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07/29/19

National General Holdings Corp. Reports Second Quarter 2019 Results

NEW YORK, July 29, 2019 (GLOBE NEWSWIRE) -- National General Holdings Corp. (Nasdaq:NGHC) reported second quarter 2019 net income of $69.0 million or $0.60 per diluted share, compared to net income of $36.7 million or $0.34 per diluted share in the second quarter of 2018. Second quarter 2019 operating earnings (non-GAAP)(1) was $78.1 million or $0.67 per diluted share compared to $59.5 million or $0.54 per diluted share in the second quarter of 2018.

Second Quarter 2019 Highlights versus Second Quarter 2018*

  • Net earned premium grew $92.9 million or 10.4% to $984.0 million driven by organic growth in our P&C segment of 11.3% and in our A&H segment of 6.3%.
  • The overall combined ratio(12,13) was 90.9% compared to 92.1% in the prior year’s quarter, excluding non-cash amortization of intangible assets. The P&C segment reported a decrease in combined ratio to 92.6% from 92.9% in the prior year’s quarter. The A&H segment reported a decrease in combined ratio to 82.6% from 88.6% in the prior year’s quarter, driven by strong operating results in our small group self-funded and individual products.
  • Service and fee income grew 12.1% to $166.0 million, driven by organic growth primarily in our group administration fees and third party technology services fees within our A&H segment.
  • Stockholders’ equity was $2.48 billion and fully diluted book value per share was $17.48 at June 30, 2019, growth of 11.6% and 14.6%, respectively, from December 31, 2018. Our trailing twelve month operating return on average equity (ROE)(14) was 15.2% as of June 30, 2019.
  • Second quarter 2019 operating earnings (non-GAAP)(1) primarily excludes $4.2 million or $0.04 net loss on investments and $5.6 million or $0.05 per share of non-cash amortization of intangible assets, net of tax.

Barry Karfunkel, National General’s CEO, stated: “Our second quarter 2019 results continue to highlight the earnings capabilities of our platform. Our P&C segment was able to generate a 92.6% combined ratio. Our A&H segment continues to grow profitably with a combined ratio of 82.6% in the quarter, utilizing our suite of products and owned distribution. I am pleased with the continued execution of our strategy of focused underwriting discipline.”

*NOTE: Unless specified otherwise, discussion of our second quarter 2019 and 2018 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 2019 as Compared to Second Quarter 2018

  • Property & Casualty - Gross written premium decreased by 4.2% to $1,021.1 million, net written premium increased by 15.0% to $786.5 million, and net earned premium increased by 11.3% to $818.0 million. Service and fee income grew 7.6% to $113.1 million compared to $105.2 million in the prior year’s quarter. Excluding non-cash amortization of intangible assets, the combined ratio(12,13) was 92.6% with a loss and LAE ratio of 72.6% and an expense ratio(11,13) of 20.0%, versus a prior year combined ratio of 92.9% with a loss and LAE ratio of 73.5% and an expense ratio of 19.4%. The loss and LAE ratio was impacted by pre-tax catastrophe losses of approximately $18.4 million primarily related to weather-related events in the second quarter 2019, compared to $20.5 million of losses in the second quarter 2018. Unfavorable loss development was $10.4 million in the second quarter 2019, compared to favorable loss development of $5.4 million in the second quarter 2018.
     
  • Accident & Health - Gross written premium grew by 9.5% to $171.7 million, net written premium grew by 9.7% to $152.7 million, and net earned premium grew by 6.3% to $166.0 million. The A&H gross written premium increase was driven by the continued growth across the entire book. Service and fee income grew 23.3% to $52.9 million compared to $42.9 million in the prior year’s quarter, primarily driven by group administration fees and third party technology services fees. Excluding non-cash amortization of intangible assets, the combined ratio(12,13) was 82.6% with a loss and LAE ratio of 52.0% and an expense ratio(11,13) of 30.6%, versus a prior year combined ratio of 88.6% with a loss and LAE ratio of 56.6% and an expense ratio of 32.0%. The loss and LAE ratio reflects continued strong performance in both small group self-funded and individual products. Favorable loss development was $8.1 million in the second quarter 2019, compared to $8.0 million in the second quarter 2018.
     
  • Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $121.1 million, net written premium was $56.2 million, and net earned premium was $46.6 million. Reciprocal Exchanges combined ratio(12,13) excluding non-cash amortization of intangible assets was 100.1% with a loss and LAE ratio of 75.7% and an expense ratio(11,13) of 24.4%.

Second quarter 2019 investment income grew to $35.9 million, compared to $26.2 million in the second quarter of 2018, with the growth primarily driven by an increase in our investment portfolio. Total investments and cash and cash equivalents (including restricted cash) were $4.6 billion as of June 30, 2019. Accumulated other comprehensive income (loss) increased to a $59.9 million gain at June 30, 2019 from a $52.1 million loss at December 31, 2018, primarily due to the impact of lower interest rates which positively impacted bond valuations.

Interest expense was $12.9 million, down from $15.0 million in the prior year’s quarter. Debt was $708.7 million at June 30, 2019, up from $705.8 million at December 31, 2018.

The second quarter of 2019 provision for income taxes was $22.3 million and the effective tax rate for the quarter was 22.2% compared with income taxes of $9.4 million and an effective rate of 17.5% in the second quarter of 2018. The effective tax rate was impacted by the implementation of tax law changes under the Tax Cuts and Jobs Act in 2018.

