Investments

9 Months Ended

Sep. 30, 2020

Investments, Debt and Equity Securities [Abstract]

Investment

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.

	Amortized		Allowance for		Gross Unrealized				Fair
September 30, 2020	Cost		Credit Losses (1)		Gains		Losses		Value
U.S. Treasury	$	55,630	$	—	$	3,551	$	—	$	59,181
Federal agencies	258		—		5		—		263
States and political subdivision bonds	311,092		—		16,653		(92)		327,653
Foreign government	1,764		—		98		—		1,862
Corporate bonds	2,038,791		(1,085)		131,410		(1,222)		2,167,894
Residential mortgage-backed securities	1,078,657		—		47,491		(149)		1,125,999
Commercial mortgage-backed securities	572,951		—		57,865		(968)		629,848
Asset-backed securities	32,824		—		1,034		(702)		33,156
Structured securities	206,707		—		594		(4,024)		203,277
Total	$	4,298,674	$	(1,085)	$	258,701	$	(7,157)	$	4,549,133
NGHC	$	4,002,360	$	(935)	$	254,347	$	(6,763)	$	4,249,009
Reciprocal Exchanges	296,314		(150)		4,354		(394)		300,124
Total	$	4,298,674	$	(1,085)	$	258,701	$	(7,157)	$	4,549,133

(1) Represents the amount of impairment that has resulted from credit-related factors recorded in net gain (loss) on investments.

	Amortized		Gross Unrealized				Fair
December 31, 2019	Cost		Gains		Losses		Value
U.S. Treasury	$	65,037	$	1,992	$	(23)	$	67,006
Federal agencies	3,907		8		—		3,915
States and political subdivision bonds	298,345		4,778		(1,441)		301,682
Foreign government	1,762		40		—		1,802
Corporate bonds	1,859,736		59,184		(2,357)		1,916,563
Residential mortgage-backed securities	1,265,830		15,747		(4,117)		1,277,460
Commercial mortgage-backed securities	585,044		27,261		(112)		612,193
Asset-backed securities	74,465		1,194		(48)		75,611
Structured securities	222,565		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 Exchanges	319,190		5,479		(420)		324,249
Total	$	4,376,691	$	110,430	$	(10,763)	$	4,476,358

The amortized cost and fair value of available-for-sale debt securities held as of September 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.

	NGHC				Reciprocal Exchanges				Total
September 30, 2020	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	59,932	$	60,490	$	—	$	—	$	59,932	$	60,490
Due after one year through five years	1,070,690		1,136,846		67,247		68,826		1,137,937		1,205,672
Due after five years through ten years	1,037,307		1,106,581		63,434		64,359		1,100,741		1,170,940
Due after ten years	295,443		302,797		20,189		20,231		315,632		323,028
Mortgage-backed securities	1,538,988		1,642,295		145,444		146,708		1,684,432		1,789,003
Total	$	4,002,360	$	4,249,009	$	296,314	$	300,124	$	4,298,674	$	4,549,133

(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 Months				12 Months or More				Total
September 30, 2020	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
States and political subdivision bonds	$	16,935	$	(92)	$	—	$	—	$	16,935	$	(92)
Corporate bonds	227,663		(1,222)		—		—		227,663		(1,222)
Residential mortgage-backed securities	59,991		(149)		—		—		59,991		(149)
Commercial mortgage-backed securities	27,134		(968)		—		—		27,134		(968)
Asset-backed securities	6,492		(692)		163		(10)		6,655		(702)
Structured securities	81,862		(1,852)		53,520		(2,172)		135,382		(4,024)
Total	$	420,077	$	(4,975)	$	53,683	$	(2,182)	$	473,760	$	(7,157)
NGHC	$	355,598	$	(4,669)	$	49,771	$	(2,094)	$	405,369	$	(6,763)
Reciprocal Exchanges	64,479		(306)		3,912		(88)		68,391		(394)
Total	$	420,077	$	(4,975)	$	53,683	$	(2,182)	$	473,760	$	(7,157)

	Less Than 12 Months				12 Months or More				Total
December 31, 2019	Fair 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 bonds	106,103		(1,415)		2,580		(26)		108,683		(1,441)
Corporate bonds	586,817		(2,253)		5,976		(104)		592,793		(2,357)
Residential mortgage-backed securities	410,484		(4,074)		3,983		(43)		414,467		(4,117)
Commercial mortgage-backed securities	18,250		(105)		748		(7)		18,998		(112)
Asset-backed securities	5,406		(29)		920		(19)		6,326		(48)
Structured securities	40,979		(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 Exchanges	83,698		(339)		6,906		(81)		90,604		(420)
Total	$	1,187,942	$	(7,993)	$	124,587	$	(2,770)	$	1,312,529	$	(10,763)

The Company’s debt securities portfolio is sensitive to interest rate fluctuations, which impact the fair value of individual securities. There were 276 and 1,337 individual security lots at September 30, 2020, and December 31, 2019, respectively, that accounted for the gross unrealized loss. As of September 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 $1,203 on seven securities in the energy sector as of June 30, 2020, however, market improvements and subsequent sales have resulted in $118 of the allowance being reversed for the three months ended September 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 September 30, 2020.

