NGHC 2014 3Q 10-Q (Reciprocals)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM 10-Q
 

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to 
Commission File Number: 001-36311 
 

NATIONAL GENERAL HOLDINGS CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
27-1046208
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
59 Maiden Lane, 38th Floor
New York, New York
 
10038
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 380-9500
(Registrant’s Telephone Number, Including Area Code)
 
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
 
Accelerated Filer o
 
Non-Accelerated Filer x
(Do not check if a smaller
reporting company)
 
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
As of November 7, 2014, the number of common shares of the registrant outstanding was 93,408,212.




NATIONAL GENERAL HOLDINGS CORP.

TABLE OF CONTENTS

 
 
Page
PART I
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 6.
 
 
 
 


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)
 
September 30, 2014
 
December 31, 2013
ASSETS
(unaudited)
 
(audited)
Investments - NGHC
 
 
  

Fixed maturities, available-for-sale, at fair value (amortized cost $1,288,829 and $757,188)
$
1,324,641

 
$
766,589

Equity securities, available-for-sale, at fair value (cost $53,794 and $6,939)
53,403

 
6,287

Equity investment in unconsolidated subsidiaries
146,650

 
133,193

Other investments
4,095

 
2,893

Securities pledged (amortized cost $100,177 and $133,013)
100,932

 
133,922

Investments - Exchanges
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $229,585)
229,585

 
—

Equity securities, available-for-sale, at fair value (cost $2,752)
2,752

 
—

Short-term investments
2,901

 
—

Total investments
1,864,959

 
1,042,884

Cash and cash equivalents (Exchanges - $446 and $0)
118,141

 
73,823

Accrued investment income (Exchanges - $1,975 and $0)
13,788

 
9,263

Premiums and other receivables, net (Exchanges - $72,263 and $0)
757,377

 
449,252

Deferred acquisition costs
111,791

 
60,112

Reinsurance recoverable on unpaid losses (Related parties - $101,744 and $176,241) (Exchanges - $19,137 and $0)
911,046

 
950,828

Prepaid reinsurance premiums (Exchanges - $28,012 and $0)
100,300

 
50,878

Notes receivable from related party
125,364

 
—

Due from affiliate
7,008

 
4,785

Income tax receivable (Exchanges - $1,030 and $0)
1,030

 
—

Premises and equipment, net
29,346

 
29,535

Intangible assets, net (Exchanges - $13,508 and $0)
243,968

 
86,564

Goodwill
97,711

 
70,351

Prepaid and other assets (Exchanges - $123 and $0)
14,662

 
9,240

Total assets
$
4,396,491

 
$
2,837,515

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
  

Liabilities:
 
 
  

Unpaid loss and loss adjustment expense reserves (Exchanges - $100,282 and $0)
$
1,514,008

 
$
1,259,241

Unearned premiums (Exchanges - $116,145 and $0)
860,988

 
476,232

Unearned service contract and other revenue
8,949

 
7,319

Reinsurance payable (Related parties - $34,722 and $76,360) (Exchanges - $7,940 and $0)
103,365

 
93,534

Accounts payable and accrued expenses (Exchanges - $19,822 and $0)
263,798

 
91,143

Due to affiliate (Exchanges - $17,808 and $0)
17,808

 
—

Securities sold under agreements to repurchase, at contract value
95,362

 
109,629

Deferred tax liability (Exchanges - $24,046 and $0)
72,737

 
24,476

Income tax payable
19,604

 
1,987

Notes payable (Exchanges - $44,600 and $0)
300,222

 
81,142

Other liabilities (Exchanges - $4,506 and $0)
51,742

 
49,945

Total liabilities
3,308,583

 
2,194,648

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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)
Stockholders’ equity:
 
 
 
Common stock, $0.01 par value - authorized 150,000,000 shares, issued and outstanding 93,408,212 shares - 2014; authorized 150,000,000 shares, issued and outstanding 79,731,800 shares - 2013
934

 
797

Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,200,000 shares - 2014; authorized 10,000,000 shares, issued and outstanding 0 shares - 2013
55,000

 
—

Additional paid-in capital
690,908

 
437,006

Accumulated other comprehensive income
20,873

 
7,425

Retained earnings
283,541

 
197,552

Total National General Holdings Corp. Stockholders' Equity
1,051,256

 
642,780

Non-controlling interest (Exchanges - $36,583 and $0)
36,652

 
87

Total stockholders’ equity
1,087,908

 
642,867

Total liabilities and stockholders' equity
$
4,396,491

 
$
2,837,515


See accompanying notes to unaudited condensed consolidated financial statements.
2




NATONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Shares and Per Share Data)
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
  
2014
 
2013
 
2014
 
2013
Revenues:
  

 
  

 
 
 
 
Premium income:
  

 
  

 
 
 
 
Gross premium written
$
497,595

 
$
332,714

 
$
1,612,210

 
$
1,021,016

Ceded premiums (related parties - three months $964; $131,758 and nine months $43,931; $423,259)
(66,025
)
 
