National General Holdings Corp. Reports Third Quarter 2018 Results

NEW YORK, Oct. 30, 2018 (GLOBE NEWSWIRE) -- National General Holdings Corp. (Nasdaq:NGHC) today reported third quarter 2018 net income of $60.5 million or $0.55 per diluted share, compared to net income of $49.8 million or $0.46 per diluted share in the third quarter of 2017. Third quarter 2018 operating earnings(1) was $70.8 million or $0.65 per diluted share, compared to $28.7 million or $0.26 per diluted share in the third quarter of 2017.

Third Quarter 2018 Highlights Versus Third Quarter 2017*

  • Gross written premium grew $133.6 million or 12.1% to $1,234.3 million, driven by continued organic growth in our P&C segment of 11.3% and in our A&H segment of 18.7%.

  • In the third quarter, our homeowners’ product experienced organic growth of 24.6% 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 10.3% driven by continued rate increases and PIF growth.

  • The overall combined ratio(9,13) was 91.3% compared to 96.8% in the prior year’s quarter, excluding non-cash amortization of intangible assets. The P&C segment reported a decrease in combined ratio to 94.4% from 98.1% in the prior year’s quarter. The combined ratio includes $35.0 million of losses, or 4.7 P&C loss ratio points, primarily related to Hurricane Florence and the California Fires in the third quarter 2018, compared to $52.4 million of losses, or 7.6 P&C loss ratio points, from events in the third quarter 2017. The A&H segment reported a combined ratio of 77.0% compared to 89.7% in the prior year’s quarter.

  • Loss trends in both of our segments remained strong in the quarter.  The P&C loss ratio reflects favorable loss trends for accident year 2018 compared with prior accident years at the same age, particularly on the shorter-tailed auto physical damage claims, which improved our view of the current accident year loss ratio.  The A&H loss ratio reflects an improvement in our view of the current accident year loss ratio for both small group self-funded and individual products.

  • Service and fee income grew 20.6% to $160.4 million, driven by organic growth in both our Accident & Health and Property & Casualty segments.

  • Shareholders’ equity was $2.06 billion and fully diluted book value per share was $14.66 at September 30, 2018, growth of 6.7% and 5.8%, respectively, from December 31, 2017. Our trailing twelve month operating return on average equity (ROE)(14) was 14.5% as of September 30, 2018.

  • Third quarter 2018 operating earnings exclude the following material items, net of tax: $2.4 million or $0.02 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: “Our third quarter results continue to demonstrate the underwriting results that both our Property and Casualty and Accident and Health segments are able to generate with the full integration of past acquisitions.  Despite another active catastrophe quarter, our P&C segment was able to generate a 94% combined ratio, largely driven by strong trends in our auto book.  Our A&H segment continues to grow profitably, and our suite of products and owned distribution positions us well in the changing domestic healthcare environment.  I am pleased with the continued execution of our strategy: continued profitable growth within the niches of the insurance industry we serve.”

*NOTE: Unless specified otherwise, discussion of our third 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 Third Quarter 2018 as Compared to Third Quarter 2017 by Segment

  • Property & Casualty - Gross written premium grew by 11.3% to $1,090.4 million, net written premium increased by 67.7% to $784.6 million, with net premiums written for the third quarter of 2017 impacted by the unearned premium transfer associated with the Quota Shares, and net earned premium increased by 7.9% to $741.0 million. P&C gross written premium growth was primarily driven by organic growth of 24.6% from our homeowners’ product and 10.3% from our personal auto product. Service and fee income grew 13.3% to $114.0 million. Excluding non-cash amortization of intangible assets, the combined ratio(9,13) was 94.4% with a loss ratio of 73.5% and an expense ratio(9,12) of 20.9%, versus a prior year combined ratio of 98.1% with a loss ratio of 77.0% and an expense ratio of 21.1%. The loss ratio reflects favorable loss trends for accident year 2018 compared with prior accident years at the same age, particularly on the shorter-tailed auto physical damage claims, which improved our view of the current accident year loss ratio. The loss ratio was also impacted by pre-tax catastrophe losses of approximately $35.0 million primarily related to Hurricane Florence and the California Fires in the third quarter 2018.
     
