National General Holdings Corp. Reports Second Quarter 2018 Results

NEW YORK, Aug. 06, 2018 (GLOBE NEWSWIRE) -- National General Holdings Corp. (Nasdaq:NGHC) today reported second quarter 2018 net income of $36.7 million or $0.34 per diluted share, compared to net income of $5.5 million or $0.05 per diluted share in the second quarter of 2017. Second quarter 2018 operating earnings(1) was $59.5 million or $0.54 per diluted share, compared to $23.7 million or $0.22 per diluted share in the second quarter of 2017. Second quarter 2018 net income was impacted by an $18.7 million net realized loss on investments related to a repositioning of the portfolio.

Second Quarter 2018 Highlights Versus Second Quarter 2017*

  • Gross written premium grew $186.9 million or 18.0% to $1,222.5 million, driven by continued organic growth in our P&C segment of 17.8% and in our A&H segment of 19.7%.
  • In the second quarter, our homeowners’ product experienced organic growth of 25.5% driven by strong results from strategic partnerships and the continued expansion in the high net worth market. Our personal auto product experienced organic growth of 22.8% driven by continued rate increases and PIF growth.
  • The overall combined ratio(9,13) was 92.1% compared to 96.3% in the prior year’s quarter, excluding non-cash amortization of intangible assets. The P&C segment reported a decrease in combined ratio to 92.9% from 96.8% in the prior year’s quarter. The combined ratio includes $20.5 million of losses, or 2.8 P&C loss ratio points, primarily related to spring weather events in the Midwestern and Northeastern parts of the U.S. and hail in Texas in the second quarter 2018, compared to $16.1 million of losses, or 2.0 P&C loss ratio points, from events in the second quarter 2017. The A&H segment reported a combined ratio of 88.6% compared to 93.7% in the prior year’s quarter.
  • Service and fee income grew 7.7% to $148.1 million, driven by organic growth in both our Accident & Health and Property & Casualty segments.
  • Shareholders’ equity was $1.98 billion and fully diluted book value per share was $14.28 at June 30, 2018, growth of 2.8% and 3.0%, respectively, from December 31, 2017. Our trailing twelve month operating return on average equity (ROE)(14) was 12.1% as of June 30, 2018.
  • Second quarter 2018 operating earnings exclude the following material items, net of tax: $14.8 million or $0.14 net loss on investments and $6.5 million or $0.06 per share of non-cash amortization of intangible assets.

Barry Karfunkel, National General’s CEO, stated: “We are pleased to report another quarter with both strong top line growth and underwriting results, despite continued active catastrophe loss activity for the industry.  Our second quarter results reflect the strength and stability of returns the platform we have built is able to generate.  We expect the opportunity for profitable growth across the diversified niche lines of business we have developed to continue as market dynamics in both our P&C and A&H segments remain favorable.”

*NOTE: Unless specified otherwise, discussion of our second quarter 2018 and 2017 results do not include financial results from the Reciprocal Exchanges, which are presented within our consolidated financial results within this release but are not included in net income available to NGHC common stockholders.

Overview of Second Quarter 2018 as Compared to Second Quarter 2017 by Segment

  • Property & Casualty - Gross written premium grew by 17.8% to $1,065.6 million, net written premium decreased by 16.9% to $683.9 million and net earned premium decreased by 8.7% to $734.9 million. P&C gross written premium growth was primarily driven by organic growth of 25.5% from our homeowners’ product and 22.8% from our personal auto product. The decrease in the net premiums written and earned were driven by the home and auto quota shares entered after July 1, 2017.  Service and fee income grew 11.3% to $105.2 million. Excluding non-cash amortization of intangible assets, the combined ratio(9,13) was 92.9% with a loss ratio of 73.5% and an expense ratio(9,12) of 19.4%, versus a prior year combined ratio of 96.8% with a loss ratio of 73.6% and an expense ratio of 23.2%. The decrease in the expense ratio was driven by the impact of the home and auto quota shares.  The loss ratio was impacted by pre-tax catastrophe losses of approximately $20.5 million primarily related to spring weather events in the Midwestern and Northeastern parts of the U.S. and hail in Texas in the second quarter 2018.
     
  • Accident & Health - Gross written premium grew by 19.7% to $156.8 million, net written premium grew by 17.8% to $139.3 million, and net earned premium grew by 15.8% to $156.2 million. The A&H gross written premium increase was driven by the continued growth across the entire book. Service and fee income was $42.9 million compared to $43.0 million in the prior year’s quarter. Excluding non-cash amortization of intangible assets, the combined ratio(9,13) was 88.6% with a loss ratio of 56.6% and an expense ratio(9,12) of 32.0%, versus a prior year combined ratio of 93.7% with a loss ratio of 63.4% and an expense ratio of 30.3%.
     
  • Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $118.0 million, net written premium was $66.8 million, and net earned premium was $51.8 million. Reciprocal Exchanges combined ratio(9,13) excluding non-cash amortization of intangible assets was 118.2% with a loss ratio of 80.5% and an expense ratio(9,12) of 37.7%.