(174,591
)
 
(194,599
)
 
(543,373
)
Net premium written
431,570

 
158,123

 
1,417,611

 
477,643

Change in unearned premium
6,836

 
8,002

 
(229,887
)
 
(4,811
)
Net earned premium
438,406

 
166,125

 
1,187,724

 
472,832

Ceding commission income (primarily related parties)
705

 
23,518

 
7,632

 
73,509

Service and fee income
45,894

 
34,385

 
121,086

 
93,053

Net investment income
13,697

 
8,439

 
34,232

 
22,093

Net realized gain (losses) on investments
(1,118
)
 
516

 
(1,118
)
 
1,463

Other revenue
373

 
—

 
480

 
16

Total revenues
497,957

 
232,983

 
1,350,036

 
662,966

Expenses:
  

 
  

 
  

 
  

Loss and loss adjustment expense
275,019

 
108,260

 
755,970

 
310,133

Acquisition costs and other underwriting expenses
83,915

 
32,231

 
232,706

 
94,664

General and administrative expenses
90,128

 
74,232

 
243,386

 
209,455

Interest expense
4,709

 
540

 
7,821

 
1,456

Total expenses
453,771

 
215,263

 
1,239,883

 
615,708

Income before provision for income taxes and equity in losses of unconsolidated subsidiaries
44,186

 
17,720

 
110,153

 
47,258

Provision for income taxes
10,026

 
4,839

 
17,786

 
12,393

Income before equity in losses of unconsolidated subsidiaries
34,160

 
12,881

 
92,367

 
34,865

Equity in losses of unconsolidated subsidiaries
(1,611
)
 
(128
)
 
(3,098
)
 
(452
)
Net income
32,549

 
12,753

 
89,269

 
34,413

Less: Net loss (income) attributable to non-controlling interest
770

 
—

 
776

 
(44
)
Net income attributable to National General Holdings Corp. ("NGHC")
$
33,319

 
$
12,753

 
$
90,045

 
$
34,369

Dividends on preferred stock
(1,260
)
 
—

 
(1,260
)
 
(2,158
)
Net income attributable to NGHC common stockholders
$
32,059

 
$
12,753

 
$
88,785

 
$
32,211

Earnings per common share:
  

 
  

 
  

 
  

Basic earnings per share
$
0.34

 
$
0.16

 
$
0.98

 
$
0.54

Diluted earnings per share
$
0.34

 
$
0.16

 
$
0.96

 
$
0.50

Dividends declared per common share
$
0.01

 
$
0.01

 
$
0.03

 
$
0.01

Weighted average common shares outstanding:
  

 
  

 
  

 
  

Basic
93,359,265

 
79,700,000

 
90,853,536

 
60,063,250

Diluted
95,663,429

 
80,624,303

 
92,615,198

 
68,690,957


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
32,549

 
$
12,753

 
$
89,269

 
$
34,413

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax expense - three months $0; $0 and nine months $0; $0
(2,785
)
 
150

 
(3,227
)
 
150

Unrealized holding gain (loss) on securities, net of tax expense - three months $(4,995); $(2,905) and nine months $8,400; $(15,963)
(9,277
)
 
(5,395
)
 
15,601

 
(29,647
)
Reclassification adjustment for securities sold during the period, net of tax expense - three months $578; $2,734 and nine months $578; $2,619
1,074

 
5,079

 
1,074

 
4,865

Other comprehensive income (loss), net of tax
(10,988
)
 
(166
)
 
13,448

 
(24,632
)
Comprehensive income
21,561

 
12,587

 
102,717

 
9,781

Less: Comprehensive loss (income) attributable to non-controlling interest
770

 
—

 
776

 
(44
)
Comprehensive income attributable to NGHC
$
22,331

 
$
12,587

 
$
103,493

 
$
9,737






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)


Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest in Subsidiary
 
Total
Balance January 1, 2014
79,731,800

 
$
797

 
—

 
$
—

 
$
437,006

 
$
197,552

 
$
7,425

 
$
87

 
$
642,867

Net income
—

 
—

 
—

 
—

 
—

 
90,045

 
—

 
(776
)
 
89,269

Reciprocal Exchanges' equity on September 15, 2014, date of consolidation
—

 
—

 
—

 
—

 
—

 
—

 
—

 
37,341

 
37,341

Change in unrealized gains on investments, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
16,675

 
—

 
16,675

Foreign currency translation, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(3,227
)
 
—

 
(3,227
)
Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(1,260
)
 
—

 
—

 
(1,260
)
Common stock dividends
—

 
—

 
—

 
—

 
—

 
(2,796
)
 
—

 
—

 
(2,796
)
Issuance of common stock
13,570,000

 
136

 
—

 
—

 
177,693

 
—

 
—

 
—

 
177,829

Issuance of preferred stock
—

 
—

 
2,200,000

 
55,000

 
(1,836
)
 