  • Accident & Health - Gross written premium grew by 18.7% to $143.9 million, net written premium grew by 12.1% to $123.6 million, and net earned premium grew by 14.5% to $155.3 million. The A&H gross written premium increase was driven by the continued growth across the entire book. Service and fee income was $46.5 million compared to $32.5 million in the prior year’s quarter. Excluding non-cash amortization of intangible assets, the combined ratio(9,13) was 77.0% with a loss ratio of 46.8% and an expense ratio(9,12) of 30.2%, versus a prior year combined ratio of 89.7% with a loss ratio of 61.5% and an expense ratio of 28.2%. The loss ratio reflects an improvement in our view of the current accident year loss ratio for both small group self-funded and individual products.
     
  • Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $121.4 million, net written premium was $14.8 million, and net earned premium was $43.2 million. Reciprocal Exchanges combined ratio(9,13) excluding non-cash amortization of intangible assets was 129.3% with a loss ratio of 93.2% and an expense ratio(9,12) of 36.1%.

Third quarter 2018 investment income grew to $31.0 million, compared to $25.4 million in the third quarter of 2017, with the increase partially driven by an improvement in the book yield from the previous quarter’s re-balancing and new investments in the quarter. Total investments and cash and cash equivalents (including restricted cash) were $4.1 billion as of September 30, 2018. Accumulated other comprehensive income (loss) increased to a $68.6 million loss at September 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 was $12.6 million and debt was $675.3 million at September 30, 2018, and $713.7 million at December 31, 2017.

The third quarter of 2018 provision for income taxes was $16.4 million and the effective tax rate for the quarter was 19.4%. The effective tax rate for the nine months ended September 30, 2018 was 19.7%.

Shareholders’ equity was $2,056.9 million at September 30, 2018, growth of 6.7% from $1,928.6 million at December 31, 2017. Fully diluted book value per share was $14.66 at September 30, 2018, growth of 5.8% from $13.86 at December 31, 2017. Our trailing twelve month operating return on average equity (ROE)(14) was 14.5% as of September 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
Q3California Fires and Hurricane Florence $35.0 4.7% $0.25
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

We expect Hurricane Michael, which impacted the Southeastern U.S. in October 2018, to produce pre-tax losses of $7-10 million ($6-8 million after-tax) in Q4’18, net of quota share reinsurance recoverables.

Conference Call

On Wednesday, October 31, 2018 at 8:30 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:      888-346-7359
International Dial-in:       973-528-0008
Conference Entry Code:   626384
Webcast Registration:      http://ir.nationalgeneral.com/events-and-presentations 

A replay of the conference call will be accessible from 2:00 PM ET on Wednesday, October 31, 2018 to 11:59 PM ET on Wednesday, November 14, 2018 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 626384. 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 - Third Quarter
$ in thousands
(Unaudited)

  Three Months Ended September 30,
  2018  2017 
  NGHC Reciprocal Exchanges Consolidated  NGHC Reciprocal Exchanges Consolidated 
Revenues:              
Gross written premium $1,234,320  $121,351  $1,355,671   $1,100,706  $104,406  $1,204,311 (G)
Net written premium 908,210  14,814  923,024   578,021  43,533  621,554  
Net earned premium 896,376  43,151  939,527   822,323  41,978  864,301  
               
Ceding commission income 44,513  14,587  59,100   30,901  19,201  50,102  
Service and fee income 160,425  1,575  142,690 (A) 133,057  4,084  122,526 (H)
Net investment income 30,984  2,344  30,696 (B) 25,426  2,189  25,150 (I)
Net gain (loss) on investments (3,003) (167) (3,170)  47,659  (54) 47,605  
Other income (expense)        (3,901)   (3,901) 
Total revenues $1,129,295  $61,490  $1,168,843 (C) $1,055,465  $67,398  $1,105,783 (J)
               
