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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2020
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)
Delaware27-1046208
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
59 Maiden Lane, 38th Floor
New York, New York
(Address of Principal Executive Offices)

10038
(Zip Code)

(212) 380-9500
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading
Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per shareNGHCThe Nasdaq Stock Market LLC
7.50% Non-Cumulative Preferred Stock, Series ANGHCPThe Nasdaq Stock Market LLC
Depositary Shares, Representing 1/40th of a Share of 7.50% Non-Cumulative Preferred Stock, Series BNGHCOThe Nasdaq Stock Market LLC
Depositary Shares, Representing 1/40th of a Share of 7.50% Non-Cumulative Preferred Stock, Series CNGHCNThe Nasdaq Stock Market LLC
7.625% Subordinated Notes due 2055NGHCZThe Nasdaq Stock Market LLC

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
Accelerated Filer
Non-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 Exchange Act). Yes No

As of July 29, 2020, the number of common shares of the registrant outstanding was 113,401,545.



NATIONAL GENERAL HOLDINGS CORP.

TABLE OF CONTENTS


Page

i


PART I - FINANCIAL INFORMATION


Item 1. Financial Statements


NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
(Unaudited)
June 30,December 31,
20202019
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (allowance for expected credit losses $1,203 - 2020) (Exchanges - $320,773 and $324,249; allowance for expected credit losses $149 - 2020)
$4,581,531  $4,476,358  
Short-term investments (Exchanges - $19,330 and $5,245)
216,484  67,353  
Other investments (related parties - $235,458 and $238,841)
287,735  311,287  
Total investments5,085,750  4,854,998  
Cash and cash equivalents (Exchanges - $4 and $959)
297,282  135,942  
Restricted cash and cash equivalents (Exchanges - $233 and $24)
37,726  28,521  
Accrued investment income (related parties - $2,405 and $2,391)
(Exchanges - $1,939 and $2,001)
29,499  30,927  
Premiums and other receivables (net of allowance for expected credit losses $40,078 - 2020; net of bad debt allowance $24,067 - 2019) (Exchanges - $49,649 and $55,859; net of allowance for expected credit losses $1,867 - 2020; net of bad debt allowance $541 - 2019)
1,487,734  1,428,948  
Deferred acquisition costs (Exchanges - $23,097 and $23,307)
275,931  263,523  
Reinsurance recoverable (net of allowance for expected credit losses $517 - 2020) (Exchanges - $113,321 and $119,125; net of allowance for expected credit losses $173 - 2020)
1,292,636  1,394,308  
Prepaid reinsurance premiums (Exchanges - $82,684 and $105,894)
518,082  575,747  
Property and equipment, net (Exchanges - $18 and $241)
388,889  403,827  
Intangible assets, net (Exchanges - $3,135 and $3,225)
350,821  365,823  
Goodwill179,328  179,328  
Prepaid and other assets (Exchanges - $4,310 and $3,521)
74,165  94,642  
Total assets$10,017,843  $9,756,534  
See accompanying notes to unaudited condensed consolidated financial statements.
1


NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value per Share)
(Unaudited)
June 30,December 31,
20202019
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves (Exchanges - $200,270 and $205,786)
$2,826,584  $2,886,414  
Unearned premiums and other revenue (Exchanges - $226,403 and $252,553)
2,328,447  2,312,241  
Reinsurance payable (Exchanges - $23,907 and $35,689)
461,896  562,844  
Accounts payable and accrued expenses (Exchanges - $7,753 and $8,497)
327,929  315,366  
Debt682,266  686,006  
Other liabilities (Exchanges - $30,279 and $30,803)
411,045  376,169  
Total liabilities$7,038,167  $7,139,040  
Contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,120 shares - 2020 and 2019; Aggregate liquidation preference $450,000 - 2020 and 2019.
$450,000  $450,000  
Common stock, $0.01 par value - authorized 150,000,000 shares, issued 113,856,628 and 113,368,811 shares - 2020 and 2019, outstanding 113,397,545 and 113,368,811 shares - 2020 and 2019.
1,139  1,134  
Treasury stock, at cost - 459,083 shares - 2020.
(8,482)   
Additional paid-in capital1,069,152  1,065,634  
Accumulated other comprehensive income:
Unrealized foreign currency translation adjustment, net of tax(686) (202) 
Unrealized gain on investments, net of tax187,550  74,750  
Total accumulated other comprehensive income186,864  74,548  
Retained earnings1,296,451  1,058,138  
Total National General Holdings Corp. stockholders’ equity2,995,124  2,649,454  
Noncontrolling interest(15,448) (31,960) 
Total stockholders’ equity$2,979,676  $2,617,494  
Total liabilities and stockholders’ equity$10,017,843  $9,756,534  

See accompanying notes to unaudited condensed consolidated financial statements.
2



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenues:
Net earned premium$1,065,567  $1,030,651  $2,140,773  $1,994,808  
Ceding commission income46,640  60,192  96,945  129,726  
Service and fee income180,592  148,908  360,033  314,415  
Net investment income 31,175  35,131  61,418  68,576  
Net gain (loss) on investments5,158  (5,230) (1,703) (5,208) 
Total revenues1,329,132  1,269,652  2,657,466  2,502,317  
Expenses:
Loss and loss adjustment expense600,446  715,535  1,292,444  1,367,344  
Acquisition costs and other underwriting expenses229,378  194,126  457,620  406,044  
General and administrative expenses262,409  247,767  529,978  495,861  
Interest expense11,779  12,925  23,559  25,924  
Total expenses1,104,012  1,170,353  2,303,601  2,295,173  
Income before provision for income taxes
225,120  99,299  353,865  207,144  
Provision for income taxes50,507  22,241  78,679  44,747  
Net income174,613  77,058  275,186  162,397  
Net (income) loss attributable to noncontrolling interest(8,039) 818  (7,853) 7,237  
Net income attributable to NGHC166,574  77,876  267,333  169,634  
Dividends on preferred stock
(8,925) (8,925) (16,800) (16,800) 
Net income attributable to NGHC common stockholders$157,649  $68,951  $250,533  $152,834  
Earnings Per Share (“EPS”) attributable to NGHC common stockholders:
Basic EPS$1.39  $0.61  $2.21  $1.35  
Diluted EPS$1.37  $0.60  $2.17  $1.33  

See accompanying notes to unaudited condensed consolidated financial statements.
3



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net income$174,613  $77,058  $275,186  $162,397  
Other comprehensive income:
Foreign currency translation adjustment(270) 210  (612) (4,043) 
Income tax effect56  (44) 128  845  
Total foreign currency translation adjustment, net of tax(214) 166  (484) (3,198) 
Gross unrealized gain on investments before reclassifications196,361  80,187  155,888  156,972  
Income tax effect(41,236) (16,839) (32,736) (32,964) 
Total change in net unrealized gain on investments, net of tax155,125  63,348  123,152  124,008  
Reclassification adjustments for investments gain or loss to net income:
Net realized (gain) loss on investments(1,693) (69) (1,957) 51  
Income tax effect356  14  411  (11) 
Total (gain) loss on investments reclassifications to net income, net of tax(1,337) (55) (1,546) 40  
Other comprehensive income before income tax effect194,398  80,328  153,319  152,980  
Income tax effect(40,824) (16,869) (32,197) (32,130) 
Other comprehensive income, net of tax153,574  63,459  121,122  120,850  
Comprehensive income328,187  140,517  396,308  283,247  
Comprehensive income attributable to noncontrolling interest(18,594) (3,312) (16,659) (1,573) 
Comprehensive income attributable to NGHC$309,593  $137,205  $379,649  $281,674  

See accompanying notes to unaudited condensed consolidated financial statements.
4



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Shares)
(Unaudited)


Three Months Ended June 30, 2020
Preferred StockCommon StockTreasury StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeRetained EarningsNoncontrolling InterestTotal
Balance April 1, 2020$450,000  $1,137  $  $1,066,075  $43,845  $1,144,473  $(34,042) $2,671,488  
Net income—  —  —  —  —  166,574  8,039  174,613  
Foreign currency translation adjustment, net of tax—  —  —  —  (214) —  —  (214) 
Change in unrealized gain on investments, net of tax—  —  —  —  143,233  —  10,555  153,788  
Common stock repurchased—  —  (8,482) —  —  —  —  (8,482) 
Common stock dividends declared—  —  —  —  —  (5,671) —  (5,671) 
Preferred stock dividends declared—  —  —  —  —  (8,925) —  (8,925) 
Common stock issued under employee stock plans and exercises of stock options—  2  —  446  —  —  —  448  
Shares withheld related to net share settlement—  —  —  (385) —  —  —  (385) 
Stock-based compensation—  —  —  3,016  —  —  —  3,016  
Balance June 30, 2020$450,000  $1,139  $(8,482) $1,069,152  $186,864  $1,296,451  $(15,448) $2,979,676  


Three Months Ended June 30, 2019
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeRetained EarningsNoncontrolling InterestTotal
Balance April 1, 2019$450,000  $1,131  $1,058,061  $581  $843,415  $(21,706) $2,331,482  
Net income (loss)—  —  —  —  77,876  (818) 77,058  
Foreign currency translation adjustment, net of tax—  —  —  166  —  —  166  
Change in unrealized gain on investments, net of tax—  —  —  59,163  —  4,130  63,293  
Common stock dividends declared—  —  —  —  (4,525) —  (4,525) 
Preferred stock dividends declared—  —  —  —  (8,925) —  (8,925) 
Common stock issued under employee stock plans and exercises of stock options—  1  153  —  —  —  154  
Shares withheld related to net share settlement—  —  (705) —  —  —  (705) 
Stock-based compensation—  —  2,870  —  —  —  2,870  
Balance June 30, 2019$450,000  $1,132  $1,060,379  $59,910  $907,841  $(18,394) $2,460,868  

See accompanying notes to unaudited condensed consolidated financial statements.
5



NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Shares)
(Unaudited)

Six Months Ended June 30, 2020
Preferred StockCommon StockTreasury StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeRetained EarningsNoncontrolling InterestTotal
Balance January 1, 2020$450,000  $1,134  $  $1,065,634  $74,548  $1,058,138  $(31,960) $2,617,494  
Cumulative-effect adjustment of change in accounting principle, net of tax—  —  —  —  (863) (147) (1,010) 
Net income—  —  —  —  267,333  7,853  275,186  
Foreign currency translation adjustment, net of tax—  —  —  (484) —  —  (484) 
Change in unrealized gain on investments, net of tax—  —  —  112,800  —  8,806  121,606  
Common stock repurchased—  —  (8,482) —  —  —  —  (8,482) 
Common stock dividends declared—  —  —  —  (11,357) —  (11,357) 
Preferred stock dividends declared—  —  —  —  (16,800) —  (16,800) 
Common stock issued under employee stock plans and exercises of stock options—  5  831  —  —  —  836  
Shares withheld related to net share settlement—  —  (3,491) —  —  —  (3,491) 
Stock-based compensation—  —  6,178  —  —  —  6,178  
Balance June 30, 2020$450,000  $1,139  $(8,482) $1,069,152  $186,864  $1,296,451  $(15,448) $2,979,676  


Six Months Ended June 30, 2019
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Retained EarningsNoncontrolling InterestTotal
Balance January 1, 2019$450,000  $1,129  $1,057,783  $(52,130) $764,056  $(19,967) $2,200,871  
Net income (loss)—  —  —  —  169,634  (7,237) 162,397  
Foreign currency translation adjustment, net of tax—  —  —  (3,198) —  —  (3,198) 
Change in unrealized gain on investments, net of tax—  —  —  115,238  —  8,810  124,048  
Common stock dividends declared—  —  —  —  (9,049) —  (9,049) 
Preferred stock dividends declared—  —  —  —  (16,800) —  (16,800) 
Common stock issued under employee stock plans and exercises of stock options—  3  244  —  —  —  247  
Shares withheld related to net share settlement—  —  (3,140) —  —  —  (3,140) 
Stock-based compensation—  —  5,492  —  —  —  5,492  
Balance June 30, 2019$450,000  $1,132  $1,060,379  $59,910  $907,841  $(18,394) $2,460,868  

See accompanying notes to unaudited condensed consolidated financial statements.
6



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

Six Months Ended June 30,
20202019
Cash flows from operating activities:
Net income$275,186  $162,397  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Net loss on investments1,703  5,208  
Credit loss expense56,942  37,849  
Depreciation and amortization41,476  57,134  
Stock-based compensation expense6,178  5,492  
Other, net11,579  (213) 
Changes in assets and liabilities:
Accrued investment income652  (1,858) 
Premiums and other receivables(118,214) (172,669) 
Deferred acquisition costs(12,408) (19,198) 
Reinsurance recoverable101,156  167,655  
Prepaid reinsurance premiums57,665  55,856  
Prepaid expenses and other assets20,688  93,691  
Unpaid loss and loss adjustment expense reserves(59,829) (65,795) 
Unearned premiums and other revenue16,207  87,986  
Reinsurance payable(100,949) (63,426) 
Accounts payable and accrued expenses6,371  (29,703) 
Other liabilities4,136  (25,202) 
Net cash provided by operating activities308,539  295,204  
Cash flows from investing activities:
Purchases of:
Debt securities, available-for-sale(254,147) (489,070) 
Short-term investments(590,546) (1,237,248) 
Other investments(2,579) (1,235) 
Property and equipment(18,455) (77,749) 
Proceeds from:
Sale of debt securities, available-for-sale41,410  41,619  
Maturity of debt securities, available-for-sale268,952  131,491  
Sale of short-term investments441,594  1,385,164  
Sale and return of other investments21,964  7,599  
Other investing activities  (5,935) 
Net cash used in investing activities$(91,807) $(245,364) 
See accompanying notes to unaudited condensed consolidated financial statements.
7


NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
20202019
Cash flows from financing activities:
Common stock repurchased$(8,482) $  
Payments of debt issuance costs  (1,726) 
Repayments of debt and principal payments under capital leases obligations(6,895) (6,554) 
Issuance of common stock — employee share options836  247  
Taxes paid related to net share settlement of equity awards(3,491) (3,140) 
Dividends paid to common shareholders(11,355) (9,044) 
Dividends paid to preferred shareholders(16,800) (16,742) 
Net cash used in financing activities(46,187) (36,959) 
Effect of exchange rate changes on cash and cash equivalents  (2,124) 
Net increase in cash, cash equivalents, and restricted cash170,545  10,757  
Cash, cash equivalents, and restricted cash at beginning of the period164,463  233,583  
Cash, cash equivalents, and restricted cash at end of the period$335,008  $244,340  
Supplemental disclosures of non-cash financing activities:
Accrued common stock dividends$5,671  $4,526  
Accrued preferred stock dividends8,925  8,925  

See accompanying notes to unaudited condensed consolidated financial statements.
8


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

1. Basis of Reporting

The accompanying unaudited interim condensed consolidated financial statements include the accounts of National General Holdings Corp. and its subsidiaries (the “Company” or “NGHC”) and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, previously filed with the SEC on February 20, 2020. The balance sheet at December 31, 2019, has been derived from the audited consolidated financial statements at that date.

These interim condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

The unaudited condensed consolidated financial statements include the accounts and operations of Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer (together with Mountain Valley Indemnity Company, a subsidiary of Adirondack Insurance Exchange, the “Reciprocal Exchanges” or “Exchanges”); variable interest entities (“VIE”) of which the Company is the primary beneficiary. The Company has no ownership interest in the Reciprocal Exchanges but is paid a fee to manage their business operations and has the ability to direct their activities through its wholly-owned management companies. The Reciprocal Exchanges are property and casualty insurers.

A detailed description of the Company’s significant accounting policies and management judgments is located in the notes to the audited consolidated financial statements, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC.

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. The pandemic outbreak has caused an economic downturn on a global scale. The Company continues to monitor the impact of the pandemic as it unfolds. As of June 30, 2020, and for the three and six months ended June 30, 2020, the Company did not experience a material adverse impact due to COVID-19, and cannot, at this time, predict the impact the pandemic will have on its future consolidated financial position, cash flows or results of operations.


9


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
2. Recent Accounting Pronouncements

Adopted During 2020

StandardDescriptionDate of AdoptionEffect on the Company
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related amendments.This standard changed the impairment model to a new forward-looking expected loss model for most financial assets and certain other instruments. The standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which generally results in earlier recognition of allowances for credit losses on loans and other financial instruments. Many of the loss estimation techniques applied prior the adoption of the standard are still permitted, although the inputs to those techniques changed to reflect the full amount of expected credit losses. The Company continues to use judgement to determine which loss estimation method is appropriate for its circumstances. The standard became effective for interim and annual reporting periods beginning after December 15, 2019 and 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.January 1, 2020
The Company adopted ASU 2016-13 using the modified retrospective approach and recorded a cumulative-effect adjustment, net of tax of $1,010 to the opening balance of retained earnings and increased the allowance for premiums receivable, reinsurance recoverable and deferred taxes by the same amount.
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.This standard established 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, 2020The adoption of ASU 2017-04 did not have a material impact on the Company’s condensed consolidated financial statements.

With the exception of the adopted accounting pronouncements discussed above, there have been no recent accounting pronouncements, or quantitative or qualitative progress made toward implementation of outstanding accounting pronouncements during the six months ended June 30, 2020, as compared to those described in Note 2, “Significant Accounting Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, that are of significance, or potential significance, to the Company.

Accounting Policies

The following accounting policies have been updated to reflect the Company's adoption of Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as described above. Premiums and Other Receivables also was updated to include the accounting of the premium refund.

Investment Impairments

The Company conducts a periodic review to identify and evaluate invested assets that may have credit impairments. Beginning on January 1, 2020, credit losses on available-for-sale debt securities are recognized through an allowance account. See Note 4, “Investments” for additional information.

The Company reports accrued investment income separately from debt securities in the Condensed Consolidated Balance Sheets, and has elected not to measure an allowance for credit losses. Accrued investment
10


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
income is written off by reversing interest income through net investment income at the time the issuer of the bond defaults or is expected to default on payments.

Uncollectible debt securities are written-off to net gain (loss) on investments when the Company determines that no additional payments of principal or interest will be received.

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. Premium refunds are recorded against gross premium written.

Premiums and other receivables are reported net of an allowance for expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, historical loss data, including delinquencies and write-offs, current and forecasted economic conditions, and other relevant factors. The Company uses a loss-rate method to estimate the expected credit losses. Credit risk is partially mitigated by the Company’s ability to cancel the policy if the policyholder does not pay the premium.