Second quarter 2018 investment income decreased to $26.2 million, compared to $27.8 million in the second quarter of 2017, reflecting our decision to increase credit quality of the portfolio in the second half of 2017. Total investments and cash and cash equivalents (including restricted cash) were $3.8 billion as of June 30, 2018. Accumulated other comprehensive income (loss) increased to a $55.7 million loss at June 30, 2018 from a $8.1 million loss at December 31, 2017, primarily due to the impact of higher interest rates which negatively impacted bond valuations.

Interest expense, which includes interest credited on funds held balances, was $15.0 million and debt was $705.1 million at June 30, 2018, and $713.7 million at December 31, 2017.

The second quarter of 2018 provision for income taxes was $9.4 million and the effective tax rate for the quarter was 17.5%.  The effective tax rate for the first half of 2018 was 19.9%.

Shareholders’ equity was $1,982.2 million at June 30, 2018, growth of 2.8% from $1,928.6 million at December 31, 2017. Fully diluted book value per share was $14.28 at June 30, 2018, growth of 3.0% from $13.86 at December 31, 2017. Our trailing twelve month operating return on average equity (ROE)(14) was 12.1% as of June 30, 2018.

Year-to-Date P&C Segment Notable Large Losses
2018
Quarter
  P&C Notable
Large Losses
and LAE

($ millions)
 P&C Loss Ratio
Points*
 EPS Impact
After Tax
Q2Spring Weather-related and Texas Hail Events $20.5 2.8% $0.15
Q1Northeastern Winter Weather $14.2 2.0% $0.10
 
* Loss ratio points related to P&C net earned premium in quarter the loss event was recorded.
 

Additional Item

  • National General Enters into Business Collaboration Agreement with Aioi Nissay Dowa Insurance Co., Ltd. - On July 11, 2018, we entered into a collaboration agreement among Aioi Nissay Dowa Insurance Co., Ltd. (AD), part of MS&AD Insurance Group and Aioi Nissay Dowa Insurance Services USA Corp. (AIS), a subsidiary of AD. In conjunction with the collaboration agreement, we issued AD $30 million aggregate liquidation preference of our Series D Fixed/Floating Rate Non-Cumulative Convertible Preferred Stock. Holders of the Preferred Stock will be entitled to receive noncumulative cash dividends, if and when declared by the board of directors, at a rate of 7% per annum, subject to adjustment to a floating rate following July 15, 2023. The Series D Preferred Stock is convertible at the holder’s option, on or after July 15, 2023 to shares of the Company’s common stock at an initial conversion price of $38 per share. We may, at our option, redeem the Series D Preferred Stock on or after July 15, 2023, with the redemption price being at the liquidation preference, unless certain premium thresholds are met under the collaboration agreement.

Conference Call

On Tuesday, August 7, 2018 at 9:30 AM ET, Chief Executive Officer Barry Karfunkel and Chief Financial Officer Mike Weiner will review results and discuss business conditions via a conference call that may be accessed as follows:

Toll-Free U.S. Dial-in:888-267-2845
International Dial-in:973-413-6102
Conference Entry Code:226472
Webcast Registration:http://ir.nationalgeneral.com/events-and-presentations 
  

A replay of the conference call will be accessible from 2:00 PM ET on Tuesday, August 7, 2018 to 11:59 PM ET on Tuesday, August 21, 2018 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 226472. In addition, a replay of the webcast can also be retrieved at http://ir.nationalgeneral.com/events-and-presentations

About National General Holdings Corp.

National General Holdings Corp., headquartered in New York City, is a specialty personal lines insurance holding company. National General traces its roots to 1939, has a financial strength rating of A- (excellent) from A.M. Best, and provides personal and commercial automobile, homeowners, umbrella, recreational vehicle, motorcycle, lender-placed, supplemental health and other niche insurance products.

Forward Looking Statements

This news release contains “forward-looking statements” that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on the Company’s current expectations and beliefs concerning future developments and their potential effects on the Company. Forward-looking statements can generally be identified by the use of forward-looking terminology, such as “may,” “will,” “plan,” “expect,” “project,” “intend,” “estimate,” “anticipate” and “believe” or their variations or similar terminology. There can be no assurance that actual developments will be those anticipated by the Company. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers, changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance of financial markets on our investment portfolio, our ability to accurately underwrite and price our products and to maintain and establish accurate loss reserves, estimates of the fair value of investments, development of claims and the effect on loss reserves, large loss activity including hurricanes and wildfires, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, the effect of unpredictable catastrophic losses, changes in the demand for our products, our degree of success in integrating acquired businesses, the effect of general economic conditions, state and federal legislation, the effects of tax reform, regulations and regulatory investigations into industry practices, risks associated with conducting business outside the United States, developments relating to existing agreements, disruptions to our business relationships with third party or vendor agencies, breaches in data security or other disruptions involving our technology, heightened competition, changes in pricing environments, and changes in asset valuations. The forward-looking statements contained in this news release are made only as of the date of this release. The Company undertakes no obligation to publicly update any forward-looking statement except as may be required by law. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those projected is contained in the Company’s filings with the Securities and Exchange Commission.

