National General 10Q 2019 Q1 Quarterly report

National General (NTTNP) 10-Q2019 Q1 Quarterly report

Content analysis

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 March 31, 2019



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)		(I.R.S. 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer x		Accelerated Filer o
Non-Accelerated Filer o		Smaller Reporting Company o
		Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	NGHC	The Nasdaq Stock Market LLC
7.50% Non-Cumulative Preferred Stock, Series A	NGHCP	The Nasdaq Stock Market LLC
Depositary Shares, each Representing 1/40th of a Share of 7.50% Non-Cumulative Preferred Stock, Series B	NGHCO	The Nasdaq Stock Market LLC
Depositary Shares, each Representing 1/40th of a Share of 7.50% Non-Cumulative Preferred Stock, Series C	NGHCN	The Nasdaq Stock Market LLC
7.625% Subordinated Notes due 2055	NGHCZ	The Nasdaq Stock Market LLC

As of May 2, 2019, the number of common shares of the registrant outstanding was 113,168,026.

NATIONAL GENERAL HOLDINGS CORP.

TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Income - Three Months Ended March 31, 2019 and 2018	3
	Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity - Three Months Ended March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	64

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 6.	Exhibits	65
	Signatures	66

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL GENERAL HOLDINGS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Shares and Par Value per Share) (Unaudited)




	March 31,		December 31,
	2019		2018
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (Exchanges - $299,282 and $297,083)	$	3,635,347	$	3,561,032
Equity securities, at fair value	10,285		10,949
Short-term investments (Exchanges - $19,632 and $17,328)	390,052		348,549
Other investments (related parties - $233,555 and $233,723)	305,971		306,276
Total investments	4,341,655		4,226,806
Cash and cash equivalents	188,064		193,858
Restricted cash and cash equivalents (Exchanges - $293 and $200)	32,208		39,725
Accrued investment income (related parties - $1,188 and $2,362) (Exchanges - $2,135 and $1,596)	26,451		27,177
Premiums and other receivables, net (Exchanges - $60,293 and $61,327)	1,608,251		1,399,812
Deferred acquisition costs (Exchanges - $20,305 and $20,007)	268,177		251,408
Reinsurance recoverable (related parties - $6,136 and $7,425) (Exchanges - $125,722 and $117,068)	1,489,565		1,611,738
Prepaid reinsurance premiums (Exchanges - $127,210 and $136,433)	637,024		665,674
Premises and equipment, net (Exchanges - $1,183 and $1,695)	413,180		308,004
Intangible assets, net (Exchanges - $3,360 and $3,405)	372,812		379,937
Goodwill	180,183		180,183
Prepaid and other assets (Exchanges - $5,592 and $4,581)	73,997		154,958
Total assets	$	9,631,567	$	9,439,280

See accompanying notes to unaudited condensed consolidated financial statements.

NATIONAL GENERAL HOLDINGS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Shares and Par Value per Share) (Unaudited)




	March 31,			December 31,
	2019			2018
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves (Exchanges - $196,022 and $178,470)	$	2,870,323		$	2,957,159
Unearned premiums and other revenue (Exchanges - $258,701 and $265,763)	2,440,280			2,280,728
Reinsurance payable (Exchanges - $31,579 and $40,393)	524,859			656,265
Accounts payable and accrued expenses (related parties - $19,196 and $69,874) (Exchanges - $6,160 and $7,720)	362,267			398,058
Debt	710,196			705,795
Other liabilities (Exchanges - $58,539 and $61,640)	392,160			240,404
Total liabilities	$	7,300,085		$	7,238,409
Commitments and contingencies (Note 10)

Stockholders’ equity:
Common stock, $0.01 par value - authorized 150,000,000 shares, issued and outstanding 113,137,346 shares - 2019; authorized 150,000,000 shares, issued and outstanding 112,940,595 shares - 2018.	$	1,131		$	1,129
Preferred stock, $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,120 shares - 2019; authorized 10,000,000 shares, issued and outstanding 2,565,120 shares - 2018. Aggregate liquidation preference $450,000 - 2019, $450,000 - 2018.	450,000			450,000
Additional paid-in capital	1,058,061			1,057,783
Accumulated other comprehensive income:
Unrealized foreign currency translation adjustment, net of tax	(17,825		)	(14,461		)
Unrealized gain (loss) on investments, net of tax	18,406			(37,669		)
Total accumulated other comprehensive income (loss)	581			(52,130		)
Retained earnings	843,415			764,056
Total National General Holdings Corp. Stockholders’ Equity	2,353,188			2,220,838
Non-controlling interest	(21,706		)	(19,967		)
Total stockholders’ equity	$	2,331,482		$	2,200,871
Total liabilities and stockholders’ equity	$	9,631,567		$	9,439,280

See accompanying notes to unaudited condensed consolidated financial statements.

NATIONAL GENERAL HOLDINGS CORP. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Data) (Unaudited)




	Three Months Ended March 31,
	2019			2018
Revenues:
Net earned premium	$	964,157		$	905,538
Ceding commission income	69,534			44,468
Service and fee income	165,507			142,122
Net investment income	33,445			25,011
Net gain on investments	22			118
Total revenues	1,232,665			1,117,257
Expenses:
Loss and loss adjustment expense	651,809			634,166
Acquisition costs and other underwriting expenses	211,918			168,710
General and administrative expenses	248,094			231,005
Interest expense	12,999			11,154
Total expenses	1,124,820			1,045,035
Income before provision for income taxes	107,845			72,222
Provision for income taxes	22,506			16,202
Net income	85,339			56,020
Net (income) loss attributable to non-controlling interest	6,419			12,188
Net income attributable to NGHC	91,758			68,208
Dividends on preferred stock	(7,875		)	(7,875		)
Net income attributable to NGHC common stockholders	$	83,883		$	60,333

Earnings per common share (“EPS”):
Basic EPS	$	0.74		$	0.57
Diluted EPS	$	0.72		$	0.55

See accompanying notes to unaudited condensed consolidated financial statements.

NATIONAL GENERAL HOLDINGS CORP. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)




	Three Months Ended March 31,
	2019			2018
Net income	$	85,339		$	56,020

Other comprehensive income:
Foreign currency translation adjustment	(4,253		)	(907		)
Income tax effect	889			188
Total foreign currency translation adjustment, net of tax	(3,364		)	(719		)

Gross unrealized gain (loss) on investments before reclassifications	76,785			(53,206		)
Income tax effect	(16,125		)	11,173
Total change in net unrealized gain (loss) on investments, net of tax	60,660			(42,033		)
Reclassification adjustments for investments gain/loss to net income:
Net realized loss on investments	120			2
Income tax effect	(25		)	—
Total loss on investments reclassifications to net income, net of tax	95			2

Other comprehensive income (loss) before income tax effect	72,652			(54,111		)
Income tax effect	(15,261		)	11,361
Other comprehensive income (loss), net of tax	57,391			(42,750		)
Comprehensive income	142,730			13,270
Comprehensive (income) loss attributable to non-controlling interest	1,739			17,292
Comprehensive income attributable to NGHC	$	144,469		$	30,562

See accompanying notes to unaudited condensed consolidated financial statements.

NATIONAL GENERAL HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Shares and Per Share Data)

(Unaudited)



	Three Months Ended March 31, 2019
	Common Stock				Preferred Stock
	Shares		$		Shares	$		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Non-controlling Interest			Total
Balance January 1, 2019	112,940,595		$	1,129	2,565,120	$	450,000	$	1,057,783		$	(52,130	)	$	764,056		$	(19,967	)	$	2,200,871
Net income (loss)	—		—		—	—		—			—			91,758			(6,419		)	85,339
Foreign currency translation adjustment, net of tax	—		—		—	—		—			(3,364		)	—			—			(3,364		)
Change in unrealized gain on investments, net of tax	—		—		—	—		—			56,075			—			4,680			60,755
Common stock dividends declared ($0.04 per share)	—		—		—	—		—			—			(4,524		)	—			(4,524		)
Preferred stock dividends declared (Series A - $0.46875, Series B and C - $18.75 and Series D - $0 per share)	—		—		—	—		—			—			(7,875		)	—			(7,875		)
Common stock issued under employee stock plans and exercises of stock options	292,276		2		—	—		91			—			—			—			93
Shares withheld related to net share settlement	(95,525	)	—		—	—		(2,435		)	—			—			—			(2,435		)
Stock-based compensation	—		—		—	—		2,622			—			—			—			2,622
Balance March 31, 2019	113,137,346		$	1,131	2,565,120	$	450,000	$	1,058,061		$	581		$	843,415		$	(21,706	)	$	2,331,482



	Three Months Ended March 31, 2018
	Common Stock				Preferred Stock
	Shares		$		Shares	$		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Non-controlling Interest			Total
Balance January 1, 2018	106,697,648		$	1,067	2,565,000	$	420,000	$	917,751		$	(8,112	)	$	597,863		$	24,856		$	1,953,425
Cumulative-effect adjustment of change in accounting principles	—		—		—	—		—			36			8,794			—			8,830
Net income (loss)	—		—		—	—		—			—			68,208			(12,188		)	56,020
Foreign currency translation adjustment, net of tax	—		—		—	—		—			(719		)	—			—			(719		)
Change in unrealized loss on investments, net of tax	—		—		—	—		—			(36,927		)	—			(5,104		)	(42,031		)
Common stock dividends declared ($0.04 per share)	—		—		—	—		—			—			(4,277		)	—			(4,277		)
Preferred stock dividends declared (Series A - $0.46875, and Series B and C - $18.75)	—		—		—	—		—			—			(7,875		)	—			(7,875		)
Common stock issued under employee stock plans and exercises of stock options	251,491		2		—	—		490			—			—			—			492
Shares withheld related to net share settlement	(61,573	)	—		—	—		(1,342		)	—			—			—			(1,342		)
Stock-based compensation	—		—		—	—		2,130			—			—			—			2,130
Balance March 31, 2018	106,887,566		$	1,069	2,565,000	$	420,000	$	919,029		$	(45,722	)	$	662,713		$	7,564		$	1,964,653

See accompanying notes to unaudited condensed consolidated financial statements.

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




	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	85,339		$	56,020
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Net (gain) loss on investments	(22		)	(118		)
Bad debt expense	20,967			20,184
Depreciation and amortization	27,135			20,141
Stock-compensation expense	2,622			2,130
Other, net	(1,251		)	(7,088		)
Changes in assets and liabilities:
Accrued investment income	658			(1,082		)
Premiums and other receivables	(228,239		)	(200,150		)
Deferred acquisition costs	(17,020		)	(20,755		)
Reinsurance recoverable	121,500			(40,537		)
Prepaid reinsurance premiums	28,058			(11,648		)
Prepaid expenses and other assets	82,591			38,712
Unpaid loss and loss adjustment expense reserves	(83,073		)	17,044
Unearned premiums and other revenue	161,680			213,465
Reinsurance payable	(130,353		)	39,036
Accounts payable and accrued expenses	9,458			(52,811		)
Other liabilities	35,160			(20,601		)
Net cash provided by operating activities	115,210			51,942
Cash flows from investing activities:
Purchases of:
Debt securities, available-for-sale	(94,525		)	(310,241		)
Short-term investments	(678,000		)	(906,325		)
Other investments	(110		)	(2,979		)
Premises and equipment	(57,622		)	(5,716		)
Proceeds from:
Sale and maturity of debt securities, available-for-sale	83,138			193,733
Sale of equity securities	1,700			—
Sale of short-term investments	637,682			904,788
Sale and return of other investments	1,105			109,793
Net cash used in investing activities	$	(106,632	)	$	(16,947	)

See accompanying notes to unaudited condensed consolidated financial statements.

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




	Three Months Ended March 31,
	2019			2018
Cash flows from financing activities:
Payments of debt issuance costs	$	(1,726	)	$	—
Repayments of debt and principal payments under capital leases obligations	(3,034		)	—
Issuance of common stock — employee share options	93			492
Taxes paid related to net share settlement of equity awards	(2,435		)	(1,342		)
Dividends paid to common shareholders	(4,518		)	(4,268		)
Dividends paid to preferred shareholders	(8,867		)	(7,875		)
Net cash used in financing activities	(20,487		)	(12,993		)
Effect of exchange rate changes on cash and cash equivalents	(1,402		)	(1,433		)
Net (decrease) increase in cash, cash equivalents, and restricted cash	(13,311		)	20,569
Cash, cash equivalents, and restricted cash at beginning of the period	233,583			357,484
Cash, cash equivalents, and restricted cash at end of the period	$	220,272		$	378,053

Supplemental disclosures of non-cash financing activities:
Accrued common stock dividends	$	4,524		$	4,277
Accrued preferred stock dividends	7,875			7,875

See accompanying notes to unaudited condensed consolidated financial statements.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

1. Basis of Reporting

The accompanying unaudited interim condensed consolidated financial statements include the accounts of National General Holdings Corp. and its subsidiaries (the “Company” or “NGHC”) and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 previously filed with the SEC on February 25, 2019. The balance sheet at December 31, 2018, has been derived from the audited consolidated financial statements at that date.

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

The unaudited condensed consolidated financial statements include the accounts and operations of Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer (together with their subsidiaries, the “Exchanges” or “Reciprocal Exchanges”). The Company has no ownership interest in the Reciprocal Exchanges but manages their business operations and has the ability to direct their activities through its wholly-owned management companies. The Reciprocal Exchanges are property and casualty insurers.

As of December 31, 2018, the Company reclassified finance lease liabilities in the amount of $30,346 from “Other liabilities” to “Debt” on the Condensed Consolidated Balance Sheets to conform to the current-year presentation.

A detailed description of the Company’s significant accounting policies and management judgments is located in the notes to the audited consolidated financial statements, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

2. Recent Accounting Pronouncements

Adopted During 2019

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

Not Yet Adopted

With the exception of the adopted or not yet adopted accounting pronouncements discussed here, there have been no recent accounting pronouncements, or quantitative or qualitative progress made towards implementation of outstanding accounting pronouncements during the three months ended March 31, 2019, as compared to those described in Note 2, “Significant Accounting Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, that are of significance, or potential significance, to the Company.



Standard	Description	Effective Date	Effect on the Company
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.	This standard significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. Companies will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” the amendment to ASU 2016-13 which clarifies that receivables arising from operating leases are not within the scope of Topic 326 and impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases.	January 1, 2020	Based on the financial instruments currently held by the Company, it does not expect a material effect on the Company’s consolidated financial condition, results of operations, cash flows and disclosures if the new guidance were able to be adopted in the current accounting period. The impact on the Company’s consolidated financial condition, results of operations, cash flows and disclosures at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time. The Company’s implementation and evaluation process to date includes, but is not limited to, identifying the financial assets within the scope of the guidance and assessing models for the relevant financial assets.
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.	This standard establishes a one-step process for testing the value of the goodwill which an entity carries. ASU 2017-04 requires the goodwill impairment to be measured as the excess of the reporting unit’s carrying amount over its fair value. Early adoption is permitted for interim or annual goodwill impairment tests.	January 1, 2020	Based on the goodwill currently held by the Company, there would not be a material effect on the Company’s consolidated financial condition, results of operations, cash flows and disclosures if the new guidance were able to be adopted in the current accounting period.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

3. Investments

(a) Available-For-Sale Debt Securities

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



March 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury	$	61,814	$	1,348	$	(179	)	$	62,983
Federal agencies	25,611		22		(17		)	25,616
States and political subdivision bonds	258,204		3,222		(523		)	260,903
Foreign government	142,324		2,894		—			145,218
Corporate bonds	1,332,739		23,098		(6,287		)	1,349,550
Residential mortgage-backed securities	937,003		3,844		(9,837		)	931,010
Commercial mortgage-backed securities	547,557		14,281		(4,766		)	557,072
Asset-backed securities	61,198		941		(53		)	62,086
Structured securities	245,552		179		(4,822		)	240,909
Total	$	3,612,002	$	49,829	$	(26,484	)	$	3,635,347
NGHC	$	3,312,760	$	47,687	$	(24,382	)	$	3,336,065
Reciprocal Exchanges	299,242		2,142		(2,102		)	299,282
Total	$	3,612,002	$	49,829	$	(26,484	)	$	3,635,347



December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury	$	64,829	$	1,026	$	(262	)	$	65,593
Federal agencies	37,842		22		(389		)	37,475
States and political subdivision bonds	274,367		1,369		(3,539		)	272,197
Foreign government	151,443		993		(70		)	152,366
Corporate bonds	1,283,061		3,094		(25,450		)	1,260,705
Residential mortgage-backed securities	944,365		716		(19,965		)	925,116
Commercial mortgage-backed securities	548,192		3,757		(6,974		)	544,975
Asset-backed securities	60,563		705		(121		)	61,147
Structured securities	249,947		99		(8,588		)	241,458
Total	$	3,614,609	$	11,781	$	(65,358	)	$	3,561,032
NGHC	$	3,311,639	$	11,206	$	(58,896	)	$	3,263,949
Reciprocal Exchanges	302,970		575		(6,462		)	297,083
Total	$	3,614,609	$	11,781	$	(65,358	)	$	3,561,032

As of March 31, 2019 and December 31, 2018, the Company had no other-than-temporary impairments (“OTTI”) in AOCI related to available-for-sale debt securities.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

The amortized cost and fair value of available-for-sale debt securities held as of March 31, 2019, 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
March 31, 2019	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	30,231	$	30,138	$	300	$	300	$	30,531	$	30,438
Due after one year through five years	803,464		811,067		157,364		156,838		960,828		967,905
Due after five years through ten years	775,802		788,585		44,621		45,048		820,423		833,633
Due after ten years	242,711		241,384		11,751		11,819		254,462		253,203
Mortgage-backed securities	1,460,552		1,464,891		85,206		85,277		1,545,758		1,550,168
Total	$	3,312,760	$	3,336,065	$	299,242	$	299,282	$	3,612,002	$	3,635,347

(b) Gross Unrealized Losses

The tables below summarize the gross unrealized losses on debt securities classified as available for sale, by length of time the security has continuously been in an unrealized loss position.



