National General
05/08/17
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National General Holdings Corp. Reports First Quarter 2017 Results

NEW YORK, May 08, 2017 (GLOBE NEWSWIRE) -- National General Holdings Corp. (NASDAQ:NGHC) today reported first quarter 2017 net income of $34.1 million or $0.31 per diluted share, compared to $52.7 million or $0.49 per diluted share in the first quarter of 2016. First quarter 2017 operating earnings(1) was $41.3 million or $0.38 per diluted share, compared to $53.7 million or $0.50 per diluted share in the first quarter of 2016.

First Quarter 2017 Highlights Versus First Quarter 2016*

Barry Karfunkel, National General's President and CEO, stated: "The first quarter saw strong organic growth in our Property and Casualty segment, especially in our auto book, as we continue to take advantage of the current market dislocation.  The opportunity that we are seeing in the market is exceptional, and we are excited to be in a position to benefit from it.  Our Accident and Health segment had another strong quarter, as the segment has built the scale to be a significant contributor to earnings moving forward.  Internally, we remain focused on integrating recent acquisitions and enhancing the capabilities of our state-of-the-art platform."

*NOTE: Unless specified otherwise, discussion of our first 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 First Quarter 2017 as Compared to First Quarter 2016

Gross written premium grew 43.8% to $1,173.7 million, net written premium grew 45.7% to $1,085.0 million, and net earned premium grew 34.5% to $881.1 million. Premium growth was driven by several key factors: underlying organic growth within our P&C segment, continued growth of our A&H segment, additional premiums from the acquisitions of Direct General which closed on November 1, 2016, Standard Property and Casualty Insurance Company (f/k/a Standard Mutual) which closed on October 7, 2016 and Century-National which closed on June 1, 2016.

Service and fee income grew 40.1% to $135.9 million, driven by added service and fee income from our recent completed transactions, primarily the Direct General acquisition which contributed an additional $33.3 million in the quarter, partially offset by a slight decrease in our A&H segment. Other revenue in the first quarter of 2017 included a $9.8 million pre-tax bargain purchase gain related to recent acquisitions.

Excluding non-cash amortization of intangible assets, the combined ratio(10,14,15) was 94.4% with a loss ratio(15) of 66.8% and an expense ratio(10,13,15) of 27.6%, compared to a prior year combined ratio of 91.3% with a loss ratio of 62.5% and an expense ratio of 28.8%. In the current year's quarter, certain costs associated with claims handling were reclassified from general and administrative expenses to loss adjustment expenses resulting in an increase in loss and loss adjustment expense ratio and a decrease in expense ratio in corresponding amounts(15).

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

Investment income grew 18.9% to $25.8 million, reflecting an increase in the size of our investment portfolio as compared to the prior year's quarter. First quarter 2017 results included $0.2 million of net realized investment losses compared to a gain of $3.6 million in the first quarter of 2016. Total investments and cash equivalents were $3.8 billion as of March 31, 2017. Accumulated other comprehensive income increased to $19.9 million at March 31, 2017 from $12.7 million at December 31, 2016.

Interest expense was $11.5 million, up from $9.1 million in the prior year's quarter due to an increased amount of debt on our balance sheet. Debt was $746.0 million at March 31, 2017, up from $446.2 million at March 31, 2016, as a result of our borrowings under our credit facility, our June 2016 promissory note for the acquisition of Century-National, and debt assumed from our prior acquisitions.

Earnings of equity investments (predominantly our investment in Life Settlement Entities and alternative investments) was a $5.0 million gain in the first quarter of 2017 versus a $6.7 million gain in the prior year's quarter.

The first quarter of 2017 provision for income taxes was $15.8 million and the effective tax rate for the quarter was 29.8%.

National General Holding Corp.'s shareholders' equity was $1,933.2 million at March 31, 2017, growth of 2.1% from $1,893.8 million at December 31, 2016. Fully diluted book value per share was $13.83 at March 31, 2017, growth of 2.3% from $13.52 at December 31, 2016. Our trailing twelve month operating return on average equity (ROE)(16) was 10.7% as of March 31, 2017.

