NATIONAL GENERAL HOLDINGS CORP. 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 byThe 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 endedDecember 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 endedDecember 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
42-------------------------------------------------------------------------------- Our insurance subsidiaries have an "A-" (Excellent) group rating byA.M. Best Company, Inc. ("A.M. Best"). OnJuly 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 outsidethe United States , primarily inBermuda . Two of our wholly-owned subsidiaries are management companies that act as attorneys-in-fact forAdirondack Insurance Exchange , aNew York reciprocal insurer, andNew Jersey Skylands Insurance Association , aNew 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 endedDecember 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 ourA.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 endedDecember 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 endedDecember 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 ofDecember 31, 2020 , and 2019, respectively. Our most significant balance sheet liability is our unpaid loss and LAE reserves. As ofDecember 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 43 --------------------------------------------------------------------------------
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.
InMarch 2020 , the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by theWorld Health Organization . Shortly thereafter, the President ofthe United States declared a National Emergency throughoutthe United States attributable to such outbreak. The outbreak has become increasingly widespread inthe 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
44
--------------------------------------------------------------------------------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
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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.
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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.
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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 onJanuary 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. 48 --------------------------------------------------------------------------------
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.
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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 applicableSEC 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. 50 --------------------------------------------------------------------------------
Results of Operations
Consolidated Results of Operations
Year Ended December 31,
2020 2019
Reciprocal Reciprocal
NGHC Exchanges Eliminations Total NGHC 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 $
-
$ -$ 4,224,621 Change in unearned premium (146,257) 20,033 - (126,224) (82,338) (24,241) - (106,579) Net earned premium$ 4,273,371 $ 221,249 $
-
$ -$ 4,118,042 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
(53,709)
$ (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
(53,709)
$ (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 $
-
$ -$ 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
-
$ - $ 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
51--------------------------------------------------------------------------------
Year Ended December 31,
2020 2019
Reciprocal Reciprocal
NGHC Exchanges Eliminations Total NGHC 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 $ (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)
$ -
$ -$ 974,448 Net earned premium$ 4,273,371 $ 221,249
$ -
$ -$ 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)
$ -
$ -
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
$ -
$ -$ 939,712 Net earned premium$ 4,273,371 $ 221,249
$ -
$ -$ 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 % 52
-------------------------------------------------------------------------------- The Company has auto and homeowners quota share agreements (collectively, the "Quota Shares"). EffectiveJanuary 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 effectiveJanuary 1, 2019 , andJuly 1, 2019 , respectively. FromJuly 1, 2019 , toJune 30, 2020 , under the homeowners quota share agreement we ceded 40.0% of net liability. EffectiveJuly 1, 2020 , we cede 20.0% of net liability under homeowners policies. InAugust 2019 , we completed the acquisition ofNational Farmers Union Property and Casualty Company ("Farmers Union Insurance "). InDecember 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
Consolidated Results of Operations for the Year Ended
Gross premium written. Gross premium written increased by$51.5 million , from$5,583.1 million for the year endedDecember 31, 2019 , to$5,634.5 million for the year endedDecember 31, 2020 . The P&C segment increased by$43.2 million , primarily driven by the acquisition ofFarmers 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 endedDecember 31, 2019 , to$4,620.8 million for the year endedDecember 31, 2020 . Net premium written for the P&C segment increased by$370.4 million for the year endedDecember 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 endedDecember 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 endedDecember 31, 2019 , to$4,494.6 million for the year endedDecember 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
Service and fee income. Service and fee income increased by$118.4 million , or 18.4%, from$642.0 million for the year endedDecember 31, 2019 , to$760.4 million for the year endedDecember 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. 53 --------------------------------------------------------------------------------
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 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 endedDecember 31, 2019 , to$2,824.1 million for the year endedDecember 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 ofFarmers 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 endedDecember 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 endedDecember 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
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 endedDecember 31, 2019 , to$990.6 million for the year endedDecember 31, 2020 , due to an increase of$76.3 million in the P&C segment, as a result of the acquisition ofFarmers 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 endedDecember 31, 2019 , to$1,043.2 million for the year endedDecember 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 endedDecember 31, 2019 , to$1,112.9 million for the year endedDecember 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. 54 -------------------------------------------------------------------------------- The consolidated net operating expense ratio increased from 23.7% for the year endedDecember 31, 2019 , to 24.8% for the year endedDecember 31, 2020 . Excluding the Reciprocal Exchanges, the net operating expense ratio was 24.6% and 23.4% for the years endedDecember 31, 2020 , and 2019, respectively. The Reciprocal Exchanges' net operating expense ratio was 28.7% and 29.4% for the years endedDecember 31, 2020 , and 2019, respectively.