	Less Than 12 Months					12 Months or More					Total
March 31, 2019	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury	$	17,811	$	(5	)	$	19,397	$	(174	)	$	37,208	$	(179	)
Federal agencies	4,897		(3		)	719		(14		)	5,616		(17		)
States and political subdivision bonds	9,247		(32		)	73,312		(491		)	82,559		(523		)
Foreign government	500		—			—		—			500		—
Corporate bonds	50,725		(196		)	368,397		(6,091		)	419,122		(6,287		)
Residential mortgage-backed securities	91,162		(1,655		)	485,077		(8,182		)	576,239		(9,837		)
Commercial mortgage-backed securities	—		—			151,359		(4,766		)	151,359		(4,766		)
Asset-backed securities	340		—			1,752		(53		)	2,092		(53		)
Structured securities	165,574		(3,796		)	21,169		(1,026		)	186,743		(4,822		)
Total	$	340,256	$	(5,687	)	$	1,121,182	$	(20,797	)	$	1,461,438	$	(26,484	)
NGHC	$	315,312	$	(5,452	)	$	965,236	$	(18,930	)	$	1,280,548	$	(24,382	)
Reciprocal Exchanges	24,944		(235		)	155,946		(1,867		)	180,890		(2,102		)
Total	$	340,256	$	(5,687	)	$	1,121,182	$	(20,797	)	$	1,461,438	$	(26,484	)

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)



	Less Than 12 Months					12 Months or More					Total
December 31, 2018	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury	$	474	$	(2	)	$	21,540	$	(260	)	$	22,014	$	(262	)
Federal agencies	23,729		(351		)	1,493		(38		)	25,222		(389		)
States and political subdivision bonds	57,090		(902		)	119,759		(2,637		)	176,849		(3,539		)
Foreign government	45,748		(70		)	—		—			45,748		(70		)
Corporate bonds	586,359		(12,891		)	321,115		(12,559		)	907,474		(25,450		)
Residential mortgage-backed securities	234,396		(1,637		)	551,623		(18,328		)	786,019		(19,965		)
Commercial mortgage-backed securities	13,229		(239		)	148,700		(6,735		)	161,929		(6,974		)
Asset-backed securities	25,978		(78		)	1,494		(43		)	27,472		(121		)
Structured securities	222,154		(8,136		)	6,167		(452		)	228,321		(8,588		)
Total	$	1,209,157	$	(24,306	)	$	1,171,891	$	(41,052	)	$	2,381,048	$	(65,358	)
NGHC	$	1,115,823	$	(22,668	)	$	1,018,975	$	(36,228	)	$	2,134,798	$	(58,896	)
Reciprocal Exchanges	93,334		(1,638		)	152,916		(4,824		)	246,250		(6,462		)
Total	$	1,209,157	$	(24,306	)	$	1,171,891	$	(41,052	)	$	2,381,048	$	(65,358	)

There were 857 and 1,662 individual security lots at March 31, 2019 and December 31, 2018, respectively, that accounted for the gross unrealized loss, none of which are deemed by the Company to be other-than-temporary impairments. As of March 31, 2019 and December 31, 2018, of the $20,797 and $41,052, respectively, of unrealized losses in unrealized loss positions for a period of twelve or more consecutive months, none of those securities were greater than or equal to 25% of its amortized cost.

Factors influencing management’s determination that none of these securities were OTTI included the length of time and/or magnitude of unrealized losses in relation to cost, the nature of the investment, the current financial condition of the issuer and its future prospects, the ability to recover to cost in the near term, 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. The Company regularly monitors its investments that have fair values less than cost or amortized cost for indicators of OTTI, an assessment that requires management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known, which could negatively impact the amounts reported.

The Company’s debt securities portfolio is sensitive to interest rate fluctuations, which impact the fair value of individual securities. Unrealized losses on debt securities reported above were primarily caused by the effects of the interest rate environment. Therefore, the Company does not believe the unrealized losses represent an OTTI as of March 31, 2019 and December 31, 2018.

The fair values of equity securities were as follows:



	March 31, 2019		December 31, 2018
Common stock	$	10,285	$	10,949
Total	$	10,285	$	10,949
NGHC	$	10,285	$	10,949
Reciprocal Exchanges	—		—
Total	$	10,285	$	10,949

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

(d) Investment Income

The components of net investment income consisted of the following:



	Three Months Ended March 31,
	2019			2018
Cash and short-term investments	$	1,497		$	187
Debt securities	29,467			24,256
Equity securities	2			155
Other, net (related parties - $254 and $(295))	3,506			1,821
Investment income	34,472			26,419
Investment expenses	(1,027		)	(1,408		)
Net investment income	$	33,445		$	25,011
NGHC	$	31,275		$	22,867
Reciprocal Exchanges	2,170			2,144
Net investment income	$	33,445		$	25,011

(e) Net Realized Gains (Losses)

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



	Three Months Ended March 31,
	2019			2018
Debt securities, available-for-sale:
Gross gains	$	136		$	1,169
Gross losses	(256		)	(1,171		)
Net realized gain (loss) on debt securities, available-for-sale	(120		)	(2		)
Equity securities	1,036			(1,048		)
Short-term and other investments	(1		)	(4		)
Foreign currency transactions	(893		)	1,172
Net realized gain on investments	$	22		$	118
NGHC	$	766		$	249
Reciprocal Exchanges	(744		)	(131		)
Net realized gain on investments	$	22		$	118

Net gains and losses recognized during the reporting period on equity securities still held at the reporting date were as follows:



	Three Months Ended March 31,
	2019		2018
Net gains (losses) recognized during the period	$	1,036	$	(1,048	)
Less: Net gains (losses) recognized during the period on securities sold during the period	—		—
Net gains (losses) recognized during the reporting period on securities still held at the reporting date	$	1,036	$	(1,048	)

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

(f) Credit Quality of Investments

The tables below summarize the credit quality of debt securities, as rated by Standard & Poor’s (“S&P”). If a security is not rated by S&P, an S&P equivalent is determined based on ratings from similar rating agencies. Securities that are not rated are included in the “BB+ and lower” category.



	NGHC						Reciprocal Exchanges
March 31, 2019	Amortized Cost		Fair Value		Percentage		Amortized Cost		Fair Value		Percentage
U.S. Treasury	$	48,823	$	49,736	1.5	%	$	12,991	$	13,247	4.4	%
AAA	574,775		589,125		17.7	%	18,283		18,408		6.2	%
AA, AA+, AA-	1,368,935		1,363,545		40.9	%	129,590		129,337		43.2	%
A, A+, A-	615,601		621,717		18.6	%	127,511		127,668		42.7	%
BBB, BBB+, BBB-	664,992		673,198		20.2	%	10,835		10,590		3.5	%
BB+ and lower	39,634		38,744		1.1	%	32		32		—	%
Total	$	3,312,760	$	3,336,065	100.0	%	$	299,242	$	299,282	100.0	%



	NGHC						Reciprocal Exchanges
December 31, 2018	Amortized Cost		Fair Value		Percentage		Amortized Cost		Fair Value		Percentage
U.S. Treasury	$	52,122	$	52,759	1.6	%	$	12,707	$	12,834	4.3	%
AAA	586,639		589,078		18.0	%	18,335		18,109		6.1	%
AA, AA+, AA-	1,385,709		1,358,528		41.6	%	142,525		140,114		47.2	%
A, A+, A-	591,219		581,106		17.8	%	118,535		115,618		38.9	%
BBB, BBB+, BBB-	653,645		641,554		19.7	%	10,834		10,374		3.5	%
BB+ and lower	42,305		40,924		1.3	%	34		34		—	%
Total	$	3,311,639	$	3,263,949	100.0	%	$	302,970	$	297,083	100.0	%

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



March 31, 2019	AAA		AA+, AA, AA-		A+,A,A-		BBB+, BBB, BBB-		BB+ or Lower		Fair Value		% of Corporate Bonds Portfolio
Financial Institutions	—	%	4.4	%	24.1	%	14.5	%	0.7	%	$	589,699	43.7	%
Industrials	0.4	%	5.5	%	21.3	%	26.5	%	0.6	%	733,355		54.3	%
Utilities/Other	—	%	—	%	1.6	%	0.4	%	—	%	26,496		2.0	%
Total	0.4	%	9.9	%	47.0	%	41.4	%	1.3	%	$	1,349,550	100.0	%
NGHC	—	%	6.7	%	37.6	%	40.6	%	1.3	%	$	1,163,549	86.2	%
Reciprocal Exchanges	0.4	%	3.2	%	9.4	%	0.8	%	—	%	186,001		13.8	%
Total	0.4	%	9.9	%	47.0	%	41.4	%	1.3	%	$	1,349,550	100.0	%

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)



December 31, 2018	AAA		AA+, AA, AA-		A+,A,A-		BBB+, BBB, BBB-		BB+ or Lower		Fair Value		% of Corporate Bonds Portfolio
Financial Institutions	—	%	4.3	%	23.1	%	14.2	%	0.9	%	$	535,373	42.5	%
Industrials	0.4	%	6.1	%	21.5	%	26.7	%	0.6	%	697,324		55.3	%
Utilities/Other	—	%	—	%	1.8	%	0.4	%	—	%	28,008		2.2	%
Total	0.4	%	10.4	%	46.4	%	41.3	%	1.5	%	$	1,260,705	100.0	%
NGHC	—	%	6.3	%	37.3	%	40.6	%	1.4	%	$	1,079,099	85.6	%
Reciprocal Exchanges	0.4	%	4.1	%	9.1	%	0.7	%	0.1	%	181,606		14.4	%
Total	0.4	%	10.4	%	46.4	%	41.3	%	1.5	%	$	1,260,705	100.0	%

(g) Cash and Cash Equivalents, Restricted Cash and Restricted Investments

The Company, in order to conduct business in certain states, is required to maintain letters of credit or assets on deposit to support state mandated regulatory requirements and certain third party agreements. The Company also utilizes trust accounts to collateralize business with its reinsurance counterparties. These assets are held primarily in the form of cash or certain high grade securities.

Cash, cash equivalents, and restricted cash are as follows:



	March 31, 2019		December 31, 2018
Cash and cash equivalents	$	188,064	$	193,858
Restricted cash and cash equivalents	32,208		39,725
Total cash, cash equivalents and restricted cash	$	220,272	$	233,583

Restricted investments are as follows:



	March 31, 2019		December 31, 2018
Securities on deposit with state regulatory authorities	$	76,215	$	73,119
Restricted investments to trusts in certain reinsurance transactions	66,894		70,470
Total restricted investments	$	143,109	$	143,589

(h) Short-term and Other Investments

Short-term investments include investments with maturities between 91 days and less than one year at the date of acquisition. Short-term investments also consist of commercial paper, U.S. Treasury bills and money market funds that are held within the Company’s longer term investment portfolios.

The table below summarizes the composition of other investments:



	March 31, 2019		December 31, 2018
Equity method investments (related parties - $105,097 and $106,031)	$	142,707	$	142,921
Notes receivable (related parties - $128,458 and $127,692)	129,474		128,893
Long-term Certificates of Deposit (CDs), at cost	20,151		20,252
Investments, at fair value	5,971		6,542
Investments, at cost or amortized cost	7,668		7,668
Total	$	305,971	$	306,276

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

Equity method investments represent limited liability companies and limited partnership investments in real estate. Investments at fair value, primarily represent the Company’s right to receive the excess servicing spread related to servicing rights, for which the Company has elected the fair value option with changes in fair value recorded in earnings. Investments at cost or amortized cost, represent limited partnerships, loans and trusts. The Company believes its exposure to risk associated with these investments is generally limited to the investment carrying amounts.

The Company’s other investments are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. For both the three months ended March 31, 2019 and 2018, the Company did not record OTTI on other investments.

Equity Method Investments - Related Parties

The significant shareholder of the Company has an ownership interest in AmTrust Financial Services, Inc. (“AmTrust”) and ACP Re Ltd. (“ACP Re”).

Limited Liability Companies and Limited Partnerships

The following entities are considered by the Company to be VIEs, for which the Company is not the primary beneficiary. The Company accounts for these entities using the equity method of accounting. The Company believes its exposure to risk associated with these investments is generally limited to the investment carrying amounts.

LSC Entity

The Company has a 50% ownership interest in an entity (the “LSC Entity”) initially formed to acquire life settlement contracts, with AmTrust owning the remaining 50%. The LSC Entity used the contributed capital to pay premiums and purchase policies. A life settlement contract is a contract between the owner of a life insurance policy and a third party who obtains the ownership and beneficiary rights of the underlying life insurance policy. The LSC Entity has a 30% non-controlling equity interest in a limited partnership. As of March 31, 2019, the LSC Entity directly held one life settlement contract. The life settlement contract is accounted for using the fair value method.

The following table presents the Company’s 50% investment activity in the LSC Entity:



	Three Months Ended March 31,
	2019		2018
Beginning of the period	$	48,324	$	160,683
Distributions	—		(107,035		)
Contributions	—		2,000
Equity in earnings (losses)	586		700
Change in equity method investments	586		(104,335		)
End of the period	$	48,910	$	56,348

800 Superior, LLC

The Company holds an investment in 800 Superior, LLC, a limited liability company that owns an office building in Cleveland, Ohio, with AmTrust. AmTrust has been appointed managing member of 800 Superior, LLC. The Company and AmTrust each have a 50% ownership interest in 800 Superior, LLC. Additionally, the Company entered into an office lease with 800 Superior, LLC. The Company paid 800 Superior, LLC $742 and $722 in rent for the three months ended March 31, 2019 and 2018, respectively. The Company’s equity interest in 800 Superior, LLC as of March 31, 2019 and December 31, 2018 was $510 and $816, respectively. For the three months ended March 31, 2019 and 2018, the Company recorded equity in earnings (losses) from 800 Superior, LLC of $(306) and $(1,070), respectively.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

East Ninth & Superior, LLC

The Company holds an investment in East Ninth & Superior, LLC and 800 Superior NMTC Investment Fund II, LLC with AmTrust (collectively “East Ninth & Superior”). The Company and AmTrust each have a 50% ownership interest in East Ninth and Superior, LLC and a 24.5% ownership interest in 800 Superior NMTC Investment Fund II, LLC. The Company’s equity interest in East Ninth & Superior as of March 31, 2019 and December 31, 2018 was $4,322 and $4,309, respectively. For the three months ended March 31, 2019 and 2018, the Company recorded equity in earnings (losses) from East Ninth & Superior of $13 and $16, respectively.

North Dearborn Building Company, L.P.

The Company holds an investment in North Dearborn Building Company, L.P. (“North Dearborn”), a limited partnership that owns an office building in Chicago, Illinois. AmTrust is also a limited partner in North Dearborn, and the general partner is NA Advisors GP LLC (“NA Advisors”), a related party, owned by Karfunkel family members which is managed by an unrelated third party. The Company and AmTrust each hold a 45% limited partnership interest in North Dearborn, while NA Advisors holds a 10% general partnership interest and a 10% profit interest, which NA Advisors pays to the unrelated third party manager. North Dearborn appointed NA Advisors as the general manager to oversee the day-to-day operations of the office building. The Company’s equity interest in North Dearborn as of March 31, 2019 and December 31, 2018 was $6,186 and $6,214, respectively. For the three months ended March 31, 2019 and 2018, the Company recorded equity in earnings (losses) from North Dearborn of $(28) and $(9), respectively.

4455 LBJ Freeway, LLC

The Company holds an investment in 4455 LBJ Freeway, LLC, a limited liability company that owns an office building in Dallas, Texas, with AmTrust. AmTrust has been appointed managing member of 4455 LBJ Freeway, LLC. The Company and AmTrust each have a 50% ownership interest in 4455 LBJ Freeway, LLC. Additionally, the Company entered into a lease agreement with 4455 LBJ Freeway, LLC. The Company paid 4455 LBJ Freeway, LLC $555 and $574 in rent for the three months ended March 31, 2019 and 2018, respectively. The Company’s equity interest in 4455 LBJ Freeway, LLC as of March 31, 2019 and December 31, 2018 was $816 and $793, respectively. For the three months ended March 31, 2019 and 2018, the Company recorded equity in earnings (losses) from 4455 LBJ Freeway, LLC of $23 and $2, respectively.

Illinois Center Building, L.P.

The Company holds an investment in Illinois Center Building, L.P. (“Illinois Center”), a limited partnership that owns an office building in Chicago, Illinois. AmTrust and ACP Re are also limited partners in Illinois Center and the general partner is NA Advisors. The Company and AmTrust each hold a 37.5% limited partnership interest in Illinois Center, while ACP Re holds a 15.0% limited partnership interest. NA Advisors holds a 10.0% general partnership interest and a 10.0% profit interest, which NA Advisors pays to the unrelated third party manager. Illinois Center appointed NA Advisors as the general manager to oversee the day-to-day operations of the office building. The Company’s equity interest in Illinois Center as of March 31, 2019 and December 31, 2018 was $44,353 and $45,575, respectively. For the three months ended March 31, 2019 and 2018, the Company recorded equity in earnings (losses) from Illinois Center of $(1,222) and $(1,109), respectively.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

4. Fair Value of Financial Instruments

The Company carries certain financial instruments at fair value. Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three “levels” based on the observability of valuation inputs:

Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.

Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.

The following describes the valuation techniques used by the Company to determine the fair value measurements on a recurring basis of financial instruments held as of March 31, 2019 and December 31, 2018. The Company utilizes a pricing service (“pricing service”) to estimate fair value measurements for all its debt and equity securities.

