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10/30/18

National General Holdings Corp. Reports Third Quarter 2018 Results

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

Third Quarter 2018 Highlights Versus Third Quarter 2017*

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

  • In the third quarter, our homeowners’ product experienced organic growth of 24.6% driven by strong results from strategic partnerships and the continued expansion in the high net worth market. Our personal auto product experienced organic growth of 10.3% driven by continued rate increases and PIF growth.

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

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

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

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

  • Third quarter 2018 operating earnings exclude the following material items, net of tax: $2.4 million or $0.02 net loss on investments and $6.5 million or $0.06 per share of non-cash amortization of intangible assets.

Barry Karfunkel, National General’s CEO, stated: “Our third quarter results continue to demonstrate the underwriting results that both our Property and Casualty and Accident and Health segments are able to generate with the full integration of past acquisitions.  Despite another active catastrophe quarter, our P&C segment was able to generate a 94% combined ratio, largely driven by strong trends in our auto book.  Our A&H segment continues to grow profitably, and our suite of products and owned distribution positions us well in the changing domestic healthcare environment.  I am pleased with the continued execution of our strategy: continued profitable growth within the niches of the insurance industry we serve.”

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

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

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

Third quarter 2018 investment income grew to $31.0 million, compared to $25.4 million in the third quarter of 2017, with the increase partially driven by an improvement in the book yield from the previous quarter’s re-balancing and new investments in the quarter. Total investments and cash and cash equivalents (including restricted cash) were $4.1 billion as of September 30, 2018. Accumulated other comprehensive income (loss) increased to a $68.6 million loss at September 30, 2018 from a $8.1 million loss at December 31, 2017, primarily due to the impact of higher interest rates which negatively impacted bond valuations.

Interest expense was $12.6 million and debt was $675.3 million at September 30, 2018, and $713.7 million at December 31, 2017.

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

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

Year-to-Date P&C Segment Notable Large Losses
2018 Quarter     P&C Notable Large Losses and LAE
($ millions)
  P&C Loss Ratio Points*   EPS Impact After Tax
Q3 California Fires and Hurricane Florence   $35.0   4.7%   $0.25
Q2 Spring Weather-related and Texas Hail Events   $20.5   2.8%   $0.15
Q1 Northeastern Winter Weather   $14.2   2.0%   $0.10

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

Additional Item

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

Conference Call

On Wednesday, October 31, 2018 at 8:30 AM ET, Chief Executive Officer Barry Karfunkel and Chief Financial Officer Mike Weiner will review results and discuss business conditions via a conference call that may be accessed as follows:

Toll-Free U.S. Dial-in:      888-346-7359
International Dial-in:       973-528-0008
Conference Entry Code:   626384
Webcast Registration:      http://ir.nationalgeneral.com/events-and-presentations 

A replay of the conference call will be accessible from 2:00 PM ET on Wednesday, October 31, 2018 to 11:59 PM ET on Wednesday, November 14, 2018 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 626384. In addition, a replay of the webcast can also be retrieved at http://ir.nationalgeneral.com/events-and-presentations

About National General Holdings Corp.

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

Forward Looking Statements

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


Income Statement - Third Quarter
$ in thousands
(Unaudited)