Reinsurance Recoverable

Amounts recoverable from reinsurers are estimated in a manner consistent with the associated claim liability. The Company reports its reinsurance recoverable net of an allowance for estimated uncollectible reinsurance. The allowance is based upon the Company’s ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, applicable coverage defenses, and other relevant factors. The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies.


3. Allowance for Expected Credit Losses

Premiums and Other Receivables

The following tables present the balances of premiums and other receivables, net of the allowance for expected credit losses, as of January 1, 2020, and June 30, 2020, and changes in the allowance for expected credit losses for the three and six months ended June 30, 2020.

Three Months Ended June 30, 2020
Premiums and Other Receivables, NetAllowance for Expected Credit Losses
Balance, beginning of the period$1,541,760  $27,114  
Current period change for expected credit losses (1)
31,176  
Write-offs of uncollectible premiums and other receivables(18,212) 
Balance, end of the period$1,487,734  $40,078  


11


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Six Months Ended June 30, 2020
Premiums and Other Receivables, NetAllowance for Expected Credit Losses
Balance, beginning of the period$1,428,948  $24,067  
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020762  
Current period change for expected credit losses (1)
56,942  
Write-offs of uncollectible premiums and other receivables(41,693) 
Balance, end of the period$1,487,734  $40,078  
(1) Current period charges for expected losses are recorded in general and administrative expenses.

Reinsurance Recoverable

The following tables present the balances of reinsurance recoverable, net of the allowance for estimated uncollectible reinsurance, as of January 1, 2020, and June 30, 2020, and changes in the allowance for estimated uncollectible reinsurance for the three and six months ended June 30, 2020.

Three Months Ended June 30, 2020
Reinsurance Recoverable, NetAllowance for Expected Credit Losses
Balance, beginning of the period$1,401,681  $517  
Current period change for estimated uncollectible reinsurance (1)
  
Write-offs of uncollectible reinsurance  
Balance, end of the period$1,292,636  $517  


Six Months Ended June 30, 2020
Reinsurance Recoverable, NetAllowance for Expected Credit Losses
Balance, beginning of the period$1,394,308  $  
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020517  
Current period change for estimated uncollectible reinsurance (1)
  
Write-offs of uncollectible reinsurance  
Balance, end of the period$1,292,636  $517  
(1) Current period charges for expected losses are recorded in loss and loss adjustment expense.

Other than the Company’s mandatory pools and associations reinsurance agreements and before allowances for estimated uncollectible reinsurance, the Company’s reinsurers generally carry at least an A.M. Best rating of “A-” (Excellent) or the reinsurance recoverable balances are collateralized. The Company also maintains funds held liabilities under the auto quota share reinsurance agreement.

12


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
4. Investments

(a) Debt Securities, Available-For-Sale

The following tables summarize the unrealized positions for available-for-sale debt securities, disaggregated by major security type.

AmortizedAllowance forGross UnrealizedFair
June 30, 2020Cost
Credit Losses (1)
GainsLossesValue
U.S. Treasury$56,667  $  $4,356  $(1) $61,022  
Federal agencies558    7    565  
States and political subdivision bonds290,985    14,483  (135) 305,333  
Foreign government1,763    82    1,845  
Corporate bonds2,039,050  (1,203) 136,824  (1,232) 2,173,439  
Residential mortgage-backed securities1,096,583    53,893  (14) 1,150,462  
Commercial mortgage-backed securities590,047    54,361  (989) 643,419  
Asset-backed securities43,015    961  (979) 42,997  
Structured securities210,398    52  (8,001) 202,449  
Total$4,329,066  $(1,203) $265,019  $(11,351) $4,581,531  
NGHC$4,024,349  $(1,054) $248,284  $(10,821) $4,260,758  
Reciprocal Exchanges304,717  (149) 16,735  (530) 320,773  
Total$4,329,066  $(1,203) $265,019  $(11,351) $4,581,531  
(1) Represents the amount of impairment that has resulted from credit-related factors recorded in net gain (loss) on investments.

AmortizedGross UnrealizedFair
December 31, 2019CostGainsLossesValue
U.S. Treasury$65,037  $1,992  $(23) $67,006  
Federal agencies3,907  8    3,915  
States and political subdivision bonds298,345  4,778  (1,441) 301,682  
Foreign government1,762  40    1,802  
Corporate bonds1,859,736  59,184  (2,357) 1,916,563  
Residential mortgage-backed securities1,265,830  15,747  (4,117) 1,277,460  
Commercial mortgage-backed securities585,044  27,261  (112) 612,193  
Asset-backed securities74,465  1,194  (48) 75,611  
Structured securities222,565  226  (2,665) 220,126  
Total$4,376,691  $110,430  $(10,763) $4,476,358  
NGHC$4,057,501  $104,951  $(10,343) $4,152,109  
Reciprocal Exchanges319,190  5,479  (420) 324,249  
Total$4,376,691  $110,430  $(10,763) $4,476,358  

13


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED 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 June 30, 2020, 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.

NGHCReciprocal ExchangesTotal
June 30, 2020Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Due in one year or less$59,142  $59,763  $  $  $59,142  $59,763  
Due after one year through five years1,071,646  1,135,486  133,703  140,137  1,205,349  1,275,623  
Due after five years through ten years919,621  984,263  72,474  77,260  992,095  1,061,523  
Due after ten years327,157  331,714  15,678  16,030  342,835  347,744  
Mortgage-backed securities1,646,783  1,749,532  82,862  87,346  1,729,645  1,836,878  
Total$4,024,349  $4,260,758  $304,717  $320,773  $4,329,066  $4,581,531  

(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.

Less Than 12 Months12 Months or MoreTotal
June 30, 2020Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Treasury$5,196  $(1) $  $  $5,196  $(1) 
States and political subdivision bonds23,423  (135)     23,423  (135) 
Corporate bonds44,373  (1,232)     44,373  (1,232) 
Residential mortgage-backed securities1,794  (14)     1,794  (14) 
Commercial mortgage-backed securities22,382  (989)     22,382  (989) 
Asset-backed securities6,911  (965) 183  (14) 7,094  (979) 
Structured securities130,046  (3,924) 66,928  (4,077) 196,974  (8,001) 
Total$234,125  $(7,260) $67,111  $(4,091) $301,236  $(11,351) 
NGHC$224,513  $(6,907) $63,288  $(3,914) $287,801  $(10,821) 
Reciprocal Exchanges9,612  (353) 3,823  (177) 13,435  (530) 
Total$234,125  $(7,260) $67,111  $(4,091) $301,236  $(11,351) 

Less Than 12 Months12 Months or MoreTotal
December 31, 2019Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Treasury$19,903  $(23) $500  $  $20,403  $(23) 
States and political subdivision bonds106,103  (1,415) 2,580  (26) 108,683  (1,441) 
Corporate bonds586,817  (2,253) 5,976  (104) 592,793  (2,357) 
Residential mortgage-backed securities410,484  (4,074) 3,983  (43) 414,467  (4,117) 
Commercial mortgage-backed securities18,250  (105) 748  (7) 18,998  (112) 
Asset-backed securities5,406  (29) 920  (19) 6,326  (48) 
Structured securities40,979  (94) 109,880  (2,571) 150,859  (2,665) 
Total$1,187,942  $(7,993) $124,587  $(2,770) $1,312,529  $(10,763) 
NGHC$1,104,244  $(7,654) $117,681  $(2,689) $1,221,925  $(10,343) 
Reciprocal Exchanges83,698  (339) 6,906  (81) 90,604  (420) 
Total$1,187,942  $(7,993) $124,587  $(2,770) $1,312,529  $(10,763) 
14


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED 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. There were 267 and 1,337 individual security lots at June 30, 2020, and December 31, 2019, respectively, that accounted for the gross unrealized loss. As of June 30, 2020, and December 31, 2019, the unrealized losses for those securities in unrealized loss positions for a period of twelve or more consecutive months were not greater than or equal to 25% of their amortized cost. The Company recorded a credit loss allowance of $2,927 on seven securities in the energy sector as of March 31, 2020; however, market improvements have resulted in $1,724 of the allowance being reversed as of June 30, 2020. Some of the factors considered in assessing credit loss and impairment of fixed maturities due to credit-related factors include: (1) the magnitude of the unrealized loss in relation to the amortized cost; (2) the credit rating of the issuing entity and market or issuer events that could impact the issuer’s ability to repay the debt security; (3) the likelihood of the recoverability of principal and interest; and (4) whether it is more likely than not that the Company will be required to sell the investment prior to an anticipated recovery in value. The Company did not record any new credit loss during the three months ended June 30, 2020.

The following tables display the roll forward of the allowance for credit losses:

Three Months Ended June 30, 2020
Corporate bondsTotal
Balance, beginning of the period$2,927  $2,927  
Decreases to the allowance for credit losses (1)
(1,724) (1,724) 
Balance, end of the period$1,203  $1,203  

Six Months Ended June 30, 2020
Corporate bondsTotal
Balance, beginning of the period$  $  
Additions to the allowance for credit losses on securities not previously recorded (1)
2,927  2,927  
Decreases to the allowance for credit losses (1)
(1,724) (1,724) 
Balance, end of the period$1,203  $1,203  
(1) Current period increases or decreases for expected losses are recorded in net gain (loss) on investments.

(c) Net Investment Income

The components of net investment income consisted of the following:

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Cash and short-term investments$30  $847  $308  $2,344  
Debt securities, available-for-sale30,491  30,725  62,593  60,192  
Other, net (related parties - three months - $1,042 and $1,919; six months - $(1,483) and $2,173)
1,709  4,733  941  8,241  
Investment income$32,230  $36,305  $63,842  $70,777  
Investment expenses(1,055) (1,174) (2,424) (2,201) 
Net investment income$31,175  $35,131  $61,418  $68,576  
NGHC$29,163  $33,007  $57,223  $64,282  
Reciprocal Exchanges2,012  2,124  4,195  4,294  
Net investment income$31,175  $35,131  $61,418  $68,576  
15


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
(d) Net Gain (Loss) on Investments

The table below indicates realized gains and losses on investments. Other, net includes realized gains and losses from short-term and other investments and foreign exchange. Purchases and sales of investments are recorded on a trade date basis. Realized gains and losses are determined based on the specific identification method.

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Debt securities, available-for-sale:
Gross gains$1,773  $187  $2,046  $323  
Gross losses(80) (118) (89) (374) 
Expected credit losses1,724    (1,203)   
Net realized gain (loss) on debt securities, available-for-sale3,417  69  754  (51) 
Other, net (1)
1,741  (5,299) (2,457) (5,157) 
Net realized gain (loss) on investments$5,158  $(5,230) $(1,703) $(5,208) 
NGHC$5,511  $(5,274) $(557) $(4,508) 
Reciprocal Exchanges(353) 44  (1,146) (700) 
Net realized gain (loss) on investments$5,158  $(5,230) $(1,703) $(5,208) 
(1) Includes gains and losses on publicly traded equity securities and foreign currency.

(e) Credit Quality of Investments

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.

NGHCReciprocal Exchanges
June 30, 2020Amortized
Cost
Fair
Value
PercentageAmortized
Cost
Fair
Value
Percentage
U.S. Treasury$43,785  $47,164  1.1 %$12,882  $13,858  4.3 %
AAA505,813  541,881  12.7 %21,788  23,044  7.2 %
AA, AA+, AA-1,558,195  1,644,162  38.7 %105,625  110,717  34.6 %
A, A+, A-1,034,029  1,090,822  25.6 %100,935  107,450  33.5 %
BBB, BBB+, BBB-858,991  913,538  21.4 %62,587  64,944  20.2 %
BB+ and lower23,536  23,191  0.5 %900  760  0.2 %
Total$4,024,349  $4,260,758  100.0 %$304,717  $320,773  100.0 %

NGHCReciprocal Exchanges
December 31, 2019Amortized
Cost
Fair
Value
PercentageAmortized
Cost
Fair
Value
Percentage
U.S. Treasury$52,108  $53,599  1.3 %$12,929  $13,407  4.1 %
AAA515,869  537,508  12.9 %20,947  21,555  6.6 %
AA, AA+, AA-1,677,787  1,697,220  40.9 %120,113  121,720  37.5 %
A, A+, A-954,312  976,468  23.5 %116,747  119,041  36.7 %
BBB, BBB+, BBB-795,594  823,239  19.8 %48,021  48,093  14.8 %
BB+ and lower61,831  64,075  1.6 %433  433  0.3 %
Total$4,057,501  $4,152,109  100.0 %$319,190  $324,249  100.0 %
16


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The tables below summarize the investment quality of the corporate bond holdings and industry concentrations.
June 30, 2020AAAAA+,
AA,
AA-
A+,A,A-BBB+,
BBB,
BBB-
BB+ or
Lower
Fair
Value
% of
Corporate
Bonds
Portfolio
Financial Institutions %3.2 %25.9 %11.6 %0.1 %$887,613  40.8 %
Industrials0.6 %3.5 %22.0 %29.8 %0.4 %1,221,976  56.3 %
Utilities/Other % %1.6 %1.3 % %63,850  2.9 %
Total0.6 %6.7 %49.5 %42.7 %0.5 %$2,173,439  100.0 %
NGHC0.3 %5.7 %44.6 %39.7 %0.5 %$1,973,551  90.8 %
Reciprocal Exchanges0.3 %1.0 %4.9 %3.0 % %199,888  9.2 %
Total0.6 %6.7 %49.5 %42.7 %0.5 %$2,173,439  100.0 %

December 31, 2019AAAAA+,
AA,
AA-
A+,A,A-BBB+,
BBB,
BBB-
BB+ or
Lower
Fair
Value
% of
Corporate
Bonds
Portfolio
Financial Institutions %3.6 %25.0 %12.1 %0.3 %$785,910  41.0 %
Industrials0.7 %2.7 %24.1 %29.0 %0.1 %1,083,959  56.6 %
Utilities/Other % %1.0 %1.4 % %46,694  2.4 %
Total0.7 %6.3 %50.1 %42.5 %0.4 %$1,916,563  100.0 %
NGHC0.3 %5.1 %44.0 %40.0 %0.4 %$1,720,962  89.8 %
Reciprocal Exchanges0.4 %1.2 %6.1 %2.5 % %195,601  10.2 %
Total0.7 %6.3 %50.1 %42.5 %0.4 %$1,916,563  100.0 %

(f) 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:
June 30, 2020December 31, 2019
Cash and cash equivalents$297,282  $135,942  
Restricted cash and cash equivalents37,726  28,521  
Total cash, cash equivalents and restricted cash$335,008  $164,463  

Restricted investments are as follows:
June 30, 2020December 31, 2019
Securities on deposit with state regulatory authorities$81,484  $74,061  
Restricted investments to trusts in certain reinsurance transactions40,845  49,502  
Total restricted investments$122,329  $123,563  

17


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
(g) Short-term and Other 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 from the date of acquisition.

The table below summarizes the composition of other investments:

June 30, 2020December 31, 2019
Equity method investments (related parties - $105,454 and $109,612)
$139,890  $143,511  
Notes receivable (related parties - $130,004 and $129,229)(1)
130,059  129,299  
Long-term Certificates of Deposit (CDs), at cost150  20,150  
Investments, at fair value8,732  9,365  
Investments, at cost or amortized cost8,904  8,962  
Total$287,735  $311,287  
(1) See Note 15, “Related Party Transactions” for additional information.

Equity method investments represent limited liability companies and limited partnership investments in real estate. Investments at fair value include publicly traded equity securities and 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 net investment income. Investments at cost or amortized cost, represent limited partnerships, loans and trusts. The Company believes its exposure to risks associated with these investments is generally limited to the investment carrying amounts.

Other than investments at fair value, 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.

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 Company holds a variable interest in the following entities but is not the primary beneficiary of such VIE’s. 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 June 30, 2020, the LSC Entity directly held one life settlement contract. The life settlement contract is accounted for using the fair value method.

18


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The Company’s equity interest in the LSC Entity as of June 30, 2020, and December 31, 2019, was $46,048 and $49,477, respectively. For the three months ended June 30, 2020, and 2019, the Company recorded equity in earnings from the LSC Entity of $757 and $1,145, respectively. For the six months ended June 30, 2020, and 2019, the Company recorded equity in earnings (losses) from the LSC Entity of $(3,429) and $1,731, respectively.

800 Superior, LLC

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.

The Company’s equity interest in 800 Superior, LLC as of June 30, 2020, and December 31, 2019, was $9,466 and $9,365, respectively. For the three months ended June 30, 2020, and 2019, the Company recorded equity in earnings (losses) from 800 Superior, LLC of $(21) and $309, respectively. For the six months ended June 30, 2020, and 2019, the Company recorded equity in earnings from 800 Superior, LLC of $101 and $16, respectively.

The Company paid 800 Superior, LLC $762 and $742 in rent for the three months ended June 30, 2020, and 2019, respectively, and $1,523 and $1,484 in rent for the six months ended June 30, 2020, and 2019, 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 June 30, 2020, and December 31, 2019, was $5,882 and $5,317, respectively. For the three months ended June 30, 2020, and 2019, the Company recorded equity in earnings (losses) from North Dearborn of $405 and $(38), respectively, and received distributions of $225 and $270, respectively. For the six months ended June 30, 2020, and 2019, the Company recorded equity in earnings (losses) from North Dearborn of $835 and $(66), respectively, and received distributions of $270 in both periods.

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 June 30, 2020, and December 31, 2019, was $1,453 and $1,074, respectively. For the three months ended June 30, 2020, and 2019, the Company recorded equity in earnings from 4455 LBJ Freeway, LLC of $219 and $105, respectively. For the six months ended June 30, 2020, and 2019, the Company recorded equity in earnings from 4455 LBJ Freeway, LLC of $379 and $128, respectively.

The Company paid 4455 LBJ Freeway, LLC $623 and $608 in rent for the three months ended June 30, 2020, and 2019, respectively, and $1,236 and $1,206 in rent for the six months ended June 30, 2020, and 2019, respectively.

19


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED 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 June 30, 2020, and December 31, 2019, was $42,605 and $44,379, respectively. For the three months ended June 30, 2020, and 2019, the Company recorded equity in losses from Illinois Center of $(1,520) and $(790), respectively, and made contributions of $0 and $1,125, respectively. For the six months ended June 30, 2020, and 2019, the Company recorded equity in losses from Illinois Center of $(1,774) and $(2,012), respectively, and made contributions of $0 and $1,125, respectively.