Level 1 measurements:


•	U.S. Treasury and federal agencies. The fair values of U.S. government securities are based on quoted market prices in active markets. The Company believes the market for U.S. government securities is an actively traded market given the high level of daily trading volume.


•	Common stock. The pricing service utilizes market quotations for equity securities that have quoted market prices in active markets and their respective quoted prices are provided at fair value.


•	Short-term investments. Comprised of money market funds that are traded in active markets and fair values are based on quoted market prices.

Level 2 measurements:


•	States and political subdivision bonds, and foreign government. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.

•

Corporate bonds. Comprised of bonds issued by corporations, public and privately placed. The fair values of short-term corporate bonds are priced using the spread above the London Interbank Offering Rate (“LIBOR”) yield curve, and the fair value of long-term corporate bonds are priced using the spread above the risk-free yield curve. The spreads are sourced from broker dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.


•	Residential and commercial mortgage-backed securities, asset-backed securities and structured securities. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.

Level 3 measurements:


•	States and political subdivision bonds. The Company holds certain municipal bonds that finance economic development, infrastructure and environmental projects which do not have an active market. These bonds are valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)


•	Corporate bonds. The Company holds certain structured notes and term loans that do not have an active market. These bonds are valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable.

•

Common stock and preferred stock. From time to time, the Company also holds certain equity securities that are issued by privately-held entities or direct equity investments that do not have an active market. The Company estimates the fair value of these securities primarily based on inputs such as third-party broker quotes, issuers’ book value, market multiples, and other inputs. These bonds are valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable.


•	Other investments, at fair value. Comprised of the Company’s right to receive the Excess Servicing Spread (“ESS”) related to servicing rights. The Company uses a discounted cash flow method to estimate their fair value. The key inputs used in the estimation of ESS include prepayment speed and discount rate. Changes in the fair value of the ESS are recorded in earnings.

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



	March 31, 2019
	Level 1		Level 2		Level 3		Total
Available-for-sale debt securities:
U.S. Treasury	$	62,983	$	—	$	—	$	62,983
Federal agencies	25,616		—		—		25,616
States and political subdivision bonds	—		257,243		3,660		260,903
Foreign government	—		145,218		—		145,218
Corporate bonds	—		1,337,716		11,834		1,349,550
Residential mortgage-backed securities	—		931,010		—		931,010
Commercial mortgage-backed securities	—		557,072		—		557,072
Asset-backed securities	—		62,086		—		62,086
Structured securities	—		240,909		—		240,909
Total available-for-sale debt securities	88,599		3,531,254		15,494		3,635,347
Equity securities:
Common stock	9,068		—		1,217		10,285
Total equity securities	9,068		—		1,217		10,285
Short-term investments	390,052		—		—		390,052
Other investments	—		—		5,971		5,971
Total	$	487,719	$	3,531,254	$	22,682	$	4,041,655
NGHC	$	454,840	$	3,245,219	$	22,682	$	3,722,741
Reciprocal Exchanges	32,879		286,035		—		318,914
Total	$	487,719	$	3,531,254	$	22,682	$	4,041,655

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)



	December 31, 2018
	Level 1		Level 2		Level 3		Total
Available-for-sale debt securities:
U.S. Treasury	$	65,593	$	—	$	—	$	65,593
Federal agencies	37,475		—		—		37,475
States and political subdivision bonds	—		268,601		3,596		272,197
Foreign government	—		152,366		—		152,366
Corporate bonds	—		1,248,938		11,767		1,260,705
Residential mortgage-backed securities	—		925,116		—		925,116
Commercial mortgage-backed securities	—		544,975		—		544,975
Asset-backed securities	—		61,147		—		61,147
Structured securities	—		241,458		—		241,458
Total available-for-sale debt securities	103,068		3,442,601		15,363		3,561,032
Equity securities:
Common stock	9,898		—		1,051		10,949
Total equity securities	9,898		—		1,051		10,949
Short-term investments	348,549		—		—		348,549
Other investments	—		—		6,542		6,542
Total	$	461,515	$	3,442,601	$	22,956	$	3,927,072
NGHC	$	429,502	$	3,160,203	$	22,956	$	3,612,661
Reciprocal Exchanges	32,013		282,398		—		314,411
Total	$	461,515	$	3,442,601	$	22,956	$	3,927,072

The following tables provide a reconciliation of recurring fair value measurements of the Level 3 financial assets:



	States and political subdivision bonds		Corporate bonds		Common stock		Other investments			Total
Balance as of January 1, 2019	$	3,596	$	11,767	$	1,051	$	6,542		$	22,956
Transfers into Level 3	—		—		—		—			—
Transfers out of Level 3	—		—		—		—			—
Total gains (losses) for the period:
Included in net income⁽¹⁾	—		—		166		(571		)	(405		)
Included in other comprehensive income⁽²⁾	64		67		—		—			131
Purchases	—		—		—		—			—
Sales	—		—		—		—			—
Balance as of March 31, 2019	$	3,660	$	11,834	$	1,217	$	5,971		$	22,682
Change in unrealized gains (losses) for the period included in net income for assets held at the end of the reporting period	$	—	$	—	$	166	$	(571	)	$	(405	)
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held at the end of the reporting period	$	64	$	67	$	—	$	—		$	131

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)



	States and political subdivision bonds		Corporate bonds			Common stock			Preferred stock		Other investments			Total
Balance as of January 1, 2018	$	4,081	$	24,545		$	5,052		$	270	$	10,782		$	44,730
Transfers into Level 3	—		—			—			—		—			—
Transfers out of Level 3	—		—			—			—		—			—
Total gains (losses) for the period:
Included in net income⁽¹⁾	—		—			(1,186		)	12		794			(380		)
Included in other comprehensive income⁽²⁾	46		(32		)	—			—		—			14
Purchases	—		—			—			—		—			—
Sales	—		—			—			—		(526		)	(526		)
Balance as of March 31, 2018	$	4,127	$	24,513		$	3,866		$	282	$	11,050		$	43,838
Change in unrealized gains (losses) for the period included in net income for assets held at the end of the reporting period	$	—	$	—		$	(1,186	)	$	12	$	794		$	(380	)

⁽¹⁾ Gains and losses recognized in net income are reported within Net investment income.

⁽²⁾ Gains and losses recognized in other comprehensive income are reported within unrealized gains (losses) on investments, net of tax.

During the three months ended March 31, 2019 and 2018, there were no transfers between Level 2 and Level 3.

At March 31, 2019 and December 31, 2018, the carrying values of the Company’s cash and cash equivalents, premiums and other receivables, and accounts payable approximate the fair value given their short-term nature and were classified as Level 1.

Fair value information about financial instruments not measured at fair value

Debt - The amount reported in the accompanying Condensed Consolidated Balance Sheets for these financial instruments represents the carrying value of the debt. See Note 8, “Debt” for additional information.

The following table presents the carrying amount and estimated fair value of debt not carried at fair value, excluding capital lease liabilities, as well as the input level used to determine the fair value are indicated below:



		March 31, 2019				December 31, 2018
	Input Level	Carrying amount		Fair value		Carrying amount		Fair value
7.625% Notes	Level 2	$	96,863	$	102,000	$	96,842	$	90,400

6.75% Notes	Level 3	346,600		357,879		346,439		353,756
Subordinated Debentures	Level 3	72,168		72,114		72,168		72,109
Credit Agreement	Level 3	—		—		160,000		163,222
2019 Credit Agreement	Level 3	160,000		168,964		—		—

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

5. Deferred Acquisition Costs

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



	Three Months Ended March 31,
	2019									2018
	Property and Casualty			Accident and Health			Total			Property and Casualty			Accident and Health			Total
Beginning of the period	$	226,188		$	25,220		$	251,408		$	198,283		$	18,106		$	216,389
Additions	145,979			25,101			171,080			139,132			5,940			145,072
Amortization	(136,008		)	(18,303		)	(154,311		)	(120,332		)	(7,529		)	(127,861		)
Change in DAC	9,971			6,798			16,769			18,800			(1,589		)	17,211
End of the period	$	236,159		$	32,018		$	268,177		$	217,083		$	16,517		$	233,600
NGHC	$	215,854		$	32,018		$	247,872		$	195,448		$	16,517		$	211,965
Reciprocal Exchanges	20,305			—			20,305			21,635			—			21,635
End of the period	$	236,159		$	32,018		$	268,177		$	217,083		$	16,517		$	233,600

6. Unpaid Losses and Loss Adjustment Expense Reserves

The unpaid losses and loss adjustment expense (“LAE”) reserves are the result of ongoing analysis of recent loss development trends and emerging historical experience. Original estimates are increased or decreased as additional information becomes known regarding individual claims. In setting its reserves, the Company reviews its loss data to estimate expected loss development. Management believes that its use of standard actuarial methodology applied to its analyses of its historical experience provides a reasonable estimate of future losses. However, actual future losses may differ from the Company’s estimate, and future events beyond the control of management, such as changes in law, judicial interpretations of law and inflation, may favorably or unfavorably impact the ultimate settlement of the Company’s losses and LAE.

The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. In addition to inflation, the average severity of claims is affected by a number of factors that may vary by types and features of policies written. Future average severities are projected from historical trends, adjusted for implemented changes in underwriting standards and policy provisions, and general economic trends. These estimated trends are monitored and revised as necessary based on actual development.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

The tables below show the roll forward of loss reserves on a gross and net of reinsurance basis, reflecting changes in losses incurred and paid losses:



	Three Months Ended March 31, 2019
	Property and Casualty			Accident and Health			NGHC			Reciprocal Exchanges			Total
Unpaid losses and LAE, gross of related reinsurance recoverable at beginning of the period	$	2,507,409		$	271,280		$	2,778,689		$	178,470		$	2,957,159
Less: Reinsurance recoverable at beginning of the period	(1,182,588		)	(24,575		)	(1,207,163		)	(77,979		)	(1,285,142		)
Net balance at beginning of the period	1,324,821			246,705			1,571,526			100,491			1,672,017
Incurred losses and LAE related to:
Current year	530,549			95,601			626,150			39,973			666,123
Prior year	(5,514		)	(10,852		)	(16,366		)	2,052			(14,314		)
Total incurred	525,035			84,749			609,784			42,025			651,809
Paid losses and LAE related to:
Current year	(130,395		)	(33,681		)	(164,076		)	(14,949		)	(179,025		)
Prior year	(422,560		)	(53,310		)	(475,870		)	(21,478		)	(497,348		)
Total paid	(552,955		)	(86,991		)	(639,946		)	(36,427		)	(676,373		)
Effect of foreign exchange rates	—			1,094			1,094			—			1,094
Net balance at end of the period	1,296,901			245,557			1,542,458			106,089			1,648,547
Plus: Reinsurance recoverable at end of the period	1,103,114			28,729			1,131,843			89,933			1,221,776
Gross balance at end of period	$	2,400,015		$	274,286		$	2,674,301		$	196,022		$	2,870,323



	Three Months Ended March 31, 2018
	Property and Casualty			Accident and Health			NGHC			Reciprocal Exchanges			Total
Unpaid losses and LAE, gross of related reinsurance recoverable at beginning of the period	$	2,270,551		$	249,653		$	2,520,204		$	143,353		$	2,663,557
Less: Reinsurance recoverable at beginning of the period	(1,067,495		)	(9,840		)	(1,077,335		)	(52,408		)	(1,129,743		)
Net balance at beginning of the period	1,203,056			239,813			1,442,869			90,945			1,533,814
Incurred losses and LAE related to:
Current year	513,526			94,661			608,187			45,917			654,104
Prior year	(15,169		)	(3,383		)	(18,552		)	(1,386		)	(19,938		)
Total incurred	498,357			91,278			589,635			44,531			634,166
Paid losses and LAE related to:
Current year	(202,967		)	(20,290		)	(223,257		)	(19,686		)	(242,943		)
Prior year	(306,126		)	(47,992		)	(354,118		)	(17,455		)	(371,573		)
Total paid	(509,093		)	(68,282		)	(577,375		)	(37,141		)	(614,516		)
Effect of foreign exchange rates	—			(1,679		)	(1,679		)	—			(1,679		)
Net balance at end of the period	1,192,320			261,130			1,453,450			98,335			1,551,785
Plus: Reinsurance recoverable at end of the period	1,058,106			8,565			1,066,671			60,461			1,127,132
Gross balance at end of period	$	2,250,426		$	269,695		$	2,520,121		$	158,796		$	2,678,917

Prior year loss development, net of reinsurance

Prior year development is based upon numerous estimates by line of business and accident year. No additional premiums or return premiums have been accrued as a result of the prior year effects.

2019. Loss and LAE for the three months ended March 31, 2019 included $14,314 of favorable development on prior accident year loss and LAE reserves. The $3,462 of favorable development in the property and casualty segment (including $2,052 of unfavorable development for the Reciprocal Exchanges) was driven by the Company’s homeowners business, while the $10,852 of favorable development in the accident and health segment was primarily driven by the Company’s domestic products, specifically the Stop Loss business.

2018. Loss and LAE for the three months ended March 31, 2018 included $19,938 of favorable development on prior accident year loss and LAE reserves. The $16,555 of favorable development in the property and casualty segment

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

(including $1,386 of favorable development for the Reciprocal Exchanges) was primarily driven by favorable development in the Company’s auto physical damage and homeowners business, while $3,383 of favorable development in the accident and health products was primarily driven by favorable development in the Company’s domestic products.

7. Reinsurance

The Company utilizes reinsurance agreements to transfer portions of the underlying risk of the business the Company writes to various reinsurance companies. Reinsurance does not discharge or diminish the Company’s obligation to pay claims covered by the insurance policies it issues; however, it does permit the Company to recover certain incurred losses from its reinsurers and the Company’s reinsurance recoveries reduce the maximum loss that it may incur as a result of a covered loss event. The Company’s reinsurers generally carry at least an A.M. Best Company, Inc. rating of “A-” (Excellent) or are fully collateralized at the time they enter into the Company’s reinsurance agreements. The Company also enters into reinsurance relationships with third-party captives formed by agents as a mechanism for sharing risk and profit. The total amount, cost and limits relating to the reinsurance coverage the Company purchases may vary from year to year based upon a variety of factors, including the availability of quality reinsurance at an acceptable price and the level of risk that the Company chooses to retain for its own account.

The Company assumes and cedes insurance risks under various reinsurance agreements, on both a pro rata basis and excess of loss basis. The Company purchases reinsurance to mitigate the volatility of direct and assumed business, which may be caused by the aggregate value or the concentration of written exposures in a particular geographic area or business segment and may arise from catastrophes or other events. The Company pays a premium as consideration for ceding the risk.

Reinsurance recoverable summary is as follows:



	March 31, 2019		December 31, 2018
Reinsurance recoverable on paid losses	$	267,789	$	326,596
Reinsurance recoverable on unpaid losses	1,221,776		1,285,142
Reinsurance recoverable	$	1,489,565	$	1,611,738

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



	March 31, 2019				December 31, 2018
	Assumed		Ceded		Assumed		Ceded
Unpaid Loss and LAE reserves	$	76,123	$	1,221,776	$	84,469	$	1,285,142
Unearned premiums	20,604		637,024		21,015		665,674

The following is a summary of effects of reinsurance on premiums and losses:



	Three Months Ended March 31,
	2019						2018
Premium:	Written			Earned			Written			Earned
Direct	$	1,489,188		$	1,315,705		$	1,413,877		$	1,191,327
Assumed	20,590			21,000			19,253			29,051
Total Gross Premium	1,509,778			1,336,705			1,433,130			1,220,378
Ceded	(345,114		)	(372,548		)	(326,487		)	(314,840		)
Net Premium	$	1,164,664		$	964,157		$	1,106,643		$	905,538

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)



	Three Months Ended March 31,
	2019				2018
	Assumed		Ceded		Assumed			Ceded
Loss and LAE	$	5,322	$	209,322	$	(1,321	)	$	197,317

Quota Share Agreements

Effective July 1, 2017, the Company entered into an Auto Quota Share Agreement (the “Auto Quota Share Agreement”) covering the Company’s auto lines of business, under which the Company cedes 15.0% of net liability under auto policies in force as of the effective date and new and renewal policies issued during the two-year term of the agreement to an unaffiliated third-party reinsurance provider. Under the Auto Quota Share Agreement, the Company receives a 31.2% provisional ceding commission on premiums ceded to the reinsurer during the term of the Auto Quota Share Agreement, subject to a sliding scale adjustment to a maximum of 32.8% if the loss ratio for the reinsured business is 63.4% or less and a minimum of 29.6% if the loss ratio is 66.6% or higher. The liability of the reinsurer is capped at $5,000 per risk or $70,000 per event. The Company retains the flexibility, under certain conditions, to increase the cession percentage up to a maximum cession of 30.0% and to decrease the cession percentage to a minimum cession of 5.0% during 2019. Effective January 1, 2019, the Company cedes 7.0% of net liability under new and renewal auto policies written.

Effective July 1, 2017, the Company entered into a Homeowners Quota Share Agreement (the “HO Quota Share Agreement”) covering the Company’s homeowners line of business, under which the Company cedes 29.6% of net liability under homeowners policies, including lender-placed property policies, in force as of the effective date and new and renewal policies issued during the two-year term of the agreement to unaffiliated third-party reinsurance providers. Under the HO Quota Share Agreement, the Company receives a 42.5% ceding commission on premiums ceded to the reinsurers during the term of the HO Quota Share Agreement. The liability of the reinsurers is capped at $5,000 per risk or $70,000 per event. Effective May 1, 2018, the Company cedes an additional 12.4% of net liability (for a total cession of 42.0%) and receives a 38.0% ceding commission on the additional 12.4% in ceded premiums.

