National General
08/07/17
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National General Holdings Corp. Reports Second Quarter 2017 Results

NEW YORK, Aug. 07, 2017 (GLOBE NEWSWIRE) -- National General Holdings Corp. (NASDAQ:NGHC) today reported a second quarter 2017 net loss of $5.1 million or $0.05 per diluted share, compared to net income of $44.3 million or $0.41 per diluted share in the second quarter of 2016. Second quarter 2017 operating earnings(1) was $11.9 million or $0.11 per diluted share, compared to $46.4 million or $0.43 per diluted share in the second quarter of 2016.

Second Quarter 2017 Highlights Versus Second Quarter 2016*

Barry Karfunkel, National General's President and CEO, stated: "The results this quarter were disappointing due to the poor performance from National General Lender Services and weather losses impacting our home product. Within both our home and auto product lines, we continue to experience tremendous organic growth that is meeting our underwriting return hurdles. We expect the opportunity for profitable growth to continue as we have the scale and underwriting sophistication to compete in a largely fragmented market.

Effective July 1, 2017, we entered into two quota share reinsurance agreements with a group of high quality third-party reinsurance providers, a testament to the value placed on the business that we have built."

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

Gross written premium grew 33.8% to $1,035.6 million, net written premium grew 34.7% to $940.8 million, and net earned premium grew 38.8% to $939.5 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, Century-National, and Standard Property and Casualty Insurance Company.

Service and fee income grew 38.1% to $137.6 million, driven by added service and fee income from our recent completed transactions, primarily the Direct General acquisition which contributed an additional $24.4 million in the quarter and additional fees in our A&H segment.

Excluding non-cash amortization of intangible assets, the combined ratio(10,14,15) was 96.2% with a loss ratio(15) of 72.0% and an expense ratio(10,13,15) of 24.2%, compared to a prior year combined ratio of 94.0% with a loss ratio of 67.2% and an expense ratio of 26.8%. 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).

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

Interest expense was $11.6 million, up from $8.9 million in the prior year's quarter due to an increased amount of debt on our balance sheet. Debt was $754.7 million at June 30, 2017, up from $678.7 million at June 30, 2016, as a result of debt assumed from our prior acquisitions.

Earnings (losses) of equity investments (predominantly our investment in Life Settlement Entities and alternative investments) was a $18.9 million loss in the second quarter of 2017 versus a $7.4 million gain in the prior year's quarter.

The second quarter of 2017 provision for income taxes was $5.7 million and the effective tax rate for the quarter was 20.9% compared with incomes taxes of $14.8 million and an effective tax rate of 26.5% in the second quarter of 2016.

National General Holding Corp.'s shareholders' equity was $1,939.9 million at June 30, 2017, growth of 2.4% from $1,893.8 million at December 31, 2016. Fully diluted book value per share was $13.88 at June 30, 2017, growth of 2.7% from $13.52 at December 31, 2016. Our trailing twelve month operating return on average equity (ROE)(16) was 8.0% as of June 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
Q2Hail event $7.0 0.9% $0.04
Q2Increased Loss Estimate from Q1 West Coast Storms $9.1 1.1% $0.05
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 Tuesday, August 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: 583127
Webcast Registration: http://ir.nationalgeneral.com/events.cfm
   

A replay of the conference call will be accessible from 2:00 PM ET on Tuesday, August 8, 2017 to 11:59 PM ET on Tuesday, August 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 583127. 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 - Second Quarter
$ in thousands
(Unaudited)
    
  Three Months Ended June 30, 
  2017  2016 
  NGHC Reciprocal
Exchanges
 Consolidated  NGHC Reciprocal
Exchanges
 Consolidated 
Revenues:              
Gross written premium $1,035,552  $99,157  $1,133,909 (A) $774,048  $77,170  $850,507 (H)
Net written premium 940,757  51,243  992,000   698,319  39,130  737,449  
Net earned premium 939,495  42,256  981,751   676,912  36,028  712,940  
               
Ceding commission income (loss) 3,399  18,109  21,508   (3,205) 14,909  11,704  
Service and fee income 137,562  1,494  125,176 (B) 99,629  1,195  90,017 (I)
Net investment income 29,680  2,147  29,446 (C) 27,361  2,248  27,528 (J)
Net gain (loss) on investments (8,362) 6,187  (2,175)  3,854  141  3,995  
Other income (expense) (6,098)   (6,098)        
Total revenues $1,095,676  $70,193  $1,149,608 (D) $804,551  $54,521  $846,184 (K)
               