5. Fair Value of Financial Instruments

The Company carries certain financial instruments at fair value. Assets and liabilities recorded at fair value in the Condensed 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 June 30, 2020, and December 31, 2019. 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.
Short-term investments. Comprised of money market funds that are traded in active markets and fair values are based on quoted market prices.
Other Investments, at fair value. Common and preferred equity securities. The pricing service utilizes market quotations for equity securities that have quoted market prices in active markets and their respective quoted prices are provided at fair value.

20


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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.
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.
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 the fair value of the ESS. 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 net investment income.
Other Investments, at cost or amortized cost. 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.

21


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Assets measured at fair value on a recurring basis are as follows:

June 30, 2020
Level 1Level 2Level 3Total
Debt securities, available-for-sale:
U.S. Treasury$61,022  $  $  $61,022  
Federal agencies565      565  
States and political subdivision bonds  302,814  2,519  305,333  
Foreign government  1,845    1,845  
Corporate bonds  2,168,133  5,306  2,173,439  
Residential mortgage-backed securities  1,150,462    1,150,462  
Commercial mortgage-backed securities  643,419    643,419  
Asset-backed securities  42,997    42,997  
Structured securities  202,449    202,449  
Total debt securities, available-for-sale61,587  4,512,119  7,825  4,581,531  
Short-term investments196,484  20,000    216,484  
Other investments4,811    3,921  8,732  
Total$262,882  $4,532,119  $11,746  $4,806,747  
NGHC$229,695  $4,225,203  $11,746  $4,466,644  
Reciprocal Exchanges33,187  306,916    340,103  
Total$262,882  $4,532,119  $11,746  $4,806,747  

December 31, 2019
Level 1Level 2Level 3Total
Debt securities, available-for-sale:
U.S. Treasury$67,006  $  $  $67,006  
Federal agencies3,915      3,915  
States and political subdivision bonds  298,582  3,100  301,682  
Foreign government  1,802    1,802  
Corporate bonds  1,908,235  8,328  1,916,563  
Residential mortgage-backed securities  1,277,460    1,277,460  
Commercial mortgage-backed securities  612,193    612,193  
Asset-backed securities  75,611    75,611  
Structured securities  220,126    220,126  
Total debt securities, available-for-sale70,921  4,394,009  11,428  4,476,358  
Short-term investments59,953  7,400    67,353  
Other investments4,881    4,484  9,365  
Total$135,755  $4,401,409  $15,912  $4,553,076  
NGHC$116,602  $4,091,068  $15,912  $4,223,582  
Reciprocal Exchanges19,153  310,341    329,494  
Total$135,755  $4,401,409  $15,912  $4,553,076  

22


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
For the six months ended June 30, 2020, and 2019, 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:
States and
political
subdivision
bonds
Corporate
bonds
Other
investments
Total
Balance as of January 1, 2020$3,100  $8,328  $4,484  $15,912  
Total gains (losses) for the period:
Included in net income    (66) (66) 
Included in other comprehensive income(581) (3,022)   (3,603) 
Sales    (497) (497) 
Balance as of June 30, 2020$2,519  $5,306  $3,921  $11,746  
Change in unrealized gains (losses) for the period included in net income for assets held at the end of the reporting period$(66) $(66) 
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held at the end of the reporting period$(581) $(3,022) $(3,603) 

States and
political
subdivision
bonds
Corporate
bonds
Other
investments
Total
Balance as of January 1, 2019$3,596  $11,767  $7,593  $22,956  
Total gains (losses) for the period:
Included in net income    (1,414) (1,414) 
Included in other comprehensive income(496) (2,726)   (3,222) 
Balance as of June 30, 2019$3,100  $9,041  $6,179  $18,320  
Change in unrealized gains (losses) for the period included in net income for assets held at the end of the reporting period$(1,414) $(1,414) 
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held at the end of the reporting period$(496) $(2,726) $(3,222) 

At June 30, 2020, and December 31, 2019, 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.

Fair Value Information About Financial Liabilities not Measured at Fair Value

Debt - The amount reported in the accompanying Condensed Consolidated Balance Sheets for these financial instruments represents the carrying value of the debt. See Note 9, “Debt” for additional information.

23


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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:

June 30, 2020December 31, 2019
Input LevelCarrying amountFair valueCarrying amountFair value
7.625% Notes
Level 2$96,972  $101,000  $96,928  $103,560  
6.75% Notes
Level 3347,414  384,305  347,091  371,366  
Subordinated DebenturesLevel 372,168  71,209  72,168  72,103  
2019 Credit AgreementLevel 3140,000  144,461  140,000  148,272  


6. Deferred Acquisition Costs

The following table reflects the amounts of policy acquisition costs deferred and amortized:

Six Months Ended June 30,
20202019
Property
and
Casualty
Accident
and
Health
TotalProperty
and
Casualty
Accident
and
Health
Total
Balance, beginning of the period$239,293  $24,230  $263,523  $226,188  $25,220  $251,408  
Additions302,123  12,681  314,804  264,381  32,066  296,447  
Amortization(291,591) (10,805) (302,396) (252,342) (25,129) (277,471) 
Change in DAC10,532  1,876  12,408  12,039  6,937  18,976  
Balance, end of the period$249,825  $26,106  $275,931  $238,227  $32,157  $270,384  
NGHC$226,728  $26,106  $252,834  $216,588  $32,157  $248,745  
Reciprocal Exchanges23,097    23,097  21,639    21,639  
Balance, end of the period$249,825  $26,106  $275,931  $238,227  $32,157  $270,384  


7. Unpaid Losses and Loss Adjustment Expense Reserves

The unpaid losses and loss adjustment expense (“LAE”) reserves are an estimate of the Company’s liability from incurred claims at the end of the reporting period. The unpaid losses and loss adjustment expense reserves are the result of an 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 may be affected by future events beyond the control of management, including inflation, which may favorably or unfavorably impact the ultimate settlement of the Company’s losses and LAE, as well as changes in the law and judicial interpretations.

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, as well as general economic trends. These estimated trends are monitored and revised as necessary based on actual development.

24


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following tables present a reconciliation of beginning and ending balances for unpaid losses and LAE:

Six Months Ended June 30, 2020
Property
and
Casualty
Accident
and
Health
NGHCReciprocal
Exchanges
Total
Gross balance at beginning of the period$2,528,754  $151,874  $2,680,628  $205,786  $2,886,414  
Less: Reinsurance recoverable at beginning of the period(1,016,368) (11,266) (1,027,634) (84,174) (1,111,808) 
Net balance at beginning of the period1,512,386  140,608  1,652,994  121,612  1,774,606  
Incurred losses and LAE related to:
Current year1,058,759  164,494  1,223,253  71,699  1,294,952  
Prior year13,055  (16,238) (3,183) 675  (2,508) 
Total incurred1,071,814  148,256  1,220,070  72,374  1,292,444  
Paid losses and LAE related to:
Current year(514,992) (59,685) (574,677) (37,793) (612,470) 
Prior year(612,469) (68,916) (681,385) (37,169) (718,554) 
Total paid(1,127,461) (128,601) (1,256,062) (74,962) (1,331,024) 
Net balance at end of the period1,456,739  160,263  1,617,002  119,024  1,736,026  
Plus: Reinsurance recoverable at end of the period993,459  15,853  1,009,312  81,246  1,090,558  
Gross balance at end of the period$2,450,198  $176,116  $2,626,314  $200,270  $2,826,584  

Six Months Ended June 30, 2019
Property
and
Casualty
Accident
and
Health
NGHCReciprocal
Exchanges
Total
Gross balance at beginning of the period$2,507,409  $271,280  $2,778,689  $178,470  $2,957,159  
Less: Reinsurance recoverable at beginning of the period(1,182,588) (24,575) (1,207,163) (77,979) (1,285,142) 
Net balance at beginning of the period1,324,821  246,705  1,571,526  100,491  1,672,017  
Incurred losses and LAE related to:
Current year1,114,075  190,060  1,304,135  75,936  1,380,071  
Prior year4,882  (18,987) (14,105) 1,378  (12,727) 
Total incurred1,118,957  171,073  1,290,030  77,314  1,367,344  
Paid losses and LAE related to:
Current year(373,662) (76,149) (449,811) (39,264) (489,075) 
Prior year(712,961) (88,468) (801,429) (33,260) (834,689) 
Total paid(1,086,623) (164,617) (1,251,240) (72,524) (1,323,764) 
Effect of foreign exchange rates  (3,338) (3,338)   (3,338) 
Net balance at end of the period1,357,155  249,823  1,606,978  105,281  1,712,259  
Plus: Reinsurance recoverable at end of the period1,050,771  35,194  1,085,965  89,016  1,174,981  
Gross balance at end of the period$2,407,926  $285,017  $2,692,943  $194,297  $2,887,240  

25


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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.

2020. Loss and LAE for the six months ended June 30, 2020, included $2,508 of favorable loss development on prior accident year loss and LAE reserves. The $13,730 of unfavorable loss development in the property and casualty segment (including $675 of unfavorable loss development for the Reciprocal Exchanges) was driven by small business auto, while the $16,238 of favorable loss development in the accident and health segment was driven by the small group self-funded business and short term medical.

2019. Loss and LAE for the six months ended June 30, 2019, included $12,727 of favorable loss development on prior accident year loss and LAE reserves. The $6,260 of unfavorable loss development in the property and casualty segment (including $1,378 of unfavorable loss development for the Reciprocal Exchanges) was driven by auto liability, while the $18,987 of favorable loss development in the accident and health segment was driven by the small group self-funded business and short term medical.


8. 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 reinsurance recoverable balances are collateralized. The Company also maintains funds held liabilities under the auto quota share reinsurance agreement. 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 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 is as follows:
June 30, 2020December 31, 2019
Reinsurance recoverable on paid losses$202,595  $282,500  
Reinsurance recoverable on unpaid losses1,090,558  1,111,808  
Allowance for uncollectible reinsurance(517)   
Reinsurance recoverable, net$1,292,636  $1,394,308  

The following is the effect of reinsurance on unpaid loss and LAE reserves and unearned premiums:

June 30, 2020December 31, 2019
AssumedCededAssumedCeded
Unpaid Loss and LAE reserves$45,123  $1,090,558  $50,884  $1,111,808  
Unearned premiums18,590  518,082  15,278  575,747  
26


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following is the effect of reinsurance on premiums and loss and LAE:

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Premiums:WrittenEarnedWrittenEarnedWrittenEarnedWrittenEarned
Direct$1,324,549  $1,370,172  $1,293,591  $1,356,695  $2,783,082  $2,760,322  $2,782,779  $2,672,400  
Assumed17,052  15,654  20,317  19,843  35,073  31,760  40,907  40,843  
Total Gross Premium1,341,601  1,385,826  1,313,908  1,376,538  2,818,155  2,792,082  2,823,686  2,713,243  
Ceded(326,693) (320,259) (318,510) (345,887) (593,644) (651,309) (663,624) (718,435) 
Net Premium$1,014,908  $1,065,567  $995,398  $1,030,651  $2,224,511  $2,140,773  $2,160,062  $1,994,808  

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
AssumedCededAssumedCededAssumedCededAssumedCeded
Loss and LAE $7,136  $190,165  $11,324  $150,709  $13,771  $386,651  $16,646  $360,031  

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”), for which the Company retains no loss indemnity risk. Prepaid reinsurance premiums are recognized on a pro-rata basis over the period of risk, consistent with premiums written.

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.

Quota Share Agreements

In 2017, the Company entered into an Auto Quota Share Agreement (the “Auto Quota Share Agreement”) covering the Company’s auto lines 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 ceded 40.0% of net liability and received 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. On July 1, 2020, the Company renewed its HO
27


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Quota Share Agreement for a one-year term. Effective July 1, 2020, the Company cedes 20.0% of net liability and receives a 37.0% ceding commission on in-force, new and renewal business.

In 2019, the Reciprocal Exchanges entered into a personal lines quota share agreement for a one-year term. The Reciprocal Exchanges ceded 42.3% 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. Effective July 1, 2020, the Reciprocal Exchanges renewed their personal lines quota share agreement for a one-year term, ceding 42.0% combined weighted average of net liability. This includes a 55.0% quota share covering homeowners multiple peril, dwelling fire, and automobile physical damage (comprehensive only) policies written in the states of New Jersey and New York as well as a 25.0% quota share on automobile liability and collision coverages.

Catastrophe and Casualty Reinsurance

Effective May 1, 2020, with additional purchases made at June 1, 2020, and July 1, 2020, the Company renewed its property catastrophe excess of loss program, protecting the Company against catastrophic events and other large losses. The mainframe treaty provides coverage up to $650,000 with one reinstatement. The mainframe treaty attaches at $70,000 for the first event and $50,000 for the second event. The Company purchased additional first event coverage for named wind that attaches at $50,000. Effective July 17, 2020, the Company purchased an additional $115,000 of top layer coverage. Effective October 1, 2019, the Company’s casualty program provides $35,000 in coverage in excess of a $5,000 retention. The Company pays a premium as consideration for ceding the risk.

Effective July 1, 2020, the Reciprocal Exchanges’ property catastrophe excess of loss program provided coverage up to $475,000 with a $20,000 retention, and one reinstatement. Effective July 17, 2020, the Company purchased an additional $125,000 of top layer coverage.


9. Debt

The following table represents the Company’s debt:

Interest RateMaturityJune 30, 2020December 31, 2019
Fixed-rate:
6.75% Notes
6.75%2024$350,000  $350,000  
7.625% Notes
7.625%2055100,000  100,000  
Floating-rate:
Subordinated Debentures I(1)
LIBOR + 3.40%
203541,238  41,238  
Subordinated Debentures II(2)
LIBOR + 4.25%
203730,930  30,930  
2019 Credit Agreement(3)
LIBOR + 1.75%
2023140,000  140,000  
Finance lease liabilitiesVariousVarious19,542  20,477  
Other3.5%Various6,170  9,342  
Unamortized debt issuance costs and unamortized discount(5,614) (5,981) 
Total carrying amount of debt$682,266  $686,006  
(1) Interest rate was 3.71% and 5.29%, as of June 30, 2020, and December 31, 2019, respectively.
(2) Interest rate was 4.56% and 6.14%, as of June 30, 2020, and December 31, 2019, respectively.
(3) Weighted-average interest rate was 1.94% and 3.59% as of June 30, 2020, and December 31, 2019, respectively.

28


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following table presents the Company’s interest expense:

Three Months Ended June 30,Six Months Ended June 30,
Interest Payment Frequency2020201920202019
6.75% Notes
Semiannually$5,907  $5,907  $11,813  $11,813  
7.625% Notes
Quarterly1,907  1,907  3,813  3,813  
Subordinated DebenturesQuarterly810  1,189  1,807  2,352  
2016 Credit AgreementQuarterly      1,211  
2019 Credit AgreementQuarterly819  1,817  2,034  2,346  
Finance lease liabilitiesVarious276  292  647  586  
Other(1)
Various2,060  1,813  3,445  3,803  
Total interest expense$11,779  $12,925  $23,559  $25,924  
(1) Includes interest for other liabilities, interest credited on funds held balances and accretion of debt issuance costs.

Notes

The 6.75% Notes are the Company’s general unsecured obligations and rank (i) equally in right of payment with its other existing and future senior unsecured indebtedness and (ii) senior in right of payment to any of its indebtedness that is contractually subordinated to the 6.75% Notes. The 6.75% Notes are also effectively subordinated to any of the Company’s existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness and are structurally subordinated to the existing and future indebtedness of the Company’s subsidiaries (including trade payables). The 6.75% Notes mature on May 15, 2024, unless earlier redeemed or purchased by the Company.

The 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 an 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 on 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.

29


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Credit Agreement

In 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 LIBOR 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 LIBOR 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 LIBOR 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; and as of June 30, 2020, 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 June 30, 2020, are as follows:

2020 (remaining six months)20212022202320242025 and thereafterTotal
6.75% Notes
$  $  $  $  $350,000  $  $350,000  
7.625% Notes
          100,000  100,000  
Subordinated Debentures I          41,238  41,238  
Subordinated Debentures II          30,930  30,930  
2019 Credit Agreement      140,000      140,000  
Finance lease liabilities3,317  5,889  3,698  2,288  1,391  2,959  19,542  
Other3,227  2,943          6,170  
Total principal amount of debt$6,544  $8,832  $3,698  $142,288  $351,391  $175,127  $687,880  
Unamortized debt issuance costs and unamortized discount(5,614) 
Carrying amount of debt$682,266  

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.

30


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
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 June 30, 2020, the Company was in compliance with the covenants contained in the Company’s debt agreements.


10. Contingencies

Litigation

The Company is routinely involved in legal proceedings arising in the ordinary course of business, in particular in connection with claims adjudication with respect to its policies. Management believes it has 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. 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 asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, 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 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. The amended complaint seeks damages in an amount to be proven at trial. The Company filed a Motion to Dismiss the amended complaint on March 10, 2020. Management believes that the claims set forth in the amended complaint are unfounded and without merit and intends to vigorously contest them. The Company notes, 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.


11. Income Taxes

The Company files a consolidated Federal income tax return. The Reciprocal Exchanges are not included in the Company’s consolidated tax return as the Company does not have an ownership interest in the Reciprocal Exchanges, and they are not a part of the consolidated tax sharing agreement among the Company and its subsidiaries.

The Company uses the estimated annual effective tax rate method. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions.

31


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The Company’s consolidated effective tax rate was 22.4% for both the three months ended June 30, 2020, and 2019. The Company’s consolidated effective tax rate increased to 22.2% for the six months ended June 30, 2020, from 21.6% for the six months ended June 30, 2019. The increase in consolidated effective tax rate for the six months ended June 30, 2020, was primarily driven by an increase in tax associated with U.S shareholder’s income and other nondeductible items.

All tax liabilities are payable to the Internal Revenue Service (“IRS”) and various state and local taxing agencies. The Company’s subsidiaries are currently under audit by the IRS for the years ended December 31, 2016, 2017 and 2018, and open to audit years thereafter for federal tax purposes. For state and local tax purposes, the Company is open to audit for tax years ended December 31, 2016, and forward, depending on jurisdiction.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES” Act) to mitigate the economic impacts of COVID-19. The Company believes that the provisions of the CARES Act will not have a material impact on its U.S. federal tax liabilities.