Catastrophe Reinsurance

As of May 1, 2018, the Company’s reinsurance property catastrophe excess of loss program, protecting the Company against catastrophic events and other large losses, provides a total of $575,000 in coverage with a $70,000 retention, with one reinstatement. Effective May 1, 2019, the Company’s reinsurance property catastrophe excess of loss program, protecting the Company against catastrophic events and other large losses, provides a total of $650,000 in coverage with one reinstatement with a $70,000 retention for the first event and $50,000 for the second event. Effective July 1, 2018, the casualty program provides $35,000 in coverage in excess of a $5,000 retention. The Company pays a premium as consideration for ceding the risk.

As of July 1, 2017, a reinsurance property catastrophe excess of loss program went into effect protecting the Reciprocal Exchanges against accumulations of losses resulting from a catastrophic event. The property catastrophe program provided a total of $375,000 in coverage with a $20,000 retention, with one reinstatement. Effective July 1, 2018, the Reciprocal Exchanges renewed their property catastrophe excess of loss program providing a total of $475,000 in coverage with a $20,000 retention, with one reinstatement.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

8. Debt

The following table represents the Company’s debt:



	Interest Rate	Maturity	March 31, 2019			December 31, 2018
Fixed-rate:
6.75% Notes	6.75%	2024	$	350,000		$	350,000
7.625% Notes	7.625%	2055	100,000			100,000
Floating-rate:
Subordinated Debentures I	LIBOR + 3.40%	2035	41,238			41,238
Subordinated Debentures II	LIBOR + 4.25%	2037	30,930			30,930
Credit Agreement⁽¹⁾	LIBOR + 2.00%	2020	—			160,000
2019 Credit Agreement⁽²⁾	LIBOR + 1.75%	2023	160,000			—
Finance lease liabilities	Various	Various	20,568			14,824
Other	3.5%	Various	13,997			15,522
Unamortized debt issuance costs and unamortized discount			(6,537		)	(6,719		)
Total carrying amount of debt			$	710,196		$	705,795

⁽¹⁾ The weighted average interest rate on the amount outstanding as of December 31, 2018 was 4.58%.

⁽²⁾ The weighted average interest rate on the amount outstanding as of March 31, 2019 was 4.27%.

The following table presents the Company’s interest expense:



		Three Months Ended March 31,
	Interest Payment Frequency	2019		2018
6.75% Notes	Semiannually	$	5,906	$	5,906
7.625% Notes	Quarterly	1,906		1,906
Subordinated Debentures	Quarterly	1,163		986
Credit Agreement	Quarterly	1,211		1,684
2019 Credit Agreement	Quarterly	529		—
Finance lease liabilities	Various	294		164
Other⁽¹⁾	Various	1,990		508
Total interest expense		$	12,999	$	11,154

⁽¹⁾ Other includes interest for other liabilities, interest credited on funds held balances and accretion of debt issuance costs.

Senior Notes

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

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

The 7.625% Notes are the Company’s subordinated unsecured obligations and rank (i) senior in right of payment to any future junior subordinated debt, (ii) equal in right of payment with any unsecured, subordinated debt that the Company incurs in the future that ranks equally with the 7.625% Notes, and (iii) subordinate in right of payment to any of the Company’s existing and future senior debt, including amounts outstanding under the Company’s revolving credit facility, the Company’s 6.75% notes and certain of the Company’s other obligations. In addition, the 7.625% Notes are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of the Company’s subsidiaries. The 7.625% Notes mature on September 15, 2055, unless earlier redeemed or purchased by the Company.

Subordinated Debentures

The Company, through a subsidiary, is the issuer of junior subordinated debentures (the “Subordinated Debentures”) relating to an issuance of trust preferred securities. The Subordinated Debentures require interest-only payments to be made on a quarterly basis, with principal due at maturity. The Subordinated Debentures’ principal amounts of $41,238 and $30,930 mature on 2035 and 2037, respectively, and bear interest at an annual rate equal to LIBOR plus 3.40% and LIBOR plus 4.25%, respectively. The Subordinated Debentures are redeemable by the Company at a redemption price equal to 100% of their principal amount.

Credit Agreement

On February 25, 2019, the Company refinanced its existing credit agreement and entered into a new credit agreement (the “2019 Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, KeyBank National Association and Fifth Third Bank, as Co-Syndication Agents, and the various lending institutions party thereto. The 2019 Credit Agreement is currently a $340,000 base revolving credit facility with a letter of credit sublimit of $150,000 and an expansion feature of up to $50,000. Borrowings under the 2019 Credit Agreement bear interest at either the Alternate Base Rate (“ABR”) or the LIBO rate. ABR borrowings under the 2019 Credit Agreement will bear interest at (x) the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5 percent or (c) the adjusted LIBO rate for a one-month interest period on such day plus 1 percent. Eurodollar borrowings under the 2019 Credit Agreement will bear interest at the adjusted LIBO rate plus the Eurodollar spread for the interest period in effect. Fees payable by the Company under the 2019 Credit Agreement include a letter of credit participation fee, a letter of credit fronting fee with respect to each letter of credit (0.125%) and a commitment fee on the available commitments of the lenders (a range of 0.175% to 0.25% based on the Company’s consolidated leverage ratio, and which rate was 0.225% as of March 31, 2019). The 2019 Credit Agreement has a maturity date of February 25, 2023.

Maturities of the Company’s debt for the years subsequent to March 31, 2019 are as follows:



	2019 (remaining nine months)		2020		2021		2022		2023		2024		Thereafter		Total
6.75% Notes	$	—	$	—	$	—	$	—	$	—	$	350,000	$	—	$	350,000
7.625% Notes	—		—		—		—		—		—		100,000		100,000
Subordinated Debentures I	—		—		—		—		—		—		41,238		41,238
Subordinated Debentures II	—		—		—		—		—		—		30,930		30,930
2019 Credit Agreement	—		—		—		—		160,000		—		—		160,000
Finance lease liabilities	4,866		5,585		3,370		1,756		1,192		1,242		2,557		20,568
Other	4,655		6,399		2,943		—		—		—		—		13,997
Total principal amount of debt	$	9,521	$	11,984	$	6,313	$	1,756	$	161,192	$	351,242	$	174,725	$	716,733
Unamortized debt issuance costs and unamortized discount															(6,537		)
Carrying amount of debt															$	710,196

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

Covenants and Compliance

The indenture relating to the 6.75% Notes and 7.625% Notes contains customary covenants, such as reporting of annual and quarterly financial results, and restrictions on certain mergers and consolidations, as well as covenants relating to the incurrence of debt if the Company’s consolidated leverage ratio would exceed 0.35 to 1.00, a limitation on liens, a limitation on the disposition of stock of certain of the Company’s subsidiaries and a limitation on transactions with certain of the Company’s affiliates.

The 2019 Credit Agreement contains certain restrictive covenants customary for facilities of this type (subject to negotiated exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. There are also financial covenants that require the Company to maintain a minimum consolidated net worth, a maximum consolidated leverage ratio, a minimum risk-based capital and a minimum rating. The 2019 Credit Agreement also provides for customary events of default, with grace periods where customary, including failure to pay principal when due, failure to pay interest or fees within three business days after becoming due, failure to comply with covenants, breaches of representations and warranties, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. Upon the occurrence and during the continuation of an event of default, the administrative agent, upon the request of the requisite percentage of the lenders, may terminate the obligations of the lenders to make loans and to issue letters of credit under the 2019 Credit Agreement, declare the Company’s obligations under the 2019 Credit Agreement to become immediately due and payable and/or exercise any and all remedies and other rights under the 2019 Credit Agreement.

As of March 31, 2019, the Company was in compliance with the covenants contained in the Company’s debt agreements.

9. Leases

The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and operating leases liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses an incremental borrowing rate at commencement date in determining the present value of future payments. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The Company elected the package of practical expedients permitted under the transition guidance within the new standard. Application of the package of practical expedients allowed the Company not to reassess a) whether any expired or existing contracts contain leases, b) existing lease classification, c) initial direct cost for existing leases, and d) land easements that exist before the Company's adoption of the new standard.

The Company leases certain retail stores, office space, land, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheets; the Company recognizes lease expense for these leases over the lease term.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Certain of the Company's lease agreements include rental payments adjusted periodically for inflation. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company rents or subleases certain real estate to third parties.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

Supplemental balance sheet information related to leases is as follow:



Leases	Classification	March 31, 2019
Assets:
Finance	Buildings and improvements	$	11,296
Finance	Vehicle	6,209
Finance	Hardware, software and other equipment	5,760
Total finance		23,265
Operating	Operating lease assets	104,089
Total lease assets	Premises and equipment, net ⁽¹⁾	$	127,354

Liabilities:
Finance	Debt	$	20,568
Operating	Other liabilities	112,907
Total lease liabilities		$	133,475

⁽¹⁾As of March 31, 2019, accumulated depreciation and amortization for Buildings and improvements, Vehicle, Hardware, software and other equipment, and Operating lease assets was $995, $4,709, $649 and $6,254, respectively.

The components of lease cost are as follows:



Lease Cost	Classification	Three Months Ended March 31, 2019
Finance lease cost:
Amortization of leased assets	General and administrative expenses	$	1,758
Interest on lease liabilities	Interest expense	294
Finance lease cost		$	2,052

Operating lease cost	General and administrative expenses	$	8,818

Maturities of the Company’s lease liabilities for the years subsequent to March 31, 2019 are as follows:



	Operating Leases			Finance Leases			Total
2019 (remaining nine months)	$	23,189		$	5,508		$	28,697
2020	25,770			6,230			32,000
2021	19,791			3,808			23,599
2022	15,925			2,083			18,008
2023	13,495			1,446			14,941
2024	10,915			1,428			12,343
Thereafter	25,675			2,847			28,522
Total lease payments	$	134,760		$	23,350		$	158,110
Less: Interest	(21,853		)	(2,782		)
Present value of lease liabilities	$	112,907		$	20,568

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

Supplemental information related to term and discount rate is as follow:



Leases	Classification	March 31, 2019
Weighted-average remaining lease term (years):
Finance	Buildings and improvements	7.7 years
Finance	Vehicle	2.2 years
Finance	Hardware, software and other equipment	1.5 years
Operating	Operating lease assets	5.8 years
Weighted-average discount rate:
Finance	Buildings and improvements	5.8	%
Finance	Vehicle	4.2	%
Finance	Hardware, software and other equipment	4.2	%
Operating	Operating lease assets	5.9	%

Supplemental cash flow information related to leases is as follow:



	Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	294
Financing cash flows from finance leases	1,509
Operating cash flows from operating leases	6,020
Leased assets obtained in exchange for new finance lease liabilities	7,253

10. Commitments and Contingencies

Litigation

The Company’s insurance subsidiaries are named as defendants in various legal actions arising principally from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the loss and LAE reserves. The Company’s management believes the resolution of those actions will not have a material adverse effect on the Company’s financial position or results of operations.

The Company as a defendant and the other parties involved in the consolidated multi-district class action litigation in the United States District Court for the Central District of California with respect to allegations of improper practices in the placement of insurance in the historical and no longer existing collateral protection insurance program for Wells Fargo have recently reached agreement upon a preliminary settlement of the litigation subject to final documentation and court approval. As of December 31, 2018, the Company accrued a net liability relating to the settlement of $10,000.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

11. Income Taxes

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

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

The Company’s consolidated effective tax rate decreased from 22.4% for the three months ended March 31, 2018 to 20.9% for the three months ended March 31, 2019. The decrease was primarily driven by the impact of foreign operations.

All tax liabilities are payable to the Internal Revenue Service (“IRS”) and various state and local taxing agencies. The Company’s subsidiaries are currently under audit by the IRS for the year ended December 31, 2015, and open to audit years thereafter for federal tax purposes. For state and local tax purposes, the Company is open to audit for tax years ended December 31, 2014 forward, depending on jurisdiction.

12. Share-Based Compensation

The Company currently has two equity incentive plans (the “Plans”). The Plans authorize up to an aggregate of 7,435,000 shares of Company stock for awards of options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock, restricted stock units (“RSU”), unrestricted stock and other performance awards. The aggregate number of shares of common stock for which awards may be issued may not exceed 7,435,000 shares, subject to the authority of the Company’s Board of Directors to adjust this amount in the event of a consolidation, reorganization, stock dividend, recapitalization or similar transaction affecting the Company’s common stock. As of March 31, 2019, 29,451 shares of the Company’s common stock remained available for grants under the Plans.

A summary of the stock option awards is shown below:



	Shares Subject to Options Outstanding
Three Months Ended March 31, 2019	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value⁽¹⁾
Outstanding at beginning of period	3,184,352		$	9.53
Exercised	(25,216	)	3.67
Outstanding and exercisable at end of period	3,159,136		$	9.58	3.8	$	44,718

⁽¹⁾ The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing price of the Company’s common stock of $23.73, as reported on the Nasdaq Global Select Market on March 29, 2019.

No options were granted, forfeited or expired during the three months ended March 31, 2019. The total intrinsic value of the options exercised for the three months ended March 31, 2019 and 2018 was $526 and $1,502, respectively. The total fair value of stock options vested for the three months ended March 31, 2019 and 2018 was $37 and $221, respectively.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

A summary of the RSUs is shown below:



	RSUs
Three Months Ended March 31, 2019	Number of RSUs		Weighted-Average Grant Date Fair Value
Non-vested at beginning of period	938,795		$	22.28
Granted	497,741		25.60
Vested	(267,060	)	21.70
Forfeited	(5,881	)	24.44
Non-vested at end of period	1,163,595		$	23.82

The weighted-average grant date fair value of RSUs granted for the three months ended March 31, 2019 and 2018 was $25.60 and $20.15, respectively. The total fair value of the RSUs vested for the three months ended March 31, 2019 and 2018 was $5,796 and $3,882, respectively.

Compensation expense, included in general and administrative expenses, for all share-based compensation plans was $2,622 and $2,130 for the three months ended March 31, 2019 and 2018, respectively.

As of March 31, 2019, the Company had approximately $24,051 of unrecognized share-based compensation expense, all of which was related to RSUs. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 1.7 years based on vesting under the award service conditions.

13. Earnings Per Share

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



	Three Months Ended March 31,
	2019			2018
Numerator:
Net income attributable to NGHC	$	91,758		$	68,208
Preferred stock dividends - nonconvertible	(7,875		)	(7,875		)
Preferred stock dividends - convertible	—			—
Numerator for basic EPS	83,883			60,333
Effect of dilutive securities:
Preferred stock dividends - convertible	—			—
Numerator for diluted EPS - after assumed conversions	$	83,883		$	60,333

Denominator:
Denominator for basic EPS - weighted-average shares outstanding	113,014,711			106,758,641
Effect of dilutive securities:
Employee stock options	1,939,844			1,922,885
RSUs	331,198			269,458
Convertible preferred stock	789,473			—
Dilutive potential common shares	3,060,515			2,192,343
Denominator for diluted EPS - weighted-average shares outstanding and assumed conversions	116,075,226			108,950,984

Basic EPS	$	0.74		$	0.57
Diluted EPS	$	0.72		$	0.55

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

14. Related Party Transactions

The significant shareholder of the Company has an ownership interest in AmTrust, Maiden Holdings Ltd. (“Maiden”) and ACP Re. The Company provides and receives services to and from these related entities as follows:

Agreements with AmTrust

Asset Purchase and Master Services Agreements

On September 13, 2017, the Company entered into an asset purchase and license agreement (the “Agreement”) with AmTrust, pursuant to which the Company acquired ownership of a policy management system and the related intellectual property, as well as a non-exclusive perpetual license to certain software programs used by the system (the “System”), for a purchase price of $200,000, including license fees which would have been payable for use of the System during the third quarter 2017. The System has been fully transferred to the Company’s operating environment and the purchase price has been fully paid.

The Agreement also terminated the existing master services agreement between the Company and AmTrust. AmTrust will continue to provide management of the premium receipts from its lockbox facilities during a transition period pursuant to the Agreement under the same terms as those provided under the master services agreement. The Company recorded expenses related to this agreement of $425 and $3,756 for the three months ended March 31, 2019 and 2018, respectively.

NGHC Quota Share Agreement

The Company participated in a quota share reinsurance treaty with ACP Re, Maiden and AmTrust, whereby the Company ceded 50% of the total net earned premiums, net of a ceding commission, and net incurred losses and LAE on business with effective dates after March 1, 2010 (“NGHC Quota Share”). In August 2013, the Company terminated the NGHC Quota Share agreement on a run-off basis. The net reinsurance recoverable is $6,136 and $7,425 at March 31, 2019 and December 31, 2018, respectively. The net recovery under the agreement was $456 and $97 for the three months ended March 31, 2019 and 2018, respectively.

ACP Re and Maiden held assets in trust for the benefit of the Company in the amount of $2,397 and $8,034, respectively, as of March 31, 2019 and $3,796 and $8,644, respectively, as of December 31, 2018.

Equity Method Investments

The Company has an ownership interest in an LSC Entity, limited liability companies and limited partnerships with related parties. See Note 3, “Investments - Equity Method Investments - Related Parties” for additional information.

