National General
08/01/16
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National General Holdings Corp. Reports Second Quarter 2016 Results

NEW YORK, Aug. 01, 2016 (GLOBE NEWSWIRE) -- National General Holdings Corp. (NASDAQ:NGHC) today reported second quarter 2016 net income of $44.3 million or $0.41 per diluted share, compared to $33.8 million or $0.35 per diluted share in the second quarter of 2015. Second quarter 2016 operating earnings(1) was $46.4 million or $0.43 per diluted share, compared to $36.1 million or $0.38 per diluted share in the second quarter of 2015.

Second Quarter 2016 Highlights Versus Second Quarter 2015*

Barry Karfunkel, National General's President and CEO, stated: "Our second quarter results reflect the strength of our business model and the progress we have made developing National General's diversified capabilities. We continued to produce significant top line growth and strong underwriting profitability. From a development standpoint a number of exciting events happened in the quarter. We closed on the Century-National acquisition which expands our preferred home and auto premium on the west coast and announced the acquisition of Direct General Insurance which, upon closing, will add a direct marketing distribution channel to our core non-standard auto business."

*NOTE: Unless specified otherwise, discussion of our second quarter 2016 and 2015 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. Attorney-in-Fact management fees referenced within this release are eliminated in consolidated financial results.

Overview of Second Quarter 2016 as Compared to Second Quarter 2015

Gross written premium grew 55.1% to $774.0 million, net written premium grew 55.7% to $698.3 million, and net earned premium grew 51.6% to $676.9 million. Premium growth was driven by several key factors: underlying organic growth within our P&C business, continued expansion of our A&H segment, additional premiums from the acquisition of Century-National which closed on June 1, 2016, the National General Lender Services (formerly QBE Lender-Placed Insurance) and Assurant Health transactions which both closed on October 1, 2015, and added premium volume from Assigned Risk Solutions (ARS), which we began writing on National General paper in the first quarter of 2016.

Ceding commission income was a loss of $3.2 million reflecting a sliding scale adjustment related to third-party quota share which was terminated in 2013. Service and fee income grew 47.9% to $99.6 million, driven by added service and fee income from our recently completed transactions, primarily National General Lender Services and Assurant Health, and underlying growth within our A&H segment.

Excluding non-cash amortization of intangible assets, the combined ratio was 94.0% with a loss ratio of 67.2% and an expense ratio(10, 13) of 26.8%, compared to a prior year combined ratio of 91.5% with a loss ratio of 60.8% and an expense ratio of 30.7%.

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

Investment income grew 69.4% to $27.4 million, reflecting an increase in the size of our investment portfolio as compared to the prior year's quarter. Second quarter 2016 results included $4.2 million of net realized investment gains compared with a gain of $2.4 million in the second quarter of 2015. The second quarter of 2016 included no other than temporary impairment losses versus other than temporary impairment losses of $1.5 million in the prior year's quarter. Total investments and cash equivalents were $3.3 billion as of June 30, 2016. Accumulated other comprehensive income (loss) increased to $44.7 million at June 30, 2016 from $(19.4) million at December 31, 2015.

Other revenue was a loss of $0.4 million in the second quarter of 2016 compared to a loss of $1.4 million in the prior year's quarter, with the current quarter driven by foreign exchange loss from currency fluctuations within our European subsidiaries.

Interest expense was $8.9 million, up from $4.8 million in the prior year's quarter due to an increased amount of debt on our balance sheet. Debt was $678.7 million at June 30, 2016, up from $250.3 million at June 30, 2015 as a result of our August 2015 issuance of $100.0 million of subordinated notes, our October 2015 issuance of $100.0 million of senior unsecured notes, our May 2016 borrowing of $50.0 million under our credit facility, and our June 2016 promissory note of $176.4 million for the acquisition of Century-National.

Equity in earnings of unconsolidated subsidiaries (predominantly our investment in Life Settlement Entities and Real Estate investments) was a $7.4 million gain in the second quarter of 2016 versus a $1.7 million gain in the prior year's quarter, reflecting fair value adjustments on life settlement contracts and income from our real estate investments.

The second quarter of 2016 provision for income taxes was $14.8 million and the effective tax rate for the quarter was 26.5%. Included in the second quarter of 2016 provision for income taxes was a $7.5 million benefit attributable to a reduction of the deferred tax liability associated with the equalization reserves of our Luxembourg Reinsurance Company (LRC) subsidiaries. As of June 30, 2016, the remaining DTL associated with our LRC subsidiaries was $4.5 million.

National General Holding Corp.'s shareholders' equity was $1,677.0 million at June 30, 2016, growth of 30.0% from $1,289.7 million at June 30, 2015. Fully diluted book value per share was $13.45 at June 30, 2016, growth of 21.1% from $11.11 at June 30, 2015. Annualized operating return on average equity (ROE) was 13.2% and 14.6% for the second quarter of 2016 and the six months ended June 30, 2016, respectively.