Income Statement - Second Quarter
$ in thousands
(Unaudited)

  Three Months Ended June 30,
  2018  2017 
  NGHC Reciprocal
Exchanges
 Consolidated  NGHC Reciprocal
Exchanges
 Consolidated 
Revenues:              
Gross written premium $1,222,468  $117,981  $1,340,449   $1,035,552  $99,157  $1,133,909 (G)
Net written premium 823,127  66,848  889,975   940,757  51,243  992,000  
Net earned premium 891,103  51,803  942,906   939,495  42,256  981,751  
               
Ceding commission income 41,982  13,426  55,408   3,399  18,109  21,508  
Service and fee income 148,108  445  130,501 (A) 137,562  1,494  125,176 (H)
Net investment income 26,183  2,205  25,995 (B) 27,765  2,147  27,531 (I)
Net gain (loss) on investments (18,736) (968) (19,704)  (8,362) 6,187  (2,175) 
Other income (expense)        (6,098)   (6,098) 
Total revenues $1,088,640  $66,911  $1,135,106 (C) $1,093,761  $70,193  $1,147,693 (J)
               
Expenses:              
Loss and loss adjustment expense $628,650  $41,678  $670,328   $677,374  $33,820  $711,194  
Acquisition costs and other underwriting expenses 171,300  10,560  181,860   173,255  15,540  188,795  
General and administrative expenses 219,662  22,819  224,429 (D) 206,865  18,509  211,494 (K)
Interest expense 15,038  2,393  15,038 (E) 11,550  2,381  11,550 (L)
Total expenses $1,034,650  $77,450  $1,091,655 (F) $1,069,044  $70,250  $1,123,033 (M)
               
Income (loss) before provision (benefit) for income taxes $53,990  $(10,539) $43,451   $24,717  $(57) $24,660  
Provision (benefit) for income taxes 9,442  (2,901) 6,541   11,415  72  11,487  
Net income (loss) before non-controlling interest and dividends on preferred shares 44,548  (7,638) 36,910   13,302  (129) 13,173  
Less: net income (loss) attributable to non-controlling interest   (7,638) (7,638)  (30) (129) (159) 
Net income before dividends on preferred shares 44,548    44,548   13,332    13,332  
Less: dividends on preferred shares 7,875    7,875   7,875    7,875  
Net income available to common stockholders $36,673  $  $36,673   $5,457  $  $5,457  
 
NOTES: Consolidated column includes eliminations as follows: (A) $(18,052), (B) $(2,393), (C) $(20,445), (D) $(18,052), (E) $(2,393), (F) $(20,445), (G) $(800), (H) $(13,880), (I) $(2,381), (J) $(16,261), (K) $(13,880), (L) $(2,381) and (M) $(16,261).
 


Income Statement - Year to Date

$ in thousands
(Unaudited)

  Six Months Ended June 30,
  2018  2017 
  NGHC Reciprocal
Exchanges
 Consolidated  NGHC Reciprocal
Exchanges
 Consolidated 
Revenues:              
Gross written premium $2,559,510  $215,670  $2,773,579 (A) $2,207,520  $181,373  $2,387,292 (H)
Net written premium 1,879,192  117,426  1,996,618   2,024,109  92,944  2,117,053  
Net earned premium 1,750,586  97,858  1,848,444   1,818,948  81,288  1,900,236  
               
Ceding commission income 74,940  24,936  99,876   6,146  35,356  41,502  
Service and fee income 302,868  2,891  272,623 (B) 273,425  3,574  251,118 (I)
Net investment income 51,202  4,349  51,006 (C) 56,188  5,031  56,575 (J)
Net gain (loss) on investments (18,487) (1,099) (19,586)  (9,774) 6,187  (3,587) 
Other income        3,703    3,703  
Total revenues $2,161,109  $128,935  $2,252,363 (D) $2,148,636  $131,436  $2,249,547 (K)
               
Expenses:              
Loss and loss adjustment expense $1,218,285  $86,209  $1,304,494   $1,268,091  $61,920  $1,330,011  
Acquisition costs and other underwriting expenses 328,908  21,662  350,570   333,795  29,720  363,515  
General and administrative expenses 446,955  41,615  455,434 (E) 448,948  43,612  466,679 (L)
Interest expense 26,192  4,545  26,192 (F) 23,095  4,644  23,095 (M)
Total expenses $2,020,340  $154,031  $2,136,690 (G) $2,073,929  $139,896  $2,183,300 (N)
               
Income (loss) before provision (benefit) for income taxes $140,769  $(25,096) $115,673   $74,707  $(8,460) $66,247  
Provision (benefit) for income taxes 28,013  (5,270) 22,743   24,452  (2,176) 22,276  
Net income (loss) before non-controlling interest and dividends on preferred shares 112,756  (19,826) 92,930   50,255  (6,284) 43,971  
Less: net income (loss) attributable to non-controlling interest   (19,826) (19,826)    (6,284) (6,284) 
Net income before dividends on preferred shares 112,756    112,756   50,255    50,255  
Less: dividends on preferred shares 15,750    15,750   15,750    15,750  
Net income available to common stockholders $97,006  $  $97,006   $34,505  $  $34,505  
 
NOTES: Consolidated column includes eliminations as follows: (A) $(1,601), (B) $(33,136), (C) $(4,545), (D) $(37,681), (E) $(33,136), (F) $(4,545), (G) $(37,681), (H) $(1,601), (I) $(25,881), (J) $(4,644), (K) $(30,525), (L) $(25,881), (M) $(4,644) and (N) $(30,525).
 