Expenses:              
Loss and loss adjustment expense $617,098  $40,212  $657,310   $612,289  $26,856  $639,145  
Acquisition costs and other underwriting expenses 180,180  11,290  191,470   146,469  17,116  163,585  
General and administrative expenses 234,626  20,417  235,733 (D) 209,923  18,819  214,127 (K)
Interest expense 12,583  2,632  12,583 (E) 11,495  2,465  11,495 (L)
Total expenses $1,044,487  $74,551  $1,097,096 (F) $980,176  $65,256  $1,028,352 (M)
               
Income (loss) before provision (benefit) for income taxes $84,808  $(13,061) $71,747   $75,289  $2,142  $77,431  
Provision (benefit) for income taxes 16,426  (908) 15,518   17,644  831  18,475  
Net income (loss) before non-controlling interest and dividends on preferred shares 68,382  (12,153) 56,229   57,645  1,311  58,956  
Less: net income (loss) attributable to non-controlling interest   (12,153) (12,153)    1,311  1,311  
Net income before dividends on preferred shares 68,382    68,382   57,645    57,645  
Less: dividends on preferred shares 7,875    7,875   7,875    7,875  
Net income available to common stockholders $60,507  $  $60,507   $49,770  $  $49,770  

NOTES: Consolidated column includes eliminations as follows: (A) $(19,310), (B) $(2,632), (C) $(21,942), (D) $(19,310), (E) $(2,632), (F) $(21,942), (G) $(801), (H) $(14,615), (I) $(2,465), (J) $(17,080), (K) $(14,615), (L) $(2,465) and (M) $(17,080).


Income Statement - Year to Date
$ in thousands
(Unaudited)

  Nine Months Ended September 30,
  2018  2017 
  NGHC Reciprocal Exchanges Consolidated  NGHC Reciprocal Exchanges Consolidated 
Revenues:              
Gross written premium $3,793,830  $337,021  $4,129,250 (A) $3,308,226  $285,779  $3,591,603 (H)
Net written premium 2,787,402  132,240  2,919,642   2,602,130  136,477  2,738,607  
Net earned premium 2,646,962  141,009  2,787,971   2,641,271  123,266  2,764,537  
               
Ceding commission income 119,453  39,523  158,976   37,047  54,557  91,604  
Service and fee income 463,293  4,466  415,313 (B) 406,482  7,658  373,644 (I)
Net investment income 82,186  6,693  81,702 (C) 81,614  7,220  81,725 (J)
Net gain (loss) on investments (21,490) (1,266) (22,756)  37,885  6,133  44,018  
Other income        (198)   (198) 
Total revenues $3,290,404  $190,425  $3,421,206 (D) $3,204,101  $198,834  $3,355,330 (K)
               
Expenses:              
Loss and loss adjustment expense $1,835,383  $126,421  $1,961,804   $1,880,380  $88,776  $1,969,156  
Acquisition costs and other underwriting expenses 509,088  32,952  542,040   480,264  46,836  527,100  
General and administrative expenses 681,581  62,032  691,167 (E) 658,871  62,431  680,806 (L)
Interest expense 38,775  7,177  38,775 (F) 34,590  7,109  34,590 (M)
Total expenses $3,064,827  $228,582  $3,233,786 (G) $3,054,105  $205,152  $3,211,652 (N)
               
Income (loss) before provision (benefit) for income taxes $225,577  $(38,157) $187,420   $149,996  $(6,318) $143,678  
Provision (benefit) for income taxes 44,439  (6,178) 38,261   42,096  (1,345) 40,751  
Net income (loss) before non-controlling interest and dividends on preferred shares 181,138  (31,979) 149,159   107,900  (4,973) 102,927  
Less: net income (loss) attributable to non-controlling interest   (31,979) (31,979)    (4,973) (4,973) 
Net income before dividends on preferred shares 181,138    181,138   107,900    107,900  
Less: dividends on preferred shares 23,625    23,625   23,625    23,625  
Net income available to common stockholders $157,513  $  $157,513   $84,275  $  $84,275  

NOTES: Consolidated column includes eliminations as follows: (A) $(1,601), (B) $(52,446), (C) $(7,177), (D) $(59,623), (E) $(52,446), (F) $(7,177), (G) $(59,623), (H) $(2,402), (I) $(40,496), (J) $(7,109), (K) $(47,605), (L) $(40,496), (M) $(7,109) and (N) $(47,605).