Agreements with ACP Re

Credit Agreement

The Company is party to a credit agreement (the “ACP Re Credit Agreement”) by and among AmTrust, as administrative agent, ACP Re Holdings, LLC, a Delaware limited liability company owned by a related party trust, the Michael Karfunkel Family 2005 Trust (the “Trust”), as borrower, and AmTrust and the Company, as lenders of $250,000 ($125,000 each lender). The amounts borrowed are secured by equity interests, cash and, other investments held by ACP Re Holdings, LLC in an amount equal to 115% of the outstanding loan balance. The maturity date of the loan is September 20, 2036. The interest rate on the outstanding principal balance is a fixed annual rate of 3.7%, provided that up to 1.2% thereof may be paid in kind. The Trust is required to cause ACP Re Holdings, LLC to maintain assets having a value greater than 115% of the outstanding loan balance, and if there is a shortfall, the Trust will make a contribution to ACP Re Holdings, LLC of assets having a market value of at least the shortfall (the “Maintenance Covenant”). Commencing on September 20, 2026, and for each year thereafter, two percent of the then outstanding principal balance

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

of the loan (inclusive of any amounts previously paid in kind) is due and payable. A change of control of greater than 50% and an uncured breach of the Maintenance Covenant are included as events of default.

As of March 31, 2019 and December 31, 2018 the Company had a receivable principal amount related to the ACP Re Credit Agreement of $128,458 and $127,692, respectively. The Company recorded interest income of $1,188 and $1,174 for the three months ended March 31, 2019 and 2018, respectively, under the ACP Re Credit Agreement. Management determined no impairment reserve was needed for the carrying value of the loan at March 31, 2019 and December 31, 2018 based on the collateral levels maintained.

Other Related Party Transactions

Operating Lease Agreements

The Company leases office space at 59 Maiden Lane in New York, New York from 59 Maiden Lane Associates LLC, an entity that is wholly-owned by the Karfunkel family. The lease term is through 2022. The Company paid $207 and $207 in rent for the three months ended March 31, 2019 and 2018, respectively.

The Company leases office space at 30 North LaSalle Street, Chicago, Illinois from 30 North LaSalle Street Partners LLC, an entity that is wholly-owned by the Karfunkel family. The lease term is through 2025. The Company paid $76 and $75 in rent for the three months ended March 31, 2019 and 2018, respectively.

Use of the Company Aircraft

The Company and Barry Karfunkel, Chief Executive Officer of the Company, are parties to a time sharing agreement for the use of the Company’s plane. During the three months ended March 31, 2019 and 2018, Mr. Barry Karfunkel reimbursed the Company $15 and $40, respectively, for his personal use of the company-owned aircraft.

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

15. Segment Information

The Company currently operates two business segments, “Property and Casualty” and “Accident and Health.” The “Corporate and Other” column represents the activities of the holding company, as well as income from the Company’s investment portfolio. The Company evaluates segment profits attributable to the performance of activities within the segment separately from the results of the Company’s investment portfolio. Other operating expenses allocated to the segments are called “General and administrative expenses” which are allocated on an actual basis except corporate salaries and benefits where management’s judgment is applied. In determining total assets by segment, the Company identifies those assets that are attributable to a particular segment such as premiums, deferred acquisition costs, reinsurance recoverable, prepaid reinsurance premiums, intangible assets and goodwill, while the remaining assets are allocated to Corporate and Other.

The Property and Casualty segment, which includes the Reciprocal Exchanges and the management companies, reports the management fees earned by the Company from the Reciprocal Exchanges for underwriting, investment management and other services as service and fee income. The effects of these transactions between the Company and the Reciprocal Exchanges are eliminated in consolidation to derive consolidated net income. However, the management fee income is reported in net income attributable to NGHC and included in the basic and diluted earnings per share.

The following tables summarize the results of operations of the operating segments:



	Three Months Ended March 31, 2019
	Property and Casualty			Accident and Health			Corporate and Other			Total
Underwriting revenues:
Gross premium written	$	1,251,234		$	258,544		$	—		$	1,509,778
Ceded premiums	(286,751		)	(58,363		)	—			(345,114		)
Net premium written	964,483			200,181			—			1,164,664
Change in unearned premium	(161,906		)	(38,601		)	—			(200,507		)
Net earned premium	802,577			161,580			—			964,157
Ceding commission income	66,943			2,591			—			69,534
Service and fee income	104,495			61,012			—			165,507
Total underwriting revenues	974,015			225,183			—			1,199,198
Underwriting expenses:
Loss and loss adjustment expense	567,060			84,749			—			651,809
Acquisition costs and other underwriting expenses	154,070			57,848			—			211,918
General and administrative expenses	189,456			58,638			—			248,094
Total underwriting expenses	910,586			201,235			—			1,111,821
Underwriting income	63,429			23,948			—			87,377
Net investment income	—			—			33,445			33,445
Net gain on investments	—			—			22			22
Interest expense	—			—			(12,999		)	(12,999		)
Provision for income taxes	—			—			(22,506		)	(22,506		)
Net (income) loss attributable to non-controlling interest	—			—			6,419			6,419
Net income attributable to NGHC	$	63,429		$	23,948		$	4,381		$	91,758

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)



	Three Months Ended March 31, 2018
	Property and Casualty			Accident and Health			Corporate and Other			Total
Underwriting revenues:
Gross premium written	$	1,199,354		$	233,776		$	—		$	1,433,130
Ceded premiums	(316,064		)	(10,423		)	—			(326,487		)
Net premium written	883,290			223,353			—			1,106,643
Change in unearned premium	(131,628		)	(69,477		)	—			(201,105		)
Net earned premium	751,662			153,876			—			905,538
Ceding commission income	44,210			258			—			44,468
Service and fee income	96,935			45,187			—			142,122
Total underwriting revenues	892,807			199,321			—			1,092,128
Underwriting expenses:
Loss and loss adjustment expense	542,888			91,278			—			634,166
Acquisition costs and other underwriting expenses	125,102			43,608			—			168,710
General and administrative expenses	180,397			50,608			—			231,005
Total underwriting expenses	848,387			185,494			—			1,033,881
Underwriting income	44,420			13,827			—			58,247
Net investment income	—			—			25,011			25,011
Net gain on investments	—			—			118			118
Interest expense	—			—			(11,154		)	(11,154		)
Provision for income taxes	—			—			(16,202		)	(16,202		)
Net (income) loss attributable to non-controlling interest	—			—			12,188			12,188
Net income attributable to NGHC	$	44,420		$	13,827		$	9,961		$	68,208

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



	March 31, 2019
	Property and Casualty		Accident and Health		Corporate and Other		Total
Premiums and other receivables, net	$	1,388,282	$	216,278	$	3,691	$	1,608,251
Deferred acquisition costs	236,159		32,018		—		268,177
Reinsurance recoverable	1,457,778		31,787		—		1,489,565
Prepaid reinsurance premiums	602,498		34,526		—		637,024
Intangible assets, net and Goodwill	438,009		114,986		—		552,995
Prepaid and other assets	22,660		25,196		26,141		73,997
Corporate and other assets	—		—		5,001,558		5,001,558
Total assets	$	4,145,386	$	454,791	$	5,031,390	$	9,631,567

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)



	December 31, 2018
	Property and Casualty		Accident and Health		Corporate and Other		Total
Premiums and other receivables, net	$	1,245,530	$	153,896	$	386	$	1,399,812
Deferred acquisition costs	226,188		25,220		—		251,408
Reinsurance recoverable	1,585,008		26,730		—		1,611,738
Prepaid reinsurance premiums	665,660		14		—		665,674
Intangible assets, net and Goodwill	443,163		116,957		—		560,120
Prepaid and other assets	20,941		22,472		111,545		154,958
Corporate and other assets	—		—		4,795,570		4,795,570
Total assets	$	4,186,490	$	345,289	$	4,907,501	$	9,439,280

The following table shows an analysis of the premiums by geographical location:



	Three Months Ended March 31,
	2019						2018
	NGHC		Reciprocal Exchanges		Total		NGHC		Reciprocal Exchanges		Total
Gross premium written - North America	$	1,294,794	$	105,569	$	1,400,363	$	1,232,772	$	97,689	$	1,330,461
Gross premium written - Europe	109,415		—		109,415		102,669		—		102,669
Total	$	1,404,209	$	105,569	$	1,509,778	$	1,335,441	$	97,689	$	1,433,130

Net premium written - North America	$	1,053,601	$	48,955	$	1,102,556	$	953,396	$	50,578	$	1,003,974
Net premium written - Europe	62,108		—		62,108		102,669		—		102,669
Total	$	1,115,709	$	48,955	$	1,164,664	$	1,056,065	$	50,578	$	1,106,643

Net earned premium - North America	$	893,117	$	45,658	$	938,775	$	825,112	$	46,055	$	871,167
Net earned premium - Europe	25,382		—		25,382		34,371		—		34,371
Total	$	918,499	$	45,658	$	964,157	$	859,483	$	46,055	$	905,538

The following table summarizes service and fee income by source within each operating segment:



	Three Months Ended March 31,
	2019						2018
	Property and Casualty		Accident and Health		Total		Property and Casualty		Accident and Health		Total
Commission revenue	$	27,210	$	24,771	$	51,981	$	21,709	$	17,524	$	39,233
Finance and processing fees	32,436		2,024		34,460		32,060		1,255		33,315
Installment fees	24,170		—		24,170		21,302		—		21,302
Group health administrative fees	—		23,505		23,505		—		19,291		19,291
Late payment fees	8,293		87		8,380		7,558		25		7,583
Other service and fee income	12,386		10,625		23,011		14,306		7,092		21,398
Total	$	104,495	$	61,012	$	165,507	$	96,935	$	45,187	$	142,122
NGHC	$	103,125	$	61,012	$	164,137	$	94,489	$	45,187	$	139,676
Reciprocal Exchanges	1,370		—		1,370		2,446		—		2,446
Total	$	104,495	$	61,012	$	165,507	$	96,935	$	45,187	$	142,122

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)

The following tables show an analysis of premiums and fee income by product line:



	Three Months Ended March 31,
Gross Premium Written	2019		2018
Property and Casualty
Personal Auto	$	766,681	$	724,645
Homeowners	152,042		140,253
RV/Packaged	51,851		49,464
Small Business Auto	85,878		86,244
Lender-placed Insurance	75,938		84,934
Other	13,275		16,125
Total Property and Casualty	1,145,665		1,101,665
Accident and Health
Group	64,938		56,060
Individual	84,192		75,048
International	109,414		102,668
Total Accident and Health	258,544		233,776
Total NGHC	$	1,404,209	$	1,335,441
Reciprocal Exchanges
Personal Auto	$	36,862	$	34,297
Homeowners	67,800		62,521
Other	907		871
Total Reciprocal Exchanges	$	105,569	$	97,689
Total Gross Premium Written	$	1,509,778	$	1,433,130



	Three Months Ended March 31,
Net Premium Written	2019		2018
Property and Casualty
Personal Auto	$	658,920	$	553,997
Homeowners	85,245		92,596
RV/Packaged	51,597		49,189
Small Business Auto	74,186		64,727
Lender-placed Insurance	42,070		63,214
Other	3,510		8,989
Total Property and Casualty	915,528		832,712
Accident and Health
Group	53,950		45,637
Individual	84,123		75,048
International	62,108		102,668
Total Accident and Health	200,181		223,353
Total NGHC	$	1,115,709	$	1,056,065
Reciprocal Exchanges
Personal Auto	$	15,645	$	13,495
Homeowners	33,016		36,808
Other	294		275
Total Reciprocal Exchanges	$	48,955	$	50,578
Total Net Premium Written	$	1,164,664	$	1,106,643

NATIONAL GENERAL HOLDINGS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Shares and Per Share Data)



	Three Months Ended March 31,
Net Earned Premium	2019		2018
Property and Casualty
Personal Auto	$	510,554	$	454,216
Homeowners	84,058		82,195
RV/Packaged	50,305		45,689
Small Business Auto	67,633		58,562
Lender-placed Insurance	41,718		60,469
Other	2,651		4,476
Total Property and Casualty	756,919		705,607
Accident and Health
Group	53,963		45,639
Individual	82,235		73,866
International	25,382		34,371
Total Accident and Health	161,580		153,876
NGHC Total	$	918,499	$	859,483
Reciprocal Exchanges
Personal Auto	$	15,861	$	12,997
Homeowners	29,491		32,771
Other	306		287
Total Reciprocal Exchanges	45,658		46,055
Total Net Earned Premium	$	964,157	$	905,538



	Three Months Ended March 31,
Fee Income	2019		2018
Property and Casualty
Service and Fee Income	$	103,125	$	94,489
Ceding Commission Income	48,409		32,700
Total Property and Casualty	151,534		127,189
Accident and Health
Service and Fee Income
Group	30,374		24,814
Individual	2,136		1,297
Third Party Fee	28,502		19,076
Total Service and Fee Income	61,012		45,187
Ceding Commission Income	2,591		258
Total Accident and Health	63,603		45,445
NGHC Total	$	215,137	$	172,634
Reciprocal Exchanges
Service and Fee Income	$	1,370	$	2,446
Ceding Commission Income	18,534		11,510
Total Reciprocal Exchanges	$	19,904	$	13,956
Total Fee Income	$	235,041	$	186,590

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q.

Note on Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements that are intended to be covered by the safe harbors created by The Private Securities Litigation Reform Act of 1995. When we use words such as “anticipate,” “intend,” “plan,” “believe,” “estimate,” “expect,” or similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include the plans and objectives of management for future operations, including those relating to future growth of our business activities and availability of funds, and are based on current expectations that involve assumptions that are difficult or impossible to predict accurately and many of which are beyond our control. There can be no assurance that actual developments will be those anticipated by us. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers, changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance of financial markets on our investment portfolio, our ability to accurately underwrite and price our products and to maintain and establish accurate loss reserves, estimates of the fair value of our investments, development of claims and the effect on loss reserves, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, the effect of unpredictable catastrophic losses, changes in the demand for our products, our degree of success in integrating acquired businesses, the effect of general economic conditions, state and federal legislation, the effects of tax reform, regulations and regulatory investigations into industry practices, risks associated with conducting business outside the United States, developments relating to existing agreements, disruptions to our business relationships with our vendors or other counterparties, breaches in data security or other disruptions with our technology, heightened competition, changes in pricing environments, and changes in asset valuations. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those projected, is contained in Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018, and our quarterly reports on Form 10-Q. The projections and statements in this report speak only as of the date of this report and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Overview

We are a specialty personal lines insurance holding company that, through our subsidiaries, provides a variety of insurance products, including personal and small business automobile, homeowners, umbrella, recreational vehicle, motorcycle, lender-placed, supplemental health and other niche insurance products. We sell insurance products with a focus on underwriting profitability through a combination of our customized and predictive analytics and our technology driven low cost infrastructure.

We manage our business through two segments: Property and Casualty (“P&C”) and Accident and Health (“A&H”). We transact business primarily through our twenty-one regulated domestic insurance subsidiaries: Integon Casualty Insurance Company, Integon General Insurance Corporation, Integon Indemnity Corporation, Integon National Insurance Company, Integon Preferred Insurance Company, New South Insurance Company, MIC General Insurance Corporation, National General Insurance Company, National General Assurance Company, National General Insurance Online, Inc., National Health Insurance Company, National General Premier Insurance Company, Imperial Fire and Casualty Insurance Company, Agent Alliance Insurance Company, Century-National Insurance Company, Standard Property and Casualty Insurance Company, Direct General Insurance Company, Direct General Insurance Company of Mississippi, Direct General Life Insurance Company, Direct Insurance Company and Direct National Insurance Company. Our insurance subsidiaries have an “A-” (Excellent) group rating by A.M. Best Company, Inc. (“A.M. Best”). We currently conduct a limited amount of business outside the United States, primarily in Bermuda and Sweden.

Two of our wholly-owned subsidiaries are management companies that act as attorneys-in-fact for Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer (together, the “Reciprocal Exchanges” or “Exchanges”). We do not own the Reciprocal Exchanges but are paid a fee to manage their business operations through our wholly-owned management companies. The Reciprocal Exchanges are included in our P&C segment.

The operating results of insurance companies are subject to quarterly and yearly fluctuations due to the effect of competition on pricing, the frequency and severity of losses, the effect of weather and natural disasters on losses, general economic conditions, the general regulatory environment in states in which an insurer operates, state regulation of premium rates, changes in fair value of investments, and other factors such as changes in tax laws. The industry has been highly cyclical with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. While these cycles can have a large impact on a company’s ability to grow and retain business, we have sought to focus on niche markets and regions where we are able to maintain premium rates at generally consistent levels and maintain underwriting discipline throughout these cycles. We believe that the nature of our insurance products, including their relatively low limits, the relatively short duration of time between when claims are reported and when they are settled, and the broad geographic distribution of our customers, have allowed us to grow and retain our business throughout these cycles. In addition, we have limited our exposure to catastrophe losses through reinsurance. With regard to seasonality, we tend to experience higher claims and claims expense in our P&C segment during periods of severe or inclement weather.

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

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

We evaluate our operations by monitoring key measures of growth and profitability, including net combined ratio (non-GAAP) and operating leverage. We target a net combined ratio (non-GAAP) in the low-to-mid 90s while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. To achieve our targeted net combined ratio (non-GAAP) we continually seek ways to reduce our operating costs and lower our expense ratio. For the three months ended March 31, 2019, our annualized operating leverage (the ratio of net earned premium to average total stockholders’ equity) was 1.7x, which was within our planned target operating leverage of between 1.5x and 2.0x.

Investment income is also an important part of our business. Because we often do not settle claims until several months or longer after we receive the original policy premiums, we are able to invest cash from premiums for significant periods of time. We invest our capital and surplus in accordance with state and regulatory guidelines. Our net investment income was $33.4 million and $25.0 million for the three months ended March 31, 2019 and 2018, respectively. We held 4.8% and 5.2% of total invested assets in cash, cash equivalents and restricted cash as of March 31, 2019 and December 31, 2018, respectively.

