amount of the Series A Preferred Stock held by or through them. The beneficial owner
does not receive a written confirmation of its purchase or sale or any periodic account statement directly from DTC.
The beneficial owner receives these from its direct (or indirect) participant. Thus, the direct (or indirect) participants
are responsible for keeping accurate account of the holdings of their customers.
We wire dividend payments to DTC’s nominee and we treat DTC’s nominee as the owner of the global
securities for all purposes. Accordingly, we have no direct responsibility or liability to pay amounts due on the
global securities to any other beneficial owner in the global securities.
Any redemption notices will be sent by us directly to DTC, who will in turn inform the direct participants,
who will then contact the beneficial holders.
It is DTC’s current practice, upon receipt of any payment of dividends or liquidation amount, to credit direct
participants’ accounts on the payment date based on their holdings of beneficial interests in the global securities as
shown on DTC’s records. In addition, it is DTC’s current practice to assign any consenting or voting rights to direct
participants whose accounts are credited with preferred securities on a record date, by using an omnibus proxy.
Payments by participants to owners of beneficial interests in the global securities, and voting by participants, will be
11
based on the customary practices between the participants and owners of beneficial interests, as is the case with the
Series A Preferred Stock held for the account of customers registered in “street name.” However, payments will be
the responsibility of the participants and not of DTC or us.
Shares of Series A Preferred Stock represented by global securities are exchangeable for certificated securities
with the same terms in authorized denominations only if:
• DTC is unwilling or unable to continue as depositary or if DTC ceases to be a clearing agency registered
under applicable law and a successor depositary is not appointed by us within 90 days; or
• we determine not to require all of the Series A Preferred Stock to be represented by global securities.
If the book-entry-only system is discontinued, the transfer agent will keep the registration books for the
Series A Preferred Stock at its corporate office.
DESCRIPTION OF THE SERIES B PREFERRED STOCK
The following description set forth below of our 7.50% Non-Cumulative Preferred Stock, Series B (“Series B
Preferred Stock”) is only a summary and does not purport to be complete. It is subject to and qualified in its entirety
by reference to our Certificate of Incorporation and our Certificate of Designations for our 7.50% Non-Cumulative
Preferred Stock, Series B, each of which are incorporated by reference as an exhibit to the Annual Report on Form
10-K of which this Exhibit 4.1 is a part. You should refer to such certificate for specific information on the Series B
Preferred Stock.
General
The Certificate of Designations sets forth the specific rights, preferences, limitations and other terms of the
Series B Preferred Stock as represented by the depositary shares. The Series B Preferred Stock is a single series of
authorized preferred stock consisting of 165,000 shares.
The Certificate of Incorporation permits us to authorize the issuance of up to 10,000,000 shares of preferred
stock, in one or more series without stockholder action. The Series B Preferred Stock constitutes a series of our
authorized preferred stock. We may from time to time, without notice to or the consent of holders of the Series B
Preferred Stock (or the consent of the holders of the depositary shares), issue shares of preferred stock that rank
equally with or junior to the Series B Preferred Stock. We may also from time to time, without notice to or consent
of holders of the Series B Preferred Stock (or the consent of the holders of the depositary shares), issue additional
shares of the Series B Preferred Stock; provided, that any such additional shares of Series B Preferred Stock are not
treated as “disqualified preferred stock” within the meaning of Section 1059(f)(2) of the Internal Revenue Code (or
any successor provision) and such additional shares of Series B Preferred Stock are otherwise treated as fungible
with our already outstanding Series B Preferred Stock as represented by the depositary shares for U.S. federal
income tax purposes. The additional shares of Series B Preferred Stock would form a single series with our already
outstanding Series B Preferred Stock represented by the depositary shares. We have the authority to issue fractional
shares of Series B Preferred Stock.
The Series B Preferred Stock is fully paid and non-assessable. Holders of the Series B Preferred Stock do not
have preemptive or similar rights to acquire any of our capital stock. Holders do not have the right to convert Series
B Preferred Stock into, or exchange Series B Preferred Stock for, shares of any other class or series of shares or
other securities of ours. The Series B Preferred Stock has no stated maturity and is not subject to any sinking fund,
retirement fund or purchase fund or other obligation of the Company to redeem or purchase the Series B Preferred
Stock represented by the depositary shares.
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Ranking
The Series B Preferred Stock rank senior to our common stock and any other junior stock (as defined herein)
with respect to the payment of dividends and distributions of assets upon liquidation, dissolution or winding-up,
equally with our Series A Preferred Stock and Series C Preferred Stock and each other series of our preferred stock
that we may issue the terms of which provide that they rank equally with the Series B Preferred Stock with respect
to the payment of dividends and distributions of assets upon liquidation, dissolution or winding-up and junior to
each other series of our preferred stock that we may issue in the future the terms of which provide that they rank
senior to the Series B Preferred Stock with respect to the payment of dividends and distributions of assets upon our
liquidation, dissolution or winding-up.
Dividends
Dividends on the Series B Preferred Stock are not mandatory. Holders of Series B Preferred Stock are entitled
to receive dividends only when, as and if declared by the Board of Directors of the Company or a duly authorized
committee of the Board, out of lawfully available funds for the payment of dividends, non-cumulative cash
dividends from the original issue date, quarterly on the 15th day of January, April, July and October of each year,
commencing on July 15, 2015. These dividends will accrue with respect to a particular dividend period on the
liquidation preference amount of $1,000 per share at an annual rate of 7.50% from and including the original issue
date or the most recent dividend payment date. In the event that we issue additional Series B Preferred Stock after
the original issue date, dividends on such additional shares may accrue from the original issue date or the most
recent dividend payment date at the time such additional shares are issued.
Dividends, if so declared, are payable to holders of record of the Series B Preferred Stock as represented by
the depositary shares as they appear on our books on the applicable record date, which shall be January 1, April 1,
July 1 and October 1, as applicable, immediately preceding the applicable dividend payment date or such other
record date fixed by our Board of Directors (or a duly authorized committee of the Board) that is not more than 60
nor less than 10 days prior to such dividend payment date (each, a “dividend record date”). These dividend record
dates will apply regardless of whether a particular dividend record date is a business day.
A dividend period is the period from and including a dividend payment date to but excluding the next dividend
payment date. Dividends payable on the Series B Preferred Stock are computed on the basis of a 360-day year
consisting of twelve 30-day months. If any date on which dividends would otherwise be payable is not a business
day, then the dividend payment date will be the next succeeding business day with the same force and effect as if
made on the original dividend payment date, and no additional dividends shall accrue on the amount so payable
from such date to such next succeeding business day.
Dividends on the Series B Preferred Stock are not cumulative. Accordingly, if our Board of Directors, or a
duly authorized committee of the Board, does not declare a dividend on the Series B Preferred Stock payable in
respect of any dividend period before the related dividend payment date, such dividend will not accumulate and will
not be payable and we will have no obligation to pay a dividend for that dividend period on the dividend payment
date or at any future time or to pay interest with respect to such dividends, whether or not dividends are declared for
any future dividend period on the Series B Preferred Stock or any other parity stock we may issue in the future.
So long as any Series B Preferred Stock remains outstanding for any dividend period, unless the full dividends
for the latest completed dividend period on all outstanding Series B Preferred Stock and parity stock (as defined
below) have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside):
•
•
no dividend shall be paid or declared on our common stock, or any other junior stock (other than a dividend
payable solely in common stock or other junior stock);
no common stock or other junior stock shall be purchased, redeemed or otherwise acquired for
consideration by us, directly or indirectly (other than (1) as a result of a reclassification of junior stock for
or into other junior stock, or the exchange or conversion of one share of junior stock for or into another
13
share of junior stock, or (2) through the use of the proceeds of a substantially contemporaneous sale of
junior stock or (3) in connection with grants or settlements of grants (including any “cashless exercise” or
“net share settlement”) pursuant to any equity compensation plan adopted by us)) nor shall any monies be
paid to or made available for a sinking fund for the redemption of such stock; and
•
no shares of Series B Preferred Stock or parity stock shall be repurchased, redeemed or otherwise acquired
for consideration by us other than pursuant to pro rata offers to purchase all, or a pro rata portion, of the
Series B Preferred Stock and such parity stock except by conversion into or exchange for junior stock.
As used in this Exhibit 4.1, “junior stock” means any class or series of our capital stock that ranks junior to the
Series B Preferred Stock either as to the payment of dividends or as to the distribution of assets upon our liquidation,
dissolution or winding-up. As of the date of this Exhibit 4.1, junior stock consists solely of our common stock.
As used in this Exhibit 4.1, “parity stock” means any class or series of our capital stock that ranks equally with
the Series B Preferred Stock with respect to the payment of dividends and in the distribution of assets on our
liquidation, dissolution or winding-up. As of the date of this Exhibit 4.1, parity stock consists of our Series A
Preferred Stock and Series C Preferred Stock.
When dividends are not paid (or duly provided for) in full on any dividend payment date (or, in the case of
parity stock having dividend payment dates different from the dividend payment dates pertaining to the Series B
Preferred Stock as represented by the depositary shares, on a dividend payment date falling within the related
dividend period for the Series B Preferred Stock) upon the Series B Preferred Stock and any parity stock, all
dividends declared by our Board of Directors or a duly authorized committee of the Board upon the Series B
Preferred Stock and all such parity stock and payable on such dividend payment date (or, in the case of parity stock
having dividend payment dates different from the dividend payment dates pertaining to the Series B Preferred Stock,
on a dividend payment date falling within the related dividend period for the Series B Preferred Stock) shall be
declared by the Board or such committee pro rata based on the liquidation preference of Series B Preferred Stock
and all such parity stock so that the respective amounts of such dividends shall bear the same ratio to each other as
all declared dividends per share of Series B Preferred Stock and all parity stock payable on such dividend payment
date (or, in the case of parity stock having dividend payment dates different from the dividend payment dates
pertaining to the Series B Preferred Stock, on a dividend payment date falling within the related dividend period for
the Series B Preferred Stock) bear to each other.
Our ability to pay dividends on the Series B Preferred Stock may be limited by the terms of our agreements
governing our existing and future indebtedness and by the provisions of other existing and future agreements.
In addition, 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 capital stock, including the Series B Preferred Stock.
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.
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Liquidation Rights
Upon our voluntary or involuntary liquidation, dissolution or winding-up, holders of the Series B Preferred
Stock and any parity stock are entitled to receive out of our assets available for distribution to stockholders, after
satisfaction of liabilities to creditors, if any, but before any distribution of assets is made to holders of our common
stock or any of our other junior stock, a liquidating distribution in the amount equal to the liquidation preference of
$1,000 per share of Series B Preferred Stock or the amount of the liquidation preference of such parity stock, as
applicable, plus any declared and unpaid dividends. Holders of the Series B Preferred Stock will not be entitled to
any other amounts from us after they have received their full liquidation preference plus any declared and unpaid
dividends.
In any such distribution, if our assets are not sufficient to pay the liquidation distributions in full to all holders
of the Series B Preferred Stock and all holders of any parity stock, the amounts paid to the holders of Series B
Preferred Stock and to the holders of any parity stock will be paid pro rata in accordance with the respective
aggregate liquidation distributions of those holders. In any such distribution, the liquidation distribution to any
holder of preferred stock means the amount payable to such holder in such distribution, including liquidation
preference and any declared but unpaid dividends (and any unpaid, accrued cumulative dividends in the case of any
holder of shares on which dividends accrue on a cumulative basis). If the liquidation distributions have been paid in
full to all holders of shares of the Series B Preferred Stock and any holders of shares of parity stock and shares
ranking senior to the Series B Preferred Stock with respect to the distribution of assets upon liquidation, dissolution
or winding-up, the holders of our other classes of capital stock will be entitled to receive all of our remaining assets
according to their respective rights and preferences.