Expenses:              
Loss and loss adjustment expense $676,587  $33,820  $710,407   $454,622  $17,736  $472,358  
Acquisition costs and other underwriting expenses 173,255  15,540  188,795   108,387  493  108,874 (L)
General and administrative expenses 206,865  18,509  211,494 (E) 176,660  25,261  191,120 (M)
Interest expense 11,550  2,381  11,550 (F) 8,939  2,081  8,939 (N)
Total expenses $1,068,257  $70,250  $1,122,246 (G) $748,608  $45,571  $781,291 (O)
               
Income (loss) before provision (benefit) for income taxes and earnings (losses) of equity method investments $27,419  $(57) $27,362   $55,943  $8,950  $64,893  
Provision (benefit) for income taxes 5,740  72  5,812   14,825  (274) 14,551  
Income (loss) before earnings (losses) of equity method investments 21,679  (129) 21,550   41,118  9,224  50,342  
Earnings (losses) of equity method investments (18,915)   (18,915)  7,356    7,356  
Net income (loss) before non-controlling interest and dividends on preferred shares 2,764  (129) 2,635   48,474  9,224  57,698  
Less: net income (loss) attributable to non-controlling interest (30) (129) (159)  4  9,224  9,228  
Net income before dividends on preferred shares 2,794    2,794   48,470    48,470  
Less: dividends on preferred shares 7,875    7,875   4,125    4,125  
Net income (loss) available to common stockholders $(5,081) $  $(5,081)  $44,345  $  $44,345  
                           

NOTES:
Consolidated column includes eliminations as follows: (A) $(800), (B) $(13,880), (C) $(2,381), (D) $(16,261), (E) $(13,880), (F) $(2,381), (G) $(16,261), (H) $(711), (I) $(10,807), (J) $(2,081), (K) $(12,888), (L) $(6), (M) $(10,801), (N) $(2,081) and (O) $(12,888).

 
Income Statement - Year to Date
$ in thousands
(Unaudited)
    
  Six Months Ended June 30, 
  2017  2016 (1) 
  NGHC Reciprocal
Exchanges
 Consolidated  NGHC Reciprocal
Exchanges
 Consolidated 
Revenues:              
Gross written premium $2,209,206  $181,373  $2,388,978 (A) $1,590,242  $77,170  $1,666,701 (H)
Net written premium 2,025,795  92,944  2,118,739   1,442,906  39,130  1,482,036  
Net earned premium 1,820,634  81,288  1,901,922   1,331,832  36,028  1,367,860  
               
Ceding commission income (loss) 6,146  35,356  41,502   (5,100) 14,909  9,809  
Service and fee income 273,425  3,574  251,118 (B) 196,573  1,195  186,961 (I)
Net investment income 55,449  5,031  55,836 (C) 49,031  2,248  49,198 (J)
Net gain (loss) on investments (7,874) 6,187  (1,687)  8,172  141  8,313  
Other income (expense) 3,703    3,703         
Total revenues $2,151,483  $131,436  $2,252,394 (D) $1,580,508  $54,521  $1,622,141 (K)
               
Expenses:              
Loss and loss adjustment expense $1,264,812  $61,920  $1,326,732   $863,672  $17,736  $881,408  
Acquisition costs and other underwriting expenses 334,376  29,720  364,096   221,286  493  221,773 (L)
General and administrative expenses 448,948  43,612  466,679 (E) 353,287  25,261  367,747 (M)
Interest expense 23,095  4,644  23,095 (F) 18,080  2,081  18,080 (N)
Total expenses $2,071,231  $139,896  $2,180,602 (G) $1,456,325  $45,571  $1,489,008 (O)
               
