EDGAR 10-K Filing

Company CIK: 1578735
Filing Year: 2021
Filename: 1578735_10-K_2021_0001578735-21-000032.json

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ITEM 1. BUSINESS
Item 1. Business
Legal Organization
Effective January 4, 2021 the Company was acquired by The Allstate Corporation (“Allstate”) pursuant to the Agreement and Plan of Merger (“Merger”), dated as of July 7, 2020, by and among the Company, Allstate, and Bluebird Acquisition Corp., an indirect wholly owned subsidiary of Allstate. As a result of the Merger, the Company became a wholly owned indirect subsidiary of Allstate. Our common shares were delisted from NASDAQ Global Select Market (“NASDAQ”) and we subsequently filed a Form 15 to deregister our securities under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our shareholders received $32.00 per share in cash from Allstate, plus a closing dividend of $2.50 per share, providing $34.50 in total value per share. Unless noted otherwise, the information provided in this Annual Report on Form 10-K is as of December 31, 2020.
Business 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.
Our automobile insurance products protect our customers against losses due to physical damage to their motor vehicles, bodily injury and liability to others for personal injury or property damage arising from auto accidents. Our homeowners and umbrella insurance products protect our customers against losses to dwellings and their contents from a variety of perils, as well as coverage for personal liability. We offer our Property and Casualty (“P&C”) insurance products through a network of approximately 42,620 independent agents, a number of affinity partners and through direct-response marketing programs and retail storefronts. We have approximately 4.1 million P&C policyholders.
Our Accident and Health (“A&H”) business provides accident and health insurance products not subject to the Patient Protection and Affordable Care Act (“PPACA”) and targets uninsured or underinsured individuals and employers who are interested in an alternative to PPACA-compliant major medical coverage or who are looking for supplemental insurance options to help cover out of pocket costs. We market our and other carriers’ A&H insurance products through a multi-pronged distribution platform that includes a network of over 56,100 independent agents, our in-house agencies, direct-to-consumer marketing, wholesaling, worksite marketing, and the internet.
We are licensed to operate in 50 states and the District of Columbia, but focus on niche markets. Approximately 72.7% of our P&C premium written is originated in ten core states: North Carolina, California, New York, Florida, Texas, Virginia, Louisiana, Alabama, New Jersey, and Connecticut.
For the years ended December 31, 2020, 2019, and 2018, our gross premium written was $5,635 million, $5,583 million and $5,417 million, net premium written was $4,621 million, $4,225 million and $3,828 million and total consolidated revenues were $5,552 million, $5,180 million and $4,608 million, respectively.
Our company was formed in 2009, to acquire the private passenger auto business of the U.S. consumer property and casualty insurance segment of General Motors Acceptance Corporation (“GMAC”), now known as Ally Financial Inc., which operations date back to 1939. We acquired this business on March 1, 2010.
Our wholly-owned subsidiaries include twenty-two regulated domestic insurance companies, of which twenty write primarily P&C insurance and two write A&H insurance. Our insurance subsidiaries have an “A-” (Excellent) 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.
Two of our wholly-owned subsidiaries that we acquired in 2014, 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.
Business Segments
We are a specialty national carrier with regional focuses. We manage our business through two segments:
•Property & Casualty - Our P&C segment operates its business through three primary distribution channels: agency, affinity and direct. Our agency channel focuses primarily on writing standard, preferred and nonstandard auto coverage and homeowners and umbrella coverage through our network of approximately 42,620 independent agents. In our affinity channel, we partner with a number of affinity groups and membership organizations to deliver insurance products tailored to the needs of our affinity partners’ members or customers under our affinity partners’ brand name or label, which we refer to as selling on a “white label” basis. A primary focus of a number of our affinity relationships is providing recreational vehicle coverage, of which we believe we are one of the top writers in the U.S. Our direct channel is operated through approximately 500 storefronts, web/mobile, phone sales centers and kiosks. In addition, we operate our lender-placed services through long-term distribution agreements with certain mortgage lenders.
•Accident & Health - Our A&H segment provides accident and non-major medical health insurance products targeting our existing policyholders and uninsured or underinsured individuals. Through a number of acquisitions of both carriers and general agencies, including VelaPoint, LLC, our call center general agency (“Velapoint”), National Health Insurance Company, a life and health insurance carrier (“NHIC”), Quotit Corporation, an application service provider for health insurance, HealthCompare Insurance Services, Inc., a call center agency, and Healthcare Solutions Team, LLC, a healthcare insurance managing general agency (“HST”), we have assembled a multi-pronged distribution platform that includes direct-to-consumer marketing through our call center agency, selling through approximately 56,100 independent agents, wholesaling insurance products through large general agencies/program managers and, through our affinity relationships, worksite marketing through employers and the internet.
P&C Segment
Distribution and Marketing
Agency Distribution Channel
Our agency channel focuses on writing automobile insurance, including standard, preferred and nonstandard insurance, as well as preferred homeowners and umbrella insurance, through independent insurance agents and brokers. We have established a broad geographic presence throughout the United States and have a significant market presence in our ten largest states, namely, North Carolina, California, New York, Florida, Texas, Virginia, Louisiana, Alabama, New Jersey, and Connecticut.
Relationships with our Independent Agents. We have built a strong network of approximately 42,620 independent insurance agents and brokers and provide them with competitive compensation, a user-friendly technology platform and superior service. In order to provide quick and responsive service to our agents, we operate an agency customer service call center staffed by experienced and highly-trained employees. Our focus on building and maintaining a strong agency network has created an effective variable cost distribution platform and is integral to the long-term success of our agency channel.
Our North Carolina Business. We are the largest writer of nonstandard auto insurance sold through independent agents in North Carolina, with over 50% market share. For the year ended December 31, 2020, in North Carolina, we generated $773.4 million of gross premium written.
The North Carolina nonstandard auto insurance market is serviced by a small number of carriers with most liability insurance ceded to the state-controlled North Carolina Reinsurance Facility, the NCRF. We are not subject to any underwriting liability risk on the NCRF business written because losses are incurred by the NCRF. As a servicing carrier to the state facility, we receive a ceding commission from the NCRF to help offset operating expenses for providing the coverage to North Carolina residents.
Affinity Distribution Channel
Through the affinity distribution channel of our P&C insurance business we are a leader in affinity marketing and have been in operation since 1953, relying on best-in-class marketing strategies and analytics to maximize the value of our longstanding relationships. Our affinity relationships are generally long-term in nature. In general, an affinity partner relationship consists of a partnership agreement between a sponsoring organization and an insurance company entered into to address the specific insurance needs of the sponsor organization’s members or customers. Through the affinity relationship, the insurance company receives an endorsement that positions it favorably among the sponsoring organizations’ members or customers. In exchange for the endorsement, the affinity customer receives access to a quality insurer, advantageous pricing and customized products. A primary focus of our affinity channel is to provide recreational vehicle, or RV, insurance, of which we believe we are one of the largest writers in the U.S. In 2019, we acquired National Farmers Union Property and Casualty Company (“Farmers Union Insurance”), which maintains a long-term relationship with the National Farmers Union to sell personal lines insurance to its members.
Direct Distribution Channel
Our direct channel includes approximately 500 retail storefronts, web/mobile capabilities, phone contact centers and kiosks. The diversity of the channel supports growth through changing customer preferences, and gives National General a foothold in the industry’s fastest growing channel. Local retail stores placed in high traffic areas are central to the omni-channel strategy, and are a key component to the marketing and brand awareness efforts in our direct distribution channel. The omni-channel approach also creates a seamless customer experience, regardless of the channel or device that is used.
Lender-placed Insurance Business
We offer lender-placed insurance products and related services to mortgage lenders and servicers (“LPI Business”).
P&C Product Overview
In our P&C segment, we operate in niche businesses and offer a broad range of products employing multiple channels of distribution. Through our agency channel, we primarily sell nonstandard automobile insurance through independent agents and brokers and also offer standard and preferred auto, motorcycle, small business vehicle, homeowners and umbrella products. Through our affinity channel, we primarily underwrite and market standard and preferred auto and RV insurance.
•Standard and preferred automobile insurance. These policies provide coverage designed for drivers with greater financial resources and a less risky driving and claims history and have higher renewal retention than nonstandard policies.
•Nonstandard automobile insurance. These policies provide coverage for liability and physical damage and are designed for drivers who represent a higher-than-normal level of risk as a result of several factors, including their driving record, limited driving experience and claims history, among other factors, and consequently their premiums are generally higher than those for drivers who qualify for standard or preferred coverage.
•Homeowners insurance. Our homeowners policies are generally multiple-peril policies, providing property and liability coverages for one- and two-family, owner-occupied residences. We also offer additional personal umbrella coverage to the homeowner.
•Recreational vehicle insurance. Unlike many of our competitors, our policies carry RV-specific endorsements tailored to these vehicles, including automatic personal effects coverage, optional replacement cost coverage, RV storage coverage and full-time liability coverage. We also bundle coverage for RVs and passenger cars in a single policy for which the customer is billed on a combined statement.
•Small business automobile insurance. These policies include liability and physical damage coverage for light-to-medium duty commercial vehicles, focused on artisan vehicles, with an average of two vehicles per policy.
•Motorcycle insurance. We provide coverage for most types of motorcycles, as well as golf carts and all-terrain vehicles. Our policy coverage offers flexibility to permit the customer to select the type (e.g., liability) and limit of insurance (e.g., $100,000/$250,000/$500,000), and to include other risks, such as add-on equipment and towing.
•Lender-placed insurance. Through the lender-placed insurance platform, we offer a full suite of lender-placed insurance products to customers, including fire, home and flood products, as well as collateral protection insurance and guaranteed asset protection products for automobiles.
Fee Income
In addition to traditional insurance premiums, we generate revenue by charging policy service fees to policyholders. These fees include service fees for installment or renewal policies and fees for insufficient funds, late payments, cancellations and various financial responsibility filing fees. The fee income we generate varies depending on the type of policy and state regulations. For the year ended December 31, 2020, our P&C segment generated $391.7 million in revenue from policy service fees.
P&C Gross Premium Written by State
We are licensed to operate in 50 states and the District of Columbia. For the year ended December 31, 2020, our top ten states represented 72.7% of our gross premium written. The following table sets forth the distribution of our P&C gross premium written by state as a percent of total gross premium written:
Year Ended December 31,
2020 2019 2018
(amounts in thousands, except percentages)
North Carolina $ 773,424 15.9 % $ 770,349 16.0 % $ 729,426 15.5 %
California 691,902 14.2 % 582,240 12.1 % 720,284 15.3 %
New York 575,428 11.8 % 672,439 14.0 % 694,736 14.7 %
Florida 562,018 11.6 % 517,456 10.7 % 499,430 10.6 %
Texas 195,094 4.0 % 214,209 4.4 % 218,410 4.6 %
Virginia 168,227 3.5 % 162,008 3.4 % 148,806 3.2 %
Louisiana 167,445 3.4 % 173,237 3.6 % 142,483 3.0 %
Alabama 142,629 2.9 % 133,108 2.8 % 119,462 2.5 %
New Jersey 138,480 2.9 % 171,330 3.6 % 174,234 3.7 %
Connecticut 121,780 2.5 % 131,880 2.7 % 96,165 2.0 %
Other States 1,321,204 27.3 % 1,286,207 26.7 % 1,175,294 24.9 %
Total $ 4,857,631 100.0 % $ 4,814,463 100.0 % $ 4,718,730 100.0 %
Underwriting and Claims Management Philosophy
We believe that proactive and prompt claims management is essential to reducing losses and lowering loss adjustment expense (“LAE”) and enables us to more effectively and accurately measure reserves. To this end, we utilize our technology and extensive database of loss history in order to appropriately price and structure policies,
maintain lower levels of loss, enhance our ability to accurately predict losses, and maintain lower claims costs. We believe that a strong underwriting foundation is best accomplished through careful risk selection and continuous evaluation of underwriting guidelines relative to loss experience. We are committed to a consistent and thorough review of new underwriting opportunities as well as our portfolio and product mix as a whole.
Underwriting, Pricing and Risk Management, and Actuarial Capabilities
We establish premium rates for insurance products based upon an analysis of expected losses using historical experience and anticipated future trends. Our product team develops the product and manages our underwriting tolerances. By utilizing a detailed actuarial analysis, our actuarial team establishes the necessary rate level for a given product and territory to achieve our targeted return. For risks which fall within our underwriting tolerances, we establish a price by matching a rate to a risk at a detailed level of segmentation. We determine the individual risk using predictive modeling developed by our analytics team with a level of precision that we believe is superior to the traditional loss cost pricing used by many of our competitors. We believe that effective collaboration among the product, analytics and actuarial teams enhances our ability to price risks appropriately and achieve our targeted rates of return.
Our actuarial group is central to the pricing and risk management process. The group carries out a number of functions including developing, tracking, and reporting on accident year loss results, monitoring and addressing national, state and channel-specific profit trends and establishing actuarial rate level needs and indications. Our actuarial group also helps ensure the integrity of reported accident year results.
To assist us in profitably underwriting our P&C products, our predictive analytics team has developed our RAD underwriting pricing tool. The RAD underwriting pricing tool offers significant advantages over our prior pricing tools by employing numerous additional components and pricing strategies such as supplemental risk and improved credit modeling. We believe the RAD underwriting pricing tool facilitates better pricing over the lifetime of a policy by employing lifetime value modeling, elasticity modeling and optimized pricing. We believe that our RAD underwriting pricing tool provides us with a competitive advantage for pricing our products relative to other auto insurers of our size.
Claims
Claims can be submitted by telephone, email or smartphone app by policyholders, producers or other parties directly to our claims department. Upon notification of a claim, our claims call center creates a loss notice based on policy information in our claims system, EPIC. The claim is then automatically assigned to a claim handler and to a field adjuster for a vehicle inspection, if necessary. An initial reserve is established based on the type and location of the exposure and data from actuarial tables. A notice to the adjuster is automatically generated immediately after a claim has been assigned. The claim handler’s manager receives a status assignment within 24 hours to ensure the claim is being investigated in a timely manner. The claim handler evaluates coverage and loss participants and investigates the loss. If the claim represents a loss exceeding $50,000, the claim handler will establish a case-specific reserve based on the potential exposure. Claims with potential losses exceeding $100,000 are referred to the large loss unit and handled by employees specially trained to handle these claims. Every claims employee is granted authority to reserve and pay up to a specified claim level. If the potential claim amount exceeds the employee’s authority level, the request is automatically forwarded through EPIC to the manager with the appropriate authority level. As part of the investigation, claim handlers contact the parties with respect to the loss and complete their investigations. Claim handlers record all investigation activities in EPIC, which are reviewed periodically by the managers in the department to ensure proper claims handling. Once the claim investigation has been completed, the claim handler works to close the claim as soon as possible. As of December 31, 2020, our Claims department includes approximately 2,740 individuals.
We carefully monitor our claim performance to ensure efficient handling. Management teams perform weekly reviews of open and aged claim reports. Through a combination of peer reviews, supervisor audits and monthly management information system reports, we believe that we have established an efficient mechanism designed to maintain and improve our level of claim handling performance.
Competition
The property and casualty insurance market in the United States is highly competitive. We believe that our primary competition comes not only from national companies or their subsidiaries, such as The Progressive Corporation, The Travelers Companies, Inc., The Hanover Insurance Group, Inc., Selective Insurance Group, Inc., State Farm Mutual Automobile Insurance Company, Farmers Insurance Group, Assurant, Inc. and GEICO, but also from nonstandard auto focused insurers such as Mercury General Corporation, Kemper Corporation and independent agents that operate in a specific region or single state in which we operate. See Item 1A, “Risk Factors - Risks Relating to Our Insurance Operations - The insurance industry is highly competitive, and we may not be able to compete effectively against larger companies.”
We rely heavily on technology and extensive data gathering and analysis to segment markets and price accurately according to risk potential. We have remained competitive by refining our risk measurement and price segmentation skills, closely managing expenses, and achieving operating efficiencies. Superior customer service and fair and accurate claims adjusting are also important factors in our competitive strategy. With our policy administration system and our advanced underwriting pricing tools, we believe we will continue to operate well in the competitive environment.
Reinsurance Agreements
In 2017, we entered into an Auto Quota Share Agreement covering our auto line of business pursuant to which we ceded 15.0% of net liability to an unaffiliated third party reinsurer. Under the Auto Quota Share Agreement, we retain 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%. Effective January 1, 2019, we ceded 7.0% of net liability. On July 1, 2019, we renewed our agreement for a two-year term. Effective July 1, 2019, we ceded 10.0% of net liability. Effective January 1, 2020, we cede 5.0% of net liability under new and renewal auto policies written.
In 2017, we entered into a Homeowners Quota Share Agreement covering our homeowners line of business pursuant to which we ceded 29.6% of net liability to unaffiliated third party reinsurers. Effective May 1, 2018, we ceded an additional 12.4% of net liability for a total cession of 42.0%. Effective July 1, 2019, we ceded 40.0% of net liability under new and renewal homeowners policies written. Effective July 1, 2020, we renewed our agreements for an additional one year term and cede 20.0% of net liability under new and renewal homeowners policies.
See Note 10, “Reinsurance” in the notes to our consolidated financial statements.
A&H Segment
Our A&H segment provides supplemental accident and health insurance products. One of the keys to our overall strategy revolves around distribution. We have multiple ways to reach the consumer through established channels, including:
•directly to the consumer through our in-house general agency;
•through independent agents;
•wholesaling through other general agents and Managing General Underwriters (“MGUs”); and
•through employers in the worksite.
We believe that our A&H distribution is unique because it is not driven by “company stores” - outlets that only sell products underwritten by us. In the markets where we choose not to underwrite, such as traditional individual and group fully insured major medical, we still sell these products on behalf of third-party carriers, allowing us to match consumers’ needs, whether it’s a product underwritten by us or a third-party carrier. This one-stop shopping element makes our distribution outlets attractive for both consumers and agents and enables us to promote our supplemental/ancillary products in a single sale environment.
Our product focus in our A&H segment is offering economical and quality alternatives to the traditional group and individual insurance markets. A significant portion of the market has challenges in obtaining health insurance that balances depth of coverage with affordability. We believe we are uniquely positioned to offer greater value to our consumers because of our far-reaching distribution and focused product portfolio.
Our products fall into three broad categories: (1) supplemental/ancillary healthcare policies that mitigate exposure to high out-of-pocket costs with some major medical policies; (2) specialty accident policies and short term individual major medical policies specifically not subject to the PPACA for consumers seeking an alternative to more traditional forms of major medical insurance; and (3) self-insurance programs for small employers to assist employers who find self-insurance to be a more cost effective solution to the group healthcare needs.
A&H Product Overview
We focus on products that help individuals and employers address the ever increasing affordability challenges in healthcare. Our products include those packaged with other coverages or services to enhance the overall value proposition to the consumer, as well as standalone products. Target products for groups (through employers) and individuals include:
•Accident/AD&D. This coverage pays a stated benefit to the insured or his/her beneficiary in the event of bodily injury or death due to accidental means (other than natural causes). These policies can serve as supplemental policies underneath high deductible major medical plans that help reduce out of pocket expenses for consumers that result from unexpected events.
•Hospital Indemnity. These plans provide a fixed benefit amount for specific healthcare services (e.g., office visits, hospital stays, diagnostic care, etc.) with no deductibles or copays. They are designed for individuals who are looking for coverage that reduces out of pocket costs not covered by major medical coverage.
•Short-Term Medical. These plans can bridge the timing gap between the annual open enrollment periods (when traditional major medical insurance is available), and offers individuals financial protection for certain unexpected medical bills and other health care expenses (e.g., office visits, emergency, care, hospital stays, etc.). These plans have prescribed policy durations; typically the initial policy durations cannot exceed 12 months (or shorter durations in certain states).
•Cancer/Critical Illness. Critical illness policies provide benefits when specific diseases are first diagnosed. These benefits are paid to the individual directly, who can use them to pay for other out of pocket costs that may arise. This coverage can be sold on a guarantee and simplified issue (health questionnaire) basis either as a standalone product or packaged with other products.
•Stop Loss. Increases in health insurance costs in the group fully insured market has caused an increase in the number of employers offering self-insured plans. NHIC offers a wide array of stop loss programs together with self-insured program administration for small and large employers, as permitted by state law.
•Dental. These policies provide basic dental coverage and can be sold on a stand-alone basis or packaged with other products. They are frequently matched with discount plans and/or dental networks.
•Medicare Supplement. Medicare Supplement insurance policies fills the “gaps” in Original Medicare Plan coverage. These policies help pay some of the health care costs that the Original Medicare Plan doesn't cover and have standardized plan designs.
Ratings
Financial strength ratings are an important factor in establishing the competitive position of insurance companies and are important to our ability to market and sell our products. Rating organizations continually review the financial positions of insurers, including us. A.M. Best has currently assigned our insurance subsidiaries a rating of “A-” (Excellent). According to A.M. Best, “A-” ratings are assigned to insurers that have an excellent ability to meet their ongoing financial obligations to policyholders. This rating reflects A.M. Best’s opinion of our ability to pay claims and is not an evaluation directed to investors regarding an investment in our common stock. This rating is subject to periodic review by, and may be revised downward or revoked at the sole discretion of, A.M. Best. There can be no assurance that we will maintain our current ratings. Future changes to our rating may adversely affect our
competitive position. See Item 1A, “Risk Factors - Risks Relating to our Business - A downgrade in the A.M. Best rating of our insurance subsidiaries would likely reduce the amount of business we are able to write and could materially adversely impact the competitive positions of our insurance subsidiaries.”
Loss Reserves
We record loss reserves for estimated losses under the insurance policies that we write and for LAE related to the investigation and settlement of policy claims. Our reserves for loss and LAE represent the estimated cost of all reported and unreported loss and LAE incurred and unpaid at any given point in time based on known facts and circumstances.
The process of establishing the liability for unpaid losses and LAE is complex and imprecise as it must take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments as to our ultimate exposure to losses are an important component of our loss reserving process.
Loss reserves include statistical reserves and case estimates for individual claims that have been reported and estimates for claims that have been incurred but not reported at the balance sheet date as well as estimates of the expenses associated with processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past loss experience modified for current trends as well as economic, legal and social conditions. Loss reserves, except life reserves, are not discounted to present value, which would involve recognizing the time value of money and offsetting estimates of future payments by future expected investment income.
Incurred-but-not-reported (“IBNR”) reserve estimates are generally calculated by first projecting the ultimate cost of all claims that have occurred and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported, some of which are not yet known to the insured, as well as a provision for future development on reported claims.
We regularly review our loss reserves using a variety of actuarial methods and available information. We update the reserve estimates as historical loss experience develops, additional claims are reported and settled or as new information becomes available. Any changes in estimates are reflected in financial results in the period in which the estimates are changed.
Our actuarial review includes an actual to expected loss analysis or more detailed reserve indications for segments with changes, as well as the actuary’s reasonable reserve range compared to carried reserves. We review available actuarial indications and review carried reserves compared to the reasonable reserve range to determine whether any reserve adjustments are warranted.
Our internal actuarial analysis of the historical data provides the factors we use in our actuarial analysis in estimating our loss and LAE reserves. These factors are implicit measures over time of claims reported, average case incurred amounts, case development, severity and payment patterns. However, these factors cannot be directly used as they do not take into consideration changes in business mix, claims management, regulatory issues, medical trends, and other subjective factors. In accordance with Actuarial Standards of Practice, we generally use multiple traditional methods in determining our estimates of the ultimate unpaid claim liabilities. Each of these methods require actuarial judgment and assumptions. The techniques can include, but are not limited to:
•Paid Development Method - uses historical, cumulative paid losses by accident year and develops those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years.
•Paid Generalized Cape Cod Method - combines the Paid Development Method with the expected loss method, where the expected loss ratios are estimated from exposure and claims experience weighted across multiple accident periods. The selected expected loss ratio for a given accident year is derived by giving
some weight to all of the accident years in the experience history rather than treating each accident year independently.
•Paid Bornhuetter-Ferguson Method - a combination of the Paid Development Method and the Expected Loss Method, the Paid Bornhuetter-Ferguson Method estimates ultimate losses by adding actual paid losses and projected future unpaid losses. The amounts produced are then added to cumulative paid losses to produce the final estimates of ultimate incurred losses.
•Incurred Development Method - uses historical, cumulative incurred losses by accident year and develops those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years.
•Incurred Generalized Cape Cod Method - combines the Incurred Development Method with the expected loss method, where the expected loss ratios are estimated from exposure and claims experience weighted across multiple accident periods. The selected expected loss ratio for a given accident year is derived by giving some weight to all of the accident years in the experience history rather than treating each accident year independently.
•Incurred Bornhuetter-Ferguson Method - a combination of the Incurred Development Method and the Expected Loss Method, the Incurred Bornhuetter-Ferguson Method estimates ultimate losses by adding actual incurred losses and projected future unreported losses. The amounts produced are then added to cumulative incurred losses to produce an estimate of ultimate incurred losses.
•Expected Loss Method - utilizes an expected ultimate loss ratio based on historical experience adjusted for trends multiplied by earned premium to project ultimate losses.
For each method, losses are projected to the ultimate amount to be paid. We then analyze the results and may emphasize or deemphasize some or all of the outcomes to reflect actuarial judgment regarding their reasonableness in relation to supplementary information and operational and industry changes. These outcomes are then aggregated to produce a single selected point estimate that is the basis for the internal actuary’s point estimate for loss reserves.
In determining the level of emphasis that may be placed on some or all of the methods, internal actuaries periodically review statistical information as to which methods are most appropriate, whether adjustments are appropriate within the particular methods, and if results produced by each method include inherent bias reflecting operational and industry changes.
This supplementary information may include:
•open and closed claim counts;
•statistics related to open and closed claim count percentages;
•claim closure rates;
•changes in average case reserves and average loss and LAE incurred on open claims;
•reported and ultimate average case incurred changes;
•reported and projected ultimate loss ratios; and
•loss payment patterns.
When reviewing reserves, we analyze historical data and estimate the impact of numerous factors such as (1) individual claim information; (2) industry and the historical loss experience; (3) legislative enactments, judicial decisions, legal developments in the imposition of damages, and changes in political attitudes; and (4) trends in general economic conditions, including the effects of inflation. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves, because the eventual deficiency or redundancy is affected by multiple factors. The key assumptions we use in our determination of appropriate reserve levels include the underlying actuarial methodologies, consideration of pricing and underwriting initiatives, an evaluation of reinsurance costs and retention levels in determining the net reserves, and consideration of any claims handling impact on paid and incurred loss data trends embedded in the traditional actuarial methods.
With respect to estimating ultimate losses and LAE, the key assumptions remained consistent for the years ended December 31, 2020, 2019, and 2018, and our approach in establishing such assumptions remained consistent
for newly underwritten lines. If circumstances bear out our assumptions, losses incurred in 2020, should develop similarly to losses incurred in 2019, and prior years. Thus, if for example, the net loss ratio for auto insurance premiums written in a given accident year is 65.0%, we expect that the net loss ratio for auto insurance premiums written in that same accident year evolving in Year 2 would also be 65.0%. However, due to the inherent uncertainty in the loss development factors, our actual liabilities may differ significantly from our original estimates.
See Note 9, “Unpaid Losses and Loss Adjustment Expense Reserves” for more information about short-duration insurance contracts and claims development tables in the notes to our consolidated financial statements.