For purposes of this section, a consolidation or merger involving the Company with any other entity, including
the consolidation or merger in which the holders of Series B Preferred Stock receive cash, securities or other
property for their shares, or the sale or transfer of all or substantially all of the property and assets of the Company
for cash, securities or other property, will not be deemed to constitute a liquidation, dissolution or winding-up.
Redemption
The Series B Preferred Stock represented by the depositary shares is not subject to any mandatory redemption,
sinking fund, retirement fund, purchase fund or other similar provisions.
The Series B Preferred Stock is not redeemable prior to April 15, 2020. On and after that date, the Series B
Preferred Stock will be redeemable at our option, in whole or in part, upon not less than 30 days nor more than
60 days notice, at a redemption price equal to $1,000 per share plus declared and unpaid dividends on the shares of
Series B Preferred Stock called for redemption for prior dividend periods, if any, plus accrued but unpaid dividends
(whether or not declared) thereon for the then-current dividend period, to, but excluding, the date of redemption,
without accumulation of any other undeclared dividends. Holders of the Series B Preferred Stock and, in turn, the
holders of the depositary shares have no right to require the redemption of the Series B Preferred Stock.
The redemption price for any shares of Series B Preferred Stock shall be payable on the redemption date to the
holders of such shares against book entry transfer or surrender of the certificate(s) evidencing such shares to us or
our agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the dividend
record date for a dividend period shall not be paid to the holder entitled to receive the redemption price on the
redemption date, but rather shall be paid to the holder of record of the redeemed shares on such dividend record date
relating to the dividend payment date provided in “-Dividends” above.
If shares of the Series B Preferred Stock are to be redeemed, the notice of redemption shall be given by first
class mail to the holders of record of the Series B Preferred Stock to be redeemed, mailed not less than 30 days nor
more than 60 days prior to the date fixed for redemption thereof (provided that, if the Series B Preferred Stock is
held in book-entry form through The Depository Trust Company, or “DTC,” we may give such notice in any manner
permitted by DTC). Each notice of redemption will include a statement setting forth:
15
•
•
•
•
the redemption date;
the number of shares of Series B Preferred Stock to be redeemed and, if less than all the shares of Series B
Preferred Stock held by such holder are to be redeemed, the number of such shares of Series B Preferred
Stock to be redeemed from such holder;
the redemption price; and
that the shares should be delivered via book entry transfer or the place or places where holders may
surrender certificates evidencing the Series B Preferred Stock for payment of the redemption price.
If notice of redemption of any shares of Series B Preferred Stock has been given and if the funds necessary for
such redemption and to pay declared and unpaid dividends have been set aside by us for the benefit of the holders of
such shares of Series B Preferred Stock so called for redemption, then, from and after the redemption date, no
further dividends will be declared on such shares of Series B Preferred Stock as represented by the depositary
shares, such shares of Series B Preferred Stock shall no longer be deemed outstanding and all rights of the holders of
such shares of Series B Preferred Stock will terminate, except the right to receive the redemption price, without
interest.
In case of any redemption of only part of the shares of Series B Preferred Stock at the time outstanding, the
shares of Series B Preferred Stock to be redeemed shall be selected either pro rata or by lot.
Our ability to redeem the Series B Preferred Stock as described above may be limited by the terms of our
agreements governing our existing and future indebtedness and by the provisions of other existing and future
agreements.
Voting Rights
Except as provided below or as otherwise may be required by applicable law, the holders of the Series B
Preferred Stock and, in turn, the holders of the depositary shares representing the Series B Preferred Stock have no
voting rights.
Whenever dividends on any Series B Preferred Stock shall not have been declared and paid for the equivalent
of six or more dividend periods, whether or not for consecutive dividend periods (a “nonpayment event”), the
holders of the Series B Preferred Stock, voting together as a single class with holders of any and all other series of
voting preferred stock (as defined below) then outstanding, will be entitled to vote for the election of a total of two
additional members of the Board of Directors of the Company (the “preferred stock directors”), provided that the
election of any such directors shall not cause us to violate the corporate governance requirement of any exchange on
which our securities may be listed or quoted that listed or quoted companies must have a majority of independent
directors. The number of preferred stock directors will not be more than two at any time. In the event that the
holders of the Series B Preferred Stock, and any such other holders of voting preferred stock, shall be entitled to
vote for the election of the preferred stock directors following a nonpayment event, the number of directors on the
Company’s Board of Directors shall automatically be increased by two and such directors shall be initially elected
following such nonpayment event at a special or annual meeting called at the request of the holders of record of at
least 20% of the aggregate voting power of the Series B Preferred Stock and any other such series of voting
preferred stock then outstanding (provided that if such request is received less than 90 days before the date fixed for
an annual or special meeting of the stockholders of the Company, then such election shall not be held at such annual
or special meeting of stockholders but at a subsequent annual or special meeting), and at each subsequent annual
meeting of stockholders of the Company, so long as the rights related to a nonpayment event remain in effect.
As used in this Exhibit 4.1, “voting preferred stock” means, with regard to any election or removal of a
preferred stock director or any other matter as to which the holders of Series B Preferred Stock are entitled to vote,
any other class or series of our parity stock upon which like voting rights have been conferred and are exercisable.
16
If and when dividends, for at least four consecutive dividend periods following a nonpayment event have been
paid in full (or declared and a sum sufficient for such payment shall have been set aside), the holders of the Series B
Preferred Stock shall be divested of the foregoing voting rights (subject to revesting in the event of each subsequent
nonpayment event) and, if such voting rights for all other holders of voting preferred stock have terminated, the term
of office of each preferred stock director so elected shall terminate and the number of directors on the Board of
Directors of the Company shall automatically decrease by two. In determining whether dividends have been paid for
four dividend periods following a nonpayment event, we may take account of any dividend we elect to pay for such
a dividend period after the regular dividend payment date for that period has passed.
Any preferred stock director may be removed at any time without cause by the holders of record of a majority
of the aggregate voting power, as determined under the Certificate of Incorporation, of the Series B Preferred Stock
and any other shares of voting preferred stock then outstanding (voting together as a single class) when they have
the voting rights described above. So long as a nonpayment event shall continue, any vacancy in the office of a
preferred stock director (other than prior to the initial election after a nonpayment event) may be filled by the written
consent of the preferred stock director remaining in office, or if none remains in office, by a vote of the holders of
record of a majority of the outstanding shares of Series B Preferred Stock and any other shares of voting preferred
stock then outstanding (voting together as a single class) when they have the voting rights described above. Any vote
of stockholders to remove, or to fill a vacancy in the office of, a preferred stock director may be taken at a special or
annual meeting of such stockholders, called as provided above for an initial election of preferred stock director after
a nonpayment event (provided that if such request is received less than 90 days before the date fixed for an annual or
special meeting of the stockholders of the Company, then such election shall not be held at such annual or special
meeting of stockholders but at a subsequent annual or special meeting). The preferred stock directors shall each be
entitled to one vote per director on any matter. Each preferred stock director elected at any special or annual meeting
of stockholders or by written consent of the other preferred stock director shall hold office until the next annual
meeting of the stockholders of the Company if such office shall not have previously terminated as above provided.
So long as any shares of Series B Preferred Stock remain outstanding and subject in all cases to any other vote
of stockholders required under applicable law or the Certificate of Incorporation:
• we will not, without the affirmative vote or consent of the holders of at least two-thirds of the voting power
of Series B Preferred Stock and all other series of voting preferred stock entitled to vote thereon, voting
together as a single class, given in person or by proxy, either in writing without a meeting or at a meeting,
authorize or create, or increase the authorized amount of, any specific class or series of capital stock
ranking senior to the Series B Preferred Stock with respect to the payment of dividends or the distribution
of our assets upon our liquidation, dissolution or winding up;
• we will not, without the affirmative vote or consent of the holders of at least two-thirds of the outstanding
shares of Series B Preferred Stock given in person or by proxy, either in writing without a meeting or at a
meeting:
•
•
amend, alter or repeal the provisions of the Certificate of Incorporation or the Certificate of Designations so
as to adversely affect the rights, preferences, privileges and voting powers of the Series B Preferred Stock;
or
consummate a binding share exchange or reclassification involving the Series B Preferred Stock or a
merger or consolidation of us with another entity, unless in each case (i) shares of Series B Preferred Stock
remain outstanding or, in the case of any such merger or consolidation with respect to which we are not the
surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or
resulting entity or its ultimate parent, in each case, that is an entity organized and existing under the laws of
the United States of America, any state thereof or the District of Columbia, and (ii) such shares of Series B
Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights,
preferences, privileges and voting powers and limitations and restrictions, taken as a whole, as are not less
favorable to the holders thereof than the rights, preferences, privileges and voting powers and limitations
and restrictions of the Series B Preferred Stock, taken as a whole, provided, however, that (1) any increase
17
in the amount of our authorized but unissued shares of preferred stock, (2) any increase in the authorized or
issued shares of Series B Preferred Stock, and (3) the creation and issuance, or an increase in the authorized
or issued amount, of other series of preferred stock ranking equally with or junior to the Series B Preferred
Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative)
and/ or the distribution of assets upon our liquidation, dissolution or winding up, will not be deemed to
adversely affect the rights, preferences, privileges or voting powers of the Series B Preferred Stock.
Without the consent of the holders of the Series B Preferred Stock so long as such action does not adversely
affect the rights, preferences, privileges and voting powers and limitations and restrictions of the Series B Preferred
Stock, the Board of Directors of the Company may, subject to any vote of our stockholders required by applicable
law or the Certificate of Incorporation, by resolution, amend, alter, supplement or repeal any terms of the Series B
Preferred Stock:
•
•
to cure any ambiguity, or to cure, correct or supplement any provision contained in the Certificate of
Designations that may be defective or inconsistent; or
to make any provision with respect to matters or questions arising with respect to the Series B Preferred
Stock that is not inconsistent with the provisions of the Certificate of Designations;
provided that any such amendment, alteration, supplement or repeal of any terms of the Series B Preferred Stock
effected in order to conform the terms thereof to the description of the terms of the Series B Preferred Stock set forth
under “Description of the Series B Preferred Stock” in this Exhibit 4.1 shall be deemed not to adversely affect the
rights, preferences, privileges and voting powers of the Series B Preferred Stock.
On each matter on which holders of Series B Preferred Stock are entitled to vote, each share of Series B
Preferred Stock will be entitled to one vote, and when shares of any other class or series of our preferred stock have
the right to vote with the Series B Preferred Stock as a single class on any matter, the Series B Preferred Stock and
the shares of each such other class or series will have one vote for each $25.00 of liquidation preference (excluding
accrued and unpaid dividends)(equivalent to one per depositary share).
The foregoing voting provisions will not apply with respect to the Series B Preferred Stock if, at or prior to the
time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding
Series B Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient funds
shall have been set aside by us for the benefit of the holders of Series B Preferred Stock to effect such redemption.
Conversion
Holders do not have the right to convert Series B Preferred Stock into, or exchange Series B Preferred Stock
for, any other securities or property of the Company.