Income (loss) before provision (benefit) for income taxes and earnings (losses) of equity method investments $80,252  $(8,460) $71,792   $124,183  $8,950  $133,133  
Provision (benefit) for income taxes 21,506  (2,176) 19,330   32,908  (274) 32,634  
Income (loss) before earnings (losses) of equity method investments 58,746  (6,284) 52,462   91,275  9,224  100,499  
Earnings (losses) of equity method investments (13,961)   (13,961)  14,038    14,038  
Net income (loss) before non-controlling interest and dividends on preferred shares 44,785  (6,284) 38,501   105,313  9,224  114,537  
Less: net income (loss) attributable to non-controlling interest   (6,284) (6,284)  16  9,224  9,240  
Net income before dividends on preferred shares 44,785    44,785   105,297    105,297  
Less: dividends on preferred shares 15,750    15,750   8,250    8,250  
Net income available to common stockholders $29,035  $  $29,035   $97,047  $  $97,047  
                           

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) $(1,601), (B) $(25,881), (C) $(4,644), (D) $(30,525), (E) $(25,881), (F) $(4,644), (G) $(30,525), (H) $(711), (I) $(10,807), (J) $(2,081), (K) $(12,888), (L) $(6), (M) $(10,801), (N) $(2,081) and (O) $(12,888).

 
Earnings and Per Share Data
$ in thousands, except shares and per share data
(Unaudited)
     
  Three Months Ended June 30, Six Months Ended June 30,
  2017 2016 2017 2016
Net income (loss) available to common stockholders $(5,081) $44,345  $29,035  $97,047 
Basic net income (loss) per common share $(0.05) $0.42  $0.27  $0.92 
Diluted net income (loss) per common share $(0.05) $0.41  $0.27  $0.90 
         
Operating earnings attributable to NGHC(1) $11,864  $46,416  $53,149  $100,150 
Basic operating earnings per common share(1) $0.11  $0.44  $0.50  $0.95 
Diluted operating earnings per common share(1) $0.11  $0.43  $0.49  $0.93 
         
Dividends declared per common share $0.04  $0.03  $0.08  $0.06 
         
Weighted average number of basic shares outstanding 106,560,000  105,803,802  106,514,396  105,700,682 
Weighted average number of diluted shares outstanding 109,447,812  108,197,897  109,364,273  107,987,406 
Shares outstanding, end of period 106,607,110  105,932,281  106,607,110  105,932,281 
Fully diluted shares outstanding, end of period 109,507,711  108,326,376  109,507,711  108,219,006 
         
Book value per share $14.26  $13.75  $14.26  $13.75 
Fully diluted book value per share $13.88  $13.45  $13.88  $13.46 
                 


Reconciliation of Net Income to Operating Earnings (Non-GAAP)
$ in thousands, except per share data
(Unaudited)
     
  Three Months Ended June 30, Six Months Ended June 30,
  2017 2016 2017 2016
         
Net income (loss) available to common stockholders $(5,081) $44,345  $29,035  $97,047 
Add (subtract):        
Net (gain) loss on investments 8,362  (3,854) 7,874  (8,172)
Bargain purchase gain 6,098    (3,703)  
Equity in (earnings) losses of unconsolidated subsidiaries (other than LSC investment and certain Real Estate investments) (82) (148) (100) 13 
Non-cash amortization of intangible assets 11,690  7,188  33,027  12,852 
Income tax at 35% (9,123) (1,115) (12,984) (1,590)
Operating earnings attributable to NGHC (1) $11,864  $46,416  $53,149  $100,150 
         
Operating earnings per common share:        
Basic operating earnings per common share $0.11  $0.44  $0.50  $0.95 
Diluted operating earnings per common share $0.11  $0.43  $0.49  $0.93 
                 