12. Stockholders’ Equity

Preferred Stock

The Company has four separate series (Series A through D) of preferred stock outstanding. Two of these series (Series B and C) were issued in offerings using depositary shares. Dividends on the Series A, B and C preferred stock are payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by the Company’s Board of Directors, quarterly in arrears on the 15th day of January, April, July and October of each year. Dividends on the Series D preferred stock are payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by the Company’s Board of Directors, 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.

The following table summarizes the Company’s preferred stock issued and outstanding as of June 30, 2020, and December 31, 2019.

SeriesDividend rate
per year
Shares of preferred stock issued and outstandingDepositary shares issued and outstandingLiquidation preference per shareAggregate liquidation preference
A7.50 %2,200,000    $25  $55,000  
B7.50 %165,000  6,600,000  $1,000  $165,000  
C7.50 %200,000  8,000,000  $1,000  $200,000  
D
Fixed/ Floating(1)
120    $250,000  $30,000  
2,565,120  $450,000  
(1) Dividend rate is fixed at 7.00% prior to July 15, 2023, and floating at six-month LIBOR plus 5.4941% thereafter.

32


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Common 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:
Class of StockDeclaration DateDividend
Per Share
Dividend Per Depositary Share
Common stockApril 29, 2020$0.05  
Common stockFebruary 20, 2020$0.05  
Preferred stock Series AApril 29, 2020$0.46875  
Preferred stock Series AFebruary 20, 2020$0.46875  
Preferred stock Series B and Series CApril 29, 2020$18.75  $0.46875  
Preferred stock Series B and Series CFebruary 20, 2020$18.75  $0.46875  
Preferred stock Series DApril 29, 2020$8,750.00  

Class of StockDeclaration DateDividend
Per Share
Dividend Per Depositary Share
Common stockMay 6, 2019$0.04  
Common stockFebruary 25, 2019$0.04  
Preferred stock Series AMay 6, 2019$0.46875  
Preferred stock Series AFebruary 25, 2019$0.46875  
Preferred stock Series B and Series CMay 6, 2019$18.75  $0.46875  
Preferred stock Series B and Series CFebruary 25, 2019$18.75  $0.46875  
Preferred stock Series DMay 6, 2019$8,750.00  

Share Repurchase Program

On April 29, 2020, the Board of Directors authorized and approved a share repurchase program with a 12 month term for up to $50,000 aggregate purchase price of the Company’s outstanding common shares. During the second quarter of 2020, the Company purchased 459,083 common shares at a cost of $8,482. The Company’s purchases were made in the open market in accordance with applicable federal securities laws, including Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934. Pursuant to the terms of the merger agreement with The Allstate Corporation, the Company is prohibited from making any further common share repurchases prior to the close of the merger. See Note 17, “Subsequent Event” for additional information.

33


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Shares Rollforward

The following table presents a roll forward of outstanding common shares.

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Common stock:
Balance, beginning of the period113,708,996  113,137,346  113,368,811  112,940,595  
Shares issued under employee stock plans and exercises of stock options174,551  108,212  661,965  400,488  
Shares withheld related to net share settlement(26,919) (29,926) (174,148) (125,451) 
Balance, end of the period113,856,628  113,215,632  113,856,628  113,215,632  
Treasury stock:
Balance, beginning of the period        
Repurchases of common stock(459,083)   (459,083)   
Balance, end of the period(459,083)   (459,083)   
Shares outstanding at end of the period 113,397,545  113,215,632  113,397,545  113,215,632  


13. Stock-Based Compensation

In 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 (“RSUs”), 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 June 30, 2020, approximately 1.9 million shares of the Company’s common stock remained available for grants under the 2019 Plan.

Stock Options

A summary of the stock option awards granted under the prior plan is shown below:

Shares Subject to Options Outstanding
Six Months Ended June 30, 2020Number of SharesWeighted-
Average
Exercise Price
Weighted-Average Remaining Contractual Term (in years)
Aggregate
Intrinsic
Value (1)
Outstanding at beginning of the period3,025,587  $9.83  
Exercised(218,622) 3.82  
Outstanding and exercisable at end of the period2,806,965  $10.30  2.8$31,750  
(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 $21.61, as reported on the Nasdaq Global Market on June 30, 2020.
34


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
No options were granted, forfeited or expired during the six months ended June 30, 2020. The total intrinsic value of the options exercised for the three months ended June 30, 2020, and 2019, was $1,633 and $749, respectively. The total intrinsic value of the options exercised for the six months ended June 30, 2020, and 2019, was $3,759 and $1,275, respectively. The total fair value of stock options vested for the three months ended June 30, 2020, and 2019, was $155 and $62, respectively. The total fair value of stock options vested for the six months ended June 30, 2020, and 2019, was $333 and $99, respectively.

Restricted Stock Units

A summary of the RSUs is shown below:
RSUs
Six Months Ended June 30, 2020Number of RSUsWeighted-Average Grant Date Fair Value
Non-vested at beginning of the period1,033,631  $23.98  
Granted561,497  21.46  
Vested(443,343) 23.58  
Non-vested at end of the period1,151,785  $22.91  

The weighted-average grant date fair value of RSUs granted for the six months ended June 30, 2020, and 2019, was $21.46 and $25.58, respectively. The total fair value of the RSUs vested for the three months ended June 30, 2020, and 2019, was $1,453 and $1,623, respectively. The total fair value of the RSUs vested for the six months ended June 30, 2020, and 2019, was $10,455 and $7,419, respectively.

Stock-Based Compensation Expense

Stock-based compensation expense, included in general and administrative expenses, for all stock-based compensation plans was $3,016 and $2,870 for the three months ended June 30, 2020, and 2019, respectively, and $6,178 and $5,492 for the six months ended June 30, 2020, and 2019, respectively.

As of June 30, 2020, the Company had approximately $22,078 of unrecognized stock-based compensation expense related to RSUs awards. This unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of approximately 1.5 years based on vesting under the award service conditions.

35


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
14. Earnings Per Share

The following is a summary of the elements used in calculating basic and diluted earnings per common share:

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Numerator:
Net income attributable to NGHC$166,574  $77,876  $267,333  $169,634  
Preferred stock dividends - nonconvertible(7,875) (7,875) (15,750) (15,750) 
Preferred stock dividends - convertible(1,050) (1,050) (1,050) (1,050) 
Numerator for basic EPS157,649  68,951  250,533  152,834  
Effect of dilutive securities:
Preferred stock dividends - convertible1,050  1,050  1,050  1,050  
Numerator for diluted EPS - after assumed conversions$158,699  $70,001  $251,583  $153,884  
Denominator:
Denominator for basic EPS - weighted-average shares outstanding113,542,628  113,178,552  113,549,952  113,097,084  
Effect of dilutive securities:
Employee stock options1,325,757  1,882,001  1,391,006  1,910,829  
RSUs62,211  200,241  167,679  265,335  
Convertible preferred stock789,473  789,473  789,473  789,473  
Dilutive potential common shares2,177,441  2,871,715  2,348,158  2,965,637  
Denominator for diluted EPS - weighted-average shares outstanding and assumed conversions115,720,069  116,050,267  115,898,110  116,062,721  
EPS attributable to NGHC common stockholders:
Basic EPS$1.39  $0.61  $2.21  $1.35  
Diluted EPS$1.37  $0.60  $2.17  $1.33  

36


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
15. Related Party Transactions

The significant shareholder of the Company has an ownership interest in AmTrust and ACP Re. The Company is a party to the following transactions with these related entities:

Equity Method Investments

The Company has an ownership interest in an LSC Entity, limited liability companies and limited partnerships with related parties. See Note 4, “Investments - Equity Method Investments - Related Parties” for additional information.

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 June 30, 2020, and December 31, 2019, the Company had a receivable principal amount related to the ACP Re Credit Agreement of $130,004 and $129,229, respectively. The Company recorded interest income of $1,202 and $1,188 for the three months ended June 30, 2020, and 2019, respectively, and $2,405 and $2,376 for the six months ended June 30, 2020, and 2019, respectively, under the ACP Re Credit Agreement. Management determined no impairment reserve was needed for the carrying value of the loan at June 30, 2020, and December 31, 2019, 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 $208 in rent for both the three months ended June 30, 2020, and 2019, respectively, and $415 in rent for both the six months ended June 30, 2020, and 2019, 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 $110 and $77 in rent for the three months ended June 30, 2020, and 2019, respectively, and $218 and $153 in rent for the six months ended June 30, 2020, and 2019, respectively.

37


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
16. 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:

Three Months Ended June 30, 2020
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
Underwriting revenues:
Gross premium written$1,151,944  $189,657  $  $1,341,601  
Ceded premiums(305,248) (21,445)   (326,693) 
Net premium written846,696  168,212    1,014,908  
Change in unearned premium50,074  585    50,659  
Net earned premium896,770  168,797    1,065,567  
Ceding commission income46,169  471    46,640  
Service and fee income100,524  80,068    180,592  
Total underwriting revenues1,043,463  249,336    1,292,799  
Underwriting expenses:
Loss and loss adjustment expense533,791  66,655    600,446  
Acquisition costs and other underwriting expenses162,484  66,894    229,378  
General and administrative expenses204,418  57,991    262,409  
Total underwriting expenses900,693  191,540    1,092,233  
Underwriting income142,770  57,796    200,566  
Net investment income    31,175  31,175  
Net gain on investments    5,158  5,158  
Interest expense    (11,779) (11,779) 
Provision for income taxes    (50,507) (50,507) 
Net (income) attributable to noncontrolling interest    (8,039) (8,039) 
Net income attributable to NGHC$142,770  $57,796  $(33,992) $166,574  


38


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Three Months Ended June 30, 2019
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
Underwriting revenues:
Gross premium written$1,142,236  $171,672  $  $1,313,908  
Ceded premiums(299,545) (18,965)   (318,510) 
Net premium written842,691  152,707    995,398  
Change in unearned premium21,911  13,342    35,253  
Net earned premium864,602  166,049    1,030,651  
Ceding commission income56,264  3,928    60,192  
Service and fee income95,971  52,937    148,908  
Total underwriting revenues1,016,837  222,914    1,239,751  
Underwriting expenses:
Loss and loss adjustment expense629,211  86,324    715,535  
Acquisition costs and other underwriting expenses146,125  48,001    194,126  
General and administrative expenses186,475  61,292    247,767  
Total underwriting expenses961,811  195,617    1,157,428  
Underwriting income55,026  27,297    82,323  
Net investment income    35,131  35,131  
Net loss on investments    (5,230) (5,230) 
Interest expense    (12,925) (12,925) 
Provision for income taxes    (22,241) (22,241) 
Net loss attributable to noncontrolling interest    818  818  
Net income attributable to NGHC$55,026  $27,297  $(4,447) $77,876  
39


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Six Months Ended June 30, 2020
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
Underwriting revenues:
Gross premium written$2,441,473  $376,682  $  $2,818,155  
Ceded premiums(553,390) (40,254)   (593,644) 
Net premium written1,888,083  336,428    2,224,511  
Change in unearned premium(80,813) (2,925)   (83,738) 
Net earned premium1,807,270  333,503    2,140,773  
Ceding commission income95,914  1,031    96,945  
Service and fee income199,441  160,592    360,033  
Total underwriting revenues2,102,625  495,126    2,597,751  
Underwriting expenses:
Loss and loss adjustment expense1,144,188  148,256    1,292,444  
Acquisition costs and other underwriting expenses322,255  135,365    457,620  
General and administrative expenses412,235  117,743    529,978  
Total underwriting expenses1,878,678  401,364    2,280,042  
Underwriting income223,947  93,762    317,709  
Net investment income    61,418  61,418  
Net loss on investments    (1,703) (1,703) 
Interest expense    (23,559) (23,559) 
Provision for income taxes    (78,679) (78,679) 
Net (income) attributable to noncontrolling interest    (7,853) (7,853) 
Net income attributable to NGHC$223,947  $93,762  $(50,376) $267,333  

40


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Six Months Ended June 30, 2019
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
Underwriting revenues:
Gross premium written$2,393,470  $430,216  $  $2,823,686  
Ceded premiums(586,296) (77,328)   (663,624) 
Net premium written1,807,174  352,888    2,160,062  
Change in unearned premium(139,995) (25,259)   (165,254) 
Net earned premium1,667,179  327,629    1,994,808  
Ceding commission income123,207  6,519    129,726  
Service and fee income200,466  113,949    314,415  
Total underwriting revenues1,990,852  448,097    2,438,949  
Underwriting expenses:
Loss and loss adjustment expense1,196,271  171,073    1,367,344  
Acquisition costs and other underwriting expenses300,195  105,849    406,044  
General and administrative expenses375,931  119,930    495,861  
Total underwriting expenses1,872,397  396,852    2,269,249  
Underwriting income118,455  51,245    169,700  
Net investment income    68,576  68,576  
Net loss on investments    (5,208) (5,208) 
Interest expense    (25,924) (25,924) 
Provision for income taxes    (44,747) (44,747) 
Net loss attributable to noncontrolling interest    7,237  7,237  
Net income attributable to NGHC$118,455  $51,245  $(66) $169,634  

The following tables summarize the financial position of the operating segments:

June 30, 2020
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
Premiums and other receivables, net$1,312,117  $173,084  $2,533  $1,487,734  
Deferred acquisition costs249,825  26,106    275,931  
Reinsurance recoverable, net1,270,703  21,933    1,292,636  
Prepaid reinsurance premiums517,918  164    518,082  
Goodwill and Intangible assets, net424,339  105,810    530,149  
Prepaid and other assets49,910  19,191  5,064  74,165  
Corporate and other assets    5,839,146  5,839,146  
Total assets$3,824,812  $346,288  $5,846,743  $10,017,843  

41


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
December 31, 2019
Property
and
Casualty
Accident
and
Health
Corporate
and
Other
Total
Premiums and other receivables, net$1,292,813  $131,877  $4,258  $1,428,948  
Deferred acquisition costs239,293  24,230    263,523  
Reinsurance recoverable, net1,377,284  17,024    1,394,308  
Prepaid reinsurance premiums575,712  35    575,747  
Goodwill and Intangible assets, net436,724  108,427    545,151  
Prepaid and other assets56,960  32,852  4,830  94,642  
Corporate and other assets    5,454,215  5,454,215  
Total assets$3,978,786  $314,445  $5,463,303  $9,756,534  

The following tables summarize service and fee income by source within each operating segment:

Three Months Ended June 30,
20202019
Property
and
Casualty
Accident
and
Health
TotalProperty
and
Casualty
Accident
and
Health
Total
Commission revenue$17,916  $24,354  $42,270  $19,650  $15,973  $35,623  
Group health administrative fees  30,536  30,536    24,548  24,548  
Finance and processing fees28,186  2,205  30,391  32,145  886  33,031  
Installment fees26,405    26,405  25,148    25,148  
Late payment fees7,748  13  7,761  8,517  90  8,607  
Other service and fee income20,269  22,960  43,229  10,511  11,440  21,951  
Total$100,524  $80,068  $180,592  $95,971  $52,937  $148,908  
NGHC$98,188  $80,068  $178,256  $94,455  $52,937  $147,392  
Reciprocal Exchanges2,336    2,336  1,516    1,516  
Total$100,524  $80,068  $180,592  $95,971  $52,937  $148,908  

Six Months Ended June 30,
20202019
Property
and
Casualty
Accident
and
Health
TotalProperty
and
Casualty
Accident
and
Health
Total
Commission revenue$36,667  $53,986  $90,653  $46,860  $40,744  $87,604  
Finance and processing fees63,975  4,676  68,651  64,581  2,910  67,491  
Group health administrative fees  60,511  60,511    48,053  48,053  
Installment fees51,493    51,493  49,318    49,318  
Late payment fees15,581  25  15,606  16,810  177  16,987  
Other service and fee income31,725  41,394  73,119  22,897  22,065  44,962  
Total$199,441  $160,592  $360,033  $200,466  $113,949  $314,415  
NGHC$195,948  $160,592  $356,540  $197,580  $113,949  $311,529  
Reciprocal Exchanges3,493    3,493  2,886    2,886  
Total$199,441  $160,592  $360,033  $200,466  $113,949  $314,415  
42


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
The following tables show an analysis of premiums and fee income by product line:

Three Months Ended June 30,Six Months Ended June 30,
Gross Premium Written2020201920202019
Property and Casualty
Personal Auto$612,927  $611,312  $1,407,424  $1,377,993  
Homeowners205,211  190,037  370,464  342,079  
RV/Packaged57,801  61,314  110,929  113,165  
Small Business Auto60,717  83,829  133,469  169,707  
Lender-placed Insurance103,922  58,859  199,366  134,797  
Other12,930  15,739  29,532  29,014  
Total Property and Casualty1,053,508  1,021,090  2,251,184  2,166,755  
Accident and Health
Group89,467  75,036  177,005  139,974  
Individual100,190  82,799  199,677  166,991  
International  13,837    123,251  
Total Accident and Health189,657  171,672  376,682  430,216  
Total NGHC$1,243,165  $1,192,762  $2,627,866  $2,596,971  
Reciprocal Exchanges
Personal Auto$37,382  $43,984  $69,191  $80,846  
Homeowners60,160  76,140  119,396  143,940  
Other894  1,022  1,702  1,929  
Total Reciprocal Exchanges$98,436  $121,146  $190,289  $226,715  
Total Gross Premium Written$1,341,601  $1,313,908  $2,818,155  $2,823,686  

Three Months Ended June 30,Six Months Ended June 30,
Net Premium Written2020201920202019
Property and Casualty
Personal Auto$533,242  $511,952  $1,235,549  $1,170,872  
Homeowners84,257  108,404  172,800  193,649  
RV/Packaged55,882  58,167  107,860  109,764  
Small Business Auto46,429  65,420  105,028  139,606  
Lender-placed Insurance64,674  37,214  142,143  79,284  
Other4,944  5,314  12,140  8,824  
Total Property and Casualty789,428  786,471  1,775,520  1,701,999  
Accident and Health
Group69,217  57,960  138,688  111,910  
Individual98,995  82,652  197,740  166,775  
International  12,095    74,203  
Total Accident and Health168,212  152,707  336,428  352,888  
Total NGHC$957,640  $939,178  $2,111,948  $2,054,887  
Reciprocal Exchanges
Personal Auto$34,281  $18,661  $63,355  $34,306  
Homeowners22,667  37,211  48,592  70,227  
Other320  348  616  642  
Total Reciprocal Exchanges$57,268  $56,220  $112,563  $105,175  
Total Net Premium Written$1,014,908  $995,398  $2,224,511  $2,160,062  