Our most significant balance sheet liability is our unpaid loss and loss adjustment expense (“LAE”) reserves. As of March 31, 2019 and December 31, 2018, our reserves, net of reinsurance recoverable on unpaid losses, were $1.6 billion and $1.7 billion, respectively. We record reserves for estimated losses under insurance policies that we

write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid at any given point in time based on known facts and circumstances. Reserves are based on estimates of the most likely ultimate cost of individual claims. These estimates are inherently uncertain. Judgment is required to determine the relevance of our historical experience and industry information under current facts and circumstances. The interpretation of this historical and industry data can be impacted by external forces, principally frequency and severity of future claims, length of time to achieve ultimate settlement of claims, inflation of medical costs and wages, insurance policy coverage interpretations, jury determinations and legislative changes. Accordingly, our reserves may prove to be inadequate to cover our actual losses. If we change our estimates, such changes would be reflected in our results of operations during the period in which they are made, with increases in our reserves resulting in decreases in our earnings.

Principal Revenue and Expense Items

Gross premium written. Gross premium written represents premium from each insurance policy that we write, including as a servicing carrier for assigned risk plans, during a reporting period based on the effective date of the individual policy, prior to ceding reinsurance to third parties.

Net premium written. Net premium written is gross premium written less that portion of premium that we cede to third-party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement.

Change in unearned premium. Change in unearned premium is the change in the balance of the portion of premium that we have written but have yet to earn during the relevant period because the policy is unexpired.

Net earned premium. Net earned premium is the earned portion of our net premium written. We earn insurance premium on a pro rata basis over the term of the policy. At the end of each reporting period, premium written that is not earned is classified as unearned premium, which is earned in subsequent periods over the remaining term of the policy. Our policies typically have a term of six months or one year. For a six-month policy written on January 1, 2019, we would earn half of the premium in the first quarter of 2019 and the other half in the second quarter of 2019.

Ceding commission income. Ceding commission income is commission we receive based on the earned premium ceded to third-party reinsurers to reimburse us for our acquisition, underwriting and other operating expenses. We earn commissions on reinsurance premium ceded in a manner consistent with the recognition of the earned premium on the underlying insurance policies, on a pro rata basis over the terms of the policies reinsured. The portion of ceding commission revenue which represents reimbursement of successful acquisition costs related to the underlying policies is recorded as an offset to acquisition costs and other underwriting expenses.

Service and fee income. We also generate policy service and fee income from installment fees, late payment fees, and other finance and processing fees related to policy cancellation, policy reinstatement, and insufficient fund check returns. These fees are generally designed to offset expenses incurred in the administration of our insurance business, and are generated as follows. Installment fees are charged to permit a policyholder to pay premiums in installments rather than in a lump sum. Late payment fees are charged when premiums are remitted after the due date and any applicable grace periods. Policy cancellation fees are charged to policyholders when a policy is terminated by the policyholder prior to the expiration of the policy’s term or renewal term, as applicable. Reinstatement fees are charged to reinstate a policy that has lapsed, generally as a result of non-payment of premiums. Insufficient fund fees are charged when the customer’s payment is returned by the financial institution.

All fee income is recognized as follows. An installment fee is recognized at the time each policy installment bill is due. A late payment fee is recognized when the customer’s payment is not received after the listed due date and any applicable grace period. A policy cancellation fee is recognized at the time the customer’s policy is canceled. A policy reinstatement fee is recognized when the customer’s policy is reinstated. An insufficient fund fee is recognized when the customer’s payment is returned by the financial institution. The amounts charged are primarily intended to

compensate us for the administrative costs associated with processing and administering policies that generate insurance premium; however, the amounts of fees charged are not dependent on the amount or period of insurance coverage provided and do not entail any obligation to return any portion of those funds. The costs associated with generating fee income are not separately tracked.

We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party insurance companies. Commission income and general agent fees are recognized, net of an allowance for estimated policy cancellations, at the time when the policy is sold. The allowance for estimated third-party cancellations is periodically evaluated and adjusted as necessary.

Net investment income. We invest our statutory surplus funds and the funds supporting our insurance liabilities primarily in cash and cash equivalents, debt and equity securities. Our net investment income includes interest and dividends earned on our invested assets and earnings or losses on our equity method investments.

Net gains and losses on investments. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment loss. We report net unrealized gains (losses) on debt securities classified as available for sale within accumulated other comprehensive income (loss) in our balance sheet. We report all gains (losses) on equity securities within net gains (losses) on investments in our statement of income. Net gains and losses on investments also include foreign exchange gains and losses which are generated by the remeasurement of financial statement balances that are denominated or stated in another currency into the functional currency.

Loss and loss adjustment expenses. Loss and LAE represent our largest expense item and, for any given reporting period, include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations and statistical analyses. We seek to establish all reserves at the most likely ultimate exposure based on our historical claims experience. It is typical for our more serious bodily injury claims to take several years to settle, and we revise our estimates as we receive additional information about the condition of claimants and the costs of their medical treatment. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor in our profitability.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses consist of policy acquisition and marketing expenses, salaries and benefits expenses. Policy acquisition expenses comprise commissions attributable to those agents, wholesalers or brokers that produce premiums written on our behalf and promotional fees attributable to our affinity relationships. Acquisition costs also include costs that are related to the successful acquisition of new or renewal insurance contracts including comprehensive loss underwriting exchange reports, motor vehicle reports, credit score checks, and policy issuance costs.

General and administrative expenses. General and administrative expenses are composed of all other operating expenses, including various departmental salaries and benefits expenses for employees that are involved in the maintenance of policies, information systems, and accounting for insurance transactions, and other insurance expenses such as federal excise tax, postage, telephones and internet access charges, as well as legal and auditing fees and board and bureau charges. In addition, general and administrative expenses include those charges that are related to the amortization of tangible and intangible assets and non-insurance activities in which we engage.

Interest expense. Interest expense represents amounts we incur on our outstanding indebtedness and interest credited on funds held balances at the applicable interest rates.

Income tax expense. We incur federal, state and local income tax expenses as well as income tax expenses in certain foreign jurisdictions in which we operate.

Net operating expense. These expenses consist of the sum of general and administrative expenses and acquisition costs and other underwriting expenses less ceding commission income, service and fee income.

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

Insurance Ratios

Net combined ratio (non-GAAP). The net combined ratio (non-GAAP) is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss ratio and net operating expense ratio (non-GAAP). If the net combined ratio (non-GAAP) is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient. Our definition of net loss ratio and net operating expense ratio are as follows:

Net loss ratio. The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is the ratio of loss and LAE incurred to net earned premium.

Net operating expense ratio (non-GAAP). The net operating expense ratio (non-GAAP) is one component of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of net operating expense to net earned premium.

Net combined ratio before amortization and impairment (non-GAAP). The net combined ratio before amortization and impairment (non-GAAP) is a measure of an insurance company’s overall underwriting profit. This is the sum of the net loss ratio and net operating expense ratio before amortization and impairment (non-GAAP). Management believes that this measure of underwriting profitability provides a more useful comparison to the combined ratio of other insurance companies involved in fewer acquisitions. Our definition of net operating expense ratio before amortization and impairment is as follows:

Net operating expense ratio before amortization and impairment (non-GAAP). The net operating expense ratio before amortization and impairment (non-GAAP) is one component of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of net operating expense before non-cash amortization of intangible assets and non-cash impairment of goodwill to net earned premium.

Net operating expense ratio, net operating expense ratio before amortization and impairment, net combined ratio and net combined ratio before amortization and impairment are considered non-GAAP financial measures under applicable SEC rules because a component of those ratios, net operating expense, is calculated by offsetting acquisition costs and other underwriting expenses and general and administrative expenses by ceding commission income and service and fee income, and is therefore a non-GAAP measure. We use net operating expense ratio (non-GAAP), net operating expense ratio before amortization and impairment (non-GAAP), net combined ratio (non-GAAP) and net combined ratio before amortization and impairment (non-GAAP) to evaluate financial performance against historical results and establish targets on a consolidated basis. We believe this presentation enhances the understanding of our results by eliminating what we believe are volatile and unusual events and presenting the ratios with what we believe are the underlying run rates of the business. Other companies may calculate these measures differently, and, therefore, their measures may not be comparable to those used by us. For a reconciliation showing the total amounts by which acquisition costs and other underwriting expenses and general and administrative expenses were offset by ceding commission income, service and fee income and significant corporate litigation expenses in the calculation of net operating expense, see “Results of Operations - Consolidated Results of Operations” below.

Critical Accounting Policies

Our discussion and analysis of our results of operations, financial condition and liquidity are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on actual results that may differ materially from these estimates and judgments under different assumptions. We have not made any changes in estimates or judgments that have had a significant effect on the reported amounts as previously disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.

For more information related to recent accounting pronouncements that we adopted during the three months ended March 31, 2019, see Note 2, “Recent Accounting Pronouncements” in the notes to our condensed consolidated financial statements.

Results of Operations

Consolidated Results of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited)



	Three Months Ended March 31,
	2019												2018
	NGHC			Reciprocal Exchanges			Eliminations			Total			NGHC			Reciprocal Exchanges			Eliminations			Total
Underwriting revenues:	(amounts in thousands)
Gross premium written	$	1,404,209		$	105,569		$	—		$	1,509,778		$	1,337,042		$	97,689		$	(1,601	)	$	1,433,130
Ceded premiums	(288,500		)	(56,614		)	—			(345,114		)	(280,977		)	(47,111		)	1,601			(326,487		)
Net premium written	$	1,115,709		$	48,955		$	—		$	1,164,664		$	1,056,065		$	50,578		$	—		$	1,106,643
Change in unearned premium	(197,210		)	(3,297		)	—			(200,507		)	(196,582		)	(4,523		)	—			(201,105		)
Net earned premium	$	918,499		$	45,658		$	—		$	964,157		$	859,483		$	46,055		$	—		$	905,538
Ceding commission income	51,000			18,534			—			69,534			32,958			11,510			—			44,468
Service and fee income	180,388			1,370			(16,251		)	165,507			154,760			2,446			(15,084		)	142,122
Total underwriting revenues	$	1,149,887		$	65,562		$	(16,251	)	$	1,199,198		$	1,047,201		$	60,011		$	(15,084	)	$	1,092,128
Underwriting expenses:
Loss and loss adjustment expense	609,784			42,025			—			651,809			589,635			44,531			—			634,166
Acquisition costs and other underwriting expenses	203,333			8,585			—			211,918			157,608			11,102			—			168,710
General and administrative expenses	242,833			21,512			(16,251		)	248,094			227,293			18,796			(15,084		)	231,005
Total underwriting expenses	$	1,055,950		$	72,122		$	(16,251	)	$	1,111,821		$	974,536		$	74,429		$	(15,084	)	$	1,033,881
Underwriting income (loss)	$	93,937		$	(6,560	)	$	—		$	87,377		$	72,665		$	(14,418	)	$	—		$	58,247
Net investment income	34,283			2,170			(3,008		)	33,445			25,019			2,144			(2,152		)	25,011
Net gain (loss) on investments	766			(744		)	—			22			249			(131		)	—			118
Interest expense	(12,999		)	(3,008		)	3,008			(12,999		)	(11,154		)	(2,152		)	2,152			(11,154		)
Income (loss) before provision (benefit) for income taxes	$	115,987		$	(8,142	)	$	—		$	107,845		$	86,779		$	(14,557	)	$	—		$	72,222
Provision (benefit) for income taxes	24,229			(1,723		)	—			22,506			18,571			(2,369		)	—			16,202
Net income (loss)	$	91,758		$	(6,419	)	$	—		$	85,339		$	68,208		$	(12,188	)	$	—		$	56,020
Net (income) loss attributable to non-controlling interest	—			6,419			—			6,419			—			12,188			—			12,188
Net income attributable to NGHC	$	91,758		$	—		$	—		$	91,758		$	68,208		$	—		$	—		$	68,208
Dividends on preferred stock	(7,875		)	—			—			(7,875		)	(7,875		)	—			—			(7,875		)
Net income attributable to NGHC common stockholders	$	83,883		$	—		$	—		$	83,883		$	60,333		$	—		$	—		$	60,333



	Three Months Ended March 31,
	2019												2018
	NGHC			Reciprocal Exchanges			Eliminations			Total			NGHC			Reciprocal Exchanges			Eliminations			Total
Underwriting ratios:	(amounts in thousands, except percentages)
Net loss ratio	66.4		%	92.0		%	—		%	67.6		%	68.6		%	96.7		%	—		%	70.0		%
Net operating expense ratio (non-GAAP)	23.4		%	22.3		%	—		%	23.3		%	22.9		%	34.6		%	—		%	23.5		%
Net combined ratio (non-GAAP)	89.8		%	114.3		%	—		%	90.9		%	91.5		%	131.3		%	—		%	93.5		%
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio	66.4		%	92.0		%	—		%	67.6		%	68.6		%	96.7		%	—		%	70.0		%
Net operating expense ratio before amortization and impairment (non-GAAP)	22.6		%	22.3		%	—		%	22.6		%	22.1		%	34.7		%	—		%	22.8		%
Net combined ratio before amortization and impairment (non-GAAP)	89.0		%	114.3		%	—		%	90.2		%	90.7		%	131.4		%	—		%	92.8		%

Reconciliation of net operating expense ratio (non-GAAP):
Total expenses	$	1,068,949		$	75,130		$	(19,259	)	$	1,124,820		$	985,690		$	76,581		$	(17,236	)	$	1,045,035
Less: Loss and loss adjustment expense	609,784			42,025			—			651,809			589,635			44,531			—			634,166
Less: Interest expense	12,999			3,008			(3,008		)	12,999			11,154			2,152			(2,152		)	11,154
Less: Ceding commission income	51,000			18,534			—			69,534			32,958			11,510			—			44,468
Less: Service and fee income	180,388			1,370			(16,251		)	165,507			154,760			2,446			(15,084		)	142,122
Net operating expense	$	214,778		$	10,193		$	—		$	224,971		$	197,183		$	15,942		$	—		$	213,125
Net earned premium	$	918,499		$	45,658		$	—		$	964,157		$	859,483		$	46,055		$	—		$	905,538
Net operating expense ratio (non-GAAP)	23.4		%	22.3		%	—		%	23.3		%	22.9		%	34.6		%	—		%	23.5		%

Net operating expense	$	214,778		$	10,193		$	—		$	224,971		$	197,183		$	15,942		$	—		$	213,125
Less: Non-cash impairment of goodwill	—			—			—			—			—			—			—			—
Less: Non-cash amortization of intangible assets	7,216			11			—			7,227			6,920			(27		)	—			6,893
Net operating expense before amortization and impairment	$	207,562		$	10,182		$	—		$	217,744		$	190,263		$	15,969		$	—		$	206,232
Net earned premium	$	918,499		$	45,658		$	—		$	964,157		$	859,483		$	46,055		$	—		$	905,538
Net operating expense ratio before amortization and impairment (non-GAAP)	22.6		%	22.3		%	—		%	22.6		%	22.1		%	34.7		%	—		%	22.8		%

Effective July 1, 2017, we entered into auto and homeowners quota share agreements with third party reinsurers (collectively, the “Quota Shares”). Pursuant to the auto quota share agreement, we cede 15.0% of net liability under our auto policies. Effective January 1, 2019, we cede 7.0% of net liability under new and renewal auto policies written. Pursuant to our homeowners quota share agreement, we ceded 29.6% of net liability under homeowners policies through April 30, 2018 and effective May 1, 2018, we cede an additional 12.4% (the “Additional Cession”) of net liability (for total cession of 42.0%) under the homeowners quota share agreement.

As a result of these changes in the Quota Shares, comparisons between the three months ended March 31, 2019 and 2018 results will be less meaningful. The Quota Shares impact our P&C segment only.

Consolidated Results of Operations for the Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018 (Unaudited)

Gross premium written. Gross premium written increased by $76.6 million, or 5.3%, from $1,433.1 million for the three months ended March 31, 2018 to $1,509.8 million for the three months ended March 31, 2019, due to an increase of $51.9 million from the P&C segment as a result of growth, primarily in our personal auto and homeowners product lines; and an increase of $24.8 million from the A&H segment primarily due to growth in our domestic business.

Net premium written. Net premium written increased by $58.0 million, or 5.2%, from $1,106.6 million for the three months ended March 31, 2018 to $1,164.7 million for the three months ended March 31, 2019. Net premium written for the P&C segment increased by $81.2 million for the three months ended March 31, 2019 compared to the same period in 2018, primarily as a result of growth ($29.2 million) and a reduction in premium ceded to the Quota Shares ($53.7 million). Net premium written for the A&H segment decreased by $23.2 million for the three months ended March 31, 2019 compared to the same period in 2018, primarily as a result of premium ceded to a quota share agreement in our international business.

Net earned premium. Net earned premium increased by $58.6 million, or 6.5%, from $905.5 million for the three months ended March 31, 2018 to $964.2 million for the three months ended March 31, 2019. The change by segment was: P&C increased by $50.9 million and A&H increased by $7.7 million, both increases primarily due to growth.

Ceding commission income. Ceding commission income increased by $25.1 million, or 56.4%, from $44.5 million for the three months ended March 31, 2018 to $69.5 million for the three months ended March 31, 2019, primarily driven by an increase in P&C ceded earned premium.

Service and fee income. Service and fee income increased by $23.4 million, or 16.5%, from $142.1 million for the three months ended March 31, 2018 to $165.5 million for the three months ended March 31, 2019. The increase was primarily attributable to our A&H segment ($15.8 million), due to growth in our domestic business. Service and fee income is discussed in more detail in the segment discussions that follow.