Balance Sheet
$ in thousands
       
  June 30, 2017 (unaudited)  December 31, 2016 (audited) 
ASSETS NGHC Reciprocal
Exchanges
 Consolidated  NGHC Reciprocal
Exchanges
 Consolidated 
Total investments (2) $3,606,723  $389,017  $3,906,659 (A) $3,456,112  $306,345  $3,673,449 (J)
Cash and cash equivalents 237,815  4,023  241,838   212,894  7,405  220,299  
Premiums and other receivables, net 1,284,584  48,911  1,332,694 (B) 1,044,272  47,198  1,090,669 (K)
Reinsurance recoverable (3) 900,456  68,625  969,081   892,264  55,972  948,236  
Intangible assets, net 406,880  3,775  410,655   456,695  11,025  467,720  
Goodwill 189,587    189,587   155,290    155,290  
Other (4) 639,600  107,987  736,618 (C) 621,679  89,764  689,318 (L)
Total assets $7,265,645  $622,338  $7,787,132 (D) $6,839,206  $517,709  $7,244,981 (M)
LIABILITIES AND STOCKHOLDERS' EQUITY              
Liabilities:              
Unpaid loss and loss adjustment expense reserves $2,220,251  $139,905  $2,360,156   $2,127,997  $137,075  $2,265,072  
Unearned premiums 1,698,598  182,874  1,881,472   1,472,299  163,326  1,635,625  
Reinsurance payable (5) 101,510  27,317  128,026 (E) 78,949  20,662  98,810 (N)
Accounts payable and accrued expenses (6) 397,164  81,855  468,050 (F) 330,210  13,179  336,991 (O)
Debt 754,736  89,081  754,736 (G) 752,001  89,008  752,001 (P)
Other 153,485  78,239  231,724   183,921  62,784  230,978 (Q)
Total liabilities $5,325,744  $599,271  $5,824,164 (H) $4,945,377  $486,034  $5,319,477 (R)
Stockholders' equity:              
Common stock (7) $1,066  $  $1,066   $1,064  $  $1,064  
Preferred stock (8) 420,000    420,000   420,000    420,000  
Additional paid-in capital 920,310    920,310   914,706    914,706  
Accumulated other comprehensive income 32,876    32,876   12,710    12,710  
Retained earnings 565,649    565,649   545,106    545,106  
Total National General Holdings Corp. stockholders' equity 1,939,901    1,939,901   1,893,586    1,893,586  
Non-controlling interest   23,067  23,067   243  31,675  31,918  
Total stockholders' equity $1,939,901  $23,067  $1,962,968   $1,893,829  $31,675  $1,925,504  
Total liabilities and stockholders' equity $7,265,645  $622,338  $7,787,132 (I) $6,839,206  $517,709  $7,244,981 (S)
                           

NOTES:
Consolidated column includes eliminations as follows: (A) $(89,081), (B) $(801), (C) $(10,969), (D) $(100,851), (E) $(801), (F) $(10,969), (G) $(89,081), (H) $(100,851), (I) $(100,851), (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 - Second Quarter
$ in thousands
(Unaudited)
      
  Three Months Ended June 30,   
  2017  2016
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal
Exchanges
Gross written premium $904,578  $130,974  $1,035,552   $99,157   $671,157  $102,891  $774,048   $77,170 
Net written premium 822,508  118,249  940,757   51,243   607,942  90,377  698,319   39,130 
Net earned premium 804,643  134,852  939,495   42,256   575,002  101,910  676,912   36,028 
                    
Ceding commission income (loss) 3,128  271  3,399   18,109   (3,564) 359  (3,205)  14,909 
Service and fee income 94,519  43,043  137,562   1,494   60,773  38,856  99,629   1,195 
Total underwriting revenues $902,290  $178,166  $1,080,456   $61,859   $632,211  $141,125  $773,336   $52,132 
                    
Loss and loss adjustment expense 591,844  84,743  676,587   33,820   375,893  78,729  454,622   17,736 
Acquisition costs and other 126,496  46,759  173,255   15,540   81,291  27,096  108,387   493 
General and administrative 168,023  38,842  206,865   18,509   147,113  29,547  176,660   25,261 
Total underwriting expenses $886,363  $170,344  $1,056,707   $67,869   $604,297  $135,372  $739,669   $43,490 
                    
Underwriting income (loss) 15,927  7,822  23,749   (6,010)  27,914  5,753  33,667   8,642 
Non-cash amortization of intangible assets 10,278  1,412  11,690   (91)  5,628  1,560  7,188   6,726 
Underwriting income (loss) before amortization and impairment $26,205  $9,234  $35,439   $(6,101)  $33,542  $7,313  $40,855   $15,368 
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (9) 73.6% 62.8% 72.0%  80.0%  65.4% 77.3% 67.2%  49.2%
Operating expense ratio (Non-GAAP) (10,11) 24.5% 31.4% 25.5%  34.2%  29.8% 17.1% 27.9%  26.8%
Combined ratio (Non-GAAP) (10,12) 98.1% 94.2% 97.5%  114.2%  95.2% 94.4% 95.1%  76.0%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (9) 73.6% 62.8% 72.0%  80.0%  65.4% 77.3% 67.2%  49.2%
Operating expense ratio (Non-GAAP) (10,13) 23.2% 30.3% 24.2%  34.4%  28.8% 15.6% 26.8%  8.1%
Combined ratio before amortization and impairment (Non-GAAP) (10,14) 96.8% 93.1% 96.2%  114.4%  94.2% 92.9% 94.0%  57.3%
                            

Note: Loss and loss adjustment expenses for the three months ended June 30, 2017 included $6,570 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $4,524 of favorable development in the A&H segment, versus $6,756 of favorable development in the P&C segment, and $4,350 of unfavorable development in the A&H segment for the three months ended June 30, 2016.