Technology
We rely heavily on technology and extensive data gathering and analysis to evaluate and price our products accurately according to risk exposure. In order to provide our policyholders and producers with superior service and realize profitable growth, we have substantially upgraded our information technology capabilities in recent years. In 2017, we acquired ownership of our personal lines policy administration system (“NPS”) and the related intellectual property, which we previously licensed. NPS has been fully transferred to our operating environment. NPS is based on advanced server-based technology allowing quicker processing and the ability for enhanced scalability. This system allows for increased straight-through automated processing, removing the need for expensive back office processes as well as providing enhanced self-service functionality. Since inception, we have reduced our information technology operating expenses significantly. Our goal is to continue to make strategic investments in technology in order to develop sophisticated tools that enhance our customer service, product management and data analysis capabilities.
Our RAD underwriting pricing tool accurately prices specific risk exposures to assist us in profitably underwriting our P&C products. Our RAD technology offers significant advantages over our prior underwriting pricing system by employing numerous additional components and pricing strategies such as supplemental risk and improved credit modeling. We believe the RAD underwriting pricing tool will facilitate better pricing over the lifetime of a policy by employing lifetime value modeling, elasticity modeling and optimized pricing.
In our lender-placed insurance business, we use a proprietary insurance-tracking system to monitor the customers’ mortgage portfolios to verify the continuation of insurance coverage on each mortgaged property. We believe we can leverage our technology expertise to operate the business under a more efficient cost structure.
Regulation
General
We are subject to extensive regulation in the United States and to a lesser extent in Bermuda. As of December 31, 2020, we had twenty-two operating insurance subsidiaries domiciled in the United States: Integon Casualty Insurance Company, Integon General Insurance Corporation, Integon Indemnity Corporation, Integon National Insurance Company (“Integon National”), 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, Direct National Insurance Company and National Farmers Union Property and Casualty Company. Our insurance subsidiaries have an “A-” (Excellent) group rating by A.M. Best. We currently conduct a limited amount of business outside the United States, primarily in Bermuda.
State Insurance Regulation
Insurance companies are subject to regulation and supervision by the department of insurance in the jurisdiction in which they are domiciled and, to a lesser extent, other jurisdictions in which they are authorized to conduct business. The primary purpose of such regulatory powers is to protect individual policyholders. State insurance authorities have broad regulatory, supervisory and administrative powers, including, among other things, the power to (a) grant and revoke licenses to transact business, including individual lines of authority, (b) set the standards of solvency to be met and maintained, (c) determine the nature of, and limitations on, investments and dividends, (d) approve policy rules, rates and forms prior to issuance, (e) regulate and conduct specific examinations regarding marketing, unfair trade, claims and fraud prevention and investigation practices, and (f) conduct periodic comprehensive examinations of the financial condition of insurance companies domiciled in their state.
Financial Oversight
Reporting Requirements
Our insurance subsidiaries are required to file detailed financial statements prepared in accordance with statutory accounting principles and other reports with the departments of insurance in all states in which they are licensed to transact business. These reports include details concerning claims reserves held by the insurer, specific investments held by the insurer, and numerous other disclosures about the insurer’s financial condition and operations. These financial statements are subject to periodic examination by the department of insurance in each state in which they are filed.
Investments
State insurance laws and insurance departments also regulate investments that insurers are permitted to make. Limitations are placed on the amounts an insurer may invest in a particular issuer, as well as the aggregate amount an insurer may invest in certain types of investments. Certain investments (such as real estate) are prohibited by certain jurisdictions.
Each of our domiciliary states has its own regulations and limitations on the amounts an insurer may invest in a particular issuer and the aggregate amount an insurer may invest in certain types of investments. In general, investments may not exceed a certain percentage of surplus, admitted assets or total investments. For example, the investments of Integon National, domiciled in North Carolina, in stocks shall not exceed twenty-five percent of Integon National’s admitted assets and the stock of any one corporation may not exceed three percent of its admitted assets. To ensure compliance in each state, we review our investment portfolio quarterly based on each states regulations and limitations.
State Insurance Department Examinations
As part of their regulatory oversight process, state insurance departments conduct periodic detailed financial examinations of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the National Association of Insurance Commissioners (“NAIC”). A second type of regulatory oversight examination of insurance companies involves a review by an insurance department of an authorized company’s market conduct, which entails a review and examination of a company’s compliance with laws governing marketing, underwriting, rating, policy-issuance, claims-handling and other aspects of its insurance business during a specified period of time.
The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action on the part of the company that is the subject of the examination or assessing fines or other penalties against that company.
Risk-Based Capital Regulations
Our insurance subsidiaries are required to report their risk-based capital based on a formula developed and adopted by the NAIC that attempts to measure statutory capital and surplus needs based on the risks in the insurer’s mix of products and investment portfolio. The formula is designed to allow insurance regulators to identify weakly-capitalized companies. Under the formula, a company determines its “risk-based capital” by taking into account certain risks related to the insurer’s assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer’s liabilities (including underwriting risks related to the nature and experience of its insurance business). The departments of insurance in our domiciliary states generally require a minimum total adjusted risk-based capital equal to 200% of an insurance company’s authorized control level risk-based capital. Each of our insurance subsidiaries had total adjusted risk-based capital substantially in excess of 200% of the authorized control level as of December 31, 2020.
Insurance Regulatory Information System Ratios
The NAIC Insurance Regulatory Information System, or IRIS, is part of a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. IRIS is intended to assist state insurance regulators in targeting resources to those insurers in greatest need of regulatory attention. IRIS consists of two phases: statistical and analytical. In the statistical phase, the NAIC database generates key financial ratio results based on financial information obtained from insurers’ annual statutory statements. The analytical phase is a review of the annual statements, financial ratios and other automated solvency tools. The primary goal of the analytical phase is to identify companies that appear to require immediate regulatory attention. A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are in themselves immaterial or because of certain reinsurance or pooling structures or changes in such structures.
Management does not anticipate regulatory action as a result of the 2020 IRIS ratio results for our U.S. Insurance Subsidiaries. In all instances in prior years, regulators have been satisfied upon any follow-up that no regulatory action was required.
Statutory Accounting Principles
Statutory accounting principles, or SAP, are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s solvency. Statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
Generally accepted accounting principles, or GAAP, like SAP, is concerned with a company’s solvency, but it is also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriately matching revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.
Credit for Reinsurance
State insurance laws permit U.S. insurance companies, as ceding insurers, to take financial statement credit for reinsurance that is ceded, so long as the assuming reinsurer satisfies the state’s credit for reinsurance laws. The Nonadmitted and Reinsurance Reform Act (“NRRA”) contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) provides that if the state of domicile of a ceding insurer is an NAIC accredited state, or has financial solvency requirements substantially similar to the requirements necessary for NAIC
accreditation, and recognizes credit for reinsurance for the insurer’s ceded risk, then no other state may deny such credit for reinsurance. Because all states are currently accredited by the NAIC, the Dodd-Frank Act prohibits a state in which a U.S. ceding insurer is licensed but not domiciled from denying credit for reinsurance for the insurer’s ceded risk if the cedant’s domestic state regulator recognizes credit for reinsurance. The ceding company in this instance is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premium (which are that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves to the extent ceded to the reinsurer.
Holding Company Regulation
We qualify as a holding company system under state-enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance regulatory agency of its state of domicile and periodically furnish information concerning its operations and transactions, particularly with other companies within the holding company system that may materially affect its operations, management or financial condition.
Transactions with Affiliates
The insurance laws in most of those states provide that all transactions among members of an insurance holding company system must be fair and reasonable. These laws require disclosure of material transactions within the holding company system and, in some cases, prior notice of or approval for certain transactions, including, among other things, (a) the payment of certain dividends, (b) cost sharing agreements, (c) intercompany agency, service or management agreements, (d) acquisition or divestment of control of or merger with domestic insurers, (e) sales, purchases, exchanges, loans or extensions of credit, guarantees or investments if such transactions are equal to or exceed certain thresholds, and (f) reinsurance agreements. All transactions within a holding company system affecting an insurer must have fair and reasonable terms and are subject to other standards and requirements established by law and regulation.
Dividends
Our insurance subsidiaries are subject to statutory requirements as to maintenance of policyholders’ surplus and payment of dividends. In general, the maximum amount of dividends that US-domiciled insurance subsidiaries may pay in any 12-month period without regulatory approval is the greater of adjusted statutory net income or 10% of statutory policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is generally defined for this purpose to be statutory net income, net of realized capital gains, for the calendar year preceding the date of the dividend. Also, most states restrict an insurance company’s ability to pay dividends in excess of its statutory unassigned surplus or earned surplus. In addition, state insurance regulators may limit or restrict an insurance company’s ability to pay stockholder dividends or as a condition to the issuance of a certificate of authority, as a condition to a change of control approval, or for other regulatory reasons.
Enterprise Risk
The Model Insurance Holding Company System Regulatory Act and Regulation (the “Amended Model Act and Regulation”) adopted by the NAIC imposes more extensive informational requirements on an insurance holding company system in order to protect the licensed insurance companies from enterprise risk, including requiring it to prepare an annual enterprise risk report that identifies the material risks within the insurance company holding system that could pose enterprise risk to the licensed insurer. To date, a number of states have adopted some or all of the changes in the Amended Model Act and Regulation, including states where some of our insurance companies are domiciled or commercially domiciled.
The Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act, adopted by the NAIC, requires insurers to maintain a framework for identifying, assessing, monitoring and reporting on the “material and relevant risks” associated with the insurer’s current business plans. Under the ORSA Model Act, an insurer must perform at least annually a self-assessment of its current and future risks and must file a confidential report with the
insurer’s lead insurance regulator. The ORSA report was filed in 2020, with the Company’s lead insurance regulator, as well as with certain other state regulators, and describes our process for assessing our own solvency.
Change of Control
State insurance holding company laws require prior approval by the respective state insurance departments of any change of control of an insurer. “Control” is generally defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract or otherwise. Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or any entity that controls a domestic insurance company. Any person acquiring control of us or of any substantial portion of our outstanding shares would first be required to obtain the approval of the domestic regulators (including those asserting “commercial domicile”) of our insurance subsidiaries.
Any transactions that would constitute a change of control, including a change of control of us and/or any of our domestic insurance subsidiaries, would generally require the party acquiring control to obtain the prior approval of the department of insurance in the state in which the insurance company being acquired is domiciled (and in any other state in which the company may be deemed to be commercially domiciled by reason of concentration of its insurance business within such state) and may also require pre-notification in certain other states. Obtaining these approvals may result in the material delay of, or deter, any such transaction.
Market Conduct
Regulation of Insurance Rates and Approval of Policy Forms
The insurance laws of most states in which we conduct business require insurance companies to file insurance rate schedules and insurance policy forms for review and approval. If, as permitted in some states, we begin using new rates before they are approved, we may be required to issue refunds or credits to the policyholders if the new rates are ultimately deemed excessive or unfair and disapproved by the applicable state regulator. In other states, prior approval of rate changes is required and there may be long delays in the approval process or the rates may not be approved. Accordingly, our ability to respond to market developments or increased costs in that state can be adversely affected.
Restrictions on Withdrawal, Cancellation, and Nonrenewal
In addition, many states have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one or more lines of business written in the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove any proposed plan that may lead to market disruption. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict the ability of our insurance subsidiaries to exit unprofitable markets.
Required Licensing
Our insurance subsidiaries operate under licenses issued by the department of insurance in the states in which they sell insurance. If a regulatory authority denies or delays granting a new license, our ability to offer new insurance products in that market may be substantially impaired. In addition, if the department of insurance in any state in which one of our insurance subsidiaries currently operates suspends, non-renews, or revokes an existing license, we would not be able to offer affected products in the state.
In addition, insurance agencies, producers, third-party administrators, claims adjusters and service contract providers and administrators are subject to licensing requirements and regulation by insurance regulators in various
states in which they conduct business. Certain of our subsidiaries engage in these functions and are subject to licensing requirements and regulation by insurance regulators in various states.
Guaranty Fund Assessments
Most, if not all, of the states where we are licensed to transact business require that property and casualty insurers doing business within the state participate in a guaranty association, which is organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by the member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.
Property and casualty insurance company insolvencies or failures may result in additional guaranty association assessments to our insurance subsidiaries at some future date. At this time, we are unable to determine the impact, if any, that such assessments may have on their financial positions or results of their operations. As of December 31, 2020, each of our insurance subsidiaries has established accruals for guaranty fund assessments with respect to insurers that are currently subject to insolvency proceedings.
Assigned Risks
Many states in which we conduct business require automobile liability insurers to sell bodily injury liability, property damage liability, medical expense, and uninsured motorist coverage to a proportionate number (based on the insurer’s share of the state’s automobile casualty insurance market) of those drivers applying for placement as “assigned risks.” Drivers seek placement as assigned risks because their driving records or other relevant characteristics make them difficult to insure in the voluntary market.
Federal and State Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC.
Regulatory changes occur from time to time with respect to state-based industry pools, facilities or associations. In June 2019, Michigan enacted major reforms of its current system governing personal automobile insurance. These changes to the Michigan Catastrophic Claims Association (“MCCA”), effective in 2020, among other things, allowed insureds to choose levels of personal injury protection coverage, including the option to opt-out of personal injury protection coverage in certain circumstances, and implemented mandated rate reductions that correspond to the level of personal injury protection coverage chosen by insureds.
On December 22, 2017, “H.R.1”, also known as the Tax Cuts and Jobs Act of 2017 (the “TCJA”), was signed into law. The TCJA reduced the federal corporate income tax rate from 35% to 21%, which impacted the Company’s effective tax rate and after-tax earnings in the United States. The Company was also affected by certain other aspects of the TCJA, such as limitations on the deductibility of interest expense and executive compensation, deductibility of capital expenditures, and, implementation of a minimum tax on the “global intangible low-taxed income” of a “United States shareholder” of a “controlled foreign corporation.”
The Dodd-Frank Act established a Federal Insurance Office (“FIO”) within the U.S. Department of the Treasury. The Federal Insurance Office is charged with monitoring all aspects of the insurance industry (other than health insurance, certain long-term care insurance and crop insurance), gathering data, and conducting a study on methods to modernize and improve the insurance regulatory system in the United States.
In addition, the Dodd-Frank Act gives the Federal Reserve supervisory authority over a number of financial services companies, including insurance companies, if they are designated by a two-thirds vote of the Financial Stability Oversight Council as “systemically important.” If an insurance company is designated as systemically important, the Federal Reserve’s supervisory authority could include the ability to impose heightened financial regulations upon that insurance company and could impact requirements regarding its capital, liquidity and leverage as well as its business and investment conduct.
The Dodd-Frank Act also incorporates the NRRA, which, among other things, establishes national uniform standards on how states may regulate and tax surplus lines insurance and sets national standards concerning the regulation of reinsurance. In particular, the NRRA gives regulators in the home state of an insured exclusive authority to regulate and tax surplus lines insurance transactions, and regulators in a ceding insurer’s state of domicile the sole responsibility for regulating the balance sheet credit that the ceding insurer may take for reinsurance recoverable.
Existing and new laws and regulations affecting the health insurance industry, or changes to existing laws and regulations, may transpire. The PPACA was signed into law in 2010, and, in recent years there have been several judicial and congressional challenges and a number of proposed and adopted amendments to the PPACA. The TCJA also repealed certain aspects of the PPACA. If we are unable to adapt our A&H business to current and/or future requirements of the health insurance legislation, our A&H business could be materially adversely affected.
Other possible federal regulatory developments include the introduction of legislation in Congress that would repeal the McCarran-Ferguson Act antitrust exemption for the insurance industry. The antitrust exemption allows insurers to compile and share loss data, develop standard policy forms and manuals and predict future loss costs with greater reliability, among other things. The ability of the industry, under the exemption permitted in the McCarran-Ferguson Act, to collect loss cost data and build a credible database as a means of predicting future loss costs is an important part of cost-based pricing. If the ability to collect this data were removed, the predictability of future loss costs and the reliability of pricing could be undermined.
In recent years, the lender-placed insurance business has been subject to class action litigation and investigations by state insurance regulators and federal regulatory agencies. Litigation and regulatory proceedings have included allegations of excessive premium rates and inappropriate business transactions. Unfavorable outcomes of litigation or regulatory investigations or significant problems in our relationships with regulators could adversely affect our results of operations and financial condition, reputation, and ability to continue to do business. They could also expose us to further investigations or litigation. In addition, certain of our customers in the mortgage industry are the subject of various regulatory investigations and/or litigation regarding mortgage lending practices, which could indirectly affect agreements with these clients and our business.
Privacy Regulations
The Gramm-Leach-Bliley Act is a federal law which, among other things, protects consumers from the unauthorized dissemination of certain personal information. States have also implemented additional regulations to address privacy issues. For example, the California Consumer Privacy Act (“CCPA”) was signed into law on June 28, 2018, and took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and affords those individuals new rights relating to their personal information that may affect our ability to use personal information or share it with our business partners. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach. We will continue to monitor and assess the interpretation and enforcement of these state laws, which are continuously developing and evolving, and there is significant uncertainty with respect to how these laws and regulations may evolve and the costs and complexity of future compliance. Certain aspects of these laws and regulations apply to all financial institutions, including insurance and finance companies, and require us to maintain appropriate policies and procedures for managing and protecting certain personal information of our policyholders. We may also be subject to future privacy laws and regulations, which could impose additional costs and impact our results of operations or financial condition. The NAIC adopted the Privacy of Consumer Financial and Health Information Model Regulation in 2000, which assisted
states in promulgating regulations to comply with the Gramm-Leach-Bliley Act. In 2002, to further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model Regulation. Several states have now adopted similar provisions regarding the safeguarding of policyholder information.
Additionally, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), The Health Information Technology for Economic and Clinical Health Act (“HITECH”), and the 2013 Omnibus Rule dictates the dissemination of an individual’s personal health information by covered entities and their business associates. These laws and their implementing regulations apply to health care providers and health insurers, and thereby requires our A&H business to maintain policies and procedures with regard to the storage, maintenance and disclosure of our policyholders’ personal health information.
Cybersecurity Regulation
Insurance regulators have been focusing increased attention on data security during financial exams, and new laws and regulations are pending that would impose new requirements and standards for protecting personally identifiable information of insurance company policyholders. For example, the New York Department of Financial Services enacted a comprehensive cybersecurity regulation that became effective during 2017, requiring insurance companies and other entities to have a cybersecurity program designed to protect consumers’ private data; a written policy that is approved by the board or a senior officer; a chief information security officer to help protect data and systems; and controls and plans in place to help ensure the safety of New York’s financial services industry. In addition, the NAIC has adopted the Roadmap for Cybersecurity Consumer Protections, a set of directives aimed at protecting consumer data, and is working on a new model data security law that is expected to incorporate the directives and impose additional requirements on insurance companies to the extent ultimately adopted by applicable state legislation. The NAIC has also strengthened and enhanced the cybersecurity guidance included in its handbook for state insurance examiners. We anticipate a continuing focus on new regulatory and legislative proposals at the state and federal levels that further regulate practices regarding privacy and security of personal information.
Telephone Sales Regulations
The United States Congress, the Federal Communications Commission and various states have promulgated and enacted rules and laws that govern telephone solicitations. There are numerous state statutes and regulations governing telephone sales activities that do or may apply to our operations, including the operations of our call center insurance agencies. For example, some states place restrictions on the methods and timing of calls and require that certain mandatory disclosures be made during the course of a telephone sales call. Federal and state “Do Not Call” regulations must be followed for us to engage in telephone sales activities.
Foreign Regulation
Classification
Our Bermuda subsidiaries, National General Re Ltd. (“NG Re”) and National General Insurance Ltd. (“NGIL”, and together with NG Re, the “Bermuda Insurers”), are registered as Class 3A general insurers with the Bermuda Monetary Authority (“BMA”) under the Bermuda Insurance Act, 1978 and related regulations as amended (the “Insurance Act - Bermuda”). The Bermuda Insurers’ license authorizes them to write general business other than long-term business. The BMA is responsible for the day-to-day supervision of insurers and monitors compliance with the solvency and liquidity standards imposed by the Insurance Act - Bermuda.
Annual Financial Statements, Annual Statutory Financial Return and Annual Capital and Solvency Return
Each Bermuda Insurer is required to file annually with the BMA financial statements, a statutory financial return and a capital and solvency return. The statutory financial return for an insurer includes, among other matters, statutory financial statements, a report of the approved auditor on the statutory financial statements, and a declaration of compliance confirming compliance with various minimum criteria, including certifying the company
meets the minimum solvency margin. The capital and solvency return for each Bermuda Insurer includes a Bermuda solvency capital return model for a Class 3A insurer, a commercial insurer's solvency self-assessment, a reconciliation of net loss reserves, schedule of solvency, financial condition report, an opinion of the company’s loss reserve specialist, a schedule of eligible capital and an economic balance sheet. Each capital and solvency return also includes a capital and solvency declaration that the return fairly represents the financial condition of the respective Bermuda Insurer in all material respects.
Insurance Code of Conduct
The Insurance Code of Conduct prescribes the duties and standards with which registered insurers must adhere and comply, to ensure that the registered insurer implements sound corporate governance, risk management and internal controls. Failure to comply with these requirements is a factor considered by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner. Any failure to comply with the requirements of the Insurance Code of Conduct could result in the BMA exercising its statutory powers of intervention.
Minimum Solvency Margin and Restrictions on Dividends and Distributions
Under the Insurance Act - Bermuda, the value of the general business assets of a registered Class 3A insurer must exceed the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margin.
Each Bermuda Insurer cannot declare or pay dividends during any financial year if it is in breach of its minimum solvency margin or minimum liquidity ratio or if it would fail to meet such margin or ratio as a result. In addition, BMA approval would be required prior to a Bermuda Insurer declaring or paying dividends in any financial year that such Bermuda Insurer failed to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year.
As a registered Class 3A insurer, each Bermuda Insurer is prohibited from declaring or paying dividends of more than 25% of its previous year’s total statutory capital and surplus unless it files with the BMA an affidavit stating that a declaration of the dividend has not caused the insurer to fail to meet its relevant margins. Relevant margins in relation to an insurer means its solvency margin, and in relation to an insurer carrying on general business, its minimum liquidity ratio. In addition, each Bermuda Insurer is prohibited, without the approval of the BMA, from reducing by 15% or more its total statutory capital as set out in its previous year’s financial statements.
Minimum Liquidity Ratio
Under Regulation 11 of the Insurance Returns and Solvency Regulations 1980 - Bermuda, an insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities.
Offices
Our principal executive offices are located at 59 Maiden Lane, 38th Floor, New York New York 10038, and our telephone number at that location is (212) 380-9500. Our website is www.nationalgeneral.com. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into the Annual Report on Form 10-K.
Human Capital Management
As of December 31, 2020, we have approximately 9,700 employees, including part-time employees, none of whom are covered by collective bargaining arrangements.
We are committed to ensuring that employees achieve their personal best by providing the resources needed for employees to take charge of their own future successful career at a highly rated insurance provider that is focused on innovation. We offer employment opportunities for entry-level positions, working professionals and students, and we provide training and competitive compensation in an effort to attract and retain skilled employees. Our human capital strategy focuses on our values and culture, employee development and training, and safety of our employees. The execution of this strategy is overseen at the highest levels of our organization from our senior management.
We are committed to a culture which values teamwork, entrepreneurship and opportunity. In support of our culture, we encourage the diversity of ideas and unique skills that each employee brings to our organization because all of our employees are essential to our success. We appreciate hard work and dedication and an entrepreneurial spirit.
We are a fast paced and dynamic organization, and our employees live by and exemplify what we call the 4 Es. At National General, we are Energized, Engaged, and Empowered, and we Execute every day in order to provide an exceptional experience for our customers. Our successful employees: are Engaged in the overall success of the company and always looking for a better way to address what we do as well as why and how we do things; are Energized and push themselves and colleagues to do more every day; Exhibit Empowerment through the willingness to take initiative and leadership, accepting additional responsibilities beyond regular job duties or assignments while making a positive impact on the company as a whole; and Execute and follow through on commitments while going above and beyond, exceeding the expectations of those internally and externally.
Our Code of Business Conduct and Ethics ensures that our core values of respect, teamwork, innovation, and excellence are applied throughout our organization. Our Code of Business Conduct and Ethics serves as a critical tool to help all of us recognize and report unethical conduct, while preserving our culture of honesty. We provide a certification program on our Code of Business Conduct for all of our employees annually.
Our online training platform provides our staff and management employees with access to a multitude of training courses, videos, reference material, and other tools. Our employees also receive on-the-job training to ensure we are executing appropriately for our clients.
We are committed to the safety of our employees. During the Covid-19 pandemic, we transformed large portions of our employee workforce into work-from-home roles, ensuring minimal disruption to customers and vendors while maintaining the health and safety of our employees and their communities. For areas of our organization that were not able to work remotely, precautions were taken to protect those limited employees, including the implementation of social distancing and personal protective equipment requirements, enhanced cleaning and sanitation procedures, and modified workspaces to reduce the potential for disease transmission.
Available Information
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and all amendments to those reports as required by the U.S. Securities and Exchange Commission (the “SEC”). You may obtain our electronic filings by accessing the SEC’s website at http://www.sec.gov.
You can also obtain on our website’s Investor Relations page (www.nationalgeneral.com), free of charge, a copy of our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such reports or amendments with, or furnish them to, the SEC.
Also available at the “Corporate Governance” section of the Investor Relations page of our website, free of charge, are copies of our Code of Business Conduct and Ethics, and the Charters for our Audit, Compensation, and Nominating and Corporate Governance Committees. Copies of our Code of Business Conduct and Ethics, and Charters are also available in print free of charge, upon request by any shareholder. You can obtain such copies in
print by contacting Investor Relations by mail at our corporate office. We intend to disclose on our website any amendment to, or waiver of, any provision of our Code of Business Conduct and Ethics applicable to our directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or Nasdaq.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
You should carefully consider the following risks and all of the other information set forth in this report, including our consolidated financial statements and the notes thereto. The following discussion of risk factors includes forward-looking statements and our actual results may differ substantially from those discussed in such forward-looking statements. See “Note on Forward-Looking Statements.”
Risks Relating to Our Business
If we are unable to accurately underwrite risks and charge competitive yet profitable rates to our policyholders, our business, financial condition and results of operations may be adversely affected.
In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate premiums is necessary, together with investment income, to generate sufficient revenue to offset losses, LAE and other underwriting costs and to earn a profit. If we do not accurately assess the risks that we assume, we may not charge adequate premiums to cover our losses and expenses, which would negatively affect our results of operations and our profitability. Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to lower revenues.
Pricing involves the acquisition and analysis of historical loss data, and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. In order to accurately price our policies, we:
•collect and properly analyze a substantial volume of data from our insureds;
•develop, test and apply appropriate actuarial projections and rating formulas;
•closely monitor and timely recognize changes in trends; and
•project both frequency and severity of our insureds’ losses with reasonable accuracy.
We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including:
•insufficient or unreliable data;
•incorrect or incomplete analysis of available data;
•uncertainties generally inherent in estimates and assumptions;
•our failure to implement appropriate actuarial projections and rating formulas or other pricing methodologies;
•regulatory constraints on rate increases;
•unexpected escalation in the costs of ongoing medical treatment;
•our failure to accurately estimate investment yields and the duration of our liability for loss and LAE; and
•unanticipated court decisions, legislation or regulatory action.
If we are unable to establish and maintain accurate loss reserves, our business, financial condition and results of operations may be materially adversely affected.
Our financial statements include loss reserves, which represent our best estimate of the amounts that our insurance subsidiaries ultimately will pay on claims that have been incurred, and the related costs of adjusting those claims, as of the date of the financial statements. The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as: changes in claims handling procedures, adverse changes in loss cost trends, economic conditions (including general inflation), legal trends and legislative changes, and varying judgments and viewpoints in the estimation process, among others. The impact of many of these items on ultimate loss reserves is difficult to estimate.