Earnings and Per Share Data

$ in thousands, except shares and per share data
(Unaudited)

  Three Months Ended June 30, Six Months Ended June 30,
  2018 2017 2018 2017
Net income available to common stockholders $36,673  $5,457  $97,006  $34,505 
Basic net income per common share $0.34  $0.05  $0.91  $0.32 
Diluted net income per common share $0.34  $0.05  $0.89  $0.32 
         
Operating earnings attributable to NGHC(1) $59,484  $23,699  $127,107  $59,438 
Basic operating earnings per common share(1) $0.56  $0.22  $1.19  $0.56 
Diluted operating earnings per common share(1) $0.54  $0.22  $1.16  $0.54 
         
Dividends declared per common share $0.04  $0.04  $0.08  $0.08 
         
Weighted average number of basic shares outstanding 106,969,134  106,560,000  106,864,469  106,514,396 
Weighted average number of diluted shares outstanding 109,402,465  109,447,812  109,181,041  109,364,273 
Shares outstanding, end of period 107,057,771  106,607,110     
Fully diluted shares outstanding, end of period 109,374,343  109,507,711     
Book value per share $14.59  $14.24     
Fully diluted book value per share $14.28  $13.86     
 


Reconciliation of Net Income to Operating Earnings (Non-GAAP)
$ in thousands, except per share data
(Unaudited)

  Three Months Ended June 30, Six Months Ended June 30,
  2018 2017 2018 2017
Net income available to common stockholders $36,673  $5,457  $97,006  $34,505 
Add (subtract):        
Net loss on investments 18,736  8,362  18,487  9,774 
Other (income) expense   6,098    (3,703)
Equity in (earnings) losses of equity method investments 834  1,915  2,303  (739)
Non-cash amortization of intangible assets 8,217  11,690  15,137  33,027 
Income tax expense (benefit) (4,976) (9,823) (5,826) (13,426)
Operating earnings attributable to NGHC (1) $59,484  $23,699  $127,107  $59,438 
         
Operating earnings per common share:        
Basic operating earnings per common share $0.56  $0.22  $1.19  $0.56 
Diluted operating earnings per common share $0.54  $0.22  $1.16  $0.54 
 


Balance Sheet
$ in thousands

  June 30, 2018 (unaudited)  December 31, 2017 (audited) 
ASSETS NGHC Reciprocal
Exchanges
 Consolidated  NGHC Reciprocal
Exchanges
 Consolidated 
Total investments (2) $3,415,421  $322,114  $3,636,306 (A) $3,411,730  $327,213  $3,649,788 (J)
Cash and cash equivalents, including restricted cash 399,484  1,844  401,328   351,433  6,051  357,484  
Premiums and other receivables, net 1,634,837  59,426  1,692,662 (B) 1,268,330  56,792  1,324,321 (K)
Reinsurance activity (3) 1,856,515  200,967  2,057,482   1,616,103  195,184  1,811,287  
Intangible assets, net 386,258  3,595  389,853   400,385  3,685  404,070  
Goodwill 181,827    181,827   174,153    174,153  
Other (4) 718,608  31,994  730,276 (C) 705,321  29,174  718,640 (L)
Total assets $8,592,950  $619,940  $9,089,734 (D) $7,927,455  $618,099  $8,439,743 (M)
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Liabilities:              
Unpaid loss and loss adjustment expense reserves $2,560,233  $167,256  $2,727,489   $2,520,204  $143,353  $2,663,557  
Unearned premiums and other revenue 2,055,260  246,763  2,302,023   1,807,210  225,395  2,032,605  
Reinsurance payable 546,300  36,455  581,154 (E) 329,772  69,076  398,047 (N)
Accounts payable and accrued expenses (5) 659,704  25,456  664,834 (F) 423,054  24,682  431,881 (O)
Debt 705,077  101,229  705,077 (G) 713,710  89,155  713,710 (P)
Other 84,160  43,722  127,882   204,936  41,582  246,518  
Total liabilities $6,610,734  $620,881  $7,108,459 (H) $5,998,886  $593,243  $6,486,318 (Q)
Stockholders’ equity:              
Common stock (6) $1,071  $  $1,071   $1,067  $  $1,067  
Preferred stock (7) 420,000    420,000   420,000    420,000  
Additional paid-in capital 921,744    921,744   917,751    917,751  
Accumulated other comprehensive income (loss) (55,698)   (55,698)  (8,112)   (8,112) 
Retained earnings 695,099    695,099   597,863    597,863  
Total National General Holdings Corp. stockholders’ equity 1,982,216    1,982,216   1,928,569    1,928,569  
Non-controlling interest   (941) (941)    24,856  24,856  
Total stockholders’ equity $1,982,216  $(941) $1,981,275   $1,928,569  $24,856  $1,953,425  
Total liabilities and stockholders’ equity $8,592,950  $619,940  $9,089,734 (I) $7,927,455  $618,099  $8,439,743 (R)
 
NOTES: Consolidated column includes eliminations as follows: (A) $(101,229), (B) $(1,601), (C) $(20,326), (D) $(123,156), (E) $(1,601), (F) $(20,326), (G) $(101,229), (H) $(123,156), (I) $(123,156), (J) $(89,155), (K) $(801), (L) $(15,855), (M) $(105,811), (N) $(801), (O) $(15,855), (P) $(89,155), (Q) $(105,811) and (R) $(105,811).