 
Segment Information - Year to Date
$ in thousands
(Unaudited)
      
  Six Months Ended June 30,   
  2017  2016
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal
Exchanges (1)
Gross written premium $1,886,277  $322,929  $2,209,206   $181,373   $1,332,494  $257,748  $1,590,242   $77,170 
Net written premium 1,726,432  299,363  2,025,795   92,944   1,208,716  234,190  1,442,906   39,130 
Net earned premium 1,556,856  263,778  1,820,634   81,288   1,129,050  202,782  1,331,832   36,028 
                    
Ceding commission income (loss) 5,588  558  6,146   35,356   (5,828) 728  (5,100)  14,909 
Service and fee income 198,109  75,316  273,425   3,574   124,261  72,312  196,573   1,195 
Total underwriting revenues $1,760,553  $339,652  $2,100,205   $120,218   $1,247,483  $275,822  $1,523,305   $52,132 
                    
Loss and loss adjustment expense 1,113,178  151,634  1,264,812   61,920   708,552  155,120  863,672   17,736 
Acquisition costs and other 256,127  78,249  334,376   29,720   172,950  48,336  221,286   493 
General and administrative 364,893  84,055  448,948   43,612   291,807  61,480  353,287   25,261 
Total underwriting expenses $1,734,198  $313,938  $2,048,136   $135,252   $1,173,309  $264,936  $1,438,245   $43,490 
                    
Underwriting income (loss) 26,355  25,714  52,069   (15,034)  74,174  10,886  85,060   8,642 
Non-cash amortization of intangible assets 30,012  3,015  33,027   6,978   9,475  3,377  12,852   6,726 
Underwriting income (loss) before amortization and impairment $56,367  $28,729  $85,096   $(8,056)  $83,649  $14,263  $97,912   $15,368 
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (9) 71.5% 57.5% 69.5%  76.2%  62.8% 76.5% 64.8%  49.2%
Operating expense ratio (Non-GAAP) (10,11) 26.8% 32.8% 27.7%  42.3%  30.7% 18.1% 28.8%  26.8%
Combined ratio (Non-GAAP) (10,12) 98.3% 90.3% 97.2%  118.5%  93.5% 94.6% 93.6%  76.0%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (9) 71.5% 57.5% 69.5%  76.2%  62.8% 76.5% 64.8%  49.2%
Operating expense ratio (Non-GAAP) (10,13) 24.9% 31.6% 25.9%  33.7%  29.8% 16.5% 27.8%  8.1%
Combined ratio before amortization and impairment (Non-GAAP) (10,14) 96.4% 89.1% 95.4%  109.9%  92.6% 93.0% 92.6%  57.3%
                            

Note: (1) Reciprocal Exchanges' column for the six months ended June 30, 2016 excludes its operating results from January 1, 2016 to March 31, 2016.
Loss and loss adjustment expenses for the six months ended June 30, 2017 included $2,216 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $12,844 of favorable development in the A&H segment, versus $7,334 of favorable development in the P&C segment, and $3,584 of unfavorable development in the A&H segment for the six months ended June 30, 2016.

 
Reconciliation of Operating Expense Ratio (Non-GAAP)
$ in thousands
(Unaudited)
      
  Three Months Ended June 30,   
  2017  2016
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal
Exchanges
Total underwriting expenses $886,363  $170,344  $1,056,707   $67,869   $604,297  $135,372  $739,669   $43,490 
Less: Loss and loss adjustment expense 591,844  84,743  676,587   33,820   375,893  78,729  454,622   17,736 
Less: Ceding commission income (loss) 3,128  271  3,399   18,109   (3,564) 359  (3,205)  14,909 
Less: Service and fee income 94,519  43,043  137,562   1,494   60,773  38,856  99,629   1,195 
Operating expense 196,872  42,287  239,159   14,446   171,195  17,428  188,623   9,650 
Net earned premium $804,643  $134,852  $939,495   $42,256   $575,002  $101,910  $676,912   $36,028 
Operating expense ratio (Non-GAAP) 24.5% 31.4% 25.5%  34.2%  29.8% 17.1% 27.9%  26.8%
                    