As a result of these uncertainties, the ultimate paid LAE may deviate, perhaps substantially, from the point-in-time estimates of such losses and expenses, as reflected in the loss reserves included in our financial statements. To the extent that loss and LAE exceed our estimates, we will be required to immediately recognize the unfavorable development and increase loss reserves, with a corresponding reduction in our net income in the period in which the deficiency is identified. Consequently, ultimate losses paid could materially exceed reported loss reserves and have a materially adverse effect on our business, financial condition and results of operations.
The current COVID-19 pandemic could materially impact our business, our future results of operations and our overall financial condition.
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time.
The COVID-19 outbreak has had a notable adverse impact on general economic conditions, including adverse impacts on automobile sales and new home sales and increased unemployment, which may decrease customer demand for our insurance products, negatively impact our premium volume, and otherwise adversely impact our future results of operations. For a further discussion of risks that can impact us as a result of an economic downturn, see “General economic conditions could materially and adversely affect our business, our liquidity and financial condition.” included in this section.
The outbreak of COVID-19 has caused, and will continue to cause, substantial disruption to our employees, distribution channels and customers through self-isolation, travel limitations, business restrictions, and otherwise. Though most of our employees are able to work remotely, these closures have nevertheless affected many of our customers and certain channels through which we sell our products and services. In addition, an interruption of our system capabilities could result in a deterioration of our ability to write and process new business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Having shifted to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities. These effects, individually or in the aggregate, could adversely impact our business, financial condition, operating results and cash flows, and such adverse impacts may be material.
The disruption in the financial markets due to the continuing impact of COVID-19 could result in net realized and unrealized investment losses, including potential impairments in our fixed income portfolio. For further discussion of the risks related to our investment portfolio see “Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results.” included in this section. In the event that these market conditions recur or result in a prolonged economic downturn, our results of operations, financial position and/or liquidity could be materially and adversely affected.
Federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, regulatory actions seek to retroactively mandate coverage for losses which various types of insurance policies were not designed or priced to cover or seek to require premium refunds. Regulatory restrictions or requirements also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums or fees. This may also result in an increased charge for uncollected premium and lower service and fee income. It is also possible that changes in economic conditions and steps taken by federal, state, and local governments in response to COVID-19 could require an increase in taxes at the federal, state, and local levels, which would adversely impact our results of operations.
Any of the foregoing effects, individually or in the aggregate, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could adversely impact our business, operating results and our overall financial condition, and such adverse impacts may be material. The duration of any such impacts cannot be predicted.
General economic conditions could materially and adversely affect our business, our liquidity and financial condition.
General economic factors beyond our control that affect our business include unemployment rates, consumer spending, residential and commercial real estate prices, U.S. debt ceiling and budget deficit concerns, tax rates and policies, changes in interest rates and the availability of credit. Such conditions may potentially affect (among other aspects of our business) the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance. In the event that these conditions result in a prolonged period of economic uncertainty, our results of operations, our financial condition and/or liquidity, our prospects and competitor landscape could be materially and adversely affected.
Our business is dependent on the efforts of our executive officers and other key employees. If we are unsuccessful in our efforts to attract, train and retain qualified executive officers and key employees, our business may be materially adversely affected.
Our success has developed from, and will continue to depend on, the efforts of our executive officers because of their industry expertise, knowledge of our markets, and relationships with our independent agents and distribution partners. Should any of our executive officers cease working for us, we may be unable to find acceptable replacements with comparable skills and experience in the specialty P&C and A&H sectors that we target. In addition, our business is also dependent on skilled underwriters and other skilled employees. We cannot assure you that we will be able to attract, train and retain, on a timely basis and on anticipated economic and other terms, experienced and capable senior management, underwriters and support staff. We intend to pay competitive salaries, bonuses and equity-based rewards in order to attract and retain such personnel, but we may not be successful in such endeavors. The loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition or operating results. We do not currently maintain life insurance policies with respect to our executive officers or other employees.
Revenues and operating profits from our P&C segment depend on our production in several key states and adverse developments in these key states could have a material adverse effect on our business, financial condition and results of operations.
For the year ended December 31, 2020, our P&C segment derived 72.7% of its gross premium written from the following ten states: North Carolina (15.9%), California (14.2%), New York (11.8%), Florida (11.6%), Texas (4.0%), Virginia (3.5%), Louisiana (3.4%), Alabama (2.9%), New Jersey (2.9%), and Connecticut (2.5%). As a result, our financial results are subject to prevailing regulatory, legal, economic, demographic, competitive, and other conditions in these states. Adverse developments relating to any of these conditions could have a material adverse effect on our business, financial condition and results of operations.
If we cannot sustain our business relationships, including our relationships with independent agents, agencies and other parties, we may be unable to compete effectively and operate profitably.
We market our products primarily through a network of independent agents and distribution partners. Our relationships with our agents are generally governed by agreements that may be terminated on short notice. Independent agencies generally are not obligated to promote our products and may sell insurance offered by our competitors. As a result, our ability to compete and remain profitable depends, in part, on our maintaining our business relationship with our independent agents and agencies, the marketing efforts of our independent agents and agencies and on our ability to offer insurance products and maintain financial strength ratings that meet the requirements and preferences of our independent agents and agencies and their policyholders.
In connection with our lender-placed insurance business, we also have relationships with certain mortgage lenders and servicers, and we insure properties securing mortgages serviced by the mortgage loan servicers with whom we do business. If such lenders terminate important business arrangements with us, or renew contracts on terms less favorable to us, our cash flows, results of operations and financial condition could be materially adversely
affected. For example, in our lender-placed insurance business, restrictions imposed by state regulators on us or by federal regulators on our customers could affect our ability to do business with certain mortgage loan servicers or the volume or profitability of such business. Furthermore, the transfer by mortgage servicer clients of loan portfolios to other carriers or the new participation by other carriers in insuring or reinsuring lender-placed insurance risks could materially reduce our revenues and profits from this business.
Any failure on our part to be effective in any of these areas could have a material adverse effect on our business and results of operations.
Our affinity channel depends on a relatively small number of affinity partner relationships for a significant percentage of the net premium revenue that it generates, and the loss of one of these significant affinity partner relationships could have a material adverse effect on our business, financial condition and results of operations.
Our affinity channel operates primarily through relationships with affinity partners, which include major retailers and membership organizations. Our top two affinity relationships collectively represent 63% of our affinity channel written premium. Although our relationships with these and most of our other affinity partners are long-standing with long-term contracts, in the event of the termination of any of our significant affinity partner relationships, our net earned premium could be adversely affected.
If we, together with our affiliates and the other third parties that we contract with, are unable to maintain our technology platform or our technology platform fails to operate properly, or we fail to meet the technological demands of our customers with respect to the products and services we offer, our business and financial performance could be significantly harmed.
We use our own policy administration system. We also use technology systems to more accurately evaluate specific risk exposures in order to assist us in profitably underwriting our P&C products.
If we are unable to properly maintain our policy administration system and other technology systems or if our technology systems otherwise fail to perform in the manner we currently contemplate, our ability to effectively underwrite and issue policies, process claims and perform other business functions could be significantly impaired and our business and financial performance could be significantly harmed. In addition, the success of our business is dependent on our ability to resolve any issues identified with our technology arrangements during operations and make any necessary improvements in a timely manner. Further, we will need to match or exceed the technological capabilities of our competitors over time. We cannot predict with certainty the cost of such integration, maintenance and improvements, but failure to make such improvements could have an adverse effect on our business.
Also, we use e-commerce and other technology to provide, expand and market our products and services. Accordingly, we believe that it will be essential to continue to invest resources in maintaining electronic connectivity with customers and, more generally, in e-commerce and technology. Our business may suffer if we do not maintain these arrangements or keep pace with the technological demands of customers.
If we experience security breaches or other disruptions involving our technology, our ability to conduct our business could be adversely affected, we could be liable to third parties and our reputation could suffer, which could have a material adverse effect on our business.
Our business is dependent upon the uninterrupted functioning of our information technology and telecommunication systems. We rely upon our systems, as well as the systems of our vendors, for all our business operations, including underwriting and issuing policies, processing claims, providing customer service, complying with insurance regulatory requirements and performing actuarial and other analytical functions necessary for underwriting, pricing and product development. Our operations are dependent upon our ability to timely and efficiently maintain and improve our information and telecommunications systems and protect them from physical loss, telecommunications failure or other similar catastrophic events, as well as from security breaches. A shut-down of, or inability to access, one or more of our facilities, a power outage or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on
a timely basis. In the event of a disaster such as a natural catastrophe, terrorist attack or industrial accident, or due to a computer virus or other form of cyberattacks, our systems could be inaccessible for an extended period of time. While we have implemented business contingency plans and other reasonable and appropriate internal controls to protect our systems from interruption, loss or security breaches, a sustained business interruption or system failure could adversely impact our ability to process our business, provide customer service, pay claims in a timely manner or perform other necessary business functions.
Our operations depend on the reliable and secure processing, storage and transmission of confidential and other information in our computer systems and networks. Computer viruses, hackers, phishing attempts, e-mail fraud, employee misconduct and other external hazards could expose our data systems to security breaches, cyberattacks or other disruptions. In addition, we routinely transmit and receive personal, confidential and proprietary information by electronic means. Despite security measures that we have implemented, we cannot assure you that our or third party systems and networks will not be subject to breaches or interference. Any such event may result in operational disruptions, cause payments to be made to an unintended recipient, or result in unauthorized access to or the disclosure or loss of our proprietary information or our customers’ information, which in turn may result in legal claims, regulatory scrutiny and liability, reputational damage, the incurrence of costs to eliminate or mitigate further exposure, the loss of customers or affiliated advisors or other damage to our business. In addition, the trend toward broad consumer and general public notification of such incidents could exacerbate the harm to our business, financial condition and results of operations. We could suffer harm to our business and reputation if attempted security breaches are publicized. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology or other security measures protecting the networks and systems used in connection with our business.
The regulatory environment surrounding information security and privacy is increasingly demanding. We are subject to numerous U.S. federal and state laws and regulations in jurisdictions outside the U.S. governing the protection of personal and confidential information of our clients or employees. These laws and regulations are increasing in complexity and number and change frequently. If any person, including any of our employees or those with whom we share such information, negligently disregards or intentionally breaches our established controls with respect to our client or employee data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions.
If our businesses, including businesses we have acquired, do not perform well, we may be required to recognize an impairment of our goodwill or other intangible assets, which could have a material adverse effect on our financial condition and results of operations.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We are required to perform goodwill impairment tests at least annually and whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. If we determine that the goodwill has been impaired, we would be required to write down the goodwill by the amount of the impairment, with a corresponding charge to net income. Such write-downs could have a material adverse effect on our financial condition and results of operations.
Intangible assets represent the amount of fair value assigned to certain assets when we acquire a subsidiary or a book of business. Intangible assets are classified as having either a finite or an indefinite life. We test the recoverability of our intangible assets at least annually. We test the recoverability of finite life intangibles whenever events or changes in circumstances indicate that the carrying value of a finite life intangible may not be recoverable. We recognize an impairment if the carrying value of an intangible asset is not recoverable and exceeds its fair value, in which circumstances we must write down the intangible asset by the amount of the impairment with a corresponding charge to net income. We own two management companies that are attorneys-in-fact for two reciprocal exchanges. If the reciprocal business does not perform well or the reciprocal exchanges are downgraded, we may be required to recognize an impairment of our intangible assets. Such write downs could have a material adverse effect on our financial condition and results of operations.
A downgrade in the A.M. Best rating of our insurance subsidiaries would likely reduce the amount of business we are able to write and could materially adversely impact the competitive positions of our insurance subsidiaries.
Rating agencies evaluate insurance companies based on their ability to pay claims. A.M. Best has currently assigned our insurance subsidiaries a group rating of “A-” (Excellent). On July 9, 2020, following the announcement of our agreement to be acquired by Allstate, A.M. Best placed us and our subsidiaries under review with positive implications. The ratings of A.M. Best are subject to periodic review using, among other things, proprietary capital adequacy models, and are subject to revision or withdrawal at any time. Our competitive position relative to other companies is determined in part by the A.M. Best rating of our insurance subsidiaries. A.M. Best ratings are directed toward the concerns of policyholders and insurance agencies and are not intended for the protection of investors or as a recommendation to buy, hold or sell securities.
There can be no assurances that our insurance subsidiaries will be able to maintain their current ratings. Any downgrade in ratings would likely adversely affect our business through the loss of certain existing and potential policyholders and the loss of relationships with independent agencies that might move to other companies with higher ratings. We are not able to quantify the percentage of our business, in terms of premiums or otherwise, that would be affected by a downgrade in our A.M. Best ratings.
Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results.
Our results are affected, in part, by the performance of our investment portfolio. Our investment portfolio contains interest rate sensitive investments, such as fixed-income securities. As of December 31, 2020, our investment in fixed-income securities was approximately $4,497.1 million, or 90.5% of our total investment portfolio. Increases in market interest rates may have an adverse impact on the value of our investment portfolio by decreasing the value of fixed-income securities. Conversely, declining market interest rates could have an adverse impact on our investment income as we invest positive cash flows from operations and as we reinvest proceeds from maturing and called investments in new investments that could yield lower rates than our investments have historically generated. Defaults in our investment portfolio may produce operating losses and adversely impact our results of operations.
Our investment portfolio also contains floating rate instruments, which typically bear interest based on LIBOR. Regulatory and industry initiatives to eliminate LIBOR as an interest rate benchmark may create uncertainty in our LIBOR-based instruments, which may adversely impact both pricing and liquidity of such instruments.
Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. We may not be able to manage interest rate sensitivity effectively. Despite our efforts to maintain a high quality portfolio and manage the duration of the portfolio to reduce the effect of interest rate changes, a significant change in interest rates could have a material adverse effect on our financial condition and results of operations.
In addition, the performance of our investment portfolio generally is subject to other risks, including the following:
•the risk of decrease in value due to a deterioration in the financial condition, operating performance or business prospects of one or more issuers of our fixed-income securities;
•the risk that our portfolio may be too heavily concentrated in the securities of one or more issuers, sectors or industries;
•the risk that we will not be able to convert investment securities into cash on favorable terms and on a timely basis; and
•general movements in the values of securities markets.
If our investment portfolio were to suffer a substantial decrease in value due to market, sector or issuer-specific conditions, our liquidity, financial condition and results of operations could be materially adversely affected. A decrease in value of an insurance subsidiary’s investment portfolio could also put the subsidiary at risk of failing to satisfy regulatory minimum capital requirements and could limit the subsidiary’s ability to write new business.
Our holding company structure and certain regulatory and other constraints, including adverse business performance, could affect our ability to satisfy our obligations.
We are a holding company and conduct our business operations through our various subsidiaries. Our principal sources of funds are dividends and other payments from our insurance subsidiaries and other operating subsidiaries, income from our investment portfolio and funds that may be raised from time to time in the capital markets. We will be largely dependent on amounts from our insurance subsidiaries to pay principal and interest on any indebtedness that we may incur, to pay holding company operating expenses, to make capital investments in our other subsidiaries and to pay dividends on our common and preferred stock. In addition, our credit agreement contains covenants that limit our ability to pay cash dividends to our stockholders under certain circumstances.
Our insurance subsidiaries are subject to statutory and regulatory restrictions imposed on insurance companies by their states 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 domiciliary state. In general, the maximum amount of dividends that US-domiciled insurance subsidiaries may pay in any 12-month period without regulatory approval is the greater of adjusted statutory net income or 10% of statutory policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is generally defined for this purpose to be statutory net income, net of realized capital gains, for the calendar year preceding the date of the dividend. In addition, other states may limit or restrict our insurance subsidiaries’ ability to pay stockholder dividends generally or as a condition to issuance of a certificate of authority. The aggregate amount of cash dividends and distributions that could be paid by our insurance subsidiaries without prior approval by the various domiciliary states of our insurance subsidiaries was approximately $156.4 million as of December 31, 2020, taking into account dividends paid in the prior twelve month period.
Our insurance subsidiaries are subject to minimum capital and surplus requirements. Our failure to meet these requirements could subject us to regulatory action.
The laws of the states of domicile of our insurance subsidiaries impose risk-based capital standards and other minimum capital and surplus requirements. Failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels, which we may be unable to do. See Item 1, “Business - Regulation - State Insurance Regulation - Financial Oversight-Risk-Based Capital Regulations.”
The insurance industry is subject to extensive regulation, which may affect our ability to execute our business plan and grow our business.
We are subject to comprehensive regulation and supervision by government agencies in each of the states in which our insurance subsidiaries are domiciled or commercially domiciled, as well as all states in which they are licensed, sell insurance products, issue policies, or handle claims. Some states impose restrictions or require prior regulatory approval of specific corporate actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow our business profitably. These regulations provide safeguards for policyholders and are not intended to protect the interests of stockholders. Our ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner is, and will continue to be, critical to our success. Some of these regulations include:
•Required Licensing. We operate under licenses issued by the insurance department in the states in which we sell insurance. If a regulatory authority denies or delays granting a new license, our ability to enter that market quickly or offer new insurance products in that market may be substantially impaired. In addition, if the insurance department in any state in which we currently operate suspends, non-renews, or revokes an existing license, we would not be able to offer affected products in that state.
•Transactions Between Insurance Companies and Their Affiliates. Transactions between us or other of our affiliates and our insurance companies generally must be disclosed, and prior approval is required before any material or extraordinary transaction may be consummated. Approval may be refused or the time required to obtain approval may delay some transactions, which may adversely affect our ability to innovate or operate efficiently.
•Regulation of Insurance Rates and Approval of Policy Forms. The insurance laws of most states in which we conduct business require insurance companies to file insurance rate schedules and insurance policy forms for review and approval. If, as permitted in some states, we begin using new rates before they are approved, we may be required to issue refunds or credits to the policyholders if the new rates are ultimately deemed excessive or unfair and disapproved by the applicable insurance department. In most of the states in which we operate, prior approval of rate changes is required and there may be long delays in the approval process or the rates may not be approved. Accordingly, our ability to respond to market developments or increased costs in that state could be adversely affected and our ability to operate in a profitable manner may be limited.
•Restrictions on Cancellation, Non-Renewal or Withdrawal. Many of the states in which we operate have laws and regulations that limit our ability to exit a market. For example, some states limit a private passenger auto insurer’s ability to cancel and refuse to renew policies and some prohibit insurers from withdrawing one or more lines of insurance business from the state unless prior approval is received. In some states, these regulations extend to significant reductions in the amount of insurance written, not just to a complete withdrawal. Laws and regulations that limit our ability to cancel and refuse to renew policies in some states or locations and that subject withdrawal plans to prior approval requirements may restrict our ability to exit unprofitable markets, which may harm our business, financial condition and results of operations.
•Lender-placed insurance products. State departments of insurance and regulatory authorities may choose to review the appropriateness of our premium rates for our lender-placed insurance products. If the reviews by state departments of insurance lead to significant decreases in premium rates for our lender-placed insurance products, our results of operations could be materially adversely affected.
•Other Regulations. We must also comply with regulations involving, among other matters:
•the use of non-public consumer information and related privacy issues;
•the use of credit history in underwriting and rating policies;
•limitations on the ability to charge policy fees;
•limitations on types and amounts of investments;
•restrictions on the payment of dividends by our insurance subsidiaries;
•the acquisition or disposition of an insurance company or of any company controlling an insurance company;
•involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, assessments and other governmental surcharges for guaranty funds, second-injury funds, catastrophe funds and other mandatory pooling arrangements;
•reporting with respect to financial condition; and
•periodic financial and market conduct examinations performed by state insurance department examiners.
The failure to comply with these laws and regulations may also result in regulatory actions, fines and penalties, and in extreme cases, revocation of our ability to do business in a particular jurisdiction. In the past we have been fined by state insurance departments for failing to comply with certain laws and regulations. In addition, we may face individual and class action lawsuits by insured and other parties for alleged violations of certain of these laws or regulations.
Our failure to accurately and timely pay claims could adversely affect our business, financial results and liquidity.
We must accurately and timely evaluate and pay claims that are made under our policies. Many factors affect our ability to pay claims accurately and timely, including the training and experience of our claims representatives, our claims department’s culture and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to pay claims accurately and timely could lead to material litigation, undermine our reputation in the marketplace and materially adversely affect our financial results and liquidity.
In addition, if we do not train new claims employees effectively or lose a significant number of experienced claims employees, our claims department’s ability to handle an increasing workload could be adversely affected. In addition to potentially requiring that growth be slowed in the affected markets, our business could suffer from decreased quality of claims work which, in turn, could lower our operating margins.
Reform of the health insurance industry could materially reduce the profitability of our A&H segment.
The PPACA was signed into law in 2010. In recent years there have been several judicial and congressional challenges and proposed amendments to PPACA, and the Tax Cuts and Jobs Act of 2017 repealed certain aspects of the PPACA. Congress may consider other legislation to repeal or replace elements of the PPACA.
Due to the complexity and continued uncertainty surrounding healthcare legislation, the impact from the PPACA or any amendments to the PPACA remains difficult to predict and could significantly affect the health insurance industry. We continue to review our product offerings and make changes to adapt to the current environment and the opportunities presented. However, we could be adversely affected if our plans for operating in the current environment are unsuccessful or if there is less demand than we expect for our A&H products.
If we are unable to adapt our A&H business to current and/or future requirements of the PPACA, or if significant uncertainty continues with respect to implementation of the PPACA or other healthcare reform legislation, our A&H business could be materially adversely affected. Furthermore, should Congress extend the scope of or repeal parts of or all of the PPACA, such a development could have a material adverse effect on our A&H business. For more information on the PPACA and its impact on our A&H segment, see Item 1, “Business - A&H Segment.”
Our operations and business activities outside of the United States are subject to a number of risks, which could have an adverse effect on our business, financial condition and results of operations.
We currently conduct a limited amount of business outside the United States, primarily in Bermuda. In this jurisdiction, we are subject to a number of significant risks in conducting such business. These risks include restrictions such as capital controls and other restrictive government actions, which could have an adverse effect on our business and our reputation. Investments outside the United States also subject us to additional domestic and foreign laws and regulations, including the Foreign Corrupt Practices Act and similar laws in other countries that prohibit the making of improper payments to foreign officials. In addition, some countries have laws and regulations that lack clarity and, even with local expertise and effective controls, it can be difficult to determine the exact requirements of the local laws. Failure to comply with local laws in a particular market could have a significant and negative effect not only on our business in that market but also on our reputation generally.
Changes in accounting standards issued by the FASB or other standard-setting bodies may adversely affect our financial statements.
Our financial statements are subject to the application of accounting principles generally accepted in the United States of America, which are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB. The anticipated impact of accounting pronouncements that have been issued but not yet implemented is
disclosed in our reports filed with the SEC. See Note 2, “Significant Accounting Policies,” in the notes to our consolidated financial statements. An assessment of proposed standards, including standards on insurance contracts and accounting for financial instruments, is not provided as such proposals are subject to change through the exposure process and official positions of the FASB are determined only after extensive due process and deliberations. Therefore, the effects on our financial statements cannot be meaningfully assessed. The required adoption of future accounting standards could have a material adverse effect on our business, financial condition or results of operations, including on our net income.
Risks Relating to Our Insurance Operations
The insurance industry is highly competitive, and we may not be able to compete effectively against larger companies.
The insurance industry is highly competitive and, except for regulatory considerations, there are relatively few barriers to entry. We compete with both large national insurance providers and smaller regional companies on the basis of price, coverages offered, claims handling, customer service, agent commissions, geographic coverage and financial strength ratings. Some of our competitors have more capital, higher ratings and greater resources than we have, and may offer a broader range of products than we offer.
Many of our competitors invest heavily in advertising and marketing efforts and/or expanding their online service offerings. Many of these competitors have better brand recognition than we have and have a significantly larger market share than we do. As a result, these larger competitors may be better able to offer lower rates to consumers, to withstand larger losses, and to more effectively take advantage of new marketing opportunities. Our ability to compete against these larger competitors depends on our ability to deliver superior service and maintain our relationships with independent agents, distribution partners and affinity groups.
In our lender-placed insurance business, we use a proprietary insurance-tracking system to monitor the clients’ mortgage portfolios to verify the continuation of insurance on each mortgaged property. If, in addition to our current competitors, others in this industry develop a competing system or equivalent administering capabilities, this could adversely affect our business and results of operations.
We write a significant amount of business in the nonstandard auto insurance market, which could make us more susceptible to unfavorable market conditions which have a disproportionate effect on that customer base.
A significant amount of our P&C premium currently is written in the nonstandard auto insurance market. As a result, adverse developments in the economic, competitive or regulatory environment affecting the nonstandard customer base or the nonstandard auto insurance industry in general may have a greater effect on us as compared to a more diversified auto insurance carrier with a larger percentage of its business in other types of auto insurance products. Adverse developments of this type may have a material adverse effect on our business.
We generate significant revenue from service fees generated from our P&C and A&H policyholders, which could be adversely affected by additional insurance or consumer protection regulation.
For the year ended December 31, 2020, we generated $760.4 million in service and fee revenue from our P&C and A&H policyholders, which included, among others, origination fees, installment fees relating to installment payment plans, late payment fees, policy cancellation fees and reinstatement fees. The revenue we generate from these service fees could be reduced by changes in consumer protection or insurance regulation that restrict or prohibit our ability to charge these fees. If our ability to charge fees for these services were to be restricted or prohibited, there can be no assurance that we would be able to obtain rate increases or take other action to offset the lost revenue and the direct and indirect costs associated with providing the services, which could adversely affect our business, financial condition and results of operations.
The insurance industry is cyclical in nature, which may affect our overall financial performance.
Historically, the financial performance of the insurance industry has tended to fluctuate in cyclical periods of price competition and excess capacity (known as a soft market) followed by periods of high premium rates and shortages of underwriting capacity (known as a hard market). The profitability of most insurance companies tends to follow this cyclical market pattern. We cannot predict with certainty the timing or duration of changes in the market cycle because the cyclicality is due in large part to the actions of our competitors and general economic factors beyond our control. These cyclical patterns, the actions of our competitors, and general economic factors could cause our revenues and net income to fluctuate, which may adversely affect our business.
Catastrophic losses or the frequency of smaller insured losses may exceed our expectations as well as the limits of our reinsurance, which could adversely affect our financial condition and results of operations.
Our P&C insurance business is subject to claims arising from catastrophes, such as hurricanes, tornadoes, windstorms, floods, earthquakes, hailstorms, severe winter weather, and fires, non-catastrophic weather and water losses or other events, such as explosions, terrorist attacks, riots, and hazardous material releases. The incidence and severity of such events are inherently unpredictable, and our losses from catastrophes could be substantial.
Longer-term weather trends are changing and new types of catastrophe losses may be developing due to climate change, a phenomenon that may be associated with extreme weather events linked to rising temperatures, including effects on global weather patterns, sea, land and air temperature, sea levels, rain and snow. Climate change could increase the frequency and severity of catastrophe losses we experience in both coastal and non-coastal areas.