Listing of the Series B Preferred Stock
The Series B Preferred Stock are not listed on any exchange except as represented by the depositary shares.
DESCRIPTION OF THE DEPOSITARY SHARES REPRESENTING INTERESTS IN THE
SERIES B PREFERRED STOCK
The following description set forth below of our depositary shares representing fractional interests in the
Series B Preferred Stock is only a summary and does not purport to be complete. It is subject to and qualified in its
entirety by reference to the terms and provisions of the Series B Deposit Agreement (as defined below), the form of
depositary receipts, which contain the terms and provisions of the depositary shares, our Certificate of Incorporation
and our Certificate of Designations for our 7.50% Non-Cumulative Preferred Stock, Series B, each of which are
incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part.
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General
Each depositary share represents a 1/40th interest in a share of the Series B Preferred Stock and is evidenced
by a depositary receipt. We deposited the underlying shares of the Series B Preferred Stock with the depositary
pursuant to a deposit agreement among us, American Stock Transfer & Trust Company, LLC, acting as depositary,
and the holders from time to time of the depositary receipts (the “Series B Deposit Agreement”). Subject to the
terms of the Series B Deposit Agreement, each owner of a depositary receipt is entitled, in proportion to the
fractional interest of a share of Series B Preferred Stock represented by the depositary shares evidenced by that
depositary receipt, to all the rights and preferences of Series B Preferred Stock represented by those depositary
shares (including any dividend, liquidation, redemption and voting rights).
The depositary shares are evidenced by depositary receipts issued pursuant to the Series B Deposit Agreement.
Immediately following the issuance and delivery of the Series B Preferred Stock by us to the depositary, we caused
the depositary to issue, on our behalf, the depositary receipts.
Dividends and Other Distributions
Any dividend or other distribution (including upon our voluntary or involuntary liquidation, dissolution or
winding-up) paid in respect of a depositary share will be in an amount equal to 1/40th of the dividend declared or
distribution payable, as the case may be, on the underlying share of the Series B Preferred Stock. The depositary will
distribute all cash dividends and other cash distributions received on the Series B Preferred Stock to the holders of
record of the depositary receipts in proportion to the number of depositary shares held by each holder on the relevant
record date. In the event of a distribution other than in cash, the depositary will distribute property received by it to
the holders of record of the depositary receipts in proportion to the number of depositary shares held by each holder,
unless the depositary determines that this distribution is not feasible, in which case the depositary may, with our
approval, adopt a method of distribution that it deems practicable, including the sale of the property and distribution
of the net proceeds of that sale to the holders of the depositary receipts.
Record dates for the payment of dividends and other matters relating to the depositary shares will be the same
as the corresponding record dates for the Series B Preferred Stock represented by the depositary shares.
The amount paid as dividends or otherwise distributable by the depositary with respect to the depositary shares
or the underlying Series B Preferred Stock will be reduced by any amounts required to be withheld by us or the
depositary on account of taxes or other governmental charges. The depositary may refuse to make any payment or
distribution, or any transfer, exchange or withdrawal of any depositary shares or the shares of the Series B Preferred
Stock until such taxes or other governmental charges are paid.
Withdrawal of Series B Preferred Stock
Unless the related depositary shares have been previously called for redemption, a holder of depositary shares
may surrender his or her depositary receipts at the corporate trust office of the depositary, pay any taxes, charges and
fees provided for in the Series B Deposit Agreement and comply with any other requirements of the Series B
Deposit Agreement for the number of shares of Series B Preferred Stock and any money or other property
represented by such holder’s depositary receipts. A holder of depositary shares who withdraws shares of Series B
Preferred Stock will be entitled to receive whole shares of Series B Preferred Stock on the basis set forth herein;
partial shares of Series B Preferred Stock will not be issued.
However, holders of whole shares of Series B Preferred Stock will not be entitled to deposit those shares under
the Series B Deposit Agreement or to receive depositary receipts for those shares after the withdrawal. If the
depositary shares surrendered by the holder in connection with the withdrawal exceed the number of depositary
shares that represent the number of whole shares of Series B Preferred Stock to be withdrawn, the depositary will
deliver to the holder at the same time a new depositary receipt evidencing the excess number of depositary shares.
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Redemption
If the Series B Preferred Stock underlying the depositary shares is redeemed, in whole or in part, a
corresponding number of depositary shares will be redeemed with the proceeds received by the depositary from the
redemption of the Series B Preferred Stock held by the depositary. The redemption price per depositary share will be
equal to 1/40th of the applicable redemption price per share payable in respect of such Series B Preferred Stock.
Whenever we redeem shares of Series B Preferred Stock held by the depositary, the depositary will redeem, as
of the same redemption date, the number of depositary shares representing shares of Series B Preferred Stock so
redeemed. If fewer than all of the outstanding depositary shares are redeemed, the depositary will select the
depositary shares to be redeemed pro rata or by lot. The depositary will mail notice of redemption to holders of the
depositary receipts not less than 30 and not more than 60 days prior to the date fixed for redemption of the Series B
Preferred Stock represented by the depositary shares and the related depositary shares.
Voting Rights
Because each depositary share represents a 1/40th interest in a share of the Series B Preferred Stock, holders of
depositary receipts will be entitled to 1/40th of a vote per share of the Series B Preferred Stock under those limited
circumstances in which holders of the Series B Preferred Stock represented by the depositary shares are entitled to
vote. Holders of the depositary shares representing the Series B Preferred Stock do not have any voting rights,
except for the limited voting rights described under “Description of the Series B Preferred Stock-Voting Rights.”
When the depositary receives notice of any meeting at which the holders of the Series B Preferred Stock are
entitled to vote, the depositary will mail (or otherwise transmit by an authorized method) the information contained
in the notice to the record holders of the depositary shares relating to the Series B Preferred Stock. Each record
holder of the depositary shares on the record date, which will be the same date as the record date for the Series B
Preferred Stock, may instruct the depositary to vote the number of the Series B Preferred Stock votes represented by
the holder’s depositary shares. To the extent possible, the depositary will vote the number of the Series B Preferred
Stock votes represented by depositary shares in accordance with the instructions it receives.
We will agree to take all reasonable actions that the depositary determines are necessary to enable the
depositary to vote as instructed. If the depositary does not receive specific instructions from the holders of any
depositary shares representing the Series B Preferred Stock, it will vote all depositary shares held by it
proportionately with instructions received.
Conversion
Holders of depositary receipts do not have the right to convert depositary shares representing the Series B
Preferred Stock into, or exchange depositary shares representing the Series B Preferred Stock for, any other
securities or property of the Company.
Amendment and Termination of the Series B Deposit Agreement
The form of depositary receipt evidencing the depositary shares and any provision of the Series B Deposit
Agreement may be amended by agreement between us and the depositary. However, any amendment that materially
and adversely alters the rights of the existing holders of depositary shares will not be effective unless the amendment
has been approved by the record holders of at least a majority of the depositary shares then outstanding. Either we or
the depositary may terminate the Series B Deposit Agreement if there has been a final distribution in respect of the
Series B Preferred Stock in connection with our liquidation, dissolution, or winding up.
Charges of Depositary
We will pay all transfer and other taxes, assessments, and governmental charges arising solely from the
existence of the depositary arrangements, and we paid the fees of the depositary in connection with the initial
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deposit of the Series B Preferred Stock represented by the depositary shares. Holders of depositary receipts will pay
transfer and other taxes, assessments, and governmental charges and any other charges as are expressly provided in
the Series B Deposit Agreement to be for their accounts. The depositary may refuse to effect any transfer of a
depositary receipt or any withdrawals of Series B Preferred Stock evidenced by a depositary receipt until all taxes,
assessments, and governmental charges with respect to the depositary receipt or Series B Preferred Stock are paid by
their holders.
Resignation and Removal of Depositary
The depositary may resign at any time by delivering to us notice of its election to do so, and we may remove
the depositary at any time. Any resignation or removal will take effect only upon the appointment of a successor
depositary and the successor depositary’s acceptance of the appointment. Any successor depositary must be a
U.S. bank or trust company.
Miscellaneous
The depositary will forward to the holders of depositary shares all of our reports and communications which
are delivered to the depositary and which we are required to furnish to the holders of our Series B Preferred Stock.
Neither we nor the depositary will be liable if we are prevented or delayed by law or any circumstance beyond
our control in performing our obligations under the Series B Deposit Agreement. All of our obligations as well as the
depositary’s obligations under the Series B Deposit Agreement are limited to performance in good faith of our
respective duties set forth in the Series B Deposit Agreement, and neither of us will be obligated to prosecute or
defend any legal proceeding relating to any depositary shares or Series B Preferred Stock unless provided with
satisfactory indemnity. We, and the depository, may rely upon written advice of counsel or accountants, or
information provided by persons presenting Series B Preferred Stock for deposit, holders of depositary shares, or
other persons believed to be competent and on documents believed to be genuine.
Listing of the Depositary Shares
The depositary shares representing the Series B Preferred Stock are listed on the Nasdaq Global Market under
the symbol “NGHCO.”
Transfer Agent, Registrar, Dividend Disbursing Agent and Redemption Agent
American Stock Transfer & Trust Company, LLC is the transfer agent, registrar, dividend disbursing agent and
redemption agent for the depositary shares representing the Series B Preferred Stock.
Book-Entry; Delivery and Form
The depositary shares are represented by one or more global securities that are deposited with and registered
in the name of DTC or its nominee. The global securities are issued to DTC, the depository for the depositary shares,
who keeps a computerized record of its participants whose clients have purchased the depositary shares. Each
participant will then keep a record of its clients. Unless exchanged in whole or in part for a certificated security, a
global security may not be transferred. However, DTC, its nominees, and their successors may transfer a global
security as a whole to one another. Beneficial interests in the global securities will be shown on, and transfers of the
global securities will be made only through, records maintained by DTC and its participants.
Purchases of depositary shares through the DTC system must be made by or through a direct participant, who
receives credit for the depositary shares on DTC’s records. The beneficial owner’s ownership interest is only
recorded in the direct (or indirect) participants’ records. DTC’s records only show the identity of the direct
participants and the amount of the depositary shares held by or through them. The beneficial owner does not receive
a written confirmation of the purchase or sale or any periodic account statement directly from DTC. The beneficial
21
owner receives these from its direct (or indirect) participant. Thus, the direct (or indirect) participants are responsible
for keeping accurate account of the holdings of their customers.
We wire dividend payments to DTC’s nominee and we treat DTC’s nominee as the owner of the global
securities for all purposes. Accordingly, we have no direct responsibility or liability to pay amounts due on the
global securities to any beneficial owner in the global securities.
Any redemption notices will be sent by us directly to DTC, who will in turn inform the direct participants,
who will then contact the beneficial holders.
It is DTC’s current practice, upon receipt of any payment of dividends or liquidation amount, to credit direct
participants’ accounts on the payment date based on their holdings of beneficial interests in the global securities as
shown on DTC’s records. In addition, it is DTC’s current practice to assign any consenting or voting rights to direct
participants whose accounts are credited with preferred securities on a record date, by using an omnibus proxy.
Payments by participants to owners of beneficial interests in the global securities, and voting by participants, will be
based on the customary practices between the participants and owners of beneficial interests, as is the case with the
Series B Preferred Stock held for the account of customers registered in “street name.” However, payments will be
the responsibility of the participants and not of DTC or us.