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

	Three Months Ended September 30, 2020
	Corporate bonds		Total
Balance, beginning of the period	$	1,203	$	1,203
Decreases to the allowance for credit losses (1)	(100)		(100)
Decreases to the allowance for credit losses for securities sold (1)	(18)		(18)
Balance, end of the period	$	1,085	$	1,085

	Nine Months Ended September 30, 2020
	Corporate bonds		Total
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)	(1,824)		(1,824)
Decreases to the allowance for credit losses for securities sold (1)	(18)		(18)
Balance, end of the period	$	1,085	$	1,085

(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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cash and short-term investments	$	110	$	1,123	$	418	$	3,467
Debt securities, available-for-sale	29,526		31,439		92,119		91,631
Other, net (related parties - three months - $(1,425) and $(10); nine months - $(2,908) and $2,163)	497		2,271		1,438		10,512
Investment income	$	30,133	$	34,833	$	93,975	$	105,610
Investment expenses	(1,229)		(1,093)		(3,653)		(3,294)
Net investment income	$	28,904	$	33,740	$	90,322	$	102,316
NGHC	$	26,650	$	31,580	$	83,873	$	95,862
Reciprocal Exchanges	2,254		2,160		6,449		6,454
Net investment income	$	28,904	$	33,740	$	90,322	$	102,316

(d) Net Gain (Loss) on Investments

The table below indicates realized gains and losses on investments. Purchases and sales of investments are recorded on a trade date basis. Realized gains and losses are determined based on the specific identification method.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Debt securities, available-for-sale:
Gross gains	$	19,652	$	3,598	$	21,698	$	3,921
Gross losses	(259)		(1,712)		(348)		(2,086)
Expected credit losses	100		—		(1,103)		—
Net realized gain on debt securities, available-for-sale	19,493		1,886		20,247		1,835
Other, net (1)	346		(305)		(2,111)		(5,462)
Net realized gain (loss) on investments	$	19,839	$	1,581	$	18,136	$	(3,627)
NGHC	$	6,736	$	1,718	$	6,179	$	(2,790)
Reciprocal Exchanges	13,103		(137)		11,957		(837)
Net realized gain (loss) on investments	$	19,839	$	1,581	$	18,136	$	(3,627)

(1) Includes gains and losses on publicly traded equity securities, other investments, 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.

	NGHC						Reciprocal Exchanges
September 30, 2020	Amortized Cost		Fair Value		Percentage		Amortized Cost		Fair Value		Percentage
U.S. Treasury	$	41,164	$	44,386	1.0	%	$	14,466	$	14,795	4.9	%
AAA	502,797		544,772		12.8	%	20,970		21,114		7.0	%
AA, AA+, AA-	1,463,849		1,547,498		36.6	%	155,194		156,645		52.3	%
A, A+, A-	1,109,928		1,166,023		27.4	%	39,081		40,077		13.4	%
BBB, BBB+, BBB-	856,831		918,836		21.6	%	65,723		66,758		22.2	%
BB+ and lower	27,791		27,494		0.6	%	880		735		0.2	%
Total	$	4,002,360	$	4,249,009	100.0	%	$	296,314	$	300,124	100.0	%

	NGHC						Reciprocal Exchanges
December 31, 2019	Amortized Cost		Fair Value		Percentage		Amortized Cost		Fair Value		Percentage
U.S. Treasury	$	52,108	$	53,599	1.3	%	$	12,929	$	13,407	4.1	%
AAA	515,869		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 lower	61,831		64,075		1.6	%	433		433		0.3	%
Total	$	4,057,501	$	4,152,109	100.0	%	$	319,190	$	324,249	100.0	%

The tables below summarize the investment quality of the corporate bond holdings and industry concentrations.