Segment Information - Second Quarter

$ in thousands
(Unaudited)

  Three Months Ended June 30,
  2018  2017
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal
Exchanges
Gross written premium $1,065,632  $156,836  $1,222,468   $117,981   $904,578  $130,974  $1,035,552   $99,157 
Net written premium 683,869  139,258  823,127   66,848   822,508  118,249  940,757   51,243 
Net earned premium 734,934  156,169  891,103   51,803   804,643  134,852  939,495   42,256 
                    
Ceding commission income 41,720  262  41,982   13,426   3,128  271  3,399   18,109 
Service and fee income 105,167  42,941  148,108   445   94,519  43,043  137,562   1,494 
Total underwriting revenues $881,821  $199,372  $1,081,193   $65,674   $902,290  $178,166  $1,080,456   $61,859 
                    
Loss and loss adjustment expense 540,216  88,434  628,650   41,678   591,844  85,530  677,374   33,820 
Acquisition costs and other 123,183  48,117  171,300   10,560   126,496  46,759  173,255   15,540 
General and administrative 172,530  47,132  219,662   22,819   168,023  38,842  206,865   18,509 
Total underwriting expenses $835,929  $183,683  $1,019,612   $75,057   $886,363  $171,131  $1,057,494   $67,869 
                    
Underwriting income (loss) 45,892  15,689  61,581   (9,383)  15,927  7,035  22,962   (6,010)
Non-cash amortization of intangible assets 6,179  2,038  8,217   (26)  10,278  1,412  11,690   (91)
Underwriting income (loss) before amortization and impairment $52,071  $17,727  $69,798   $(9,409)  $26,205  $8,447  $34,652   $(6,101)
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (8) 73.5% 56.6% 70.5%  80.5%  73.6% 63.4% 72.1%  80.0%
Operating expense ratio (Non-GAAP) (9,10) 20.3% 33.3% 22.5%  37.7%  24.5% 31.4% 25.5%  34.2%
Combined ratio (Non-GAAP) (9,11) 93.8% 89.9% 93.0%  118.2%  98.1% 94.8% 97.6%  114.2%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (8) 73.5% 56.6% 70.5%  80.5%  73.6% 63.4% 72.1%  80.0%
Operating expense ratio (Non-GAAP) (9,12) 19.4% 32.0% 21.6%  37.7%  23.2% 30.3% 24.2%  34.4%
Combined ratio before amortization and impairment (Non-GAAP) (9,13) 92.9% 88.6% 92.1%  118.2%  96.8% 93.7% 96.3%  114.4%
 
NOTE: Loss and loss adjustment expenses for the three months ended June 30, 2018 included $5,383 of favorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $8,040 of favorable development in the A&H segment, versus $6,570 of unfavorable development in the P&C segment, and $4,524 of favorable development in the A&H segment for the three months ended June 30, 2017.
 


Segment Information - Year to Date
$ in thousands
(Unaudited)

  Six Months Ended June 30,
  2018  2017
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal
Exchanges
Gross written premium $2,168,898  $390,612  $2,559,510   $215,670   $1,884,591  $322,929  $2,207,520   $181,373 
Net written premium 1,516,581  362,611  1,879,192   117,426   1,724,746  299,363  2,024,109   92,944 
Net earned premium 1,440,541  310,045  1,750,586   97,858   1,555,170  263,778  1,818,948   81,288 
                    
Ceding commission income 74,420  520  74,940   24,936   5,588  558  6,146   35,356 
Service and fee income 214,740  88,128  302,868   2,891   198,109  75,316  273,425   3,574 
Total underwriting revenues $1,729,701  $398,693  $2,128,394   $125,685   $1,758,867  $339,652  $2,098,519   $120,218 
                    
Loss and loss adjustment expense 1,038,573  179,712  1,218,285   86,209   1,113,178  154,913  1,268,091   61,920 
Acquisition costs and other 237,183  91,725  328,908   21,662   255,546  78,249  333,795   29,720 
General and administrative 349,215  97,740  446,955   41,615   364,893  84,055  448,948   43,612 
Total underwriting expenses $1,624,971  $369,177  $1,994,148   $149,486   $1,733,617  $317,217  $2,050,834   $135,252 
                    
