NGHC 2015 2Q 10-Q

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 June 30, 2015

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 August 3, 2015, the number of common shares of the registrant outstanding was 93,730,711.




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)
 
June 30,
2015
 
December 31,
2014
ASSETS
(unaudited)
 
(audited)
Investments - NGHC
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $1,436,983 and $1,330,760)
$
1,461,944

 
$
1,374,087

Equity securities, available-for-sale, at fair value (cost $55,937 and $52,272)
55,848

 
45,802

Short-term investments
50

 
50

Equity investment in unconsolidated subsidiaries
178,557

 
155,900

Other investments
7,607

 
4,764

Securities pledged (amortized cost $68,942 and $47,546)
68,826

 
49,456

Investments - Exchanges
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $225,924 and $222,121)
223,453

 
222,739

Equity securities, available-for-sale, at fair value (cost $1,501 and $2,752)
1,515

 
2,817

Short-term investments
9,261

 
10,490

Total investments
2,007,061

 
1,866,105

Cash and cash equivalents (Exchanges - $35,270 and $9,437)
168,061

 
132,615

Accrued investment income (Exchanges - $1,976 and $1,898)
15,439

 
14,451

Premiums and other receivables, net (Related parties $108,542 and $64,129) (Exchanges - $54,716 and $58,238)
766,155

 
647,443

Deferred acquisition costs (Exchanges - $19,028 and $4,485)
141,260

 
125,999

Reinsurance recoverable on unpaid losses (Related parties - $60,384 and $88,970) (Exchanges - $42,039 and $23,583)
878,666

 
911,798

Prepaid reinsurance premiums (Exchanges - $59,047 and $26,924)
123,894

 
102,761

Notes receivable from related party
125,000

 
125,000

Due from affiliate
24,701

 
5,129

Premises and equipment, net
28,709

 
30,583

Intangible assets, net (Exchanges - $7,567 and $11,433)
272,430

 
248,837

Goodwill
113,843

 
70,764

Prepaid and other assets (Exchanges - $24,348 and $71)
42,699

 
43,231

Total assets
$
4,707,918

 
$
4,324,716

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Unpaid loss and loss adjustment expense reserves (Exchanges - $124,328 and $111,848)
$
1,553,572

 
$
1,562,153

Unearned premiums (Exchanges - $137,380 and $119,998)
945,775

 
864,436

Unearned service contract and other revenue (Exchanges - $35,145 and $0)
44,481

 
8,527

Reinsurance payable (Related parties - $41,600 and $41,965) (Exchanges - $6,675 and $13,811)
89,683

 
111,641

Accounts payable and accrued expenses (Related parties - $48,128 and $38,576) (Exchanges - $22,923 and $17,691)
188,835

 
207,121

Due to affiliate (Exchanges - $38,056 and $1,552)
38,056

 
1,552

Securities sold under agreements to repurchase, at contract value
61,154

 
46,804

Deferred tax liability (Exchanges - $38,855 and $38,402)
31,296

 
67,535

Income tax payable (Exchanges - $35 and $1,059)
46,535

 
30,591

Notes payable (Exchanges owed to related party - $52,547 and $48,374)
302,884

 
299,082

Other liabilities (Exchanges - $14,809 and $5,710)
108,506

 
51,824

Total liabilities
3,410,777

 
3,251,266


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 93,713,986 shares - 2015; authorized 150,000,000 shares, issued and outstanding 93,427,382 shares - 2014
937

 
934

Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,365,000 shares - 2015; authorized 10,000,000 shares, issued and outstanding 2,200,000 shares - 2014. Aggregate liquidation preference $220,000 - 2015, $55,000 - 2014.
220,000

 
55,000

Additional paid-in capital
688,967

 
690,736

Accumulated other comprehensive income
14,993

 
20,192

Retained earnings
364,609

 
292,832

Total National General Holdings Corp. Stockholders' Equity
1,289,506

 
1,059,694

Non-controlling interest (Exchanges - $7,467 and $13,670)
7,635

 
13,756

Total stockholders’ equity
1,297,141

 
1,073,450

Total liabilities and stockholders' equity
$
4,707,918

 
$
4,324,716


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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Premium income:
 
 
 
 
 
 
 
Gross premium written
$
575,681

 
$
468,473

 
$
1,219,136

 
$
1,114,615

Ceded premiums (related parties - three months $373; $12,690 and six months $721; $42,967)
(96,271
)
 
(49,917
)
 
