XML 23 R12.htm IDEA: XBRL DOCUMENT

Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2020

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 September 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.

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.

Assets measured at fair value on a recurring basis are as follows:


	September 30, 2020
	Level 1		Level 2		Level 3		Total
Debt securities, available-for-sale:
U.S. Treasury	$	59,181	$	—	$	—	$	59,181
Federal agencies	263		—		—		263
States and political subdivision bonds	—		325,133		2,520		327,653
Foreign government	—		1,862		—		1,862
Corporate bonds	—		2,162,525		5,369		2,167,894
Residential mortgage-backed securities	—		1,125,999		—		1,125,999
Commercial mortgage-backed securities	—		629,848		—		629,848
Asset-backed securities	—		33,156		—		33,156
Structured securities	—		203,277		—		203,277
Total debt securities, available-for-sale	59,444		4,481,800		7,889		4,549,133
Short-term investments	490,800		20,000		—		510,800
Other investments	2,638		—		3,349		5,987
Total	$	552,882	$	4,501,800	$	11,238	$	5,065,920
NGHC	$	507,135	$	4,216,471	$	11,238	$	4,734,844
Reciprocal Exchanges	45,747		285,329		—		331,076
Total	$	552,882	$	4,501,800	$	11,238	$	5,065,920


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Debt securities, available-for-sale:
U.S. Treasury	$	67,006	$	—	$	—	$	67,006
Federal agencies	3,915		—		—		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-sale	70,921		4,394,009		11,428		4,476,358
Short-term investments	59,953		7,400		—		67,353
Other investments	4,881		—		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 Exchanges	19,153		310,341		—		329,494
Total	$	135,755	$	4,401,409	$	15,912	$	4,553,076

For the nine months ended September 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	—		—		(417)		(417)
Included in other comprehensive income	(580)		(2,959)		—		(3,539)

Sales	—		—		(718)		(718)
Balance as of September 30, 2020	$	2,520	$	5,369	$	3,349	$	11,238
Change in unrealized gains (losses) for the period included in net income for assets held at the end of the reporting period					$	(417)	$	(417)
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held at the end of the reporting period	$	(580)	$	(2,959)			$	(3,539)


	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	—		—		(3,012)		(3,012)
Included in other comprehensive income	(496)		(1,987)		—		(2,483)


Balance as of September 30, 2019	$	3,100	$	9,780	$	4,581	$	17,461
Change in unrealized gains (losses) for the period included in net income for assets held at the end of the reporting period					$	(3,012)	$	(3,012)
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held at the end of the reporting period	$	(496)	$	(1,987)			$	(2,483)

At September 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.

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:


		September 30, 2020				December 31, 2019
	Input Level	Carrying amount		Fair value		Carrying amount		Fair value
7.625% Notes	Level 2	$	96,993	$	101,520	$	96,928	$	103,560
6.75% Notes	Level 3	347,579		388,866		347,091		371,366
Subordinated Debentures	Level 3	72,168		72,147		72,168		72,103
2019 Credit Agreement	Level 3	140,000		144,267		140,000		148,272

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details