Year-to-Date P&C Segment Notable Large Losses
  P&C Notable Large
Losses and ALAE

($ millions)
 P&C Loss Ratio
Points*
 EPS Impact After
Tax
Q1West 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 Monday, May 8, 2017 at 11:00 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: 170847
Webcast Registration: http://ir.nationalgeneral.com/events.cfm


A replay of the conference call will be accessible from 2:00 PM ET on Monday, May 8, 2017 to 11:59 PM ET on Monday, May 22, 2017 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 170847. 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 our life settlement contracts, development of claims and the effect on loss reserves, 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 - First Quarter
$ in thousands
(Unaudited)
 
  Three Months Ended March 31,
  2017  2016 (1)
  NGHC Reciprocal
Exchanges
 Consolidated  NGHC Consolidated
Revenues:           
Gross written premium $1,173,654  $82,216  $1,255,069 (A) $816,194  $816,194 
Net written premium 1,085,038  41,701  1,126,739   744,587  744,587 
Net earned premium 881,139  39,032  920,171   654,920  654,920 
            
Ceding commission income (loss) 2,747  17,247  19,994   (1,895) (1,895)
Service and fee income 135,863  2,080  125,942 (B) 96,944  96,944 
Net investment income 25,769  2,884  26,390 (C) 21,670  21,670 
Net gain (loss) on investments (161)   (161)  3,617  3,617 
Bargain purchase gain and other revenue 10,450    10,450   701  701 
Total revenues $1,055,807  $61,243  $1,102,786 (D) $775,957  $775,957 
            
Expenses:           
Loss and loss adjustment expense $588,225  $28,100  $616,325   $409,050  $409,050 
Acquisition costs and other underwriting expenses 161,121  14,180  175,301   112,899  112,899 
General and administrative expenses 242,083  25,103  255,185 (E) 176,627  176,627 
Interest expense 11,545  2,263  11,545 (F) 9,141  9,141 
Total expenses $1,002,974  $69,646  $1,058,356 (G) $707,717  $707,717 
            
Income (loss) before provision (benefit) for income taxes and earnings of equity method investments $52,833  $(8,403) $44,430   $68,240  $68,240 
Provision (benefit) for income taxes 15,766  (2,248) 13,518   18,083  18,083 
Income (loss) before earnings of equity method investments 37,067  (6,155) 30,912   50,157  50,157 
Earnings of equity method investments 4,954    4,954   6,682  6,682 
Net income (loss) before non-controlling interest and dividends on preferred shares 42,021  (6,155) 35,866   56,839  56,839 
Less: net income (loss) attributable to non-controlling interest 30  (6,155) (6,125)  12  12 
Net income before dividends on preferred shares 41,991    41,991   56,827  56,827 
Less: dividends on preferred shares 7,875    7,875   4,125  4,125 
Net income available to common stockholders $34,116  $  $34,116   $52,702  $52,702 

NOTES:
(1) The Reciprocal Exchanges did not meet the criteria for consolidation under GAAP for the Three Months Ended March 31, 2016.
Consolidated column includes eliminations as follows: (A) $(801), (B) $(12,001), (C) $(2,263), (D) $(14,264), (E) $(12,001), (F) $(2,263) and (G) $(14,264).



Earnings and Per Share Data
$ in thousands, except shares and per share data
(Unaudited)
 
 Three Months Ended March 31,
 2017 2016
Net income available to common stockholders$34,116  $52,702 
Basic net income per common share$0.32  $0.50 
Diluted net income per common share$0.31  $0.49 
    
Operating earnings attributable to NGHC(1)$41,285  $53,734 
Basic operating earnings per common share(1)$0.39  $0.51 
Diluted operating earnings per common share(1)$0.38  $0.50 
    
Dividends declared per common share$0.04  $0.03 
    
Weighted average number of basic shares outstanding106,467,599  105,597,594 
Weighted average number of diluted shares outstanding109,166,681  108,266,508 
Shares outstanding, end of period106,502,250  105,714,916 
Fully diluted shares outstanding, end of period109,378,890  108,383,830 
    