(209,701
)
 
(128,574
)
Net premium written
479,410

 
418,556

 
1,009,435

 
986,041

Change in unearned premium
(10,594
)
 
(27,090
)
 
(61,454
)
 
(236,723
)
Net earned premium
468,816

 
391,466

 
947,981

 
749,318

Ceding commission income
9,970

 
1,557

 
15,050

 
6,927

Service and fee income
57,558

 
38,486

 
112,428

 
75,192

Net investment income
18,335

 
11,321

 
34,483

 
20,535

Net realized gain on investments
389

 
—

 
1,576

 
—

Other revenue
(1,415
)
 
100

 
(170
)
 
107

Total revenues
553,653

 
442,930

 
1,111,348

 
852,079

Expenses:
 
 
 
 
 
 
 
Loss and loss adjustment expense
286,829

 
255,604

 
593,515

 
480,951

Acquisition costs and other underwriting expenses
96,502

 
74,418

 
186,387

 
148,791

General and administrative expenses
119,158

 
77,059

 
224,845

 
153,258

Interest expense
8,601

 
2,519

 
17,681

 
3,112

Total expenses
511,090

 
409,600

 
1,022,428

 
786,112

Income before provision for income taxes and equity in earnings (losses) of unconsolidated subsidiaries
42,563

 
33,330

 
88,920

 
65,967

Provision for income taxes
7,891

 
424

 
16,278

 
7,760

Income before equity in earnings (losses) of unconsolidated subsidiaries
34,672

 
32,906

 
72,642

 
58,207

Equity in earnings (losses) of unconsolidated subsidiaries
1,654

 
(2,610
)
 
6,612

 
(1,487
)
Net income
36,326

 
30,296

 
79,254

 
56,720

Less: Net loss (income) attributable to non-controlling interest
2,201

 
38

 
2,041

 
6

Net income attributable to National General Holdings Corp. ("NGHC")
$
38,527

 
$
30,334

 
$
81,295

 
$
56,726

Dividends on preferred stock
(4,744
)
 
—

 
(5,775
)
 
—

Net income attributable to NGHC common stockholders
$
33,783

 
$
30,334

 
$
75,520

 
$
56,726

Earnings per common share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.36

 
$
0.32

 
$
0.81

 
$
0.63

Diluted earnings per share
$
0.35

 
$
0.32

 
$
0.79

 
$
0.62

Dividends declared per common share
$
0.02

 
$
0.01

 
$
0.04

 
$
0.02

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
93,597,448

 
93,344,400

 
93,527,977

 
89,526,029

Diluted
96,181,037

 
94,819,307

 
96,005,397

 
90,898,518

Net realized gain on investments:
 
 
 
 
 
 
 
Other-than-temporary impairment loss
$
(1,467
)
 
$
—

 
$
(2,483
)
 
$
—

Portion of loss recognized in other comprehensive income
—

 
—

 
—

 
—

Net impairment losses recognized in earnings
(1,467
)
 
—

 
(2,483
)
 
—

Other net realized gain on investments
1,856

 
—

 
4,059

 
—

Net realized gain on investments
$
389

 
$
—

 
$
1,576

 
$
—


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,
 
2015
 
2014
 
2015
 
2014
Net income
$
36,326

 
$
30,296

 
$
79,254

 
$
56,720

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
2,728

 
156

 
3,752

 
(441
)
Gross unrealized holding gain (loss) on securities, net of tax expense (benefit) of ($11,069) and ($5,079) for the three and six months ended June 30, 2015, respectively, and $8,673 and $13,395 for the three and six months ended June 30, 2014, respectively.
(24,868
)
 
16,107

 
(10,513
)
 
24,878

Reclassification adjustments for investment gain/loss included in net income:
 
 
 
 
 
 
 
Other-than-temporary impairment loss
1,467

 
—

 
2,483

 
—

Other net realized gain on investments
(1,856
)
 
—

 
(4,059
)
 
—

Other comprehensive income (loss), net of tax
(22,529
)
 
16,263

 
(8,337
)
 
24,437

Comprehensive income
13,797

 
46,559

 
70,917

 
81,157

Less: Comprehensive loss (income) attributable to non-controlling interest
7,040

 
38

 
5,179

 
6

Comprehensive income attributable to NGHC
$
20,837

 
$
46,597

 
$
76,096

 
$
81,163




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)