—

 
—

 
—

 
53,164

Capital contributions
—

 
—

 
—

 
—

 
75,404

 
—

 
—

 
—

 
75,404

Exercise of stock options, other
106,412

 
1

 
—

 
—

 
838

 
—

 
—

 
—

 
839

Stock-based compensation
—

 
—

 
—

 
—

 
1,803

 
—

 
—

 
—

 
1,803

Balance at September 30, 2014
93,408,212

 
$
934

 
2,200,000

 
$
55,000


$
690,908

 
$
283,541

 
$
20,873

 
$
36,652

 
$
1,087,908

Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest in Subsidiary
 
Total
Balance January 1, 2013
45,554,570

 
$
455

 
53,054

 
$
53,054

 
$
158,015

 
$
169,039

 
$
32,474

 
$
5

 
$
413,042

Net income
—

 
—

 
—

 
—

 
—

 
34,369

 
—

 
44

 
34,413

Change in unrealized gains (loss) on investments, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(24,782
)
 
—

 
(24,782
)
Foreign currency translation, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
150

 
—

 
150

Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(12,202
)
 
—

 
—

 
(12,202
)
Common stock dividends
—

 
—

 
—

 
—

 
—

 
(797
)
 
—

 
—

 
(797
)
Conversion of preferred stock
12,295,430

 
123

 
(53,054
)
 
(53,054
)
 
52,931

 
—

 
—

 
—

 
—

Issuance of common stock
21,881,800

 
219

 
—

 
—

 
213,058

 
—

 
—

 
—

 
213,277

Capital contributions
—

 
—

 
—

 
—

 
10,275

 
—

 
—

 
—

 
10,275

Stock-based compensation
—

 
—

 
—

 
—

 
1,629

 
—

 
—

 
—

 
1,629

Balance at September 30, 2013
79,731,800

 
$
797

 
—

 
$
—

 
$
435,908

 
$
190,409

 
$
7,842

 
$
49

 
$
635,005


See accompanying notes to unaudited condensed consolidated financial statements.
5


NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
  

Net income
$
89,269

 
$
34,413

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and goodwill impairment
19,716

 
14,897

Net amortization of premium on fixed maturities
2,338

 
2,945

Stock compensation expense
1,803

 
1,629

Equity in losses of unconsolidated subsidiaries
3,098

 
452

Net realized loss (gain) on investments
1,118

 
(1,463
)
Realized loss (gain) on premise and equipment disposals
(23
)
 
96

Bad debt expense
22,624

 
16,776

Foreign currency translation, net of tax
(3,227
)
 
150

Changes in assets and liabilities:
 
 
 
Accrued investment income
(1,928
)
 
662

Premiums and other receivables
(232,823
)
 
(17,053
)
Deferred acquisition costs, net
(51,679
)
 
(706
)
Reinsurance recoverable on unpaid losses
77,659

 
7,289

Prepaid reinsurance premiums
15,556

 
580

Prepaid expenses and other assets
(2,803
)
 
(1,824
)
Unpaid loss and loss adjustment expense reserves
97,825

 
(17,075
)
Unearned premiums
210,558

 
4,232

Unearned service contract and other revenue
1,630

 
2,397

Reinsurance payable
(27,235
)
 
(8,566
)
Accounts payable
116,331

 
687

Income tax payable
17,490

 
(1,402
)
Deferred tax liability
(43,812
)
 
(8,871
)
Other liabilities
720

 
(305
)
Net cash provided by operating activities
314,205

 
29,940

Cash flows from investing activities:
 
 
 
Investment in unconsolidated subsidiaries
(16,690
)
 
(29,868
)
Purchases of other investments
(1,297
)
 
—

Acquisition of consolidated subsidiaries, net of cash obtained
(37,064
)
 
(22,766
)
Purchases of short term investments
(124,000
)
 
(44,566
)
Notes receivable from related party
(125,364
)
 
—

Proceeds from sale of short-term investments
124,830

 
112,936

Proceeds from sale of equity securities
1,703

 
—

Purchases of premises and equipment
(7,048
)
 
(4,909
)
Disposals of premises and equipment
794

 
49

Purchases of equity securities
(36,755
)
 
(4,808
)
Purchases of fixed maturities
(742,702
)
 
(402,122
)
Proceeds from sale and maturity of fixed maturities
313,373

 
265,998

Net cash used in investing activities
(650,220
)
 
(130,056
)
 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.
6


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

Cash flows from financing activities:
 
 
 

Securities sold under agreements to repurchase, net
(14,267
)
 
(58,462
)
Securities sold but not yet purchased, net
—

 
(56,700
)
Notes payable repayments
(84,436
)
 
(58,435
)
Proceeds from notes payable
250,000

 
69,308

Issuance of common stock
177,829

 
213,277

Issuance of preferred stock, net of fees
53,164

 
—

Exercises of stock options
839

 
—

Dividends paid to preferred shareholders
—

 
(12,202
)
Dividends paid to common shareholders
(2,796
)
 