Stockholders’ equity was $2,479.3 million at June 30, 2019, growth of 11.6% from $2,220.8 million at December 31, 2018. Fully diluted book value per share was $17.48 at June 30, 2019, growth of 14.6% from $15.25 at December 31, 2018. Our trailing twelve month operating return on average equity (ROE)(14) was 15.2% as of June 30, 2019.

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

($ millions)
  P&C Loss
Ratio Points*
  EPS
Impact
After Tax
2019   Q2   Weather-related Events   $18.4   2.2%   $0.13
2019   Q1   Winter Weather   $12.1   1.6%   $0.08
                     
2018   Q2   Spring Weather-related and Texas Hail Events   $20.5   2.8%   $0.15
2018   Q1   Winter Weather   $14.2   2.0%   $0.10

* Loss and LAE ratio points related to P&C net earned premium in quarter the loss event was recorded.

Additional Items

  • Auto and Homeowners Quota Share Renewals. 

    Effective July 1, 2019, the Company renewed its auto quota share reinsurance agreement for a two year term. Effective July 1, 2019, the Company cedes 10.0% of net liability under new and renewal auto policies with the ability to increase the cession to up to 30.0% and decrease the cession down to 5.0% under certain conditions. The Company receives a 31.2% provisional ceding commission on premiums ceded to the reinsurer during the term of the Auto Quota Share Agreement, subject to a sliding scale adjustment to a maximum of 32.8% if the loss ratio for the reinsured business is 64.7% or less and a minimum of 30.0% if the loss ratio is 67.5% or higher.

    Effective July 1, 2019, the Company renewed its homeowners quota share reinsurance agreement for a one year term. Effective July 1, 2019, the Company cedes 40.0% of net liability under homeowners policies and receives a 36.0% ceding commission on new and renewal business and a portion of the in-force business. A portion of the in-force business is being run-off under the prior agreements. The weighted average expected ceding commission for all in-force business and new and renewal homeowners business is 37.5% over the contract term.

Conference Call

On Tuesday, July 30, 2019 at 9:00 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:

800 Access Number: 800-346-7359
973 Access Number: 973-528-0008
Conference Entry Code: 620532
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, July 30, 2019 to 11:59 PM ET on Tuesday, August 13, 2019 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 620532. 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 vendors or 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,
    2019     2018  
    NGHC   Reciprocal
Exchanges
  Consolidated     NGHC   Reciprocal
Exchanges
  Consolidated  
Revenues:                            
Gross written premium   $ 1,192,762     $ 121,146     $ 1,313,908       $ 1,222,468     $ 117,981     $ 1,340,449    
Net written premium   939,178     56,220     995,398       823,127     66,848     889,975    
Net earned premium   984,021     46,630     1,030,651       891,103     51,803     942,906    
                             
Ceding commission income   43,346     16,846     60,192       41,982     13,426     55,408    
Service and fee income   166,049     1,516     148,908   (A)   148,108     445     130,501   (G)
Net investment income   35,949     2,124     35,131   (B)   26,183     2,205     25,995   (H)
Net gain (loss) on investments   (5,274 )   44     (5,230 )     (18,736 )   (968 )   (19,704 )  
Total revenues   $ 1,224,091     $ 67,160     $ 1,269,652   (C)   $ 1,088,640     $ 66,911     $ 1,135,106   (I)
                             
Expenses:                            
Loss and loss adjustment expense   $ 680,246     $ 35,289     $ 715,535       $ 628,650     $ 41,678     $ 670,328    
Acquisition costs and other underwriting expenses   185,951     8,175     194,126       171,300     10,560     181,860    
General and administrative expenses   244,827     21,597     247,767   (D)   219,662     22,819     224,429   (J)
Interest expense   12,925     2,942     12,925   (E)   15,038     2,393     15,038   (K)
Total expenses   $ 1,123,949     $ 68,003     $ 1,170,353   (F)   $ 1,034,650     $ 77,450     $ 1,091,655   (L)
                             
Income (loss) before provision (benefit) for income taxes   $ 100,142     $ (843 )   $ 99,299       $ 53,990     $ (10,539 )   $ 43,451    
Provision (benefit) for income taxes   22,266     (25 )   22,241       9,442     (2,901 )   6,541    
Net income (loss) before non-controlling interest and dividends on preferred shares   77,876     (818 )   77,058       44,548     (7,638 )   36,910    
Less: net income (loss) attributable to non-controlling interest       (818 )   (818 )         (7,638 )   (7,638 )  
Net income before dividends on preferred shares   77,876         77,876       44,548         44,548    
Less: dividends on preferred shares   8,925         8,925       7,875         7,875    
Net income available to common stockholders   $ 68,951     $     $ 68,951       $ 36,673     $     $ 36,673    
                                                     

NOTES: Consolidated column includes eliminations as follows: (A) $(18,657), (B) $(2,942), (C) $(21,599), (D) $(18,657), (E) $(2,942), (F) $(21,599) || (G) $(18,052), (H) $(2,393), (I) $(20,445), (J) $(18,052), (K) $(2,393) and (L) $(20,445).