Depositary Shares represented by global securities will be exchangeable for certificated securities with the
same terms in authorized denominations only if:
• DTC is unwilling or unable to continue as depositary or if DTC ceases to be a clearing agency registered
under applicable law and a successor depositary is not appointed by us within 90 days; or
• we determine not to require all of the depositary shares to be represented by global securities.
If the book-entry-only system is discontinued, the transfer agent will keep the registration books for the
depositary shares at its corporate office.
DESCRIPTION OF THE SERIES C PREFERRED STOCK
The following description set forth below of our 7.50% Non-Cumulative Preferred Stock, Series C (“Series C
Preferred Stock”) is only a summary and does not purport to be complete. It is subject to and qualified in its entirety
by reference to our Certificate of Incorporation and our Certificate of Designations for our 7.50% Non-Cumulative
Preferred Stock, Series C, each of which are incorporated by reference as an exhibit to the Annual Report on Form
10-K of which this Exhibit 4.1 is a part. You should refer to such certificate for specific information on the Series C
Preferred Stock.
General
The Certificate of Designations sets forth the specific rights, preferences, limitations and other terms of the
Series C Preferred Stock as represented by the depositary shares. The Series C Preferred Stock is a single series of
authorized preferred stock consisting of 200,000 shares.
The Certificate of Incorporation permits us to authorize the issuance of up to 10,000,000 shares of preferred
stock, in one or more series without stockholder action. The Series C Preferred Stock constitutes a series of our
authorized preferred stock. We may from time to time, without notice to or the consent of holders of the Series C
Preferred Stock (or the consent of the holders of the depositary shares), issue shares of preferred stock that rank
equally with or junior to the Series C Preferred Stock. We may also from time to time, without notice to or consent
of holders of the Series C Preferred Stock (or the consent of the holders of the depositary shares), issue additional
shares of the Series C Preferred Stock; provided, that any such additional shares of Series C Preferred Stock are not
22
treated as “disqualified preferred stock” within the meaning of Section 1059(f)(2) of the Internal Revenue Code (or
any successor provision) and such additional shares of Series C Preferred Stock are otherwise treated as fungible
with the already outstanding Series C Preferred Stock as represented by the depositary shares for U.S. federal
income tax purposes. The additional shares of Series C Preferred Stock would form a single series with the already
outstanding Series C Preferred Stock represented by the depositary shares. We have the authority to issue fractional
shares of Series C Preferred Stock.
The Series C Preferred Stock is fully paid and non-assessable. Holders of the Series C Preferred Stock do not
have preemptive or similar rights to acquire any of our capital stock. Holders do not have the right to convert Series
C Preferred Stock into, or exchange Series C Preferred Stock for, shares of any other class or series of shares or
other securities of ours. The Series C Preferred Stock has no stated maturity and is not subject to any sinking fund,
retirement fund or purchase fund or other obligation of the Company to redeem or purchase the Series C Preferred
Stock as represented by the depositary shares.
Ranking
The Series C Preferred Stock rank senior to our common stock and any other junior stock (as defined herein)
with respect to the payment of dividends and distributions of assets upon liquidation, dissolution or winding-up,
equally with our Series A Preferred Stock, Series B Preferred Stock and each other series of our preferred stock that
we may issue the terms of which provide that they rank equally with the Series C Preferred Stock with respect to the
payment of dividends and distributions of assets upon liquidation, dissolution or winding-up and junior to each other
series of our preferred stock that we may issue in the future the terms of which provide that they rank senior to the
Series C Preferred Stock with respect to the payment of dividends and distributions of assets upon our liquidation,
dissolution or winding-up.
Dividends
Dividends on the Series C Preferred Stock are not mandatory. Holders of Series C Preferred Stock are entitled
to receive only when, as and if declared by the Board of Directors of the Company or a duly authorized committee
of the Board, out of lawfully available funds for the payment of dividends, non-cumulative cash dividends from the
original issue date, quarterly on the 15th day of January, April, July and October of each year, commencing on
October 15, 2016. These dividends will accrue with respect to a particular dividend period on the liquidation
preference amount of $1,000 per share at an annual rate of 7.50% from and including the original issue date or the
most recent dividend payment date. In the event that we issue additional Series C Preferred Stock after the original
issue date, dividends on such additional shares may accrue from the original issue date or the most recent dividend
payment date at the time such additional shares are issued.
Dividends, if so declared, are payable to holders of record of the Series C Preferred Stock as represented by
the depositary shares as they appear on our books on the applicable record date, which shall be January 1, April 1,
July 1 and October 1, as applicable, immediately preceding the applicable dividend payment date or such other
record date fixed by our Board of Directors (or a duly authorized committee of the Board) that is not more than 60
nor less than 10 days prior to such dividend payment date (each, a “dividend record date”). These dividend record
dates will apply regardless of whether a particular dividend record date is a business day.
A dividend period is the period from and including a dividend payment date to but excluding the next dividend
payment date. Dividends payable on the Series C Preferred Stock will be computed on the basis of a 360-day year
consisting of twelve 30-day months. If any date on which dividends would otherwise be payable is not a business
day, then the dividend payment date will be the next succeeding business day with the same force and effect as if
made on the original dividend payment date, and no additional dividends shall accrue on the amount so payable
from such date to such next succeeding business day.
Dividends on the Series C Preferred Stock are not cumulative. Accordingly, if our Board of Directors, or a
duly authorized committee of the Board, does not declare a dividend on the Series C Preferred Stock payable in
respect of any dividend period before the related dividend payment date, such dividend will not accumulate and will
23
not be payable and we will have no obligation to pay a dividend for that dividend period on the dividend payment
date or at any future time or to pay interest with respect to such dividends, whether or not dividends are declared for
any future dividend period on the Series C Preferred Stock or any other parity stock we may issue in the future.
So long as any Series C Preferred Stock remains outstanding for any dividend period, unless the full dividends
for the latest completed dividend period on all outstanding Series C Preferred Stock and parity stock (as defined
below) have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside):
•
•
•
no dividend shall be paid or declared on our common stock, or any other junior stock (other than a dividend
payable solely in common stock or other junior stock);
no common stock or other junior stock shall be purchased, redeemed or otherwise acquired for
consideration by us, directly or indirectly (other than (1) as a result of a reclassification of junior stock for
or into other junior stock, or the exchange or conversion of one share of junior stock for or into another
share of junior stock, or (2) through the use of the proceeds of a substantially contemporaneous sale of
junior stock or (3) in connection with grants or settlements of grants (including any “cashless exercise” or
“net share settlement”) pursuant to any equity compensation plan adopted by us) nor shall any monies be
paid to or made available for a sinking fund for the redemption of such stock; and
no shares of Series C Preferred Stock or parity stock shall be repurchased, redeemed or otherwise acquired
for consideration by us other than pursuant to pro rata offers to purchase all, or a pro rata portion, of the
Series C Preferred Stock and such parity stock except by conversion into or exchange for junior stock.
As used in this Exhibit 4.1, “junior stock” means any class or series of our capital stock that ranks junior to the
Series C Preferred Stock either as to the payment of dividends or as to the distribution of assets upon our liquidation,
dissolution or winding-up. As of the date of this Exhibit 4.1, junior stock consists solely of our common stock.
As used in this Exhibit 4.1, “parity stock” means any class or series of our capital stock that ranks equally with
the Series C Preferred Stock with respect to the payment of dividends and in the distribution of assets on our
liquidation, dissolution or winding-up. As of the date of this Exhibit 4.1, parity stock consists of our Series A
Preferred Stock and Series B Preferred Stock.
When dividends are not paid (or duly provided for) in full on any dividend payment date (or, in the case of
parity stock having dividend payment dates different from the dividend payment dates pertaining to the Series C
Preferred Stock as represented by the depositary shares, on a dividend payment date falling within the related
dividend period for the Series C Preferred Stock) upon the Series C Preferred Stock and any parity stock, all
dividends declared by our Board of Directors or a duly authorized committee of the Board upon the Series C
Preferred Stock and all such parity stock and payable on such dividend payment date (or, in the case of parity stock
having dividend payment dates different from the dividend payment dates pertaining to the Series C Preferred Stock,
on a dividend payment date falling within the related dividend period for the Series C Preferred Stock) shall be
declared by the Board or such committee pro rata based on the liquidation preference of Series C Preferred Stock
and all such parity stock so that the respective amounts of such dividends shall bear the same ratio to each other as
all declared dividends per share of Series C Preferred Stock and all parity stock payable on such dividend payment
date (or, in the case of parity stock having dividend payment dates different from the dividend payment dates
pertaining to the Series C Preferred Stock, on a dividend payment date falling within the related dividend period for
the Series C Preferred Stock) bear to each other.
Our ability to pay dividends on the Series C Preferred Stock may be limited by the terms of our agreements
governing our existing and future indebtedness and by the provisions of other existing and future agreements.
In addition, 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
24
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 capital stock, including the Series C Preferred Stock.
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.
Liquidation Rights
Upon our voluntary or involuntary liquidation, dissolution or winding-up, holders of the Series C Preferred
Stock and any parity stock are entitled to receive out of our assets available for distribution to stockholders, after
satisfaction of liabilities to creditors, if any, but before any distribution of assets is made to holders of our common
stock or any of our other junior stock, a liquidating distribution in the amount equal to the liquidation preference of
$1,000 per share of Series C Preferred Stock or the amount of the liquidation preference of such parity stock, as
applicable, plus any declared and unpaid dividends. Holders of the Series C Preferred Stock will not be entitled to
any other amounts from us after they have received their full liquidation preference plus any declared and unpaid
dividends.
In any such distribution, if our assets are not sufficient to pay the liquidation distributions in full to all holders
of the Series C Preferred Stock and all holders of any parity stock, the amounts paid to the holders of Series C
Preferred Stock and to the holders of any parity stock will be paid pro rata in accordance with the respective
aggregate liquidation distributions of those holders. In any such distribution, the liquidation distribution to any
holder of preferred stock means the amount payable to such holder in such distribution, including liquidation
preference and any declared but unpaid dividends (and any unpaid, accrued cumulative dividends in the case of any
holder of shares on which dividends accrue on a cumulative basis). If the liquidation distributions have been paid in
full to all holders of shares of the Series C Preferred Stock and any holders of shares of parity stock and shares
ranking senior to the Series C Preferred Stock with respect to the distribution of assets upon liquidation, dissolution
or winding-up, the holders of our other classes of capital stock will be entitled to receive all of our remaining assets
according to their respective rights and preferences.
For purposes of this section, a consolidation or merger involving the Company with any other entity, including
the consolidation or merger in which the holders of Series C Preferred Stock receive cash, securities or other
property for their shares, or the sale or transfer of all or substantially all of the property and assets of the Company
for cash, securities or other property, will not be deemed to constitute a liquidation, dissolution or winding-up.
Redemption
The Series C Preferred Stock as represented by the depositary shares is not subject to any mandatory
redemption, sinking fund, retirement fund, purchase fund or other similar provisions.
The Series C Preferred Stock is not redeemable prior to July 15, 2021. On and after that date, the Series C
Preferred Stock will be redeemable at our option, in whole or in part, upon not less than 30 days nor more than 60
days notice, at a redemption price equal to $1,000 per share plus declared and unpaid dividends on the shares of
Series C Preferred Stock called for redemption for prior dividend periods, if any, plus accrued but unpaid dividends
(whether or not declared) thereon for the then-current dividend period, to, but excluding, the date of redemption,
without accumulation of any other undeclared dividends. Holders of the Series C Preferred Stock and, in turn, the
holders of the depositary shares have no right to require the redemption of the Series C Preferred Stock.