 
Six Months Ended June 30, 2015
 
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, 2015
93,427,382

 
$
934

 
2,200,000

 
$
55,000

 
$
690,736

 
$
292,832

 
$
20,192

 
$
13,756

 
$
1,073,450

Net income (loss)
—

 
—

 
—

 
—

 
—

 
81,295

 
—

 
(2,041
)
 
79,254

Foreign currency translation adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
3,752

 
—

 
3,752

Change in unrealized losses on investments, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(8,951
)
 
(3,138
)
 
(12,089
)
Change in non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(942
)
 
(942
)
Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(5,775
)
 
—

 
—

 
(5,775
)
Common stock dividends
—

 
—

 
—

 
—

 
—

 
(3,743
)
 
—

 
—

 
(3,743
)
Issuance of preferred stock
—

 
—

 
165,000

 
165,000

 
(5,448
)
 
—

 
—

 
—

 
159,552

Common stock issued under employee stock plans and exercises of stock options
286,604

 
3

 
—

 
—

 
1,415

 
—

 
—

 
—

 
1,418

Stock-based compensation
—

 
—

 
—

 
—

 
2,264

 
—

 
—

 
—

 
2,264

Balance June 30, 2015
93,713,986

 
$
937

 
2,365,000

 
$
220,000

 
$
688,967

 
$
364,609

 
$
14,993

 
$
7,635

 
$
1,297,141


 
Six Months Ended June 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
—

 
—

 
—

 
—

 
—

 
56,726

 
—

 
(6
)
 
56,720

Foreign currency translation adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(441
)
 
—

 
(441
)
Change in unrealized gains on investments, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
24,878

 
—

 
24,878

Common stock dividends
—

 
—

 
—

 
—

 
—

 
(1,865
)
 
—

 
—

 
(1,865
)
Issuance of common stock
13,612,600

 
136

 
—

 
—

 
177,750

 
—

 
—

 
—

 
177,886

Issuance of preferred stock
—

 
—

 
2,200,000

 
55,000

 
(1,836
)
 
—

 
—

 
—

 
53,164

Stock-based compensation
—

 
—

 
—

 
—

 
919

 
—

 
—

 
—

 
919

Balance June 30, 2014
93,344,400

 
$
933

 
2,200,000

 
$
55,000

 
$
613,839

 
$
252,413

 
$
31,862

 
$
81

 
$
954,128




See accompanying notes to unaudited condensed consolidated financial statements.
5


NATIONAL GENERAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
79,254

 
$
56,720

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
14,751

 
13,338

Net amortization of premium on fixed maturities
2,565

 
1,594

Net amortization of discount on debt
4,173

 
—

Stock compensation expense
2,264

 
919

Equity in (earnings) losses of unconsolidated subsidiaries
(6,612
)
 
1,487

Other net realized gain on investments
(4,059
)
 
—

Other-than-temporary impairment loss
2,483

 
—

Bad debt expense
10,722

 
14,519

Foreign currency translation adjustment, net of tax
1,204

 
(441
)
Changes in assets and liabilities:
 
 
 
Accrued investment income
(988
)
 
(2,485
)
Premiums and other receivables
(102,993
)
 
(184,691
)
Deferred acquisition costs, net
(15,261
)
 
(54,623
)
Reinsurance recoverable on unpaid losses
33,132

 
58,603

Prepaid reinsurance premiums
(21,133
)
 
18,011

Prepaid expenses and other assets
809

 
(1,988
)
Unpaid loss and loss adjustment expense reserves
(8,581
)
 
77,948

Unearned premiums
81,339

 
217,286

Unearned service contract and other revenue
30,424

 
1,669

Reinsurance payable
(21,958
)
 
(81,435
)
Accounts payable
(23,163
)
 
131,185

Income tax payable
15,651

 
17,070

Deferred tax liability
(32,107
)
 
(29,630
)
Other liabilities
42,358

 
(20,830
)
Net cash provided by operating activities
84,274

 
234,226

Cash flows from investing activities:
 
 
 
Investment in unconsolidated subsidiaries
(17,425
)
 
(10,901
)
Distributions from unconsolidated subsidiaries
1,923

 
—

Purchases of other investments
(3,315
)
 
(557
)
Acquisition of consolidated subsidiaries, net of cash
(61,413
)
 
(15,778
)
Purchases of equity securities
(245
)
 
—

Proceeds from sale of equity securities
1,259

 
—

Purchases of short term investments
(82,162
)
 