Additional Items

Conference Call

On Tuesday, August 2, 2016 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:888-267-2860
International Dial-in:973-413-6102
Conference Entry Code:337409
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 2, 2016 to 11:59 PM ET on Tuesday, August 16, 2016 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 337409. 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, supplemental health, and other niche insurance products.

Forward Looking Statements

This news release contains "forward-looking statements" that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. Forward-looking statements can generally be identified by the use of forward-looking terminology, such as "may," "will," "plan," "expect," "project," "intend," "estimate," "anticipate" and "believe" or their variations or similar terminology. There can be no assurance that actual developments will be those anticipated by the Company. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers, changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance of financial markets on our investment portfolio, our ability to accurately underwrite and price our products and to maintain and establish accurate loss reserves, estimates of the fair value of life settlement contracts, development of claims and the effect on loss reserves, 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, 
  2016  2015 
  NGHC Reciprocal Exchanges Consolidated  NGHC Reciprocal Exchanges Consolidated 
Revenues:              
Gross written premium $774,048  $77,170  $850,507 (A) $498,952  $76,729  $575,681  
Ceded premiums (75,729) (38,040) (113,058)(B) (50,308) (45,963) (96,271) 
Net written premium 698,319  39,130  737,449   448,644  30,766  479,410  
Net earned premium 676,912  36,028  712,940   446,568  22,248  468,816  
               
Ceding commission income/(loss) (3,205) 14,909  11,704   46  9,924  9,970  
Service and fee income 99,629  1,195  90,017 (C) 67,343  947  57,558 (J)
Net investment income 27,361  2,248  27,528 (D) 16,154  2,181  18,335  
Net realized gain/(loss) on investments 4,241  141  4,382   2,402  (546) 1,856  
Other than temporary impairment loss        (1,467)   (1,467) 
Other revenue (387)   (387)  (1,415)   (1,415) 
Total revenues $804,551  $54,521  $846,184 (E) $529,631  $34,754  $553,653 (K)
               
Expenses:              
Loss and loss adjustment expense $454,622  $17,736  $472,358   $271,584  $15,245  $286,829  
Acquisition costs and other underwriting expenses 108,387  493  108,874 (F) 88,912  7,611  96,502 (L)
General and administrative expenses 176,660  25,261  191,120 (G) 118,328  11,541  119,158 (M)
Interest expense 8,939  2,081  8,939 (H) 4,804  3,797  8,601  
Total expenses $748,608  $45,571  $781,291 (I) $483,628  $38,194  $511,090 (N)
               
Income (loss) before provision/(benefit) for income taxes and equity in earnings of unconsolidated subsidiaries $55,943  $8,950  $64,893   $46,003  $(3,440) $42,563  
Provision/(benefit) for income taxes 14,825  (274) 14,551   9,110  (1,219) 7,891  
Income (loss) before equity in earnings of unconsolidated subsidiaries 41,118  9,224  50,342   36,893  (2,221) 34,672  
Equity in earnings of unconsolidated subsidiaries 7,356    7,356   1,654    1,654  
Net income (loss) before non-controlling interest and dividends on preferred shares 48,474  9,224  57,698   38,547  (2,221) 36,326  
Less: net income (loss) attributable to non-controlling interest 4  9,224  9,228   20  (2,221) (2,201) 
Net income before dividends on preferred shares 48,470    48,470   38,527    38,527  
Less: dividends on preferred shares 4,125    4,125   4,744    4,744  
Net income available to common stockholders $44,345  $  $44,345   $33,783  $  $33,783  
                           

NOTE: Consolidated column includes eliminations as follows: (A) $(711), (B) $711, (C) $(10,807), (D) $(2,081), (E) $(12,888), (F) $(6), (G) $(10,801), (H) $(2,081), (I) $(12,888), (J) $(10,732), (K) $(10,732), (L) $(21), (M) $(10,711), and (N) $(10,732).

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

  Six Months Ended June 30, 
  2016  2015 
  NGHC Reciprocal Exchanges Consolidated (1)  NGHC Reciprocal Exchanges Consolidated 
Revenues:              
Gross written premium $1,590,242  $77,170  $1,666,701 (A) $1,084,760  $137,966  $1,219,136 (J)
Ceded premiums (147,336) (38,040) (184,665)(B) (124,728) (88,563) (209,701)(K)
Net written premium 1,442,906  39,130  1,482,036   960,032  49,403  1,009,435  
Net earned premium 1,331,832  36,028  1,367,860   883,837  64,144  947,981  
               