Earnings and Per Share Data
$ in thousands, except shares and per share data
(Unaudited)

  Three Months Ended
September 30,
 Nine Months Ended
September 30,
  2018 2017 2018 2017
Net income available to common stockholders $60,507  $49,770  $157,513  $84,275 
Basic net income per common share $0.56  $0.47  $1.47  $0.79 
Diluted net income per common share $0.55  $0.46  $1.44  $0.78 
         
Operating earnings attributable to NGHC(1) $70,798  $28,653  $197,905  $88,091 
Basic operating earnings per common share(1) $0.66  $0.27  $1.85  $0.83 
Diluted operating earnings per common share(1) $0.65  $0.26  $1.81  $0.81 
         
Dividends declared per common share $0.04  $0.04  $0.12  $0.12 
         
Weighted average number of basic shares outstanding 107,101,837  106,645,601  106,944,461  106,556,662 
Weighted average number of diluted shares outstanding 109,563,392  108,520,964  109,315,780  108,690,139 
Shares outstanding, end of period 107,132,560  106,670,768     
Fully diluted shares outstanding, end of period 109,594,115  108,546,131     
Book value per share $15.00  $14.44     
Fully diluted book value per share $14.66  $14.19     


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

  Three Months Ended
September 30,
 Nine Months Ended
September 30,
  2018 2017 2018 2017
Net income available to common stockholders $60,507  $49,770  $157,513  $84,275 
Add (subtract):        
Net (gain) loss on investments 3,003  (47,659) 21,490  (37,885)
Other expense   3,901    198 
Equity in (earnings) losses of equity method investments 676  1,997  2,979  1,258 
Non-cash amortization of intangible assets 8,260  9,274  23,397  42,301 
Income tax expense (benefit) (1,648) 11,370  (7,474) (2,056)
Operating earnings attributable to NGHC (1) $70,798  $28,653  $197,905  $88,091 
         
Operating earnings per common share:        
Basic operating earnings per common share $0.66  $0.27  $1.85  $0.83 
Diluted operating earnings per common share $0.65  $0.26  $1.81  $0.81 


Balance Sheet
$ in thousands

  September 30, 2018 (unaudited)  December 31, 2017 (audited) 
ASSETS NGHC Reciprocal Exchanges Consolidated  NGHC Reciprocal Exchanges Consolidated 
Total investments (2) $3,644,476  $320,337  $3,863,534 (A) $3,411,730  $327,213  $3,649,788 (J)
Cash and cash equivalents, including restricted cash 434,667  263  434,930   351,433  6,051  357,484  
Premiums and other receivables, net 1,398,843  64,090  1,461,332 (B) 1,268,330  56,792  1,324,321 (K)
Reinsurance activity (3) 1,951,021  256,773  2,207,794   1,616,103  195,184  1,811,287  
Intangible assets, net 379,652  3,550  383,202   400,385  3,685  404,070  
Goodwill 183,984    183,984   174,153    174,153  
Other (4) 704,870  32,350  714,312 (C) 705,321  29,174  718,640 (L)
Total assets $8,697,513  $677,363  $9,249,088 (D) $7,927,455  $618,099  $8,439,743 (M)
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Liabilities:              
Unpaid loss and loss adjustment expense reserves $2,679,190  $175,945  $2,855,135   $2,520,204  $143,353  $2,663,557  
Unearned premiums and other revenue 2,067,437  264,418  2,331,855   1,807,210  225,395  2,032,605  
Reinsurance payable 594,460  62,833  655,692 (E) 329,772  69,076  398,047 (N)
Accounts payable and accrued expenses (5) 460,498  27,299  464,889 (F) 423,054  24,682  431,881 (O)
Debt 675,263  101,279  675,263 (G) 713,710  89,155  713,710 (P)
Other 163,731  59,544  223,275   204,936  41,582  246,518  
Total liabilities $6,640,579  $691,318  $7,206,109 (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) 450,000    450,000   420,000    420,000  
Additional paid-in capital 923,124    923,124   917,751    917,751  
Accumulated other comprehensive income (loss) (68,581)   (68,581)  (8,112)   (8,112) 
Retained earnings 751,320    751,320   597,863    597,863  
Total National General Holdings Corp. stockholders’ equity 2,056,934    2,056,934   1,928,569    1,928,569  
Non-controlling interest   (13,955) (13,955)    24,856  24,856  
Total stockholders’ equity $2,056,934  $(13,955) $2,042,979   $1,928,569  $24,856  $1,953,425  
Total liabilities and stockholders’ equity $8,697,513  $677,363  $9,249,088 (I) $7,927,455  $618,099  $8,439,743 (R)