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

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


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

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

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


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

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


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

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


Balance Sheet
$ in thousands

    September 30, 2018 (unaudited)     December 31, 2017 (audited)  
ASSETS   NGHC   Reciprocal Exchanges   Consolidated     NGHC   Reciprocal Exchanges   Consolidated  
Total investments (2)   $ 3,644,476     $ 320,337     $ 3,863,534   (A)   $ 3,411,730     $ 327,213     $ 3,649,788   (J)
Cash and cash equivalents, including restricted cash   434,667     263     434,930       351,433     6,051     357,484    
Premiums and other receivables, net   1,398,843     64,090     1,461,332   (B)   1,268,330     56,792     1,324,321   (K)
Reinsurance activity (3)   1,951,021     256,773     2,207,794       1,616,103     195,184     1,811,287    
Intangible assets, net   379,652     3,550     383,202       400,385     3,685     404,070    
Goodwill   183,984         183,984       174,153         174,153    
Other (4)   704,870     32,350     714,312   (C)   705,321     29,174     718,640   (L)
Total assets   $ 8,697,513     $ 677,363     $ 9,249,088   (D)   $ 7,927,455     $ 618,099     $ 8,439,743   (M)
LIABILITIES AND STOCKHOLDERS’ EQUITY                            
Liabilities:                            
Unpaid loss and loss adjustment expense reserves   $ 2,679,190     $ 175,945     $ 2,855,135       $ 2,520,204     $ 143,353     $ 2,663,557    
Unearned premiums and other revenue   2,067,437     264,418     2,331,855       1,807,210     225,395     2,032,605    
Reinsurance payable   594,460     62,833     655,692   (E)   329,772     69,076     398,047   (N)
Accounts payable and accrued expenses (5)   460,498     27,299     464,889   (F)   423,054     24,682     431,881   (O)
Debt   675,263     101,279     675,263   (G)   713,710     89,155     713,710   (P)
Other   163,731     59,544     223,275       204,936     41,582     246,518    
Total liabilities   $ 6,640,579     $ 691,318     $ 7,206,109   (H)   $ 5,998,886     $ 593,243     $ 6,486,318   (Q)
Stockholders’ equity:                            
Common stock (6)   $ 1,071     $     $ 1,071       $ 1,067     $     $ 1,067    
Preferred stock (7)   450,000         450,000       420,000         420,000    
Additional paid-in capital   923,124         923,124       917,751         917,751    
Accumulated other comprehensive income (loss)   (68,581 )       (68,581 )     (8,112 )       (8,112 )  
Retained earnings   751,320         751,320       597,863         597,863    
Total National General Holdings Corp. stockholders’ equity   2,056,934         2,056,934       1,928,569         1,928,569    
Non-controlling interest       (13,955 )   (13,955 )         24,856     24,856    
Total stockholders’ equity   $ 2,056,934     $ (13,955 )   $ 2,042,979       $ 1,928,569     $ 24,856     $ 1,953,425    
Total liabilities and stockholders’ equity   $ 8,697,513     $ 677,363     $ 9,249,088   (I)   $ 7,927,455     $ 618,099     $ 8,439,743   (R)

NOTES: Consolidated column includes eliminations as follows: (A) $(101,279), (B) $(1,601), (C) $(22,908), (D) $(125,788), (E) $(1,601), (F) $(22,908), (G) $(101,279), (H) $(125,788), (I) $(125,788), (J) $(89,155), (K) $(801), (L) $(15,855), (M) $(105,811), (N) $(801), (O) $(15,855), (P) $(89,155), (Q) $(105,811) and (R) $(105,811).


Segment Information - Third Quarter
$ in thousands
(Unaudited)

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

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


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

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

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


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

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


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

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


Premiums by Business Line
$ in thousands
(Unaudited)

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

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

nm - not meaningful

Premiums by Business Line
$ in thousands
(Unaudited)

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

NOTES: (A) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(567) in Personal Auto and $(1,034) in Homeowners Gross Written Premium in 2018, respectively, and $(866) in Personal Auto and $(1,536) in Homeowners Gross Written Premium in 2017, respectively.

Additional Disclosures

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

(2) Total investments includes $233,179 and $347,548 in related parties at September 30, 2018 and December 31, 2017, respectively.

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

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

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

(6) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 107,132,560 shares - September 30, 2018; authorized 150,000,000 shares, issued and outstanding 106,697,648 shares - December 31, 2017.

(7) Preferred stock: $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,120 shares - September 30, 2018; authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - December 31, 2017.

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

(9) Operating expense ratio and combined ratio are considered non-GAAP financial measures under applicable SEC rules because a component of those ratios, operating expense, is calculated by offsetting acquisition and other underwriting costs and general and administrative expenses by ceding commission income and service and fee income. Management uses operating expense ratio (non-GAAP) and combined ratio (non-GAAP) to evaluate financial performance against historical results and establish targets on a consolidated basis. The Company believes this presentation enhances the understanding of our results by eliminating what we believe are volatile and unusual events and presenting the ratios with what we believe are the underlying run rates of the business. Other companies may calculate these measures differently, and, therefore, their measures may not be comparable to those used by National General. Please see the Non-GAAP Financial Measures table within this release for the reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

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

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

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

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

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

(15) Combined ratio excluding losses from various Q3’18 weather-related events, and is calculated by taking the combined ratio as defined in Note 13, and adjusting it to exclude the total net losses of $35.0 million from these events. The company believes this measure enhances investors’ understanding of our results by eliminating what we believe are volatile and unusual events.

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

Investor Contact

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

 

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Source: National General Holdings Corp