Underwriting income (loss) 104,730  29,516  134,246   (23,801)  25,250  22,435  47,685   (15,034)
Non-cash amortization of intangible assets 11,579  3,558  15,137   (53)  30,012  3,015  33,027   6,978 
Underwriting income (loss) before amortization and impairment $116,309  $33,074  $149,383   $(23,854)  $55,262  $25,450  $80,712   $(8,056)
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (8) 72.1% 58.0% 69.6%  88.1%  71.6% 58.7% 69.7%  76.2%
Operating expense ratio (Non-GAAP) (9,10) 20.6% 32.5% 22.7%  36.2%  26.8% 32.8% 27.7%  42.3%
Combined ratio (Non-GAAP) (9,11) 92.7% 90.5% 92.3%  124.3%  98.4% 91.5% 97.4%  118.5%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (8) 72.1% 58.0% 69.6%  88.1%  71.6% 58.7% 69.7%  76.2%
Operating expense ratio (Non-GAAP) (9,12) 19.8% 31.4% 21.9%  36.3%  24.9% 31.6% 25.8%  33.7%
Combined ratio before amortization and impairment (Non-GAAP) (9,13) 91.9% 89.4% 91.5%  124.4%  96.5% 90.3% 95.5%  109.9%
 
NOTE: Loss and loss adjustment expenses for the six months ended June 30, 2018 included $20,552 of favorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $11,423 of favorable development in the A&H segment, versus $2,216 of unfavorable development in the P&C segment, and $12,844 of favorable development in the A&H segment for the six months ended June 30, 2017.
 


Reconciliation of Operating Expense Ratio (Non-GAAP)

$ in thousands
(Unaudited)

  Three Months Ended June 30,
  2018  2017
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal
Exchanges
Total underwriting expenses $835,929  $183,683  $1,019,612   $75,057   $886,363  $171,131  $1,057,494   $67,869 
Less: Loss and loss adjustment expense 540,216  88,434  628,650   41,678   591,844  85,530  677,374   33,820 
Less: Ceding commission income 41,720  262  41,982   13,426   3,128  271  3,399   18,109 
Less: Service and fee income 105,167  42,941  148,108   445   94,519  43,043  137,562   1,494 
Operating expense 148,826  52,046  200,872   19,508   196,872  42,287  239,159   14,446 
Net earned premium $734,934  $156,169  $891,103   $51,803   $804,643  $134,852  $939,495   $42,256 
Operating expense ratio (Non-GAAP) 20.3% 33.3% 22.5%  37.7%  24.5% 31.4% 25.5%  34.2%
                    
Total underwriting expenses $835,929  $183,683  $1,019,612   $75,057   $886,363  $171,131  $1,057,494   $67,869 
Less: Loss and loss adjustment expense 540,216  88,434  628,650   41,678   591,844  85,530  677,374   33,820 
Less: Ceding commission income 41,720  262  41,982   13,426   3,128  271  3,399   18,109 
Less: Service and fee income 105,167  42,941  148,108   445   94,519  43,043  137,562   1,494 
Less: Non-cash amortization of intangible assets 6,179  2,038  8,217   (26)  10,278  1,412  11,690   (91)
Operating expense before amortization and impairment 142,647  50,008  192,655   19,534   186,594  40,875  227,469   14,537 
Net earned premium $734,934  $156,169  $891,103   $51,803   $804,643  $134,852  $939,495   $42,256 
Operating expense ratio before amortization and impairment (Non-GAAP) 19.4% 32.0% 21.6%  37.7%  23.2% 30.3% 24.2%  34.4%
 

Reconciliation of Operating Expense Ratio (Non-GAAP)
$ in thousands
(Unaudited)

  Six Months Ended June 30,
  2018  2017
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal
Exchanges
Total underwriting expenses $1,624,971  $369,177  $1,994,148   $149,486   $1,733,617  $317,217  $2,050,834   $135,252 
Less: Loss and loss adjustment expense 1,038,573  179,712  1,218,285   86,209   1,113,178  154,913  1,268,091   61,920 
Less: Ceding commission income 74,420  520  74,940   24,936   5,588  558  6,146   35,356 
Less: Service and fee income 214,740  88,128  302,868   2,891   198,109  75,316  273,425   3,574 
Operating expense 297,238  100,817  398,055   35,450   416,742  86,430  503,172   34,402 
Net earned premium $1,440,541  $310,045  $1,750,586   $97,858   $1,555,170  $263,778  $1,818,948   $81,288 
Operating expense ratio (Non-GAAP) 20.6% 32.5% 22.7%  36.2%  26.8% 32.8% 27.7%  42.3%
                    
Total underwriting expenses $1,624,971  $369,177  $1,994,148   $149,486   $1,733,617  $317,217  $2,050,834   $135,252 
Less: Loss and loss adjustment expense 1,038,573  179,712  1,218,285   86,209   1,113,178  154,913  1,268,091   61,920 
Less: Ceding commission income 74,420  520  74,940   24,936   5,588  558  6,146   35,356 
Less: Service and fee income 214,740  88,128  302,868   2,891   198,109  75,316  273,425   3,574 
Less: Non-cash amortization of intangible assets 11,579  3,558  15,137   (53)  30,012  3,015  33,027   6,978 
Operating expense before amortization and impairment 285,659  97,259  382,918   35,503   386,730  83,415  470,145   27,424 
Net earned premium $1,440,541  $310,045  $1,750,586   $97,858   $1,555,170  $263,778  $1,818,948   $81,288 
Operating expense ratio before amortization and impairment (Non-GAAP) 19.8% 31.4% 21.9%  36.3%  24.9% 31.6% 25.8%  33.7%
 