(797
)
Net cash provided by financing activities
380,333

 
95,989

Net increase in cash and cash equivalents
44,318

 
(4,127
)
Cash and cash equivalents, beginning of the period
73,823

 
39,937

Cash and cash equivalents, end of the period
$
118,141

 
$
35,810

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
39,031

 
$
20,500

Cash paid for interest
9,082

 
1,371

Non-cash capital contribution
75,404

 
10,275


See accompanying notes to unaudited condensed consolidated financial statements.
7
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” or “U.S. 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 (“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, 2013, previously filed with the SEC on March 28, 2014. The balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 also include the accounts and operations of Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer (together with their subsidiaries, the “Reciprocal Exchanges”), following the Company's acquisition on September 15, 2014 of two management companies that are the attorneys-in-fact for the Reciprocal Exchanges. The Company does not own the Reciprocal Exchanges but manages their business operations through its wholly-owned management companies.

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.

A detailed description of the Company’s significant accounting policies and management judgments is located in the audited consolidated financial statements, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC.

All significant inter-company transactions and accounts have been eliminated in the condensed consolidated financial statements.

To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation.

2. Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2014, as compared to those described in our Annual Report on Form 10-K for the year ended December 31, 2013, that are of significance, or potential significance, to the Company.
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity’s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective prospectively for fiscal years beginning after December 15, 2014, and interim periods within those years. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

In May 2014, the FASB issued guidance on recognizing revenue in contracts with customers. The objective of the new guidance as issued by the FASB in ASU 2014-09, “Revenue from Contracts with Customers”, is to remove inconsistencies and

8
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and provide for improved disclosure requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity applies the following five steps: (1) identifies the contract(s) with a customer; (2) identifies the performance obligations in the contract; (3) determines the transaction price; (4) allocates the transaction price to the performance obligations in the contract; and (5) recognizes revenue when (or as) the entity satisfies the performance obligations. The new guidance also includes a comprehensive set of qualitative and quantitative disclosure requirements including information about: (i) contracts with customers-including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations; (ii) significant judgments in determining the satisfaction of performance obligations, determining the transaction price, and amounts allocated to performance obligations; and (iii) assets recognized from the costs to obtain or fulfill a contract. For a public entity, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. While the guidance specifically excludes revenues from insurance contracts, investments and financial instruments from the scope of the new guidance, the guidance will be applicable to the Company’s other forms of revenue not specifically exempted from the guidance. The Company is currently evaluating the impact this guidance will have on its consolidated financial condition, results of operations, cash flows and disclosures and is currently unable to estimate the impact of adopting this guidance.

In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. ASU No. 2014-11 requires new disclosures for certain transactions comprised of (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. Such disclosures include: (1) the carrying amount of assets derecognized (sold) as of the date of derecognition; (2) the amount of gross proceeds received by the transferor at the time of derecognition for the assets derecognized; (3) the information about the transferor’s ongoing exposure to the economic return on the transferred financial assets; and (4) the amounts that are reported in the statement of financial position arising from the transaction, such as those represented by derivative contracts. ASU No. 2014-11 also requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. Such disclosures include: (1) a disaggregation of the gross obligation by the class of collateral pledged; (2) the remaining contractual time to maturity of the agreements; and (3) a discussion of the potential risks associated with the agreements and the related collateral pledged including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed. For public entities, the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for all annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. All other amendments in this Update are effective for public entities for the first interim or annual period beginning after December 15, 2014. The disclosure requirements are not required to be presented for comparative periods before the effective date. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.


3. Reciprocal Exchanges

As of September 15, 2014, through its wholly-owned management companies, the Company manages the business operations of the Reciprocal Exchanges and has the ability to direct their activities. The Reciprocal Exchanges are policyholder-owned insurance carriers organized as unincorporated associations. Each policyholder insured by the Reciprocal Exchanges shares risk with the other policyholders.
In the event of dissolution, policyholders would share any residual unassigned surplus in the same proportion as the amount of insurance purchased but are not subject to assessment for any deficit in unassigned surplus of the Reciprocal Exchanges. The Company receives management fee income for the services provided to the Reciprocal Exchanges. The assets of the Reciprocal Exchanges can be used only to settle the obligations of the Reciprocal Exchanges and general creditors to their liabilities have no recourse to the Company.