NOTES: Consolidated column includes eliminations as follows: (A) $(101,279), (B) $(1,601), (C) $(22,908), (D) $(125,788), (E) $(1,601), (F) $(22,908), (G) $(101,279), (H) $(125,788), (I) $(125,788), (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 - Third Quarter
$ in thousands
(Unaudited)

  Three Months Ended September 30,
  2018  2017
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal Exchanges
Gross written premium $1,090,372  $143,948  $1,234,320   $121,351   $979,440  $121,266  $1,100,706   $104,406 
Net written premium 784,634  123,576  908,210   14,814   467,824  110,197  578,021   43,533 
Net earned premium 741,030  155,346  896,376   43,151   686,596  135,727  822,323   41,978 
                    
Ceding commission income 44,244  269  44,513   14,587   30,675  226  30,901   19,201 
Service and fee income 113,967  46,458  160,425   1,575   100,565  32,492  133,057   4,084 
Total underwriting revenues $899,241  $202,073  $1,101,314   $59,313   $817,836  $168,445  $986,281   $65,263 
                    
Loss and loss adjustment expense 544,446  72,652  617,098   40,212   528,875  83,414  612,289   26,856 
Acquisition costs and other 135,406  44,774  180,180   11,290   112,643  33,826  146,469   17,116 
General and administrative 184,101  50,525  234,626   20,417   171,460  38,463  209,923   18,819 
Total underwriting expenses $863,953  $167,951  $1,031,904   $71,919   $812,978  $155,703  $968,681   $62,791 
                    
Underwriting income (loss) 35,288  34,122  69,410   (12,606)  4,858  12,742  17,600   2,472 
Non-cash amortization of intangible assets 6,546  1,714  8,260   (14)  7,994  1,280  9,274   (69)
Underwriting income (loss) before amortization and impairment $41,834  $35,836  $77,670   $(12,620)  $12,852  $14,022  $26,874   $2,403 
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (8) 73.5% 46.8% 68.8%  93.2%  77.0% 61.5% 74.5%  64.0%
Operating expense ratio (Non-GAAP) (9,10) 21.8% 31.3% 23.4%  36.0%  22.3% 29.2% 23.4%  30.1%
Combined ratio (Non-GAAP) (9,11) 95.3% 78.1% 92.2%  129.2%  99.3% 90.7% 97.9%  94.1%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (8) 73.5% 46.8% 68.8%  93.2%  77.0% 61.5% 74.5%  64.0%
Operating expense ratio (Non-GAAP) (9,12) 20.9% 30.2% 22.5%  36.1%  21.1% 28.2% 22.3%  30.3%
Combined ratio before amortization and impairment (Non-GAAP) (9,13) 94.4% 77.0% 91.3%  129.3%  98.1% 89.7% 96.8%  94.3%

NOTE: Loss and loss adjustment expenses for the three months ended September 30, 2018 included $7,234 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $13,200 of favorable development in the A&H segment, versus $4,961 of unfavorable development in the P&C segment, and $2,738 of unfavorable development in the A&H segment for the three months ended September 30, 2017.