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

    Six Months Ended June 30,
    2019     2018  
    NGHC   Reciprocal
Exchanges
  Consolidated     NGHC   Reciprocal
Exchanges
  Consolidated  
Revenues:                            
Gross written premium   $ 2,596,971     $ 226,715     $ 2,823,686       $ 2,559,510     $ 215,670     $ 2,773,579   (G)
Net written premium   2,054,887     105,175     2,160,062       1,879,192     117,426     1,996,618    
Net earned premium   1,902,520     92,288     1,994,808       1,750,586     97,858     1,848,444    
                             
Ceding commission income   94,346     35,380     129,726       74,940     24,936     99,876    
Service and fee income   346,437     2,886     314,415   (A)   302,868     2,891     272,623   (H)
Net investment income   70,232     4,294     68,576   (B)   51,202     4,349     51,006   (I)
Net loss on investments   (4,508 )   (700 )   (5,208 )     (18,487 )   (1,099 )   (19,586 )  
Total revenues   $ 2,409,027     $ 134,148     $ 2,502,317   (C)   $ 2,161,109     $ 128,935     $ 2,252,363   (J)
                             
Expenses:                            
Loss and loss adjustment expense   $ 1,290,030     $ 77,314     $ 1,367,344       $ 1,218,285     $ 86,209     $ 1,304,494    
Acquisition costs and other underwriting expenses   389,284     16,760     406,044       328,908     21,662     350,570    
General and administrative expenses   487,660     43,109     495,861   (D)   446,955     41,615     455,434   (K)
Interest expense   25,924     5,950     25,924   (E)   26,192     4,545     26,192   (L)
Total expenses   $ 2,192,898     $ 143,133     $ 2,295,173   (F)   $ 2,020,340     $ 154,031     $ 2,136,690   (M)
                             
Income (loss) before provision (benefit) for income taxes   $ 216,129     $ (8,985 )   $ 207,144       $ 140,769     $ (25,096 )   $ 115,673    
Provision (benefit) for income taxes   46,495     (1,748 )   44,747       28,013     (5,270 )   22,743    
Net income (loss) before non-controlling interest and dividends on preferred shares   169,634     (7,237 )   162,397       112,756     (19,826 )   92,930    
Less: net income (loss) attributable to non-controlling interest       (7,237 )   (7,237 )         (19,826 )   (19,826 )  
Net income before dividends on preferred shares   169,634         169,634       112,756         112,756    
Less: dividends on preferred shares   16,800         16,800       15,750         15,750    
Net income available to common stockholders   $ 152,834     $     $ 152,834       $ 97,006     $     $ 97,006    
                                                     

NOTES: Consolidated column includes eliminations as follows: (A) $(34,908), (B) $(5,950), (C) $(40,858), (D) $(34,908), (E) $(5,950), (F) $(40,858) || (G) $(1,601), (H) $(33,136), (I) $(4,545), (J) $(37,681), (K) $(33,136), (L) $(4,545) and (M) $(37,681).


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

  Three Months Ended June 30,   Six Months Ended June 30,
  2019   2018   2019   2018
Net income available to common stockholders $ 68,951     $ 36,673     $ 152,834     $ 97,006  
Basic net income per common share $ 0.61     $ 0.34     $ 1.35     $ 0.91  
Diluted net income per common share $ 0.60     $ 0.34     $ 1.33     $ 0.89  
               
Operating earnings attributable to NGHC (non-GAAP)(1) $ 78,140     $ 59,484     $ 167,856     $ 127,107  
Basic operating earnings per common share (non-GAAP)(1) $ 0.69     $ 0.56     $ 1.48     $ 1.19  
Diluted operating earnings per common share (non-GAAP)(1) $ 0.67     $ 0.54     $ 1.45     $ 1.16  
               
Dividends declared per common share $ 0.04     $ 0.04     $ 0.08     $ 0.08  
               
Weighted average number of basic shares outstanding 113,178,552     106,969,134     113,097,084     106,864,469  
Weighted average number of diluted shares outstanding 116,050,267     109,402,465     116,062,721     109,181,041  
Shares outstanding, end of period 113,215,632     107,057,771          
Fully diluted shares outstanding, end of period 116,087,347     109,374,343          
Book value per share $ 17.92     $ 14.59          
Fully diluted book value per share $ 17.48     $ 14.28          


Reconciliation of Net Income to Operating Earnings (Non-GAAP)(1)(14)
$ in thousands, except per share data
(Unaudited)

    Three Months Ended June 30,   Six Months Ended June 30,
    2019   2018   2019   2018
Net income available to common stockholders   $ 68,951     $ 36,673     $ 152,834     $ 97,006  
Add (subtract):                
Net loss on investments   5,274     18,736     4,508     18,487  
Equity in (earnings) losses of equity method investments   (731 )   834     203     2,303  
Non-cash amortization of intangible assets   7,089     8,217     14,305     15,137  
Income tax expense (benefit)   (2,443 )   (4,976 )   (3,994 )   (5,826 )
Operating earnings attributable to NGHC (non-GAAP)(1)   $ 78,140     $ 59,484     $ 167,856     $ 127,107  
                 
Operating earnings per common share (non-GAAP)(1):                
Basic operating earnings per common share (non-GAAP)(1)   $ 0.69     $ 0.56     $ 1.48     $ 1.19  
Diluted operating earnings per common share (non-GAAP)(1)   $ 0.67     $ 0.54     $ 1.45     $ 1.16  


Balance Sheet
$ in thousands
(Unaudited)

    June 30, 2019     December 31, 2018  
ASSETS   NGHC   Reciprocal
Exchanges
  Consolidated     NGHC   Reciprocal
Exchanges
  Consolidated  
Total investments (2)   $ 4,325,977     $ 321,365     $ 4,539,962   (A)   $ 4,013,699     $ 314,411     $ 4,226,806   (H)
Cash and cash equivalents, including restricted cash   244,051     289     244,340       233,383     200     233,583    
Premiums and other receivables, net   1,467,727     65,053     1,532,780       1,338,485     61,327     1,399,812    
Reinsurance balances (3)   1,798,741     253,869     2,052,610       2,023,911     253,501     2,277,412    
Intangible assets, net   365,685     3,315     369,000       376,532     3,405     379,937    
Goodwill   183,430         183,430       180,183         180,183    
Other (4)   751,784     24,024     744,534   (B)   739,068     27,879     741,547   (I)
Total assets   $ 9,137,395     $ 667,915     $ 9,666,656   (C)   $ 8,905,261     $ 660,723     $ 9,439,280   (J)
LIABILITIES AND STOCKHOLDERS’ EQUITY                            
Liabilities:                            
Unpaid loss and loss adjustment expense reserves   $ 2,692,943     $ 194,297     $ 2,887,240       $ 2,778,689     $ 178,470     $ 2,957,159    
Unearned premiums and other revenue   2,099,746     267,086     2,366,832       2,014,965     265,763     2,280,728    
Reinsurance payable   554,685     36,733     591,418       615,872     40,393     656,265    
Accounts payable and accrued expenses (5)   305,045     35,402     309,173   (D)   390,338     33,120     398,058   (K)
Debt   708,657     107,380     708,657   (E)   705,795     101,304     705,795   (L)
Other   297,057     45,411     342,468       178,764     61,640     240,404    
Total liabilities   $ 6,658,133     $ 686,309     $ 7,205,788   (F)   $ 6,684,423     $ 680,690     $ 7,238,409   (M)
Stockholders’ equity:                            
Common stock (6)   $ 1,132     $     $ 1,132       $ 1,129     $     $ 1,129    
Preferred stock (7)   450,000         450,000       450,000         450,000    
Additional paid-in capital   1,060,379         1,060,379       1,057,783         1,057,783    
Accumulated other comprehensive income (loss)   59,910         59,910       (52,130 )       (52,130 )  
Retained earnings   907,841         907,841       764,056         764,056    
Total National General Holdings Corp. stockholders’ equity   2,479,262         2,479,262       2,220,838         2,220,838    
Non-controlling interest       (18,394 )   (18,394 )         (19,967 )   (19,967 )  
Total stockholders’ equity   $ 2,479,262     $ (18,394 )   $ 2,460,868       $ 2,220,838     $ (19,967 )   $ 2,200,871    
Total liabilities and stockholders’ equity   $ 9,137,395     $ 667,915     $ 9,666,656   (G)   $ 8,905,261     $ 660,723     $ 9,439,280   (N)
                                                     

NOTES: Consolidated column includes eliminations as follows: (A) $(107,380), (B) $(31,274), (C) $(138,654), (D) $(31,274), (E) $(107,380), (F) $(138,654), (G) $(138,654) || (H) $(101,304), (I) $(25,400), (J) $(126,704), (K) $(25,400), (L) $(101,304), (M) $(126,704) and (N) $(126,704).


Segment Information - Second Quarter
$ in thousands
(Unaudited)

    Three Months Ended June 30,
    2019     2018
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal
Exchanges
Gross written premium   $ 1,021,090     $ 171,672     $ 1,192,762       $ 121,146       $ 1,065,632     $ 156,836     $ 1,222,468       $ 117,981  
Net written premium   786,471     152,707     939,178       56,220       683,869     139,258     823,127       66,848  
Net earned premium   817,972     166,049     984,021       46,630       734,934     156,169     891,103       51,803  
                                       
Ceding commission income   39,418     3,928     43,346       16,846       41,720     262     41,982       13,426  
Service and fee income   113,112     52,937     166,049       1,516       105,167     42,941     148,108       445  
Total underwriting revenues   $ 970,502     $ 222,914     $ 1,193,416       $ 64,992       $ 881,821     $ 199,372     $ 1,081,193       $ 65,674  
                                       
Loss and loss adjustment expense   593,922     86,324     680,246       35,289       540,216     88,434     628,650       41,678  
Acquisition costs and other underwriting expenses   137,950     48,001     185,951       8,175       123,183     48,117     171,300       10,560  
General and administrative expenses   183,535     61,292     244,827       21,597       172,530     47,132     219,662       22,819  
Total underwriting expenses   $ 915,407     $ 195,617     $ 1,111,024       $ 65,061       $ 835,929     $ 183,683     $ 1,019,612       $ 75,057  
                                       
Underwriting income (loss)   55,095     27,297     82,392       (69 )     45,892     15,689     61,581       (9,383 )
Non-cash amortization of intangible assets   5,412     1,677     7,089       12       6,179     2,038     8,217       (26 )
Underwriting income (loss) before amortization and impairment   $ 60,507     $ 28,974     $ 89,481       $ (57 )     $ 52,071     $ 17,727     $ 69,798       $ (9,409 )
                                       
Underwriting ratios                                      
Loss and loss adjustment expense ratio (8)   72.6 %   52.0 %   69.1 %     75.7 %     73.5 %   56.6 %   70.5 %     80.5 %
Operating expense ratio (Non-GAAP) (9)   20.7 %   31.6 %   22.5 %     24.5 %     20.3 %   33.3 %   22.5 %     37.7 %
Combined ratio (Non-GAAP) (10)   93.3 %   83.6 %   91.6 %     100.2 %     93.8 %   89.9 %   93.0 %     118.2 %
                                                                       
Underwriting ratios (before amortization and impairment)                                                                      
Loss and loss adjustment expense ratio (8)   72.6 %   52.0 %   69.1 %     75.7 %     73.5 %   56.6 %   70.5 %     80.5 %
Operating expense ratio (Non-GAAP) (11)   20.0 %   30.6 %   21.8 %     24.4 %     19.4 %   32.0 %   21.6 %     37.7 %
Combined ratio before amortization and impairment (Non-GAAP) (12)   92.6 %   82.6 %   90.9 %     100.1 %     92.9 %   88.6 %   92.1 %     118.2 %

NOTE: Loss and loss adjustment expenses for the three months ended June 30, 2019 included $10,396 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $8,135 of favorable development in the A&H segment, versus $5,383 of favorable development in the P&C segment, and $8,040 of favorable development in the A&H segment for the three months ended June 30, 2018.

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

    Six Months Ended June 30,
    2019     2018
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal
Exchanges
Gross written premium   $ 2,166,755     $ 430,216     $ 2,596,971       $ 226,715       $ 2,168,898     $ 390,612     $ 2,559,510       $ 215,670  
Net written premium   1,701,999     352,888     2,054,887       105,175       1,516,581     362,611     1,879,192       117,426  
Net earned premium   1,574,891     327,629     1,902,520       92,288       1,440,541     310,045     1,750,586       97,858  
                                       
Ceding commission income   87,827     6,519     94,346       35,380       74,420     520     74,940       24,936  
Service and fee income   232,488     113,949     346,437       2,886       214,740     88,128     302,868       2,891  
Total underwriting revenues   $ 1,895,206     $ 448,097     $ 2,343,303       $ 130,554       $ 1,729,701     $ 398,693     $ 2,128,394       $ 125,685  
                                       
Loss and loss adjustment expense   1,118,957     171,073     1,290,030       77,314       1,038,573     179,712     1,218,285       86,209  
Acquisition costs and other underwriting expenses   283,435     105,849     389,284       16,760       237,183     91,725     328,908       21,662  
General and administrative expenses   367,730     119,930     487,660       43,109       349,215     97,740     446,955       41,615  
Total underwriting expenses   $ 1,770,122     $ 396,852     $ 2,166,974       $ 137,183       $ 1,624,971     $ 369,177     $ 1,994,148       $ 149,486  
                                       
Underwriting income (loss)   125,084     51,245     176,329       (6,629 )     104,730     29,516     134,246       (23,801 )
Non-cash amortization of intangible assets   10,897     3,408     14,305       23       11,579     3,558     15,137       (53 )
Underwriting income (loss) before amortization and impairment   $ 135,981     $ 54,653     $ 190,634       $ (6,606 )     $ 116,309     $ 33,074     $ 149,383       $ (23,854 )
                                       
Underwriting ratios                                      
Loss and loss adjustment expense ratio (8)   71.0 %   52.2 %   67.8 %     83.8 %     72.1 %   58.0 %   69.6 %     88.1 %
Operating expense ratio (Non-GAAP) (9)   21.0 %   32.1 %   22.9 %     23.4 %     20.6 %   32.5 %   22.7 %     36.2 %
Combined ratio (Non-GAAP) (10)   92.0 %   84.3 %   90.7 %     107.2 %     92.7 %   90.5 %   92.3 %     124.3 %
                                                                       
Underwriting ratios (before amortization and impairment)                                                                      
Loss and loss adjustment expense ratio (8)   71.0 %   52.2 %   67.8 %     83.8 %     72.1 %   58.0 %   69.6 %     88.1 %
Operating expense ratio (Non-GAAP) (11)   20.3 %   31.1 %   22.2 %     23.4 %     19.8 %   31.4 %   21.9 %     36.3 %
Combined ratio before amortization and impairment (Non-GAAP) (12)   91.3 %   83.3 %   90.0 %     107.2 %     91.9 %   89.4 %   91.5 %     124.4 %

NOTE: Loss and loss adjustment expenses for the six months ended June 30, 2019 included $4,882 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $18,987 of favorable development in the A&H segment, versus $20,552 of favorable development in the P&C segment, and $11,423 of favorable development in the A&H segment for the six months ended June 30, 2018.


Reconciliation of Operating Expense Ratio (Non-GAAP)(9,11,13)
$ in thousands
(Unaudited)

    Three Months Ended June 30,
    2019     2018
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal
Exchanges
Total underwriting expenses   $ 915,407     $ 195,617     $ 1,111,024       $ 65,061       $ 835,929     $ 183,683     $ 1,019,612       $ 75,057  
Less: Loss and loss adjustment expense   593,922     86,324     680,246       35,289       540,216     88,434     628,650       41,678  
Less: Ceding commission income   39,418     3,928     43,346       16,846       41,720     262     41,982       13,426  
Less: Service and fee income   113,112     52,937     166,049       1,516       105,167     42,941     148,108       445  
Operating expense   168,955     52,428     221,383       11,410       148,826     52,046     200,872       19,508  
Net earned premium   $ 817,972     $ 166,049     $ 984,021       $ 46,630       $ 734,934     $ 156,169     $ 891,103       $ 51,803  
Operating expense ratio (Non-GAAP) (9)   20.7 %   31.6 %   22.5 %     24.5 %     20.3 %   33.3 %   22.5 %     37.7 %
                                                                       
Total underwriting expenses   $ 915,407     $ 195,617     $ 1,111,024       $ 65,061       $ 835,929     $ 183,683     $ 1,019,612       $ 75,057  
Less: Loss and loss adjustment expense   593,922     86,324     680,246       35,289       540,216     88,434     628,650       41,678  
Less: Ceding commission income   39,418     3,928     43,346       16,846       41,720     262     41,982       13,426  
Less: Service and fee income   113,112     52,937     166,049       1,516       105,167     42,941     148,108       445  
Less: Non-cash amortization of intangible assets   5,412     1,677     7,089       12       6,179     2,038     8,217       (26 )
Operating expense before amortization and impairment   163,543     50,751     214,294       11,398       142,647     50,008     192,655       19,534  
Net earned premium   $ 817,972     $ 166,049     $ 984,021       $ 46,630       $ 734,934     $ 156,169     $ 891,103       $ 51,803  
Operating expense ratio before amortization and impairment (Non-GAAP) (11)   20.0 %   30.6 %   21.8 %     24.4 %     19.4 %   32.0 %   21.6 %     37.7 %

Reconciliation of Operating Expense Ratio (Non-GAAP)(9,11,13)
$ in thousands
(Unaudited)

    Six Months Ended June 30,
    2019     2018
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal
Exchanges
Total underwriting expenses   $ 1,770,122     $ 396,852     $ 2,166,974       $ 137,183       $ 1,624,971     $ 369,177     $ 1,994,148       $ 149,486  
Less: Loss and loss adjustment expense   1,118,957     171,073     1,290,030       77,314       1,038,573     179,712     1,218,285       86,209  
Less: Ceding commission income   87,827     6,519     94,346       35,380       74,420     520     74,940       24,936  
Less: Service and fee income   232,488     113,949     346,437       2,886       214,740     88,128     302,868       2,891  
Operating expense   330,850     105,311     436,161       21,603       297,238     100,817     398,055       35,450  
Net earned premium   $ 1,574,891     $ 327,629     $ 1,902,520       $ 92,288       $ 1,440,541     $ 310,045     $ 1,750,586       $ 97,858  
Operating expense ratio (Non-GAAP) (9)   21.0 %   32.1 %   22.9 %     23.4 %     20.6 %   32.5 %   22.7 %     36.2 %
                                                                       
Total underwriting expenses   $ 1,770,122     $ 396,852     $ 2,166,974       $ 137,183       $ 1,624,971     $ 369,177     $ 1,994,148       $ 149,486  
Less: Loss and loss adjustment expense   1,118,957     171,073     1,290,030       77,314       1,038,573     179,712     1,218,285       86,209  
Less: Ceding commission income   87,827     6,519     94,346       35,380       74,420     520     74,940       24,936  
Less: Service and fee income   232,488     113,949     346,437       2,886       214,740     88,128     302,868       2,891  
Less: Non-cash amortization of intangible assets   10,897     3,408     14,305       23       11,579     3,558     15,137       (53 )
Operating expense before amortization and impairment   319,953     101,903     421,856       21,580       285,659     97,259     382,918       35,503  
Net earned premium   $ 1,574,891     $ 327,629     $ 1,902,520       $ 92,288       $ 1,440,541     $ 310,045     $ 1,750,586       $ 97,858  
Operating expense ratio before amortization and impairment (Non-GAAP) (11)   20.3 %   31.1 %   22.2 %     23.4 %     19.8 %   31.4 %   21.9 %     36.3 %


Premiums by Product Line
$ in thousands
(Unaudited)

  Three Months Ended June 30,
  Gross Written Premium     Net Written Premium     Net Earned Premium
  2019   2018   Change     2019   2018   Change     2019   2018   Change
Property & Casualty                                      
Personal Auto $ 611,312     $ 632,225     (3.3 )%     $ 511,952     $ 485,724     5.4 %     $ 542,834     $ 486,438     11.6 %
Homeowners 190,037     190,706     (0.4 )%     108,404     50,304     nm     102,008     79,658     28.1 %
RV/Packaged 61,314     59,999     2.2 %     58,167     59,118     (1.6 )%     49,411     48,993     0.9 %
Small Business Auto 83,829     84,986     (1.4 )%     65,420     63,432     3.1 %     60,059     60,104     (0.1 )%
Lender-placed insurance 58,859     80,599     (27.0 )%     37,214     14,887     nm     60,278     53,694     12.3 %
Other 15,739     17,117     (8.1 )%     5,314     10,404     (48.9 )%     3,382     6,047     (44.1 )%
Total Premium $ 1,021,090     $ 1,065,632     (4.2 )%     $ 786,471     $ 683,869     15.0 %     $ 817,972     $ 734,934     11.3 %
                                       
Accident & Health                                      
Group 75,036     59,233     26.7 %     57,960     48,827     18.7 %     57,949     48,839     18.7 %
Individual 82,799     78,464     5.5 %     82,652     78,464     5.3 %     83,916     79,329     5.8 %
International 13,837     19,139     (27.7 )%     12,095     11,967     1.1 %     24,184     28,001     (13.6 )%
Total Premium $ 171,672     $ 156,836     9.5 %     $ 152,707     $ 139,258     9.7 %     $ 166,049     $ 156,169     6.3 %
                                       
Total National General $ 1,192,762     $ 1,222,468     (2.4 )%     $ 939,178     $ 823,127     14.1 %     $ 984,021     $ 891,103     10.4 %
                                       
Reciprocal Exchanges                                      
Personal Auto $ 43,984     $ 42,065     4.6 %     $ 18,661     $ 14,520     28.5 %     $ 16,093     $ 12,462     29.1 %
Homeowners 76,140     74,895     1.7 %     37,211     52,016     (28.5 )%     30,225     39,109     (22.7 )%
Other 1,022     1,021     0.1 %     348     312     11.5 %     312     232     34.5 %
Total Premium $ 121,146     $ 117,981     2.7 %     $ 56,220     $ 66,848     (15.9 )%     $ 46,630     $ 51,803     (10.0 )%
                                       
Consolidated Total $ 1,313,908     $ 1,340,449     (2.0 )%     $ 995,398     $ 889,975     11.8 %     $ 1,030,651     $ 942,906     9.3 %
                                                                     

nm - not meaningful

Premiums by Product Line
$ in thousands
(Unaudited)

  Six Months Ended June 30,
  Gross Written Premium     Net Written Premium     Net Earned Premium
  2019   2018   Change     2019   2018   Change     2019   2018   Change
Property & Casualty                                      
Personal Auto $ 1,377,993     $ 1,357,437     1.5 %     $ 1,170,872     $ 1,039,721     12.6 %     $ 1,053,388     $ 940,654     12.0 %
Homeowners 342,079     331,993     3.0 %     193,649     142,900     35.5 %     186,066     161,853     15.0 %
RV/Packaged 113,165     109,463     3.4 %     109,764     108,307     1.3 %     99,716     94,682     5.3 %
Small Business Auto 169,707     171,230     (0.9 )%     139,606     128,159     8.9 %     127,692     118,666     7.6 %
Lender-placed insurance 134,797     165,533     (18.6 )%     79,284     78,101     1.5 %     101,996     114,163     (10.7 )%
Other 29,014     33,242     (12.7 )%     8,824     19,393     (54.5 )%     6,033     10,523     (42.7 )%
Total Premium $ 2,166,755     $ 2,168,898     (0.1 )%     $ 1,701,999     $ 1,516,581     12.2 %     $ 1,574,891     $ 1,440,541     9.3 %
                                       
Accident & Health                                      
Group 139,974     115,293     21.4 %     111,910     94,464     18.5 %     111,912     94,478     18.5 %
Individual 166,991     153,512     8.8 %     166,775     153,512     8.6 %     166,151     153,195     8.5 %
International 123,251     121,807     1.2 %     74,203     114,635     (35.3 )%     49,566     62,372     (20.5 )%
Total Premium $ 430,216     $ 390,612     10.1 %     $ 352,888     $ 362,611     (2.7 )%     $ 327,629     $ 310,045     5.7 %
                                       
Total National General $ 2,596,971     $ 2,559,510     1.5 %     $ 2,054,887     $ 1,879,192     9.3 %     $ 1,902,520     $ 1,750,586     8.7 %
                                       
Reciprocal Exchanges                                      
Personal Auto $ 80,846     $ 76,362     5.9 %     $ 34,306     $ 28,015     22.5 %     $ 31,954     $ 25,459     25.5 %
Homeowners 143,940     137,416     4.7 %     70,227     88,824     (20.9 )%     59,716     71,880     (16.9 )%
Other 1,929     1,892     2.0 %     642     587     9.4 %     618     519     19.1 %
Total Premium $ 226,715     $ 215,670     5.1 %     $ 105,175     $ 117,426     (10.4 )%     $ 92,288     $ 97,858     (5.7 )%
                                       
Consolidated Total (A) $ 2,823,686     $ 2,773,579     1.8 %     $ 2,160,062     $ 1,996,618     8.2 %     $ 1,994,808     $ 1,848,444     7.9 %
                                                                     

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.

Fee Income
$ in thousands
(Unaudited)

  Three Months Ended June 30,   Six Months Ended June 30,
  2019   2018   Change   2019   2018   Change
Property & Casualty                      
Service and Fee Income $ 113,112     $ 105,167     7.6 %   $ 232,488     $ 214,740     8.3 %
Ceding Commission Income 39,418     41,720     (5.5 )%   87,827     74,420     18.0 %
Property & Casualty $ 152,530     $ 146,887     3.8 %   $ 320,315     $ 289,160     10.8 %
                       
Accident & Health                      
Service and Fee Income                      
Group $ 32,862     $ 24,756     32.7 %   $ 63,236     $ 49,570     27.6 %
Individual 1,242     2,164     (42.6 )%   3,378     3,461     (2.4 )%
Third Party Fee 18,833     16,021     17.6 %   47,335     35,097     34.9 %
Total Service and Fee Income 52,937     42,941     23.3 %   113,949     88,128     29.3 %
Ceding Commission Income 3,928     262     nm   6,519     520     nm
Accident and Health $ 56,865     $ 43,203     31.6 %   $ 120,468     $ 88,648     35.9 %
                       
Total National General $ 209,395     $ 190,090     10.2 %   $ 440,783     $ 377,808     16.7 %
                       
Reciprocal Exchanges                      
Service and Fee Income $ 1,516     $ 445     nm   $ 2,886     $ 2,891     (0.2 )%
Ceding Commission Income 16,846     13,426     25.5 %   35,380     24,936     41.9 %
Reciprocal Exchanges $ 18,362     $ 13,871     32.4 %   $ 38,266     $ 27,827     37.5 %
                       
Consolidated Total (A) $ 209,100     $ 185,909     12.5 %   $ 444,141     $ 372,499     19.2 %
                                           

nm - not meaningful

NOTES: (A) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges in Service and Fee Income of $(18,657) and $(18,052) in the three months ended June 30, 2019 and 2018, respectively, and $(34,908) and $(33,136) in the six months ended June 30, 2019 and 2018, 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, 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, and any significant non-recurring or infrequent items that may not be indicative of ongoing operations. 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 financial measures to the most directly comparable GAAP measure.

(2) Total investments includes $235,141 and $233,723 in related parties at June 30, 2019 and December 31, 2018, respectively.

(3) Reinsurance balances includes $5,664 and $7,425 from related parties at June 30, 2019 and December 31, 2018, respectively.

(4) Other includes $2,376 and $2,362 from related parties at June 30, 2019 and December 31, 2018, respectively.

(5) Accounts payable and accrued expenses includes $2,454 and $69,874 to related parties at June 30, 2019 and December 31, 2018, respectively.

(6) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 113,215,632 shares - June 30, 2019; authorized 150,000,000 shares, issued and outstanding 112,940,595 shares - December 31, 2018.

(7) Preferred stock: $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,120 shares - June 30, 2019; authorized 10,000,000 shares, issued and outstanding 2,565,120 shares - December 31, 2018.

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

(9) Operating expense ratio is a non-GAAP financial measure defined by the Company, which 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.

(10) Combined ratio is a non-GAAP financial measure defined by the Company, which is commonly used in the insurance industry. The Company calculates the ratio by adding the loss and loss adjustment expense ratio(8) and the operating expense ratio (non-GAAP)(9) 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. Management uses operating expense ratio (non-GAAP) and combined ratio (non-GAAP) to evaluate financial performance against historical results and establish targets. A combined ratio under 100% generally indicates an underwriting profit, while over 100% an underwriting loss.

(11) Operating expense ratio before amortization and impairment is a non-GAAP financial measure defined by the Company, which 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. Management believes that this measure provides a more useful comparison to the operating expense ratio of other insurance companies involved in fewer acquisitions.

(12) Combined ratio before amortization and impairment is a non-GAAP financial measure defined by the Company, which is commonly used in the insurance industry. The Company calculates the ratio by adding the loss and loss adjustment expense ratio(8) and the operating expense ratio before amortization and impairment (non-GAAP)(11) 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. 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. A combined ratio under 100% generally indicates an underwriting profit, while over 100% an underwriting loss.

(13) Combined ratio (non-GAAP), operating expense ratio (non-GAAP), combined ratio before amortization and impairment (non-GAAP) and operating expense ratio before amortization and impairment (non-GAAP) are considered non-GAAP financial measures under applicable SEC rules. Other companies may calculate these ratios 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 financial 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 (non-GAAP) to average shareholders’ equity for the same twelve-month period. Average shareholders’ equity is the sum of the shareholders’ equity excluding preferred stock at the beginning and end of the period 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 weather-related events, is calculated by taking the combined ratio as defined in Note 12, and adjusting it to exclude the total net losses of $18.4 million and $20.5 million from these events for the three months ended June 30, 2019 and 2018, respectively. The Company believes this measure enhances investors’ understanding of our results by eliminating what we believe are volatile and unusual events.

Year       Combined Ratio
(12)
  Impact of
Weather-related
Events
  Combined Ratio
Excluding
Weather-related
Events (15)
2019   P&C Segment   92.6%   2.2%   90.4%
                 
2019   Overall NGHC   90.9%   1.2%   89.7%
                 
                 
2018   P&C Segment   92.9%   2.8%   90.1%
                 
2018   Overall NGHC   92.1%   2.3%   89.8%

(16) Our products in the P&C segment include personal auto, homeowners, RV/Packaged, small business auto, lender-placed insurance and other products. The personal auto product includes policies for standard, preferred and nonstandard automobile insurance. The homeowners product includes multiple-peril policies and personal umbrella coverage to the homeowner. The RV/Packaged product offers policies that include RV automatic personal effects coverage, optional replacement cost coverage, RV storage coverage and full-time liability coverage. The small business auto product offers policies that include liability and physical damage coverage for light-to-medium duty commercial vehicles. The lender-placed insurance product offers fire, home and flood products, as well as collateral protection insurance and guaranteed asset protection products for automobiles. Our products and revenue in the A&H segment include group, individual and third party fees. The group product includes revenue from our small group self-funded product. The individual product line includes revenue from our supplemental products including short-term medical, accident/AD&D, hospital indemnity, cancer/critical illness, dental and term life insurance. Third party fees include commission and general agent fees for selling policies issued by third-party insurance companies, fees generated through selling our technology products to third parties and fees from our international health insurance offerings.

Investor Contact

Investor Relations Department
Phone: 212-380-9462
Email: InvestorRelations@NGIC.COM 

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Source: National General Holdings Corp