(124,000
)
Proceeds from sale of short-term investments
83,391

 
124,000

Purchases of premises and equipment
(3,670
)
 
(5,550
)
Purchases of fixed maturities
(355,504
)
 
(591,550
)
Proceeds from sale and maturity of fixed maturities
219,595

 
79,529

Net cash used in investing activities
(217,566
)
 
(544,807
)

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
14,350

 
(49,532
)
Notes payable repayments
(631
)
 
(80,946
)
Proceeds from notes payable
—

 
250,000

Issuance of common stock
—

 
177,730

Issuance of preferred stock, net of fees
159,552

 
53,164

Exercises of stock options
1,418

 
156

Dividends paid to preferred shareholders
(2,062
)
 
—

Dividends paid to common shareholders
(3,736
)
 
(1,865
)
Net cash provided by financing activities
168,891

 
348,707

Effect of exchange rate changes on cash and cash equivalents
(153
)
 
—

Net increase in cash and cash equivalents
35,446

 
38,126

Cash and cash equivalents, beginning of the period
132,615

 
73,823

Cash and cash equivalents, end of the period
$
168,061

 
$
111,949

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
31,100

 
$
14,200

Cash paid for interest
8,469

 
3,089


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, 2014, previously filed with the SEC on March 9, 2015. The balance sheet at December 31, 2014 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 June 30, 2015 and for the three and six months ended June 30, 2015, and the audited condensed consolidated balance sheet as of December 31, 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” or "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, 2014 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 six months ended June 30, 2015, as compared to those described in our Annual Report on Form 10-K for the year ended December 31, 2014, that are of significance, or potential significance, to the Company.

In April 2014, the FASB issued 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 Company adopted ASU 2014-08 on January 1, 2015 and the implementation of the standard did not have an impact on the Company’s results of operations, financial position or liquidity.

8
NATIONAL GENERAL HOLDINGS CORP.

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


In June 2014, the FASB issued ASU 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 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: (a) the carrying amount of assets derecognized (sold) as of the date of derecognition; (b) the amount of gross proceeds received by the transferor at the time of derecognition for the assets derecognized; (c) the information about the transferor’s ongoing exposure to the economic return on the transferred financial assets; and (d) the amounts that are reported in the statement of financial position arising from the transaction, such as those represented by derivative contracts. ASU 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: (i) a disaggregation of the gross obligation by the class of collateral pledged; (ii) the remaining contractual time to maturity of the agreements; and (iii) 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 Company adopted ASU 2014-11 on April 1, 2015 and the effects of adoption were limited to the expanded disclosure requirements about the nature of collateral pledged in the Company's repurchase agreements which are accounted for as secured borrowings. The implementation of the standard did not have an impact on the Company’s results of operations, financial position or liquidity.

In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" to address concerns that GAAP might require a reporting entity to consolidate another legal entity in situations in which the reporting entity's contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity's voting rights, or the reporting entity is not exposed to a majority of the legal entity's economic benefits or obligations. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 amends certain areas in the consolidation analysis including: (i) the effect of related parties on the primary beneficiary determination; (ii) the evaluation of fees paid to a decision maker or a service provider as a variable interest; (iii) the effect of fee arrangements on the primary beneficiary determination; and (iv) certain investment funds. The amendments in ASU 2015-02 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in ASU 2015-02 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or may apply the amendments retrospectively. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, as part of its initiative to reduce complexity in accounting standards. ASU 2015-03 amends the current practice where debt issuance costs were recognized as separate assets (i.e., deferred charges) on the balance sheet and were not deducted from the carrying value of the debt liability. ASU 2015-03 amends the current practice and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. The amendments in ASU 2015-03 are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early

9
NATIONAL GENERAL HOLDINGS CORP.

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

adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The Company adopted ASU 2015-03 on April 1, 2015 which resulted in the reclassification of $4,923 of debt issuance costs from Prepaid and other assets to Notes payable in the Company's Condensed Consolidated Balance Sheet as of December 31, 2014 (see Note 10, "Debt").