43


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
Three Months Ended June 30,Six Months Ended June 30,
Net Earned Premium2020201920202019
Property and Casualty
Personal Auto$561,548  $542,834  $1,141,050  $1,053,388  
Homeowners99,368  102,008  190,851  186,066  
RV/Packaged46,956  49,411  96,248  99,716  
Small Business Auto53,733  60,059  113,158  127,692  
Lender-placed Insurance71,102  60,278  140,769  101,996  
Other9,278  3,382  12,811  6,033  
Total Property and Casualty841,985  817,972  1,694,887  1,574,891  
Accident and Health
Group69,232  57,949  138,702  111,912  
Individual99,565  83,916  194,801  166,151  
International  24,184    49,566  
Total Accident and Health168,797  166,049  333,503  327,629  
NGHC Total$1,010,782  $984,021  $2,028,390  $1,902,520  
Reciprocal Exchanges
Personal Auto$31,714  $16,093  $64,637  $31,954  
Homeowners22,741  30,225  47,074  59,716  
Other330  312  672  618  
Total Reciprocal Exchanges$54,785  $46,630  $112,383  $92,288  
Total Net Earned Premium$1,065,567  $1,030,651  $2,140,773  $1,994,808  

Three Months Ended June 30,Six Months Ended June 30,
Fee Income2020201920202019
Property and Casualty
Service and Fee Income$98,188  $94,455  $195,948  $197,580  
Ceding Commission Income35,059  39,418  71,090  87,827  
Total Property and Casualty133,247  133,873  267,038  285,407  
Accident and Health
Service and Fee Income
Group43,241  32,862  83,723  63,236  
Individual2,265  1,242  4,482  3,378  
Third-Party Fee34,562  18,833  72,387  47,335  
Total Service and Fee Income80,068  52,937  160,592  113,949  
Ceding Commission Income471  3,928  1,031  6,519  
Total Accident and Health80,539  56,865  161,623  120,468  
NGHC Total$213,786  $190,738  $428,661  $405,875  
Reciprocal Exchanges
Service and Fee Income$2,336  $1,516  $3,493  $2,886  
Ceding Commission Income11,110  16,846  24,824  35,380  
Total Reciprocal Exchanges$13,446  $18,362  $28,317  $38,266  
Total Fee Income$227,232  $209,100  $456,978  $444,141  

44


NATIONAL GENERAL HOLDINGS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)
17. Subsequent Event

On July 7, 2020, the Company, The Allstate Corporation (“Allstate”), and Bluebird Acquisition Corp., a Delaware corporation and an indirect wholly owned subsidiary of Allstate (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will be merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Allstate subject to the receipt of shareholder and regulatory approval and the satisfaction of other customary conditions. The Company expects the Merger to close in the first quarter of 2021.

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Item 2. 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 condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q.

Note on Forward-Looking Statements

This current report on Form 10-Q contains “forward-looking statements” that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on the Company’s current expectations and beliefs concerning future developments and their potential effects on the Company. Forward-looking statements can generally be identified by the use of forward-looking terminology, such as “may,” “will,” “plan,” “expect,” “project,” “intend,” “estimate,” “anticipate” and “believe” or their variations or similar terminology. 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, plans and expectations related to our proposed merger with The Allstate Corporation (“Allstate”), including anticipated timing for closing of the merger, the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement with Allstate, the inability to complete the proposed merger due to the failure to obtain stockholder approval for the proposed merger or the failure to satisfy other conditions to completion of the proposed merger, the possibility that competing offers will be made, 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 effects of pandemics or other widespread health problems such as the ongoing COVID-19 pandemic on our business, including our investment portfolio, and the national and global economy generally, 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 investments, development of claims and the effect on loss reserves, large loss activity including hurricanes and wildfires, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, the effect of unpredictable catastrophic losses, 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 third party vendors or agencies, breaches in data security or other disruptions involving 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” included in our Annual Report on Form 10-K for the year ended December 31, 2019, Part II, Item 1A, “Risk Factors, in this quarterly report on Form 10-Q, and our other quarterly reports on Form 10-Q. 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.


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.

46


We manage our business in two segments, Property and Casualty (“P&C”) and Accident and Health (“A&H”), and conduct 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 July 9, 2020, A.M. Best placed us and our subsidiaries under review with positive implications. We currently conduct a limited amount of business outside the United States, primarily in Bermuda.

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 with Mountain Valley Indemnity Company, a subsidiary of Adirondack Insurance Exchange, 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. Also, we have limited
47


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 products in the P&C segment include personal auto, homeowners, RV/Packaged, small business auto, lender-placed insurance, and other products. The personal auto segment includes policies for standard, preferred and nonstandard automobile insurance. The homeowners product includes multiple-peril policies and personal umbrella coverage to the homeowner. The RV/Packaged product offers policies that include RV automatic personal effects coverage, optional replacement cost coverage, RV storage coverage, and full-time liability coverage. The small business auto product offers policies that include liability and physical damage coverage for light-to-medium duty commercial vehicles. The lender-placed insurance product offers fire, home and flood products, as well as collateral protection insurance and guaranteed asset protection products for automobiles.

Our products in the A&H segment include group, individual and third-party fees. The group product includes revenue from our small group self-funded product. The individual product line includes revenue from our supplemental products including short-term medical, accident/AD&D, hospital indemnity, cancer/critical illness, dental and term life insurance. Third-party fees include commission and general agent fees for selling policies issued by third-party insurance companies, fees generated through selling our technology products to third parties and fees from our international health insurance offerings.

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 six months ended June 30, 2020, our operating leverage (the ratio of net earned premium to average total stockholders’ equity) was 1.5x, 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 can invest cash from premiums for significant periods. We invest our capital and surplus following state and regulatory guidelines. Our net investment income was $61.4 million and $68.6 million for the six months ended June 30, 2020, and 2019, respectively. We held 6.2% and 3.3% of our total invested assets in cash, cash equivalents and restricted cash as of June 30, 2020, and December 31, 2019, respectively.

Our most significant balance sheet liability is our unpaid loss and LAE reserves. As of June 30, 2020, and December 31, 2019, our reserves, net of reinsurance recoverable on unpaid losses, were $1.7 billion and $1.8 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 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.

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable adverse impact on general economic conditions, including adverse impacts on automobile sales and new home sales and increased unemployment, which may decrease customer demand for our
48


insurance products, negatively impact our premium volume, reduce our ability to access capital, and otherwise adversely impact our future results of operations. Additionally, federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, regulatory actions seek to retroactively mandate coverage for losses which various types of insurance policies were not designed or priced to cover or seek to require premium refunds. Regulatory restrictions or requirements also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums or fees. Because of the unprecedented size and breadth of this pandemic, and rapidly evolving situation, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time.

While we continue to closely monitor the impact of the COVID-19 pandemic and assess its potential effects on our business, the extent to which the COVID-19 outbreak will impact our operations or financial results is uncertain.

On July 7, 2020, the Company, The Allstate Corporation, a Delaware corporation (“Allstate”), and Bluebird Acquisition Corp., a Delaware corporation and an indirect wholly owned subsidiary of Allstate (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will be merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Allstate following the receipt of shareholder and regulatory approval and the satisfaction of other customary conditions. The Company expects the Merger to close in the first quarter of 2021.

For further discussion regarding the potential impact of COVID-19 and related economic conditions on the Company, and the proposed merger transaction pursuant to which the Company will be acquired by Allstate, see “Part II—Item 1A—Risk Factors.”


Critical Accounting Policies

Our discussion and analysis of our results of operations, financial condition, and liquidity are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on actual results that may differ materially from these estimates and judgments under different assumptions. We have not made any changes in estimates or judgments that have had a significant effect on the reported amounts as previously disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.

For more information related to recent accounting pronouncements that we adopted during the six months ended June 30, 2020, see Note 2, “Recent Accounting Pronouncements” in the notes to our condensed consolidated financial statements.


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, before ceding reinsurance to third parties. Premium refunds are recorded against gross premium written.

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.

49


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, 2020, we would earn half of the premium in the first quarter of 2020, and the other half in the second quarter of 2020.

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. We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party insurance companies as well as fees generated through selling our technology products to third parties.

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; conversely, net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we establish a credit loss allowance on our debt securities as a result of specific credit concerns. For debt securities classified as available-for-sale, other than the allowance for credit losses, we report net unrealized gains and losses within accumulated other comprehensive income in our balance sheet. We report all gains and losses on equity securities within net gains (losses) on investments in our statement of income. Net gains and losses on investments also 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.

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.

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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.

Net operating expense (non-GAAP). These expenses consist of the sum of general and administrative expenses and acquisition costs and other underwriting expenses less ceding commission income and service and fee income.

Underwriting income. Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, interest expense, and income taxes. Underwriting income is calculated as net earned premium plus ceding commission income and service and fee income less loss and LAE, acquisition costs and other underwriting expenses, and general and administrative expenses.


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 (non-GAAP) 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-
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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 for the Three and Six Months Ended June 30, 2020, and 2019, (Unaudited)” below.

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Results of Operations

Consolidated Results of Operations for the Three Months Ended June 30, 2020, and 2019, (Unaudited)

Three Months Ended June 30,
20202019
NGHCReciprocal ExchangesEliminationsTotalNGHCReciprocal ExchangesEliminationsTotal
Underwriting revenues:(amounts in thousands)
Gross premium written$1,243,165  $98,436  $—  $1,341,601  $1,192,762  $121,146  $—  $1,313,908  
Ceded premiums(285,525) (41,168) —  (326,693) (253,584) (64,926) —  (318,510) 
Net premium written$957,640  $57,268  $—  $1,014,908  $939,178  $56,220  $—  $995,398  
Change in unearned premium53,142  (2,483) —  50,659  44,843  (9,590) —  35,253  
Net earned premium$1,010,782  $54,785  $—  $1,065,567  $984,021  $46,630  $—  $1,030,651  
Ceding commission income35,530  11,110  —  46,640  43,346  16,846  —  60,192  
Service and fee income192,023  2,336  (13,767) 180,592  166,049  1,516  (18,657) 148,908  
Total underwriting revenues$1,238,335  $68,231  $(13,767) $1,292,799  $1,193,416  $64,992  $(18,657) $1,239,751  
Underwriting expenses:
Loss and loss adjustment expense570,439  30,007  —  600,446  680,246  35,289  —  715,535  
Acquisition costs and other underwriting expenses219,278  10,100  —  229,378  185,951  8,175  —  194,126  
General and administrative expenses257,318  18,858  (13,767) 262,409  244,827  21,597  (18,657) 247,767  
Total underwriting expenses$1,047,035  $58,965  $(13,767) $1,092,233  $1,111,024  $65,061  $(18,657) $1,157,428  
Underwriting income (loss)$191,300  $9,266  $—  $200,566  $82,392  $(69) $—  $82,323  
Net investment income30,523  2,012  (1,360) 31,175  35,949  2,124  (2,942) 35,131  
Net gain (loss) on investments5,511  (353) —  5,158  (5,274) 44  —  (5,230) 
Interest expense(11,779) (1,360) 1,360  (11,779) (12,925) (2,942) 2,942  (12,925) 
Income (loss) before provision (benefit) for income taxes$215,555  $9,565  $—  $225,120  $100,142  $(843) $—  $99,299  
Provision (benefit) for income taxes48,981  1,526  —  50,507  22,266  (25) —  22,241  
Net income (loss)$166,574  $8,039  $—  $174,613  $77,876  $(818) $—  $77,058  
Net (income) loss attributable to noncontrolling interest—  (8,039) —  (8,039) —  818  —  818  
Net income attributable to NGHC$166,574  $—  $—  $166,574  $77,876  $—  $—  $77,876  
Dividends on preferred stock(8,925) —  —  (8,925) (8,925) —  —  (8,925) 
Net income attributable to NGHC common stockholders$157,649  $—  $—  $157,649  $68,951  $—  $—  $68,951  

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Three Months Ended June 30,
20202019
NGHCReciprocal ExchangesEliminationsTotalNGHCReciprocal ExchangesEliminationsTotal
Underwriting ratios:(amounts in thousands, except percentages)
Net loss ratio56.4 %54.8 %— %56.3 %69.1 %75.7 %— %69.4 %
Net operating expense ratio (non-GAAP)24.6 %28.3 %— %24.8 %22.5 %24.5 %— %22.6 %
Net combined ratio (non-GAAP)81.0 %83.1 %— %81.1 %91.6 %100.2 %— %92.0 %
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio56.4 %54.8 %— %56.3 %69.1 %75.7 %— %69.4 %
Net operating expense ratio before amortization and impairment (non-GAAP)24.1 %28.3 %— %24.3 %21.8 %24.4 %— %21.9 %
Net combined ratio before amortization and impairment (non-GAAP)80.5 %83.1 %— %80.6 %90.9 %100.1 %— %91.3 %
Reconciliation of net operating expense ratio (non-GAAP):
Total expenses$1,058,814  $60,325  $(15,127) $1,104,012  $1,123,949  $68,003  $(21,599) $1,170,353  
Less: Loss and loss adjustment expense570,439  30,007  —  600,446  680,246  35,289  —  715,535  
Less: Interest expense11,779  1,360  (1,360) 11,779  12,925  2,942  (2,942) 12,925  
Less: Ceding commission income35,530  11,110  —  46,640  43,346  16,846  —  60,192  
Less: Service and fee income192,023  2,336  (13,767) 180,592  166,049  1,516  (18,657) 148,908  
Net operating expense$249,043  $15,512  $—  $264,555  $221,383  $11,410  $—  $232,793  
Net earned premium$1,010,782  $54,785  $—  $1,065,567  $984,021  $46,630  $—  $1,030,651  
Net operating expense ratio (non-GAAP)24.6 %28.3 %— %24.8 %22.5 %24.5 %— %22.6 %
Net operating expense$249,043  $15,512  $—  $264,555  $221,383  $11,410  $—  $232,793  
Less: Non-cash amortization of intangible assets5,343  30  —  5,373  7,089  12  —  7,101  
Net operating expense before amortization and impairment$243,700  $15,482  $—  $259,182  $214,294  $11,398  $—  $225,692  
Net earned premium$1,010,782  $54,785  $—  $1,065,567  $984,021  $46,630  $—  $1,030,651  
Net operating expense ratio before amortization and impairment (non-GAAP)24.1 %28.3 %— %24.3 %21.8 %24.4 %— %21.9 %

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Consolidated Results of Operations for the Six Months Ended June 30, 2020, and 2019, (Unaudited)

Six Months Ended June 30,
20202019
NGHCReciprocal ExchangesEliminationsTotalNGHCReciprocal ExchangesEliminationsTotal
Underwriting revenues:(amounts in thousands)
Gross premium written$2,627,866  $190,289  $—  $2,818,155  $2,596,971  $226,715  $—  $2,823,686  
Ceded premiums(515,918) (77,726) —  (593,644) (542,084) (121,540) —  (663,624) 
Net premium written$2,111,948  $112,563  $—  $2,224,511  $2,054,887  $105,175  $—  $2,160,062  
Change in unearned premium(83,558) (180) —  (83,738) (152,367) (12,887) —  (165,254) 
Net earned premium$2,028,390  $112,383  $—  $2,140,773  $1,902,520  $92,288  $—  $1,994,808  
Ceding commission income72,121  24,824  —  96,945  94,346  35,380  —  129,726  
Service and fee income383,180  3,493  (26,640) 360,033  346,437  2,886  (34,908) 314,415  
Total underwriting revenues$2,483,691  $140,700  $(26,640) $2,597,751  $2,343,303  $130,554  $(34,908) $2,438,949  
Underwriting expenses:
Loss and loss adjustment expense1,220,070  72,374  —  1,292,444  1,290,030  77,314  —  1,367,344  
Acquisition costs and other underwriting expenses437,023  20,597  —  457,620  389,284  16,760  —  406,044  
General and administrative expenses518,197  38,421  (26,640) 529,978  487,660  43,109  (34,908) 495,861  
Total underwriting expenses$2,175,290  $131,392  $(26,640) $2,280,042  $2,166,974  $137,183  $(34,908) $2,269,249  
Underwriting income (loss)$308,401  $9,308  $—  $317,709  $176,329  $(6,629) $—  $169,700  
Net investment income60,270  4,195  (3,047) 61,418  70,232  4,294  (5,950) 68,576  
Net loss on investments(557) (1,146) —  (1,703) (4,508) (700) —  (5,208) 
Interest expense(23,559) (3,047) 3,047  (23,559) (25,924) (5,950) 5,950  (25,924) 
Income (loss) before provision (benefit) for income taxes$344,555  $9,310  $—  $353,865  $216,129  $(8,985) $—  $207,144  
Provision (benefit) for income taxes77,222  1,457  —  78,679  46,495  (1,748) —  44,747  
Net income (loss)$267,333  $7,853  $—  $275,186  $169,634  $(7,237) $—  $162,397  
Net (income) loss attributable to noncontrolling interest—  (7,853) —  (7,853) —  7,237  —  7,237  
Net income attributable to NGHC$267,333  $—  $—  $267,333  $169,634  $—  $—  $169,634  
Dividends on preferred stock(16,800) —  —  (16,800) (16,800) —  —  (16,800) 
Net income attributable to NGHC common stockholders$250,533  $—  $—  $250,533  $152,834  $—  $—  $152,834  

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Six Months Ended June 30,
20202019
NGHCReciprocal ExchangesEliminationsTotalNGHCReciprocal ExchangesEliminationsTotal
Underwriting ratios:(amounts in thousands, except percentages)
Net loss ratio60.1 %64.4 %— %60.4 %67.8 %83.8 %— %68.5 %
Net operating expense ratio (non-GAAP)24.6 %27.3 %— %24.8 %22.9 %23.4 %— %22.9 %
Net combined ratio (non-GAAP)84.7 %91.7 %— %85.2 %90.7 %107.2 %— %91.4 %
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio60.1 %64.4 %— %60.4 %67.8 %83.8 %— %68.5 %
Net operating expense ratio before amortization and impairment (non-GAAP)24.1 %27.3 %— %24.2 %22.2 %23.4 %— %22.2 %
Net combined ratio before amortization and impairment (non-GAAP)84.2 %91.7 %— %84.6 %90.0 %107.2 %— %90.7 %
Reconciliation of net operating expense ratio (non-GAAP):
Total expenses$2,198,849  $134,439  $(29,687) $2,303,601  $2,192,898  $143,133  $(40,858) $2,295,173  
Less: Loss and loss adjustment expense1,220,070  72,374  —  1,292,444  1,290,030  77,314  —  1,367,344  
Less: Interest expense23,559  3,047  (3,047) 23,559  25,924  5,950  (5,950) 25,924  
Less: Ceding commission income72,121  24,824  —  96,945  94,346  35,380  —  129,726  
Less: Service and fee income383,180  3,493  (26,640) 360,033  346,437  2,886  (34,908) 314,415  
Net operating expense$499,919  $30,701  $—  $530,620  $436,161  $21,603  $—  $457,764  
Net earned premium$2,028,390  $112,383  $—  $2,140,773  $1,902,520  $92,288  $—  $1,994,808  
Net operating expense ratio (non-GAAP)24.6 %27.3 %— %24.8 %22.9 %23.4 %— %22.9 %
Net operating expense$499,919  $30,701  $—  $530,620  $436,161  $21,603  $—  $457,764  
Less: Non-cash amortization of intangible assets11,845  60  —  11,905  14,305  23  —  14,328  
Net operating expense before amortization and impairment$488,074  $30,641  $—  $518,715  $421,856  $21,580  $—  $443,436  
Net earned premium$2,028,390  $112,383  $—  $2,140,773  $1,902,520  $92,288  $—  $1,994,808  
Net operating expense ratio before amortization and impairment (non-GAAP)24.1 %27.3 %— %24.2 %22.2 %23.4 %— %22.2 %

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In 2017, we entered into auto and homeowners quota share agreements (collectively, the “Quota Shares”). Effective January 1, 2020, we cede 5.0% of net liability under new and renewal auto policies written, compared to 7.0% and 10.0% of net liability ceded effective January 1, 2019, and July 1, 2019, respectively. Under our homeowners’ quota share agreement we continue to cede 40.0% of net liability under homeowners policies.