Book value per share$14.21  $12.97 
Fully diluted book value per share$13.83  $12.65 



Reconciliation of Net Income to Operating Earnings (Non-GAAP)
$ in thousands, except per share data
(Unaudited)
 
  Three Months Ended March 31,
  2017 2016
     
Net income available to common stockholders $34,116  $52,702 
Add (subtract):    
Net (gain) loss on investments 161  (3,617)
Foreign exchange gain (649) (620)
Bargain purchase gain (9,801)  
Equity in (earnings) losses of unconsolidated subsidiaries (other than LSC investment and certain Real Estate investments) (18) 161 
Non-cash amortization of intangible assets 21,337  5,664 
Income tax at 35% (3,861) (556)
Operating earnings attributable to NGHC (1) $41,285  $53,734 
     
Operating earnings per common share:    
Basic operating earnings per common share $0.39  $0.51 
Diluted operating earnings per common share $0.38  $0.50 



Balance Sheet 
$ in thousands 
  
  March 31, 2017 (unaudited)  December 31, 2016 (audited) 
ASSETS NGHC Reciprocal
Exchanges
 Consolidated  NGHC Reciprocal
Exchanges
 Consolidated 
Total investments (2) $3,612,923  $311,818  $3,835,696 (A) $3,456,112  $306,345  $3,673,449 (J)
Cash and cash equivalents 202,659  6,985  209,644   212,894  7,405  220,299  
Premiums and other receivables, net 1,351,938  43,972  1,394,309 (B) 1,044,272  47,198  1,090,669 (K)
Reinsurance recoverable (3) 896,566  71,521  968,087   892,264  55,972  948,236  
Intangible assets, net 435,082  3,820  438,902   456,695  11,025  467,720  
Goodwill 173,528    173,528   155,290    155,290  
Other (4) 648,654  97,282  737,312 (C) 621,679  89,764  689,318 (L)
Total assets $7,321,350  $535,398  $7,757,478 (D) $6,839,206  $517,709  $7,244,981 (M)
LIABILITIES AND STOCKHOLDERS' EQUITY              
Liabilities:              
Unpaid loss and loss adjustment expense reserves $2,129,116  $139,085  $2,268,201   $2,127,997  $137,075  $2,265,072  
Unearned premiums 1,687,462  167,356  1,854,818   1,472,299  163,326  1,635,625  
Reinsurance payable (5) 98,413  37,638  134,450 (E) 78,949  20,662  98,810 (N)
Accounts payable and accrued expenses (6) 471,533  14,202  477,111 (F) 330,210  13,179  336,991 (O)
Debt 745,962  89,045  745,962 (G) 752,001  89,008  752,001 (P)
Other 255,627  61,726  317,353   183,921  62,784  230,978 (Q)
Total liabilities $5,388,113  $509,052  $5,797,895 (H) $4,945,377  $486,034  $5,319,477 (R)
Stockholders' equity:              
Common stock (7) $1,065  $  $1,065   $1,064  $  $1,064  
Preferred stock (8) 420,000    420,000   420,000    420,000  
Additional paid-in capital 917,057    917,057   914,706    914,706  
Accumulated other comprehensive income 19,880    19,880   12,710    12,710  
Retained earnings 574,962    574,962   545,106    545,106  
Total National General Holdings Corp. stockholders' equity 1,932,964    1,932,964   1,893,586    1,893,586  
Non-controlling interest 273  26,346  26,619   243  31,675  31,918  
Total stockholders' equity $1,933,237  $26,346  $1,959,583   $1,893,829  $31,675  $1,925,504  
Total liabilities and stockholders' equity $7,321,350  $535,398  $7,757,478 (I) $6,839,206  $517,709  $7,244,981 (S)

NOTES:
Consolidated column includes eliminations as follows: (A) $(89,045), (B) $(1,601), (C) $(8,624), (D) $(99,270), (E) $(1,601), (F) $(8,624), (G) $(89,045), (H) $(99,270), (I) $(99,270), (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 - First Quarter
$ in thousands
(Unaudited)
 