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

  Nine Months Ended September 30,
  2018  2017
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal Exchanges
Gross written premium $3,259,270  $534,560  $3,793,830   $337,021   $2,864,031  $444,195  $3,308,226   $285,779 
Net written premium 2,301,215  486,187  2,787,402   132,240   2,192,570  409,560  2,602,130   136,477 
Net earned premium 2,181,571  465,391  2,646,962   141,009   2,241,766  399,505  2,641,271   123,266 
                    
Ceding commission income 118,664  789  119,453   39,523   36,263  784  37,047   54,557 
Service and fee income 328,707  134,586  463,293   4,466   298,674  107,808  406,482   7,658 
Total underwriting revenues $2,628,942  $600,766  $3,229,708   $184,998   $2,576,703  $508,097  $3,084,800   $185,481 
                    
Loss and loss adjustment expense 1,583,019  252,364  1,835,383   126,421   1,642,053  238,327  1,880,380   88,776 
Acquisition costs and other 372,589  136,499  509,088   32,952   368,189  112,075  480,264   46,836 
General and administrative 533,316  148,265  681,581   62,032   536,353  122,518  658,871   62,431 
Total underwriting expenses $2,488,924  $537,128  $3,026,052   $221,405   $2,546,595  $472,920  $3,019,515   $198,043 
                    
Underwriting income (loss) 140,018  63,638  203,656   (36,407)  30,108  35,177  65,285   (12,562)
Non-cash amortization of intangible assets 18,125  5,272  23,397   (67)  38,006  4,295  42,301   6,909 
Underwriting income (loss) before amortization and impairment $158,143  $68,910  $227,053   $(36,474)  $68,114  $39,472  $107,586   $(5,653)
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (8) 72.6% 54.2% 69.3%  89.7%  73.2% 59.7% 71.2%  72.0%
Operating expense ratio (Non-GAAP) (9,10) 21.0% 32.1% 23.0%  36.2%  25.4% 31.5% 26.3%  38.2%
Combined ratio (Non-GAAP) (9,11) 93.6% 86.3% 92.3%  125.9%  98.6% 91.2% 97.5%  110.2%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (8) 72.6% 54.2% 69.3%  89.7%  73.2% 59.7% 71.2%  72.0%
Operating expense ratio (Non-GAAP) (9,12) 20.2% 31.0% 22.1%  36.2%  23.7% 30.5% 24.7%  32.6%
Combined ratio before amortization and impairment (Non-GAAP) (9,13) 92.8% 85.2% 91.4%  125.9%  96.9% 90.2% 95.9%  104.6%

NOTE: Loss and loss adjustment expenses for the nine months ended September 30, 2018 included $13,318 of favorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $24,623 of favorable development in the A&H segment, versus $7,177 of unfavorable development in the P&C segment, and $10,106 of favorable development in the A&H segment for the nine months ended September 30, 2017.


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

  Three Months Ended September 30,
  2018  2017
  P&C A&H NGHC  Reciprocal Exchanges  P&C A&H NGHC  Reciprocal Exchanges
Total underwriting expenses $863,953  $167,951  $1,031,904   $71,919   $812,978  $155,703  $968,681   $62,791 
Less: Loss and loss adjustment expense 544,446  72,652  617,098   40,212   528,875  83,414  612,289   26,856 
Less: Ceding commission income 44,244  269  44,513   14,587   30,675  226  30,901   19,201 
Less: Service and fee income 113,967  46,458  160,425   1,575   100,565  32,492  133,057   4,084 
Operating expense 161,296  48,572  209,868   15,545   152,863  39,571  192,434   12,650 
Net earned premium $741,030  $155,346  $896,376   $43,151   $686,596  $135,727  $822,323   $41,978 
Operating expense ratio (Non-GAAP) 21.8% 31.3% 23.4%  36.0%  22.3% 29.2% 23.4%  30.1%
                    