The components of service and fee income are as follows:



	Three Months Ended March 31,
	2019		2018		Change		% Change
	(amounts in thousands)
Commission revenue	$	51,981	$	39,233	$	12,748	32.5	%
Finance and processing fees	34,460		33,315		1,145		3.4	%
Installment fees	24,170		21,302		2,868		13.5	%
Group health administrative fees	23,505		19,291		4,214		21.8	%
Late payment fees	8,380		7,583		797		10.5	%
Other service and fee income	23,011		21,398		1,613		7.5	%
Total	$	165,507	$	142,122	$	23,385	16.5	%

Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $17.6 million, from $634.2 million for the three months ended March 31, 2018 to $651.8 million for the three months ended March 31, 2019, primarily reflecting growth. The changes by segment were: P&C - increased by $24.2 million and A&H - decreased by $6.5 million.

Loss and LAE for the three months ended March 31, 2019 included $14.3 million of favorable development on prior accident year loss and LAE reserves. This development was composed of $3.5 million of favorable development in the P&C segment (including $2.1 million of unfavorable development for the Reciprocal Exchanges) primarily driven by our homeowners business, and $10.9 million of favorable development in the A&H segment primarily driven by our domestic products, specifically the Stop Loss business. Loss and LAE for the three months ended March 31, 2018 included $19.9 million of favorable development on prior accident year loss and LAE reserves. This development was composed of $16.6 million of favorable development in the P&C segment (including $1.4 million of favorable development for the Reciprocal Exchanges) primarily driven by favorable development in our auto physical damage and homeowners business, and $3.4 million of favorable development in the A&H segment primarily driven by favorable development in our domestic A&H business.

Our consolidated net loss ratio decreased from 70.0% for the three months ended March 31, 2018 to 67.6% for the three months ended March 31, 2019. Net loss ratio is discussed in more detail in the segment discussions that follow.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $43.2 million, or 25.6%, from $168.7 million for the three months ended March 31, 2018 to $211.9 million for the three months ended March 31, 2019, due to an increase of $29.0 million in the P&C segment and an increase of $14.2 million in the A&H segment.

General and administrative expenses. General and administrative expenses increased by $17.1 million, from $231.0 million for the three months ended March 31, 2018 to $248.1 million for the three months ended March 31, 2019.

Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $11.8 million, from $213.1 million for the three months ended March 31, 2018 to $225.0 million for the three months ended March 31, 2019.

The consolidated net operating expense ratio decreased from 23.5% for the three months ended March 31, 2018 to 23.3% for the three months ended March 31, 2019. Excluding the Reciprocal Exchanges, the net operating expense ratio was 23.4% and 22.9% for the three months ended March 31, 2019 and 2018, respectively. The Reciprocal Exchanges’ net operating expense ratio was 22.3% and 34.6% for the three months ended March 31, 2019 and 2018, respectively. Net operating expense and net operating expense ratio is discussed in more detail in the segment discussions that follow.

P&C Segment - Results of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited)



	Three Months Ended March 31,
	2019												2018
	NGHC			Reciprocal Exchanges			Eliminations			Total			NGHC			Reciprocal Exchanges			Eliminations			Total
Underwriting revenues:	(amounts in thousands, except percentages)
Gross premium written	$	1,145,665		$	105,569		$	—		$	1,251,234		$	1,103,266		$	97,689		$	(1,601	)	$	1,199,354
Ceded premiums	(230,137		)	(56,614		)	—			(286,751		)	(270,554		)	(47,111		)	1,601			(316,064		)
Net premium written	$	915,528		$	48,955		$	—		$	964,483		$	832,712		$	50,578		$	—		$	883,290
Change in unearned premium	(158,609		)	(3,297		)	—			(161,906		)	(127,105		)	(4,523		)	—			(131,628		)
Net earned premium	$	756,919		$	45,658		$	—		$	802,577		$	705,607		$	46,055		$	—		$	751,662
Ceding commission income	48,409			18,534			—			66,943			32,700			11,510			—			44,210
Service and fee income	119,376			1,370			(16,251		)	104,495			109,573			2,446			(15,084		)	96,935
Total underwriting revenues	$	924,704		$	65,562		$	(16,251	)	$	974,015		$	847,880		$	60,011		$	(15,084	)	$	892,807
Underwriting expenses:
Loss and loss adjustment expense	525,035			42,025			—			567,060			498,357			44,531			—			542,888
Acquisition costs and other underwriting expenses	145,485			8,585			—			154,070			114,000			11,102			—			125,102
General and administrative expenses	184,195			21,512			(16,251		)	189,456			176,685			18,796			(15,084		)	180,397
Total underwriting expenses	$	854,715		$	72,122		$	(16,251	)	$	910,586		$	789,042		$	74,429		$	(15,084	)	$	848,387
Underwriting income (loss)	$	69,989		$	(6,560	)	$	—		$	63,429		$	58,838		$	(14,418	)	$	—		$	44,420



	Three Months Ended March 31,
	2019												2018
	NGHC			Reciprocal Exchanges			Eliminations			Total			NGHC			Reciprocal Exchanges			Eliminations			Total
Underwriting ratios:	(amounts in thousands, except percentages)
Net loss ratio	69.4		%	92.0		%	—		%	70.7		%	70.6		%	96.7		%	—		%	72.2		%
Net operating expense ratio (non-GAAP)	21.4		%	22.3		%	—		%	21.4		%	21.0		%	34.6		%	—		%	21.9		%
Net combined ratio (non-GAAP)	90.8		%	114.3		%	—		%	92.1		%	91.6		%	131.3		%	—		%	94.1		%
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio	69.4		%	92.0		%	—		%	70.7		%	70.6		%	96.7		%	—		%	72.2		%
Net operating expense ratio before amortization and impairment (non-GAAP)	20.7		%	22.3		%	—		%	20.8		%	20.3		%	34.7		%	—		%	21.2		%
Net combined ratio before amortization and impairment (non-GAAP)	90.1		%	114.3		%	—		%	91.5		%	90.9		%	131.4		%	—		%	93.4		%

Reconciliation of net operating expense ratio (non-GAAP):
Total expenses	$	854,715		$	72,122		$	(16,251	)	$	910,586		$	789,042		$	74,429		$	(15,084	)	$	848,387
Less: Loss and loss adjustment expense	525,035			42,025			—			567,060			498,357			44,531			—			542,888
Less: Ceding commission income	48,409			18,534			—			66,943			32,700			11,510			—			44,210
Less: Service and fee income	119,376			1,370			(16,251		)	104,495			109,573			2,446			(15,084		)	96,935
Net operating expense	$	161,895		$	10,193		$	—		$	172,088		$	148,412		$	15,942		$	—		$	164,354
Net earned premium	$	756,919		$	45,658		$	—		$	802,577		$	705,607		$	46,055		$	—		$	751,662
Net operating expense ratio (non-GAAP)	21.4		%	22.3		%	—		%	21.4		%	21.0		%	34.6		%	—		%	21.9		%

Net operating expense	$	161,895		$	10,193		$	—		$	172,088		$	148,412		$	15,942		$	—		$	164,354
Less: Non-cash impairment of goodwill	—			—			—			—			—			—			—			—
Less: Non-cash amortization of intangible assets	5,485			11			—			5,496			5,400			(27		)	—			5,373
Net operating expense before amortization and impairment	$	156,410		$	10,182		$	—		$	166,592		$	143,012		$	15,969		$	—		$	158,981
Net earned premium	$	756,919		$	45,658		$	—		$	802,577		$	705,607		$	46,055		$	—		$	751,662
Net operating expense ratio before amortization and impairment (non-GAAP)	20.7		%	22.3		%	—		%	20.8		%	20.3		%	34.7		%	—		%	21.2		%

P&C Segment Results of Operations for the Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018 (Unaudited)

Gross premium written. Gross premium written increased by $51.9 million, or 4.3%, from $1,199.4 million for the three months ended March 31, 2018 to $1,251.2 million for the three months ended March 31, 2019, as a result of growth, primarily in our personal auto and homeowners product lines.

Net premium written. Net premium written increased by $81.2 million, or 9.2%, from $883.3 million for the three months ended March 31, 2018 to $964.5 million for the three months ended March 31, 2019, primarily as a result of growth ($29.2 million) and a reduction in premium ceded to the Quota Shares ($53.7 million).

Net earned premium. Net earned premium increased by $50.9 million, or 6.8%, from $751.7 million for the three months ended March 31, 2018 to $802.6 million for the three months ended March 31, 2019, primarily attributable to growth ($67.9 million), partially offset by the Quota Shares ($16.6 million).

Ceding commission income. Ceding commission income increased by $22.7 million, or 51.4%, from $44.2 million for the three months ended March 31, 2018 to $66.9 million for the three months ended March 31, 2019, primarily driven by an increase in ceded earned premium to the Quota Shares.

Service and fee income. Service and fee income increased by $7.6 million, from $96.9 million for the three months ended March 31, 2018 to $104.5 million for the three months ended March 31, 2019.

The components of service and fee income are as follows:



	Three Months Ended March 31,
	2019		2018		Change			% Change
	(amounts in thousands)
Finance and processing fees	$	32,436	$	32,060	$	376		1.2	%
Commission revenue	27,210		21,709		5,501			25.3	%
Installment fees	24,170		21,302		2,868			13.5	%
Late payment fees	8,293		7,558		735			9.7	%
Other service and fee income	12,386		14,306		(1,920		)	(13.4	)%
Total	$	104,495	$	96,935	$	7,560		7.8	%

Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $24.2 million, from $542.9 million for the three months ended March 31, 2018 to $567.1 million for the three months ended March 31, 2019, primarily reflecting growth.

Our P&C segment net loss ratio, which includes the Reciprocal Exchanges, decreased from 72.2% for the three months ended March 31, 2018 to 70.7% for the three months ended March 31, 2019. Excluding the Reciprocal Exchanges, the net loss ratio was 69.4% and 70.6% for the three months ended March 31, 2019 and 2018, respectively. The Reciprocal Exchanges’ net loss ratio was 92.0% and 96.7% for the three months ended March 31, 2019 and 2018, respectively.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $29.0 million, or 23.2%, from $125.1 million for the three months ended March 31, 2018 to $154.1 million for the three months ended March 31, 2019.

General and administrative expenses. General and administrative expenses increased by $9.1 million, from $180.4 million for the three months ended March 31, 2018 to $189.5 million for the three months ended March 31, 2019.

Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $7.7 million, from $164.4 million for the three months ended March 31, 2018 to $172.1 million for the three months ended March 31, 2019. Our P&C segment net operating expense ratio decreased from 21.9% for the three months ended March 31, 2018 to 21.4% for the three months ended March 31, 2019. The increase in net operating expense and decrease in net operating expense ratio were primarily as a result of increased earned premium.

Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $19.0 million, from $44.4 million for the three months ended March 31, 2018 to $63.4 million for the three months ended March 31, 2019. Our P&C segment net combined ratio decreased from 94.1% for the three months ended March 31, 2018 to 92.1% for the three months ended March 31, 2019. The increase in underwriting income and the decrease in net combined ratio were primarily due to a lower loss ratio.

A&H Segment - Results of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited)



	Three Months Ended March 31,
	2019			2018
Underwriting revenues:	(amounts in thousands, except percentages)
Gross premium written	$	258,544		$	233,776
Ceded premiums	(58,363		)	(10,423		)
Net premium written	$	200,181		$	223,353
Change in unearned premium	(38,601		)	(69,477		)
Net earned premium	$	161,580		$	153,876
Ceding commission income	2,591			258
Service and fee income	61,012			45,187
Total underwriting revenues	$	225,183		$	199,321
Underwriting expenses:
Loss and loss adjustment expense	84,749			91,278
Acquisition costs and other underwriting expenses	57,848			43,608
General and administrative expenses	58,638			50,608
Total underwriting expenses	$	201,235		$	185,494
Underwriting income	$	23,948		$	13,827

Underwriting ratios:
Net loss ratio	52.5		%	59.3		%
Net operating expense ratio (non-GAAP)	32.7		%	31.7		%
Net combined ratio (non-GAAP)	85.2		%	91.0		%
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio	52.5		%	59.3		%
Net operating expense ratio before amortization and impairment (non-GAAP)	31.7		%	30.7		%
Net combined ratio before amortization and impairment (non-GAAP)	84.2		%	90.0		%

Reconciliation of net operating expense ratio (non-GAAP):
Total expenses	$	201,235		$	185,494
Less: Loss and loss adjustment expense	84,749			91,278
Less: Ceding commission income	2,591			258
Less: Service and fee income	61,012			45,187
Net operating expense	$	52,883		$	48,771
Net earned premium	$	161,580		$	153,876
Net operating expense ratio (non-GAAP)	32.7		%	31.7		%

Net operating expense	$	52,883		$	48,771
Less: Non-cash impairment of goodwill	—			—
Less: Non-cash amortization of intangible assets	1,731			1,520
Net operating expense before amortization and impairment	$	51,152		$	47,251
Net earned premium	$	161,580		$	153,876
Net operating expense ratio before amortization and impairment (non-GAAP)	31.7		%	30.7		%

A&H Segment Results of Operations for the Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018 (Unaudited)

Gross premium written. Gross premium written increased by $24.8 million, or 10.6%, from $233.8 million for the three months ended March 31, 2018 to $258.5 million for the three months ended March 31, 2019, primarily due to growth in our domestic business.

Net premium written. Net premium written decreased by $23.2 million, or 10.4%, from $223.4 million for the three months ended March 31, 2018 to $200.2 million for the three months ended March 31, 2019. The decrease was primarily as a result of premium ceded to a quota share agreement in our international business.

Net earned premium. Net earned premium increased by $7.7 million, or 5.0%, from $153.9 million for the three months ended March 31, 2018 to $161.6 million for the three months ended March 31, 2019, as a result of growth.

Service and fee income. Service and fee income increased by $15.8 million, or 35.0%, from $45.2 million for the three months ended March 31, 2018 to $61.0 million for the three months ended March 31, 2019, primarily due to growth in our domestic business.

The components of service and fee income are as follows:



	Three Months Ended March 31,
	2019		2018		Change		% Change
	(amounts in thousands)
Commission revenue	$	24,771	$	17,524	$	7,247	41.4	%
Group health administrative fees	23,505		19,291		4,214		21.8	%
Finance and processing fees	2,024		1,255		769		61.3	%
Other service and fee income	10,712		7,117		3,595		50.5	%
Total	$	61,012	$	45,187	$	15,825	35.0	%

Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $6.5 million, from $91.3 million for the three months ended March 31, 2018 to $84.7 million for the three months ended March 31, 2019. Our A&H net loss ratio decreased from 59.3% for the three months ended March 31, 2018 to 52.5% for the three months ended March 31, 2019. The loss ratio decrease was primarily as a result of favorable development on prior year loss.

Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $14.2 million, or 32.7%, from $43.6 million for the three months ended March 31, 2018 to $57.8 million for the three months ended March 31, 2019, primarily from domestic growth.

General and administrative expenses. General and administrative expenses increased by $8.0 million, or 15.9%, from $50.6 million for the three months ended March 31, 2018 to $58.6 million for the three months ended March 31, 2019.

Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $4.1 million, from $48.8 million for the three months ended March 31, 2018 to $52.9 million for the three months ended March 31, 2019. Our A&H net operating expense ratio increased from 31.7% for the three months ended March 31, 2018 to 32.7% for the three months ended March 31, 2019.

Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $10.1 million, from $13.8 million for the three months ended March 31, 2018 to $23.9 million for the three months ended March 31, 2019. Our A&H net combined ratio decreased from 91.0% for the three months ended March 31, 2018 to 85.2% for the three months ended March 31, 2019. The net combined ratio decrease was a result of a lower net loss ratio, partially offset by a higher net operating expense ratio.

Investment Portfolio

Our investment strategy emphasizes, first, the preservation of capital and, second, maximization of an appropriate risk-adjusted return. We seek to maximize investment returns using investment guidelines that stress prudent allocation among cash and cash equivalents, debt securities and, to a lesser extent, other investments. Cash and cash equivalents include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90 days or less. Our debt securities include obligations of the U.S. Treasury or U.S. government agencies, obligations of local and foreign governments, obligations of U.S. and Canadian corporations, mortgages guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, Federal Farm Credit entities, commercial mortgage obligations, and structured securities primarily consisting of collateralized loan and debt obligations.

The average yield on our investment portfolio was 3.3% and 3.0% for the three months ended March 31, 2019 and 2018, respectively, and the average duration of the portfolio was 4.1 and 4.2 years as of March 31, 2019 and 2018, respectively.

For more information related to our investments, see Note 3, “Investments” in the notes to our Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

We are organized as a holding company with twenty-one domestic insurance company subsidiaries and various foreign insurance and reinsurance subsidiaries, as well as various other non-insurance subsidiaries. Our principal sources of operating funds are premiums, service and fee income, investment income and proceeds from sales and maturities of investments. Our primary uses of operating funds include payments of claims and operating expenses. Currently, we pay claims using cash flow from operations and invest our excess cash primarily in debt securities and, to a lesser extent, other investments. Except as set forth below, we expect that projected cash flows from operations, as well as the net proceeds from our debt and equity issuances, will provide us with sufficient liquidity to fund our anticipated growth by providing capital to increase the surplus of our insurance subsidiaries, as well as to pay claims and operating expenses, and to pay interest and principal on debt and debt facilities and other holding company expenses for the foreseeable future. However, if our growth attributable to potential acquisitions, internally generated growth, or a combination of these factors, exceeds our expectations, we may have to raise additional capital. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support future growth or operating requirements and, as a result, our business, financial condition and results of operations could be adversely affected. To support our current and future policy writings, we have raised capital using a combination of debt and equity, and entered into third party quota share reinsurance agreements. We may raise additional capital over the next twelve months or obtain additional capital support in the form of third party quota share reinsurance.

We may generate liquidity through the issuance of debt or equity securities or financing through borrowings under credit facilities, or a combination thereof. We also have a $340.0 million credit agreement, under which there was $160.0 million outstanding as of March 31, 2019. The proceeds of borrowings under the credit agreement may be used for working capital, acquisitions and general corporate purposes. See “Revolving Credit Agreement” below.