In addition, it is possible that we may experience an unusual frequency of smaller losses in a particular period. In either case, the consequences could be substantial volatility in our financial condition or results of operations for any fiscal quarter or year, which could have a material adverse effect on our financial condition or results of operations and our ability to write new business. For example, our operating results for the year ended December 31, 2020, have been negatively impacted by losses resulting from severe weather-related events. Losses related to P&C weather-related events, excluding the Reciprocal Exchanges, were $150.2 million in 2020, compared to $51.2 million in 2019, an increase of $99.0 million year over year. Although we believe that our geographic and product mix creates limited exposure to catastrophic events and we attempt to manage our exposure to these types of catastrophic and cumulative losses, including through the use of reinsurance, catastrophic events are inherently unpredictable and the severity or frequency of these types of losses may exceed our expectations as well as the limits of our reinsurance coverage.
We rely on the use of credit scoring in pricing and underwriting our auto insurance policies and any legal or regulatory requirements which restrict our ability to access credit score information could decrease the accuracy of our pricing and underwriting process and thus lower our profitability.
We use credit scoring as a factor in pricing and underwriting decisions where allowed by state law. Consumer groups and regulators have questioned whether the use of credit scoring unfairly discriminates against some groups of people and are calling for laws and regulations to prohibit or restrict the use of credit scoring in underwriting and pricing. Laws or regulations that significantly curtail or regulate the use of credit scoring, if enacted in a large number of states in which we operate, could impact the integrity of our pricing and underwriting process, which could, in turn, adversely affect our business, financial condition and results of operations and make it harder for us to be profitable over time.
If market conditions cause our reinsurance to be more costly or unavailable, we may be required to bear increased risks or reduce the level of our underwriting commitments.
As part of our overall risk and capacity management strategy, we purchase excess of loss catastrophic and casualty reinsurance for protection against catastrophic events and other large losses. We also rely on quota share insurance agreements to cede a portion of the risk on the policies that we write. Market conditions beyond our
control, in terms of price and available capacity, may affect the amount of reinsurance we acquire and our profitability.
We may be unable to maintain our current reinsurance arrangements or to obtain other reinsurance in adequate amounts and at favorable rates. Increases in the cost of reinsurance would adversely affect our profitability. In addition, if we are unable to renew our expiring arrangements or to obtain new reinsurance on favorable terms, either our net exposure to risk would increase, which would increase our costs, or, if we are unwilling to bear an increase in net risk exposures, we would have to reduce the amount of risk we underwrite, which would reduce our revenues.
We may not be able to recover amounts due from our reinsurers, which would adversely affect our financial condition.
Reinsurance does not discharge our obligations under the insurance policies we write; it merely provides us with a contractual right to seek reimbursement on certain claims. The applicable insurance company remains liable to our policyholders even if we are unable to make recoveries that we are entitled to receive under our reinsurance contracts. As a result, we are subject to credit risk with respect to our reinsurers. Losses are recovered from our reinsurers after underlying policy claims are paid. The creditworthiness of our reinsurers may change before we recover amounts to which we are entitled. Therefore, if a reinsurer is unable to meet its obligations to us, we would be responsible for claims and claim settlement expenses for which we would have otherwise received payment from the reinsurer. If we were unable to collect these amounts from our reinsurers, our costs would increase and our financial condition would be adversely affected. As of December 31, 2020, we had an aggregate amount of approximately $1,218.9 million of reinsurance recoverable, net of the allowance for estimated uncollectible reinsurance.
Our largest reinsurance recoverables are from the North Carolina Reinsurance Facility (“NCRF”) and the Michigan Catastrophic Claims Association (“MCCA”). The NCRF is a non-profit organization established to provide automobile liability reinsurance to those insurance companies that write automobile insurance in North Carolina. The MCCA is a Michigan reinsurance mechanism that covers no-fault first party medical losses of retentions in excess of $0.6 million in 2020. At December 31, 2020, the amount of reinsurance recoverable from the NCRF and the MCCA was approximately $193.3 million and $545.7 million, respectively. If any of our principal reinsurers were unable to meet its obligations to us, our financial condition and results of operations would be materially adversely affected.
The effects of emerging claim and coverage issues on our business are uncertain and negative developments in this area could have an adverse effect on our business.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until after we have issued insurance policies that are affected by the changes. As a result, the full extent of our liability under an insurance policy may not be known until many years after the policy is issued. For example, medical costs associated with permanent and partial disabilities may increase more rapidly or be higher than we currently expect. Changes of this nature may expose us to higher claims than we anticipated when we wrote the underlying policy. Unexpected increases in our claim costs many years after policies are issued may also result in our inability to recover from certain of our reinsurers the full amount that they would otherwise owe us for such claims costs because certain of the reinsurance agreements covering our business include commutation clauses that permit the reinsurers to terminate their obligations by making a final payment to us based on an estimate of their remaining liabilities. In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to deem by statute the existence of a covered occurrence, to extend the statutes of limitations or otherwise repeal or weaken tort reforms could have an adverse impact on our business. The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict and could be harmful to our business and have a material adverse effect on our results of operations.
The effects of litigation on our business are uncertain and could have an adverse effect on our business.
We may from time to time be subject to a variety of legal actions relating to our current and past business operations including, but not limited to, disputes over coverage or claims adjudication, including claims alleging that we have acted in bad faith in the administration of claims by our policyholders, disputes with our agents or producers over compensation and termination of contracts and related claims, disputes relating to certain business acquired or disposed of by us and disputes with former employees. We also cannot determine with any certainty what new theories of recovery may evolve or what their impact may be on our business.
Class action claims present additional exposure to substantial economic, non-economic or punitive damage awards. The loss of even one of these claims, if it results in a significant damage award or a judicial ruling that was otherwise detrimental, could create a precedent in the industry that could have an adverse effect on our business.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
We use an aggregate of approximately 2.5 million square feet in approximately 54 office locations and approximately 500 storefronts. We have an ownership interest in the entities that own the buildings in which we lease space at two of these locations, which represent an aggregate of approximately 0.3 million square feet.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. 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 13, “Commitments and Contingencies” in the notes to our consolidated financial statements.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Shareholders
Our common shares began trading on the Nasdaq Global Market under the symbol “NGHC” on February 20, 2014. As a result of the Merger, on January 4, 2021, we became a wholly owned subsidiary of Allstate, our common shares were delisted from the NASDAQ Global Stock Market and we subsequently filed a Form 15 on January 14, 2021 to deregister the common shares under the Securities Exchange Act of 1934, as amended. Accordingly, our common shares are no longer publicly traded. Prior to the Merger, we had one class of common stock with 150,000,000 authorized shares at a par value of $0.01 per share. As of January 3, 2021, the day prior to the completion of the Merger, there were approximately 254 registered record holders of our common shares.
Dividend Policy
As a result of the Merger and the delisting of our common shares from the NASDAQ Global Stock Market on January 4, 2021, our common shares are now wholly owned by Allstate and there is no public market for our common shares.
Common Stock Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on our common stock for the five-year period (December 31, 2015 to December 31, 2020) with the cumulative total return on the Nasdaq Global Market Index and a peer group comprised of the Nasdaq Insurance Index. The graph shows the change in value of an initial $100 investment made on December 31, 2015. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
Comparative Cumulative Total Returns Since December 31, 2015, for National General Holdings Corp., Nasdaq Composite Index and Nasdaq Insurance Index
This information is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act or the Exchange Act.
Issuer Purchases of Equity Securities
During the fourth quarter ended December 31, 2020, we did not repurchase any shares of common stock. On April 29, 2020, our Board of Directors authorized and approved a share repurchase program with a 12-month term for up to $50 million aggregate purchase price of our outstanding common shares. During the year ended December 31, 2020, we repurchased an aggregate of 459,083 common shares with a cost of $8.5 million under the program. The purchases were made in the open market in accordance with applicable federal securities laws, including Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934. Pursuant to the terms of the Merger Agreement with Allstate signed July 7, 2020, we were prohibited from making any further common share repurchases prior to the close of the Merger. On January 4, 2021, our common shares were delisted from the NASDAQ Global Stock Market as a result of the Merger.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The income statement data for the years ended December 31, 2020, 2019, and 2018, and the balance sheet data as of December 31, 2020, and 2019, are derived from our audited financial statements included elsewhere in this annual report. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information together with the other information contained in this annual report, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this annual report.
Year Ended December 31,
2020 2019 2018 2017 2016
Selected Income Statement Data(1)
(amounts in thousands, except percentages and per share data)
Gross premium written $ 5,634,547 $ 5,583,080 $ 5,416,839 $ 4,755,985 $ 3,500,898
Ceded premiums(2)
(1,013,703) (1,358,459) (1,589,126) (1,178,390) (428,202)
Net premium written $ 4,620,844 $ 4,224,621 $ 3,827,713 $ 3,577,595 $ 3,072,696
Change in unearned premium (126,224) (106,579) (95,511) 76,581 (77,525)
Net earned premium $ 4,494,620 $ 4,118,042 $ 3,732,202 $ 3,654,176 $ 2,995,171
Ceding commission income 152,457 238,453 224,697 116,456 45,600
Service and fee income 760,374 641,965 561,583 502,927 380,817
Net investment income(3)
118,257 141,233 119,034 101,950 115,187
Net gain (loss) on investments 26,577 13,473 (29,545) 46,763 7,904
Other income (expense) - 26,428 - (198) 24,308
Total revenues $ 5,552,285 $ 5,179,594 $ 4,607,971 $ 4,422,074 $ 3,568,987
Loss and loss adjustment expense 2,824,082 2,854,468 2,662,226 2,626,082 2,092,280
Acquisition costs and other underwriting expenses(4)
990,569 827,367 735,266 672,429 497,007
General and administrative expenses(5)
1,043,193 1,041,772 938,046 912,996 709,148
Interest expense 33,772 51,544 51,425 47,086 40,180
Total expenses $ 4,891,616 $ 4,775,151 $ 4,386,963 $ 4,258,593 $ 3,338,615
Income before provision for income taxes
$ 660,669 $ 404,443 $ 221,008 $ 163,481 $ 230,372
Provision for income taxes 136,461 77,013 53,484 61,273 33,998
Net income $ 524,208 $ 327,430 $ 167,524 $ 102,208 $ 196,374
Less: Net (income) loss attributable to noncontrolling interest
(10,877) 20,639 39,830 3,637 (20,668)
Net income attributable to National General Holdings Corp.
$ 513,331 $ 348,069 $ 207,354 $ 105,845 $ 175,706
Dividends on preferred stock (33,600) (33,600) (32,492) (31,500) (24,333)
Net income attributable to National General Holdings Corp. common stockholders $ 479,731 $ 314,469 $ 174,862 $ 74,345 $ 151,373
Per common share data:
Basic earnings per share
$ 4.23 $ 2.78 $ 1.62 $ 0.70 $ 1.43
Weighted average shares outstanding - basic
113,512 113,200 107,660 106,588 105,952
Diluted earnings per share
$ 4.14 $ 2.73 $ 1.59 $ 0.68 $ 1.40
Weighted average shares outstanding - diluted
116,427 116,097 110,822 108,752 108,278
Dividends declared per common share
$ 0.20 $ 0.18 $ 0.16 $ 0.16 $ 0.14
Insurance Ratios
Net loss ratio(6)
62.8 % 69.3 % 71.3 % 71.9 % 69.9 %
Net operating expense ratio (non-GAAP)(7)(8)
24.8 % 23.7 % 23.5 % 26.4 % 26.0 %
Net combined ratio (non-GAAP)(7)(8)(9)
87.6 % 93.0 % 94.8 % 98.3 % 95.9 %
Insurance Ratios Before Amortization and Impairment (non-GAAP)
Net operating expense ratio before amortization and impairment
(non-GAAP)(10)
24.3 % 22.8 % 22.7 % 24.7 % 23.6 %
Net combined ratio before amortization and impairment
(non-GAAP)(10)(11)
87.1 % 92.1 % 94.0 % 96.6 % 93.5 %
As of December 31,
2020 2019 2018 2017 2016
Selected Balance Sheet Data (amounts in thousands)
Investments $ 4,969,271 $ 4,854,998 $ 4,226,806 $ 3,649,788 $ 3,631,064
Cash, cash equivalents and restricted cash $ 699,767 $ 164,463 $ 233,583 $ 357,484 $ 285,900
Premiums and other receivables, net $ 1,545,380 $ 1,428,948 $ 1,399,812 $ 1,324,321 $ 1,091,774
Reinsurance recoverable, net $ 1,218,930 $ 1,394,308 $ 1,611,738 $ 1,294,165 $ 948,236
Goodwill and Intangible assets, net $ 520,053 $ 545,151 $ 560,120 $ 578,223 $ 626,084
Total assets $ 10,127,894 $ 9,756,534 $ 9,439,280 $ 8,439,743 $ 7,238,028
Unpaid loss and loss adjustment expense reserves $ 2,889,098 $ 2,886,414 $ 2,957,159 $ 2,663,557 $ 2,273,866
Unearned premiums and other revenue $ 2,244,624 $ 2,312,241 $ 2,280,728 $ 2,032,605 $ 1,701,286
Debt $ 676,810 $ 686,006 $ 705,795 $ 713,710 $ 752,001
Total liabilities $ 6,911,896 $ 7,139,040 $ 7,238,409 $ 6,486,318 $ 5,320,670
Common stock and additional paid-in capital $ 1,078,146 $ 1,066,768 $ 1,058,912 $ 918,818 $ 914,851
Preferred stock $ 450,000 $ 450,000 $ 450,000 $ 420,000 $ 420,000
Noncontrolling interest $ (21,165) $ (31,960) $ (19,967) $ 24,856 $ 31,918
Total stockholders’ equity $ 3,215,998 $ 2,617,494 $ 2,200,871 $ 1,953,425 $ 1,917,358
(1) Results of operations were affected by our various acquisitions and reinsurance transactions from 2016 to 2020, and a disposition in 2019. Bargain purchase gain or gain on sale of a business is recorded in other income (expense).
(2) Premiums ceded to related parties were not material for the years ended December 31, 2020, 2019, 2018, and 2017.
(3) Earnings (losses) of equity method investments, including those with related parties, are recorded in net investment income.
(4) Acquisition costs and other underwriting expenses include policy acquisition expenses, commissions paid directly to producers, premium taxes and assessments, salary and benefits and other insurance general and administrative expenses which represent other costs that are directly attributable to insurance activities.
(5) General and administrative expenses are composed of all other operating expenses, including various departmental salaries and benefits expenses for employees that are directly 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.
(6) Net loss ratio is calculated by dividing the loss and loss adjustment expense by net earned premiums.
(7) Net operating expense ratio and net combined ratio 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, service and fee income and other general and administrative expenses (M&A advisory cost / Arbitration award). Management uses net operating expense ratio (non-GAAP) and net combined ratio (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 the Company’s management. For a reconciliation of net operating expense, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation-Results of Operations-Consolidated Results of Operations.”
(8) Net operating expense ratio (non-GAAP) is calculated by dividing the net operating expense by net earned premium. Net operating expense consists of the sum of acquisition costs and other underwriting expenses and general and administrative expenses less ceding commission income, service and fee income and other general and administrative expenses (M&A advisory cost / Arbitration award).
(9) Net combined ratio (non-GAAP) is calculated by adding net loss ratio and net operating expense ratio (non-GAAP) together.
(10) 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.
(11) 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). If the net combined ratio before amortization and impairment (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. 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.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. 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 consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This Form 10-K 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. See “Note on Forward-Looking Statements.”
The discussion of our financial condition and results of operations for the year ended December 31, 2018 included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019 is incorporated by reference into this MD&A.
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.
Reportable Segments
We manage our business through two reportable segments, Property and Casualty (“P&C”) and Accident and Health (“A&H”), and we conduct business primarily through our twenty-two regulated domestic insurance subsidiaries:
Property and Casualty:
Agent Alliance Insurance Company
Century-National Insurance Company
Direct General Insurance Company
Direct General Insurance Company of Mississippi
Direct Insurance Company
Direct National Insurance Company
Imperial Fire and Casualty Insurance Company
Integon Casualty Insurance Company
Integon General Insurance Corporation
Integon Indemnity Corporation
Integon National Insurance Company
Integon Preferred Insurance Company
MIC General Insurance Corporation
National Farmers Union Property and Casualty Company
National General Assurance Company
National General Insurance Company
National General Insurance Online, Inc.
National General Premier Insurance Company
New South Insurance Company
Standard Property and Casualty Insurance Company
Accident and Health:
Direct General Life Insurance Company
National Health Insurance Company
Our insurance subsidiaries have an “A-” (Excellent) group rating by A.M. Best Company, Inc. (“A.M. Best”). On July 9, 2020, following the announcement of our agreement to be acquired by Allstate, A.M. Best placed us and our subsidiaries under review with positive implications. We currently conduct a limited amount of business outside the United States, primarily in Bermuda.
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 or global events such as the COVID-19 pandemic and the resulting health and safety, economic and regulatory impacts. 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. Also, 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 operating results for the year ended December 31, 2020, have been negatively impacted by losses resulting from severe weather-related events.
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 year ended December 31, 2020, our operating leverage (the ratio of net earned premium to average total stockholders’ equity) was 1.5x, 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 can invest cash from premiums for significant periods. We invest our capital and surplus following state and regulatory guidelines. Our net investment income was $118.3 million, $141.2 million and $119.0 million for the years ended December 31, 2020, 2019, and 2018, respectively. We held 12.3% and 3.3% of our total invested assets in cash, cash equivalents and restricted cash as of December 31, 2020, and 2019, respectively.
Our most significant balance sheet liability is our unpaid loss and LAE reserves. As of December 31, 2020, and 2019, our reserves, net of reinsurance recoverable on unpaid losses, were $1.9 billion and $1.8 billion, respectively. We record reserves for estimated losses under insurance policies that we write and for LAE related to the investigation and settlement of policy claims. Our reserves for loss and LAE represent the estimated cost of all reported and unreported loss and LAE 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.
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 pandemic has had a notable adverse impact on general economic conditions, including adverse impacts on automobile sales and new home sales and increased unemployment, which may decrease customer demand for our insurance products, negatively impact our premium volume, reduce our ability to access capital, and otherwise adversely impact our future results of operations. Additionally, federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, regulatory actions seek to retroactively mandate coverage for losses which various types of insurance policies were not designed or priced to cover or seek to require premium refunds. Regulatory restrictions or requirements also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums or fees. Because of the unprecedented size and breadth of this pandemic, and rapidly evolving situation, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time.
While we continue to closely monitor the impact of the COVID-19 pandemic and assess its potential effects on our business, the extent to which the COVID-19 outbreak will impact our operations or financial results is uncertain.
For further discussion regarding the potential impact of COVID-19 and related economic conditions on the Company, see “Part I-Item 1A - Risk Factors.”
Critical Accounting Policies and Estimates
Our significant accounting policies are discussed in Note 2, “Significant Accounting Policies” in the notes to our consolidated financial statements.
Use of estimates and assumptions. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our principal estimates include unpaid losses and LAE reserves; deferred acquisition costs; reinsurance recoverable, including the provision for uncollectible amounts; recording of credit loss and impairment of fixed maturities due to credit-related factors; determining the fair value of investments; determining the fair value of stock-based awards for stock compensation; the valuation of intangibles and the determination of goodwill and goodwill impairment; and income taxes. In developing the estimates and assumptions, management uses all available evidence. Because of uncertainties associated with estimating the amounts, timing, and likelihood of possible outcomes, actual results could differ from estimates.
Premiums and other receivables. We recognize earned premium on a pro rata basis over the terms of the policies, generally periods of six or twelve months. Unearned premium represents the portion of premiums written applicable to the unexpired terms of the policies. Net premiums receivable represent premium written and not yet collected, net of an allowance for uncollectible premium. We regularly evaluate premium and other receivables and adjust for uncollectible amounts as appropriate. Receivables specifically identified as uncollectible are charged to expense in the period the determination is made. Premium refunds are recorded as an offset against gross premium written.
Premiums and other receivables are reported net of an allowance for expected credit losses. The allowance is based upon our ongoing review of amounts outstanding, historical loss data, including delinquencies and write-offs, current and forecasted economic conditions, and other relevant factors. We use a loss-rate method to estimate the
expected credit losses. Credit risk is partially mitigated by our ability to cancel the policy if the policyholder does not pay the premium.
Service and fee income. We currently 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 estimate an allowance for doubtful accounts based on a percentage of fee income.
We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party insurance companies. We do not bear insurance underwriting risk with respect to these policies. 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.
Reserves for loss and loss adjustment expense. We record reserves for estimated losses under insurance policies that we write and for LAE related to the investigation and settlement of policy claims. Our reserves for loss and LAE represent the estimated cost of all reported and unreported loss and LAE incurred and unpaid at any given point in time based on known facts and circumstances.
Loss reserves include statistical reserves and case estimates for individual claims that have been reported and estimates for claims that have been incurred but not reported at the balance sheet date as well as estimates of the expenses associated with processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past loss experience modified for current trends as well as economic, legal and social conditions. Loss reserves, except life reserves, are not discounted to present value, which would involve recognizing the time value of money and offsetting estimates of future payments by future expected investment income.
In establishing these estimates, we make various assumptions regarding a number of factors, including frequency and severity of claims, the length of time needed to achieve ultimate settlement of claims, inflation of medical costs, insurance policy coverage interpretations, jury determinations and legislative changes. Due to the inherent uncertainty associated with these estimates, and the cost of incurred but unreported claims, our actual liabilities may be different from our original estimates. On a quarterly basis, we review our reserves for loss and LAE to determine whether further adjustments are required. Any resulting adjustments are included in the period in which adjustments are determined. Additional information regarding the judgments and uncertainties surrounding our estimated reserves for loss and LAE can be found in Item 1, “Business - Loss Reserves.”
Reinsurance. We cede insurance risk under various reinsurance agreements. We seek to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels
of risk with other insurance enterprises. We remain liable with respect to any insurance ceded if the assuming companies are unable to meet their obligations under these reinsurance agreements.
Reinsurance premiums, losses and LAE ceded to other companies are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Earned premiums and losses and LAE incurred ceded to other companies have been recorded as a reduction of premium revenue and losses and LAE. Commissions allowed by reinsurers on business ceded have been recorded as ceding commission revenue to the extent the ceding commission exceeds acquisition costs. Reinsurance recoverable is reported based on the portion of reserves and paid losses and LAE that are ceded to other companies. Assessing whether or not a reinsurance contract meets the condition for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums and losses, and is based, in part, on the use of actuarial and pricing models and assumptions. If we determine that a reinsurance contract does not transfer sufficient risk, we account for the contract under deposit accounting.
Amounts recoverable from reinsurers are estimated in a manner consistent with the associated claim liability. We report our reinsurance recoverable net of an allowance for estimated uncollectible reinsurance. The allowance is based upon our ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, applicable coverage defenses, and other relevant factors. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies.
Deferred acquisition costs. Deferred acquisition costs include commissions, premium taxes, payments to affinity partners, and other direct sales costs that are directly related to the successful acquisition of insurance policies. These costs, net of ceding allowances, are deferred and amortized to the extent recoverable, over the policy period in which the related premiums are earned and/or over the expected life of the policy as applicable to A&H. Anticipated investment income is considered in determining the recoverability of these costs. We believe that these costs are recoverable.
Assessments related to insurance premiums. We are subject to a variety of insurance-related assessments, such as assessments by state guaranty funds used by state insurance regulators to cover losses of policyholders of insolvent insurance companies and for the operating expenses of such agencies. A typical obligating event would be the issuance of an insurance policy or the occurrence of a claim. These assessments are accrued in the period in which they have been incurred. We use estimated assessment rates in determining the appropriate assessment expense and accrual. We use estimates derived from state regulators and/or National Association of Insurance Commissioners (“NAIC”) Tax and Assessments Guidelines.
Unearned premium reserves. Unearned premium reserves represent the portion of premiums written applicable to the unexpired terms of the policies.
Investments. Our debt securities are classified as available for sale and are measured at fair value with unrealized gains and losses reported as a separate component of comprehensive income. Equity investments (except those accounted for under the equity method, and those that result in consolidation of the investee and certain other investments) are measured at fair value with all gains and losses reported in net income. We may sell our available-for-sale and equity securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors. Available-for-sale and equity securities are reported at their estimated fair values based on quoted market prices or recognized pricing services.
Purchases and sales of investments are recorded on a trade date basis. Realized gains and losses are determined based on the specific identification method. Net investment income is recognized when earned and includes interest and dividend income together with amortization of market premiums and discounts using the effective yield method and is net of investment management fees and other expenses. For mortgage-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the change in effective yields and maturities are recognized on a prospective basis through yield adjustments.
Beginning on January 1, 2020, credit losses on available-for-sale debt securities are recognized through an allowance account. The Company reports accrued investment income separately from debt securities in the Consolidated Balance Sheets, and has elected not to measure an allowance for credit losses. Accrued investment income is written-off by reversing interest income through net investment income at the time the issuer of the bond defaults or is expected to default on payments. Uncollectible debt securities are written-off to net gain (loss) on investments when the Company determines that no additional payments of principal or interest will be received.
Goodwill and intangible assets. A purchase price paid that is in excess of net assets, i.e., goodwill, arising from a business combination is recorded as an asset and is not amortized. Intangible assets with an indefinite useful life are not amortized. Goodwill and intangible assets are tested for impairment on an annual basis or more frequently if changes in circumstances indicate that the carrying amount may not be recoverable. If the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in general and administrative expenses in the consolidated statements of income.
Intangible assets that have finite lives, including but not limited to, agent and customer relationships and trademarks, are amortized over the estimated useful life of the asset. For intangible assets with finite lives, impairment is recognized if the carrying amount is not recoverable and exceeds the fair value of the intangible asset. Generally, intangible assets with finite lives are only tested for impairment if indicators of impairment, i.e, triggers, are identified. Triggers include but are not limited to, a significant adverse change in the extent, manner, or length of time in which the intangible asset is being used or a significant adverse change in legal factors or in the business climate that could affect the value of the intangible asset.
Business combinations. We account for business combinations under the acquisition method of accounting, which requires us to record assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their respective fair values as of the acquisition date. We account for the insurance and reinsurance contracts under the acquisition method as new contracts, which requires us to record assets and liabilities at fair value. We adjust the fair value of loss and LAE reserves starting with the acquired loss reserves based on our existing accounting policies and then discounting them based on expected reserve payout patterns using a current risk-free rate of interest. This risk-free interest rate is then adjusted based on different cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be reasonably possible based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. The difference between the acquired loss and LAE reserves and our best estimate of the fair value of such reserves at the acquisition date is recorded as either an intangible asset or another liability, as applicable and is amortized proportionately to the reduction in the related loss reserves (e.g., over the estimated payout period of the acquired loss and LAE reserves). We assign fair values to intangible assets acquired based on valuation techniques including the income and market approaches. We record contingent consideration at fair value based on the terms of the purchase agreement with subsequent changes in fair value recorded through earnings. The purchase price is the fair value of the total consideration conveyed to the seller and we record the excess (deficiency) of the purchase price over the fair value of the acquired net assets, where applicable, as goodwill or bargain purchase gain. We expense costs associated with the acquisition of a business in the period incurred.
Noncontrolling Interest. Non-redeemable noncontrolling interest is the portion of equity (net assets) not attributable, directly or indirectly, to a parent. We have no ownership interest in the Reciprocal Exchanges. Therefore, the difference between the value of their assets and liabilities represent the value of the noncontrolling interest.
Fair value of financial instruments. Our estimates of fair value for financial assets and financial liabilities are based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect our significant market assumptions.
Level 3 assets are unobservable inputs 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 non-binding broker quotes, pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
Income taxes. We join our subsidiaries in the filing of a consolidated federal income tax return and are party to federal income tax allocation agreement. The Reciprocal Exchanges are not party to federal income tax allocation agreement but file separate tax returns annually. Deferred income taxes reflect the impact of temporary differences between the amount of our assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax asset and liability primarily consists of book versus tax differences for earned premiums, loss and LAE reserve discounting, deferred acquisition costs, earned but unbilled premiums, and unrealized holding gains and losses on debt securities.