Total underwriting expenses $863,953  $167,951  $1,031,904   $71,919   $812,978  $155,703  $968,681   $62,791 
Less: Loss and loss adjustment expense 544,446  72,652  617,098   40,212   528,875  83,414  612,289   26,856 
Less: Ceding commission income 44,244  269  44,513   14,587   30,675  226  30,901   19,201 
Less: Service and fee income 113,967  46,458  160,425   1,575   100,565  32,492  133,057   4,084 
Less: Non-cash amortization of intangible assets 6,546  1,714  8,260   (14)  7,994  1,280  9,274   (69)
Operating expense before amortization and impairment 154,750  46,858  201,608   15,559   144,869  38,291  183,160   12,719 
Net earned premium $741,030  $155,346  $896,376   $43,151   $686,596  $135,727  $822,323   $41,978 
Operating expense ratio before amortization and impairment (Non-GAAP) 20.9% 30.2% 22.5%  36.1%  21.1% 28.2% 22.3%  30.3%


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

  Nine Months Ended September 30,
  2018  2017
  P&C A&H NGHC  Reciprocal Exchanges  P&C A&H NGHC  Reciprocal Exchanges
Total underwriting expenses $2,488,924  $537,128  $3,026,052   $221,405   $2,546,595  $472,920  $3,019,515   $198,043 
Less: Loss and loss adjustment expense 1,583,019  252,364  1,835,383   126,421   1,642,053  238,327  1,880,380   88,776 
Less: Ceding commission income 118,664  789  119,453   39,523   36,263  784  37,047   54,557 
Less: Service and fee income 328,707  134,586  463,293   4,466   298,674  107,808  406,482   7,658 
Operating expense 458,534  149,389  607,923   50,995   569,605  126,001  695,606   47,052 
Net earned premium $2,181,571  $465,391  $2,646,962   $141,009   $2,241,766  $399,505  $2,641,271   $123,266 
Operating expense ratio (Non-GAAP) 21.0% 32.1% 23.0%  36.2%  25.4% 31.5% 26.3%  38.2%
                    
Total underwriting expenses $2,488,924  $537,128  $3,026,052   $221,405   $2,546,595  $472,920  $3,019,515   $198,043 
Less: Loss and loss adjustment expense 1,583,019  252,364  1,835,383   126,421   1,642,053  238,327  1,880,380   88,776 
Less: Ceding commission income 118,664  789  119,453   39,523   36,263  784  37,047   54,557 
Less: Service and fee income 328,707  134,586  463,293   4,466   298,674  107,808  406,482   7,658 
Less: Non-cash amortization of intangible assets 18,125  5,272  23,397   (67)  38,006  4,295  42,301   6,909 
Operating expense before amortization and impairment 440,409  144,117  584,526   51,062   531,599  121,706  653,305   40,143 
Net earned premium $2,181,571  $465,391  $2,646,962   $141,009   $2,241,766  $399,505  $2,641,271   $123,266 
Operating expense ratio before amortization and impairment (Non-GAAP) 20.2% 31.0% 22.1%  36.2%  23.7% 30.5% 24.7%  32.6%


Premiums by Business Line
$ in thousands
(Unaudited)

  Three Months Ended September 30,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2018 2017 Change  2018 2017 Change  2018 2017 Change
Property & Casualty                    
Personal Auto $661,126  $599,608  10.3%  $502,964  $318,773  57.8%  $496,139  $428,112  15.9%
Homeowners 192,349  154,352  24.6%  112,390  (18,881) nm  80,308  68,042  18.0%
RV/Packaged 54,964  49,928  10.1%  54,627  49,547  10.3%  51,229  45,742  12.0%
Small Business Auto 75,218  79,296  (5.1)%  53,155  43,505  22.2%  59,636  60,013  (0.6)%
Lender-placed insurance 94,462  84,447  11.9%  56,529  70,581  (19.9)%  48,466  79,048  (38.7)%
Other 12,253  11,809  3.8%  4,969  4,299  15.6%  5,252  5,639  (6.9)%
Property & Casualty 1,090,372  979,440  11.3%  784,634  467,824  67.7%  741,030  686,596  7.9%
                     