In August 2019, we completed the acquisition of National Farmers Union Property and Casualty Company (“Farmers Union Insurance”). In December 2019, we sold our Euro Accident Health and Care Insurance Sweden operation (“Euroaccident”).

On April 23, 2020, we announced a 15.0% credit on April premiums for personal auto insurance customers with a policy in force as of April 30, 2020, which was automatically credited to their policy.

As a result of these transactions, comparisons between the results for the three and six months ended June 30, 2020, and 2019, will be less meaningful. The Quota Shares, Farmers Union Insurance and the credit relief impacted our P&C segment. The sale of Euroaccident impacted our A&H segment.

Consolidated Results of Operations for the Three Months Ended June 30, 2020, Compared to the Three Months Ended June 30, 2019, (Unaudited)

Gross premium written. Gross premium written increased by $27.7 million, or 2.1%, from $1,313.9 million for the three months ended June 30, 2019, to $1,341.6 million for the three months ended June 30, 2020. The P&C segment increased by $9.7 million, as a result of the acquisition of Farmers Union Insurance ($47.7 million), offset by a decrease in the Reciprocal Exchanges ($22.7 million). The P&C segment was also impacted by the refund of premiums related to COVID-19. The A&H segment increased by $18.0 million, due to an increase in the small group self-funded and individual products ($31.8 million), partially offset by the sale of Euroaccident in 2019 ($13.8 million).

Net premium written. Net premium written increased by $19.5 million, or 2.0%, from $995.4 million for the three months ended June 30, 2019, to $1,014.9 million for the three months ended June 30, 2020. Net premium written for the P&C segment increased by $4.0 million for the three months ended June 30, 2020, compared to the same period in 2019. Net premium written for the A&H segment increased by $15.5 million for the three months ended June 30, 2020, compared to the same period in 2019, due to an increase in the small group self-funded and individual products ($27.6 million), partially offset by the sale of Euroaccident in 2019 ($12.1 million).

Net earned premium. Net earned premium increased by $34.9 million, or 3.4%, from $1,030.7 million for the three months ended June 30, 2019, to $1,065.6 million for the three months ended June 30, 2020. The change by segment was: P&C increased by $32.2 million and A&H increased by $2.7 million. The increase in the P&C segment was attributable to higher written premium volume in the prior periods that were earned in this period, a decrease in ceded premium to the Quota Shares ($13.6 million) and an increase in the Reciprocal Exchanges ($8.2 million). The increase in the A&H segment was attributable to an increase in the small group self-funded and individual products ($26.9 million), offset by the sale of Euroaccident in 2019 ($24.2 million).

Ceding commission income. Ceding commission income decreased by $13.6 million, or 22.5%, from $60.2 million for the three months ended June 30, 2019, to $46.6 million for the three months ended June 30, 2020, primarily driven by a decrease in ceded earned premium to the Quota Shares and in the Reciprocal Exchanges.

Service and fee income. Service and fee income increased by $31.7 million, or 21.3%, from $148.9 million for the three months ended June 30, 2019, to $180.6 million for the three months ended June 30, 2020, primarily due to an increase of $27.1 million in the A&H segment related to growth in the group administration fees and third party technology fees.

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The components of service and fee income are as follows:

Three Months Ended June 30,
20202019Change% Change
(amounts in thousands)
Commission revenue$42,270  $35,623  $6,647  18.7 %
Group health administrative fees30,536  24,548  5,988  24.4 %
Finance and processing fees30,391  33,031  (2,640) (8.0)%
Installment fees26,405  25,148  1,257  5.0 %
Late payment fees7,761  8,607  (846) (9.8)%
Other service and fee income43,229  21,951  21,278  96.9 %
Total$180,592  $148,908  $31,684  21.3 %

Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $115.1 million, from $715.5 million for the three months ended June 30, 2019, to $600.4 million for the three months ended June 30, 2020, reflecting lower claims frequency ($129.8 million) and the sale of Euroaccident in 2019 ($12.9 million), offset by the acquisition of Farmers Union Insurance ($29.7 million). The changes by segment were: P&C decreased by $95.4 million and A&H decreased by $19.7 million.

Loss and LAE for the three months ended June 30, 2020, included $3.1 million of favorable loss development on prior accident year loss and LAE reserves. This loss development was composed of $8.3 million of unfavorable loss development in the P&C segment, driven by small business auto, and $11.4 million of favorable loss development in the A&H segment, driven by the small group self-funded business and short term medical. Loss and LAE for the three months ended June 30, 2019, included $1.6 million of unfavorable loss development on prior accident year loss and LAE reserves. This loss development was composed of $9.7 million of unfavorable loss development in the P&C segment, primarily driven by auto liability, and $8.1 million of favorable loss development in the A&H segment, driven by the small group self-funded business and short term medical.

Our consolidated net loss ratio decreased from 69.4% for the three months ended June 30, 2019, to 56.3% for the three months ended June 30, 2020, primarily reflecting the above items.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $35.3 million, or 18.2%, from $194.1 million for the three months ended June 30, 2019, to $229.4 million for the three months ended June 30, 2020, due to an increase of $16.4 million in the P&C segment, primarily due to the acquisition of Farmers Union Insurance; and an increase of $18.9 million in the A&H segment, primarily due to the costs of selling policies issued by third-party insurance companies.

General and administrative expenses. General and administrative expenses increased by $14.6 million, from $247.8 million for the three months ended June 30, 2019, to $262.4 million for the three months ended June 30, 2020, due to an increase of $17.9 million in the P&C segment, primarily due to organic growth and the acquisition of Farmers Union Insurance; and a decrease of $3.3 million in the A&H segment.

Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased by $31.8 million, from $232.8 million for the three months ended June 30, 2019, to $264.6 million for the three months ended June 30, 2020, due to an increase of $39.8 million from the P&C segment, offset by a decrease of $8.1 million from the A&H segment.

The consolidated net operating expense ratio increased from 22.6% for the three months ended June 30, 2019, to 24.8% for the three months ended June 30, 2020. Excluding the Reciprocal Exchanges, the net operating expense ratio was 24.6% and 22.5% for the three months ended June 30, 2020, and 2019, respectively. The Reciprocal Exchanges’ net operating expense ratio was 28.3% and 24.5% for the three months ended June 30, 2020, and 2019, respectively.
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Consolidated Results of Operations for the Six Months Ended June 30, 2020, Compared to the Six Months Ended June 30, 2019, (Unaudited)

Gross premium written. Gross premium written decreased by $5.5 million, from $2,823.7 million for the six months ended June 30, 2019, to $2,818.2 million for the six months ended June 30, 2020.The P&C segment increased by $48.0 million, as a result of the acquisition of Farmers Union Insurance ($96.6 million), offset by a decrease in the Reciprocal Exchanges ($36.4 million). The P&C segment was also impacted by the refund of premiums related to COVID-19. The A&H segment decreased by $53.5 million, due to the sale of Euroaccident in 2019 ($123.3 million), offset by an increase in the small group self-funded and individual products ($69.7 million).

Net premium written. Net premium written increased by $64.4 million, or 3.0%, from $2,160.1 million for the six months ended June 30, 2019, to $2,224.5 million for the six months ended June 30, 2020. Net premium written for the P&C segment increased by $80.9 million for the six months ended June 30, 2020, compared to the same period in 2019, due to the increase in gross premium written and a reduction in ceded premium to the Auto Quota Share. Net premium written for the A&H segment decreased by $16.5 million for the six months ended June 30, 2020, compared to the same period in 2019, due to the sale of Euroaccident in 2019 ($74.2 million), offset by an increase in the small group self-funded and individual products ($57.7 million).

Net earned premium. Net earned premium increased by $146.0 million, or 7.3%, from $1,994.8 million for the six months ended June 30, 2019, to $2,140.8 million for the six months ended June 30, 2020. The change by segment was: P&C increased by $140.1 million and A&H increased by $5.9 million. The increase in the P&C segment was attributable to the increase in net premium written, a decrease in ceded earned premium to the Quota Shares ($32.4 million) and an increase in the Reciprocal Exchanges ($20.1 million). The increase in the A&H segment was attributable to an increase in the small group self-funded and individual products ($55.4 million), offset by the sale of Euroaccident in 2019 ($49.6 million).

Ceding commission income. Ceding commission income decreased by $32.8 million, or 25.3%, from $129.7 million for the six months ended June 30, 2019, to $96.9 million for the six months ended June 30, 2020, primarily driven by a decrease in ceded earned premium to the Quota Shares and in the Reciprocal Exchanges.

Service and fee income. Service and fee income increased by $45.6 million, or 14.5%, from $314.4 million for the six months ended June 30, 2019, to $360.0 million for the six months ended June 30, 2020, primarily due to an increase of $46.6 million in the A&H segment related to growth in the group administration fees and third party technology fees.

The components of service and fee income are as follows:

Six Months Ended June 30,
20202019Change% Change
(amounts in thousands)
Commission revenue$90,653  $87,604  $3,049  3.5 %
Finance and processing fees68,651  67,491  1,160  1.7 %
Group health administrative fees60,511  48,053  12,458  25.9 %
Installment fees51,493  49,318  2,175  4.4 %
Late payment fees15,606  16,987  (1,381) (8.1)%
Other service and fee income73,119  44,962  28,157  62.6 %
Total$360,033  $314,415  $45,618  14.5 %

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Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $74.9 million, from $1,367.3 million for the six months ended June 30, 2019, to $1,292.4 million for the six months ended June 30, 2020, reflecting lower claims frequency ($118.1 million) and the sale of Euroaccident in 2019 ($30.0 million), offset by the acquisition of Farmers Union Insurance ($48.6 million) and a decrease in losses ceded to Quota Shares ($22.3 million). The changes by segment were: P&C decreased by $52.1 million and A&H decreased by $22.8 million.

Loss and LAE for the six months ended June 30, 2020, included $2.5 million of favorable loss development on prior accident year loss and LAE reserves. This loss development was composed of $13.7 million of unfavorable loss development in the P&C segment, driven by small business auto, and $16.2 million of favorable loss development in the A&H segment, driven by the small group self-funded business and short term medical. Loss and LAE for the six months ended June 30, 2019, included $12.7 million of favorable loss development on prior accident year loss and LAE reserves. This loss development was composed of $6.3 million of unfavorable loss development in the P&C segment, driven by auto liability, and $19.0 million of favorable loss development in the A&H segment, driven by the small group self-funded business and short term medical.

The consolidated net loss ratio decreased from 68.5% for the six months ended June 30, 2019, to 60.4% for the six months ended June 30, 2020, primarily reflecting the above items.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $51.6 million, or 12.7%, from $406.0 million for the six months ended June 30, 2019, to $457.6 million for the six months ended June 30, 2020, due to an increase of $22.1 million in the P&C segment, primarily due to the acquisition of Farmers Union Insurance; and an increase of $29.5 million in the A&H segment, primarily due to the costs of selling policies issued by third-party insurance companies.

General and administrative expenses. General and administrative expenses increased by $34.1 million, from $495.9 million for the six months ended June 30, 2019, to $530.0 million for the six months ended June 30, 2020, due to an increase of $36.3 million in the P&C segment, primarily due to organic growth and the acquisition of Farmers Union Insurance; and a decrease of $2.2 million in the A&H segment.

Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased by $72.9 million, from $457.8 million for the six months ended June 30, 2019, to $530.6 million for the six months ended June 30, 2020, due to an increase of $86.7 million from the P&C segment, offset by a decrease of $13.8 million from the A&H segment.

The consolidated net operating expense ratio increased from 22.9% for the six months ended June 30, 2019, to 24.8% for the six months ended June 30, 2020. Excluding the Reciprocal Exchanges, the net operating expense ratio was 24.6% and 22.9% for the six months ended June 30, 2020, and 2019, respectively. The Reciprocal Exchanges’ net operating expense ratio was 27.3% and 23.4% for the six months ended June 30, 2020, and 2019, respectively.

60


P&C Segment - Results of Operations for the Three Months Ended June 30, 2020, and 2019, (Unaudited)

Three Months Ended June 30,
20202019
NGHCReciprocal ExchangesEliminationsTotalNGHCReciprocal ExchangesEliminationsTotal
Underwriting revenues:(amounts in thousands)
Gross premium written$1,053,508  $98,436  $—  $1,151,944  $1,021,090  $121,146  $—  $1,142,236  
Ceded premiums(264,080) (41,168) —  (305,248) (234,619) (64,926) —  (299,545) 
Net premium written$789,428  $57,268  $—  $846,696  $786,471  $56,220  $—  $842,691  
Change in unearned premium52,557  (2,483) —  50,074  31,501  (9,590) —  21,911  
Net earned premium$841,985  $54,785  $—  $896,770  $817,972  $46,630  $—  $864,602  
Ceding commission income35,059  11,110  —  46,169  39,418  16,846  —  56,264  
Service and fee income111,955  2,336  (13,767) 100,524  113,112  1,516  (18,657) 95,971  
Total underwriting revenues$988,999  $68,231  $(13,767) $1,043,463  $970,502  $64,992  $(18,657) $1,016,837  
Underwriting expenses:
Loss and loss adjustment expense503,784  30,007  —  533,791  593,922  35,289  —  629,211  
Acquisition costs and other underwriting expenses152,384  10,100  —  162,484  137,950  8,175  —  146,125  
General and administrative expenses199,327  18,858  (13,767) 204,418  183,535  21,597  (18,657) 186,475  
Total underwriting expenses$855,495  $58,965  $(13,767) $900,693  $915,407  $65,061  $(18,657) $961,811  
Underwriting income (loss)$133,504  $9,266  $—  $142,770  $55,095  $(69) $—  $55,026  

61


Three Months Ended June 30,
20202019
NGHCReciprocal ExchangesEliminationsTotalNGHCReciprocal ExchangesEliminationsTotal
Underwriting ratios:(amounts in thousands, except percentages)
Net loss ratio59.8 %54.8 %— %59.5 %72.6 %75.7 %— %72.8 %
Net operating expense ratio (non-GAAP)24.3 %28.3 %— %24.6 %20.7 %24.5 %— %20.9 %
Net combined ratio (non-GAAP)84.1 %83.1 %— %84.1 %93.3 %100.2 %— %93.7 %
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio59.8 %54.8 %— %59.5 %72.6 %75.7 %— %72.8 %
Net operating expense ratio before amortization and impairment (non-GAAP)23.8 %28.3 %— %24.1 %20.0 %24.4 %— %20.2 %
Net combined ratio before amortization and impairment (non-GAAP)83.6 %83.1 %— %83.6 %92.6 %100.1 %— %93.0 %
Reconciliation of net operating expense ratio (non-GAAP):
Total underwriting expenses$855,495  $58,965  $(13,767) $900,693  $915,407  $65,061  $(18,657) $961,811  
Less: Loss and loss adjustment expense503,784  30,007  —  533,791  593,922  35,289  —  629,211  
Less: Ceding commission income35,059  11,110  —  46,169  39,418  16,846  —  56,264  
Less: Service and fee income111,955  2,336  (13,767) 100,524  113,112  1,516  (18,657) 95,971  
Net operating expense$204,697  $15,512  $—  $220,209  $168,955  $11,410  $—  $180,365  
Net earned premium$841,985  $54,785  $—  $896,770  $817,972  $46,630  $—  $864,602  
Net operating expense ratio (non-GAAP)24.3 %28.3 %— %24.6 %20.7 %24.5 %— %20.9 %
Net operating expense$204,697  $15,512  $—  $220,209  $168,955  $11,410  $—  $180,365  
Less: Non-cash amortization of intangible assets4,041  30  —  4,071  5,412  12  —  5,424  
Net operating expense before amortization and impairment$200,656  $15,482  $—  $216,138  $163,543  $11,398  $—  $174,941  
Net earned premium$841,985  $54,785  $—  $896,770  $817,972  $46,630  $—  $864,602  
Net operating expense ratio before amortization and impairment (non-GAAP)23.8 %28.3 %— %24.1 %20.0 %24.4 %— %20.2 %

62


P&C Segment - Results of Operations for the Six Months Ended June 30, 2020, and 2019, (Unaudited)