In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that we will generate future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. If necessary, we establish a valuation allowance to reduce the deferred tax assets to the amounts that are more likely than not to be realized.
We recognize tax benefits only on tax positions that are more likely than not to be sustained upon examination by taxing authorities. Our policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in our income tax provision. We file our consolidated tax returns as prescribed by the tax laws of the jurisdictions in which we operate.
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, before ceding reinsurance to third parties. Premium refunds are recorded as an offset against gross premium written.
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, 2020, we would earn half of the premium in the first quarter of 2020, and the other half in the second quarter of 2020.
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. We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party insurance companies as well as fees generated through selling our technology products to third parties.
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; conversely, net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we establish a credit loss allowance on our debt securities as a result of specific credit concerns. For debt securities classified as available-for-sale, other than the allowance for credit losses, we report net unrealized gains and losses within accumulated other comprehensive income in our balance sheet. We report all gains and 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.
Other income (expense). Other income (expense) represents the bargain purchase gain or the gain on sale of a business.
Loss and loss adjustment expense. 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 (non-GAAP). 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 and other general and administrative expenses (M&A advisory cost / Arbitration award).
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 (non-GAAP) 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 of net operating expense, see “Results of Operations - Consolidated Results of Operations” below.
Results of Operations
Consolidated Results of Operations
Year Ended December 31,
2020 2019
NGHC Reciprocal
Exchanges Eliminations Total NGHC Reciprocal
Exchanges Eliminations Total
Underwriting revenues: (amounts in thousands)
Gross premium written $ 5,260,946 $ 373,601 $ - $ 5,634,547 $ 5,135,633 $ 447,447 $ - $ 5,583,080
Ceded premiums (841,318) (172,385) - (1,013,703) (1,145,484) (212,975) - (1,358,459)
Net premium written $ 4,419,628 $ 201,216 $ - $ 4,620,844 $ 3,990,149 $ 234,472 $ - $ 4,224,621
Change in unearned premium (146,257) 20,033 - (126,224) (82,338) (24,241) - (106,579)
Net earned premium $ 4,273,371 $ 221,249 $ - $ 4,494,620 $ 3,907,811 $ 210,231 $ - $ 4,118,042
Ceding commission income 110,163 42,294 - 152,457 174,952 63,501 - 238,453
Service and fee income 807,772 6,311 (53,709) 760,374 705,006 5,755 (68,796) 641,965
Total underwriting revenues $ 5,191,306 $ 269,854 $ (53,709) $ 5,407,451 $ 4,787,769 $ 279,487 $ (68,796) $ 4,998,460
Underwriting expenses:
Loss and loss adjustment expense 2,669,732 154,350 - 2,824,082 2,677,356 177,112 - 2,854,468
Acquisition costs and other underwriting expenses 943,739 46,830 - 990,569 782,328 45,039 - 827,367
General and administrative expenses 1,031,600 65,302 (53,709) 1,043,193 1,024,574 85,994 (68,796) 1,041,772
Total underwriting expenses $ 4,645,071 $ 266,482 $ (53,709) $ 4,857,844 $ 4,484,258 $ 308,145 $ (68,796) $ 4,723,607
Underwriting income (loss) $ 546,235 $ 3,372 $ - $ 549,607 $ 303,511 $ (28,658) $ - $ 274,853
Net investment income 121,274 7,256 (10,273) 118,257 142,174 8,638 (9,579) 141,233
Net gain (loss) on investments 14,145 12,432 - 26,577 13,603 (130) - 13,473
Other income - - - - 26,428 - - 26,428
Interest expense (33,646) (10,399) 10,273 (33,772) (51,544) (9,579) 9,579 (51,544)
Income (loss) before provision (benefit) for income taxes $ 648,008 $ 12,661 $ - $ 660,669 $ 434,172 $ (29,729) $ - $ 404,443
Provision (benefit) for income taxes 134,677 1,784 - 136,461 86,103 (9,090) - 77,013
Net income (loss) $ 513,331 $ 10,877 $ - $ 524,208 $ 348,069 $ (20,639) $ - $ 327,430
Net gain (loss) attributable to noncontrolling interest - (10,877) - (10,877) - 20,639 - 20,639
Net income attributable to NGHC $ 513,331 $ - $ - $ 513,331 $ 348,069 $ - $ - $ 348,069
Dividends on preferred stock (33,600) - - (33,600) (33,600) - - (33,600)
Net income attributable to NGHC common stockholders $ 479,731 $ - $ - $ 479,731 $ 314,469 $ - $ - $ 314,469
Year Ended December 31,
2020 2019
NGHC Reciprocal
Exchanges Eliminations Total NGHC Reciprocal
Exchanges Eliminations Total
Underwriting ratios: (amounts in thousands, except percentages)
Net loss ratio 62.5 % 69.8 % - % 62.8 % 68.5 % 84.2 % - % 69.3 %
Net operating expense ratio (non-GAAP) 24.6 % 28.7 % - % 24.8 % 23.4 % 29.4 % - % 23.7 %
Net combined ratio (non-GAAP) 87.1 % 98.5 % - % 87.6 % 91.9 % 113.6 % - % 93.0 %
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio 62.5 % 69.8 % - % 62.8 % 68.5 % 84.2 % - % 69.3 %
Net operating expense ratio before amortization and impairment (non-GAAP) 24.1 % 28.7 % - % 24.3 % 22.5 % 29.4 % - % 22.8 %
Net combined ratio before amortization and impairment (non-GAAP) 86.6 % 98.5 % - % 87.1 % 91.0 % 113.6 % - % 92.1 %
Reconciliation of net operating expense ratio (non-GAAP):
Total expenses $ 4,678,717 $ 276,881 $ (63,982) $ 4,891,616 $ 4,535,802 $ 317,724 $ (78,375) $ 4,775,151
Less: Loss and loss adjustment expense 2,669,732 154,350 - 2,824,082 2,677,356 177,112 - 2,854,468
Less: Interest expense 33,646 10,399 (10,273) 33,772 51,544 9,579 (9,579) 51,544
Less: Ceding commission income 110,163 42,294 - 152,457 174,952 63,501 - 238,453
Less: Service and fee income 807,772 6,311 (53,709) 760,374 705,006 5,755 (68,796) 641,965
Less: Other general and administrative expenses 8,026 - - 8,026 14,273 - - 14,273
Net operating expense (non-GAAP) $ 1,049,378 $ 63,527 $ - $ 1,112,905 $ 912,671 $ 61,777 $ - $ 974,448
Net earned premium $ 4,273,371 $ 221,249 $ - $ 4,494,620 $ 3,907,811 $ 210,231 $ - $ 4,118,042
Net operating expense ratio (non-GAAP) 24.6 % 28.7 % - % 24.8 % 23.4 % 29.4 % - % 23.7 %
Net operating expense (non-GAAP) $ 1,049,378 $ 63,527 $ - $ 1,112,905 $ 912,671 $ 61,777 $ - $ 974,448
Less: Non-cash amortization of intangible assets 20,637 131 - 20,768 34,665 71 - 34,736
Net operating expense before amortization and impairment (non-GAAP) $ 1,028,741 $ 63,396 $ - $ 1,092,137 $ 878,006 $ 61,706 $ - $ 939,712
Net earned premium $ 4,273,371 $ 221,249 $ - $ 4,494,620 $ 3,907,811 $ 210,231 $ - $ 4,118,042
Net operating expense ratio before amortization and impairment (non-GAAP) 24.1 % 28.7 % - % 24.3 % 22.5 % 29.4 % - % 22.8 %
The Company has auto and homeowners quota share agreements (collectively, the “Quota Shares”). Effective January 1, 2020, under the auto quota share agreement we cede 5.0% of net liability under new and renewal auto policies written, compared to 7.0% and 10.0% of net liability ceded effective January 1, 2019, and July 1, 2019, respectively. From July 1, 2019, to June 30, 2020, under the homeowners quota share agreement we ceded 40.0% of net liability. Effective July 1, 2020, we cede 20.0% of net liability under homeowners policies.
In August 2019, we completed the acquisition of National Farmers Union Property and Casualty Company (“Farmers Union Insurance”). In December 2019, we sold our Euro Accident Health and Care Insurance Sweden operation (“Euroaccident”).
As a result of these transactions, comparisons between the results for the years ended December 31, 2020, and 2019, will be less meaningful.
Consolidated Results of Operations for the Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
Gross premium written. Gross premium written increased by $51.5 million, from $5,583.1 million for the year ended December 31, 2019, to $5,634.5 million for the year ended December 31, 2020. The P&C segment increased by $43.2 million, primarily driven by the acquisition of Farmers Union Insurance ($102.7 million), partially offset by a decrease in the Reciprocal Exchanges ($73.8 million). The A&H segment increased by $8.3 million due to an increase in our small group self-funded and individual products ($147.8 million), offset by the sale of Euroaccident in 2019 ($139.3 million).
Net premium written. Net premium written increased by $396.2 million, or 9.4%, from $4,224.6 million for the year ended December 31, 2019, to $4,620.8 million for the year ended December 31, 2020. Net premium written for the P&C segment increased by $370.4 million for the year ended December 31, 2020 compared to the same period in 2019, due to an increase in gross premium written and a decrease in ceded written premium to the Quota Shares ($461.2 million), partially offset by a decrease in the Reciprocal Exchanges ($33.3 million). Net premium written for the A&H segment increased by $25.8 million for the year ended December 31, 2020, compared to the same period in 2019, due to an increase in our small group self-funded and individual products ($115.1 million), offset by the sale of Euroaccident in 2019 ($89.2 million).
Net earned premium. Net earned premium increased by $376.6 million, or 9.1%, from $4,118.0 million for the year ended December 31, 2019, to $4,494.6 million for the year ended December 31, 2020. The change by segment was: P&C increased by $354.1 million and A&H increased by $22.4 million. The increase in the P&C segment was attributable to the increase in net premium written and a decrease in ceded earned premium to the Quota Shares ($301.0 million), and an increase in the Reciprocal Exchanges ($11.0 million). The increase in the A&H segment was attributable to an increase in our small group self-funded and individual products ($113.9 million), offset by the sale of Euroaccident in 2019 ($91.4 million).
Ceding commission income. Ceding commission income decreased by $86.0 million, or 36.1%, from $238.5 million for the year ended December 31, 2019, to $152.5 million for the year ended December 31, 2020, primarily driven by a decrease in ceded earned premium to the Quota Shares.
Service and fee income. Service and fee income increased by $118.4 million, or 18.4%, from $642.0 million for the year ended December 31, 2019, to $760.4 million for the year ended December 31, 2020, primarily due to an increase of $119.2 million in the A&H segment related to growth in group administration fees and third party technology fees; third party technology fees are included in other service and fee income.
The components of service and fee income are as follows:
Year Ended December 31,
2020 2019 Change % Change
(amounts in thousands)
Commission revenue $ 184,681 $ 170,962 $ 13,719 8.0 %
Finance and processing fees 138,873 134,499 4,374 3.3 %
Group health administrative fees 124,523 100,951 23,572 23.3 %
Installment fees 104,915 97,997 6,918 7.1 %
Late payment fees 32,436 34,519 (2,083) (6.0) %
Other service and fee income 174,946 103,037 71,909 69.8 %
Total $ 760,374 $ 641,965 $ 118,409 18.4 %
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $30.4 million, from $2,854.5 million for the year ended December 31, 2019, to $2,824.1 million for the year ended December 31, 2020, primarily reflecting lower claims frequency, as a result of less miles driven during the pandemic ($239.8 million), offset by a decrease in losses ceded to the Quota Shares ($180.3 million), the acquisition of Farmers Union Insurance ($43.6 million), and the sale of Euroaccident in 2019 ($48.3 million). The changes by segment were: P&C decreased by $38.6 million and A&H increased by $8.2 million. Losses related to P&C weather-related events, excluding the Reciprocal Exchanges, were $150.2 million in 2020, compared to $51.2 million in 2019, an increase of $99.0 million year over year.
Loss and LAE for the year ended December 31, 2020, included $4.2 million of unfavorable loss development on prior accident year loss and LAE reserves. The loss development was composed of $28.0 million of unfavorable loss development in the P&C segment, driven by the small business auto product line, and $23.8 million of favorable loss development in the A&H segment, driven by lower than expected loss ratios in the group segment. Loss and LAE for the year ended December 31, 2019, included $5.2 million of unfavorable loss development on prior accident year loss and LAE reserves. The loss development was composed of $50.5 million of unfavorable loss development in the P&C segment primarily driven by the small business auto product line, and $45.4 million of favorable loss development in the A&H segment primarily driven by overall improvement in loss ratio estimates.
Our consolidated net loss ratio decreased from 69.3% for the year ended December 31, 2019, to 62.8% for the year ended December 31, 2020.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $163.2 million, or 19.7%, from $827.4 million for the year ended December 31, 2019, to $990.6 million for the year ended December 31, 2020, due to an increase of $76.3 million in the P&C segment, as a result of the acquisition of Farmers Union Insurance and higher costs and expenses retained due to a decrease in ceded earned premium to the Quota Shares; and an increase of $86.9 million in the A&H segment, primarily due to the costs of selling policies issued by third-party insurance companies.
General and administrative expenses. General and administrative expenses increased by $1.4 million, from $1,041.8 million for the year ended December 31, 2019, to $1,043.2 million for the year ended December 31, 2020, due to an increase of $19.6 million in the P&C segment, offset by a decrease of $12.0 million in the A&H segment. The increase in the P&C segment was primarily due to organic growth, while the decrease in the A&H segment was primarily a result of the sale of Euroaccident in 2019.
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased by $138.5 million, or 14.2%, from $974.4 million for the year ended December 31, 2019, to $1,112.9 million for the year ended December 31, 2020, due to an increase of $171.5 million from the P&C segment, primarily offset by a decrease of $33.1 million from the A&H segment.
The consolidated net operating expense ratio increased from 23.7% for the year ended December 31, 2019, to 24.8% for the year ended December 31, 2020. Excluding the Reciprocal Exchanges, the net operating expense ratio was 24.6% and 23.4% for the years ended December 31, 2020, and 2019, respectively. The Reciprocal Exchanges’ net operating expense ratio was 28.7% and 29.4% for the years ended December 31, 2020, and 2019, respectively.
Net investment income. Net investment income decreased by $23.0 million, or 16.3%, from $141.2 million for the year ended December 31, 2019, to $118.3 million for the year ended December 31, 2020.
Net gain (loss) on investments. Net gain (loss) on investments increased by $13.1 million, from a $13.5 million gain for the year ended December 31, 2019, to a $26.6 million gain for the year ended December 31, 2020.
Interest expense. Interest expense for the years ended December 31, 2020, and 2019, was $33.8 million and $51.5 million, respectively.
Provision for income taxes. Income tax expense increased by $59.4 million, from $77.0 million for the year ended December 31, 2019, reflecting an effective tax rate of 19.0%, to $136.5 million for the year ended December 31, 2020, reflecting an effective tax rate of 20.7%.
P&C Segment - Results of Operations
Year Ended December 31,
2020 2019
NGHC Reciprocal
Exchanges Eliminations Total NGHC Reciprocal
Exchanges Eliminations Total
Underwriting revenues: (amounts in thousands, except percentages)
Gross premium written $ 4,484,030 $ 373,601 $ - $ 4,857,631 $ 4,367,016 $ 447,447 $ - $ 4,814,463
Ceded premiums (750,783) (172,385) - (923,168) (1,037,473) (212,975) - (1,250,448)
Net premium written $ 3,733,247 $ 201,216 $ - $ 3,934,463 $ 3,329,543 $ 234,472 $ - $ 3,564,015
Change in unearned premium (145,343) 20,033 - (125,310) (84,751) (24,241) - (108,992)
Net earned premium $ 3,587,904 $ 221,249 $ - $ 3,809,153 $ 3,244,792 $ 210,231 $ - $ 3,455,023
Ceding commission income 110,377 42,294 - 152,671 164,013 63,501 - 227,514
Service and fee income 439,100 6,311 (53,709) 391,702 455,519 5,755 (68,796) 392,478
Total underwriting revenues $ 4,137,381 $ 269,854 $ (53,709) $ 4,353,526 $ 3,864,324 $ 279,487 $ (68,796) $ 4,075,015
Underwriting expenses:
Loss and loss adjustment expense 2,350,839 154,350 - 2,505,189 2,366,676 177,112 - 2,543,788
Acquisition costs and other underwriting expenses 634,456 46,830 - 681,286 559,980 45,039 - 605,019
General and administrative expenses 781,336 65,302 (53,709) 792,929 756,093 85,994 (68,796) 773,291
Total underwriting expenses $ 3,766,631 $ 266,482 $ (53,709) $ 3,979,404 $ 3,682,749 $ 308,145 $ (68,796) $ 3,922,098
Underwriting income (loss) $ 370,750 $ 3,372 $ - $ 374,122 $ 181,575 $ (28,658) $ - $ 152,917
Underwriting ratios:
Net loss ratio 65.5 % 69.8 % - % 65.8 % 72.9 % 84.2 % - % 73.6 %
Net operating expense ratio (non-GAAP) 24.1 % 28.7 % - % 24.4 % 21.5 % 29.4 % - % 21.9 %
Net combined ratio (non-GAAP) 89.6 % 98.5 % - % 90.2 % 94.4 % 113.6 % - % 95.5 %
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio 65.5 % 69.8 % - % 65.8 % 72.9 % 84.2 % - % 73.6 %
Net operating expense ratio before amortization and impairment (non-GAAP) 23.7 % 28.7 % - % 24.0 % 20.6 % 29.4 % - % 21.1 %
Net combined ratio before amortization and impairment (non-GAAP) 89.2 % 98.5 % - % 89.8 % 93.5 % 113.6 % - % 94.7 %
Reconciliation of net operating expense ratio (non-GAAP):
Total underwriting expenses $ 3,766,631 $ 266,482 $ (53,709) $ 3,979,404 $ 3,682,749 $ 308,145 $ (68,796) $ 3,922,098
Less: Loss and loss adjustment expense 2,350,839 154,350 - 2,505,189 2,366,676 177,112 - 2,543,788
Less: Ceding commission income 110,377 42,294 - 152,671 164,013 63,501 - 227,514
Less: Service and fee income 439,100 6,311 (53,709) 391,702 455,519 5,755 (68,796) 392,478
Net operating expense (non-GAAP) $ 866,315 $ 63,527 $ - $ 929,842 $ 696,541 $ 61,777 $ - $ 758,318
Net earned premium $ 3,587,904 $ 221,249 $ - $ 3,809,153 $ 3,244,792 $ 210,231 $ - $ 3,455,023
Net operating expense ratio (non-GAAP) 24.1 % 28.7 % - % 24.4 % 21.5 % 29.4 % - % 21.9 %
Net operating expense (non-GAAP) $ 866,315 $ 63,527 $ - $ 929,842 $ 696,541 $ 61,777 $ - $ 758,318
Less: Non-cash amortization of intangible assets 15,436 131 - 15,567 27,920 71 - 27,991
Net operating expense before amortization and impairment (non-GAAP) $ 850,879 $ 63,396 $ - $ 914,275 $ 668,621 $ 61,706 $ - $ 730,327
Net earned premium $ 3,587,904 $ 221,249 $ - $ 3,809,153 $ 3,244,792 $ 210,231 $ - $ 3,455,023
Net operating expense ratio before amortization and impairment (non-GAAP) 23.7 % 28.7 % - % 24.0 % 20.6 % 29.4 % - % 21.1 %
P&C Segment Results of Operations for the Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
Gross premium written. Gross premium written increased by $43.2 million, from $4,814.5 million for the year ended December 31, 2019, to $4,857.6 million for the year ended December 31, 2020, primarily driven by the acquisition of Farmers Union Insurance ($102.7 million), partially offset by a decrease in the Reciprocal Exchanges ($73.8 million).
Net premium written. Net premium written increased by $370.4 million, or 10.4%, from $3,564.0 million for the year ended December 31, 2019, to $3,934.5 million for the year ended December 31, 2020, due to the increase in gross premium written and a decrease in ceded written premium to the Quota Shares ($461.2 million), partially offset by a decrease in the Reciprocal Exchanges ($33.3 million).
Net earned premium. Net earned premium increased by $354.1 million, or 10.2%, from $3,455.0 million for the year ended December 31, 2019, to $3,809.2 million for the year ended December 31, 2020, attributable to the increase in net premium written, decrease in ceded earned premium to the Quota Shares ($301.0 million), and an increase in the Reciprocal Exchanges ($11.0 million).
Ceding commission income. Ceding commission income decreased by $74.8 million, or 32.9% from $227.5 million for the year ended December 31, 2019, to $152.7 million for the year ended December 31, 2020, primarily driven by a decrease in ceded earned premium to the Quota Shares.
Service and fee income. Service and fee income decreased by $0.8 million, from $392.5 million for the year ended December 31, 2019, to $391.7 million for the year ended December 31, 2020.
The components of service and fee income are as follows:
Year Ended December 31,
2020 2019 Change % Change
(amounts in thousands)
Finance and processing fees $ 129,327 $ 128,302 $ 1,025 0.8 %
Installment fees 104,915 97,997 6,918 7.1 %
Commission revenue 60,103 87,486 (27,383) (31.3) %
Late payment fees 32,377 34,210 (1,833) (5.4) %
Other service and fee income 64,980 44,483 20,497 46.1 %
Total $ 391,702 $ 392,478 $ (776) (0.2) %
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $38.6 million, from $2,543.8 million for the year ended December 31, 2019, to $2,505.2 million for the year ended December 31, 2020, primarily reflecting lower claims frequency, as a result of less miles driven during the pandemic ($239.8 million) and the sale of Euroaccident in 2019 ($48.3 million), offset by a decrease in losses ceded to the Quota Shares ($180.3 million), and the acquisition of Farmers Union Insurance ($43.6 million). Losses related to weather-related events, excluding the Reciprocal Exchanges, were $150.2 million in 2020, compared to $51.2 million in 2019, an increase of $99.0 million year over year.
Our P&C segment net loss ratio, which includes the Reciprocal Exchanges, decreased from 73.6% for the year ended December 31, 2019, to 65.8% for the year ended December 31, 2020. Excluding the Reciprocal Exchanges, the net loss ratio was 65.5% and 72.9% for the years ended December 31, 2020, and 2019, respectively. The Reciprocal Exchanges’ net loss ratio was 69.8% and 84.2% for the years ended December 31, 2020, and 2019, respectively.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $76.3 million, or 12.6%, from $605.0 million for the year ended December 31, 2019, to $681.3 million for the year ended December 31, 2020. The increase was primarily due to the acquisition of Farmers Union Insurance and higher costs and expenses retained due to a decrease in ceded earned premium to the Quota Shares.
General and administrative expenses. General and administrative expenses increased by $19.6 million, from $773.3 million for the year ended December 31, 2019, to $792.9 million for the year ended December 31, 2020. The increase was primarily driven by organic growth.
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased by $171.5 million, or 22.6%, from $758.3 million for the year ended December 31, 2019, to $929.8 million for the year ended December 31, 2020. Our P&C segment net operating expense ratio was 21.9% for the year ended December 31, 2019, compared to 24.4% for the year ended December 31, 2020. The increases in net operating expense and net operating expense ratio were primarily due to organic growth, the acquisition of Farmers Union Insurance, and a decrease in ceding commission income from the Quota Shares.
Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $221.2 million, or 144.7%, from $152.9 million for the year ended December 31, 2019, to $374.1 million for the year ended December 31, 2020. The P&C segment net combined ratio decreased from 95.5% for the year ended December 31, 2019, to 90.2% for the year ended December 31, 2020. The increase in underwriting income and the decrease in the net combined ratio were primarily due to increased net earned premium and lower claims, including as a result of the recent decline in miles driven due to the COVID-19 pandemic, offset by higher expenses due to organic growth and the acquisition of Farmers Union Insurance, and a decrease in ceding commission income from the Quota Shares.
A&H Segment - Results of Operations
Year Ended December 31,
2020 2019
Underwriting revenues: (amounts in thousands, except percentages)
Gross premium written $ 776,916 $ 768,617
Ceded premiums (90,535) (108,011)
Net premium written $ 686,381 $ 660,606
Change in unearned premium (914) 2,413
Net earned premium $ 685,467 $ 663,019
Ceding commission income (214) 10,939
Service and fee income 368,672 249,487
Total underwriting revenues $ 1,053,925 $ 923,445
Underwriting expenses:
Loss and loss adjustment expense 318,893 310,680
Acquisition costs and other underwriting expenses 309,283 222,348
General and administrative expenses 242,238 254,208
Total underwriting expenses $ 870,414 $ 787,236
Underwriting income $ 183,511 $ 136,209
Underwriting ratios:
Net loss ratio 46.5 % 46.9 %
Net operating expense ratio (non-GAAP) 26.7 % 32.6 %
Net combined ratio (non-GAAP) 73.2 % 79.5 %
Underwriting ratios before amortization and impairment (non-GAAP):
Net loss ratio 46.5 % 46.9 %
Net operating expense ratio before amortization and impairment (non-GAAP) 25.9 % 31.6 %
Net combined ratio before amortization and impairment (non-GAAP) 72.4 % 78.5 %
Reconciliation of net operating expense ratio (non-GAAP):
Total expenses $ 870,414 $ 787,236
Less: Loss and loss adjustment expense 318,893 310,680
Less: Ceding commission income (214) 10,939
Less: Service and fee income 368,672 249,487
Net operating expense $ 183,063 $ 216,130
Net earned premium $ 685,467 $ 663,019
Net operating expense ratio (non-GAAP) 26.7 % 32.6 %
Net operating expense (non-GAAP) $ 183,063 $ 216,130
Less: Non-cash amortization of intangible assets 5,201 6,745
Net operating expense before amortization and impairment (non-GAAP) $ 177,862 $ 209,385
Net earned premium $ 685,467 $ 663,019
Net operating expense ratio before amortization and impairment (non-GAAP) 25.9 % 31.6 %
A&H Segment Results of Operations for the Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
Gross premium written. Gross premium written increased by $8.3 million, from $768.6 million for the year ended December 31, 2019, to $776.9 million for the year ended December 31, 2020, primarily due to an increase in our small group self-funded and individual products ($147.8 million), offset by the sale of Euroaccident in 2019 ($139.3 million).
Net premium written. Net premium written increased by $25.8 million, from $660.6 million for the year ended December 31, 2019, to $686.4 million for the year ended December 31, 2020, primarily due to an increase in our small group self-funded and individual products ($115.1 million), offset by the sale of Euroaccident in 2019 ($89.2 million).
Net earned premium. Net earned premium increased by $22.4 million, from $663.0 million for the year ended December 31, 2019, to $685.5 million for the year ended December 31, 2020, primarily due to an increase in our small group self-funded and individual products ($113.9 million), offset by the sale of Euroaccident in 2019 ($91.4 million).
Service and fee income. Service and fee income increased by $119.2 million, or 47.8%, from $249.5 million for the year ended December 31, 2019, to $368.7 million for the year ended December 31, 2020, primarily driven by growth in commission revenue, group administration fees and third party technology fees; third party technology fees are included in other service and fee income.