Premiums by Business Line

$ in thousands
(Unaudited)

  Three Months Ended June 30,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2018 2017 Change  2018 2017 Change  2018 2017 Change
Property & Casualty                    
Personal Auto $632,225  $514,990  22.8%  $485,724  $471,372  3.0%  $486,438  $495,225  (1.8)%
Homeowners 190,706  151,984  25.5%  50,304  131,926  (61.9)%  79,658  110,570  (28.0)%
RV/Packaged 59,999  52,598  14.1%  59,118  52,190  13.3%  48,993  43,314  13.1%
Small Business Auto 84,986  80,890  5.1%  63,432  72,864  (12.9)%  60,104  70,324  (14.5)%
Lender-placed insurance 80,599  90,374  (10.8)%  14,887  86,525  (82.8)%  53,694  79,201  (32.2)%
Other 17,117  13,742  24.6%  10,404  7,631  36.3%  6,047  6,009  0.6%
Property & Casualty 1,065,632  904,578  17.8%  683,869  822,508  (16.9)%  734,934  804,643  (8.7)%
                     
Accident & Health 156,836  130,974  19.7%  139,258  118,249  17.8%  156,169  134,852  15.8%
Total National General $1,222,468  $1,035,552  18.0%  $823,127  $940,757  (12.5)%  $891,103  $939,495  (5.2)%
                     
Reciprocal Exchanges                    
Personal Auto $42,065  $35,221  19.4%  $14,520  $21,601  (32.8)%  $12,462  $17,239  (27.7)%
Homeowners 74,895  63,049  18.8%  52,016  29,174  78.3%  39,109  24,613  58.9%
Other 1,021  887  15.1%  312  468  (33.3)%  232  404  (42.6)%
Reciprocal Exchanges $117,981  $99,157  19.0%  $66,848  $51,243  30.5%  $51,803  $42,256  22.6%
                     
Consolidated Total (A) $1,340,449  $1,133,909  18.2%  $889,975  $992,000  (10.3)%  $942,906  $981,751  (4.0)%
 
NOTES: (A) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(287) in Personal Auto and $(513) in Homeowners Gross Written Premium in 2017, respectively.
 


Premiums by Business Line

$ in thousands
(Unaudited)

  Six Months Ended June 30,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2018 2017 Change  2018 2017 Change  2018 2017 Change
Property & Casualty                    
Personal Auto $1,357,437  $1,162,171  16.8%  $1,039,721  $1,068,251  (2.7)%  $940,654  $949,640  (0.9)%
Homeowners 331,993  266,709  24.5%  142,900  236,471  (39.6)%  161,853  214,699  (24.6)%
RV/Packaged 109,463  97,352  12.4%  108,307  96,709  12.0%  94,682  83,964  12.8%
Small Business Auto 171,230  167,266  2.4%  128,159  152,072  (15.7)%  118,666  133,565  (11.2)%
Lender-placed insurance 165,533  166,644  (0.7)%  78,101  159,357  (51.0)%  114,163  162,942  (29.9)%
Other 33,242  24,449  36.0%  19,393  11,886  63.2%  10,523  10,360  1.6%
Property & Casualty 2,168,898  1,884,591  15.1%  1,516,581  1,724,746  (12.1)%  1,440,541  1,555,170  (7.4)%
                     
Accident & Health 390,612  322,929  21.0%  362,611  299,363  21.1%  310,045  263,778  17.5%
Total National General $2,559,510  $2,207,520  15.9%  $1,879,192  $2,024,109  (7.2)%  $1,750,586  $1,818,948  (3.8)%
                     
Reciprocal Exchanges                    
Personal Auto $76,362  $63,380  20.5%  $28,015  $38,707  (27.6)%  $25,459  $33,356  (23.7)%
Homeowners 137,416  116,376  18.1%  88,824  53,390  66.4%  71,880  47,151  52.4%
Other 1,892  1,617  17.0%  587  847  (30.7)%  519  781  (33.5)%
Reciprocal Exchanges $215,670  $181,373  18.9%  $117,426  $92,944  26.3%  $97,858  $81,288  20.4%
                     
Consolidated Total (A) $2,773,579  $2,387,292  16.2%  $1,996,618  $2,117,053  (5.7)%  $1,848,444  $1,900,236  (2.7)%
 
NOTES: (A) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(567) in Personal Auto and $(1,034) in Homeowners Gross Written Premium in 2018, respectively, and $(564) in Personal Auto and $(1,037) in Homeowners Gross Written Premium in 2017, respectively.
 

Additional Disclosures

(1) References to operating earnings and basic and diluted operating earnings per share (“EPS”) are non-GAAP financial measures defined by the Company as net income/loss and basic and diluted earnings per share excluding after-tax net gain or loss on investments (including foreign exchange gain or loss), other-than-temporary impairment losses, bargain purchase gains, earnings or losses of equity method investments (related parties), deferred tax asset impairment, non-cash impairment of goodwill and non-cash amortization of intangible assets. The Company believes operating earnings and basic and diluted operating EPS are relevant measures of the Company’s profitability because operating earnings and basic and diluted operating EPS contain the components of net income upon which the Company’s management has the most influence and excludes factors outside management’s direct control and non-recurring items. Other companies may calculate these measures differently, and therefore, their measures may not be comparable to those used by National General. Please see the Non-GAAP Financial Measures table within this release for the reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

(2) Total investments includes $233,092 and $347,548 in related parties at June 30, 2018 and December 31, 2017, respectively.