Six Months Ended June 30,
20202019
NGHCReciprocal ExchangesEliminationsTotalNGHCReciprocal ExchangesEliminationsTotal
Underwriting revenues:(amounts in thousands)
Gross premium written$2,251,184  $190,289  $—  $2,441,473  $2,166,755  $226,715  $—  $2,393,470  
Ceded premiums(475,664) (77,726) —  (553,390) (464,756) (121,540) —  (586,296) 
Net premium written$1,775,520  $112,563  $—  $1,888,083  $1,701,999  $105,175  $—  $1,807,174  
Change in unearned premium(80,633) (180) —  (80,813) (127,108) (12,887) —  (139,995) 
Net earned premium$1,694,887  $112,383  $—  $1,807,270  $1,574,891  $92,288  $—  $1,667,179  
Ceding commission income71,090  24,824  —  95,914  87,827  35,380  —  123,207  
Service and fee income222,588  3,493  (26,640) 199,441  232,488  2,886  (34,908) 200,466  
Total underwriting revenues$1,988,565  $140,700  $(26,640) $2,102,625  $1,895,206  $130,554  $(34,908) $1,990,852  
Underwriting expenses:
Loss and loss adjustment expense1,071,814  72,374  —  1,144,188  1,118,957  77,314  —  1,196,271  
Acquisition costs and other underwriting expenses301,658  20,597  —  322,255  283,435  16,760  —  300,195  
General and administrative expenses400,454  38,421  (26,640) 412,235  367,730  43,109  (34,908) 375,931  
Total underwriting expenses$1,773,926  $131,392  $(26,640) $1,878,678  $1,770,122  $137,183  $(34,908) $1,872,397  
Underwriting income (loss)$214,639  $9,308  $—  $223,947  $125,084  $(6,629) $—  $118,455  

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Six Months Ended June 30,
20202019
NGHCReciprocal ExchangesEliminationsTotalNGHCReciprocal ExchangesEliminationsTotal
Underwriting ratios:(amounts in thousands, except percentages)
Net loss ratio63.2 %64.4 %— %63.3 %71.0 %83.8 %— %71.8 %
Net operating expense ratio (non-GAAP)24.1 %27.3 %— %24.3 %21.0 %23.4 %— %21.1 %
Net combined ratio (non-GAAP)87.3 %91.7 %— %87.6 %92.0 %107.2 %— %92.9 %
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio63.2 %64.4 %— %63.3 %71.0 %83.8 %— %71.8 %
Net operating expense ratio before amortization and impairment (non-GAAP)23.6 %27.3 %— %23.8 %20.3 %23.4 %— %20.5 %
Net combined ratio before amortization and impairment (non-GAAP)86.8 %91.7 %— %87.1 %91.3 %107.2 %— %92.3 %
Reconciliation of net operating expense ratio (non-GAAP):
Total underwriting expenses$1,773,926  $131,392  $(26,640) $1,878,678  $1,770,122  $137,183  $(34,908) $1,872,397  
Less: Loss and loss adjustment expense1,071,814  72,374  —  1,144,188  1,118,957  77,314  —  1,196,271  
Less: Ceding commission income71,090  24,824  —  95,914  87,827  35,380  —  123,207  
Less: Service and fee income222,588  3,493  (26,640) 199,441  232,488  2,886  (34,908) 200,466  
Net operating expense$408,434  $30,701  $—  $439,135  $330,850  $21,603  $—  $352,453  
Net earned premium$1,694,887  $112,383  $—  $1,807,270  $1,574,891  $92,288  $—  $1,667,179  
Net operating expense ratio (non-GAAP)24.1 %27.3 %— %24.3 %21.0 %23.4 %— %21.1 %
Net operating expense$408,434  $30,701  $—  $439,135  $330,850  $21,603  $—  $352,453  
Less: Non-cash amortization of intangible assets9,228  60  —  9,288  10,897  23  —  10,920  
Net operating expense before amortization and impairment$399,206  $30,641  $—  $429,847  $319,953  $21,580  $—  $341,533  
Net earned premium$1,694,887  $112,383  $—  $1,807,270  $1,574,891  $92,288  $—  $1,667,179  
Net operating expense ratio before amortization and impairment (non-GAAP)23.6 %27.3 %— %23.8 %20.3 %23.4 %— %20.5 %

P&C Segment Results of Operations for the Three Months Ended June 30, 2020, Compared to the Three Months Ended June 30, 2019, (Unaudited)

Gross premium written. Gross premium written increased by $9.7 million, from $1,142.2 million for the three months ended June 30, 2019, to $1,151.9 million for the three months ended June 30, 2020, as a result of the acquisition of Farmers Union Insurance ($47.7 million), offset by a decrease in the Reciprocal Exchanges ($22.7 million). The P&C segment was also impacted by the refund of premiums related to COVID-19.

Net premium written. Net premium written increased by $4.0 million, from $842.7 million for the three months ended June 30, 2019 to $846.7 million for the three months ended June 30, 2020.

Net earned premium. Net earned premium increased by $32.2 million, or 3.7%, from $864.6 million for the three months ended June 30, 2019, to $896.8 million for the three months ended June 30, 2020, attributable to higher written premium volume in the prior periods that were earned in this period, a decrease in ceded premium to the Quota Shares ($13.6 million) and an increase in the Reciprocal Exchanges ($8.2 million).

64


Ceding commission income. Ceding commission income decreased by $10.1 million, or 17.9%, from $56.3 million for the three months ended June 30, 2019, to $46.2 million for the three months ended June 30, 2020, primarily driven by a decrease in ceded earned premium to the Quota Shares and in the Reciprocal Exchanges.

Service and fee income. Service and fee income increased by $4.6 million, from $96.0 million for the three months ended June 30, 2019, to $100.5 million for the three months ended June 30, 2020.

The components of service and fee income are as follows:

Three Months Ended June 30,
20202019Change% Change
(amounts in thousands)
Finance and processing fees$28,186  $32,145  $(3,959) (12.3)%
Installment fees26,405  25,148  1,257  5.0 %
Commission revenue17,916  19,650  (1,734) (8.8)%
Late payment fees7,748  8,517  (769) (9.0)%
Other service and fee income20,269  10,511  9,758  92.8 %
Total$100,524  $95,971  $4,553  4.7 %

Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $95.4 million, from $629.2 million for the three months ended June 30, 2019, to $533.8 million for the three months ended June 30, 2020, reflecting lower claims frequency ($129.8 million), offset by the acquisition of Farmers Union Insurance ($29.7 million).

The P&C segment net loss ratio, which includes the Reciprocal Exchanges, decreased from 72.8% for the three months ended June 30, 2019, to 59.5% for the three months ended June 30, 2020. Excluding the Reciprocal Exchanges, the net loss ratio was 59.8% and 72.6% for the three months ended June 30, 2020, and 2019, respectively. The Reciprocal Exchanges’ net loss ratio was 54.8% and 75.7% for the three months ended June 30, 2020, and 2019, respectively. Net loss ratio decreased reflecting lower claims frequency.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $16.4 million, or 11.2%, from $146.1 million for the three months ended June 30, 2019, to $162.5 million for the three months ended June 30, 2020, primarily due to the acquisition of Farmers Union Insurance.

General and administrative expenses. General and administrative expenses increased by $17.9 million, from $186.5 million for the three months ended June 30, 2019, to $204.4 million for the three months ended June 30, 2020, primarily due to 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 $39.8 million, from $180.4 million for the three months ended June 30, 2019, to $220.2 million for the three months ended June 30, 2020. The P&C segment net operating expense ratio increased from 20.9% for the three months ended June 30, 2019, to 24.6% for the three months ended June 30, 2020. The increases in net operating expense and net operating expense ratio were primarily due to organic growth, the acquisition of Farmers Union Insurance, and to a lesser extent a decrease in ceding commission income from the Quota Shares.

65


Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $87.7 million, from $55.0 million for the three months ended June 30, 2019, to $142.8 million for the three months ended June 30, 2020. The P&C segment net combined ratio decreased from 93.7% for the three months ended June 30, 2019, to 84.1% for the three months ended June 30, 2020. The increase in underwriting income and the decrease in the net combined ratio were primarily due to lower claims, including the recent decline in miles driven due to the Covid-19 pandemic, offset by higher expenses due to organic growth and the acquisition of Farmers Union Insurance, and to a lesser extent a decrease in ceding commission income from the Quota Shares.

P&C Segment Results of Operations for the Six Months Ended June 30, 2020, Compared to the Six Months Ended June 30, 2019, (Unaudited)

Gross premium written. Gross premium written increased by $48.0 million, or 2.0%, from $2,393.5 million for the six months ended June 30, 2019, to $2,441.5 million for the six months ended June 30, 2020, as a result of the acquisition of Farmers Union Insurance ($96.6 million), offset by a decrease in the Reciprocal Exchanges ($36.4 million). The P&C segment was also impacted by the refund of premiums related to COVID-19.

Net premium written. Net premium written increased by $80.9 million, or 4.5%, from $1,807.2 million for the six months ended June 30, 2019, to $1,888.1 million for the six months ended June 30, 2020, due to the increase in gross premium written and a reduction in ceded premium to the Auto Quota Share.

Net earned premium. Net earned premium increased by $140.1 million, or 8.4%, from $1,667.2 million for the six months ended June 30, 2019, to $1,807.3 million for the six months ended June 30, 2020, attributable to the increase in net premium written, a decrease in ceded earned premium to the Quota Shares ($32.4 million) and an increase in the Reciprocal Exchanges ($20.1 million).

Ceding commission income. Ceding commission income decreased by $27.3 million, or 22.2%, from $123.2 million for the six months ended June 30, 2019, to $95.9 million for the six months ended June 30, 2020, primarily driven by a decrease in ceded earned premium to the Quota Shares and in the Reciprocal Exchanges.

Service and fee income. Service and fee income decreased by $1.0 million, from $200.5 million for the six months ended June 30, 2019, to $199.4 million for the six months ended June 30, 2020.

The components of service and fee income are as follows:

Six Months Ended June 30,
20202019Change% Change
(amounts in thousands)
Finance and processing fees$63,975  $64,581  $(606) (0.9)%
Installment fees51,493  49,318  2,175  4.4 %
Commission revenue36,667  46,860  (10,193) (21.8)%
Late payment fees15,581  16,810  (1,229) (7.3)%
Other service and fee income31,725  22,897  8,828  38.6 %
Total$199,441  $200,466  $(1,025) (0.5)%

Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $52.1 million, from $1,196.3 million for the six months ended June 30, 2019, to $1,144.2 million for the six months ended June 30, 2020, reflecting lower claims frequency ($118.1 million), offset by the acquisition of Farmers Union Insurance ($48.6 million) and a decrease in losses ceded to Quota Shares ($22.3 million).

The P&C segment net loss ratio, which includes the Reciprocal Exchanges, decreased from 71.8% for the six months ended June 30, 2019, to 63.3% for the six months ended June 30, 2020. Excluding the Reciprocal Exchanges, the net loss ratio was 63.2% and 71.0% for the six months ended June 30, 2020, and 2019, respectively.
66


The Reciprocal Exchanges’ net loss ratio was 64.4% and 83.8% for the six months ended June 30, 2020, and 2019, respectively. Net loss ratio decreased reflecting lower claims frequency.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $22.1 million, or 7.3%, from $300.2 million for the six months ended June 30, 2019, to $322.3 million for the six months ended June 30, 2020, primarily due to the acquisition of Farmers Union Insurance.

General and administrative expenses. General and administrative expenses increased by $36.3 million, from $375.9 million for the six months ended June 30, 2019, to $412.2 million for the six months ended June 30, 2020, primarily due to 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 $86.7 million, from $352.5 million for the six months ended June 30, 2019, to $439.1 million for the six months ended June 30, 2020. The P&C segment net operating expense ratio increased from 21.1% for the six months ended June 30, 2019, to 24.3% for the six months ended June 30, 2020. The increases in net operating expense and net operating expense ratio were primarily due to organic growth, the acquisition of Farmers Union Insurance, and a decrease in ceding commission income from the Quota Shares.

Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $105.5 million, from $118.5 million for the six months ended June 30, 2019, to $223.9 million for the six months ended June 30, 2020. The P&C segment net combined ratio decreased from 92.9% for the six months ended June 30, 2019, to 87.6% for the six months ended June 30, 2020. The increase in underwriting income and the decrease in the net combined ratio were primarily due to lower claims, including the recent decline in miles driven due to the Covid-19 pandemic, offset by higher expenses due to organic growth and the acquisition of Farmers Union Insurance, and a decrease in ceding commission income from the Quota Shares.

67


A&H Segment - Results of Operations for the Three and Six Months Ended June 30, 2020, and 2019, (Unaudited)

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Underwriting revenues:(amounts in thousands, except percentages)
Gross premium written$189,657  $171,672  $376,682  $430,216  
Ceded premiums(21,445) (18,965) (40,254) (77,328) 
Net premium written$168,212  $152,707  $336,428  $352,888  
Change in unearned premium585  13,342  (2,925) (25,259) 
Net earned premium$168,797  $166,049  $333,503  $327,629  
Ceding commission income471  3,928  1,031  6,519  
Service and fee income80,068  52,937  160,592  113,949  
Total underwriting revenues$249,336  $222,914  $495,126  $448,097  
Underwriting expenses:
Loss and loss adjustment expense66,655  86,324  148,256  171,073  
Acquisition costs and other underwriting expenses66,894  48,001  135,365  105,849  
General and administrative expenses57,991  61,292  117,743  119,930  
Total underwriting expenses$191,540  $195,617  $401,364  $396,852  
Underwriting income$57,796  $27,297  $93,762  $51,245  
Underwriting ratios:
Net loss ratio39.5 %52.0 %44.5 %52.2 %
Net operating expense ratio (non-GAAP)26.3 %31.6 %27.4 %32.1 %
Net combined ratio (non-GAAP)65.8 %83.6 %71.9 %84.3 %
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio39.5 %52.0 %44.5 %52.2 %
Net operating expense ratio before amortization and impairment (non-GAAP)25.5 %30.6 %26.6 %31.1 %
Net combined ratio before amortization and impairment (non-GAAP)65.0 %82.6 %71.1 %83.3 %
Reconciliation of net operating expense ratio (non-GAAP):
Total underwriting expenses$191,540  $195,617  $401,364  $396,852  
Less: Loss and loss adjustment expense66,655  86,324  148,256  171,073  
Less: Ceding commission income471  3,928  1,031  6,519  
Less: Service and fee income80,068  52,937  160,592  113,949  
Net operating expense$44,346  $52,428  $91,485  $105,311  
Net earned premium$168,797  $166,049  $333,503  $327,629  
Net operating expense ratio (non-GAAP)26.3 %31.6 %27.4 %32.1 %
Net operating expense$44,346  $52,428  $91,485  $105,311  
Less: Non-cash amortization of intangible assets1,302  1,677  2,617  3,408  
Net operating expense before amortization and impairment$43,044  $50,751  $88,868  $101,903  
Net earned premium$168,797  $166,049  $333,503  $327,629  
Net operating expense ratio before amortization and impairment (non-GAAP)25.5 %30.6 %26.6 %31.1 %

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A&H Segment Results of Operations for the Three Months Ended June 30, 2020, Compared to the Three Months Ended June 30, 2019, (Unaudited)

Gross premium written. Gross premium written increased by $18.0 million, or 10.5%, from $171.7 million for the three months ended June 30, 2019, to $189.7 million for the three months ended June 30, 2020, due to an increase in the small group self-funded and individual products ($31.8 million), partially offset by the sale of Euroaccident in 2019 ($13.8 million).

Net premium written. Net premium written increased by $15.5 million, or 10.2%, from $152.7 million for the three months ended June 30, 2019, to $168.2 million for the three months ended June 30, 2020, due to an increase in the small group self-funded and individual products ($27.6 million), partially offset by the sale of Euroaccident in 2019 ($12.1 million).

Net earned premium. Net earned premium increased by $2.7 million, or 1.7%, from $166.0 million for the three months ended June 30, 2019, to $168.8 million for the three months ended June 30, 2020, attributable to an increase in the small group self-funded and individual products ($26.9 million), offset by the sale of Euroaccident in 2019 ($24.2 million).

Service and fee income. Service and fee income increased by $27.1 million, or 51.3%, from $52.9 million for the three months ended June 30, 2019, to $80.1 million for the three months ended June 30, 2020, related to growth in the group administration fees and third party technology fees.

The components of service and fee income are as follows:

Three Months Ended June 30,
20202019Change% Change
(amounts in thousands)
Group health administrative fees$30,536  $24,548  $5,988  24.4 %
Commission revenue24,354  15,973  8,381  52.5 %
Finance and processing fees2,205  886  1,319  148.9 %
Other service and fee income22,973  11,530  11,443  99.2 %
Total$80,068  $52,937  $27,131  51.3 %

Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $19.7 million, from $86.3 million for the three months ended June 30, 2019, to $66.7 million for the three months ended June 30, 2020, primarily due to the sale of Euroaccident in 2019 ($12.9 million). The A&H net loss ratio decreased from 52.0% for the three months ended June 30, 2019, to 39.5% for the three months ended June 30, 2020. The net loss ratio decrease was due to improved performance in the small group self-funded and individual products and the sale of Euroaccident in 2019.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $18.9 million, or 39.4%, from $48.0 million for the three months ended June 30, 2019, to $66.9 million for the three months ended June 30, 2020, primarily due to the costs of selling policies issued by third-party insurance companies.

General and administrative expenses. General and administrative expenses decreased by $3.3 million, or 5.4%, from $61.3 million for the three months ended June 30, 2019, to $58.0 million for the three months ended June 30, 2020, primarily due to organic growth completely offset by the sale of Euroaccident in 2019.
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Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense decreased by $8.1 million, from $52.4 million for the three months ended June 30, 2019, to $44.3 million for the three months ended June 30, 2020. The A&H net operating expense ratio decreased from 31.6% for the three months ended June 30, 2019, to 26.3% for the three months ended June 30, 2020. The decreases in net operating expense and net operating ratio were primarily due to increased net earned premium in 2020 and the sale of Euroaccident in 2019.

Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $30.5 million, from $27.3 million for the three months ended June 30, 2019, to $57.8 million for the three months ended June 30, 2020. The A&H net combined ratio decreased from 83.6% for the three months ended June 30, 2019, to 65.8% for the three months ended June 30, 2020. The increase in underwriting income and decrease in the net combined ratio were primarily due to increased net earned premium and lower loss experience in the small group self-funded and individual products in 2020, and the sale of Euroaccident in 2019.