9
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

In addition, subsidiaries of ACP Re Ltd. ("ACP Re"), a related party, hold the surplus notes issued by the Reciprocal Exchanges when they were originally capitalized. The obligation to repay principal and interest on the surplus notes is subordinated to the Reciprocal Exchanges’ other liabilities including obligations to policyholders and claimants for benefits under insurance policies. Principal and interest on the surplus notes are payable only with regulatory approval. The Company has no ownership interest in the Reciprocal Exchanges.
The Company determined that it holds a variable interest in each of the Reciprocal Exchanges because of the significance of the management fees paid by the Reciprocal Exchanges to the wholly-owned subsidiaries of the Company as the Reciprocal Exchanges' decision-maker and the relevance of these fees to the economic performance of the Reciprocal Exchanges. Each of the Reciprocal Exchanges qualifies as a Variable Interest Entity ("VIE") because the equity holders (i.e., the policyholders) of the Reciprocal Exchanges lack the ability to direct the activities of the Reciprocal Exchanges that have a significant impact on the Reciprocal Exchanges' economic performance. The Company is the primary beneficiary because it, through its wholly-owned management companies, has both the power to direct the activities of the Reciprocal Exchanges that most significantly impact their economic performance and the right to economic benefits that could be potentially significant. Accordingly, the Company consolidates these Reciprocal Exchanges and eliminates all intercompany balances and transactions with the Company.
For the period ended September 30, 2014, the Reciprocal Exchanges recognized total revenues, total expenses and net income (loss) of $6,751, $7,496 and $(745), respectively.
The following table presents the balance sheet of the Reciprocal Exchanges as of September 15, 2014:
 
 
 
September 2014
 
 
Assets:
 
 
Cash and investments
 
$
235,684

Accrued investment income
 
1,975

Premiums receivables
 
55,914

Reinsurance recoverable on unpaid losses
 
18,734

Prepaid reinsurance premiums
 
27,166

Intangible assets, net
 
13,901

Income tax receivable
 
819

Other assets
 
1,665

Total assets
 
$
355,858

Liabilities:
 
 
Unpaid loss and loss adjustment expense reserves
 
$
101,153

Unearned premiums
 
114,786

Reinsurance payable
 
5,167

Accounts payable and accrued expenses
 
9,853

Deferred tax liability
 
24,046

Notes payable
 
44,600

Due to affiliate
 
17,808

Other liabilities
 
1,077

Total liabilities
 
318,490

Stockholders’ equity:
 
 
Non-controlling interest
 
37,368

Total stockholders’ equity
 
37,368

Total liabilities and stockholders' equity
 
$
355,858




10
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

4. Investments

(a) Available-for-Sale Securities

The cost, fair value, and gross unrealized gains and losses on available-for-sale securities were as follows:

September 30, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
48,744

 
$
22

 
$
(87
)
 
$
48,679

   Preferred stock
 
7,802

 
—

 
(326
)
 
7,476

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury
 
42,602

 
1,125

 
(12
)
 
43,715

   States and political subdivisions bonds
 
168,352

 
3,720

 
(571
)
 
171,501

   Residential mortgage-backed securities
 
476,705

 
6,829

 
(2,244
)
 
481,290

   Corporate bonds
 
836,511

 
32,133

 
(4,759
)
 
863,885

   Federal agency
 
1,210

 
—

 
—

 
1,210

   Asset-backed other securities
 
5,458

 
—

 
—

 
5,458

   Foreign government
 
6,214

 
—

 
(307
)
 
5,907

   Commercial mortgage-backed securities
 
81,539

 
653

 
—

 
82,192

Subtotal
 
$
1,675,137

 
$
44,482

 
$
(8,306
)
 
$
1,711,313

Less: Securities pledged
 
100,177

 
1,614

 
(859
)
 
100,932

Total
 
$
1,574,960

 
$
42,868

 
$
(7,447
)
 
$
1,610,381

NGHC
 
$
1,342,623

 
$
42,868

 
$
(7,447
)
 
$
1,378,044

Reciprocal Exchanges
 
232,337

 
—

 
—

 
232,337

Total
 
$
1,574,960

 
$
42,868

 
$
(7,447
)
 
$
1,610,381

December 31, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
1,939

 
$
—

 
$
—

 
$
1,939

   Preferred stock
 
5,000

 
—

 
(652
)
 
4,348

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury and Federal agencies
 
30,655

 
920

 
—

 
31,575

   States and political subdivisions bonds
 
101,105

 
1,681

 
(3,202
)
 
99,584

   Residential mortgage-backed securities
 
272,820

 
4,136

 
(7,527
)
 
269,429

   Corporate bonds
 
477,442

 
21,397

 
(7,044
)
 
491,795

   Commercial mortgage-backed securities
 
8,179

 
—

 
(51
)
 
8,128

Subtotal
 
$
897,140

 
$
28,134

 
$
(18,476
)
 
$
906,798

Less: Securities pledged
 
133,013

 
3,884

 
(2,975
)
 
133,922

Total
 
$
764,127

 
$
24,250

 
$
(15,501
)
 
$
772,876


The amortized cost and fair value of available-for-sale debt securities held as of September 30, 2014, by contractual maturity, are shown in the table below. Actual maturities may differ from contractual maturities because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

11
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

 
 