In May 2015, the FASB issued ASU 2015-09, "Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts" to expand existing GAAP disclosure requirements for short-duration contracts regarding the liability for unpaid claims and claim adjustment expenses. The amendments in ASU 2015-09 are intended to increase the transparency of significant estimates made in measuring those liabilities, improve comparability by requiring consistent disclosure of information, and provide financial statement users with additional information to facilitate analysis of the amount, timing, and uncertainty of cash flows arising from contracts issued by insurance entities and the development of loss reserve estimates. Specifically, the amendments require the following information for annual reporting periods about the liability for unpaid claims and claim adjustment expenses: (1) incurred and paid claims development information by accident year, on a net basis after risk mitigation through reinsurance, for the number of years for which claims incurred typically remain outstanding; (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position; (3) the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses for each accident year presented of incurred claims development information, accompanied by a description of reserving methodologies (as well as any changes to those methodologies); (4) quantitative information about claim frequency (unless it is impracticable to do so) for each accident year presented of incurred claims development information, accompanied by a qualitative description of methodologies used for determining claim frequency information (as well as any changes to these methodologies); and (5) the average annual percentage payout of incurred claims by age (that is, history of claims duration) for the same number of accident years as presented in (3) and (4) above for all claims except health insurance claims. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a roll forward of the liability for unpaid claims and claim adjustment expenses. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. Additional disclosures about liabilities for unpaid claims and claim adjustment expenses reported at present value include the following: (1) the aggregate amount of discount for the time value of money deducted to derive the liability for unpaid claims and claim adjustment expenses for each period presented in the statement of financial position; (2) the amount of interest accretion recognized for each period presented in the statement of income; and (3) the line item(s) in the statement of income in which the interest accretion is classified. The amendments in ASU 2015-09 are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. In the year of initial application of the amendments in ASU 2015-09, an insurance entity need not disclose information about claims development for a particular category that occurred earlier than five years before the end of the first financial reporting year in which the amendments are first applied if it is impracticable to obtain the information required to satisfy the disclosure requirement. For each subsequent year following the year of initial application, the minimum required number of years will increase by at least 1 but need not exceed 10 years, including the most recent period presented in the statement of financial position. Early application of the amendments in ASU 2015-09 is permitted. The amendments should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The adoption of ASU 2015-09 is expected to be limited to disclosure requirements and is not expected to have an 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 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

10
NATIONAL GENERAL HOLDINGS CORP.

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

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.

Subsidiaries of ACP Re Ltd. ("ACP Re"), a related party, hold the surplus notes that were 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 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.

The following table presents the balance sheet of the Reciprocal Exchanges as of September 15, 2014:

September 15, 2014
 
 
Assets:
 
 
Cash and investments
 
$
235,684

Accrued investment income
 
1,975

Premiums receivables
 
62,412

Reinsurance recoverable on unpaid losses
 
19,137

Prepaid reinsurance premiums
 
27,166

Intangible assets, net
 
13,901

Income tax receivable
 
819

Other assets
 
124

Total assets
 
$
361,218

Liabilities:
 
 
Unpaid loss and loss adjustment expense reserves
 
$
113,828

Unearned premiums
 
114,786

Reinsurance payable
 
5,167

Accounts payable and accrued expenses
 
10,120

Deferred tax liability
 
39,238

Notes payable
 
44,600

Due to affiliate
 
17,808

Other liabilities
 
4,506

Total liabilities
 
350,053

Stockholders’ equity:
 
 
Non-controlling interest
 
11,165

Total stockholders’ equity
 
11,165

Total liabilities and stockholders' equity
 
$
361,218



11
NATIONAL GENERAL HOLDINGS CORP.

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

For the three months ended June 30, 2015, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $34,754, $36,975 and $(2,221), respectively. For the six months ended June 30, 2015, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $84,204, $86,289 and $(2,085), respectively.

For the three and six months ended June 30, 2015, the Company earned service and fee income from the Reciprocal Exchanges in the amount of $10,732 and $19,310, respectively. Such amounts are eliminated in our consolidated earnings.


4. Investments

(a) Available-for-Sale Securities

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

June 30, 2015
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
50,934

 
$
2,460

 
$
(2,476
)
 
$
50,918

   Preferred stock
 
6,504

 
23

 
(82
)
 
6,445

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury
 
17,205

 
1,099

 
(7
)
 
18,297

   States and political subdivision bonds
 
164,522

 
3,204

 
(1,024
)
 
166,702

   Foreign government
 
10,771

 
—

 
(1,152
)
 
9,619

   Corporate bonds
 
950,507

 
29,343

 
(14,137
)
 
965,713

   Residential mortgage-backed securities
 
397,971

 
7,204

 
(1,017
)
 
404,158

   Commercial mortgage-backed securities
 
190,873

 
1,071

 
(2,210
)
 
189,734

Total
 
$
1,789,287

 
$
44,404

 
$
(22,105
)
 