Total underwriting expenses $886,363  $170,344  $1,056,707   $67,869   $604,297  $135,372  $739,669   $43,490 
Less: Loss and loss adjustment expense 591,844  84,743  676,587   33,820   375,893  78,729  454,622   17,736 
Less: Ceding commission income (loss) 3,128  271  3,399   18,109   (3,564) 359  (3,205)  14,909 
Less: Service and fee income 94,519  43,043  137,562   1,494   60,773  38,856  99,629   1,195 
Less: Non-cash amortization of intangible assets 10,278  1,412  11,690   (91)  5,628  1,560  7,188   6,726 
Operating expense before amortization and impairment 186,594  40,875  227,469   14,537   165,567  15,868  181,435   2,924 
Net earned premium $804,643  $134,852  $939,495   $42,256   $575,002  $101,910  $676,912   $36,028 
Operating expense ratio before amortization and impairment (Non-GAAP) 23.2% 30.3% 24.2%  34.4%  28.8% 15.6% 26.8%  8.1%
                            


Reconciliation of Operating Expense Ratio (Non-GAAP)
$ in thousands
(Unaudited)
      
  Six Months Ended June 30,   
  2017  2016
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal
Exchanges
Total underwriting expenses $1,734,198  $313,938  $2,048,136   $135,252   $1,173,309  $264,936  $1,438,245   $43,490 
Less: Loss and loss adjustment expense 1,113,178  151,634  1,264,812   61,920   708,552  155,120  863,672   17,736 
Less: Ceding commission income (loss) 5,588  558  6,146   35,356   (5,828) 728  (5,100)  14,909 
Less: Service and fee income 198,109  75,316  273,425   3,574   124,261  72,312  196,573   1,195 
Operating expense 417,323  86,430  503,753   34,402   346,324  36,776  383,100   9,650 
Net earned premium $1,556,856  $263,778  $1,820,634   $81,288   $1,129,050  $202,782  $1,331,832   $36,028 
Operating expense ratio (Non-GAAP) 26.8% 32.8% 27.7%  42.3%  30.7% 18.1% 28.8%  26.8%
                    
Total underwriting expenses $1,734,198  $313,938  $2,048,136   $135,252   $1,173,309  $264,936  $1,438,245   $43,490 
Less: Loss and loss adjustment expense 1,113,178  151,634  1,264,812   61,920   708,552  155,120  863,672   17,736 
Less: Ceding commission income (loss) 5,588  558  6,146   35,356   (5,828) 728  (5,100)  14,909 
Less: Service and fee income 198,109  75,316  273,425   3,574   124,261  72,312  196,573   1,195 
Less: Non-cash amortization of intangible assets 30,012  3,015  33,027   6,978   9,475  3,377  12,852   6,726 
Operating expense before amortization and impairment 387,311  83,415  470,726   27,424   336,849  33,399  370,248   2,924 
Net earned premium $1,556,856  $263,778  $1,820,634   $81,288   $1,129,050  $202,782  $1,331,832   $36,028 
Operating expense ratio before amortization and impairment (Non-GAAP) 24.9% 31.6% 25.9%  33.7%  29.8% 16.5% 27.8%  8.1%
                            


Premiums by Business Line
$ in thousands
(Unaudited)
   
  Three Months Ended June 30,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2017 2016 Change  2017 2016 Change  2017 2016 Change
Property & Casualty                    
Personal Auto $514,990  $338,095  52.3%  $471,372  $297,281  58.6%  $495,225  $290,829  70.3%
Homeowners 151,984  100,717  50.9%  131,926  90,559  45.7%  110,570  81,556  35.6%
RV/Packaged 52,598  46,693  12.6%  52,190  46,421  12.4%  43,314  39,015  11.0%
Small Business Auto 80,890  68,366  18.3%  72,864  62,948  15.8%  70,324  51,470  36.6%
Lender-placed insurance 90,374  108,190  (16.5)%  86,525  105,385  (17.9)%  79,201  108,519  (27.0)%
Other 13,742  9,096  51.1%  7,631  5,348  42.7%  6,009  3,613  66.3%
Property & Casualty 904,578  671,157  34.8%  822,508  607,942  35.3%  804,643  575,002  39.9%
                     