Our insurance subsidiaries are subject to statutory and regulatory restrictions imposed on insurance companies by their place of domicile which limit the amount of cash dividends or distributions that they may pay to us unless special permission is received from the insurance regulator of the relevant domicile. The aggregate limit imposed by the various domiciliary regulatory authorities of our insurance subsidiaries was approximately $344.6 million and $287.9 million as of March 31, 2019 and December 31, 2018, respectively, taking into account dividends paid in the prior twelve month periods. During the three months ended March 31, 2019 and 2018, there were $0.0 million and $80.0 million, respectively, of dividends or return of capital paid by our insurance subsidiaries.

We forecast claim payments based on our historical experience. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on both a short-term and long-term basis. Cash payments for claims were $676.4 million and $614.5 million in the three months ended March 31, 2019 and 2018, respectively. Historically, we have funded claim payments from cash flow from operations (principally premiums), net of amounts ceded to our third-party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our cash and cash equivalents (including restricted cash) and total investments were $4.6 billion at March 31, 2019 and $4.5 billion at December 31, 2018. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and financial condition and could reduce investment income in future periods.

Pursuant to a tax allocation agreement by and among us and certain of our subsidiaries, we compute and pay federal income taxes on a consolidated basis. Each subsidiary party to this agreement computes and pays to us its respective share of the federal income tax liability primarily based on separate return calculations.

The following table is a summary of our statement of cash flows:



	Three Months Ended March 31,
	2019			2018			Change			% Change
	(amounts in thousands)
Net cash provided by operating activities	$	115,210		$	51,942		$	63,268		121.8	%
Net cash used in investing activities	(106,632		)	(16,947		)	(89,685		)	nm
Net cash used in financing activities	(20,487		)	(12,993		)	(7,494		)	57.7	%
Effect of exchange rate changes on cash and cash equivalents	(1,402		)	(1,433		)	31			(2.2	)%
Net (decrease) increase in cash, cash equivalents, and restricted cash	$	(13,311	)	$	20,569		$	(33,880	)	nm

nm - not meaningful

Comparison of the Three Months Ended March 31, 2019 and 2018

Net cash provided by operating activities increased by $63.3 million, primarily due to an increase in unpaid loss and loss adjustment expense reserves offset by higher net income in the first quarter of 2019.

Net cash used in investing activities increased by $89.7 million, primarily due to an increase in cash used in purchases of premises and equipment.

Condensed Consolidated Balance Sheets



	March 31, 2019
	NGHC		Reciprocal Exchanges			Eliminations			Total
ASSETS	(amounts in thousands)
Investments:
Debt securities, available-for-sale, at fair value	$	3,336,065	$	299,282		$	—		$	3,635,347
Equity securities, at fair value	10,285		—			—			10,285
Short-term investments	370,420		19,632			—			390,052
Other investments	413,313		—			(107,342		)	305,971
Total investments	4,130,083		318,914			(107,342		)	4,341,655
Cash and cash equivalents	188,064		—			—			188,064
Restricted cash and cash equivalents	31,915		293			—			32,208
Accrued investment income	52,686		2,135			(28,370		)	26,451
Premiums and other receivables, net	1,547,958		60,293			—			1,608,251
Deferred acquisition costs	247,872		20,305			—			268,177
Reinsurance recoverable	1,363,843		125,722			—			1,489,565
Prepaid reinsurance premiums	509,814		127,210			—			637,024
Premises and equipment, net	411,997		1,183			—			413,180
Intangible assets, net	369,452		3,360			—			372,812
Goodwill	180,183		—			—			180,183
Prepaid and other assets	68,405		5,592			—			73,997
Total assets	$	9,102,272	$	665,007		$	(135,712	)	$	9,631,567
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves	$	2,674,301	$	196,022		$	—		$	2,870,323
Unearned premiums and other revenue	2,181,579		258,701			—			2,440,280
Reinsurance payable	493,280		31,579			—			524,859
Accounts payable and accrued expenses	356,107		34,530			(28,370		)	362,267
Debt	710,196		107,342			(107,342		)	710,196
Other liabilities	333,621		58,539			—			392,160
Total liabilities	$	6,749,084	$	686,713		$	(135,712	)	$	7,300,085
Stockholders’ equity:
Common stock	$	1,131	$	—		$	—		$	1,131
Preferred stock	450,000		—			—			450,000
Additional paid-in capital	1,058,061		—			—			1,058,061
Accumulated other comprehensive income	581		—			—			581
Retained earnings	843,415		—			—			843,415
Total National General Holdings Corp. Stockholders’ Equity	2,353,188		—			—			2,353,188
Non-controlling interest	—		(21,706		)	—			(21,706		)
Total stockholders’ equity	$	2,353,188	$	(21,706	)	$	—		$	2,331,482
Total liabilities and stockholders’ equity	$	9,102,272	$	665,007		$	(135,712	)	$	9,631,567



	December 31, 2018
	NGHC			Reciprocal Exchanges			Eliminations			Total
ASSETS	(amounts in thousands)
Investments:
Debt securities, available-for-sale, at fair value	$	3,263,949		$	297,083		$	—		$	3,561,032
Equity securities, at fair value	10,949			—			—			10,949
Short-term investments	331,221			17,328			—			348,549
Other investments	407,580			—			(101,304		)	306,276
Total investments	4,013,699			314,411			(101,304		)	4,226,806
Cash and cash equivalents	193,858			—			—			193,858
Restricted cash and cash equivalents	39,525			200			—			39,725
Accrued investment income	50,981			1,596			(25,400		)	27,177
Premiums and other receivables, net	1,338,485			61,327			—			1,399,812
Deferred acquisition costs	231,401			20,007			—			251,408
Reinsurance recoverable	1,494,670			117,068			—			1,611,738
Prepaid reinsurance premiums	529,241			136,433			—			665,674
Premises and equipment, net	306,309			1,695			—			308,004
Intangible assets, net	376,532			3,405			—			379,937
Goodwill	180,183			—			—			180,183
Prepaid and other assets	150,377			4,581			—			154,958
Total assets	$	8,905,261		$	660,723		$	(126,704	)	$	9,439,280
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves	$	2,778,689		$	178,470		$	—		$	2,957,159
Unearned premiums and other revenue	2,014,965			265,763			—			2,280,728
Reinsurance payable	615,872			40,393			—			656,265
Accounts payable and accrued expenses	390,338			33,120			(25,400		)	398,058
Debt	705,795			101,304			(101,304		)	705,795
Other liabilities	178,764			61,640			—			240,404
Total liabilities	$	6,684,423		$	680,690		$	(126,704	)	$	7,238,409
Stockholders’ equity:
Common stock	$	1,129		$	—		$	—		$	1,129
Preferred stock	450,000			—			—			450,000
Additional paid-in capital	1,057,783			—			—			1,057,783
Accumulated other comprehensive loss	(52,130		)	—			—			(52,130		)
Retained earnings	764,056			—			—			764,056
Total National General Holdings Corp. Stockholders’ Equity	2,220,838			—			—			2,220,838
Non-controlling interest	—			(19,967		)	—			(19,967		)
Total stockholders’ equity	$	2,220,838		$	(19,967	)	$	—		$	2,200,871
Total liabilities and stockholders’ equity	$	8,905,261		$	660,723		$	(126,704	)	$	9,439,280

Other Material Changes in Financial Position



	March 31, 2019		December 31, 2018		Change		% Change
	(amounts in thousands)
Selected Assets:
Premiums and other receivables, net	$	1,608,251	$	1,399,812	$	208,439	14.9	%

Changes in Financial Position During the Three Months Ended March 31, 2019 Compared to December 31, 2018

Premiums and other receivables increased by $208.4 million, primarily driven by growth in our P&C segment ($142.8 million) and A&H segment ($62.4 million).

Reinsurance

We utilize reinsurance agreements to transfer portions of the underlying risk of the business we write to various reinsurance companies. Reinsurance does not discharge or diminish our obligation to pay claims covered by the insurance policies we issue; however, it does permit us to recover certain incurred losses from our reinsurers and our reinsurance recoveries reduce the maximum loss that we may incur as a result of a covered loss event. We believe it is important to ensure that our reinsurance partners are financially strong and they generally carry at least an A.M. Best rating of “A-” (Excellent) or are fully collateralized at the time we enter into our reinsurance agreements. We also enter into reinsurance relationships with third-party captives formed by agents as a mechanism for sharing risk and profit. The total amount, cost and limits relating to the reinsurance coverage we purchase may vary from year to year based upon a variety of factors, including the availability of quality reinsurance at an acceptable price and the level of risk that we choose to retain for our own account.

We assume and cede insurance risks under various reinsurance agreements, on both a pro rata basis and an excess of loss basis. We purchase reinsurance to mitigate the volatility of direct and assumed business, which may be caused by the aggregate value or the concentration of written exposures in a particular geographic area or business segment and may arise from catastrophes or other large loss events.

For more information about our reinsurance agreements, refer to Note 10, “Reinsurance” of our Annual Report on Form 10-K for the year ended December 31, 2018, and Note 7, “Reinsurance” in the notes to our condensed consolidated financial statements.

Debt

Revolving Credit Agreement

On February 25, 2019, we refinanced our existing credit agreement and entered into a new credit agreement (the “2019 Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, KeyBank National Association and Fifth Third Bank, as Co-Syndication Agents, and the various lending institutions party thereto. The 2019 Credit Agreement is currently a $340.0 million base revolving credit facility with a letter of credit sublimit of $150.0 million and an expansion feature of up to $50.0 million. Borrowings under the 2019 Credit Agreement bear interest at either the Alternate Base Rate (“ABR”) or the LIBO rate. ABR borrowings under the 2019 Credit Agreement will bear interest at (x) the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5 percent or (c) the adjusted LIBO rate for a one-month interest period on such day plus 1 percent. Eurodollar borrowings under the 2019 Credit Agreement will bear interest at the adjusted LIBO rate plus the Eurodollar spread for the interest period in effect. Fees payable by us under the 2019 Credit Agreement include a letter of credit participation fee, a letter of credit fronting fee with respect to each letter of credit (0.125%) and a commitment fee on the available commitments of the lenders (a range of 0.175% to 0.25% based on our consolidated leverage ratio, and which rate was 0.225% as of March 31, 2019). The 2019 Credit Agreement has a maturity date of February 25, 2023. As of March 31, 2019, there was $160.0 million outstanding under the 2019 Credit Agreement.

For more information about our debt, including other outstanding debt, ranking and restrictive covenants, refer to Note 12, “Debt” of our Annual Report on Form 10-K for the year ended December 31, 2018, and Note 8, “Debt” in the notes to our condensed consolidated financial statements.

Preferred Stock

We have four separate series (Series A through D) of preferred stock outstanding. Two of these series (Series B and C) were issued in offerings using depositary shares. Dividends on the Series A, B and C preferred stock are payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by the Company’s Board of Directors, quarterly in arrears on the 15th day of January, April, July and October of each year. Dividends on the Series D preferred stock are payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by the Company’s Board of Directors, semi-annually in arrears on the 15th day of January and July of each year, commencing on January 15, 2019. On or after July 15, 2023 (or in the event of a fundamental change of the Company, at any time), the Series D preferred stock may be converted at the holder’s option into shares of our common stock.

A summary description of the terms of these series of preferred stock is presented in the table below:



Series	Dividend rate per year		Shares of Preferred Stock issued	Depositary shares issued	Liquidation preference per share		Aggregate liquidation preference		Net proceeds		Dividend paid during the three months ended March 31, 2019
							(amounts in thousands)
A	7.50	%	2,200,000	—	$	25	$	55,000	$	53,164	$	1,031
B	7.50	%	165,000	6,600,000	$	1,000	$	165,000	$	159,802	$	3,094
C	7.50	%	200,000	8,000,000	$	1,000	$	200,000	$	193,518	$	3,750
D	Fixed/ Floating⁽¹⁾		120	—	$	250,000	$	30,000	$	29,890	$	992

⁽¹⁾Dividend rate is fixed at 7.00% prior to July 15, 2023 and floating at six-month LIBOR plus 5.4941% thereafter.

For more information about our preferred stock, refer to Note 15, “Stockholders’ Equity” of our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Liquidity Risk. Liquidity risk represents our potential inability to meet all payment obligations when they become due. We maintain sufficient cash and marketable securities to fund claim payments and operations. We purchase reinsurance coverage to mitigate the risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly.

Credit Risk. Credit risk is the potential loss arising principally from adverse changes in the financial condition of the issuers of our debt securities and the financial condition of our reinsurers.

We address the credit risk related to the issuers of our debt securities by investing primarily in debt securities that are rated “BBB-” or higher by Standard & Poor’s. We also independently monitor the financial condition of all issuers of our debt securities. To limit our risk exposure, we employ diversification policies that limit the credit exposure to any single issuer or business sector.

We are subject to credit risk with respect to our reinsurers. Although our reinsurers are obligated to reimburse us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks we have ceded. As a result, reinsurance contracts do not limit our ultimate obligations to pay claims covered under the insurance policies we issue and we might not collect amounts recoverable from our reinsurers. We address this credit risk by selecting reinsurers that generally carry at least an A.M. Best rating of “A-” (Excellent) or are fully collateralized at the time we enter into the agreement and by performing, along with our reinsurance broker, periodic credit reviews of our reinsurers. If one of our reinsurers suffers a credit downgrade, we may consider various options to lessen the risk of asset impairment, including commutation, novation and letters of credit. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reinsurance.”

Market Risk. Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are interest rate risk and equity price risk.

Interest Rate Risk. We had debt securities with a fair value of $3.6 billion as of March 31, 2019 that are subject to interest rate risk. Interest rate risk is the risk that we may incur losses due to adverse changes in interest rates. Fluctuations in interest rates have a direct impact on the market valuation of our debt securities. We manage our exposure to interest rate risk through a disciplined asset and liability matching and capital management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows are critical elements. These risks are assessed regularly and balanced within the context of our liability and capital position.

The table below summarizes the interest rate risk by illustrating the sensitivity of the fair value and carrying value of our debt securities as of March 31, 2019 to selected hypothetical changes in interest rates, and the associated impact on our stockholders’ equity. We anticipate that we will continue to meet our obligations out of income. We classify our debt securities primarily as available for sale. Temporary changes in the fair value of our debt securities impact the carrying value of these securities and are reported in our stockholders’ equity as a component of accumulated other comprehensive income, net of taxes.

The selected scenarios with our debt securities in the table below are not predictions of future events, but rather are intended to illustrate the effect such events may have on the fair value and carrying value of our debt securities and on our stockholders’ equity, each as of March 31, 2019.



Hypothetical Change in Interest Rates	Fair Value		Estimated Change in Fair Value			Hypothetical Percentage Increase (Decrease) in Stockholders’ Equity
	(amounts in thousands)
200 basis point increase	$	3,336,013	$	(299,334	)	(10.1	)%
100 basis point increase	3,485,680		(149,667		)	(5.1	)
No change	3,635,347		—			—
100 basis point decrease	3,778,180		142,833			4.8
200 basis point decrease	3,919,122		283,775			9.6

Changes in interest rates would affect the fair market value of our fixed-rate debt instruments but would not have an impact on our earnings or cash flow. As of March 31, 2019, we had $682.2 million principal amount of debt instruments (excluding finance lease and other liabilities), of which $450.0 million are fixed-rate debt instruments. A fluctuation of 100 basis points in interest on our variable-rate debt instruments, which are tied to LIBOR, would affect our earnings and cash flows by $2.3 million before income tax, on an annual basis, but would not affect the fair market value of the variable-rate debt.

Off-Balance Sheet Risk. As of March 31, 2019 we did not have any off-balance sheet arrangements that have or are likely to have a material effect on our financial condition or results of operations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Controls Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are routinely involved in legal proceedings arising in the ordinary course of business, in particular in connection with claims adjudication with respect to our policies. We believe we have recorded adequate reserves for these liabilities and that there is no individual case pending that is likely to have a material adverse effect on our financial condition or results of operations. See Note 10, “Commitments and Contingencies” for additional information.

Item 1A. Risk Factors

There have been no material changes to the Risk Factors described in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the SEC.

Item 6. Exhibits

INDEX TO EXHIBITS

The following documents are filed as exhibits to this report:



Exhibit No.		Description

10.1		Credit Agreement, dated February 25, 2019, among the Company, JPMorgan Chase Bank, N.A., as Administrative Agent, KeyBank National Association and Fifth Third Bank as Co-Syndication Agents, and Associated Bank, National Association and The Bank of Nova Scotia, as Co-Documentation Agents, and the various lending institutions party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 25, 2019)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1		Certification of Chief Executive Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2		Certification of Chief Financial Officer pursuant to 18 U.SC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (filed herewith)
101.SCH		XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB		XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	NATIONAL GENERAL HOLDINGS CORP.
May 6, 2019
	By:	/s/ Barry Karfunkel
		Name: Barry Karfunkel Title: Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Michael Weiner
		Name: Michael Weiner Title: Chief Financial Officer (Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Description

Date of Adoption

Effect on the Company

ASU 2016-02, Leases (Topic 842) and related amendments.

This standard was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

January 1, 2019

The Company adopted the standard as of the beginning of the year of adoption using the modified retrospective transition approach and did not adjust prior comparative periods. The Company recorded the recognition of the ROU asset and lease liability net of deferred rent and inducement costs in both total assets and liabilities in the Condensed Consolidated Balance Sheets of $85,000, net of the deferred tax impact. The adoption of this guidance did not have a material effect on the Company’s Condensed Consolidated Statements of Income and had no impact on cash flows. See Note 9, “Leases” for additional information.