$
1,811,586

Less: Securities pledged
 
68,942

 
231

 
(347
)
 
68,826

Total net of Securities pledged
 
$
1,720,345

 
$
44,173

 
$
(21,758
)
 
$
1,742,760

NGHC
 
$
1,561,862

 
$
43,646

 
$
(18,890
)
 
$
1,586,618

Reciprocal Exchanges
 
227,425

 
758

 
(3,215
)
 
224,968

Total
 
$
1,789,287

 
$
44,404

 
$
(22,105
)
 
$
1,811,586



12
NATIONAL GENERAL HOLDINGS CORP.

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

December 31, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Equity securities:
 
 
 
 
 
 
 
 
   Common stock
 
$
47,269

 
$
1,004

 
$
(7,349
)
 
$
40,924

   Preferred stock
 
7,755

 
65

 
(125
)
 
7,695

Fixed maturities:
 
 
 
 
 
 
 
 
   U.S. Treasury
 
37,446

 
1,536

 
(3
)
 
38,979

   Federal agencies
 
98

 
—

 
—

 
98

   States and political subdivision bonds
 
172,617

 
4,961

 
(169
)
 
177,409

   Foreign government
 
6,194

 
—

 
(658
)
 
5,536

   Corporate bonds
 
839,436

 
36,525

 
(8,699
)
 
867,262

   Residential mortgage-backed securities
 
459,596

 
11,132

 
(92
)
 
470,636

   Commercial mortgage-backed securities
 
79,579

 
1,602

 
(189
)
 
80,992

   Asset-backed securities
 
5,461

 
—

 
(91
)
 
5,370

Total
 
$
1,655,451

 
$
56,825

 
$
(17,375
)
 
$
1,694,901

Less: Securities pledged
 
47,546

 
1,910

 
—

 
49,456

Total net of Securities pledged
 
$
1,607,905

 
$
54,915

 
$
(17,375
)
 
$
1,645,445

NGHC
 
$
1,430,578

 
$
55,031

 
$
(16,264
)
 
$
1,469,345

Reciprocal Exchanges
 
224,873

 
1,794

 
(1,111
)
 
225,556

Total
 
$
1,655,451

 
$
56,825

 
$
(17,375
)
 
$
1,694,901


The amortized cost and fair value of available-for-sale fixed maturities and securities pledged, held as of June 30, 2015, 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
June 30, 2015
 
Cost or Amortized
Cost
 
Fair
Value
 
Cost or Amortized
Cost
 
Fair
Value
 
Cost or Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
10,376

 
$
10,354

 
$
767

 
$
766

 
$
11,143

 
$
11,120

Due after one year through five years
 
224,073

 
238,663

 
13,591

 
13,528

 
237,664

 
252,191

Due after five years through ten years
 
669,281

 
673,236

 
113,451

 
112,192

 
782,732

 
785,428

Due after ten years
 
86,618

 
87,075

 
24,848

 
24,517

 
111,466

 
111,592

Mortgage-backed securities
 
515,577

 
521,442

 
73,267

 
72,450

 
588,844

 
593,892

Total
 
$
1,505,925

 
$
1,530,770

 
$
225,924

 
$
223,453

 
$
1,731,849

 
$
1,754,223




13
NATIONAL GENERAL HOLDINGS CORP.

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

(b) Investment Income

The components of net investment income consisted of the following:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Interest
 
 
 
 
 
 
 
 
Cash and short term investments
 
$
4

 
$
7

 
$
9

 
$
17

Equity securities
 
122

 
—

 
197

 
—

Fixed maturities
 
15,916

 
11,926

 
30,922

 
21,679

Investment Income
 
16,042

 
11,933

 
31,128

 
21,696

Investment expense
 
(59
)
 
(560
)
 
(1,271
)
 
(1,029
)
Repurchase Agreements interest expense
 
(33
)
 
(52
)
 
(103
)
 
(132
)
Other Income (1)
 
2,385

 
—

 
4,729

 
—

Net Investment Income
 
$
18,335

 
$
11,321

 
$
34,483

 
$
20,535

NGHC
 
$
16,154

 
$
11,321

 
$
30,263

 
$
20,535

Reciprocal Exchanges
 
2,181

 
—

 
4,220

 
—

Net Investment Income
 
$
18,335

 
$
11,321

 
$
34,483

 
$
20,535


(1) Includes interest income of $2,211 and $4,399 for the three and six months ended June 30, 2015, respectively, under the ACP Re Credit Agreement (see Note 15, "Related Party Transactions").