NGHC
 
Reciprocal Exchanges
 
Total
September 30, 2014
 
Cost or Amortized
Cost
 
Fair
Value
 
Cost or Amortized
Cost
 
Fair
Value
 
Cost or Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
12,373

 
$
12,455

 
$
12,843

 
$
12,843

 
$
25,216

 
$
25,298

Due after one year through five years
 
153,861

 
161,986

 
31,275

 
31,275

 
185,136

 
193,261

Due after five years through ten years
 
661,786

 
682,755

 
64,825

 
64,825

 
726,611

 
747,580

Due after ten years
 
77,327

 
79,480

 
40,599

 
40,599

 
117,926

 
120,079

Mortgage-backed securities
 
483,659

 
488,897

 
80,043

 
80,043

 
563,702

 
568,940

Total
 
$
1,389,006

 
$
1,425,573

 
$
229,585

 
$
229,585

 
$
1,618,591

 
$
1,655,158


(b) Investment Income

The components of net investment income consisted of the following:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Interest
 
 
 
 
 
 
 
 
Cash and short term investments
 
$
11

 
$
6

 
$
28

 
$
11

Fixed maturities
 
13,858

 
9,036

 
35,537

 
24,751

Reverse Repurchase Agreements
 
—

 
—

 
—

 
61

Investment Income
 
13,869

 
9,042

 
35,565

 
24,823

Investment expense
 
(106
)
 
(564
)
 
(1,135
)
 
(2,492
)
Repurchase Agreements interest expense
 
(66
)
 
(39
)
 
(198
)
 
(238
)
Net Investment Income
 
$
13,697

 
$
8,439

 
$
34,232

 
$
22,093

NGHC
 
$
13,697

 
$
8,439

 
$
34,232

 
$
22,093

Reciprocal Exchanges
 
—

 
—

 
—

 
—

Net Investment Income
 
$
13,697

 
$
8,439

 
$
34,232

 
$
22,093


(c) Realized Gains and Losses

Proceeds from sales of fixed maturity and equity securities during the nine months ended September 30, 2014 and 2013 were $193,749 and $229,021, respectively.

The tables below indicate the gross realized gains and losses for the three and nine months ended September 30, 2014 and 2013.

Three Months Ended September 30, 2014
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$
—

 
$
(505
)
 
$
(505
)
Fixed maturity securities
 
152

 
(204
)
 
(52
)
Other
 
—

 
(561
)
 
(561
)
Equity & other securities
 
$
152

 
$
(1,270
)
 
$
(1,118
)
NGHC
 
$
152

 
$
(1,270
)
 
$
(1,118
)
Reciprocal Exchanges
 
—

 
—

 
—

Equity & other securities
 
$
152

 
$
(1,270
)
 
$
(1,118
)

12
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)


Three Months Ended September 30, 2013
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturity securities
 
$
585

 
$
(69
)
 
$
516


Nine Months Ended September 30, 2014
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$
—

 
$
(505
)
 
$
(505
)
Fixed maturity securities
 
152

 
(204
)
 
(52
)
Other
 
—

 
(561
)
 
(561
)
Equity & other securities
 
$
152

 
$
(1,270
)
 
$
(1,118
)
NGHC
 
$
152

 
$
(1,270
)
 
$
(1,118
)
Reciprocal Exchanges
 
—

 
—

 
—

Equity & other securities
 
$
152

 
$
(1,270
)
 
$
(1,118
)

Nine Months Ended September 30, 2013
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturity securities
 
$
6,971

 
$
(5,508
)
 
$
1,463



(d) Unrealized Gains and Losses

Unrealized gains (losses) on fixed maturity securities, equity securities and securities sold but not yet purchased consisted of the following:

September 30, 2014
 
 
Net unrealized loss on common stock
 
$
(65
)
Net unrealized loss on preferred stock
 
(326
)
Net unrealized gains on fixed maturity securities
 
36,902

Deferred income tax expense
 
(12,776
)
Net unrealized gains, net of deferred income tax expense
 
$
23,735

NGHC
 
$
23,735

Reciprocal Exchanges
 
—

Net unrealized gains, net of deferred income tax expense
 
$
23,735

 
 
 
Change in net unrealized gains, net of deferred income tax expense
 
$
16,675


December 31, 2013
 
 
Net unrealized loss on preferred stock
 
$
(652
)
Net unrealized gains on fixed maturity securities
 
10,310

Deferred income tax expense
 
(2,598
)
Net unrealized gains, net of deferred income tax expense
 
$
7,060



13
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

(e) Gross Unrealized Losses

The tables below summarize the gross unrealized losses of fixed maturity and equity securities by length of time the security has continuously been in an unrealized loss position as of September 30, 2014 and December 31, 2013:
 
 
Less Than 12 Months
 
12 Months or More
 
Total
September 30, 2014
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
Common stock
 
$
747

 
$
(87
)
 
22

 
$
—

 
$
—

 
—

 
$
747

 
$
(87
)
Preferred stock
 
46

 
(1
)
 
2

 
4,678

 
(325
)
 
1

 
4,724

 
(326
)
U.S. Government
 
3,319

 
(12
)
 