  Three Months Ended March 31,
  2017  2016
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC
Gross written premium $981,699  $191,955  $1,173,654   $82,216   $661,337  $154,857  $816,194 
Net written premium 903,924  181,114  1,085,038   41,701   600,774  143,813  744,587 
Net earned premium 752,213  128,926  881,139   39,032   554,048  100,872  654,920 
                 
Ceding commission income (loss) 2,460  287  2,747   17,247   (2,264) 369  (1,895)
Service and fee income 103,590  32,273  135,863   2,080   63,488  33,456  96,944 
Total underwriting revenues $858,263  $161,486  $1,019,749   $58,359   $615,272  $134,697  $749,969 
                 
Loss and loss adjustment expense 521,334  66,891  588,225   28,100   332,659  76,391  409,050 
Acquisition costs and other 129,631  31,490  161,121   14,180   91,659  21,240  112,899 
General and administrative 196,870  45,213  242,083   25,103   144,694  31,933  176,627 
Total underwriting expenses $847,835  $143,594  $991,429   $67,383   $569,012  $129,564  $698,576 
                 
Underwriting income (loss) 10,428  17,892  28,320   (9,024)  46,260  5,133  51,393 
Non-cash amortization of intangible assets 19,734  1,603  21,337   7,069   3,847  1,817  5,664 
Underwriting income before amortization and impairment $30,162  $19,495  $49,657   $(1,955)  $50,107  $6,950  $57,057 
                 
Underwriting ratios                
Loss and loss adjustment expense ratio (9) 69.3% 51.9% 66.8%  72.0%  60.0% 75.7% 62.5%
Operating expense ratio (Non-GAAP) (10,11) 29.3% 34.2% 30.0%  51.1%  31.6% 19.2% 29.7%
Combined ratio (Non-GAAP) (10,12) 98.6% 86.1% 96.8%  123.1%  91.6% 94.9% 92.2%
                 
Underwriting ratios (before amortization and impairment)                
Loss and loss adjustment expense ratio (9) 69.3% 51.9% 66.8%  72.0%  60.0% 75.7% 62.5%
Operating expense ratio (Non-GAAP) (10,13) 26.7% 33.0% 27.6%  33.0%  30.9% 17.4% 28.8%
Combined ratio before amortization and impairment (Non-GAAP) (10,14) 96.0% 84.9% 94.4%  105.0%  90.9% 93.1% 91.3%



Reconciliation of Operating Expense Ratio (Non-GAAP)
$ in thousands
(Unaudited)
 
  Three Months Ended March 31,
  2017  2016
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC
Total underwriting expenses $847,835  $143,594  $991,429   $67,383   $569,012  $129,564  $698,576 
Less: Loss and loss adjustment expense 521,334  66,891  588,225   28,100   332,659  76,391  409,050 
Less: Ceding commission income (loss) 2,460  287  2,747   17,247   (2,264) 369  (1,895)
Less: Service and fee income 103,590  32,273  135,863   2,080   63,488  33,456  96,944 
Operating expense 220,451  44,143  264,594   19,956   175,129  19,348  194,477 
Net earned premium $752,213  $128,926  $881,139   $39,032   $554,048  $100,872  $654,920 
Operating expense ratio (Non-GAAP) 29.3% 34.2% 30.0%  51.1%  31.6% 19.2% 29.7%
                 
Total underwriting expenses $847,835  $143,594  $991,429   $67,383   $569,012  $129,564  $698,576 
Less: Loss and loss adjustment expense 521,334  66,891  588,225   28,100   332,659  76,391  409,050 
Less: Ceding commission income (loss) 2,460  287  2,747   17,247   (2,264) 369  (1,895)
Less: Service and fee income 103,590  32,273  135,863   2,080   63,488  33,456  96,944 
Less: Non-cash amortization of intangible assets 19,734  1,603  21,337   7,069   3,847  1,817  5,664 
Operating expense before amortization and impairment 200,717  42,540  243,257   12,887   171,282  17,531  188,813 
Net earned premium $752,213  $128,926  $881,139   $39,032   $554,048  $100,872  $654,920 
Operating expense ratio before amortization and impairment (Non-GAAP) 26.7% 33.0% 27.6%  33.0%  30.9% 17.4% 28.8%