25
The redemption price for any shares of Series C Preferred Stock shall be payable on the redemption date to the
holders of such shares against book entry transfer or surrender of the certificate(s) evidencing such shares to us or
our agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the dividend
record date for a dividend period shall not be paid to the holder entitled to receive the redemption price on the
redemption date, but rather shall be paid to the holder of record of the redeemed shares on such dividend record date
relating to the dividend payment date provided in “-Dividends” above.
If shares of the Series C Preferred Stock are to be redeemed, the notice of redemption shall be given by first
class mail to the holders of record of the Series C Preferred Stock to be redeemed, mailed not less than 30 days nor
more than 60 days prior to the date fixed for redemption thereof (provided that, if the Series C Preferred Stock is
held in book-entry form through The Depository Trust Company, or “DTC,” we may give such notice in any manner
permitted by DTC). Each notice of redemption will include a statement setting forth:
•
•
•
•
the redemption date;
the number of shares of Series C Preferred Stock to be redeemed and, if less than all the shares of Series C
Preferred Stock held by such holder are to be redeemed, the number of such shares of Series C Preferred
Stock to be redeemed from such holder;
the redemption price; and
that the shares should be delivered via book entry transfer or the place or places where holders may
surrender certificates evidencing the Series C Preferred Stock for payment of the redemption price.
If notice of redemption of any shares of Series C Preferred Stock has been given and if the funds necessary for
such redemption and to pay declared and unpaid dividends have been set aside by us for the benefit of the holders of
such shares of Series C Preferred Stock so called for redemption, then, from and after the redemption date, no
further dividends will be declared on such shares of Series C Preferred Stock as represented by the depositary
shares, such shares of Series C Preferred Stock shall no longer be deemed outstanding and all rights of the holders of
such shares of Series C Preferred Stock will terminate, except the right to receive the redemption price, without
interest.
In case of any redemption of only part of the shares of Series C Preferred Stock at the time outstanding, the
shares of Series C Preferred Stock to be redeemed shall be selected either pro rata or by lot.
Our ability to redeem the Series C Preferred Stock as described above may be limited by the terms of our
agreements governing our existing and future indebtedness and by the provisions of other existing and future
agreements.
Voting Rights
Except as provided below or as otherwise may be required by applicable law, the holders of the Series C
Preferred Stock and, in turn, the holders of the depositary shares representing the Series C Preferred Stock will have
no voting rights.
Whenever dividends on any Series C Preferred Stock shall not have been declared and paid for the equivalent
of six or more dividend periods, whether or not for consecutive dividend periods (a “nonpayment event”), the
holders of the Series C Preferred Stock, voting together as a single class with holders of any and all other series of
voting preferred stock (as defined below) then outstanding, will be entitled to vote for the election of a total of two
additional members of the Board of Directors of the Company (the “preferred stock directors”), provided that the
election of any such directors shall not cause us to violate the corporate governance requirement of any exchange on
which our securities may be listed or quoted that listed or quoted companies must have a majority of independent
directors. The number of preferred stock directors will not be more than two at any time. In the event that the
holders of the Series C Preferred Stock, and any such other holders of voting preferred stock, shall be entitled to
26
vote for the election of the preferred stock directors following a nonpayment event, the number of directors on the
Company’s Board of Directors shall automatically be increased by two and such directors shall be initially elected
following such nonpayment event at a special or annual meeting called at the request of the holders of record of at
least 20% of the aggregate voting power of the Series C Preferred Stock and any other such series of voting
preferred stock then outstanding (provided that if such request is received less than 90 days before the date fixed for
an annual or special meeting of the stockholders of the Company, then such election shall not be held at such annual
or special meeting of stockholders but at a subsequent annual or special meeting), and at each subsequent annual
meeting of stockholders of the Company, so long as the rights related to a nonpayment event remain in effect.
As used in this Exhibit 4.1, “voting preferred stock” means, with regard to any election or removal of a
preferred stock director or any other matter as to which the holders of Series C Preferred Stock are entitled to vote,
any other class or series of our parity stock upon which like voting rights have been conferred and are exercisable,
including the Series A Preferred Stock and the Series B Preferred Stock.
If and when dividends, for at least four consecutive dividend periods following a nonpayment event have been
paid in full (or declared and a sum sufficient for such payment shall have been set aside), the holders of the Series C
Preferred Stock shall be divested of the foregoing voting rights (subject to revesting in the event of each subsequent
nonpayment event) and, if such voting rights for all other holders of voting preferred stock have terminated, the term
of office of each preferred stock director so elected shall terminate and the number of directors on the Board of
Directors of the Company shall automatically decrease by two. In determining whether dividends have been paid for
four dividend periods following a nonpayment event, we may take account of any dividend we elect to pay for such
a dividend period after the regular dividend payment date for that period has passed.
Any preferred stock director may be removed at any time without cause by the holders of record of a majority
of the aggregate voting power, as determined under the Certificate of Incorporation, of the Series C Preferred Stock
and any other shares of voting preferred stock then outstanding (voting together as a single class) when they have
the voting rights described above. So long as a nonpayment event shall continue, any vacancy in the office of a
preferred stock director (other than prior to the initial election after a nonpayment event) may be filled by the written
consent of the preferred stock director remaining in office, or if none remains in office, by a vote of the holders of
record of a majority of the outstanding shares of Series C Preferred Stock and any other shares of voting preferred
stock then outstanding (voting together as a single class) when they have the voting rights described above. Any vote
of stockholders to remove, or to fill a vacancy in the office of, a preferred stock director may be taken at a special or
annual meeting of such stockholders, called as provided above for an initial election of preferred stock director after
a nonpayment event (provided that if such request is received less than 90 days before the date fixed for an annual or
special meeting of the stockholders of the Company, then such election shall not be held at such annual or special
meeting of stockholders but at a subsequent annual or special meeting). The preferred stock directors shall each be
entitled to one vote per director on any matter. Each preferred stock director elected at any special or annual meeting
of stockholders or by written consent of the other preferred stock director shall hold office until the next annual
meeting of the stockholders of the Company if such office shall not have previously terminated as above provided.
So long as any shares of Series C Preferred Stock remain outstanding and subject in all cases to any other vote
of stockholders required under applicable law or the Certificate of Incorporation:
• we will not, without the affirmative vote or consent of the holders of at least two-thirds of the voting power
of Series C Preferred Stock and all other series of voting preferred stock entitled to vote thereon, voting
together as a single class, given in person or by proxy, either in writing without a meeting or at a meeting,
authorize or create, or increase the authorized amount of, any specific class or series of capital stock
ranking senior to the Series C Preferred Stock with respect to the payment of dividends or the distribution
of our assets upon our liquidation, dissolution or winding up;
• we will not, without the affirmative vote or consent of the holders of at least two-thirds of the outstanding
shares of Series C Preferred Stock given in person or by proxy, either in writing without a meeting or at a
meeting:
27
•
•
amend, alter or repeal the provisions of the Certificate of Incorporation or the Certificate of Designations so
as to adversely affect the rights, preferences, privileges and voting powers of the Series C Preferred Stock;
or
consummate a binding share exchange or reclassification involving the Series C Preferred Stock or a
merger or consolidation of us with another entity, unless in each case (i) shares of Series C Preferred Stock
remain outstanding or, in the case of any such merger or consolidation with respect to which we are not the
surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or
resulting entity or its ultimate parent, in each case, that is an entity organized and existing under the laws of
the United States of America, any state thereof or the District of Columbia, and (ii) such shares of Series C
Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights,
preferences, privileges and voting powers and limitations and restrictions, taken as a whole, as are not less
favorable to the holders thereof than the rights, preferences, privileges and voting powers and limitations
and restrictions of the Series C Preferred Stock, taken as a whole,
provided, however, that (1) any increase in the amount of our authorized but unissued shares of preferred stock, (2)
any increase in the authorized or issued shares of Series C Preferred Stock, and (3) the creation and issuance, or an
increase in the authorized or issued amount, of other series of preferred stock ranking equally with or junior to the
Series C Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-
cumulative) and/ or the distribution of assets upon our liquidation, dissolution or winding up, will not be deemed to
adversely affect the rights, preferences, privileges or voting powers of the Series C Preferred Stock.
Without the consent of the holders of the Series C Preferred Stock so long as such action does not adversely
affect the rights, preferences, privileges and voting powers and limitations and restrictions of the Series C Preferred
Stock, the Board of Directors of the Company may, subject to any vote of our stockholders required by applicable
law or the Certificate of Incorporation, by resolution, amend, alter, supplement or repeal any terms of the Series C
Preferred Stock:
•
•
to cure any ambiguity, or to cure, correct or supplement any provision contained in the Certificate of
Designations that may be defective or inconsistent; or
to make any provision with respect to matters or questions arising with respect to the Series C Preferred
Stock that is not inconsistent with the provisions of the Certificate of Designations;
provided that any such amendment, alteration, supplement or repeal of any terms of the Series C Preferred Stock
effected in order to conform the terms thereof to the description of the terms of the Series C Preferred Stock set forth
under “Description of the Series C Preferred Stock” in this Exhibit 4.1 shall be deemed not to adversely affect the
rights, preferences, privileges and voting powers of the Series C Preferred Stock.
On each matter on which holders of Series C Preferred Stock are entitled to vote, each share of Series C
Preferred Stock will be entitled to one vote, and when shares of any other class or series of our preferred stock have
the right to vote with the Series C Preferred Stock as a single class on any matter, the Series C Preferred Stock and
the shares of each such other class or series will have one vote for each $25.00 of liquidation preference (excluding
accrued and unpaid dividends)(equivalent to one vote per depositary share).
The foregoing voting provisions will not apply with respect to the Series C Preferred Stock if, at or prior to the
time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding
Series C Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient funds
shall have been set aside by us for the benefit of the holders of Series C Preferred Stock to effect such redemption.
28
Conversion
Holders do not have the right to convert Series C Preferred Stock into, or exchange Series C Preferred Stock
for, any other securities or property of the Company.
Listing of the Series C Preferred Stock
The Series C Preferred Stock are not listed on any exchange except as represented by the depositary shares.
DESCRIPTION OF THE DEPOSITARY SHARES REPRESENTING INTERESTS IN THE
SERIES C PREFERRED STOCK
The following description set forth below of our depositary shares representing fractional interests in the
Series C Preferred Stock is only a summary and does not purport to be complete. It is subject to and qualified in its
entirety by reference to the terms and provisions of the Series C Deposit Agreement (as defined below), the form of
depositary receipts, which contain the terms and provisions of the depositary shares, our Certificate of Incorporation
and our Certificate of Designations for our 7.50% Non-Cumulative Preferred Stock, Series C, each of which are
incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part.
General
Each depositary share represents a 1/40th interest in a share of the Series C Preferred Stock and is evidenced
by a depositary receipt. We deposited the underlying shares of the Series C Preferred Stock with the depositary
pursuant to a deposit agreement among us, American Stock Transfer & Trust Company, LLC, acting as depositary,
and the holders from time to time of the depositary receipts (the “Series C Deposit Agreement”). Subject to the
terms of the Series C Deposit Agreement, each owner of a depositary receipt is entitled, in proportion to the
fractional interest of a share of Series C Preferred Stock represented by the depositary shares evidenced by that
depositary receipt, to all the rights and preferences of Series C Preferred Stock represented by those depositary
shares (including any dividend, liquidation, redemption and voting rights).