Accident & Health 130,974  102,891  27.3%  118,249  90,377  30.8%  134,852  101,910  32.3%
Total National General $1,035,552  $774,048  33.8%  $940,757  $698,319  34.7%  $939,495  $676,912  38.8%
                     
Reciprocal Exchanges                    
Personal Auto $35,221  $23,121  52.3%  $21,601  $13,453  60.6%  $17,239  $12,980  32.8%
Homeowners 63,049  51,636  22.1%  29,174  23,535  24.0%  24,613  19,604  25.6%
Other 887  2,413  (63.2)%  468  2,142  (78.2)%  404  3,444  (88.3)%
Reciprocal Exchanges $99,157  $77,170  28.5%  $51,243  $39,130  31.0%  $42,256  $36,028  17.3%
                     
Consolidated Total (A) $1,133,909  $850,507  33.3%  $992,000  $737,449  34.5%  $981,751  $712,940  37.7%
                                    

NOTES:
(A) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(287) in Personal Auto and $(513) in Homeowners Gross Written Premium in 2017, respectively, and $(220) in Personal Auto and $(491) in Homeowners Gross Written Premium in 2016, respectively.

 
Premiums by Business Line
$ in thousands
(Unaudited)
   
  Six Months Ended June 30,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2017 2016 Change  2017 2016 Change  2017 2016 Change
Property & Casualty                    
Personal Auto $1,162,171  $723,293  60.7%  $1,068,251  $632,607  68.9%  $949,640  $562,826  68.7%
Homeowners 266,709  171,018  56.0%  236,471  156,435  51.2%  214,699  155,995  37.6%
RV/Packaged 97,352  86,296  12.8%  96,709  85,877  12.6%  83,964  76,534  9.7%
Small Business Auto 167,266  118,517  41.1%  152,072  107,941  40.9%  133,565  95,314  40.1%
Lender-placed insurance 166,644  220,187  (24.3)%  159,357  217,382  (26.7)%  162,942  231,325  (29.6)%
Other 26,135  13,183  98.2%  13,572  8,474  60.2%  12,046  7,056  70.7%
Property & Casualty 1,886,277  1,332,494  41.6%  1,726,432  1,208,716  42.8%  1,556,856  1,129,050  37.9%
                     
Accident & Health 322,929  257,748  25.3%  299,363  234,190  27.8%  263,778  202,782  30.1%
Total National General $2,209,206  $1,590,242  38.9%  $2,025,795  $1,442,906  40.4%  $1,820,634  $1,331,832  36.7%
                     
Reciprocal Exchanges                    
Personal Auto $63,380  $23,121  NA  $38,707  $13,453  NA  $33,356  $12,980  NA
Homeowners 116,376  51,636  NA  53,390  23,535  NA  47,151  19,604  NA
Other 1,617  2,413  NA  847  2,142  NA  781  3,444  NA
Reciprocal Exchanges (A) $181,373  $77,170  NA  $92,944  $39,130  NA  $81,288  $36,028  NA
                     
Consolidated Total (B) $2,388,978  $1,666,701  43.3%  $2,118,739  $1,482,036  43.0%  $1,901,922  $1,367,860  39.0%
                                    

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 $(564) in Personal Auto and $(1,037) in Homeowners Gross Written Premium in 2017, respectively, and $(220) in Personal Auto and $(491) 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 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 $400,064 and $390,688 in related parties at June 30, 2017 and December 31, 2016, respectively.

(3) Reinsurance recoverable includes $38,750 and $37,046 from related parties at June 30, 2017 and December 31, 2016, respectively.

(4) Other includes $2,320 and $1,298 from related parties at June 30, 2017 and December 31, 2016, respectively.

(5) Reinsurance payable includes $33,476 and $33,419 due to related parties at June 30, 2017 and December 31, 2016, respectively.

(6) Accounts payable and accrued expenses includes $34,857 and $29,271 to related parties at June 30, 2017 and December 31, 2016, respectively.

(7) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 106,607,110 shares - June 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 - June 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 $26.1 million, negligible in the Accident and Health segment and $3.9 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.

Investor Contact

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