Ceding commission income/(loss) (5,100) 14,909  9,809   1,099  13,951  15,050  
Service and fee income 196,573  1,195  186,961 (C) 129,996  1,742  112,428 (L)
Net investment income 49,031  2,248  49,198 (D) 30,263  4,220  34,483  
Net realized gain on investments 7,858  141  7,999   3,912  147  4,059  
Other than temporary impairment loss        (2,483)   (2,483) 
Other revenue 314    314   (170)   (170) 
Total revenues $1,580,508  $54,521  $1,622,141 (E) $1,046,454  $84,204  $1,111,348 (M)
               
Expenses:              
Loss and loss adjustment expense $863,672  $17,736  $881,408   $550,266  $43,249  $593,515  
Acquisition costs and other underwriting expenses 221,286  493  221,773 (F) 175,541  10,872  186,387 (N)
General and administrative expenses 353,287  25,261  367,747 (G) 218,204  25,925  224,845 (O)
Interest expense 18,080  2,081  18,080 (H) 10,187  7,494  17,681  
Total expenses $1,456,325  $45,571  $1,489,008 (I) $954,198  $87,540  $1,022,428 (P)
               
Income (loss) before provision/(benefit) for income taxes and equity in earnings of unconsolidated subsidiaries $124,183  $8,950  $133,133   $92,256  $(3,336) $88,920  
Provision/(benefit) for income taxes 32,908  (274) 32,634   17,529  (1,251) 16,278  
Income (loss) before equity in earnings of unconsolidated subsidiaries 91,275  9,224  100,499   74,727  (2,085) 72,642  
Equity in earnings of unconsolidated subsidiaries 14,038    14,038   6,612    6,612  
Net income (loss) before non-controlling interest and dividends on preferred shares 105,313  9,224  114,537   81,339  (2,085) 79,254  
Less: net income (loss) attributable to non-controlling interest 16  9,224  9,240   44  (2,085) (2,041) 
Net income before dividends on preferred shares 105,297    105,297   81,295    81,295  
Less: dividends on preferred shares 8,250    8,250   5,775    5,775  
Net income available to common stockholders $97,047  $  $97,047   $75,520  $  $75,520  
                           

NOTES: Consolidated column includes eliminations as follows: (A) $(711), (B) $711, (C) $(10,807), (D) $(2,081), (E) $(12,888), (F) $(6), (G) $(10,801), (H) $(2,081), (I) $(12,888), (J) $(3,590), (K) $3,590, (L) $(19,310), (M) $(19,310), (N) $(26), (O) $(19,284), and (P) $(19,310).

(1) Consolidated column for the six months ended June 30, 2016 excludes Reciprocal Exchanges' operating results from January 1, 2016 to March 31, 2016.

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

 Three Months Ended June 30,  Six Months Ended June 30,
 2016 2015  2016 2015
Net income available to common stockholders$44,345  $33,783   $97,047  $75,520 
Basic net income per common share$0.42  $0.36   $0.92  $0.81 
Diluted net income per common share$0.41  $0.35   $0.90  $0.79 
         
Operating earnings attributable to NGHC(1)$46,416  $36,134   $100,150  $79,148 
Basic operating earnings per common share(1)$0.44  $0.39   $0.95  $0.85 
Diluted operating earnings per common share(1)$0.43  $0.38   $0.93  $0.82 
         
Dividends declared per common share$0.03  $0.02   $0.06  $0.04 
         
Weighted average number of basic shares outstanding105,803,802  93,597,448   105,700,682  93,527,977 
Weighted average number of diluted shares outstanding108,197,897  96,181,037   107,987,406  96,005,397 
Shares outstanding, end of period105,932,281  93,713,986   105,932,281  93,713,986 
Fully diluted shares outstanding, end of period108,326,376  96,297,575   108,219,006  96,191,405 
         
Book value per share$13.75  $11.41   $13.75  $11.41 
Fully diluted book value per share$13.45  $11.11   $13.46  $11.12 
                 

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,
 2016 2015  2016 2015
         
Net income available to common stockholders$44,345  $33,783   $97,047  $75,520 
Add (subtract) net of tax:        
Net realized gain on investments(2,757) (1,561)  (5,108) (2,543)
Other than temporary impairment losses  954     1,614 
Foreign exchange (gain)/loss252  1,062   (151) 783 
Equity in (earnings)/losses of unconsolidated subsidiaries (other than LSC Entities and Real Estate investments)(96) (24)  8  80 
Non-cash amortization of intangible assets4,672  1,920   8,354  3,694 
Non-cash impairment of goodwill        
Operating earnings attributable to NGHC (1)$46,416  $36,134   $100,150  $79,148 
         
Operating earnings per common share:        
Basic operating earnings per common share$0.44  $0.39   $0.95  $0.85 
Diluted operating earnings per common share$0.43  $0.38   $0.93  $0.82 
                 