Accident & Health 143,948  121,266  18.7%  123,576  110,197  12.1%  155,346  135,727  14.5%
Total National General $1,234,320  $1,100,706  12.1%  $908,210  $578,021  57.1%  $896,376  $822,323  9.0%
                     
Reciprocal Exchanges                    
Personal Auto $40,240  $39,040  3.1%  $12,845  $12,533  2.5%  $13,353  $15,167  (12.0)%
Homeowners 80,070  64,240  24.6%  2,002  30,497  (93.4)%  29,698  26,382  12.6%
Other 1,041  1,126  (7.5)%  (33) 503  nm  100  429  (76.7)%
Reciprocal Exchanges $121,351  $104,406  16.2%  $14,814  $43,533  (66.0)%  $43,151  $41,978  2.8%
                     
Consolidated Total (A) $1,355,671  $1,204,311  12.6%  $923,024  $621,554  48.5%  $939,527  $864,301  8.7%

NOTES: (A) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(302) in Personal Auto and $(499) in
Homeowners Gross Written Premium in 2017, respectively.

nm - not meaningful

Premiums by Business Line
$ in thousands
(Unaudited)

  Nine Months Ended September 30,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2018 2017 Change  2018 2017 Change  2018 2017 Change
Property & Casualty                    
Personal Auto $2,018,563  $1,761,779  14.6%  $1,542,685  $1,387,024  11.2%  $1,436,793  $1,377,752  4.3%
Homeowners 524,342  421,061  24.5%  255,290  217,590  17.3%  242,161  282,741  (14.4)%
RV/Packaged 164,427  147,280  11.6%  162,934  146,256  11.4%  145,911  129,706  12.5%
Small Business Auto 246,448  246,562  %  181,314  195,577  (7.3)%  178,302  193,578  (7.9)%
Lender-placed insurance 259,995  251,091  3.5%  134,630  229,938  (41.4)%  162,629  241,990  (32.8)%
Other 45,495  36,258  25.5%  24,362  16,185  50.5%  15,775  15,999  (1.4)%
Property & Casualty 3,259,270  2,864,031  13.8%  2,301,215  2,192,570  5.0%  2,181,571  2,241,766  (2.7)%
                     
Accident & Health 534,560  444,195  20.3%  486,187  409,560  18.7%  465,391  399,505  16.5%
Total National General $3,793,830  $3,308,226  14.7%  $2,787,402  $2,602,130  7.1%  $2,646,962  $2,641,271  0.2%
                     
Reciprocal Exchanges                    
Personal Auto $116,602  $102,420  13.8%  $40,860  $51,240  (20.3)%  $38,812  $48,523  (20.0)%
Homeowners 217,486  180,616  20.4%  90,826  83,887  8.3%  101,578  73,533  38.1%
Other 2,933  2,743  6.9%  554  1,350  (59.0)%  619  1,210  (48.8)%
Reciprocal Exchanges $337,021  $285,779  17.9%  $132,240  $136,477  (3.1)%  $141,009  $123,266  14.4%
                     
Consolidated Total (A) $4,129,250  $3,591,603  15.0%  $2,919,642  $2,738,607  6.6%  $2,787,971  $2,764,537  0.8%

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 $(866) in Personal Auto and $(1,536) 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 $233,179 and $347,548 in related parties at September 30, 2018 and December 31, 2017, respectively.

(3) Reinsurance activity includes $9,075 and $15,688 from related parties at September 30, 2018 and December 31, 2017, respectively.

(4) Other includes $1,181 and $2,334 from related parties at September 30, 2018 and December 31, 2017, respectively.

(5) Accounts payable and accrued expenses includes $69,376 and $140,057 to related parties at September 30, 2018 and December 31, 2017, respectively.

(6) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 107,132,560 shares - September 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 2,565,120 shares - September 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 Q3’18 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 $35.0 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.

  Q3’18 Combined Ratio Impact of Q3’18 Weather-related Events Q3’18 Combined Ratio Excluding Weather-related Events
P&C Segment 94.4% 4.7% 89.7%
       
Overall NGHC 91.3% 3.9% 87.4%

Investor Contact

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

 

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