The components of service and fee income are as follows:
Year Ended December 31,
2020 2019 Change % Change
(amounts in thousands)
Commission revenue $ 124,578 $ 83,476 $ 41,102 49.2 %
Group health administrative fees 124,523 100,951 23,572 23.3 %
Finance and processing fees 9,546 6,197 3,349 54.0 %
Other service and fee income 110,025 58,863 51,162 86.9 %
Total $ 368,672 $ 249,487 $ 119,185 47.8 %
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $8.2 million, from $310.7 million for the year ended December 31, 2019, to $318.9 million for the year ended December 31, 2020. Our A&H net loss ratio decreased from 46.9% for the year ended December 31, 2019, to 46.5% for the year ended December 31, 2020. The loss ratio decrease was primarily due to lower claims frequency.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $86.9 million, or 39.1%, from $222.3 million for the year ended December 31, 2019, to $309.3 million for the year ended December 31, 2020, primarily due to the costs of selling policies issued by third-party insurance companies.
General and administrative expenses. General and administrative expenses decreased by $12.0 million, from $254.2 million for the year ended December 31, 2019, to $242.2 million for the year ended December 31, 2020, primarily due to the sale of Euroaccident in 2019.
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense decreased by $33.1 million, or 15.3%, from $216.1 million for the year ended December 31, 2019, to $183.1 million for the year ended December 31, 2020. Our A&H net operating expense ratio decreased from 32.6% for the year ended December 31, 2019, to 26.7% for the year ended December 31, 2020. The decreases in net operating expense and net operating ratio were primarily due to increased net earned premium in 2020 and the sale of Euroaccident in 2019.
Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $47.3 million, or 34.7%, from $136.2 million for the year ended December 31, 2019, to $183.5 million for the year ended December 31, 2020. Our A&H net combined ratio decreased from 79.5% for the year ended December 31, 2019, to 73.2% for the year ended December 31, 2020.
Balance Sheets
December 31, 2020
NGHC Reciprocal Exchanges Eliminations Total
ASSETS (amounts in thousands)
Investments:
Debt securities, available-for-sale, at fair value $ 4,186,915 $ 310,215 $ - $ 4,497,130
Short-term investments 164,199 26,887 - 191,086
Other investments 388,665 - (107,610) 281,055
Total investments 4,739,779 337,102 (107,610) 4,969,271
Cash and cash equivalents 658,990 3,782 - 662,772
Restricted cash and cash equivalents 36,664 331 - 36,995
Accrued investment income 71,121 1,628 (44,946) 27,803
Premiums and other receivables, net 1,496,065 49,315 - 1,545,380
Deferred acquisition costs 266,705 19,200 - 285,905
Reinsurance recoverable, net 1,093,415 125,515 - 1,218,930
Prepaid reinsurance premiums 324,160 89,850 - 414,010
Property and equipment, net 377,683 - - 377,683
Intangible assets, net 337,680 3,045 - 340,725
Goodwill 179,328 - - 179,328
Prepaid and other assets 65,528 3,564 - 69,092
Total assets $ 9,647,118 $ 633,332 $ (152,556) $ 10,127,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves $ 2,683,126 $ 205,972 $ - $ 2,889,098
Unearned premiums and other revenue 2,037,536 207,088 - 2,244,624
Reinsurance payable 304,492 59,039 - 363,531
Accounts payable and accrued expenses 367,459 55,149 (44,946) 377,662
Debt 676,810 107,610 (107,610) 676,810
Other liabilities 340,532 19,639 - 360,171
Total liabilities $ 6,409,955 $ 654,497 $ (152,556) $ 6,911,896
Stockholders’ equity:
Preferred stock $ 450,000 $ - $ - $ 450,000
Common stock 1,140 - - 1,140
Treasury stock, at cost (8,482) - - (8,482)
Additional paid-in capital 1,077,006 - - 1,077,006
Accumulated other comprehensive income 203,203 - - 203,203
Retained earnings 1,514,296 - - 1,514,296
Total National General Holdings Corp. stockholders’ equity 3,237,163 - - 3,237,163
Noncontrolling interest - (21,165) - (21,165)
Total stockholders’ equity $ 3,237,163 $ (21,165) $ - $ 3,215,998
Total liabilities and stockholders’ equity $ 9,647,118 $ 633,332 $ (152,556) $ 10,127,894
December 31, 2019
NGHC Reciprocal Exchanges Eliminations Total
ASSETS (amounts in thousands)
Investments:
Debt securities, available-for-sale, at fair value $ 4,152,109 $ 324,249 $ - $ 4,476,358
Short-term investments 62,108 5,245 - 67,353
Other investments 418,743 - (107,456) 311,287
Total investments 4,632,960 329,494 (107,456) 4,854,998
Cash and cash equivalents 134,983 959 - 135,942
Restricted cash and cash equivalents 28,497 24 - 28,521
Accrued investment income 63,752 2,001 (34,826) 30,927
Premiums and other receivables, net 1,373,089 55,859 - 1,428,948
Deferred acquisition costs 240,216 23,307 - 263,523
Reinsurance recoverable, net 1,275,183 119,125 - 1,394,308
Prepaid reinsurance premiums 469,853 105,894 - 575,747
Property and equipment, net 403,586 241 - 403,827
Intangible assets, net 362,598 3,225 - 365,823
Goodwill 179,328 - - 179,328
Prepaid and other assets 91,121 3,521 - 94,642
Total assets $ 9,255,166 $ 643,650 $ (142,282) $ 9,756,534
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves $ 2,680,628 $ 205,786 $ - $ 2,886,414
Unearned premiums and other revenue 2,059,688 252,553 - 2,312,241
Reinsurance payable 527,155 35,689 - 562,844
Accounts payable and accrued expenses 306,869 43,323 (34,826) 315,366
Debt 686,006 107,456 (107,456) 686,006
Other liabilities 345,366 30,803 - 376,169
Total liabilities $ 6,605,712 $ 675,610 $ (142,282) $ 7,139,040
Stockholders’ equity:
Preferred stock $ 450,000 $ - $ - $ 450,000
Common stock 1,134 - - 1,134
Additional paid-in capital 1,065,634 - - 1,065,634
Accumulated other comprehensive income 74,548 - - 74,548
Retained earnings 1,058,138 - - 1,058,138
Total National General Holdings Corp. stockholders’ equity 2,649,454 - - 2,649,454
Noncontrolling interest - (31,960) - (31,960)
Total stockholders’ equity $ 2,649,454 $ (31,960) $ - $ 2,617,494
Total liabilities and stockholders’ equity $ 9,255,166 $ 643,650 $ (142,282) $ 9,756,534
Other Material Changes in Financial Position
December 31,
2020 2019 Change % Change
(amounts in thousands)
Selected Assets:
Reinsurance recoverable, net $ 1,218,930 $ 1,394,308 $ (175,378) (12.6) %
Changes in Financial Position During the Year Ended December 31, 2020, Compared to December 31, 2019
Reinsurance recoverable decreased by $175,378, driven by a decrease in our P&C segment ($189,429), primarily due to a decrease in ceded premiums to the Quota Shares; and an increase in the A&H segment ($14,051), due to growth in the small group self-funded and individual products.
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 governments, U.S. denominated corporate obligations, 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, asset-backed securities, and structured securities consisting of collateralized loan and debt obligations.
The average yield on our investment portfolio was 2.7% and 3.1% for the years ended December 31, 2020, and 2019, respectively, and the average duration of the portfolio was 3.5 years and 4.2 years as of December 31, 2020, and 2019, respectively.
For more information related to our investments, see Note 4, “Investments” in the notes to our consolidated financial statements.
Liquidity and Capital Resources
We are organized as a holding company with twenty-two 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 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 other holding company expenses for the foreseeable future. However, if our growth attributable to prior 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 previously had a $340.0 million credit agreement, under which there was $140.0 million outstanding as of December 31, 2020. On January 4, 2021, the 2019 Credit Agreement was repaid and terminated in connection with the closing of the Merger.
On April 29, 2020, our Board of Directors authorized and approved a share repurchase program with a 12-month term for up to $50.0 million aggregate purchase price of our outstanding common shares. During the year ended December 31, 2020, we purchased 459,083 common shares with a cost of $8.5 million. The purchases were made in the open market in accordance with applicable federal securities laws, including Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934. Pursuant to the terms of the Merger Agreement with Allstate signed July 7, 2020, we ceased making any further common share repurchases.
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 $156.4 million and $403.0 million as of December 31, 2020, and 2019, respectively, taking into account dividends paid in the prior twelve month periods. During the years ended December 31, 2020, 2019, and 2018, there were $300.0 million, $7.0 million and $156.7 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 $2.7 billion, $2.8 billion and $2.5 billion in the years ended December 31, 2020, 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 increased from $4.5 billion at December 31, 2018 to $5.0 billion at December 31, 2019, and increased to $5.7 billion at December 31, 2020. 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.
We file a consolidated Federal income tax return and participate in a Federal income tax allocation agreement with our subsidiaries. Under the tax allocation agreement, each subsidiary computes and pays to the Company its respective share of the federal income tax liability primarily based on separate return calculations. The Reciprocal Exchanges are not a party to the tax allocation agreement and file separate tax returns.
The following table is a summary of our statement of cash flows:
Year Ended December 31,
2020 2019 Change % Change
(amounts in thousands)
Net cash provided by operating activities $ 600,070 $ 521,611 $ 78,459 15.0 %
Net cash provided by (used in) investing activities 14,188 (498,251) 512,439 (102.8) %
Net cash used in financing activities (78,954) (89,361) 10,407 (11.6) %
Effect of exchange rate changes on cash and cash equivalents - (3,119) 3,119 (100.0) %
Net increase (decrease) in cash, cash equivalents, and restricted cash $ 535,304 $ (69,120) $ 604,424 (874.5) %
Comparison of Years Ended December 31, 2020, and 2019
Net cash provided by operating activities increased by $78.5 million, primarily due to lower prepaid reinsurance premiums in 2020 compared to 2019.
Net cash provided by investing activities increased by $512.4 million, primarily due to lower purchases of investments in 2020 compared to 2019.
Net cash used in financing activities decreased by $10.4 million, primarily due to lower repayments of debt in 2020 compared to 2019.
Reinsurance
We utilize various excess of loss, quota share, state-based industry pools or facilities, and catastrophe reinsurance programs to limit our exposure. Reinsurance agreements transfer portions of our underlying risk on the business we write. 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 the reinsurance recoverable balances are collateralized. 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, see Note 10 “Reinsurance” in the notes to our consolidated financial statements.
Debt
6.75% Notes due 2024
We have $350.0 million aggregate principal amount outstanding of our 6.75% Notes due 2024 (the “6.75% Notes”). The 6.75% Notes bear interest at a rate equal to 6.75% per year, payable semiannually in arrears on May 15 and November 15 of each year. The 6.75% Notes are our general unsecured obligations and rank equally in right of payment with our other existing and future senior unsecured indebtedness and senior in right of payment to any of our indebtedness that is contractually subordinated to the 6.75% Notes. The 6.75% Notes mature on May 15, 2024, unless earlier redeemed or purchased by us. Interest expense on the 6.75% Notes was $23.6 million for each of the years ended December 31, 2020, 2019, and 2018.
7.625% Subordinated Notes due 2055
We had $100.0 million aggregate principal amount outstanding of our 7.625% subordinated notes due 2055 (the “7.625% Notes”). The 7.625% Notes bore interest at a rate equal to 7.625% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The 7.625% Notes were our subordinated unsecured obligations and were structurally subordinated to all existing and future indebtedness, liabilities and other obligations of our subsidiaries. The 7.625% Notes had a maturity date of September 15, 2055, unless earlier redeemed or purchased by us. Interest expense on the 7.625% Notes was $7.6 million for each of the years ended December 31, 2020, 2019, and 2018. On February 3, 2021, the 7.625% Notes were redeemed in full and ceased to be outstanding.
Subordinated Debentures
We have junior subordinated debentures (the “Subordinated Debentures”) relating to the 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 $41.2 million and $30.9 million mature in 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 us at a redemption price equal to 100% of their principal amount. Interest expense on the Subordinated Debentures for the years ended December 31, 2020, 2019, and 2018, was $3.3 million, $4.5 million and $4.3 million, respectively. The Subordinated Debentures have been called for redemption and are expected to be redeemed in full on March 15, 2021.
Revolving Credit Agreement
In 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 was a $340.0 million base revolving credit facility with a letter of credit sub-limit of $150.0 million and an expansion feature of up to $50.0 million. Borrowings under the 2019 Credit Agreement bore interest at either the Alternate Base Rate (“ABR”) or the LIBOR rate. ABR borrowings under the 2019 Credit Agreement bore interest at 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 LIBOR rate for a one-month interest period on such day plus 1 percent. Eurodollar borrowings under the 2019 Credit Agreement bore interest at the adjusted LIBOR rate plus the Eurodollar spread for the interest period in effect. Fees payable by us under the 2019 Credit Agreement included 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 as of December 31, 2020, the rate was 0.225%). The 2019 Credit Agreement had a maturity date of February 25, 2023. On January 4, 2021, the 2019 Credit Agreement was repaid and terminated in connection with the closing of the Merger.
For more information about our debt, including other outstanding debt, debt repayments, ranking and restrictive covenants, refer to Note 11, “Debt” in the notes to our consolidated financial statements.
Preferred Stock
For information about our preferred stock, refer to Note 14, “Stockholders’ Equity” in the notes to our consolidated financial statements.
Contractual Obligations and Commitments
The following table sets forth certain of our contractual obligations as of December 31, 2020:
Payment Due by Period
Total Less than
1 Year 1 - 3
Years 3 - 5
Years More than
5 Years
(amounts in thousands)
Loss and LAE reserves(1)
$ 2,889,098 $ 1,502,528 $ 760,554 $ 233,669 $ 392,347
Debt and interest(2)(3)
790,863 270,561 53,076 364,612 102,614
Operating leases 136,091 31,525 49,049 33,295 22,222
Finance lease obligations 18,530 6,601 7,016 2,520 2,393
Employment agreement obligations 9,322 4,672 3,877 773 -
Contributions to partnerships 9,973 2,579 3,930 1,569 1,895
Total $ 3,853,877 $ 1,818,466 $ 877,502 $ 636,438 $ 521,471
(1)The loss and LAE payments due by period in the table above are based upon the loss and LAE estimates as of December 31, 2020, and actuarial estimates of expected payout patterns and are not contractual liabilities with finite maturities. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and LAE payments due by period is subject to the same uncertainties associated with determining the level of loss and LAE generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and LAE estimate process, see Item 1, “Business - Loss Reserves.” Actual payments of loss and LAE by period will vary, perhaps materially, from the table above to the extent that current estimates of loss and LAE vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See Item 1A, “Risk Factors - Risks Relating to Our Business - If we are unable to establish and maintain accurate loss reserves, our business, financial condition and results of operations may be materially adversely affected” for a discussion of the uncertainties associated with estimating loss and LAE.
(2) On January 4, 2021, the 2019 Credit Agreement was repaid, and on February 3, 2021, the 7.625% Notes were repaid. Repayments of principal amounts and interest are included in the less than 1 year column.
(3) The interest related to our debt by period as of December 31, 2020, was as follows: $27.4 million - less than 1 year, $53.1 million - 1 - 3 years, $14.6 million - 3 - 5 years, and $30.4 million - more than 5 years.
Inflation
We establish the pricing for insurance premiums before we know the amount of losses and LAE or the extent to which inflation may affect such amounts. We also attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation above of the levels we have assumed could cause loss and LAE to be higher than we anticipated, which would require us to increase reserves and reduce earnings. Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, are also usually affected by inflation.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. 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 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 the reinsurance recoverable balances are collateralized 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.
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 $4.5 billion as of December 31, 2020, 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 December 31, 2020, 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 tax.
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 December 31, 2020.
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 $ 4,153,594 $ (343,536) (8.4) %
100 basis point increase 4,325,340 (171,790) (4.2)
No change 4,497,130 - -
100 basis point decrease 4,648,953 151,823 3.7
200 basis point decrease 4,713,487 216,357 5.3
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 December 31, 2020, we had $662.2 million principal amount of debt instruments (excluding finance lease and other liabilities), of which $450.0 million were fixed-rate debt instruments. A fluctuation of 100 basis points in interest on our variable-rate debt instruments (excluding our credit facility which was repaid on January 4, 2021), which are tied to LIBOR, would affect our earnings and cash flows by $0.7 million before income tax, on an annual basis, but would not affect the fair market value of the variable-rate debt.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The financial statements and financial statement schedules required to be filed pursuant to this Item 8 are listed in the accompanying Index to Consolidated Financial Statements and Schedules at page and are filed as part of this report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our CEO and CFO have concluded that as of December 31, 2020, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, management has concluded that its internal control over financial reporting was effective as of December 31, 2020, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report with respect to our internal control over financial reporting.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in Management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of 2020 that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
National General Holdings Corp.:
Opinion on Internal Control over Financial Reporting
We have audited National General Holdings Corp.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, National General Holdings Corp. (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of National General Holdings Corp. as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedules listed in the Index at Item 15(a), and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, New York
February 26, 2021

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Directors
During 2020, our board of directors consisted of eight members: Dr. Barbara Paris and Messrs. Donald T. DeCarlo, Patrick Fallon, Barry Karfunkel, Robert Karfunkel, John Marshaleck, John D. Nichols, Jr., and Barry D. Zyskind. Effective January 4, 2021, upon the closing of the Merger, each of Messrs. Barry Karfunkel, Robert Karfunkel and Barry D. Zyskind resigned as directors of the Company. Following the closing of the Merger and the effectiveness of the Amendment to Company Charter on January 4, 2021, the board of directors of the Company increased its size, in accordance with the Company Charter, as amended, and the Company Bylaws, to be comprised of 16 members, and each of Mr. Thomas J. Wilson, Ms. Carolyn D. Blair, Ms. Elizabeth A. Brady, Mr. Don Civgin, Mr. John E. Dugenske, Ms. Rhonda S. Ferguson, Mr. Suren Gupta, Mr. Jesse E. Merten, Mr. Mark Q. Prindiville, Mr. Mario Rizzo and Mr. Glenn T. Shapiro were appointed as directors of the Company to fill in the vacancies created by the board size increase and the resignations described above. Mr. Wilson was also appointed as Chairman of the Board, succeeding Messrs. Barry Karfunkel and Robert Karfunkel, who each served as Co-Chairman of the Board until their resignations as directors on January 4, 2021.
The following is biographical information about each of our current directors, including other public company board memberships. Age and other information in each director’s biography are as of February 26, 2021.
Donald T. DeCarlo, 82, has served on our board of directors since 2010. He is also a director of AmTrust Financial Services, Inc. (“AmTrust”) and many of its subsidiaries, where he has served since 2006. Mr. DeCarlo is an attorney in private practice. Mr. DeCarlo served as the chairman of the board of commissioners of the New York State Insurance Fund from 2011 until October 2012 and served as a commissioner from 1997 through 2009. From 1994 to 1997, Mr. DeCarlo served as Vice President and General Counsel of Travelers Insurance Companies. From 1997 to 2004, Mr. DeCarlo practiced at the law firm of Lord, Bissell & Brook, LLP, where he served as managing partner of the New York office prior to his departure. He is also a director of Greater New York Mutual Insurance Company (an insurer that primarily underwrites large property coverages) and its subsidiaries, Greater New York Custom Insurance Company, Insurance Company of Greater New York, Strathmore Insurance Company and Gramercy Indemnity Company.
Mr. DeCarlo has been selected to serve on our board of directors because of his extensive experience in the insurance industry.
Patrick Fallon, 76, joined our board of directors in 2013. Mr. Fallon is a leading banking executive with extensive experience providing financial services for leading corporations. Mr. Fallon is currently a Managing Director and Chief Operating Officer of CSG Partners, a New York headquartered boutique investment banking firm, predominantly specializing in ESOP advisory work, which he joined in December 2013. Prior to that, Mr. Fallon was a consultant to Northfield Bank. From 2009 to 2012, Mr. Fallon was a founder of, and president-commercial markets for, First National Bank of New York. From 1973 to 2009, Mr. Fallon was a senior banker for JPMorgan Chase, where he served as senior vice president & managing director from 1991 to 2009 and was a regional head of banking relationships.
Mr. Fallon has been selected to serve on our board of directors because of his extensive experience as a banking executive, providing financial services to major corporations.
John Marshaleck, 69, joined our board of directors in 2016. He previously served as Chief Financial Officer of Maiden Holdings, Ltd., a Bermuda-based reinsurance company, from 2009 until 2014, when he retired. Prior to that role, he served as Chief Operating Officer and Secretary of Maiden Holdings, Ltd. From 1983 to 2008, Mr. Marshaleck served in several capacities with GMAC RE and its predecessors, including president, chief operating officer and chief financial officer.
Mr. Marshaleck has been selected to serve on our board of directors because of his diverse and extensive insurance and accounting experience and because he qualifies as an “audit committee financial expert” within the meaning of Securities and Exchange Commission (“SEC”) regulations and applicable Nasdaq listing standards.
John “Jay” D. Nichols, Jr., 60, joined our board of directors in 2017. Mr. Nichols currently serves as Chairman of the Board of Directors of Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.), a property and casualty insurer, where he also served as interim Chief Executive Officer from October 2018 to May 2019. He previously served as Chief Executive Officer of AXIS Re, a reinsurance company, from 2012 until 2017. Prior to that role, Mr. Nichols was the President of RenaissanceRe Ventures, Ltd., where he was responsible for business development and the management of RenaissanceRe’s Joint Ventures and Venture Capital business, which included responsibility for the formation of DaVinci Reinsurance, and Top Layer Reinsurance, as well as several sidecars and other ventures. He joined RenaissanceRe in 1995 and was President from 2001 to 2010. In addition, Mr. Nichols has held various positions at Hartford Steam Boiler, Monarch Capital and accounting firm Matson, Driscoll and D’Amico. He is also a director of Delaware North Companies, Brit Reinsurance Ltd. and Enhanze Reinsurance Ltd.
Mr. Nichols has been selected to serve on our board of directors because of his extensive global insurance and reinsurance background, and his management experience and knowledge.
Barbara Paris, M.D., 69, joined our board of directors in 2013. Since 2002, Dr. Paris has been the vice-chair, medicine and the director of the Division of Geriatrics at Maimonides Medical Center. Since 2003, she has also been a Clinical Professor of Geriatrics and Palliative Medicine at the Mount Sinai School of Medicine.
Dr. Paris has been selected to serve on our board of directors because she is an experienced senior physician who has served in many leadership roles and we believe her experience is beneficial to our Accident & Health (“A&H”) segment.
Thomas J. Wilson, 63, joined our board of directors in 2021. Mr. Wilson serves as Chairman of the Board (2008 to present), President (2005 to 2015 and 2018 to present) and Chief Executive Officer (2007 to present) of Allstate, a parent of the Company, and Allstate Insurance Company (“AIC”), an affiliate of the Company. He was previously a director of State Street Corporation from 2012 to 2017.
Mr. Wilson has been selected to serve on our board of directors because he has a deep understanding of the insurance business, as well as extensive business and board leadership experience.
Carolyn D. Blair, 52, joined our board of directors in 2021. Since 2019, Ms. Blair has served as Executive Vice President and Chief Human Resources Officer of AIC, an affiliate of the Company. Previously, she was President of Tartan Advisory Group, Inc. from 2018 to 2019, and Executive Vice President, Chief Human Resources & Communications Officer of Sun Life Financial from April 2014 to June 2018.
Ms. Blair has been selected to serve on our board of directors because she has over 25 years of experience in the financial services industry as well as a deep understanding of human capital management.
Elizabeth A. Brady, 56, joined our board of directors in 2021. Since 2020, Ms. Brady has served as Executive Vice President, Chief Marketing, Customer and Communications Officer of AIC, an affiliate of the Company. Previously, she was Executive Vice President and Chief Marketing, Innovation and Corporate Relations Officer of AIC from 2018 to 2020. Prior to that, she served as Senior Vice President, Global Brand Management of Kohler Co. from 2013 to 2018.
Ms. Brady has been selected to serve on our board of directors because she has been a proven leader in innovative retail marketing, brand strategies and creative solutions.
Don Civgin, 59, joined our board of directors in 2021. Since 2020, Mr. Civgin has served as Vice Chairman of Allstate, a parent of the Company, and AIC, an affiliate of the Company, as well as Chief Executive Officer,
Protection Products and Services of AIC. Previously, he served as President, Service Businesses of AIC from 2018 to 2020, and President, Emerging Businesses of AIC from 2015 to 2018.
Mr. Civgin has been selected to serve on our board of directors because he has extensive experience in corporate finance, strategy and mergers and acquisitions.
John E. Dugenske, 54, joined our board of directors in 2021. Since 2020, Mr. Dugenske has served as President, Investments and Financial Products of AIC, an affiliate of the Company. Previously, he served as Executive Vice President and Chief Investment and Corporate Strategy Officer of AIC from 2018 to 2020, and as Executive Vice President and Chief Investment Officer of AIC from 2017 to 2018. Prior to that, he was Group Managing Director and Global Head of Fixed Income at UBS Global Asset Management from 2008 to 2017.
Mr. Dugenske has been selected to serve on our board of directors because he has an extensive financial services background and a deep understanding of the insurance business and investments.
Rhonda S. Ferguson, 51, joined our board of directors in 2021. Since November 2020, Ms. Ferguson has served as Executive Vice President, Chief Legal Officer, General Counsel, and Secretary of Allstate, a parent of the Company, and AIC, an affiliate of the Company. Previously, she served as Executive Vice President and General Counsel of Allstate and AIC from September 2020 to November 2020. Prior to that, Ms. Ferguson served as Executive Vice President, Chief Legal Officer and Corporate Secretary of Union Pacific Railroad from 2017 to 2020; Executive Vice President and Chief Legal Officer of Union Pacific Railroad from 2016 to 2017; and Vice President, Corporate Secretary and Chief Ethics Officer of FirstEnergy Corp. from 2007 to 2016.
Ms. Ferguson has been selected to serve on our board of directors because she has extensive leadership experience in legal and regulatory compliance.
Suren Gupta, 59, joined our board of directors in 2021. Since 2020, Mr. Gupta has served as Executive Vice President, Chief Information Technology and Enterprise Services Officer of AIC, an affiliate of the Company. Previously, he served as Executive Vice President, Enterprise Technology and Strategic Ventures of AIC from 2015 to 2020. He has also served as a director of Zions Bancorporation, National Association since 2015.
Mr. Gupta has been selected to serve on our board of directors because he has deep knowledge of technology, operations and business strategy.
Jess E. Merten, 46, joined our board of directors in 2021. Since 2020, Mr. Merten has served as President, Financial Products of AIC, an affiliate of the Company. Previously, he served as Executive Vice President and Chief Risk Officer of AIC from 2017 to 2020 and as Treasurer of Allstate, a parent of the Company, and AIC from 2015 to 2019.
Mr. Merten has been selected to serve on our board of directors because he has extensive experience overseeing corporate risk, liquidity management, capital sourcing and deployment and corporate financial planning and analysis.
Mark Q. Prindiville, 53, joined our board of directors in 2021. Since 2020, Mr. Prindiville has served as Executive Vice President and Chief Risk Officer of AIC, an affiliate of the Company. Previously, he served as Senior Vice President of AIC from 2016 to 2020 and as Vice President of AIC from 2011 to 2016.
Mr. Prindiville has been selected to serve on our board of directors because he has extensive experience in business analytics, economic forecasting, asset allocation and risk management.
Mario Rizzo, 54, joined our board of directors in 2021. Since 2018, Mr. Rizzo has served as Executive Vice President and Chief Financial Officer of Allstate, a parent of the Company, and AIC, an affiliate of the Company. Previously, he served as Senior Vice President and Chief Financial Officer, Allstate Personal Lines of AIC from 2015 to 2018.