The depositary shares are evidenced by depositary receipts issued pursuant to the Series C Deposit Agreement.
Immediately following the issuance and delivery of the Series C Preferred Stock by us to the depositary, we caused
the depositary to issue, on our behalf, the depositary receipts.
Dividends and Other Distributions
Any dividend or other distribution (including upon our voluntary or involuntary liquidation, dissolution or
winding-up) paid in respect of a depositary share will be in an amount equal to 1/40th of the dividend declared or
distribution payable, as the case may be, on the underlying share of the Series C Preferred Stock. The depositary will
distribute all cash dividends and other cash distributions received on the Series C Preferred Stock to the holders of
record of the depositary receipts in proportion to the number of depositary shares held by each holder on the relevant
record date. In the event of a distribution other than in cash, the depositary will distribute property received by it to
the holders of record of the depositary receipts in proportion to the number of depositary shares held by each holder,
unless the depositary determines that this distribution is not feasible, in which case the depositary may, with our
approval, adopt a method of distribution that it deems practicable, including the sale of the property and distribution
of the net proceeds of that sale to the holders of the depositary receipts.
Record dates for the payment of dividends and other matters relating to the depositary shares will be the same
as the corresponding record dates for the Series C Preferred Stock represented by the depositary shares.
The amount paid as dividends or otherwise distributable by the depositary with respect to the depositary shares
or the underlying Series C Preferred Stock will be reduced by any amounts required to be withheld by us or the
depositary on account of taxes or other governmental charges. The depositary may refuse to make any payment or
29
distribution, or any transfer, exchange or withdrawal of any depositary shares or the shares of the Series C Preferred
Stock until such taxes or other governmental charges are paid.
Withdrawal of Series C Preferred Stock
Unless the related depositary shares have been previously called for redemption, a holder of depositary shares
may surrender his or her depositary receipts at the corporate trust office of the depositary, pay any taxes, charges and
fees provided for in the Series C Deposit Agreement and comply with any other requirements of the Series C
Deposit Agreement for the number of shares of Series C Preferred Stock and any money or other property
represented by such holder’s depositary receipts. A holder of depositary shares who withdraws shares of Series C
Preferred Stock will be entitled to receive whole shares of Series C Preferred Stock on the basis set forth herein;
partial shares of Series C Preferred Stock will not be issued.
However, holders of whole shares of Series C Preferred Stock will not be entitled to deposit those shares under
the Series C Deposit Agreement or to receive depositary receipts for those shares after the withdrawal. If the
depositary shares surrendered by the holder in connection with the withdrawal exceed the number of depositary
shares that represent the number of whole shares of Series C Preferred Stock to be withdrawn, the depositary will
deliver to the holder at the same time a new depositary receipt evidencing the excess number of depositary shares.
Redemption
If the Series C Preferred Stock underlying the depositary shares is redeemed, in whole or in part, a
corresponding number of depositary shares will be redeemed with the proceeds received by the depositary from the
redemption of the Series C Preferred Stock held by the depositary. The redemption price per depositary share will be
equal to 1/40th of the applicable redemption price per share payable in respect of such Series C Preferred Stock.
Whenever we redeem shares of Series C Preferred Stock held by the depositary, the depositary will redeem, as
of the same redemption date, the number of depositary shares representing shares of Series C Preferred Stock so
redeemed. If fewer than all of the outstanding depositary shares are redeemed, the depositary will select the
depositary shares to be redeemed pro rata or by lot. The depositary will mail notice of redemption to holders of the
depositary receipts not less than 30 and not more than 60 days prior to the date fixed for redemption of the Series C
Preferred Stock represented by the depositary shares and the related depositary shares.
Voting Rights
Because each depositary share represents a 1/40th interest in a share of the Series C Preferred Stock, holders of
depositary receipts are entitled to 1/40th of a vote per share of the Series C Preferred Stock under those limited
circumstances in which holders of the Series C Preferred Stock represented by the depositary shares are entitled to
vote. Holders of the depositary shares representing the Series C Preferred Stock do not have any voting rights,
except for the limited voting rights described under “Description of the Series C Preferred Stock-Voting Rights.”
When the depositary receives notice of any meeting at which the holders of the Series C Preferred Stock are
entitled to vote, the depositary will mail (or otherwise transmit by an authorized method) the information contained
in the notice to the record holders of the depositary shares relating to the Series C Preferred Stock. Each record
holder of the depositary shares on the record date, which will be the same date as the record date for the Series C
Preferred Stock, may instruct the depositary to vote the number of the Series C Preferred Stock votes represented by
the holder’s depositary shares. To the extent possible, the depositary will vote the number of the Series C Preferred
Stock votes represented by depositary shares in accordance with the instructions it receives.
We will agree to take all reasonable actions that the depositary determines are necessary to enable the
depositary to vote as instructed. If the depositary does not receive specific instructions from the holders of any
depositary shares representing the Series C Preferred Stock, it will vote all depositary shares held by it
proportionately with instructions received.
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Conversion
Holders of depositary receipts do not have the right to convert depositary shares representing the Series C
Preferred Stock into, or exchange depositary shares representing the Series C Preferred Stock for, any other
securities or property of the Company.
Amendment and Termination of the Series C Deposit Agreement
The form of depositary receipt evidencing the depositary shares and any provision of the Series C Deposit
Agreement may be amended by agreement between us and the depositary. However, any amendment that materially
and adversely alters the rights of the existing holders of depositary shares will not be effective unless the amendment
has been approved by the record holders of at least a majority of the depositary shares then outstanding. Either we or
the depositary may terminate the Series C Deposit Agreement if there has been a final distribution in respect of the
Series C Preferred Stock in connection with our liquidation, dissolution, or winding up.
Charges of Depositary
We will pay all transfer and other taxes, assessments, and governmental charges arising solely from the
existence of the depositary arrangements, and we paid the fees of the depositary in connection with the initial
deposit of the Series C Preferred Stock represented by the depositary shares. Holders of depositary receipts will pay
transfer and other taxes, assessments, and governmental charges and any other charges as are expressly provided in
the Series C Deposit Agreement to be for their accounts. The depositary may refuse to effect any transfer of a
depositary receipt or any withdrawals of Series C Preferred Stock evidenced by a depositary receipt until all taxes,
assessments, and governmental charges with respect to the depositary receipt or Series C Preferred Stock are paid by
their holders.
Resignation and Removal of Depositary
The depositary may resign at any time by delivering to us notice of its election to do so, and we may remove
the depositary at any time. Any resignation or removal will take effect only upon the appointment of a successor
depositary and the successor depositary’s acceptance of the appointment. Any successor depositary must be a U.S.
bank or trust company.
Miscellaneous
The depositary will forward to the holders of depositary shares all of our reports and communications which
are delivered to the depositary and which we are required to furnish to the holders of our Series C Preferred Stock.
Neither we nor the depositary will be liable if we are prevented or delayed by law or any circumstance beyond
our control in performing our obligations under the Series C Deposit Agreement. All of our obligations as well as the
depositary’s obligations under the Series C Deposit Agreement are limited to performance in good faith of our
respective duties set forth in the Series C Deposit Agreement, and neither of us will be obligated to prosecute or
defend any legal proceeding relating to any depositary shares or Series C Preferred Stock unless provided with
satisfactory indemnity. We, and the depository, may rely upon written advice of counsel or accountants, or
information provided by persons presenting Series C Preferred Stock for deposit, holders of depositary shares, or
other persons believed to be competent and on documents believed to be genuine.
Listing of the Depositary Shares
The depositary shares representing the Series C Preferred Stock are listed on the Nasdaq Global Market under
the symbol “NGHCN.”
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Transfer Agent, Registrar, Dividend Disbursing Agent and Redemption Agent
American Stock Transfer & Trust Company, LLC is the transfer agent, registrar, dividend disbursing agent and
redemption agent for the depositary shares representing the Series C Preferred Stock.
Book-Entry; Delivery and Form
The depositary shares are represented by one or more global securities that are deposited with and registered
in the name of DTC or its nominee. The global securities are issued to DTC, the depository for the depositary shares,
who keeps a computerized record of its participants whose clients have purchased the depositary shares. Each
participant will then keep a record of its clients. Unless exchanged in whole or in part for a certificated security, a
global security may not be transferred. However, DTC, its nominees, and their successors may transfer a global
security as a whole to one another. Beneficial interests in the global securities will be shown on, and transfers of the
global securities will be made only through, records maintained by DTC and its participants.
Purchases of depositary shares through the DTC system must be made by or through a direct participant, who
receives credit for the depositary shares on DTC’s records. The beneficial owner’s ownership interest is only
recorded in the direct (or indirect) participants’ records. DTC has no knowledge of the beneficial owner’s ownership
of the depositary shares. DTC’s records only show the identity of the direct participants and the amount of the
depositary shares held by or through them. The beneficial owner does not receive a written confirmation of its
purchase or sale or any periodic account statement directly from DTC. The beneficial owner receives these from its
direct (or indirect) participant. Thus, the direct (or indirect) participants are responsible for keeping accurate account
of the holdings of their customers.
We wire dividend payments to DTC’s nominee and we treat DTC’s nominee as the owner of the global
securities for all purposes. Accordingly, we have no direct responsibility or liability to pay amounts due on the
global securities to any beneficial owner in the global securities.
Any redemption notices will be sent by us directly to DTC, who will in turn inform the direct participants,
who will then contact the beneficial holders.
It is DTC’s current practice, upon receipt of any payment of dividends or liquidation amount, to credit direct
participants’ accounts on the payment date based on their holdings of beneficial interests in the global securities as
shown on DTC’s records. In addition, it is DTC’s current practice to assign any consenting or voting rights to direct
participants whose accounts are credited with preferred securities on a record date, by using an omnibus proxy.
Payments by participants to owners of beneficial interests in the global securities, and voting by participants, will be
based on the customary practices between the participants and owners of beneficial interests, as is the case with the
Series C Preferred Stock held for the account of customers registered in “street name.” However, payments will be
the responsibility of the participants and not of DTC or us.
Depositary Shares represented by global securities will be exchangeable for certificated securities with the
same terms in authorized denominations only if:
• DTC is unwilling or unable to continue as depositary or if DTC ceases to be a clearing agency registered
under applicable law and a successor depositary is not appointed by us within 90 days; or
• we determine not to require all of the depositary shares to be represented by global securities.
If the book-entry-only system is discontinued, the transfer agent will keep the registration books for the
depositary shares at its corporate office.
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DESCRIPTION OF THE NOTES
The following description set forth below of our 7.625% Subordinated Notes due 2055 (the “Notes”) is only a
summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to the
pertinent sections of the indenture, which we refer to as the base indenture, dated as of May 23, 2014, between us
and The Bank of New York Mellon, as trustee, as supplemented by a supplemental indenture with respect to the
Notes, which we refer to as the supplemental indenture. We refer to the base indenture and the supplemental
indenture, collectively, as the indenture. The base indenture and supplemental indenture are incorporated by
reference as exhibits to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part.
General
We issued $100,000,000 aggregate principal amount of the Notes pursuant to the indenture. The Notes are
unsecured, subordinated debt instruments. The Notes are issued in fully-registered book-entry form without coupons
and in denominations of $25 and integral multiples of $25 in excess thereof. The Notes have a maturity date of
September 15, 2055.