(3) Reinsurance activity includes $9,891 and $15,688 from related parties at June 30, 2018 and December 31, 2017, respectively.

(4) Other includes $2,348 and $2,334 from related parties at June 30, 2018 and December 31, 2017, respectively.

(5) Accounts payable and accrued expenses includes $72,415 and $140,057 to related parties at June 30, 2018 and December 31, 2017, respectively.

(6) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 107,057,771 shares - June 30, 2018; authorized 150,000,000 shares, issued and outstanding 106,697,648 shares - December 31, 2017.

(7) Preferred stock: $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - June 30, 2018; authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - December 31, 2017.

(8) Loss and loss adjustment expense ratio is calculated by dividing loss and loss adjustment expense by net earned premium.

(9) Operating expense ratio and combined ratio are considered non-GAAP financial measures under applicable SEC rules because a component of those ratios, operating expense, is calculated by offsetting acquisition and other underwriting costs and general and administrative expenses by ceding commission income and service and fee income. Management uses operating expense ratio (non-GAAP) and combined ratio (non-GAAP) to evaluate financial performance against historical results and establish targets on a consolidated basis. The Company believes 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 National General. Please see the Non-GAAP Financial Measures table within this release for the reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

(10) Operating expense ratio is a non-GAAP measure defined by the Company, that is commonly used in the insurance industry. The Company calculates the ratio by dividing operating expense by net earned premium. Operating expense consists of the sum of acquisition and other underwriting costs and general and administrative expenses less ceding commission income and service and fee income. The ratio is used as an indicator of the Company’s efficiency in acquiring and servicing its business. Other companies may calculate these measures differently, and therefore, their measures may not be comparable to those used by National General. Please see the Non-GAAP Financial Measures table within this release for the reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

(11) Combined ratio is a non-GAAP measure defined by the Company, that is commonly used in the insurance industry. The Company calculates the ratio by adding the loss and loss adjustment expense ratio and the operating expense ratio (non-GAAP) together. The ratio is used as an indicator of the Company’s underwriting discipline, efficiency in acquiring and servicing its business, and overall underwriting profit. A combined ratio under 100% generally indicates an underwriting profit, while over 100% an underwriting loss. Other companies may calculate these measures differently, and therefore, their measures may not be comparable to those used by National General.

(12) Operating expense ratio before amortization and impairment is a non-GAAP measure defined by the Company, that is commonly used in the insurance industry. The Company calculates the ratio by dividing the operating expense before amortization and impairment by net earned premium. Operating expense before amortization and impairment consists of the sum of acquisition and other underwriting costs and general and administrative expenses less ceding commission income and service and fee income less non-cash amortization of intangible assets and non-cash impairment of goodwill. The ratio is used as an indicator of the Company’s efficiency in acquiring and servicing its business. Other companies may calculate these measures differently, and therefore, their measures may not be comparable to those used by National General. Please see the Non-GAAP Financial Measures table within this release for the reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

(13) Combined ratio before amortization and impairment is a non-GAAP measure defined by the Company, that is commonly used in the insurance industry. The Company calculates the ratio by adding the loss and loss adjustment expense ratio and the operating expense ratio before amortization and impairment (non-GAAP) together. The ratio is used as an indicator of the Company’s underwriting discipline, efficiency in acquiring and servicing its business, and overall underwriting profit. A combined ratio under 100% generally indicates an underwriting profit, while over 100% an underwriting loss. Other companies may calculate these measures differently, and therefore, their measures may not be comparable to those used by National General. Please see the Non-GAAP Financial Measures table within this release for the reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

(14) Trailing twelve month operating return on average equity is the ratio of the previous twelve months operating earnings to average shareholders’ equity for the periods presented. Average shareholders’ equity is the sum of the shareholders’ equity excluding preferred stock at the beginning and end of the period presented divided by two. In the opinion of the Company’s management this ratio is an important indicator of how well management creates value for its shareholders through its operating activities and capital management. Other companies may calculate these measures differently, and therefore, their measures may not be comparable to those used by National General. Please see the Non-GAAP Financial Measures table within this release for the reconciliation of net income to operating earnings, which is the Non-GAAP component of the operating return on average equity.

(15) Combined ratio excluding losses from various Q2’18 weather-related events, and is calculated by taking the combined ratio as defined in Note 13, and adjusting it to exclude the total net losses of $20.5 million from these events. The company believes this measure enhances investors’ understanding of our results by eliminating what we believe are volatile and unusual events.

  Q2’18 Combined
Ratio
 Impact of Q2’18
Weather-related
Events
 Q2’18 Combined
Ratio Excluding
Weather-related
Events
P&C Segment 92.9% 2.8% 90.1%
       
Overall NGHC 92.1% 2.3% 89.8%

Investor Contact

Christine Worley
Director of Investor Relations
Phone: 212-380-9462
Email: Christine.Worley@NGIC.com 

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