Mr. Rizzo has been selected to serve on our board of directors because he has a deep understanding of the insurance business, financial planning and capital management.
Glenn T. Shapiro, 55, joined our board of directors in 2021. Since 2020, Mr. Shapiro has served as President, Personal Property-Liability of AIC, an affiliate of the Company. Previously, he served as President, Allstate Personal Lines of AIC from 2018 to 2020 and Executive Vice President, Claims of AIC from 2016 to 2018. Prior to that, he served as Executive Vice President and Chief Claims Officer of Liberty Mutual Commercial Insurance from 2011 to 2016.
Mr. Shapiro has been selected to serve on our board of directors because he has 30 years of experience in the insurance industry and has held various senior leadership positions in strategy and operations.
Information About our Executive Officers
The table below sets forth the names, ages and positions of our executive officers as of February 26, 2021:
Name Age Position(s)
Barry Karfunkel 40 Chief Executive Officer
Michael Weiner 49 Executive Vice President, Chief Financial Officer and Treasurer
Peter Rendall 48 Executive Vice President, Chief Operating Officer
Jeffrey Weissmann 43 Executive Vice President, General Counsel and Secretary
Lawrence Moloney 58 Senior Vice President, Chief Accounting Officer and Controller
Set forth below are descriptions of the backgrounds of each of our executive officers.
Barry Karfunkel has served as Chief Executive Officer of the Company since April 2016. Mr. Karfunkel served as a director from 2010 to January 4, 2021 and co-chairman of the Board from May 2018 to January 4, 2021, having resigned from such positions upon the closing of the Merger. He also served as President of the Company from November 2015 to May 2018, a position that he previously held from 2010 through 2013 prior to the Company becoming a publicly listed company. He previously served as executive vice president and chief marketing officer of the Company from 2013 to 2015. He serves as an officer and director of many of our subsidiaries. From 2009 to 2010, he was a managing director with Maiden Capital Solutions and from 2007 to 2009 he was an analyst with AmTrust Capital Partners.
Michael Weiner joined the Company in 2010 as chief financial officer. He has also served as our treasurer since December 2019. Mr. Weiner also serves as an officer and director of many of our subsidiaries. From 2009 to 2010, Mr. Weiner was the global chief financial officer of Ally Financial’s GMAC Insurance unit. From 2008 to 2009, Mr. Weiner was at Cerberus Operations and Advisory Company as a member of the financial services team. Prior to his tenure at Cerberus, Mr. Weiner held a number of financial management positions with Citigroup. He joined Citigroup from KPMG LLP, and began his career at Bankers Trust Company.
Peter Rendall currently serves as chief operating officer of the Company. Mr. Rendall has served as chief operating officer since 2015 and previously served as treasurer from 2011 through February 2019. He joined the Company in 2010 as finance manager. Prior to that, Mr. Rendall held various financial and managerial positions at GMAC Insurance Group with respect to personal lines business since August 2002.
Jeffrey Weissmann, general counsel and secretary, joined the Company in 2011. Mr. Weissmann also serves as an officer and director of many of our subsidiaries. Prior to joining the Company, from 2003 to 2011 Mr. Weissmann practiced law at Cadwalader, Wickersham & Taft, LLP in the securities, mergers & acquisitions and corporate governance areas.
Lawrence Moloney joined the Company in December 2016 as senior vice president, finance and has served as chief accounting officer since May 2017 and also as Controller since January 4, 2021. Prior to joining the Company, Mr. Moloney served as controller of AIG North America, a division of American International Group, Inc., from September 2014 to December 2016. Prior to that role, he served as deputy controller of AIG North America from May 2012 to September 2014. Before his tenure at AIG, Mr. Moloney held a number of financial management positions with Tokio Marine Management. He joined Tokio Marine from Deloitte where he began his career. Mr. Moloney holds the Certified Public Accountant (CPA) and Chartered Management Accountant (CMA) designations.
Robert Karfunkel, a named executive officer for our 2020 fiscal year, served as President of the Company from 2018 until his resignation effective January 15, 2021. Mr. Karfunkel served as a director from May 2016 to January 4, 2021 and co-chairman of the board from May 2018 to January 4, 2021, having resigned from such positions upon the closing of the Merger. Mr. Karfunkel previously served as Executive Vice President - Chief Marketing Officer from 2016 to 2018 and Executive Vice President - Strategy and Development from 2010 to 2016. From 2010 until the completion of our initial private placement in June 2013, he also served as a director of the Company. He also served as a director and president of many of our subsidiaries while employed by the Company.
Code of Business Conduct and Ethics
All directors, officers, and employees must act ethically at all times and in accordance with our Code of Business Conduct and Ethics. This Code satisfies the definition of “code of ethics” pursuant to the rules and regulations of the SEC and complies with the requirements of Nasdaq. Our Code of Business Conduct and Ethics is posted under the “Corporate Governance” tab on the Investor Relations section of our website (www.nationalgeneral.com). We intend to disclose any amendments or waivers to the Code of Business Conduct and Ethics on our website. Information included on our website is not part of this Form 10-K.
Corporate Governance
Procedures for Nominations to the Board of Directors
On January 4, 2021, as a result of the Merger, the Company became an indirect wholly owned subsidiary of Allstate and is no longer an independent company. Because the Company’s common stock is now wholly owned by Allstate, the Company’s board of directors no longer has a formal procedure for shareholders to recommend nominees to the Company’s board of directors.
Audit Committee
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board has determined that each member of the Audit Committee meets the independence standards contained in the Nasdaq listing standards (which the Company was previously subject to) and the independence requirements contained in Rule 10A-3(b)(1) of the Exchange Act. In addition, the Board has determined that Mr. Marshaleck qualifies as an “audit committee financial expert” within the meaning of SEC regulations and the Nasdaq listing standards. The Chair of the Audit Committee is Mr. Marshaleck, and the other members of the Audit Committee are Mr. Fallon and Dr. Paris.
The Audit Committee oversees our auditing, accounting, financial reporting, internal audit and internal control functions, appoints our independent public accounting firm and approves its services and compensation. One of its functions is to assure that the independent public accountants have the freedom, cooperation and opportunity necessary to accomplish their functions. The Audit Committee also assures that appropriate action is taken on the recommendations of the independent public accountants. In carrying out its oversight of our independent public accounting firm, the Audit Committee, among other things, ensures the rotation of the lead (or coordinating) audit partner having primary responsibility for our audit and the audit partner responsible for reviewing our audits as required by law, and meets with the independent auditor prior to the audit to discuss the planning and staffing of the
audit. The Audit Committee also communicates with our independent auditor on matters related to the conduct of our audit and any critical audit matters (CAM) identified by our independent auditor.
As part of its oversight responsibilities, the Audit Committee also discusses with management and the independent auditor any correspondence with regulators or governmental agencies and any published reports which raise material issues regarding the Company’s financial statements or accounting policies. The Committee also discusses with the Company’s General Counsel legal matters that may have a material impact on the Company’s financial statements or compliance policies. The Audit Committee also reviews and approves related-party transactions and conflicts of interest.
Our Audit Committee Charter, which describes all of the Audit Committee’s responsibilities, is posted under the “Corporate Governance” tab on the Investor Relations section of our website (www.nationalgeneral.com).

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Compensation Committee Report
Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, has recommended to the Board that the following Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
February 26, 2021
Donald DeCarlo (Chairman)
Patrick Fallon
Jay Nichols
Compensation Discussion and Analysis
Overview
This Compensation Discussion and Analysis describes compensation awarded to, earned by or paid to our named executive officers with respect to 2020. Our named executive officers for 2020 are: (i) Barry Karfunkel (Chief Executive Officer); (ii) Michael Weiner (Chief Financial Officer and Treasurer); (iii) Robert Karfunkel (former President); (iv) Peter Rendall (Chief Operating Officer); and (v) Jeffrey Weissmann (General Counsel & Secretary). This Compensation Discussion and Analysis provides a detailed review of the Company’s executive compensation program, including its philosophy and objectives, design, process, elements and determination of awards.
The Company’s executive compensation program is designed to attract and retain skilled executives to drive the Company’s strategic plan and lead to greater long-term shareholder value. In 2020, the Compensation Committee continued its approach to emphasize performance-based measures and targets for the named executive officers in accordance with the revised compensation program implemented in recent years. The Committee retained Meridian Compensation Partners, LLC (“Meridian”) as its independent compensation consultant to assist with the design and implementation of the 2020 annual incentive plan, based on objective financial metrics to measure performance and payouts.
At our 2020 Annual Meeting of Shareholders, we held our triennial shareholder advisory vote on the compensation of our named executive officers, referred to as a “say on pay” vote. In that vote, shareholders approved the compensation of our named executive officers, with approximately 99% of the shares voted being voted in favor of our executive compensation program.
Compensation Philosophy and Objectives
Our approach to compensation is based upon a pay-for-performance philosophy. Our executive compensation program is designed to attract, retain and motivate executives with the skills necessary to achieve our business objectives, to reward those individuals for individual performance and to align their compensation with our Company’s performance. The Company seeks to establish and maintain a performance-driven culture that delivers exceptional value to its shareholders, and to reward individuals who fit that culture and reflect the Company’s core values. The Compensation Committee is committed to providing performance-based rewards that are tied to the execution of our business strategy, as measured by operating and financial metrics, execution of management initiatives and shareholder value creation. To align executives’ and shareholders’ interests, the Compensation Committee historically awarded a larger portion of the annual incentive awards in equity. The Company’s executive compensation program is intended to be competitive with the programs of other employers in the industry with whom we compete for talent.
Our Compensation Process
Compensation Committee. Our Compensation Committee, composed solely of independent directors, is responsible for making all executive compensation determinations with respect to our named executive officers. The Compensation Committee, working with our senior management and our independent compensation consultant, develops and implements the Company’s executive compensation program and policies.
The Compensation Committee conducts its annual review of executive performance and compensation in the first quarter of each year.
The Compensation Committee makes incentive compensation decisions based on the Company’s prior year performance, makes prospective adjustments, if any, to base salaries and target bonuses for the then-current year, and grants equity-based awards with multi-year vesting terms. This process includes a review of the performance of the Company and of each named executive officer against pre-established goals, the executive’s duties, responsibilities and experience, his or her personal contribution to the Company’s success, and, on a periodic basis, a comparison of each named executive officer’s compensation to market data for executives in similar positions at peer companies of the Company.
The Compensation Committee may also make compensation adjustments during the course of the year if circumstances are appropriate, such as when an individual is promoted or takes on additional responsibilities. Equity-based awards may also be made to individuals at any time during the year, as the Compensation Committee deems appropriate.
We believe that the compensation levels for our named executive officers are competitive and do not encourage them to take unnecessary or excessive risks.
Management. On an annual basis, our CEO presents performance assessments to the Compensation Committee with respect to each member of the Company’s senior management team, excluding himself, including recommendations for compensation decisions for prior year performance as well as prospective adjustments to compensation targets going forward.
Compensation Consultant. The Compensation Committee has engaged Meridian to serve as its independent compensation consultant. Meridian has been engaged to provide on a periodic basis, among other things, competitive benchmarking assessments of the executive compensation program, peer group analysis and selection, pay program analytics, advice on short- and long-term incentive plan design and appropriate performance measures, and any other executive compensation and governance matters for which the Compensation Committee requests assistance from time to time. Meridian advises the Compensation Committee directly, but it also works closely with management to ensure a collaborative process in implementation of an effective executive compensation program.
Peer Group. With Meridian’s assistance, the Compensation Committee previously selected an appropriate group of peer companies for the purpose of comparing our executive compensation program with market practices and in order to inform the Compensation Committee’s decisions regarding its executive compensation program. However, the Compensation Committee does not ultimately target or benchmark compensation to any particular percentile of compensation paid by other companies, but rather considers comparator compensation as just one factor in making its compensation decisions. Other factors include Company performance and the individual’s contribution, experience and potential. After taking all these factors into account, the Compensation Committee exercises its judgment in making compensation decisions. We believe this approach gives the Company the flexibility to make compensation decisions based upon all relevant facts and circumstances.
The Company’s 2020 peer group remained unchanged from 2019 and consisted of 17 companies:
Company
Allied World Assurance Company
American National Insurance
Arch Capital Group Ltd.
Argo Group International Holdings, Ltd.
Aspen Insurance Holdings, Ltd.
CNO Financial Group Inc.
Endurance Specialty Holdings, Ltd.
First American Financial Corp
The Hanover Insurance Group, Inc.
Kemper Corp.
Mercury General Corp.
Primerica Inc.
RLI Corp.
Selective Insurance Group, Inc.
Globe Life Inc.
Validus Holdings, Ltd.
White Mountains Insurance Group Ltd.
The Compensation Committee, in consultation with Meridian, used several criteria in the selection of its peer group of companies, including company size, industry competitors, companies with talent overlap, companies with similar organizational structures and business complexity, peers of peers, company life-cycle and geographical considerations, and proxy advisory firm views.
Elements of Compensation
The primary elements of our 2020 executive compensation program are annual base salary, annual cash bonuses and equity incentives. The Compensation Committee historically assigned a heavier weight to the incentive portion of each named executive officer’s overall compensation reflecting the Committee’s belief that executive compensation should be aligned with the success of the Company and be risk-based depending upon the future performance of the Company. Set forth below is a summary of each component of the 2020 compensation opportunities for our CEO and our other named executive officers.
Base Salary. We use base salary to compensate our employees, including our named executive officers, for performing their day-to-day responsibilities. The Compensation Committee determines the base salary for each named executive officer in consideration of various factors, such as level of responsibility, prior experience, breadth of knowledge, the executive’s individual performance, achievements and contributions to the Company, and external pay practices. The Compensation Committee did not make any changes to the base salaries of the named executive
officers for 2020, which were as follows: Barry Karfunkel, $925,000; Michael Weiner, $600,000; Robert Karfunkel, $900,000; Jeffrey Weissmann, $575,000, and Peter Rendall, $550,000.
Incentive Awards. Our annual incentive awards, which include a cash component and an equity component, are designed to motivate our employees, including our named executive officers, to drive various aspects of our business strategy. The equity portion of the incentive award is designed to not only reward named executive officers, but also to closely align their interests to those of our shareholders and to provide an additional incentive to promote our success and to remain in our service. Following the Merger, given that the Company’s common stock is now wholly owned by Allstate and the Company’s 2019 Equity Incentive Plan has been terminated, the Compensation Committee no longer has the ability to issue restricted stock units of the Company. Instead, the equity portion of the annual incentive plan for 2020 was handled by the Committee making a recommendation to Allstate to issue Allstate restricted stock units under the Allstate Equity Incentive Plan. The value of the RSUs reflected below for Mr. Weiner, Mr. Weissmann and Mr. Rendall reflect the value of the Allstate RSUs granted on February 18, 2021. No RSUs were issued to Mr. R. Karfunkel or to Mr. B. Karfunkel .
2020 Annual Incentive Plan. Our 2020 Annual Incentive Plan is designed to reward each named executive officer for his contributions to the Company’s annual performance. The 2020 Annual Incentive Plan uses operating earnings margin (25% weighting), combined ratio (25% weighting), operating return on equity (25% weighting) and gross premium written (25% weighting) as the performance metrics on which payouts are determined under this plan. The Compensation Committee maintains discretion to modify the actual payouts based on developments in the industry and in the market during the year, as well as based on the Committee’s assessment of the Company’s performance, the individual’s performance or any other factor that the Committee deems relevant. These are common metrics used to measure performance in the insurance industry and are indicative of an insurance company’s financial health. We believe achievement on these metrics will lead to an increase in long-term shareholder value. The performance metrics are defined as follows:
Operating Earnings Margin Calculated as net income/loss attributable to the Company common stockholders excluding after-tax net gain or loss on investments (including foreign exchange gain or loss), other-than-temporary impairment losses before 2020 and credit loss on investments thereafter, earnings or losses of equity method investments (related parties), deferred tax asset impairment, non-cash amortization of intangible assets and non-cash impairment of goodwill and any significant non-recurring or infrequent items that may not be indicative of ongoing operations, and such number is then divided by the total revenue of the Company.
Combined Ratio The sum of the loss and loss adjustment expense ratio and the operating expense ratio before amortization and impairment.
Operating Return on Equity (ROE) Calculated by dividing annual operating earnings by the average of stockholders’ equity for the periods presented.
Gross Premium Written Calculated as the premium from each insurance policy that the Company writes, during a reporting period based on the effective date of the individual policy, prior to ceding reinsurance to third parties.
The threshold, target and maximum performance levels for each performance measure are set by the Compensation Committee in consideration of, among other things, our strategic goals, business plans and the degree of difficulty in achieving the targets. It is the goal of the Compensation Committee to establish targets that can be achieved, but only with strong execution on our business strategy. The Compensation Committee considers reaching the maximum performance for each measure to be far less probable than reaching target performance levels. The performance goals (including threshold, target and maximum levels) established by the Compensation Committee for the 2020 fiscal year, as well as the actual performance levels achieved by the Company in 2020, were as follows:
Performance Measures
Operating Earnings Margin Combined
Ratio Operating
ROE Gross Premium Written Total
(amounts in millions, except percentages)
Maximum (200% payout) 10.0 % 90.0 % 13.0 % $ 5,701
Target (100% payout) 5.0 % 95.0 % 10.0 % $ 5,290
Threshold (50% payout) - % 100.0 % 7.0 % $ 4,879
Actual 2020 Performance 9.3 % 86.6 % 19.9 % $ 5,261
2020 Performance Score 187.0 % 200.0 % 200.0 % 96.0 % 170.7 %
The Committee approved the actual cash and recommended the equity incentive awards for each named executive officer for 2020 following careful consideration of the Company’s 2020 performance under the principles and performance metrics utilized under the 2020 Annual Incentive Plan (with such performance resulting in a payout percentage equal to 170.7% of the target as set forth above), as well as the individual performance of each named executive officer and the Company’s excellent operational year during the COVID-19 pandemic, each individual’s efforts in the Merger process and the value achieved for the Company’s stockholders.
Accordingly, the Compensation Committee determined to award the named executive officers 170.7% of their respective target awards. However, with respect to Messrs. B. Karfunkel and R. Karfunkel, such total payout percentage was only applied to the portion of the target award historically paid in cash. The target incentive value, total incentive payout percentage, and the portion of the 2020 incentive award of each named executive officer that is payable in cash and in equity, respectively, are as set forth in the table below:
Total Incentive Payout Incentive Payout Breakdown
Executive Target Total Payout Percentage Portion Paid in Cash Portion Paid in Equity (1)
Barry Karfunkel $ 3,056,000 170.7% $ 1,980,000 -
Michael Weiner $ 1,350,000 170.7% $ 1,014,000 $ 1,289,962
Robert Karfunkel $ 2,700,000 170.7% $ 1,936,000 -
Jeffrey Weissmann $ 1,293,000 170.7% $ 950,000 $ 1,258,963
Peter Rendall $ 1,182,000 170.7% $ 868,000 $ 1,151,046
(1) Payable in restricted stock units of Allstate vesting over a three year period issued under The Allstate Corporation 2019 Equity Incentive Plan, subject to the terms and conditions of the plan.
Other Benefits and Perquisites. Our named executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life, disability and our 401(k) savings plan (with a company contribution equal to up to six percent of salary, subject to certain limitations), in each case on the same basis as our other employees, subject to applicable law. Limited perquisites are provided to the named executive officers.
Employment Agreements
We have entered into an employment agreement with Mr. Weiner, which establishes his base salary level and certain bonus opportunity amounts or targets and includes termination payments in certain circumstances. None of our other named executive officers has (or had) an employment agreement. See “Employment Agreements with Executive Officers.”
Policy on Hedging and Pledging of Company Stock
The Company does not have any practices or policies that prohibit hedging or pledging the Company’s equity securities by employees, executive officers or directors.
Tax and Accounting Considerations
The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, includes a number of significant changes to Section 162(m) of the Internal Revenue Code (“Section 162(m)”), which generally apply to compensation that would have otherwise been deductible in 2018 and later fiscal years. The changes to Section 162(m) include the repeal of the qualified performance-based compensation exemption and the expansion of the definition of “covered employees” (for example, by including the CFO as a covered employee and causing the tax deductibility limitation of Section 162(m) to continue to apply to covered employees with respect to compensation paid after termination of employment). As a result of these changes, compensation paid to a covered employee generally is not deductible in 2018 or a later year, to the extent that it exceeds $1 million.
Executive Officer Compensation
Summary Compensation Table for Fiscal Year 2020
The following table sets forth information with respect to the annual and long-term compensation earned in fiscal years 2020, 2019, and 2018, by our named executive officers.
Name and Principal Position Year Salary Bonus (1)
Stock Awards (2)
Option Awards Non-Equity Incentive Plan Compensation (3)
All Other Compensation (4)
Total
Barry Karfunkel 2020 $ 925,000 $ 500 $ - $ - $ 1,980,000 $ 300 $ 2,905,800
Chief Executive Officer 2019 925,000 - 2,911,000 - 1,771,000 270 5,607,270
2018 925,000 - 3,088,000 - 1,879,000 270 5,892,270
Michael Weiner 2020 600,000 500 1,289,962 - 1,024,000 9,000 2,923,462
Executive Vice President, 2019 600,000 - 1,149,000 - 919,000 8,850 2,676,850
Chief Financial Officer and Treasurer 2018 600,000 - 1,219,000 - 975,000 8,700 2,802,700
Robert Karfunkel 2020 900,000 500 - - 1,936,000 270 2,836,770
Former President 2019 900,000 - 2,399,000 - 1,738,000 270 5,037,270
2018 900,000 - 2,545,000 - 1,843,000 240 5,288,240
Jeffrey Weissmann 2020 575,000 500 1,258,963 - 950,000 8,850 2,793,313
Executive Vice President, 2019 575,000 - 1,129,000 - 852,000 8,700 2,564,700
General Counsel & Secretary 2018 575,000 - 1,198,000 - 904,000 8,550 2,685,550
Peter Rendall 2020 550,000 500 1,151,046 - 868,000 9,000 2,578,546
Executive Vice President, 2019 550,000 - 1,033,000 - 778,000 8,850 2,369,850
Chief Operating Officer 2018 550,000 70,000 1,095,000 - 826,000 8,700 2,549,700
(1) Represents cash bonus of $500 paid to all employees during 2020.
(2) Represents the aggregate grant date fair value of awards of restricted stock units computed in accordance with ASC 718, as further discussed in Note 15, “Stock-Based Compensation” in the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K . The grant date fair value of the awards granted to Mr. Weiner, Mr. Weissmann and Mr. Rendall with respect to 2020 performance is equal to $105.08, which is the closing price of Allstate’s common stock on February 18, 2021, multiplied by the number of restricted stock units awarded. The grant date fair value of the awards granted with respect to 2019 performance is equal to $21.52, which
is the closing price at which our common stock traded on February 19, 2020, multiplied by the number of restricted stock units awarded to each named executive officer. The grant date fair value of the awards granted with respect to 2018 performance is equal to $25.60, which is the closing price at which our common stock traded on February 25, 2019, multiplied by the number of restricted stock units awarded to each named executive officer.
(3) Represents cash bonuses based on the Compensation Committee’s assessment of prior year performance.
(4) For all named executive officers, includes imputed income for personal life insurance. For each of Messrs. Weiner, Weissmann and Rendall, includes company contributions to the 401(k) plan for 2020 of $8,550.
Grants of Plan-Based Awards
The following table sets forth certain information regarding grants of plan-based awards to our named executive officers with respect to the fiscal year ended December 31, 2020.
Name Grant Date Approval Date All other stock awards: number of shares of stock or units (1)
Grant date fair value of stock awards (2)
Barry Karfunkel - - - -
Michael Weiner 2/18/2021 2/18/2021 12,276 1,289,962
Robert Karfunkel - - - -
Jeffrey Weissmann 2/18/2021 2/18/2021 11,981 1,258,963
Peter Rendall 2/18/2021 2/18/2021 10,954 1,151,046
(1) The restricted stock units granted on February 18, 2021 vest ratably over three years until fully vested on February 18, 2024.
(2) This amount reflects the grant date fair value in accordance with FASB ASC 718. The grant date fair value of the awards granted with respect to 2020 is equal to $105.08, which is the price at which Allstate common stock closed on February 18, 2021, multiplied by the number of shares of restricted stock units awarded to each named executive officer.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information regarding the outstanding equity awards at December 31, 2020, of our named executive officers.
Option Awards Stock Awards
Name Number of securities underlying unexercised options exercisable(1)
Number of securities underlying unexercised options unexercisable Option Exercise Price Option Expiration Date Number of shares or units of stock that have not vested (2)
Market value of shares or units of stock that have not vested (3)
Barry Karfunkel 743,500 - $ 10.50 6/6/2023 246,239 $ 8,416,449
Michael Weiner 520,450 - $ 10.50 6/6/2023 95,690 3,270,684
Robert Karfunkel 743,500 - $ 10.50 6/6/2023 195,337 6,676,619
Jeffrey Weissmann 32,663 - $ 6.53 1/27/2022 93,981 3,212,271
185,875 - $ 10.50 6/6/2023 - -
Peter Rendall - - - - 83,546 2,855,602
(1) Each of the named executive officer’s options expiring in 2023 were granted on June 6, 2013 and vested ratably over four years, provided that 25% of the options vested on the first anniversary of the grant date and 6 1/4% of the options vested quarterly thereafter until the fourth anniversary of the grant date. Mr. Weissmann’s options, expiring in 2022, were granted on January 27, 2012 and vested ratably annually over five years until fully vested on January
27, 2017. Upon the closing of the Merger on January 4, 2021, each named executive officer’s options were cancelled and converted into the right to receive $34.50, minus the exercise price per Common Share underlying such option.
(2) The restricted stock units granted on February 26, 2018, February 26, 2019 and February 20, 2020, which were subject to a three-year vesting schedule, were canceled upon the closing of the Merger on January 4, 2021 and converted into the right to receive $34.50.
(3) Amount is based on the closing price of our common stock of $34.18 on December 31, 2020, the last business day of the year, in accordance with applicable SEC rules.
Employment Agreements with Executive Officers
Employment Agreement with Michael Weiner
Pursuant to Mr. Weiner’s employment agreement, which was effective as of January 1, 2013, Mr. Weiner serves as chief financial officer of our subsidiary, National General Management Corp. (“Management Corp.”). Mr. Weiner’s employment agreement was renewed on January 1, 2021 and is in effect until January 1, 2023. The employment agreement automatically renews for additional two year periods unless 120 days’ notice of intention not to renew the employment agreement is given by us or Mr. Weiner. Mr. Weiner is eligible to receive a discretionary annual bonus, as determined based on his performance during such year and the recommendation of the chief executive officer.
Under his employment agreement, we are able to terminate Mr. Weiner at any time for “cause” as defined in the agreement and, upon such an event, we will have no further compensation or benefit obligations after the date of termination other than the payment of earned but unpaid base salary, earned but unused vacation and any unreimbursed expenses incurred as of the date of termination.
In the event of disability, we may terminate Mr. Weiner’s employment upon written notice and in the event of his death, Mr. Weiner’s employment will terminate, and in either case, Mr. Weiner (or his heirs) will be entitled to receive any earned but unpaid base salary, earned but unused vacation and any unreimbursed expenses incurred as of the date of termination.