5

 
—

 
—

 
—

 
3,319

 
(12
)
States and political subdivisions
 
14,865

 
(108
)
 
32

 
9,734

 
(463
)
 
9

 
24,599

 
(571
)
Residential Mortgage-backed
 
144,489

 
(2,187
)
 
17

 
3,099

 
(57
)
 
4

 
147,588

 
(2,244
)
Foreign government
 
5,907

 
(307
)
 
1

 
—

 
—

 
—

 
5,907

 
(307
)
Corporate bonds
 
122,775

 
(2,697
)
 
51

 
27,189

 
(2,062
)
 
13

 
149,964

 
(4,759
)
Total
 
$
292,148

 
$
(5,399
)
 
130

 
$
44,700

 
$
(2,907
)
 
27

 
$
336,848

 
$
(8,306
)
NGHC
 
$
292,148

 
$
(5,399
)
 
130

 
$
44,700

 
$
(2,907
)
 
27

 
$
336,848

 
$
(8,306
)
Reciprocal Exchanges
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
292,148

 
$
(5,399
)
 
130

 
$
44,700

 
$
(2,907
)
 
27

 
$
336,848

 
$
(8,306
)


 
 
Less Than 12 Months
 
12 Months or More
 
Total
December 31, 2013
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
 
No. of
Positions
Held
 
Fair
Market
Value
 
Unrealized
Losses
Preferred stock
 
$
4,348

 
$
(652
)
 
1

 
$
—

 
$
—

 
—

 
$
4,348

 
$
(652
)
States and political subdivisions
 
32,770

 
(2,622
)
 
18

 
2,600

 
(580
)
 
2

 
35,370

 
(3,202
)
Residential Mortgage-backed
 
176,491

 
(7,527
)
 
6

 
—

 
—

 
—

 
176,491

 
(7,527
)
Commercial Mortgage-backed
 
8,128

 
(51
)
 
2

 
—

 
—

 
—

 
8,128

 
(51
)
Corporate bonds
 
128,362

 
(4,051
)
 
39

 
41,673

 
(2,993
)
 
9

 
170,035

 
(7,044
)
Total
 
$
350,099

 
$
(14,903
)
 
66

 
$
44,273

 
$
(3,573
)
 
11

 
$
394,372

 
$
(18,476
)

There were 157 and 77 securities at September 30, 2014 and December 31, 2013, respectively, that account for the gross unrealized loss, none of which are deemed by the Company to be an other-than-temporary impairment (“OTTI”). Significant factors influencing the Company’s determination that none of the securities are OTTI included the magnitude of unrealized losses in relation to cost, the nature of the investment and management’s intent not to sell these securities and it being more likely than not that the Company will not be required to sell these investments before anticipated recovery of fair value to the Company’s cost basis.

(f) Restricted Cash and Investments

The Company, in order to conduct business in certain states, is required to maintain letters of credit or assets on deposit to support state mandated regulatory requirements and certain third party agreements. The Company also utilizes trust accounts to collateralize business with its reinsurance counterparties. These assets held are primarily in the form of cash or certain high grade securities. The fair values of our restricted assets as of September 30, 2014 and December 31, 2013 are as follows:

14
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

 
 
September 30, 2014
 
December 31, 2013
Restricted cash
 
$
3,238

 
$
1,155

Restricted investments - fixed maturities at fair value
 
57,530

 
42,092

Total restricted cash and investments
 
$
60,768

 
$
43,247


(g) Other

The Company enters into reverse repurchase and repurchase agreements, which are accounted for as either collateralized lending or borrowing transactions and are recorded at contract amounts which approximate fair value. For the collateralized borrowing transactions (i.e., repurchase agreements), the Company receives cash or securities that it invests or holds in short-term or fixed income securities. As of September 30, 2014, the Company had collateralized borrowing transaction principal outstanding of $95,362 at interest rates between 3.00% and 3.50%. As of December 31, 2013, the Company had collateralized borrowing transaction principal outstanding of $109,629 at interest rates between 0.37% and 0.44%. Interest expense associated with the repurchase borrowing agreements for the three and nine months ended September 30, 2014 was $66 and $198, respectively. Interest expense associated with the repurchase borrowing agreements for the three and nine months ended September 30, 2013 was $39 and $238, respectively. The Company has approximately $100,932 and $133,922 of collateral pledged in support for these agreements as of September 30, 2014 and December 31, 2013, respectively.