September 30, 2020	AAA		AA+, AA, AA-		A+,A,A-		BBB+, BBB, BBB-		BB+ or Lower		Fair Value		% of Corporate Bonds Portfolio
Financial Institutions	—	%	2.4	%	23.0	%	14.1	%	0.1	%	$	858,974	39.6	%
Industrials	0.3	%	3.3	%	25.5	%	28.1	%	0.4	%	1,247,187		57.6	%
Utilities/Other	—	%	—	%	1.6	%	1.2	%	—	%	61,733		2.8	%
Total	0.3	%	5.7	%	50.1	%	43.4	%	0.5	%	$	2,167,894	100.0	%
NGHC	0.3	%	5.7	%	48.3	%	40.3	%	0.5	%	$	2,060,258	95.1	%
Reciprocal Exchanges	—	%	—	%	1.8	%	3.1	%	—	%	107,636		4.9	%
Total	0.3	%	5.7	%	50.1	%	43.4	%	0.5	%	$	2,167,894	100.0	%

December 31, 2019	AAA		AA+, 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	%
Industrials	0.7	%	2.7	%	24.1	%	29.0	%	0.1	%	1,083,959		56.6	%
Utilities/Other	—	%	—	%	1.0	%	1.4	%	—	%	46,694		2.4	%
Total	0.7	%	6.3	%	50.1	%	42.5	%	0.4	%	$	1,916,563	100.0	%
NGHC	0.3	%	5.1	%	44.0	%	40.0	%	0.4	%	$	1,720,962	89.8	%
Reciprocal Exchanges	0.4	%	1.2	%	6.1	%	2.5	%	—	%	195,601		10.2	%
Total	0.7	%	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:

	September 30, 2020		December 31, 2019
Cash and cash equivalents	$	188,282	$	135,942
Restricted cash and cash equivalents	63,061		28,521
Total cash, cash equivalents and restricted cash	$	251,343	$	164,463

Restricted investments are as follows:

	September 30, 2020		December 31, 2019
Securities on deposit with state regulatory authorities	$	83,876	$	74,061
Restricted investments to trusts in certain reinsurance transactions	36,324		49,502
Total restricted investments	$	120,200	$	123,563

(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:

	September 30, 2020		December 31, 2019
Equity method investments (related parties - $100,809 and $109,612)	$	136,935	$	143,511
Notes receivable (related parties - $130,784 and $129,229)(1)	130,832		129,299
Long-term Certificates of Deposit (CDs), at cost	150		20,150
Investments, at fair value	5,987		9,365
Investments, at cost or amortized cost	8,962		8,962
Total	$	282,866	$	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 VIEs. 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 September 30, 2020, the LSC Entity directly held one life settlement contract. The life settlement contract is accounted for using the fair value method.

The Company’s equity interest in the LSC Entity as of September 30, 2020, and December 31, 2019, was $44,541 and $49,477, respectively. The Company recorded equity in losses from the LSC Entity of $(1,507) and $(481), made contributions of $0 and $258, and received distributions of $0 and $2,500 for the three months ended September 30, 2020, and 2019, respectively. For the nine months ended September 30, 2020, and 2019, the Company recorded equity in earnings (losses) from the LSC Entity of $(4,936) and $1,250, made contributions of $0 and $258, and received distributions of $0 and $2,500, 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 September 30, 2020, and December 31, 2019, was $9,559 and $9,365, respectively. The Company recorded equity in earnings (losses) from 800 Superior, LLC of $93 and $(103), and made contributions of $0 and $2,287, for the three months ended September 30, 2020, and 2019, respectively. For the nine months ended September 30, 2020, and 2019, the Company recorded equity in earnings (losses) from 800 Superior, LLC of $194 and $(87), and made contributions of $0 and $2,287, respectively.

The Company paid 800 Superior, LLC $761 and $742 in rent for the three months ended September 30, 2020, and 2019, respectively, and $2,284 and $2,226 in rent for the nine months ended September 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 September 30, 2020, and December 31, 2019, was $5,704 and $5,317, respectively. For the three months ended September 30, 2020, and 2019, the Company recorded equity in losses from North Dearborn of $(43) and $(84), respectively, and received distributions of $135 in both periods. For the nine months ended September 30, 2020, and 2019, the Company recorded equity in earnings (losses) from North Dearborn of $792 and $(150), respectively, and received distributions of $405 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 September 30, 2020, and December 31, 2019, was $1,563 and $1,074, respectively. For the three months ended September 30, 2020, and 2019, the Company recorded equity in earnings from 4455 LBJ Freeway, LLC of $110 and $63, respectively. For the nine months ended September 30, 2020, and 2019, the Company recorded equity in earnings from 4455 LBJ Freeway, LLC of $489 and $191, respectively.

The Company paid 4455 LBJ Freeway, LLC $623 and $607 in rent for the three months ended September 30, 2020, and 2019, respectively, and $1,859 and $1,813 in rent for the nine months ended September 30, 2020, and 2019, respectively.

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 September 30, 2020, and December 31, 2019, was $39,442 and $44,379, respectively. For the three months ended September 30, 2020, and 2019, the Company recorded equity in losses from Illinois Center of $(1,288) and $(600), and received distributions of $1,875 and $0, respectively. For the nine months ended September 30, 2020, and 2019, the Company recorded equity in losses from Illinois Center of $(3,062) and $(2,612), made contributions of $0 and $1,125, and received distributions of $1,875 and $0, respectively.