(c) Realized Gains and Losses

Proceeds from sales of equity securities and fixed maturities during the six months ended June 30, 2015 and 2014 were $114,496 and $0, respectively. For the three and six months ended June 30, 2015, the Company recognized an other-than-temporary impairment ("OTTI") loss of $1,467 and $2,483, respectively, on investments based on our qualitative and quantitative review.

The tables below indicate the gross realized gains and losses (including any OTTI) for the three and six months ended June 30, 2015 and 2014.

Three Months Ended June 30, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$
5

 
$
—

 
$
5

Fixed maturities
 
2,466

 
(615
)
 
1,851

OTTI
 
—

 
(1,467
)
 
(1,467
)
Total gross realized gains and losses
 
$
2,471

 
$
(2,082
)
 
$
389

NGHC
 
$
2,415

 
$
(1,480
)
 
$
935

Reciprocal Exchanges
 
56

 
(602
)
 
(546
)
Total gross realized gains and losses
 
$
2,471

 
$
(2,082
)
 
$
389

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

 
$
—

 
$
—

Fixed maturities
 
—

 
—

 
—

Total gross realized gains and losses
 
$
—

 
$
—

 
$
—


14
NATIONAL GENERAL HOLDINGS CORP.

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

Six Months Ended June 30, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$
5

 
$
—

 
$
5

Fixed maturities
 
5,090

 
(1,036
)
 
4,054

OTTI
 
—

 
(2,483
)
 
(2,483
)
Total gross realized gains and losses
 
$
5,095

 
$
(3,519
)
 
$
1,576

NGHC
 
$
4,188

 
$
(2,759
)
 
$
1,429

Reciprocal Exchanges
 
907

 
(760
)
 
147

Total gross realized gains and losses
 
$
5,095

 
$
(3,519
)
 
$
1,576

Six Months Ended June 30, 2014
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Equity securities
 
$
—

 
$
—

 
$
—

Fixed maturities
 
—

 
—

 
—

Total gross realized gains and losses
 
$
—

 
$
—

 
$
—



(d) Unrealized Gains and Losses

Unrealized gains (losses) on investments at June 30, 2015 and December 31, 2014 consisted of the following:

 
 
June 30, 2015
 
December 31, 2014
Net unrealized loss on common stock
 
$
(16
)
 
$
(6,345
)
Net unrealized gain (loss) on preferred stock
 
(59
)
 
(60
)
Net unrealized gains on fixed maturities
 
22,375

 
45,855

Net unrealized gain (loss) on other
 
—

 
18

Deferred income tax expense
 
(8,708
)
 
(13,787
)
Net unrealized gains, net of deferred income tax expense
 
$
13,592

 
$
25,681

NGHC
 
$
16,047

 
$
24,998

Reciprocal Exchanges
 
(2,455
)
 
683

Net unrealized gains, net of deferred income tax expense
 
13,592

 
25,681

Non-controlling interest
 
2,455

 
(683
)
NGHC net unrealized gains, net of deferred income tax expense
 
$
16,047

 
$
24,998

Period Ended:
 
 
 
 
NGHC year-to-date change in net unrealized gains, net of deferred income tax expense
 
$
(8,951
)
 
$
17,938




15
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 on equity securities and fixed maturities by length of time the security has continuously been in an unrealized loss position as of June 30, 2015 and December 31, 2014:

 
 
Less Than 12 Months
 
12 Months or More
 
Total
June 30, 2015
 
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
 
$
33,276

 
$
(2,476
)
 
4

 
$
—

 
$
—

 
—

 
$
33,276

 
$
(2,476
)
Preferred stock
 
5,494

 
(82
)
 
2

 
—

 
—

 
—

 
5,494

 
(82
)
U.S. Treasury
 
194

 
(7
)
 
1

 
—

 
—

 
—

 
194

 
(7
)
States and political subdivision bonds
 
54,287

 
(915
)
 
61

 
1,709

 
(109
)
 
4

 
55,996

 
(1,024
)
Foreign government
 
9,619

 
(1,152
)
 
1

 
—

 
—

 
—

 
9,619

 
(1,152
)
Corporate bonds
 
300,909

 
(11,807
)
 
139

 
25,198

 
(2,330
)
 
9

 
326,107

 
(14,137
)
Residential mortgage-backed securities
 
90,727

 
(978
)
 