5. Fair Value of Financial Instruments

ASC 820, “Fair Value Measurements and Disclosures”, provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires or allows assets or liabilities to be measured at fair value; therefore, it does not expand the use of fair value in any new circumstance.
The Company utilized a pricing service to estimate fair value measurements for approximately 100.0% of its fixed maturities. For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the fair value hierarchy. The Company receives the quoted market prices from nationally recognized third-party pricing services (“pricing services”). When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate of fair value. This pricing method is used, primarily, for fixed maturities. The fair value estimates provided by the pricing service are included in Level 2 of the fair value hierarchy. If the Company determines that the fair value estimate provided by the pricing service does not represent fair value or if quoted market prices and an estimate from pricing services are unavailable, the Company produces an estimate of fair value based on dealer quotations of the bid price for recent activity in positions with the same or similar characteristics to that being valued or through consensus pricing of a pricing service. Depending on the level of observable inputs, the Company will then determine if the estimate is in Level 2 or Level 3 of the fair value hierarchy.
The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of September 30, 2014.
Equity Securities ‑ For public common and preferred stocks, the Company receives prices from a nationally recognized pricing service that are based on observable market transactions and includes these estimates in the amount disclosed in Level 1. When current market quotes in active markets are unavailable for certain non-redeemable preferred stocks held by the Company, the Company receives an estimate of fair value from the pricing service that provides fair value estimates for the Company’s fixed maturities. The service utilizes some of the same methodologies to price the non-redeemable preferred stocks as it does for the fixed maturities. The Company includes the estimate in the amount disclosed in Level 2. When common stock has no available pricing from the pricing services and is not actively traded on any exchange, a broker-dealer quote price is used and the amount is disclosed in Level 3.
U.S. Treasury and Federal Agencies ‑ Comprised of primarily bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association and the Federal National Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.

15
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

State and Political Subdivision Bonds ‑ Comprised of bonds and auction rate securities issued by U.S. state and municipality entities or agencies. The fair values of municipal bonds are generally priced by pricing services. The pricing services typically use spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipal bonds are observable market inputs, these are classified within Level 2. Municipal auction rate securities are reported in the consolidated balance sheets at cost which approximates their fair value.
Corporate Bonds ‑ Comprised of bonds issued by corporations and are generally priced by pricing services. The fair values of corporate bonds that are short term are priced, by the pricing services, using the spread above the London Interbank Offering Rate ("LIBOR") yield curve and the fair value of corporate bonds that are long term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker/dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker dealers. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.
Foreign Government ‑ Comprised of bonds issued by foreign governments, and are generally priced by pricing services. As the significant inputs used to price foreign government bonds are observable market inputs, the fair values of foreign government bonds are included in the Level 2 fair value hierarchy.
Mortgage and Asset-Backed Securities ‑ Comprised of commercial, residential mortgage-backed and asset-backed securities. These securities are priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the significant inputs used to price are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy.
Premiums and other receivables - The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair values due to the short term nature of these assets.
Notes Payable - The amount reported in the accompanying balance sheets for this financial instrument represents the carrying value of the debt. As of September 30, 2014, the current fair value of the Company's 6.75% Notes and Imperial Surplus Notes, which are not publicly traded, were $275,588 and $4,982, respectively. The fair value of the Company’s 6.75% Notes was determined using market-based metrics and the magnitude and timing of contractual interest and principal payments. The Imperial Surplus Notes were valued using the Black Derman-Toy interest rate lattice model. In addition, as of September 30, 2014, the current fair value of the Reciprocal Exchanges' Surplus Notes, which are not publicly traded, was $44,600. The fair value of the Reciprocal Exchanges' Surplus Notes was determined by discounting the estimated interest and principal payments by an appropriate yield.

In accordance with ASC 820, assets and liabilities measured at fair value on a recurring basis are as follows:

16
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

 
 
 
 
 
 
 
 
 
September 30, 2014
 
Recurring Fair Value Measures
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
Common stock
 
$
6,961

 
$
—

 
$
41,718

 
$
48,679

Preferred stock
 
—

 
7,476

 
—

 
7,476

Fixed maturities:
 
 
 
 
 
 
 

U.S. Treasury and Federal agencies
 
44,925

 
—

 
—

 
44,925

State and political subdivision bonds
 
—

 
171,501

 
—

 
171,501

Residential mortgage-backed securities
 
—

 
481,290

 
—

 
481,290

Corporate bonds
 
—

 
863,885

 
—

 
863,885

Commercial mortgage-backed securities
 
—

 
82,192

 
—

 
82,192

Asset-backed other securities
 
—

 
5,458

 
—

 
5,458

Foreign government
 
—

 
5,907

 
—

 
5,907

Short term investments
 
—

 
2,901

 
—

 
2,901

Other investments
 
—

 
—

 
4,095

 
4,095

Total assets
 
$
51,886

 
$
1,620,610

 
$
45,813

 
$
1,718,309

NGHC
 
$
27,974

 
$
1,409,284

 
$
45,813

 
1,483,071

Reciprocal Exchanges
 
23,912

 
211,326

 
—

 
235,238

Total assets
 
$
51,886

 
$
1,620,610

 
$
45,813

 
$
1,718,309

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
 
$
—

 
$
95,362

 
$
—

 
$
95,362

Total liabilities
 
$
—

 
$
95,362

 
$
—

 
$
95,362




17
NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares and Per Share Data)

 
 
 
 
 
 
 
 
 
December 31, 2013
 
Recurring Fair Value Measures
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets