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11/08/17

National General Holdings Corp. Reports Third Quarter 2017 Results

NEW YORK, Nov. 08, 2017 (GLOBE NEWSWIRE) -- National General Holdings Corp. (NASDAQ:NGHC) today reported third quarter 2017 net income of $46.2 million or $0.43 per diluted share, compared to net income of $19.9 million or $0.18 per diluted share in the third quarter of 2016. Third quarter 2017 operating earnings(1) was $26.6 million or $0.24 per diluted share, compared to $31.7 million or $0.29 per diluted share in the third quarter of 2016.

Third Quarter 2017 Highlights Versus Third Quarter 2016*

  • Gross written premium grew $249.3 million or 29.3% to $1,100.7 million, driven by added premiums from the acquisitions of Direct General and Standard Property and Casualty Insurance Company, and organic growth within our P&C business of 19.3%, or 26.4% excluding the decline in lender-placed premiums, and continued growth of our A&H segment.
  • The overall combined ratio(10,14) was 98.2% compared to 94.6% in the prior year's quarter, excluding non-cash amortization of intangible assets. The P&C segment reported an increase in combined ratio to 98.1% from 94.5% in the prior year's quarter, due to $52.4 million of losses, or 7.6 P&C loss ratio points, from Hurricanes Harvey, Irma and Maria. Excluding the aforementioned hurricane-related losses, the P&C segment combined ratio(17) was 90.5% and NGHC overall combined ratio(17) was 91.8%.  The A&H segment reported a combined ratio of 98.6% compared to 95.4% in the prior year's quarter, with the increase driven by the EuroAccident business.
  • Total revenue grew by $200.1 million or 23.3% to $1.1 billion, primarily driven by the aforementioned premium growth, service and fee income growth of $27.4 million or 26.0%, and an increase in ceding commission income of $28.8 million, primarily related to the new quota share agreements announced in the quarter.
  • Shareholders' equity was $1.96 billion and fully diluted book value per share was $14.16 at September 30, 2017, growth of 3.4% and 4.7%, respectively, from December 31, 2016. Our trailing twelve month operating return on average equity (ROE)(16) was 7.7% as of September 30, 2017.
  • Third quarter 2017 operating earnings exclude the following material items, net of tax: $31.0 million or $0.29 per share of net gain on investments, $6.0 million or $0.06 per share of non-cash amortization of intangible assets and losses of $2.8 million or $0.03 per share from earnings of equity method investments.
  • We expect to recognize between $40-45 million in pre-tax losses, net of reinsurance, in the fourth quarter of 2017 from the fires that impacted Northern California in October 2017.  This amount excludes reinstatement premiums.

Barry Karfunkel, National General's President and CEO, stated: "This quarter was one of great accomplishment for National General. We continue to deliver strong organic growth within our auto, home and health lines of business while executing on our plan to return our lender placed business to profitability. We also set the stage for further growth by entering into quota share agreements with a high quality group of reinsurers for our auto and home lines of business. We're extremely pleased to have closed on the acquisition of our policy administration system, NPS, which is at the heart of National General's competitive advantage in the Personal Lines marketplace and we look forward to the benefits that will come from owning one of our most important assets.

"We were able to post strong underwriting results despite one of the most active catastrophic loss periods in recent history, from a multitude of hurricanes impacting the Southern region to what will likely be the costliest wildfire in Northern California history.  We are here to support our insureds and I'm proud of the way our team has responded to these events.  Our diversified, niche portfolio was also able to generate profitable returns in our P&C segment despite the losses.

"Finally, I'm excited to announce the addition of Jay Nichols to our Board of Directors.  Jay has a wealth of industry experience that will benefit our growing company."

*NOTE: Unless specified otherwise, discussion of our third quarter 2017 and 2016 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 2017 as Compared to Third Quarter 2016

Gross written premium grew 29.3% to $1,100.7 million, net written premium decreased by 24.7% to $578.0 million (or grew by 29.7% excluding the quota share) and net earned premium grew 12.0% to $822.3 million. Premium growth was driven by several key factors: underlying organic growth within our P&C segment, continued growth of our A&H segment, and additional premiums from the acquisitions of Direct General and Standard Property and Casualty Insurance Company.  The third quarter quota share impact on net written premiums includes both the cession of business written during the quarter and the initial transfer of unearned premium related to policies in force at the treaty effective date.

Service and fee income grew 26.0% to $133.1 million, driven by added service and fee income from our recent completed transactions, primarily the Direct General acquisition which contributed an additional $23.5 million in the quarter.

Excluding non-cash amortization of intangible assets, the combined ratio(10,14,15) was 98.2% with a loss ratio(15) of 75.9% and an expense ratio(10,13,15) of 22.3%, compared to a prior year combined ratio of 94.6% with a loss ratio of 67.0% and an expense ratio of 27.6%. In the current year's quarter, certain costs associated with claims handling were reclassified from general and administrative expenses to loss adjustment expenses when compared with the previous year's quarter, resulting in an increase in loss and loss adjustment expense ratio and a decrease in expense ratio in corresponding amounts(15).  The expense ratio also benefited from increased ceding commission related to the new quota shares.

Underwriting results detailed by each of our business segments are as follows:

  • Property & Casualty - Gross written premium grew by 29.9% to $979.4 million, net written premium decreased by 31.2% to $467.8 million (grew by 30.2% excluding the quota share), and net earned premium grew by 9.1% to $686.6 million. P&C gross written premium growth was driven by several key factors: organic growth of 19.3%, or 26.4% excluding the decline in lender-placed premiums, $96.1 million from the Direct General acquisition and $11.8 million from the Standard Property and Casualty Insurance Company acquisition, partially offset by a decrease in our lender-placed premiums. Service and fee income grew 53.6% to $100.6 million, driven by increased premium volume in the quarter and the addition of service and fee income from acquisitions completed during the prior year, particularly Direct General. Excluding non-cash amortization of intangible assets, the combined ratio(10,14) was 98.1% with a loss ratio of 77.0% and an expense ratio(10,13) of 21.1%, versus a prior year combined ratio of 94.5% with a loss ratio of 65.9% and an expense ratio of 28.6%. The loss ratio was impacted by pre-tax catastrophe losses of approximately $52.4 million related to Hurricanes Harvey, Irma and Maria. Excluding the aforementioned losses, the P&C segment combined ratio(17) was 90.5% in the quarter. In the current year's quarter, the reclassification of certain costs associated with claims handling from general and administrative expenses to loss adjustment expenses impacted both the loss and expense ratios by identical amounts(15).  The expense ratio also benefited from increased ceding commission related to the new quota shares.
     
  • Accident & Health - Gross written premium grew to $121.3 million, net written premium grew to $110.2 million, and net earned premium grew to $135.7 million, from $97.6 million, $87.4 million, and $105.1 million, respectively, in the prior year's quarter. The A&H gross written premium increase was driven by the continued growth across the entire book. Service and fee income was $32.5 million compared to $40.2 million in the prior year's quarter. The decrease in service and fee income primarily relates to mix of business sold in the quarter quarter versus the year-ago quarter. Excluding non-cash amortization of intangible assets, the combined ratio(10,14) was 98.6% with a loss ratio of 70.4% and an expense ratio(10,13,15) of 28.2%, versus a prior year combined ratio of 95.4% with a loss ratio of 73.4% and an expense ratio of 22.0%. The increase in the combined ratio was driven by the EuroAccident business.
     
  • Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $104.4 million, net written premium was $43.5 million, and net earned premium was $42.0 million. Reciprocal Exchanges combined ratio(10,14,15) excluding non-cash amortization of intangible assets was 94.3% with a loss ratio of 64.0% and an expense ratio(10,13) of 30.3%.

Investment income grew 4.0% to $27.4 million, reflecting an increase in the size of our investment portfolio as compared to the prior year's quarter. Third quarter 2017 results included $47.7 million of net investment gains compared to a gain of $11.0 million in the third quarter of 2016. Total investments and cash and cash equivalents were $3.9 billion as of September 30, 2017. Accumulated other comprehensive income decreased to $9.3 million at September 30, 2017 from $12.7 million at December 31, 2016.

Interest expense was $11.5 million, up from $10.5 million in the prior year's quarter due to an increased amount of debt on our balance sheet. Debt was $754.9 million at September 30, 2017, up from $675.5 million at September 30, 2016, as a result of debt assumed from our prior acquisitions.

Earnings of equity investments (predominantly our investment in Life Settlement Entities and alternative investments) was a $4.3 million loss in the third quarter of 2017 versus a $3.0 million gain in the prior year's quarter primarily reflecting a normalized level of amortization from our real estate investment portfolio and the sale by the life settlement entities of 114 policies in the quarter.

The third quarter of 2017 provision for income taxes was $6.9 million and the effective tax rate for the quarter was 10.5% compared with incomes taxes of $9.1 million and an effective tax rate of 26.5% in the third quarter of 2016. The decrease in the effective tax rate was primarily driven by the reduction of our estimate of annual pre-tax income.

National General Holding Corp.'s shareholders' equity was $1,957.4 million at September 30, 2017, growth of 3.4% from $1,893.8 million at December 31, 2016. Fully diluted book value per share was $14.16 at September 30, 2017, growth of 4.7% from $13.52 at December 31, 2016. Our trailing twelve month operating return on average equity (ROE)(16) was 7.7% as of September 30, 2017.

 
Year-to-Date P&C Segment Notable Large Losses
2017 Quarter     P&C Notable Large Losses and LAE
($ millions)
  P&C Loss Ratio Points*   EPS Impact After Tax
Q3 Hurricane Maria   $5.0   0.7 %   $0.03
Q3 Hurricane Irma   $25.1   3.7 %   $0.15
Q3 Hurricane Harvey   $22.3   3.2 %   $0.13
Q2 Hail event   $7.0   0.9 %   $0.04
Q2 Increased Loss Estimate from Q1 West Coast Storms   $9.1   1.1 %   $0.05
Q1 West Coast Storms   $8.9   1.2 %   $0.05

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

Conference Call

On Thursday, November 9, 2017 at 9:00 AM ET, President and Chief Executive Officer Barry Karfunkel and Chief Financial Officer Mike Weiner will review results and discuss business conditions via a conference call that may be accessed as follows:

Toll-Free U.S. Dial-in:  888-267-2845
International Dial-in:  973-413-6102
Conference Entry Code:  784681
Webcast Registration:  http://ir.nationalgeneral.com/events.cfm

A replay of the conference call will be accessible from 2:00 PM ET on Thursday, November 9, 2017 to 11:59 PM ET on Thursday, November 23, 2017 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 784681. In addition, a replay of the webcast can also be retrieved at
http://ir.nationalgeneral.com/events.cfm.

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 life settlement contracts, development of claims and the effect on loss reserves, large loss activity including hurricanes and wildfires, accuracy in projecting loss reserves, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, 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, 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 AmTrust Financial Services, Inc., ACP Re Ltd., Maiden Holdings, Ltd., or third party 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,  
    2017     2016  
    NGHC   Reciprocal Exchanges   Consolidated     NGHC   Reciprocal Exchanges   Consolidated  
Revenues:                            
Gross written premium   $ 1,100,706     $ 104,406     $ 1,204,311   (A)   $ 851,371     $ 80,978     $ 931,459   (H)
Net written premium   578,021     43,533     621,554       767,319     39,066     806,385    
Net earned premium   822,323     41,978     864,301       734,343     35,507     769,850    
                             
Ceding commission income   30,901     19,201     50,102       2,136     12,461     14,597    
Service and fee income   133,057     4,084     122,526   (B)   105,636     1,360     95,662   (I)
Net investment income   27,423     2,189     27,147   (C)   26,368     3,405     27,676   (J)
Net gain (loss) on investments   47,659     (54 )   47,605       10,997     96     11,093    
Other-than-temporary impairment loss                 (22,102 )       (22,102 )  
Other income (expense)   (3,901 )       (3,901 )                
Total revenues   $ 1,057,462     $ 67,398     $ 1,107,780   (D)   $ 857,378     $ 52,829     $ 896,776   (K)
                             
Expenses:                            
Loss and loss adjustment expense   $ 624,362     $ 26,856     $ 651,218       $ 491,948     $ 17,905     $ 509,853    
Acquisition costs and other underwriting expenses   146,469     17,116     163,585       135,057     5,683     140,740    
General and administrative expenses   209,923     18,819     214,127   (E)   185,615     24,456     198,737   (L)
Interest expense   11,495     2,465     11,495   (F)   10,455     2,097     10,455   (M)
Total expenses   $ 992,249     $ 65,256     $ 1,040,425   (G)   $ 823,075     $ 50,141     $ 859,785   (N)
                             
Income before provision (benefit) for income taxes and earnings (losses) of equity method investments   $ 65,213     $ 2,142     $ 67,355       $ 34,303     $ 2,688     $ 36,991    
Provision (benefit) for income taxes   6,867     831     7,698       9,090     (285 )   8,805    
Income before earnings (losses) of equity method investments   58,346     1,311     59,657       25,213     2,973     28,186    
Earnings (losses) of equity method investments (related parties)   (4,297 )       (4,297 )     2,953         2,953    
Net income before non-controlling interest and dividends on preferred shares   54,049     1,311     55,360       28,166     2,973     31,139    
Less: net income attributable to non-controlling interest       1,311     1,311       36     2,973     3,009    
Net income before dividends on preferred shares   54,049         54,049       28,130         28,130    
Less: dividends on preferred shares   7,875         7,875       8,208         8,208    
Net income available to common stockholders   $ 46,174     $     $ 46,174       $ 19,922     $     $ 19,922    

NOTES: Consolidated column includes eliminations as follows: (A) $(801), (B) $(14,615), (C) $(2,465), (D) $(17,080), (E) $(14,615), (F) $(2,465), (G) $(17,080), (H) $(890), (I) $(11,334), (J) $(2,097), (K) $(13,431), (L) $(11,334), (M) $(2,097) and (N) $(13,431).

 
Income Statement - Year to Date 
$ in thousands
(Unaudited)
 
    Nine Months Ended September 30,  
    2017     2016 (1)  
    NGHC   Reciprocal Exchanges   Consolidated     NGHC   Reciprocal Exchanges   Consolidated  
Revenues:                            
Gross written premium   $ 3,309,912     $ 285,779     $ 3,593,289   (A)   $ 2,441,613     $ 158,148     $ 2,598,160   (H)
Net written premium   2,603,816     136,477     2,740,293       2,210,225     78,196     2,288,421    
Net earned premium   2,642,957     123,266     2,766,223       2,066,175     71,535     2,137,710    
                             
Ceding commission income (loss)   37,047     54,557     91,604       (2,964 )   27,370     24,406    
Service and fee income   406,482     7,658     373,644   (B)   302,209     2,555     282,623   (I)
Net investment income   82,872     7,220     82,983   (C)   75,399     5,653     76,874   (J)
Net gain on investments   39,810     6,133     45,943       19,169     237     19,406    
Other-than-temporary impairment loss   (25 )       (25 )     (22,102 )       (22,102 )  
Other income (expense)   (198 )       (198 )                
Total revenues   $ 3,208,945     $ 198,834     $ 3,360,174   (D)   $ 2,437,886     $ 107,350     $ 2,518,917   (K)
                             
Expenses:                            
Loss and loss adjustment expense   $ 1,889,174     $ 88,776     $ 1,977,950       $ 1,355,620     $ 35,641     $ 1,391,261    
Acquisition costs and other underwriting expenses   480,845     46,836     527,681       356,343     6,176     362,513   (L)
General and administrative expenses   658,871     62,431     680,806   (E)   538,902     49,717     566,484   (M)
Interest expense   34,590     7,109     34,590   (F)   28,535     4,178     28,535   (N)
Total expenses   $ 3,063,480     $ 205,152     $ 3,221,027   (G)   $ 2,279,400     $ 95,712     $ 2,348,793   (O)
                             
Income (loss) before provision (benefit) for income taxes and earnings (losses) of equity method investments   $ 145,465     $ (6,318 )   $ 139,147       $ 158,486     $ 11,638     $ 170,124    
Provision (benefit) for income taxes   28,373     (1,345 )   27,028       41,998     (559 )   41,439    
Income (loss) before earnings (losses) of equity method investments   117,092     (4,973 )   112,119       116,488     12,197     128,685    
Earnings (losses) of equity method investments (related parties)   (18,258 )       (18,258 )     16,991         16,991    
Net income (loss) before non-controlling interest and dividends on preferred shares   98,834     (4,973 )   93,861       133,479     12,197     145,676    
Less: net income (loss) attributable to non-controlling interest       (4,973 )   (4,973 )     52     12,197     12,249    
Net income before dividends on preferred shares   98,834         98,834       133,427         133,427    
Less: dividends on preferred shares   23,625         23,625       16,458         16,458    
Net income available to common stockholders   $ 75,209     $     $ 75,209       $ 116,969     $     $ 116,969    

NOTES: Consolidated column includes eliminations as follows: (A) $(2,402), (B) $(40,496), (C) $(7,109), (D) $(47,605), (E) $(40,496), (F) $(7,109), (G) $(47,605), (H) $(1,601), (I) $(22,141), (J) $(4,178), (K) $(26,319), (L) $(6), (M) $(22,135), (N) $(4,178) and (O) $(26,319).

(1) The Reciprocal Exchanges did not meet the criteria for consolidation under GAAP for the Three Months Ended March 31, 2016.

 
Earnings and Per Share Data
$ in thousands, except shares and per share data
(Unaudited)
 
    Three Months Ended September 30,   Nine Months Ended September 30,
    2017   2016   2017   2016
Net income available to common stockholders   $ 46,174     $ 19,922     $ 75,209     $ 116,969  
Basic net income per common share   $ 0.43     $ 0.19     $ 0.71     $ 1.11  
Diluted net income per common share   $ 0.43     $ 0.18     $ 0.69     $ 1.08  
                 
Operating earnings attributable to NGHC(1)   $ 26,552     $ 31,673     $ 88,841     $ 122,638  
Basic operating earnings per common share(1)   $ 0.25     $ 0.30     $ 0.83     $ 1.16  
Diluted operating earnings per common share(1)   $ 0.24     $ 0.29     $ 0.82     $ 1.13  
                 
Dividends declared per common share   $ 0.04     $ 0.04     $ 0.12     $ 0.10  
                 
Weighted average number of basic shares outstanding   106,645,601     106,002,337     106,556,662     105,801,817  
Weighted average number of diluted shares outstanding   108,520,964     108,423,998     108,690,139     108,053,177  
Shares outstanding, end of period   106,670,768     106,088,008          
Fully diluted shares outstanding, end of period   108,546,131     108,509,669          
Book value per share   $ 14.41     $ 14.07          
Fully diluted book value per share   $ 14.16     $ 13.76          

 

 
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,
    2017   2016   2017   2016
                 
Net income available to common stockholders   $ 46,174     $ 19,922     $ 75,209     $ 116,969  
Add (subtract):                
Net (gain) on investments   (47,659 )   (10,997 )   (39,810 )   (19,169 )
Other-than-temporary impairment losses       22,102     25     22,102  
Other (income) expense   3,901         198      
Equity in (earnings) losses of equity method investments (related parties)   4,297     (2,953 )   18,258     (16,991 )
Non-cash amortization of intangible assets   9,274     9,927     42,301     22,779  
Income tax at 35%   10,565     (6,328 )   (7,340 )   (3,052 )
Operating earnings attributable to NGHC (1)   $ 26,552     $ 31,673     $ 88,841     $ 122,638  
                 
Operating earnings per common share:                
Basic operating earnings per common share   $ 0.25     $ 0.30     $ 0.83     $ 1.16  
Diluted operating earnings per common share   $ 0.24     $ 0.29     $ 0.82     $ 1.13  

NOTE: Our definition of Operating Earnings has been revised and now excludes the impact of equity in (earnings) losses of equity method investments (life settlements and real estate investments).  Previously, Operating Earnings included life settlements and certain real estate investments.

 
Balance Sheet
$ in thousands
 
    September 30, 2017 (unaudited)     December 31, 2016 (audited)  
ASSETS   NGHC   Reciprocal Exchanges   Consolidated     NGHC   Reciprocal Exchanges   Consolidated  
Total investments (2)   $ 3,580,273     $ 346,629     $ 3,837,784   (A)   $ 3,456,112     $ 306,345     $ 3,673,449   (J)
Cash and cash equivalents   326,637     4,091     330,728       212,894     7,405     220,299    
Premiums and other receivables, net   1,293,691     47,946     1,340,836   (B)   1,044,272     47,198     1,090,669   (K)
Reinsurance recoverable (3)   1,052,234     87,646     1,139,880       892,264     55,972     948,236    
Intangible assets, net   390,306     3,730     394,036       456,695     11,025     467,720    
Goodwill   190,713         190,713       155,290         155,290    
Other (4)   1,129,992     122,869     1,239,464   (C)   621,679     89,764     689,318   (L)
Total assets   $ 7,963,846     $ 612,911     $ 8,473,441   (D)   $ 6,839,206     $ 517,709     $ 7,244,981   (M)
LIABILITIES AND STOCKHOLDERS' EQUITY                            
Liabilities:                            
Unpaid loss and loss adjustment expense reserves   $ 2,426,619     $ 139,818     $ 2,566,437       $ 2,127,997     $ 137,075     $ 2,265,072    
Unearned premiums and other revenue   1,772,551     196,745     1,969,296       1,502,562     163,326     1,665,888    
Reinsurance payable (5)   288,622     43,633     331,454   (E)   78,949     20,662     98,810   (N)
Accounts payable and accrued expenses (6)   585,719     40,016     612,338   (F)   330,210     13,179     336,991   (O)
Debt   754,922     89,118     754,922   (G)   752,001     89,008     752,001   (P)
Other   178,055     78,476     256,531       153,658     62,784     200,715   (Q)
Total liabilities   $ 6,006,488     $ 587,806     $ 6,490,978   (H)   $ 4,945,377     $ 486,034     $ 5,319,477   (R)
Stockholders' equity:                            
Common stock (7)   $ 1,067     $     $ 1,067       $ 1,064     $     $ 1,064    
Preferred stock (8)   420,000         420,000       420,000         420,000    
Additional paid-in capital   919,477         919,477       914,706         914,706    
Accumulated other comprehensive income   9,259         9,259       12,710         12,710    
Retained earnings   607,555         607,555       545,106         545,106    
Total National General Holdings Corp. stockholders' equity   1,957,358         1,957,358       1,893,586         1,893,586    
Non-controlling interest       25,105     25,105       243     31,675     31,918    
Total stockholders' equity   $ 1,957,358     $ 25,105     $ 1,982,463       $ 1,893,829     $ 31,675     $ 1,925,504    
Total liabilities and stockholders' equity   $ 7,963,846     $ 612,911     $ 8,473,441   (I)   $ 6,839,206     $ 517,709     $ 7,244,981   (S)

NOTES: Consolidated column includes eliminations as follows: (A) $(89,118), (B) $(801), (C) $(13,397), (D) $(103,316), (E) $(801), (F) $(13,397), (G) $(89,118), (H) $(103,316), (I) $(103,316), (J) $(89,008), (K) $(801), (L) $(22,125), (M) $(111,934), (N) $(801), (O) $(6,398), (P) $(89,008), (Q) $(15,727), (R) $(111,934) and (S) $(111,934).

 
Segment Information - Third Quarter
$ in thousands
(Unaudited)
 
    Three Months Ended September 30,
    2017     2016
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal Exchanges
Gross written premium   $ 979,440     $ 121,266     $ 1,100,706       $ 104,406       $ 753,747     $ 97,624     $ 851,371       $ 80,978  
Net written premium   467,824     110,197     578,021       43,533       679,944     87,375     767,319       39,066  
Net earned premium   686,596     135,727     822,323       41,978       629,261     105,082     734,343       35,507  
                                       
Ceding commission income   30,675     226     30,901       19,201       1,809     327     2,136       12,461  
Service and fee income   100,565     32,492     133,057       4,084       65,478     40,158     105,636       1,360  
Total underwriting revenues   $ 817,836     $ 168,445     $ 986,281       $ 65,263       $ 696,548     $ 145,567     $ 842,115       $ 49,328  
                                       
Loss and loss adjustment expense   528,875     95,487     624,362       26,856       414,801     77,147     491,948       17,905  
Acquisition costs and other   112,643     33,826     146,469       17,116       102,221     32,836     135,057       5,683  
General and administrative   171,460     38,463     209,923       18,819       153,246     32,369     185,615       24,456  
Total underwriting expenses   $ 812,978     $ 167,776     $ 980,754       $ 62,791       $ 670,268     $ 142,352     $ 812,620       $ 48,044  
                                       
Underwriting income   4,858     669     5,527       2,472       26,280     3,215     29,495       1,284  
Non-cash amortization of intangible assets   7,994     1,280     9,274       (69 )     8,368     1,559     9,927       7,000  
Underwriting income before amortization and impairment   $ 12,852     $ 1,949     $ 14,801       $ 2,403       $ 34,648     $ 4,774     $ 39,422       $ 8,284  
                                       
Underwriting ratios                                      
Loss and loss adjustment expense ratio (9)   77.0 %   70.4 %   75.9 %     64.0 %     65.9 %   73.4 %   67.0 %     50.4 %
Operating expense ratio (Non-GAAP) (10,11)   22.3 %   29.2 %   23.4 %     30.1 %     29.9 %   23.5 %   29.0 %     46.0 %
Combined ratio (Non-GAAP) (10,12)   99.3 %   99.6 %   99.3 %     94.1 %     95.8 %   96.9 %   96.0 %     96.4 %
                                                                       
Underwriting ratios (before amortization and impairment)                                                                      
Loss and loss adjustment expense ratio (9)   77.0 %   70.4 %   75.9 %     64.0 %     65.9 %   73.4 %   67.0 %     50.4 %
Operating expense ratio (Non-GAAP) (10,13)   21.1 %   28.2 %   22.3 %     30.3 %     28.6 %   22.0 %   27.6 %     26.2 %
Combined ratio before amortization and impairment (Non-GAAP) (10,14)   98.1 %   98.6 %   98.2 %     94.3 %     94.5 %   95.4 %   94.6 %     76.6 %

NOTE: Loss and loss adjustment expenses for the three months ended September 30, 2017 included $4,961 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $2,738 of unfavorable development in the A&H segment, versus $705 of unfavorable development in the P&C segment, and $450 of favorable development in the A&H segment for the three months ended September 30, 2016.

 
Segment Information - Year to Date
$ in thousands
(Unaudited)
 
    Nine Months Ended September 30,
    2017     2016
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal Exchanges (1)
Gross written premium   $ 2,865,717     $ 444,195     $ 3,309,912       $ 285,779       $ 2,086,241     $ 355,372     $ 2,441,613       $ 158,148  
Net written premium   2,194,256     409,560     2,603,816       136,477       1,888,660     321,565     2,210,225       78,196  
Net earned premium   2,243,452     399,505     2,642,957       123,266       1,758,311     307,864     2,066,175       71,535  
                                       
Ceding commission income (loss)   36,263     784     37,047       54,557       (4,019 )   1,055     (2,964 )     27,370  
Service and fee income   298,674     107,808     406,482       7,658       189,739     112,470     302,209       2,555  
Total underwriting revenues   $ 2,578,389     $ 508,097     $ 3,086,486       $ 185,481       $ 1,944,031     $ 421,389     $ 2,365,420       $ 101,460  
                                       
Loss and loss adjustment expense   1,642,053     247,121     1,889,174       88,776       1,123,353     232,267     1,355,620       35,641  
Acquisition costs and other   368,770     112,075     480,845       46,836       275,171     81,172     356,343       6,176  
General and administrative   536,353     122,518     658,871       62,431       445,053     93,849     538,902       49,717  
Total underwriting expenses   $ 2,547,176     $ 481,714     $ 3,028,890       $ 198,043       $ 1,843,577     $ 407,288     $ 2,250,865       $ 91,534  
                                       
Underwriting income (loss)   31,213     26,383     57,596       (12,562 )     100,454     14,101     114,555       9,926  
Non-cash amortization of intangible assets   38,006     4,295     42,301       6,909       17,843     4,936     22,779       13,726  
Underwriting income (loss) before amortization and impairment   $ 69,219     $ 30,678     $ 99,897       $ (5,653 )     $ 118,297     $ 19,037     $ 137,334       $ 23,652  
                                       
Underwriting ratios                                      
Loss and loss adjustment expense ratio (9)   73.2 %   61.9 %   71.5 %     72.0 %     63.9 %   75.4 %   65.6 %     49.8 %
Operating expense ratio (Non-GAAP) (10,11)   25.4 %   31.5 %   26.3 %     38.2 %     30.4 %   20.0 %   28.8 %     36.3 %
Combined ratio (Non-GAAP) (10,12)   98.6 %   93.4 %   97.8 %     110.2 %     94.3 %   95.4 %   94.4 %     86.1 %
                                                                       
Underwriting ratios (before amortization and impairment)                                                                      
Loss and loss adjustment expense ratio (9)   73.2 %   61.9 %   71.5 %     72.0 %     63.9 %   75.4 %   65.6 %     49.8 %
Operating expense ratio (Non-GAAP) (10,13)   23.7 %   30.5 %   24.7 %     32.6 %     29.4 %   18.4 %   27.7 %     17.1 %
Combined ratio before amortization and impairment (Non-GAAP) (10,14)   96.9 %   92.4 %   96.2 %     104.6 %     93.3 %   93.8 %   93.3 %     66.9 %

NOTES: (1) Reciprocal Exchanges' column for the nine months ended September 30, 2016 excludes its operating results from January 1, 2016 to March 31, 2016.
Loss and loss adjustment expenses for the nine months ended September 30, 2017 included $7,177 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $10,106 of favorable development in the A&H segment, versus $6,629 of favorable development in the P&C segment, and $3,134 of unfavorable development in the A&H segment for the nine months ended September 30, 2016.

 
Reconciliation of Operating Expense Ratio (Non-GAAP)
$ in thousands
(Unaudited)
 
    Three Months Ended September 30, 
    2017     2016
    P&C   A&H   NGHC     Reciprocal Exchanges     P&C   A&H   NGHC     Reciprocal Exchanges
Total underwriting expenses   $ 812,978     $ 167,776     $ 980,754       $ 62,791       $ 670,268     $ 142,352     $ 812,620       $ 48,044  
Less: Loss and loss adjustment expense   528,875     95,487     624,362       26,856       414,801     77,147     491,948       17,905  
Less: Ceding commission income   30,675     226     30,901       19,201       1,809     327     2,136       12,461  
Less: Service and fee income   100,565     32,492     133,057       4,084       65,478     40,158     105,636       1,360  
Operating expense   152,863     39,571     192,434       12,650       188,180     24,720     212,900       16,318  
Net earned premium   $ 686,596     $ 135,727     $ 822,323       $ 41,978       $ 629,261     $ 105,082     $ 734,343       $ 35,507  
Operating expense ratio (Non-GAAP)   22.3 %   29.2 %   23.4 %     30.1 %     29.9 %   23.5 %   29.0 %     46.0 %
                                       
Total underwriting expenses   $ 812,978     $ 167,776     $ 980,754       $ 62,791       $ 670,268     $ 142,352     $ 812,620       $ 48,044  
Less: Loss and loss adjustment expense   528,875     95,487     624,362       26,856       414,801     77,147     491,948       17,905  
Less: Ceding commission income   30,675     226     30,901       19,201       1,809     327     2,136       12,461  
Less: Service and fee income   100,565     32,492     133,057       4,084       65,478     40,158     105,636       1,360  
Less: Non-cash amortization of intangible assets   7,994     1,280     9,274       (69 )     8,368     1,559     9,927       7,000  
Operating expense before amortization and impairment   144,869     38,291     183,160       12,719       179,812     23,161     202,973       9,318  
Net earned premium   $ 686,596     $ 135,727     $ 822,323       $ 41,978       $ 629,261     $ 105,082     $ 734,343       $ 35,507  
Operating expense ratio before amortization and impairment (Non-GAAP)   21.1 %   28.2 %   22.3 %     30.3 %     28.6 %   22.0 %   27.6 %     26.2 %

 

 
Reconciliation of Operating Expense Ratio (Non-GAAP)
$ in thousands
(Unaudited)
 
    Nine Months Ended September 30,
    2017     2016
    P&C   A&H   NGHC     Reciprocal Exchanges     P&C   A&H   NGHC     Reciprocal Exchanges
Total underwriting expenses   $ 2,547,176     $ 481,714     $ 3,028,890       $ 198,043       $ 1,843,577     $ 407,288     $ 2,250,865       $ 91,534  
Less: Loss and loss adjustment expense   1,642,053     247,121     1,889,174       88,776       1,123,353     232,267     1,355,620       35,641  
Less: Ceding commission income (loss)   36,263     784     37,047       54,557       (4,019 )   1,055     (2,964 )     27,370  
Less: Service and fee income   298,674     107,808     406,482       7,658       189,739     112,470     302,209       2,555  
Operating expense   570,186     126,001     696,187       47,052       534,504     61,496     596,000       25,968  
Net earned premium   $ 2,243,452     $ 399,505     $ 2,642,957       $ 123,266       $ 1,758,311     $ 307,864     $ 2,066,175       $ 71,535  
Operating expense ratio (Non-GAAP)   25.4 %   31.5 %   26.3 %     38.2 %     30.4 %   20.0 %   28.8 %     36.3 %
                                       
Total underwriting expenses   $ 2,547,176     $ 481,714     $ 3,028,890       $ 198,043       $ 1,843,577     $ 407,288     $ 2,250,865       $ 91,534  
Less: Loss and loss adjustment expense   1,642,053     247,121     1,889,174       88,776       1,123,353     232,267     1,355,620       35,641  
Less: Ceding commission income (loss)   36,263     784     37,047       54,557       (4,019 )   1,055     (2,964 )     27,370  
Less: Service and fee income   298,674     107,808     406,482       7,658       189,739     112,470     302,209       2,555  
Less: Non-cash amortization of intangible assets   38,006     4,295     42,301       6,909       17,843     4,936     22,779       13,726  
Operating expense before amortization and impairment   532,180     121,706     653,886       40,143       516,661     56,560     573,221       12,242  
Net earned premium   $ 2,243,452     $ 399,505     $ 2,642,957       $ 123,266       $ 1,758,311     $ 307,864     $ 2,066,175       $ 71,535  
Operating expense ratio before amortization and impairment (Non-GAAP)   23.7 %   30.5 %   24.7 %     32.6 %     29.4 %   18.4 %   27.7 %     17.1 %

 

 
Premiums by Business Line
$ in thousands
(Unaudited)
 
    Three Months Ended September 30,
    Gross Written Premium     Net Written Premium     Net Earned Premium
    2017   2016   Change     2017   2016   Change     2017   2016   Change
Property & Casualty                                        
Personal Auto   $ 599,608     $ 384,670     55.9 %     $ 318,773     $ 344,605     (7.5 )%     $ 428,112     $ 312,654     36.9 %
Homeowners   154,352     136,437     13.1 %     (18,881 )   120,242     (115.7 )%     68,042     100,875     (32.5 )%
RV/Packaged   49,928     42,964     16.2 %     49,547     42,705     16.0 %     45,742     40,727     12.3 %
Small Business Auto   79,296     72,692     9.1 %     43,505     66,790     (34.9 )%     60,013     59,791     0.4 %
Lender-placed insurance   84,447     105,249     (19.8 )%     70,581     99,824     (29.3 )%     79,048     103,751     (23.8 )%
Other   11,809     11,735     0.6 %     4,299     5,778     (25.6 )%     5,639     11,463     (50.8 )%
Property & Casualty   979,440     753,747     29.9 %     467,824     679,944     (31.2 )%     686,596     629,261     9.1 %
                                         
Accident & Health   121,266     97,624     24.2 %     110,197     87,375     26.1 %     135,727     105,082     29.2 %
Total National General   $ 1,100,706     $ 851,371     29.3 %     $ 578,021     $ 767,319     (24.7 )%     $ 822,323     $ 734,343     12.0 %
                                         
Reciprocal Exchanges                                        
Personal Auto   $ 39,040     $ 25,345     54.0 %     $ 12,533     $ 15,047     (16.7 )%     $ 15,167     $ 13,860     9.4 %
Homeowners   64,240     53,534     20.0 %     30,497     22,948     32.9 %     26,382     20,275     30.1 %
Other   1,126     2,099     (46.4 )%     503     1,071     (53.0 )%     429     1,372     (68.7 )%
Reciprocal Exchanges   $ 104,406     $ 80,978     28.9 %     $ 43,533     $ 39,066     11.4 %     $ 41,978     $ 35,507     18.2 %
                                             
Consolidated Total (A)   $ 1,204,311     $ 931,459     29.3 %     $ 621,554     $ 806,385     (22.9 )%     $ 864,301     $ 769,850     12.3 %

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, and $(286) in Personal Auto and $(604) in Homeowners Gross Written Premium in 2016, respectively.

 
Premiums by Business Line
$ in thousands
(Unaudited)
 
    Nine Months Ended September 30,
    Gross Written Premium     Net Written Premium     Net Earned Premium
    2017   2016   Change     2017   2016   Change     2017   2016   Change
Property & Casualty                                        
Personal Auto   $ 1,761,779     $ 1,107,963     59.0 %     $ 1,387,024     $ 977,212     41.9 %     $ 1,377,752     $ 875,480     57.4 %
Homeowners   421,061     307,455     37.0 %     217,590     276,677     (21.4 )%     282,741     256,870     10.1 %
RV/Packaged   147,280     129,260     13.9 %     146,256     128,582     13.7 %     129,706     117,261     10.6 %
Small Business Auto   246,562     191,209     28.9 %     195,577     174,731     11.9 %     193,578     155,105     24.8 %
Lender-placed insurance   251,091     325,436     (22.8 )%     229,938     317,206     (27.5 )%     241,990     335,076     (27.8 )%
Other   37,944     24,918     52.3 %     17,871     14,252     25.4 %     17,685     18,519     (4.5 )%
Property & Casualty   2,865,717     2,086,241     37.4 %     2,194,256     1,888,660     16.2 %     2,243,452     1,758,311     27.6 %
                                         
Accident & Health   444,195     355,372     25.0 %     409,560     321,565     27.4 %     399,505     307,864     29.8 %
Total National General   $ 3,309,912     $ 2,441,613     35.6 %     $ 2,603,816     $ 2,210,225     17.8 %     $ 2,642,957     $ 2,066,175     27.9 %
                                         
Reciprocal Exchanges                                        
Personal Auto   $ 102,420     $ 48,466     NA     $ 51,240     $ 28,500     NA     $ 48,523     $ 26,840     NA
Homeowners   180,616     105,170     NA     83,887     46,483     NA     73,533     39,879     NA
Other   2,743     4,512     NA     1,350     3,213     NA     1,210     4,816     NA
Reciprocal Exchanges (A)   $ 285,779     $ 158,148     NA     $ 136,477     $ 78,196     NA     $ 123,266     $ 71,535     NA
                                         
Consolidated Total (B)   $ 3,593,289     $ 2,598,160     38.3 %     $ 2,740,293     $ 2,288,421     19.7 %     $ 2,766,223     $ 2,137,710     29.4 %

NOTES: (A) The Reciprocal Exchanges did not meet the criteria for consolidation under GAAP for the Three Months Ended March 31, 2016.
(B) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(866) in Personal Auto and $(1,536) in Homeowners Gross Written Premium in 2017, respectively, and $(506) in Personal Auto and $(1,095) in Homeowners Gross Written Premium in 2016, 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), 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 $352,330 and $390,688 in related parties at September 30, 2017 and December 31, 2016, respectively.

(3) Reinsurance recoverable includes $20,174 and $37,046 from related parties at September 30, 2017 and December 31, 2016, respectively.

(4) Other includes $1,167 and $1,298 from related parties at September 30, 2017 and December 31, 2016, respectively.

(5) Reinsurance payable includes $18,180 and $33,419 due to related parties at September 30, 2017 and December 31, 2016, respectively.

(6) Accounts payable and accrued expenses includes $179,118 and $29,271 to related parties at September 30, 2017 and December 31, 2016, respectively.

(7) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 106,670,768 shares - September 30, 2017; authorized 150,000,000 shares, issued and outstanding 106,428,092 shares - December 31, 2016.

(8) Preferred stock: $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - September 30, 2017; authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - December 31, 2016.

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

(10) 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.

(11) 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.

(12) 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.

(13) 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.

(14) 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.

(15) In the current year's quarter, certain costs associated with claims handling were prospectively reclassified from general and administrative expenses to loss adjustment expenses. In the year-ago quarter, the corresponding change to the Property and Casualty segment would have been $28.2 million, negligible in the Accident and Health segment and $4.0 million in the Reciprocal Exchange.

(16) 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.

(17) Combined ratio excluding losses from Hurricanes Harvey, Irma and Maria is calculated by taking the combined ratio as defined in Note 14, and adjusting it to exclude the total net losses of $52.4 million from those three events.  The company believes this measure enhances investors' understanding of our results by eliminating what we believe are volatile and unusual events.

    Q3'17 Combined
Ratio
  Impact of
Excluding
Hurricane Losses
  Q3'17 Combined
Ratio Excluding
Hurricane Losses
             
Overall NGHC   98.2%   6.4%   91.8%
             
P&C Segment   98.1%   7.6%   90.5%
             

Investor Contact

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