In the event that we terminate Mr. Weiner without “cause” or he terminates his employment for “good reason,” as defined in his employment agreement, we will be required to pay Mr. Weiner severance (in accordance with normal payroll practices) at a per annum rate equal to the base salary in effect at the time of such termination for a period of 12 months following such termination, subject to receipt of an executed release of all claims and such release becoming effective under applicable law. Notwithstanding the foregoing, the obligation to pay full severance will terminate upon the parties’ mutual agreement to waive enforcement of the non-compete provision or upon Mr. Weiner’s commencement of new or alternative employment (including consulting arrangements), and the remaining severance obligation will be reduced by the base salary received from such new or alternative employment or consulting arrangement.
Mr. Weiner has agreed to keep confidential all information regarding Management Corp. and its affiliates (including the Company) that he receives during the term of his employment and thereafter. Mr. Weiner has also agreed that upon termination of employment he will not compete with us for a period of one year following the date of termination and will not solicit any of our customers, producers or employees for two years after termination.
In the event of a termination on account of a “Non-Compete Event,” as defined in the agreement, Mr. Weiner will not receive any severance, and the non-compete provision set forth in the employment agreement will not apply unless Management Corp. agrees to pay Mr. Weiner his base salary for the term of the non-compete period. In the event that Management Corp. does not renew Mr. Weiner’s employment agreement and Mr. Weiner’s employment is terminated more than 30 days after receiving notice of such non-renewal, Mr. Weiner will not receive any severance, and the non-compete provision set forth in the employment agreement will not apply unless Management Corp. agrees to pay Mr. Weiner his base salary for the term of the non-compete period. Mr. Weiner will also be
entitled to receive any earned but unpaid base salary and any unreimbursed expenses incurred as of the date of termination.
Other Named Executive Officers
We are not currently a party to an employment agreement with any of Messrs. B. Karfunkel, Rendall or Weissmann.
Termination Payments Upon Termination or Change-in-Control.
The table below sets forth the potential payments to our named executive officers in the event of a change of control as well as under various termination scenarios. The potential payments assume that the termination event occurred on the last day of our fiscal year (December 31, 2020). Our named executive officers were entitled to these payments pursuant to the terms of our 2013 Plan and the 2019 Plan (which were terminated upon the closing of the Merger on January 4, 2021), and Mr. Weiner is entitled to payments pursuant to his employment agreement . We have assumed for purposes of the table that the Company will not exercise its discretionary right to cancel for a cash payment outstanding equity awards upon termination of employment. We have also assumed that in the event of an executive’s disability, the Company will not impose the non-competition restrictions on the executive and, as such, will not pay any severance.
Name Termination Scenario (on 12/31/2020)
Severance Equity Award Vesting Acceleration Health Insurance Benefit
Barry Karfunkel Without Cause/Good Reason $ - $ - $ -
Retirement - - -
Death or Disability(1)
- 3,959,810 -
Change of Control(2)
- 4,623,494 -
Robert Karfunkel Without Cause/Good Reason - - -
Retirement - - -
Death or Disability(1)
- 3,003,773 -
Change of Control(2)
- 3,810,284 -
Michael Weiner Without Cause/Good Reason 600,000 - -
Retirement - - -
Death or Disability(1)
- 1,511,554 -
Change of Control(2)
- 1,824,939 -
Jeffrey Weissmann Without Cause/Good Reason - - -
Retirement - - -
Death or Disability(1)
- 1,483,680 -
Change of Control(2)
- 1,793,151 -
Peter Rendall Without Cause/Good Reason - - -
Retirement - - -
Death or Disability(1)
- 1,274,487 -
Change of Control(2)
- 1,640,674 -
(1) This amount includes the full vesting of restricted stock units that would have vested in the twelve months following the termination event in accordance with the named executive officers’ award agreements under the 2013 Plan and the 2019 Plan. The value of unvested restricted stock units reported in this table is calculated by multiplying the number of the unvested restricted stock units by $34.18, the closing market price of our common stock at December 31, 2020.
(2) Since the board of directors had discretion as of December 31, 2020 as to whether or not to accelerate the vesting of unvested stock options or restricted stock units granted under the 2013 Plan upon a change in control of the Company, the financial effect of such events has not been included in this table. The 2019 Plan provided that, upon a
Change of Control (as defined in the 2019 Plan), the outstanding awards would vest and be settled as set forth in the 2019 Plan or as otherwise provided in the award agreement, unless such awards were assumed by the surviving entity or otherwise equitably converted or substituted in connection with the Change of Control.
2019 Omnibus Incentive Plan
Our board of directors and shareholders approved the 2019 Plan in 2019, which allowed for grants of equity awards, including incentive stock options, non-qualified stock options, performance shares, shares of restricted stock, unrestricted stock and restricted stock units to present and future officers, directors, employees and consultants of the Company or any subsidiary or affiliate. The aggregate number of shares of common stock for which awards may have been issued could not exceed 2.5 million 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. The 2019 Plan served as a successor of the Company’s prior equity incentive plans. During 2020, outstanding awards under the prior plans continued to be outstanding and subject to their terms and conditions. Effective January 4, 2021, all outstanding equity awards under the Company’s equity plans, including the 2019 Plan were canceled in connection with the closing of the Merger in exchange for payment of the merger consideration and special pre-closing dividend in accordance with the terms of the Merger Agreement. Concurrent with the closing of the Merger, the Company’s equity plans were terminated.
Risk Assessment of Compensation Policies and Procedures
Our Compensation Committee has reviewed our material compensation policies and practices applicable to our employees, including our named executive officers, and concluded that these policies and practices do not create risks that are reasonably likely to have a material adverse effect on us.
Option Exercises and Stock Vested
The following table summarizes the exercise of stock options and the vesting of stock grants during 2020:
Option Awards Stock Awards
Name Number of Shares Acquired on Exercise Value Realized on Exercise (1)
Number of shares acquired on vesting Value realized on vesting (2)
Barry Karfunkel
- $ - 92,630 $ 2,303,013
Michael Weiner
- - 36,080 897,243
Robert Karfunkel
- - 66,807 1,661,045
Jeffrey Weissmann
101,565 2,799,345 34,289 852,559
Peter Rendall
- - 27,720 689,168
(1) The value realized on the exercise of options is the number of options exercised multiplied by the excess of the fair market value of the underlying shares on the date of exercise over the exercise price. Effective January 4, 2021, in connection with the closing of the Merger, all stock options were cancelled and converted into the right to receive $34.50, minus the exercise price per Common Share underlying such option.
(2) The value realized on the vesting of stock awards is the number of restricted stock units multiplied by the fair market value of stock, which means the closing price of the stock on the day immediately preceding the vesting date. Effective January 4, 2021, in connection with the closing of the Merger, all unvested restricted stock units were cancelled and converted into the right to receive $34.50 in cash per unit.
Director Compensation
Our director compensation program is designed to attract and retain highly qualified directors and align their interests with those of our shareholders. We compensate directors who are not employed by the Company with a combination of cash and equity awards. During 2020, Barry Karfunkel, Robert Karfunkel, and Barry Zyskind did not receive any compensation for serving on our board of directors.
The Nominating and Corporate Governance Committee annually reviews the director compensation program and recommends proposed changes for approval by the Board. As part of this review, the Nominating and Corporate Governance Committee considers the significant amount of time expended and the skill level required by each director not employed by the Company in fulfilling his or her duties on the Board, each director’s role and involvement on the Board and its committees and the market compensation practices and levels of our peer companies.
For 2020, our director compensation program consisted of the following:
Annual Retainer (payable in quarterly increments)
$ 80,000
Equity Award (subject to 1-year vesting schedule)
1,500 restricted stock units
Audit Committee Chair Supplemental Annual Retainer
$ 20,000
Audit Committee Member Supplemental Annual Retainer
$ 10,000
Compensation Committee Member Supplemental Annual Retainer
$ 10,000
Nominating and Corporate Governance Member Supplemental Annual Retainer
$ 5,000
All Board fees are paid pro rata in quarterly installments.
On April 29, 2020, each of our non-employee directors that were serving on that date received a grant of 1,500 restricted stock units under our 2019 Plan subject to a one-year vesting schedule, with full vesting on the first anniversary of the grant date. Under the terms of the awards, vested restricted stock units were to automatically convert to common stock on a one-for-one basis on the vesting date and all unvested restricted stock units were to be forfeited if the director resigned or was terminated from his or her position before the stock award vested. Effective January 4, 2021, in connection with the closing of the Merger, each non-employee director’s unvested restricted stock units were cancelled and converted into the right to receive $34.50 in cash per unit.
The following table sets forth compensation earned by our non-employee directors during the fiscal year ended December 31, 2020:
Name Fees Earned or Paid in Cash Stock Awards(1)
Total
Donald DeCarlo
$ 95,000 $ 26,970 $ 121,970
Patrick Fallon
100,000 26,970 126,970
John Marshaleck
105,000 26,970 131,970
Jay Nichols
90,000 26,970 116,970
Barbara Paris, M.D.
90,000 26,970 116,970
(1) Reflects the grant date fair value of the restricted stock unit grant calculated in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718 (“ASC 718”) as discussed in Note 15 to our audited financial statements included in this Annual Report on Form 10-K . The grant date fair value of these awards is equal to the closing price of our common stock on the day prior to the date of grant ($17.98) multiplied by the number of restricted stock units awarded to each director. As of December 31, 2020, each of Messrs. DeCarlo, Fallon, Marshaleck and Nichols and Dr. Paris had 1,500 unvested restricted stock units. In addition, as of December 31, 2020, each of Messrs. DeCarlo and Fallon and Dr. Paris had 10,000 fully vested and exercisable option awards. Effective January 4, 2021, in connection with the closing of the Merger, each non-employee
director’s unvested restricted stock units were cancelled and converted into the right to receive $34.50 in cash and their fully vested and exercisable option awards were cancelled and converted into the right to receive $34.50 in cash, minus the exercise price per Common Share underlying such option.
CEO Compensation Pay Ratio
The following pay ratio and supporting information compares the annual total compensation of our employees other than our CEO (including full-time, part-time, seasonal and temporary employees) and the annual total compensation of our CEO, as required by Section 953(b) of the Dodd-Frank Act. The pay ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K.
For 2020, our last completed fiscal year:
•The median of the annual total compensation of all employees of our Company (other than our CEO) was $52,982; and
•The annual total compensation of our CEO, as reported in the Summary Compensation Table included in Item 11 of Part III of this Annual Report on Form 10-K, was $2,905,800.
Based on this information, the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all other employees was 55 to 1.
To determine the pay ratio, we took the following steps:
We selected December 3, 2020 as the date on which to determine our median employee. As of that date, we had a total of 9,481 employees.
For purposes of identifying the median employee from the employee population base described above, we used wages, as compiled from our payroll records. We selected wages as a consistently applied compensation measure to identify our median employee, because base pay represents the principal form of compensation delivered to all of our employees. Once we identified our median employee for fiscal year 2020, such employee’s annual total compensation was calculated in accordance with Item 402(c)(2)(x) of Regulation S-K, as required pursuant to the SEC executive compensation disclosure rules.
Compensation Committee Interlocks and Insider Participation
During 2020, none of the Company’s executive officers served as a director of another entity, one of whose executive officers served on our Compensation Committee; and none of the Company’s executive officers served as a member of the compensation committee of another entity, one of whose executive officers served as a member of our Board.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The table below shows information regarding awards outstanding as of December 31, 2020, and shares of common stock that were available for issuance as of December 31, 2020, under our equity incentive plans.
Plan Category Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1)
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(2)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity Compensation Plans Approved by Security Holders 3,753,927 $ 10.28 1,912,935
Equity Compensation Plans Not Approved by Security Holders - - -
Total 3,753,927 $ 10.28 1,912,935
(1) Includes restricted stock unit awards outstanding as of December 31, 2020 that, upon vesting, provided the holder with the right to receive common shares on a one-to-one basis. For further discussion of these awards, see Note 15, “Stock-Based Compensation” in the notes to our consolidated financial statements.
(2) Only applies to outstanding options as of December 31, 2020, as restricted stock units did not have exercise prices.
On January 4, 2021, pursuant to the Merger Agreement, at the Effective Time (i) each outstanding option to purchase a Common Share, regardless of whether vested or unvested, was cancelled and converted into the right to receive $34.50 in cash, subject to any applicable tax withholdings, minus the exercise price per Common Share underlying such option and (ii) each restricted stock unit with respect to a Common Share which was outstanding as of the date the Merger Agreement, regardless of whether vested or unvested, was cancelled and converted into the right to receive $34.50 in cash, subject to any applicable tax withholdings. Upon the closing of the Merger, both the 2013 Plan and the 2019 Plan were terminated.
Security Ownership of Certain Beneficial Owners
On January 4, 2021, upon the completion of the Merger, we were acquired by Allstate through its directly wholly owned subsidiary, Allstate Insurance Holdings, LLC. Since the acquisition was completed, all of our common shares have been indirectly held by Allstate. The following table sets forth information with respect to the ownership of our common stock by Allstate as of February 1, 2021. Allstate, through its direct wholly owned subsidiary, has sole voting and investment power over our shares of common stock.
Name and Address Amount and Nature of Beneficial Ownership
Percent of Class
Allstate Insurance Holdings, LLC(1)
100 100%
2775 Sanders Road
Northbrook, IL 60062
(1) Allstate Insurance Holdings, LLC is a direct wholly owned subsidiary of The Allstate Corporation.
Security Ownership of Directors and Executive Officers
The following table sets forth information with respect to common shares of The Allstate Corporation, the Company’s ultimate parent, beneficially owned as of February 1, 2021, by each director and named executive officer of the Company individually, and by all executive officers and directors of the Company as a group. Shares reported as beneficially owned include shares held indirectly through the Allstate 401(k) Savings Plan and other shares held indirectly. It also includes shares subject to stock options exercisable, and restricted stock units and performance stock awards subject to conversion into common shares, within sixty days of February 1, 2021. As of February 1, 2021, none of these shares were pledged as security. All of the directors and executive officers have sole voting and investment power over the shares of common stock listed or share voting and investment power with his or her spouse, except as otherwise provided below.
Name of Beneficial Owner Amount and Nature of Beneficial Ownership of Allstate Common Stock Common Stock Subject to Options Exercisable and Restricted Stock Units and Performance Stock Awards for which restrictions expire on or prior to April 2, 2021
Total Stock Based Ownership(1)
Percent of Class
Thomas J. Wilson 837,059 2,061,018 2,898,077 *
Carolyn D. Blair 213 9,334 9,547 *
Elizabeth A. Brady 180 40,363 40,543 *
Don Civgin 168,603 201,779 370,382 *
Donald DeCarlo - - - *
John E. Dugenske 46,759 184,913 231,672 *
Patrick Fallon - - - *
Rhonda S. Ferguson - - - *
Suren Gupta 58,479 348,461 406,940 *
John Marshaleck - - - *
Jesse E. Merten 14,288 57,767 72,055 *
Jay Nichols - - - *
Barbara Paris, M.D - - - *
Mark Q. Prindiville 8,177 55,683 63,860 *
Mario Rizzo 23,051 154,505 177,556 *
Glenn T. Shapiro 22,938 134,955 157,893 *
Barry Karfunkel - - - *
Michael Weiner - - - *
Jeffrey Weissmann - - - *
Peter Rendall - - - *
All executive officers and directors as a group (21 persons) 1,179,747 3,248,778 4,428,525 1.46%
*Less than one percent.
(1) These amounts are the sum of the number of shares shown in the prior columns.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Effective on January 4, 2021, we completed our previously announced Merger with a wholly owned indirect subsidiary of Allstate and, as a result, Allstate now owns all of the Company’s outstanding common stock. Other than as stated below, since the beginning of fiscal year 2020, no director, executive officer or security holder who prior to the closing of the Merger on January 4, 2021, was known to us to own of record or beneficially more than five percent of our common securities, or any member of the immediate family of such director, executive officer or
security holder, had or will have a direct or indirect material interest in a transaction or series of transactions in which we are, or one of our subsidiaries is, a party and the amount involved exceeds $120,000.
Our Audit Committee charter requires that all related party transactions be approved by our Audit Committee. In response to an annual questionnaire, we require directors, director nominees or appointees and executive officers to submit a description of any current or proposed related party transaction and provide updates during the year. In addition, prior to being acquired by The Allstate Corporation, we provided the Audit Committee any similar available information with respect to any known transactions with beneficial owners of 5% or more of our voting securities. If management becomes aware of any transactions during the year, management presents such transactions for approval by the Audit Committee. In the event management becomes aware of any transaction that was not approved under the policy, management will present the transaction to the Audit Committee for its action as soon as reasonably practicable, which may include termination, amendment or ratification of the transaction. The Audit Committee will approve only those transactions that are in, or are not inconsistent with, the best interests of National General Holdings Corp. and our shareholder, as is determined in good faith in accordance with its business judgment. Unless otherwise indicated below, each of these related party transactions was approved by our Audit Committee.
Other Related Party Transactions
Prior to being acquired by Allstate, the Company had a significant shareholder who, at all times during 2020, held, and continued to hold through the closing of the Merger on January 4, 2021, an ownership interest in each of AmTrust and ACP Re Holdings LLC (“ACP Re”). The Company provides services to and receives services from, or otherwise has additional relationships with, these formerly related entities. See Note 4, “Investments” and Note 16, “Related Party Transactions” in the notes to our consolidated financial statements.
Family Relationships
During 2020, Barry Karfunkel and Robert Karfunkel, brothers, were employed by the Company as chief executive officer and president, respectively. The compensation, perquisites and benefits provided to Barry Karfunkel and Robert Karfunkel in 2020 are disclosed in the “Summary Compensation Table” section of Item 11 of Part III of this Annual Report. Barry Karfunkel and Robert Karfunkel also served as co-chairmen of our board of directors during 2020 and resigned from such positions on January 4, 2021, in connection with the closing of the Merger. Effective January 15, 2021, Mr. Robert Karfunkel resigned as president of the Company. Mr. Barry Karfunkel continues to serve as chief executive officer of the Company.
Barry Zyskind, chairman and chief executive officer of AmTrust, served on our board of directors without remuneration in 2020 and resigned as director on January 4, 2021, in connection with the closing of the Merger. Mr. Zyskind is Barry Karfunkel and Robert Karfunkel’s brother-in-law.
Independence of Directors
During 2020, our common shares were listed on the Nasdaq Global Market and we therefore were subject to the Nasdaq listing standards. Although we delisted the common shares on January 4, 2021, in connection with the closing of the Merger, we remained subject to the Nasdaq listing standards due to the listing on Nasdaq of our Series A Preferred Stock, Depositary Shares representing Series B Preferred Stock, Depositary Shares representing Series C Preferred Stock and 2055 Subordinated Notes. Following the consummation of the Merger, we voluntarily redeemed the following securities effective February 3, 2021: (a) all outstanding shares of the Class A Preferred Stock, (b) all outstanding Depositary Shares and the underlying shares of the Class B Preferred Stock, and (c) the 2055 Notes. All outstanding Depositary Shares and the underlying shares of the Class C Preferred Stock were delisted from NASDAQ effective January 25, 2021. Despite no longer having any securities listed on Nasdaq or on any other exchange, we continue to apply the Nasdaq listing standards for determining the independence of our directors.
In January 24, 2021, our board of directors determined that five of our eight directors then serving, Donald DeCarlo, Patrick Fallon, John Marshaleck, Jay Nichols, and Barbara Paris, were independent directors under the Nasdaq listing standards. During 2020, and until their resignations on January 24, 2021, three of our directors, Barry Karfunkel, Robert Karfunkel and Barry Zyskind, did not qualify as independent directors.
Following the closing of the Merger on January 24, 2021, and the subsequent increase in the size of our board of directors to sixteen members, our board of directors determined that the following five current members of our board of directors are independent under the Nasdaq listing standards: Mr. DeCarlo, Mr. Fallon, Mr. Marshaleck, Mr. Nichols, and Dr. Paris. Eleven of our current directors do not qualify as independent directors.
In accordance with the Nasdaq listing standards, all board committees were entirely independent during 2020, and remain independent as of the date hereof.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
Audit and Non-Audit Fees
Our Audit Committee approves the fees and other significant compensation to be paid to our independent auditors for the purpose of preparing or issuing an audit report or related work. Our Audit Committee also preapproves all auditing services and permitted non-audit services, including the fees and terms thereof, to be performed for us by our independent auditors, subject to the de minimis exceptions for non-audit services described in the Exchange Act.
Ernst & Young LLP (“E&Y”) served as our independent registered public accounting firm for the fiscal year ended December 31, 2020. Our Audit Committee reviewed and discussed with E&Y the following fees for services rendered for the 2020, and 2019, fiscal years and considered the compatibility of non-audit services with E&Y’s independence.
The following table presents the aggregate fees billed or expected to be billed for professional services rendered to us by E&Y for the 2020, and 2019, fiscal years. Other than as set forth below, no professional services were rendered or fees billed by E&Y or its international affiliates during the 2020, and 2019, fiscal years.
Ernst & Young LLP 2020
Audit Fees (1)
$ 5,550,000 $ 7,239,400
Audit-Related Fees (2)
280,000 312,500
Tax Fees (3)
1,012,350 1,184,180
All Other Fees (4)
260,000 255,000
Total $ 7,102,350 $ 8,991,080
(1) Audit fees relate to professional services rendered for: (i) the integrated audit of our annual financial statements and internal control over financial reporting, (ii) interim reports, (iii) comfort letters, (iv) acquisition work related to the audit, (v) audit of domestic and international statutory reports, and (vi) expenses incurred related to services performed.
(2) Audit-related fees relate to professional services rendered for: (i) benefit plan audits, (ii) the audits of service organization internal controls, and (iii) regulatory compliance services.
(3) Tax fees relate to professional services rendered for: tax compliance and consultation services.
(4) All other fees relate to professional services rendered for: actuarial services.
Pre-Approval Policies and Procedures of the Audit Committee
Pursuant to its charter, the Audit Committee pre-approves all audit and permitted non-audit services, including engagement fees and terms thereof, to be performed for us by the independent auditors, subject to the exceptions for certain non-audit services approved by the Audit Committee prior to the completion of the audit in accordance with Section 10A of the Exchange Act. The Audit Committee must also pre-approve all internal control-related services to be provided by the independent auditors. The Audit Committee will generally pre-approve a list of specific services and categories of services, including audit, audit-related and other services, for the upcoming or current fiscal year, subject to a specified cost level. In addition, from time to time, we may want the independent auditors to perform additional permitted services that the Audit Committee must pre-approve before the independent auditors can proceed with providing such services. In doing this, the Audit Committee has established a procedure whereby a partner of our independent auditor, in conjunction with our Chief Financial Officer, will contact the Audit Committee Chairperson and obtain pre-approval (verbally or via email) for such services, to be followed (where appropriate) by a written engagement letter confirming such arrangements, signed by both our Chief Financial Officer and Audit Committee Chairperson. In addition, all audit and permissible non-audit services in excess of 5% over the pre-approved cost level must be separately pre-approved by the Audit Committee.
The Audit Committee may form and delegate to a subcommittee consisting of one or more members (provided that such person(s) are independent directors) its authority to grant pre-approvals of audit, permitted non-audit services and internal control-related services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Audit Committee at its next scheduled meeting.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)Documents filed as part of this report: The financial statements and financial schedules listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this report. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(b)Schedules: See Item 15(a).
(c)Exhibits Index
Exhibit No. Description
2.1** Agreement and Plan of Merger, dated as of July 7, 2020 (by and among The Allstate Corporation, Bluebird Acquisition Corp. and National General Holdings Corp. (the “Company”) incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 8, 2020)
3.1 Second Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
3.2 Amendment No. 1 to the Second Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 4, 2021)
3.3 Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 4, 2021)
3.4 Certificate of Designations for 7.50% Non-Cumulative Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2014)
3.5 Certificate of Designations of 7.50% Non-Cumulative Preferred Stock, Series B (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 27, 2015)
3.6 Certificate of Designations of 7.50% Non-Cumulative Preferred Stock, Series C (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 7, 2016)
3.7 Certificate of Designations of Fixed/Floating Rate Non-Cumulative Convertible Preferred Stock, Series D (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 9, 2018)
4.1 Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
4.2 Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
4.3 Registration Rights Agreement, dated as of October 16, 2009, by and among the Company, The Michael Karfunkel 2005 Grantor Retained Annuity Trust, Michael Karfunkel and AmTrust International Insurance, Ltd., as assignee of AmTrust Financial Services, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
4.4 Form of Stock Certificate evidencing 7.50% Non-Cumulative Preferred Stock, Series A (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2014)
4.5 Form of stock certificate evidencing 7.50% Non-Cumulative Preferred Stock, Series B (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on March 27, 2015)
4.6 Form of stock certificate evidencing 7.50% Non-Cumulative Preferred Stock, Series C (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on July 7, 2016)
4.7 Form of 6.750% Notes due 2024 (included as Exhibit A to Exhibit 4.10) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May 28, 2014)
4.8 Form of 7.625% Subordinated Notes due 2055 (included as Exhibit A to Exhibit 4.11) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 18, 2015)
4.9 Indenture, dated as of May 23, 2014, by and between the Company, as Issuer, and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 28, 2014)
4.10 First Supplemental Indenture, dated as of May 23, 2014, by and between the Company, as Issuer, and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May 28, 2014)
Exhibit No. Description
4.11 Second Supplemental Indenture, dated as of August 18, 2015, by and between the Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 18, 2015)
4.12 Third Supplemental Indenture, dated as of January 4, 2021, by and among the Company, The Allstate Corporation and the Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 4, 2021)
4.13 Deposit Agreement, dated March 27, 2015, among National General Holdings Corp., American Stock Transfer & Trust Company, LLC and the holders from time to time of the depositary receipts described therein (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2015)
4.14 Deposit Agreement, dated July 7, 2016, among National General Holdings Corp., American Stock Transfer & Trust Company, LLC and the holders from time to time of the depositary receipts described therein (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 7, 2016)
4.15 Form of depositary receipt (included as Exhibit A to Exhibit 4.12) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 27, 2015)
4.16 Form of depositary receipt (included as Exhibit A to Exhibit 4.13) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 7, 2016)
10.1* National General Holdings Corp. 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 6, 2019)
10.2* Form of Non-Qualified Stock Option Agreement under the NGHC 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 6, 2019)
10.3* Form of Restricted Share Unit Agreement under the NGHC 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on May 6, 2019)
10.4* American Capital Acquisition Corporation 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
10.5* Form of Statutory Time-Based Stock Option Agreement for the American Capital Acquisition Corporation 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
10.6* Amendment to Form of Statutory Time-Based Stock Option Agreement for the American Capital Acquisition Corporation 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
10.7* 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
10.8* Form of Non-Qualified Stock Option Award Agreement for the NGHC 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
10.9* Form of Incentive Stock Option Award Agreement for the NGHC 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
10.10* Form of Restricted Stock Unit Agreement for the NGHC 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2014)
10.11* Form of Indemnification Agreement for Directors and Certain Officers (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
10.12* Employment Agreement, dated as of January 1, 2013, by and between National General Management Corp. and Michael Weiner (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1 (No. 333-190454) filed on August 7, 2013)
10.13 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)
10.14 Amended and Restated Credit Agreement, dated September 20, 2016, among AmTrust Financial Services, Inc. as Administrative Agent, ACP Re Holdings, LLC, the Michael Karfunkel Family 2005 Trust, and AmTrust International Insurance, Ltd. and National General Re Ltd., as Lenders (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 21, 2016)
Exhibit No. Description
21.1 List of subsidiaries of the Company (filed herewith)
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 Inline 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 Inline XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104 The Cover Page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL contained in Exhibit 101.
* Management contract or compensatory plan or arrangement.
** Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K, The Company hereby undertakes to furnish supplementary copies of any of the omitted schedules upon request by the SEC.