18

 
1,787

 
(39
)
 
5

 
92,514

 
(1,017
)
Commercial mortgage-backed securities
 
131,148

 
(2,210
)
 
51

 
—

 
—

 
—

 
131,148

 
(2,210
)
Total
 
$
625,654

 
$
(19,627
)
 
277

 
$
28,694

 
$
(2,478
)
 
18

 
$
654,348

 
$
(22,105
)
NGHC
 
$
498,640

 
$
(16,412
)
 
175

 
$
28,694

 
$
(2,478
)
 
18

 
$
527,334

 
$
(18,890
)
Reciprocal Exchanges
 
127,014

 
(3,215
)
 
102

 
—

 
—

 
—

 
127,014

 
(3,215
)
Total
 
$
625,654

 
$
(19,627
)
 
277

 
$
28,694

 
$
(2,478
)
 
18

 
$
654,348

 
$
(22,105
)
 
 
Less Than 12 Months
 
12 Months or More
 
Total
December 31, 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
 
$
33,717

 
$
(7,349
)
 
3

 
$
—

 
$
—

 
—

 
$
33,717

 
$
(7,349
)
Preferred stock
 
—

 
—

 
—

 
4,878

 
(125
)
 
1

 
4,878

 
(125
)
U.S. Treasury
 
6,343

 
(3
)
 
5

 
—

 
—

 
—

 
6,343

 
(3
)
States and political subdivision bonds
 
16,320

 
(92
)
 
39

 
8,341

 
(77
)
 
8

 
24,661

 
(169
)
Foreign government
 
5,536

 
(658
)
 
1

 
—

 
—

 
—

 
5,536

 
(658
)
Corporate bonds
 
116,880

 
(5,594
)
 
108

 
23,592

 
(3,105
)
 
10

 
140,472

 
(8,699
)
Residential mortgage-backed securities
 
15,598

 
(34
)
 
17

 
1,975

 
(58
)
 
3

 
17,573

 
(92
)
Commercial mortgage-backed securities
 
33,735

 
(189
)
 
10

 
—

 
—

 
—

 
33,735

 
(189
)
Asset-backed securities
 
4,869

 
(91
)
 
3

 
—

 
—

 
—

 
4,869

 
(91
)
Total
 
$
232,998

 
$
(14,010
)
 
186

 
$
38,786

 
$
(3,365
)
 
22

 
$
271,784

 
$
(17,375
)
NGHC
 
$
142,313

 
$
(12,899
)
 
97

 
$
38,786

 
$
(3,365
)
 
22

 
$
181,099

 
$
(16,264
)
Reciprocal Exchanges
 
90,685

 
(1,111
)
 
89

 
—

 
—

 
—

 
90,685

 
(1,111
)
Total
 
$
232,998

 
$
(14,010
)
 
186

 
$
38,786

 
$
(3,365
)
 
22

 
$
271,784

 
$
(17,375
)

There were 295 and 208 securities at June 30, 2015 and December 31, 2014, respectively, that account for the gross unrealized loss, none of which are deemed by the Company to be an OTTI. At June 30, 2015, we have determined that the unrealized losses on fixed maturities were primarily due to market interest rate movements since their date of purchase. Significant factors influencing the Company’s determination that none of the securities are OTTI included the magnitude of unrealized losses in relation to cost,

16
NATIONAL GENERAL HOLDINGS CORP.

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

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) Credit Quality of Investments

The tables below summarize the credit quality of our fixed maturities, securities pledged and preferred securities as of June 30, 2015 and December 31, 2014, as rated by Standard & Poor’s.

 
 
NGHC
 
Reciprocal Exchanges
June 30, 2015
 
Cost or Amortized Cost
 
Fair Value
 
Percentage of Fixed Maturities and Preferred Securities
 
Cost or Amortized Cost
 
Fair Value
 
Percentage of Fixed Maturities and Preferred Securities
U.S. Treasury
 
$
13,504

 
$
14,562

 
0.9
%
 
$
3,701

 
$
3,735

 
1.7
%
AAA
 
300,993

 
305,988

 
19.9
%
 
13,487

 
13,269

 
5.9
%
AA, AA+, AA-
 
296,148

 
300,202

 
19.6
%
 
28,642

 
28,670

 
12.7
%
A, A+, A-
 
325,933

 
337,568

 
22.0
%
 
54,232

 
53,809

 
23.9
%
BBB, BBB+, BBB-