Holders of the Notes and the trustee have no right to accelerate the maturity of the Notes in the event we fail to
pay interest or principal on the Notes, fail to perform any other obligation under the Notes or in the indenture or
default on any other securities issued by us. See “-Events of Default” below.
The indenture does not require the maintenance of any financial ratios or specified levels of net worth or
liquidity. The indenture does not contain provisions that would afford holders of Notes protection in the event of a
sudden and dramatic decline in our credit quality resulting from any highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving us that may adversely affect holders. The indenture does not
restrict us in any way, now or in the future, from incurring additional indebtedness, including Senior Indebtedness
(as defined below) that would rank senior in right of payment to the Notes. The Notes are not entitled to a sinking
fund and cannot be redeemed at the option of the holder.
Interest Rate
Subject to applicable law, as described below, interest on the Notes accrues from and including the original
issue date to, but excluding, the maturity date or earlier acceleration or redemption at an annual rate equal to
7.625%, and is payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year,
commencing on December 15, 2015, to the record holders at the close of business on the immediately preceding
March 1, June 1, September 1 or December 1, as applicable (whether or not a Business Day). If the interest payment
date falls on a day that is not a Business Day, interest will be paid on the next succeeding Business Day (and without
any interest or other payment in respect of any such delay).
Interest on the Notes will accrue from the most recent date on which interest has been paid or duly provided
for, or if no interest has been paid or duly provided for, the date of initial issuance. Interest on the Notes will cease to
accrue upon the earlier of the maturity date and any date of redemption. The amount of interest payable for any
interest payment period will be computed on the basis of a 360-day year comprised of twelve 30-day months.
“Business Day” means any day other than a Saturday, a Sunday or a day on which the Federal Reserve Bank
of New York is authorized or required by law or executive order to close or to be closed.
Ranking
The payment of the principal of and interest on the Notes is expressly subordinated, to the extent and in the
manner set forth in the indenture, to the prior payment in full of all of our Senior Indebtedness.
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“Senior Indebtedness” is defined in the indenture to include the principal of (and premium, if any) and unpaid
interest on (x) Indebtedness of the Company, whether outstanding on the date of the indenture or thereafter created,
incurred, assumed or guaranteed, for money borrowed other than (a) any Indebtedness of the Company which when
incurred, and without respect to any election under Section 1111(b) of the Federal Bankruptcy Code, was without
recourse to the Company, (b) any Indebtedness of the Company to any of its subsidiaries, (c) Indebtedness to any
employee of the Company, (d) any liability for taxes, (e) Trade Payables and (f) any Indebtedness of the Company
which is expressly subordinate in right of payment to any other Indebtedness of the Company, and (y) renewals,
extensions, modifications and refundings of any such Indebtedness. For purposes of the foregoing and the definition
of “Senior Indebtedness,” the phrase “subordinated in right of payment” means debt subordination only and not lien
subordination, and accordingly, (i) unsecured indebtedness shall not be deemed to be subordinated in right of
payment to secured indebtedness merely by virtue of the fact that it is unsecured, and (ii) junior liens, second liens
and other contractual arrangements that provide for priorities among Holders of the same or different issues of
indebtedness with respect to any collateral or the proceeds of collateral shall not constitute subordination in right of
payment.
“Indebtedness” is defined in the indenture as any and all obligations of a Person (as defined in the indenture)
for money borrowed which, in accordance with GAAP, would be reflected on the balance sheet of such Person as a
liability on the date as of which Indebtedness is to be determined.
“Trade Payables” is defined in the indenture as accounts payable or any other Indebtedness or monetary
obligations to trade creditors created or assumed by the Company or any Subsidiary (as defined in the indenture) of
the Company in the ordinary course of business (including guarantees thereof or instruments evidencing such
liabilities).
In addition, the Notes are structurally subordinated to all existing and future indebtedness, liabilities and other
obligations of our subsidiaries. Because we are a holding company, we rely primarily on dividends and other
payments from our subsidiaries to pay interest and principal on our outstanding debt obligations and to make
payments on our other securities.
If certain events in bankruptcy, insolvency or reorganization occur relating to us, we will first pay all Senior
Indebtedness, including any interest accrued after the events occur, in full before we make any payment or
distribution, whether in cash, securities or other property, on account of the principal of or interest on the Notes. In
such an event, we will pay or deliver directly to the holders of Senior Indebtedness, any payment or distribution
otherwise payable or deliverable to holders of the Notes. We will make the payments to the holders of Senior
Indebtedness according to priorities existing among those holders until we have paid all Senior Indebtedness,
including accrued interest, in full. If, notwithstanding the preceding sentence, the trustee or the holder of any Note
receives any payment or distribution before all Senior Indebtedness is paid in full, and if such fact shall, at or prior
to the time of such payment or distribution, have been made known to the trustee or such holder, then such payment
or distribution shall be paid over or delivered for application to the payment of all Senior Indebtedness remaining
unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment
or distribution to or for the holders of Senior Indebtedness.
If such events of bankruptcy, insolvency or reorganization occur, after we have paid in full all amounts owed
on Senior Indebtedness, the holders of Notes together with the holders of any of our other obligations that rank
equally with the Notes will be entitled to receive from our remaining assets any principal, premium or interest due at
that time on the Notes and such other obligations before we make any payment or other distribution on account of
any of our capital stock or obligations ranking junior to the Notes.
In addition, if any principal, premium or interest in respect of Senior Indebtedness is not paid within any
applicable grace period (including at maturity) or any other default on Senior Indebtedness occurs and the maturity
of such Senior Indebtedness is accelerated in accordance with its terms, we may not pay the principal of, or
premium, if any, or interest on, the Notes or repurchase, redeem or otherwise retire any Notes, unless, in each case,
the default has been cured or waived and any such acceleration has been rescinded or such Senior Indebtedness has
been paid in full in cash, subject to certain exceptions as provided in the indenture. If the Notes are declared due and
34
payable before their stated maturity, the holders of Senior Indebtedness outstanding at the time the Notes so become
due and payable shall be entitled to receive payment in full of all amounts due or to become due on or in respect of
such Senior Indebtedness before the holders of the Notes are entitled to receive any payment on the Notes. If,
notwithstanding the foregoing, we make any payment to the trustee or the holder of any Note prohibited by the
preceding sentences, and if such fact shall, at or prior to the time of such payment, have been made known to the
trustee or such holder, such payment must be paid over and delivered to us.
Because of the subordination provisions of the indenture, if we become insolvent, holders of Senior
Indebtedness may receive more, ratably, and holders of the Notes may receive less, ratably, than our other creditors.
The Notes do not limit our or our subsidiaries’ ability to incur additional debt, including debt that ranks senior
or pari passu (i) in right of payment and (ii) upon our liquidation to the Notes. The Notes are our subordinated
unsecured obligations and rank (i) senior in right of payment to any existing and future junior subordinated debt,
(ii) equally in right of payment with any unsecured subordinated debt that we incur in the future that ranks equally
with the Notes, and (iii) subordinate in right of payment to any of our existing and future Senior Indebtedness.
Optional Redemption
We may redeem the Notes in $25 increments in whole or in part on September 15, 2020, or on any date
thereafter, at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus accrued
and unpaid interest to, but not including, the date of redemption. If we redeem only a portion of the Notes on any
date of redemption, we may subsequently redeem additional Notes.
If we are redeeming less than all the Notes at any time, the Notes to be redeemed will be selected in
accordance with the procedures of DTC and which may provide for the selection or redemption of a portion of the
principal amount of any Note so long as the unredeemed portion of the principal amount of any Note is in an
authorized denomination.
The notices of redemption will be sent at least 30 days but not more than 60 days before the applicable
redemption date to each holder of Notes being redeemed or transmitted otherwise in accordance with the procedures
of DTC. If any Note is to be redeemed in part only, any notice of redemption that relates to that Note will state the
portion of the principal amount to be redeemed.
Notice of redemption having been given, any Notes to be redeemed shall, on the redemption date, become due
and payable at the redemption price and from and after such date (unless we default in the payment of the
redemption price) such Notes shall cease to bear interest. Upon surrender of any such Notes for redemption, such
Notes shall be paid by us at the redemption price.
If any Notes called for redemption shall not be paid upon surrender for redemption, the principal thereof shall,
until paid, bear interest from the redemption date at the rate prescribed in the Notes.
Denominations
The outstanding Notes were issued only in fully-registered book-entry form without coupons in denominations
of $25 each and integral multiples of $25 in excess thereof.
Events of Default
The indenture provides that certain events of bankruptcy, insolvency, reorganization or receivership relating to
us or a Significant Subsidiary are events of default with respect to the Notes.
“Significant Subsidiary” means a Subsidiary, including its Subsidiaries, that meets any of the conditions set
forth in the definition of “significant subsidiary” in Article 1, Rule 1-02 of Regulation S-X. “Subsidiary” means a
corporation, company (including any limited liability company), association, partnership, joint venture, trust or other
35
business entity in which the Company and/or one or more of the Company’s other Subsidiaries owns at least 50% of
the voting stock thereof.
The indenture defines a default with respect to the Notes as:
•
•
•
default in any payment of interest on any Note when due and payable, and the default continues for a
period of thirty (30) calendar days;
default in payment of principal or premium, if any, on the Notes when due, regardless of whether such
payment became due because of maturity, redemption, acceleration or otherwise; or
failure to perform any other covenant or warranty in the indenture that applies to the Notes for 90 days after
we have received written notice of the failure to perform in the manner specified in the indenture.
There is only a right of acceleration in the case of an event of default. There is no right of acceleration in the
case of a default. Accordingly, payment of principal of the Notes may be accelerated only in the case of the
bankruptcy, insolvency, reorganization or receivership of us or a Significant Subsidiary. If we default in the payment
of principal or interest on the Notes or we fail to perform any other covenant in the indenture, the holders of the
Notes have no right to accelerate the maturity of the Notes and declare the Notes immediately due and payable.
If an event of default relating to bankruptcy, insolvency, reorganization or receivership occurs, the principal
amount of all the Notes will automatically, and without action by the trustee or any holder, become immediately due
and payable. Subject to certain conditions, the holders of a majority in principal amount of the Notes may rescind
such declaration.
The indenture provides that if default is made on payment of interest and continues for a 30 day period or if
default is made on payment of principal of the Notes, we will, upon demand of the trustee, pay to it, for the benefit
of the holder of any such Note, the whole amount then due and payable on such Note for principal, premium, if any,
and interest. The indenture further provides that if we fail to pay such amount immediately upon such demand, the
trustee may, among other things, institute a judicial proceeding for its collection.
In cases specified in the indenture, the holders of a majority in principal amount of the Notes may waive any
default on behalf of all holders of the Notes, except a default in the payment of principal or interest or a default in
the performance of a covenant or provision of the indenture which cannot be modified without the consent of each
holder. We are required to file annually with the trustee a certificate as to whether or not we are in compliance with
all the conditions and covenants applicable to us under the indenture.
Within 90 days after the trustee’s knowledge of the occurrence of any default with respect to the Notes, the
trustee shall transmit by mail to all holders of Notes, notice of such default unless such default shall have been cured
or waived.
The holders of a majority of the aggregate outstanding principal amount of the Notes have the right to direct
the time, method and place of conducting any proceeding for any remedy available to the trustee with respect to the
Notes.