Net investment income. Net investment income decreased by
Net gain (loss) on investments. Net gain (loss) on investments increased by
Interest expense. Interest expense for the years ended
Provision for income taxes. Income tax expense increased by$59.4 million , from$77.0 million for the year endedDecember 31, 2019 , reflecting an effective tax rate of 19.0%, to$136.5 million for the year endedDecember 31, 2020 , reflecting an effective tax rate of 20.7%. 55 --------------------------------------------------------------------------------
P&C Segment - Results of Operations
Year Ended December 31,
2020 2019
Reciprocal Reciprocal
NGHC Exchanges Eliminations Total NGHC 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 $
-
$ -$ 3,564,015 Change in unearned premium (145,343) 20,033 - (125,310) (84,751) (24,241) - (108,992) Net earned premium$ 3,587,904 $ 221,249 $
-
$ -$ 3,455,023 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
(53,709)
$ (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
(53,709)
$ (68,796) $ 3,922,098 Underwriting income (loss)$ 370,750 $ 3,372 $
-
$ -$ 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)
$ (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 $
-
$ -$ 758,318 Net earned premium$ 3,587,904 $ 221,249 $
-
$ -$ 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
$ -
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 $
-
$ -$ 730,327 Net earned premium$ 3,587,904 $ 221,249 $
-
$ -$ 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 % 56
--------------------------------------------------------------------------------
P&C Segment Results of Operations for the Year Ended
Gross premium written. Gross premium written increased by$43.2 million , from$4,814.5 million for the year endedDecember 31, 2019 , to$4,857.6 million for the year endedDecember 31, 2020 , primarily driven by the acquisition ofFarmers 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 endedDecember 31, 2019 , to$3,934.5 million for the year endedDecember 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 endedDecember 31, 2019 , to$3,809.2 million for the year endedDecember 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
Service and fee income. Service and fee income decreased by$0.8 million , from$392.5 million for the year endedDecember 31, 2019 , to$391.7 million for the year endedDecember 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.
57
--------------------------------------------------------------------------------
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 $374.1 million for the year ended December 31, 2020 . The
P&C segment net combined ratio decreased from 95.5% for the year ended
December 31, 2019 , to 90.2% for the year ended December 31, 2020 . The increase
in underwriting income and the decrease in the net combined ratio were primarily
due to increased net earned premium and lower claims, including as a result of
the recent decline in miles driven due to the COVID-19 pandemic, offset by
higher expenses due to organic growth and the acquisition of Farmers Union
Insurance , and a decrease in ceding commission income from the Quota Shares.