A&H Segment Results of Operations for the Six Months Ended June 30, 2020, Compared to the Six Months Ended June 30, 2019, (Unaudited)

Gross premium written. Gross premium written decreased by $53.5 million, or 12.4%, from $430.2 million for the six months ended June 30, 2019, to $376.7 million for the six months ended June 30, 2020, due to the sale of Euroaccident in 2019 ($123.3 million), offset by an increase in the small group self-funded and individual products ($69.7 million).

Net premium written. Net premium written decreased by $16.5 million, or 4.7%, from $352.9 million for the six months ended June 30, 2019, to $336.4 million for the six months ended June 30, 2020, due to the sale of Euroaccident in 2019 ($74.2 million), offset by an increase in the small group self-funded and individual products ($57.7 million).

Net earned premium. Net earned premium increased by $5.9 million, or 1.8%, from $327.6 million for the six months ended June 30, 2019, to $333.5 million for the six months ended June 30, 2020, attributable to an increase in the small group self-funded and individual products ($55.4 million), offset by the sale of Euroaccident in 2019 ($49.6 million).

Service and fee income. Service and fee income increased by $46.6 million, or 40.9%, from $113.9 million for the six months ended June 30, 2019, to $160.6 million for the six months ended June 30, 2020, due to growth in the group administration fees and third party technology fees.

The components of service and fee income are as follows:

Six Months Ended June 30,
20202019Change% Change
(amounts in thousands)
Group health administrative fees$60,511  $48,053  $12,458  25.9 %
Commission revenue53,986  40,744  13,242  32.5 %
Finance and processing fees4,676  2,910  1,766  60.7 %
Other service and fee income41,419  22,242  19,177  86.2 %
Total$160,592  $113,949  $46,643  40.9 %

Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $22.8 million, from $171.1 million for the six months ended June 30, 2019, to $148.3 million for the six months ended June 30, 2020, primarily due to the sale of Euroaccident in 2019 ($30.0 million). The A&H net loss ratio decreased from 52.2% for the six months ended June 30, 2019, to 44.5% for the six months ended June 30, 2020. The net loss ratio decrease was due to improved performance in the small group self-funded and individual products and the sale of Euroaccident in 2019.
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Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $29.5 million, or 27.9%, from $105.8 million for the six months ended June 30, 2019, to $135.4 million for the six months ended June 30, 2020, primarily due to the costs of selling policies issued by third-party insurance companies.

General and administrative expenses. General and administrative expenses decreased by $2.2 million, or 1.8%, from $119.9 million for the six months ended June 30, 2019, to $117.7 million for the six months ended June 30, 2020, primarily due to organic growth completely offset by the sale of Euroaccident in 2019.

Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense decreased by $13.8 million, from $105.3 million for the six months ended June 30, 2019, to $91.5 million for the six months ended June 30, 2020. The A&H net operating expense ratio decreased from 32.1% for the six months ended June 30, 2019, to 27.4% for the six months ended June 30, 2020. The decreases in net operating expense and net operating expense ratio were primarily due to increased net earned premium in 2020 and the sale of Euroaccident in 2019.

Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $42.5 million, from $51.2 million for the six months ended June 30, 2019, to $93.8 million for the six months ended June 30, 2020. The A&H net combined ratio decreased from 84.3% for the six months ended June 30, 2019, to 71.9% for the six months ended June 30, 2020. The increase in underwriting income and decrease in the net combined ratio were primarily due to increased net earned premium and lower loss experience in the small group self-funded and individual products in 2020, and the sale of Euroaccident in 2019.

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Balance Sheets
June 30, 2020
NGHCReciprocal ExchangesEliminationsTotal
ASSETS(amounts in thousands)
Investments:
Debt securities, available-for-sale, at fair value$4,260,758  $320,773  $—  $4,581,531  
Short-term investments197,154  19,330  —  216,484  
Other investments395,268  —  (107,533) 287,735  
Total investments4,853,180  340,103  (107,533) 5,085,750  
Cash and cash equivalents297,278   —  297,282  
Restricted cash and cash equivalents37,493  233  —  37,726  
Accrued investment income65,356  1,939  (37,796) 29,499  
Premiums and other receivables, net1,438,085  49,649  —  1,487,734  
Deferred acquisition costs252,834  23,097  —  275,931  
Reinsurance recoverable, net1,179,315  113,321  —  1,292,636  
Prepaid reinsurance premiums435,398  82,684  —  518,082  
Property and equipment, net388,871  18  —  388,889  
Intangible assets, net347,686  3,135  —  350,821  
Goodwill179,328  —  —  179,328  
Prepaid and other assets69,855  4,310  —  74,165  
Total assets$9,544,679  $618,493  $(145,329) $10,017,843  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves$2,626,314  $200,270  $—  $2,826,584  
Unearned premiums and other revenue2,102,044  226,403  —  2,328,447  
Reinsurance payable437,989  23,907  —  461,896  
Accounts payable and accrued expenses320,176  45,549  (37,796) 327,929  
Debt682,266  107,533  (107,533) 682,266  
Other liabilities380,766  30,279  —  411,045  
Total liabilities$6,549,555  $633,941  $(145,329) $7,038,167  
Stockholders’ equity:
Preferred stock$450,000  $—  $—  $450,000  
Common stock1,139  —  —  1,139  
Treasury stock, at cost(8,482) —  —  (8,482) 
Additional paid-in capital1,069,152  —  —  1,069,152  
Accumulated other comprehensive income186,864  —  —  186,864  
Retained earnings1,296,451  —  —  1,296,451  
Total National General Holdings Corp. stockholders’ equity2,995,124  —  —  2,995,124  
Noncontrolling interest—  (15,448) —  (15,448) 
Total stockholders’ equity$2,995,124  $(15,448) $—  $2,979,676  
Total liabilities and stockholders’ equity$9,544,679  $618,493  $(145,329) $10,017,843  

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December 31, 2019
NGHCReciprocal ExchangesEliminationsTotal
ASSETS(amounts in thousands)
Investments:
Debt securities, available-for-sale, at fair value$4,152,109  $324,249  $—  $4,476,358  
Short-term investments62,108  5,245  —  67,353  
Other investments418,743  —  (107,456) 311,287  
Total investments4,632,960  329,494  (107,456) 4,854,998  
Cash and cash equivalents134,983  959  —  135,942  
Restricted cash and cash equivalents28,497  24  —  28,521  
Accrued investment income63,752  2,001  (34,826) 30,927  
Premiums and other receivables, net1,373,089  55,859  —  1,428,948  
Deferred acquisition costs240,216  23,307  —  263,523  
Reinsurance recoverable, net1,275,183  119,125  —  1,394,308  
Prepaid reinsurance premiums469,853  105,894  —  575,747  
Property and equipment, net403,586  241  —  403,827  
Intangible assets, net362,598  3,225  —  365,823  
Goodwill179,328  —  —  179,328  
Prepaid and other assets91,121  3,521  —  94,642  
Total assets$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 revenue2,059,688  252,553  —  2,312,241  
Reinsurance payable527,155  35,689  —  562,844  
Accounts payable and accrued expenses306,869  43,323  (34,826) 315,366  
Debt686,006  107,456  (107,456) 686,006  
Other liabilities345,366  30,803  —  376,169  
Total liabilities$6,605,712  $675,610  $(142,282) $7,139,040  
Stockholders’ equity:
Preferred stock$450,000  $—  $—  $450,000  
Common stock1,134  —  —  1,134  
Additional paid-in capital1,065,634  —  —  1,065,634  
Accumulated other comprehensive income74,548  —  —  74,548  
Retained earnings1,058,138  —  —  1,058,138  
Total National General Holdings Corp. Stockholders’ Equity2,649,454  —  —  2,649,454  
Noncontrolling interest—  (31,960) —  (31,960) 
Total stockholders’ equity$2,649,454  $(31,960) $—  $2,617,494  
Total liabilities and stockholders’ equity$9,255,166  $643,650  $(142,282) $9,756,534  

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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, asset-backed securities, and structured securities consisting of collateralized loan and debt obligations.

The average yield on our investment portfolio was 2.8% and 3.2% for the six months ended June 30, 2020, and 2019, respectively, and the average duration of the portfolio was 3.3 years and 4.2 years as of June 30, 2020, and 2019, respectively.

For more information related to our investments, see Note 4, “Investments” in the notes to our condensed 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 June 30, 2020. The proceeds of borrowings under the credit agreement may be used for working capital, acquisitions, and general corporate purposes.

On April 29, 2020, our Board of Directors authorized and approved a share repurchase program with a 12 month term for up to $50.0 million aggregate purchase price of our outstanding common shares. During the second quarter of 2020, we purchased 459,083 common shares at a cost of $8.5 million. Our purchases were made in the open market in accordance with applicable federal securities laws, including Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934. Pursuant to the terms of the Merger Agreement with Allstate, the Company is prohibited from making any further common share repurchases prior to the close of the Merger.
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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 $449.4 million and $403.0 million as of June 30, 2020, and December 31, 2019, respectively, taking into account dividends paid in the prior twelve month periods. During the six months ended June 30, 2020, and 2019, there were no 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 $1.3 billion for both the six months ended June 30, 2020, and 2019. 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, cash equivalents (including restricted cash), and total investments were $5.4 billion at June 30, 2020, and $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 with our subsidiaries. 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:

Six Months Ended June 30,
20202019Change% Change
(amounts in thousands)
Net cash provided by operating activities$308,539  $295,204  $13,335  4.5 %
Net cash used in investing activities(91,807) (245,364) 153,557  (62.6)%
Net cash used in financing activities(46,187) (36,959) (9,228) 25.0 %
Effect of exchange rate changes on cash and cash equivalents—  (2,124) 2,124  (100.0)%
Net increase in cash, cash equivalents, and restricted cash$170,545  $10,757  $159,788  

Comparison of the Six Months Ended June 30, 2020, and 2019

Net cash provided by operating activities increased by $13.3 million, primarily due to higher net income during the six months ended June 30, 2020.

Net cash used in investing activities decreased by $153.6 million, primarily due to a decrease in purchases of short-term investments and a decrease in purchases of property and equipment during the six months ended June 30, 2020.

Net cash used in financing activities increased by $9.2 million, primarily due to cash used to repurchase our shares during the six months ended June 30, 2020.

Off-Balance Sheet Arrangements

As of June 30, 2020, 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.


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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 account.

For more information about our reinsurance agreements, refer to Note 9, “Reinsurance” of our Annual Report on Form 10-K for the year ended December 31, 2019, and Note 8, “Reinsurance” in the notes to our condensed consolidated financial statements included in this report.

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Item 3. 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.

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 $4.6 billion as of June 30, 2020, 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. For example, unrealized losses on debt securities in our portfolio during the six months ended June 30, 2020, were primarily caused by the effects of the interest rate environment and the market impacts of COVID-19.

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 June 30, 2020, 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 tax.

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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 June 30, 2020.
Hypothetical Change in Interest RatesFair ValueEstimated
Change in
Fair Value
Hypothetical Percentage
Increase (Decrease) in
Stockholders’ Equity
(amounts in thousands)
200 basis point increase$4,275,210  $(306,321) (8.1)%
100 basis point increase4,428,691  (152,840) (4.1) 
No change4,581,531  —  —  
100 basis point decrease4,730,935  149,404  4.0  
200 basis point decrease4,821,512  239,981  6.4  

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 June 30, 2020, we had $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.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act is timely recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Information required for Part II, Item 1 is incorporated by reference to the discussion under the heading “Litigation” in Note 10. “Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.


Item 1A. Risk Factors

Except as set forth below, as of the date of this report, there have been no material changes to the Risk Factors described in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC (the “2019 Annual Report”).

The current COVID-19 pandemic could materially impact our business, our future results of operations and our overall financial condition.

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time.

The COVID-19 outbreak has had a notable adverse impact on general economic conditions, including adverse impacts on automobile sales and new home sales and increased unemployment, which may decrease customer demand for our insurance products, negatively impact our premium volume, reduce our ability to access capital, and otherwise adversely impact our future results of operations. For a further discussion of risks that can impact us as a result of an economic downturn, see “General economic conditions could materially and adversely affect our business, our liquidity and financial condition.” included in “Part I—Item 1A—Risk Factors” in the Company’s 2019 Annual Report.

The outbreak of COVID-19 has caused, and will continue to cause, substantial disruption to our employees, distribution channels and customers through self-isolation, travel limitations, business restrictions, and otherwise. Though most of our employees are able to work remotely, these closures have nevertheless affected many of our customers and certain channels through which we sell our products and services. In addition, an interruption of our system capabilities could result in a deterioration of our ability to write and process new business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Having shifted to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities. These effects, individually or in the aggregate, could adversely impact our business, financial condition, operating results and cash flows, and such adverse impacts may be material.

The disruption in the financial markets due to the continuing impact of COVID-19 could result in net realized and unrealized investment losses, including potential impairments in our fixed income portfolio. For further discussion of the risks related to our investment portfolio see “Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results.” included in “Part I—Item 1A—Risk Factors” in the Company’s 2019 Annual Report. The disruption and volatility of the financial markets also could result in reduced liquidity and uncertainty as to our ability to raise capital or access debt and equity capital markets. In the event that these market conditions recur or result in a prolonged economic downturn, our results of operations, financial position and/or liquidity could be materially and adversely affected.

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Federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, regulatory actions seek to retroactively mandate coverage for losses which various types of insurance policies were not designed or priced to cover or seek to require premium refunds. Regulatory restrictions or requirements also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums or fees. This may also result in an increased charge for uncollected premium and lower service and fee income. It is also possible that changes in economic conditions and steps taken by federal, state, and local governments in response to COVID-19 could require an increase in taxes at the federal, state, and local levels, which would adversely impact our results of operations.

Any of the foregoing effects, individually or in the aggregate, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could adversely impact our business, operating results and our overall financial condition, and such adverse impacts may be material. The duration of any such impacts cannot be predicted.

Failure to consummate the proposed Merger within the expected timeframe or at all could have a material adverse impact on our business, results of operations and financial condition.

There can be no assurance that the proposed merger transaction pursuant to which the Company will be acquired by Allstate will be consummated. Consummation of the proposed transaction is not subject to a financing condition, but is subject to various other conditions, including the approval of the proposed transaction by the Company’s common stockholders, the receipt of certain insurance regulatory and antitrust approvals and other customary closing conditions. There can be no assurance that these and other conditions to closing will be satisfied in a timely manner or at all.

The Merger Agreement between Allstate and the Company also provides that the Merger Agreement may be terminated by the Company or Allstate under certain circumstances, and in certain specified circumstances upon termination of the Merger Agreement we will be required to pay Allstate a fee of $132.5 million. If we are required to make such payment, doing so may materially adversely affect our business, results of operations and financial condition.

There can be no assurance that a remedy will be available to us in the event of a breach of the Merger Agreement by Allstate or that we will wholly or partially recover for any damages incurred by us in connection with the proposed transaction. In addition, we could be subject to litigation related to any failure to complete the proposed transaction or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement. A failed transaction may result in negative publicity and a negative impression of us among our agents and customers or in the investment community or business community generally. Further, any disruptions to our business resulting from the announcement and pendency of the proposed transaction, including any adverse changes in our relationships with our agents, customers, employees and other business partners, could continue or accelerate in the event of a failed transaction. In addition, if the proposed transaction is not completed, and there are no other parties willing and able to acquire the Company for total consideration of $34.50 per share of common stock or higher, on terms acceptable to us, the price of our common stock will likely decline to the extent that the current market price of our common stock reflects an assumption that the proposed transaction will be completed. Also, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, for which we will have received little or no benefit if the proposed transaction is not completed. Many of these fees and costs will be payable by us even if the proposed transaction is not completed and may relate to activities that we would not have undertaken other than to complete the proposed transaction.

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The announcement and pendency of the proposed Merger may adversely affect our business, results of operations and financial condition.

Uncertainty about the effect of the proposed Merger on our agents, customers, employees, and other parties may have an adverse effect on our business, results of operation and financial condition. These risks to our business include the following, among other factors, all of which could be exacerbated by a delay in the completion of the proposed transaction:

the impairment of our ability to attract, retain, and motivate our employees, including key personnel;
the diversion of significant management time and resources towards the completion of the proposed transaction that could otherwise have been devoted to pursuing other beneficial opportunities for the Company;
difficulties maintaining relationships with agents, customers and other business partners;
delays or deferments of certain business decisions by agents, customers and other business partners;
the inability to pursue alternative business opportunities or make appropriate changes to our business because the Merger Agreement between the Company and Allstate requires us to conduct our business in the ordinary course of business consistent with past practice and not engage in certain kinds of transactions prior to the completion of the proposed transaction;
any legal proceedings related to the proposed transaction and the costs related thereto; and
the incurrence of significant costs, expenses, and fees for professional services and other transaction costs in connection with the proposed transaction.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


Issuer Purchase of Equity Securities
Period in 2020
Total number of shares purchasedAverage price paid per share
Total number of shares purchased as part of publicly announced program(1)
Approximate dollar value of shares that may yet be purchased under the program
(amounts in thousands, except shares and per share data)
April 1 - April 30—  $—  —  $50,000  
May 1 - May 31427,277  $18.33  427,277  $42,167  
June 1 - June 3031,806  $19.96  31,806  $41,532  
Total459,083  459,083  

(1) On April 29, 2020, the Board of Directors of the Company authorized and approved a share repurchase program with a 12 month term for up to $50.0 million aggregate purchase price of the Company’s outstanding common shares. During the second quarter of 2020, the Company purchased 459,083 common shares at a cost of $8.5 million. The Company’s purchases were made in the open market in accordance with applicable federal securities laws, including Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934. Pursuant to the terms of the Merger Agreement with Allstate, the Company is prohibited from making any further common share repurchases prior to the close of the Merger.

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Item 6. Exhibits

INDEX TO EXHIBITS

The following documents are filed as exhibits to this report:

Exhibit No.Description
2.1 *
31.1
31.2
32.1
32.2
101.INSInline 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)
101.SCHInline XBRL Taxonomy Extension Schema Document (filed herewith)
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LABInline XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104The Cover Page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL contained in Exhibit 101.
* Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K, the Company hereby undertakes to furnish supplementary copies of any of the omitted schedules upon request by the SEC.


SIGNATURES

Pursuant to the requirements 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.


NATIONAL GENERAL HOLDINGS CORP.
July 31, 2020
By:/s/ Barry Karfunkel
Name: Barry Karfunkel
Title: Chief Executive Officer
(Principal Executive Officer)
By:/s/ Michael Weiner
Name: Michael Weiner
Title: Chief Financial Officer
(Principal Financial Officer)

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