Premiums by Business Line
$ in thousands
(Unaudited)
 
  Three Months Ended March 31,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2017 2016 Change  2017 2016 Change  2017 2016 Change
Property & Casualty                    
Personal Auto $647,181  $385,198  68.0%  $596,879  $335,326  78.0%  $454,415  $271,997  67.1%
Homeowners 114,725  70,301  63.2%  104,545  65,876  58.7%  104,129  74,439  39.9%
RV/Packaged 44,754  39,603  13.0%  44,519  39,456  12.8%  40,650  37,519  8.3%
Small Business Auto 86,376  50,151  72.2%  79,208  44,993  76.0%  63,241  43,844  44.2%
Lender-placed insurance 76,270  111,997  (31.9)%  72,832  111,997  (35.0)%  83,741  122,806  (31.8)%
Other 12,393  4,087  203.2%  5,941  3,126  90.1%  6,037  3,443  75.3%
Property & Casualty 981,699  661,337  48.4%  903,924  600,774  50.5%  752,213  554,048  35.8%
                     
Accident & Health 191,955  154,857  24.0%  181,114  143,813  25.9%  128,926  100,872  27.8%
Total National General $1,173,654  $816,194  43.8%  $1,085,038  $744,587  45.7%  $881,139  $654,920  34.5%
                     
Reciprocal Exchanges                    
Personal Auto $28,159  $  NA  $17,106  $  NA  $16,117  $  NA
Homeowners 53,327    NA  24,216    NA  22,538    NA
Other 730    NA  379    NA  377    NA
Reciprocal Exchanges (A) $82,216  $  NA  $41,701  $  NA  $39,032  $  NA
                     
Consolidated Total (B) $1,255,069  $816,194  53.8%  $1,126,739  $744,587  51.3%  $920,171  $654,920  40.5%

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 $(277) in 2017 Personal Auto and $(524) in 2017 Homeowners Gross Written Premium.

Additional Disclosures

(1) References to operating earnings and basic and diluted operating EPS are non-GAAP financial measures defined by the Company as net income and basic earnings per share excluding after-tax net gain or loss on investments, other-than-temporary impairment losses, foreign exchange gain or loss, bargain purchase gains, earnings of operating equity method investments (800 Superior, LLC and 4455 LBJ Freeway, LLC), 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 $405,889 and $390,688 in related parties at March 31, 2017 and December 31, 2016, respectively.

(3) Reinsurance recoverable includes $39,866 and $37,046 from related parties at March 31, 2017 and December 31, 2016, respectively.

(4) Other includes $1,160 and $1,298 from related parties at March 31, 2017 and December 31, 2016, respectively.

(5) Reinsurance payable includes $33,795 and $33,419 due to related parties at March 31, 2017 and December 31, 2016, respectively.

(6) Accounts payable and accrued expenses includes $32,011 and $29,271 to related parties at March 31, 2017 and December 31, 2016, respectively.

(7) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 106,502,250 shares - March 31, 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 - March 31, 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 resulting in an increase in the loss and loss adjustment expense by $48.1 million and a corresponding decrease of $48.1 million in the general and administrative expense in the Property and Casualty segment and a $1.0 million reclassification from general and administrative expense to loss adjustment expense in the Accident and Health segment. Historically, the corresponding 2016 change to the Property and Casualty segment would have been: $25.9 million in Q1'16, $26.1 million in Q2'16, $28.2 million in Q3'16 and $39.4 million in Q4'16. The 2016 corresponding change to the Accident and Health segment would have been negligible. The Reciprocal Exchange corresponding change would have been: $0 in Q1'16, $3.9 million in Q2'16, $4.0 million in Q3'16, $4.4 million in Q4'16 and $4.3 million as reflected in Q1'17.

(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.

Investor Contact

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