58
--------------------------------------------------------------------------------A&H Segment - Results of Operations
Year Ended December 31,
2020 2019
(amounts in thousands, except
Underwriting revenues: percentages)
Gross premium written$ 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 % 59
--------------------------------------------------------------------------------
A&H Segment Results of Operations for the Year Ended
Gross premium written. Gross premium written increased by$8.3 million , from$768.6 million for the year endedDecember 31, 2019 , to$776.9 million for the year endedDecember 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 endedDecember 31, 2019 , to$686.4 million for the year endedDecember 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 endedDecember 31, 2019 , to$685.5 million for the year endedDecember 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 endedDecember 31, 2019 , to$368.7 million for the year endedDecember 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 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
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 endedDecember 31, 2019 , to$309.3 million for the year endedDecember 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 endedDecember 31, 2019 , to$242.2 million for the year endedDecember 31, 2020 , primarily due to the sale of Euroaccident in 2019. 60 -------------------------------------------------------------------------------- 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 endedDecember 31, 2019 , to$183.1 million for the year endedDecember 31, 2020 . Our A&H net operating expense ratio decreased from 32.6% for the year endedDecember 31, 2019 , to 26.7% for the year endedDecember 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 endedDecember 31, 2019 , to$183.5 million for the year endedDecember 31, 2020 . Our A&H net combined ratio decreased from 79.5% for the year endedDecember 31, 2019 , to 73.2% for the year endedDecember 31, 2020 . 61 -------------------------------------------------------------------------------- Balance Sheets December 31, 2020 Reciprocal NGHC Exchanges Eliminations Total ASSETS (amounts in thousands) Investments: Debt securities, available-for-sale, at fair value$ 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
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
633,332$ (152,556) $ 10,127,894 62
--------------------------------------------------------------------------------
December 31, 2019
Reciprocal
NGHC 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
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
643,650$ (142,282) $ 9,756,534 63
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Other Material Changes in Financial Position
December 31,
2020 2019 Change % Change
(amounts in thousands)
Selected Assets:
Reinsurance recoverable, net
Changes in Financial Position During the Year Ended
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 theU.S. Treasury orU.S. government agencies, obligations of local governments,U.S. denominated corporate obligations, mortgages guaranteed by the Federal National Mortgage Association, theGovernment 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 endedDecember 31, 2020 , and 2019, respectively, and the average duration of the portfolio was 3.5 years and 4.2 years as ofDecember 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 ofDecember 31, 2020 . OnJanuary 4, 2021 , the 2019 Credit Agreement was repaid and terminated in connection with the closing of the Merger. OnApril 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 endedDecember 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 signedJuly 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 ofDecember 31, 2020 , and 2019, respectively, taking into account dividends paid in the prior twelve month periods. During the years endedDecember 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 endedDecember 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 atDecember 31, 2018 to$5.0 billion atDecember 31, 2019 , and increased to$5.7 billion atDecember 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
Net cash provided by operating activities increased by
Net cash provided by investing activities increased by
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Net cash used in financing activities decreased by
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 anA.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 onMay 15 andNovember 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 onMay 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 endedDecember 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 onMarch 15 ,June 15 ,September 15 andDecember 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 ofSeptember 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 endedDecember 31, 2020 , 2019, and 2018. OnFebruary 3, 2021 , the 7.625% Notes were redeemed in full and ceased to be outstanding. 66
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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 endedDecember 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 onMarch 15, 2021 . Revolving Credit Agreement In 2019, we refinanced our existing credit agreement and entered into a new credit agreement (the "2019 Credit Agreement"), withJPMorgan Chase Bank, N.A ., as Administrative Agent,KeyBank National Association andFifth 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$50.0 million . Borrowings under the 2019 Credit Agreement bore interest at either the Alternate Base Rate ("ABR") or the LIBOR rate. ABR borrowings under the 2019 Credit Agreement bore interest at the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5 percent or (c) the adjusted LIBOR rate for a one-month interest period on such day plus 1 percent. Eurodollar borrowings under the 2019 Credit Agreement bore interest at the adjusted LIBOR rate plus the Eurodollar spread for the interest period in effect. Fees payable by us under the 2019 Credit Agreement included a letter of credit participation fee, a letter of credit fronting fee with respect to each letter of credit (0.125%) and a commitment fee on the available commitments of the lenders (a range of 0.175% to 0.25% based on our consolidated leverage ratio; and as ofDecember 31, 2020 , the rate was 0.225%). The 2019 Credit Agreement had a maturity date ofFebruary 25, 2023 . OnJanuary 4, 2021 , the 2019 Credit Agreement was repaid and terminated in connection with the closing of the Merger.
For more information about our debt, including other outstanding debt, debt repayments, ranking and restrictive covenants, refer to Note 11, "Debt" in the notes to our consolidated financial statements.
Preferred Stock
For information about our preferred stock, refer to Note 14, "Stockholders' Equity" in the notes to our consolidated financial statements.
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--------------------------------------------------------------------------------Contractual Obligations and Commitments
The following table sets forth certain of our contractual obligations as ofDecember 31, 2020 : Payment Due by Period Less than 1 - 3 3 - 5 More than Total 1 Year Years Years 5 Years (amounts in thousands) Loss and LAE reserves(1)$ 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 ofDecember 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) OnJanuary 4, 2021 , the 2019 Credit Agreement was repaid, and onFebruary 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 ofDecember 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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