Consolidation, Merger and Sale of Assets
The indenture provides that we shall not amalgamate or consolidate with, merge with or into, or convey,
transfer or lease our properties and assets substantially as an entirety to another person, unless (i) the resulting,
surviving or transferee person (if not us) shall expressly assume, by supplemental indenture, executed and delivered
to the trustee, in form satisfactory to the trustee, all of our obligations under the Notes and the indenture; and
(ii) immediately after giving effect to such transaction, no default or event of default has occurred and is continuing
36
under the indenture with respect to the Notes. Upon any such amalgamation, consolidation, merger, conveyance,
transfer or lease, the resulting, surviving or transferee person (if not us) shall succeed to, and may exercise every
right and power of ours under the indenture, and we shall be discharged from our obligations under the Notes and
the indenture except in the case of any such lease. At our election, this requirement will not apply to any
conveyance, transfer or lease of our properties and assets substantially as an entirety to one or more of our
subsidiaries.
Modification and Amendment
Subject to certain exceptions, the indenture or the Notes may be amended with the consent of the holders of at
least a majority of the principal amount of then outstanding Notes (including without limitation, consents obtained in
connection with a repurchase of, or tender or exchange offer for, Notes) and, subject to certain exceptions, any past
default or compliance with any provisions may be waived with the consent of the holders of a majority of the
principal amount of then outstanding Notes (including, without limitation, consents obtained in connection with a
repurchase of, or tender offer or exchange offer for, Notes). However, without the consent of each holder of a then
outstanding Note affected, no amendment may, among other things:
•
•
•
•
•
reduce the percentage in aggregate principal amount of Notes outstanding necessary to waive any past
default or event of default;
reduce the rate of interest on any Note or change the time for payment of interest on any Note;
reduce the principal of any Note or change the maturity date of any Note;
change the place or currency of payment on any Note;
impair the right of any holder to receive payment of principal of and interest, if any, on, its Notes or to
institute suit for the enforcement of any such payment with respect to such holder’s Notes; or
• make any change in the provisions described in this “-Modification and Amendment” section or in the
waiver provisions of the indenture that require each holder’s consent to modify and amend or to waive.
Without the consent of any holder of the Notes, we and the trustee may amend the indenture or the Notes:
•
•
•
•
•
•
•
to cure any ambiguity, omission, defect or inconsistency in the indenture or the Notes, including to
eliminate any conflict with the terms of the Trust Indenture Act of 1939, as amended (the “Trust Indenture
Act”);
to conform the terms of the indenture or the Notes to the description thereof in the accompanying
prospectus relating to the offering of the Notes;
to evidence the succession by a successor corporation and to provide for the assumption by a successor
corporation of our obligations under the indenture;
to add guarantees with respect to the Notes;
to secure the Notes;
to add (or expand) the covenants, restrictions or conditions for the benefit of the holders or to surrender any
right or power conferred upon us;
to make any other change that does not adversely affect the rights of any holder of the Notes in any material
respect (other than any holder that consents to such change);
37
•
•
•
to provide for a successor trustee;
to comply with the applicable procedures of the depositary; or
to comply with any rules or requirements in connection with the qualification of the indenture under the
Trust Indenture Act.
Holders do not need to approve the particular form of any proposed amendment. It will be sufficient if such
Holders approve the substance of the proposed amendment. After an amendment under the indenture becomes
effective, we are required to mail to the Holders a notice briefly describing such amendment. However, the failure to
give such notice to all the holders, or any defect in the notice, will not impair or affect the validity of the
amendment.
Satisfaction and Discharge; Defeasance
We may satisfy and discharge our obligations under the indenture by delivering to the securities registrar for
cancellation all outstanding Notes or by depositing with the trustee or delivering to the holders, as applicable, after
the Notes have become due and payable, whether at the maturity date or otherwise, cash sufficient to pay all of the
outstanding Notes and paying all other sums payable under the indenture by us. Such discharge is subject to the
other terms contained in the indenture, including the requirement that we provide an officer’s certificate and opinion
to the trustee that all of the conditions precedent to the satisfaction and discharge have been satisfied.
Covenant Defeasance
The “covenant defeasance” provisions of the indenture, which would allow us to cease to comply with any
restrictive covenants applicable to the Notes, are not applicable to the Notes because there are no restrictive
covenants applicable to the Notes.
Governing Law
The indenture and the Notes are governed by and construed in accordance with the laws of the State of New
York. The indenture is subject to the provisions of the Trust Indenture Act.
Listing
The Notes are listed on Nasdaq Global Market under the symbol “NGHCZ.”
Further Issuances
We may, from time to time, without the consent of the holders of the Notes, create and issue additional notes
having the same terms and conditions as the Notes that are equal in rank to the Notes in all respects (or in all
respects except for the issue date, the issue price and, if applicable, the first interest payment date and the initial
interest accrual date). These notes will be consolidated and form a single series with the Notes, provided, however,
that a separate CUSIP, common code or ISIN, as applicable, will be issued for any additional notes unless the
additional notes and the Notes of such series are fungible for U.S. federal income tax purposes.
About the Trustee
The Bank of New York Mellon is the trustee under the indenture and is the principal paying agent and registrar
for the Notes.
The trustee under the indenture may resign or be removed with respect to one or more series of debt securities
under the indenture and a successor trustee may be appointed to act with respect to such series.
38
Entity Name
1100 Compton, LLC
ABC Agency Network of Texas, LLC
ABC Agency Network, Inc.
Adirondack AIF, LLC
Agent Alliance Insurance Company
AgentCubed, LLC
Allied Producers Reinsurance Company, Ltd.
America’s Health Care/RX Plan Agency, Inc.
American Capital Acquisition Investments S.A.
Assigned Risk Solutions Ltd.
Century-National Insurance Company
ClearSide General Insurance Services, LLC
Direct Administration, Inc.
Direct Bay, LLC
Direct General Consumer Products, Inc.
Direct General Financial Services, Inc.
Direct General Insurance Agency, Inc.
Direct General Insurance Company
Direct General Insurance Company of Mississippi
Direct General Life Insurance Company
Direct General Premium Finance Company
Direct Insurance Company
Direct National Insurance Company
Health Network Group, LLC
Healthcare Solutions Team, LLC
HealthCompare Insurance Services, Inc.
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
Integon Properties S.A. de C.V.
Integon Service Co, S.A. de C.V.
John Alden Financial Corporation
LeadCloud, LLC
MIC General Insurance Corporation
SUBSIDIARIES
EXHIBIT 21.1
Jurisdiction of Incorporation or Formation
Delaware
Texas
Louisiana
New York
Alabama
Idaho
Bermuda
Delaware
Luxembourg
New Jersey
California
California
Tennessee
Florida
Tennessee
Tennessee
Tennessee
Indiana
Mississippi
South Carolina
Tennessee
North Carolina
North Carolina
Delaware
Illinois
Delaware
North Carolina
Texas
Texas
Louisiana
North Carolina
North Carolina
North Carolina
North Carolina
North Carolina
Mexico
Mexico
Delaware
Maryland
Michigan
National Farmers Union Property and Casualty Company
North Carolina
Entity Name
National General Assurance Company
National General Georgia, LLC
National General Holdings Bermuda, Ltd.
National General Holdings Luxembourg S.à.r.l.
National General Insurance Company
National General Insurance Holdings, Ltd.
National General Insurance Management Ltd.
National General Insurance Marketing, Inc.
National General Insurance Online, Inc.
National General Lender Services, Inc.
National General Management Corp.
National General Motor Club, Inc.
National General Premier Insurance Company
National General Re Ltd.
National Health Insurance Company
New Jersey Skylands Management, LLC
New South Insurance Company
Newport Management Corporation
NG Holdings, LLC
NGLS Adjusting, LLC
NGLS Insurance Services, Inc.
NSM Sales Corporation
Personal Express Insurance Services, Inc.
Quotit Corporation
RAC Insurance Partners, LLC
Renuant, LLC
Right Choice Insurance Agency Inc.
Seattle Specialty Insurance Services, Inc.
Standard Property and Casualty Insurance Company
Syndeste, LLC
The Association Benefits Solution, LLC
Velapoint, LLC
Western General Agency, Inc.
Jurisdiction of Incorporation or Formation
Missouri
Delaware
Bermuda
Luxembourg
Missouri
Bermuda
Bermuda
Missouri
Missouri
Delaware
Delaware
North Carolina
California
Bermuda
Texas
Delaware
North Carolina
California
Delaware
Delaware
California
Nevada
California
California
Florida
Nevada
Tennessee
Washington
Illinois
Virginia
Delaware
Washington
California
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements Form S-8 (No. 333-194493) and
(No. 333-231256) and Registration Statement Form S-3ASR (No. 333-224717) of National General Holdings Corp.
of our reports dated February 20, 2020, with respect to the consolidated financial statements and the effectiveness of
internal control over financial reporting of National General Holdings Corp., incorporated by reference in this Annual
Report (Form 10-K) for the year ended December 31, 2019, and the financial statement schedules of National General
Holdings Corp. included herein.
/s/ Ernst & Young LLP
New York, New York
February 20, 2020
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Barry 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: February 20, 2020
By:
/s/ Barry Karfunkel
Barry Karfunkel
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: February 20, 2020
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,
Barry Karfunkel, 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, 2019 (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.
Dated: February 20, 2020
By:
/s/ Barry Karfunkel
Barry Karfunkel
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, 2019 (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.
Dated: February 20, 2020
By:
/s/ Michael Weiner
Michael Weiner
Chief Financial Officer
(Principal Financial Officer)
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59 MAIDEN LANE
38TH FLOOR
NEW YORK, NY 10038
OFFICE LOCATIONS
CORPORATE
National General Corporate Headquarters
59 Maiden Lane, 38th Floor
New York, NY 10038
Winston Salem Operational Center
5630 University Parkway
Winston Salem, NC 27105
Cleveland Operational Center
800 Superior Avenue
Cleveland, OH 44114
Dallas Operational Center
4455 LBJ Freeway
Dallas, TX 75244
National General Bermuda
Purvis House, 29 Victoria Street
Hamilton Bermuda HM10
PROPERTY & CASUALTY
National General Preferred–Buffalo
550 Essjay Road
Williamsville, NY 14221
National General Preferred–Chicago
30 North LaSalle
Chicago, IL 60602
Personal Express
5301 Truxtun Avenue
Bakersfield, CA 93309
RAC Insurance Partners
6161 Blue Lagoon Drive
Miami, FL 33126
National General Lender Services–Arizona
827 West Grove
Mesa, AZ 85210
National General Lender Services–California
16802 Aston Street
Irvine, CA 92606
National General Lender Services–Texas
5001 North Riverside Drive
Fort Worth, TX 76137
Seattle Specialty Insurance Services
332 SW Everett Mall Way
Everett, WA 98204
Assigned Risk Solutions–New York
999 Stewart Avenue
Bethpage, NY
Assigned Risk Solutions–New Jersey
250 Pehle Ave
Saddle Brook, NJ
Direct General
1281 Murfreesboro Road
Nashville, TN 37217
California Branch Office
3800 East Concours Drive
Ontario, CA 91764
St. Louis Branch Office
5757 Phantom Drive
Hazelwood, MO 63042
ACCIDENT & HEALTH
Accident & Health Operational Center
1555 N. Rivercenter
Milwaukee, WI 53212
VelaPoint
1100 Northwest Compton Drive
Hillsboro, OR 97006
Healthcare Solutions Team
1900 South Highland Avenue
Lombard, IL 60148
Quotit® and HealthCompare®
3333 Michelson Drive
Irvine, CA 92606
59 MAIDEN LANE
38TH FLOOR
NEW YORK, NY 10038