Balance Sheets
$ in thousands

  June 30, 2016 (unaudited)  December 31, 2015 (audited)
ASSETS NGHC Reciprocal Exchanges Consolidated  NGHC Reciprocal Exchanges Consolidated
Total investments $3,080,116  $290,569  $3,281,749 (A) $2,425,168  $242,542  $2,667,710 
Cash and cash equivalents 258,704  12,990  271,694   273,884  8,393  282,277 
Premiums and other receivables, net (2) 835,683  58,402  893,373 (B) 702,439  56,194  758,633 
Reinsurance recoverable on unpaid losses (3) 813,942  39,617  853,559   794,091  39,085  833,176 
Intangible assets, net 358,267  25,433  383,700   344,073  4,825  348,898 
Goodwill 208,971    208,971   112,414    112,414 
Other 545,453  82,118  619,895 (C) 459,619  100,665  560,284 
Total assets $6,101,136  $509,129  $6,512,941 (D) $5,111,688  $451,704  $5,563,392 
LIABILITIES AND STOCKHOLDERS' EQUITY             
Liabilities:             
Unpaid loss and loss adjustment expense reserves $1,833,221  $133,531  $1,966,752   $1,623,232  $132,392  $1,755,624 
Unearned premiums 1,276,637  148,502  1,425,139   1,046,313  146,186  1,192,499 
Reinsurance payable (4) 70,033  22,640  91,961 (E) 54,815  14,357  69,172 
Accounts payable and accrued expenses (5) 274,784  6,541  279,281 (F) 265,057  19,845  284,902 
Debt (6) 678,715  88,936  678,715 (G) 446,061  45,476  491,537 
Other 290,768  78,391  363,527 (H) 162,189  70,829  233,018 
Total liabilities $4,424,158  $478,541  $4,805,375 (I) $3,597,667  $429,085  4,026,752 
Stockholders' equity:             
Common stock (7) $1,059  $  $1,059   $1,056  $  $1,056 
Preferred stock (8) 220,000    220,000   220,000    220,000 
Additional paid-in capital 908,276    908,276   900,114    900,114 
Accumulated other comprehensive income (loss) 44,724    44,724   (19,414)   (19,414)
Retained earnings 502,741    502,741   412,044    412,044 
Total National General Holdings Corp. stockholders' equity 1,676,800    1,676,800   1,513,800    1,513,800 
Non-controlling interest 178  30,588  30,766   221  22,619  22,840 
Total stockholders' equity $1,676,978  $30,588  $1,707,566   $1,514,021  $22,619  $1,536,640 
Total liabilities and stockholders' equity $6,101,136  $509,129  $6,512,941 (J) $5,111,688  $451,704  $5,563,392 
                          

NOTE: Consolidated column includes eliminations as follows: (A) $(88,936), (B) $(712), (C) $(7,676), (D) $(97,324), (E) $(712), (F) $(2,044), (G) $(88,936), (H) $(5,632), (I) $(97,324), and (J) $(97,324).

Segment Information - Second Quarter
$ in thousands
(Unaudited)

  Three Months Ended June 30,
  2016  2015
  P&C A&H NGHC  Reciprocal Exchanges  P&C A&H NGHC  Reciprocal Exchanges
Gross written premium $671,157  $102,891  $774,048   $77,170   $464,494  $34,458  $498,952   $76,729 
Net written premium 607,942  90,377  698,319   39,130   422,838  25,806  448,644   30,766 
Net earned premium 575,002  101,910  676,912   36,028   410,301  36,267  446,568   22,248 
                    
Ceding commission income/(loss) (3,564) 359  (3,205)  14,909   (225) 271  46   9,924 
Service and fee income 60,773  38,856  99,629   1,195   49,671  17,672  67,343   947 
Total underwriting revenue $632,211  $141,125  $773,336   $52,132   $459,747  $54,210  $513,957   $33,119 
                    
Loss and loss adjustment expense 375,893  78,729  454,622   17,736   245,454  26,130  271,584   15,245 
Acquisition costs and other 81,291  27,096  108,387   493   77,293  11,619  88,912   7,611 
General and administrative 147,113  29,547  176,660   25,261   104,297  14,031  118,328   11,541 
Total underwriting expenses $604,297  $135,372  $739,669   $43,490   $427,044  $51,780  $478,824   $34,397 
                    
Underwriting income/(loss) 27,914  5,753  33,667   8,642   32,703  2,430  35,133   (1,278)
Non-cash impairment of goodwill                   
Non-cash amortization of intangible assets 5,628  1,560  7,188   6,726   1,733  1,221  2,954   1,615 
Underwriting income before amortization and impairment $33,542  $7,313  $40,855   $15,368   $34,436  $3,651  $38,087   $337 
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (9) 65.4% 77.3% 67.2%  49.2%  59.8% 72.0% 60.8%  68.5%
Operating expense ratio (Non-GAAP) (10,11) 29.8% 17.1% 27.9%  26.8%  32.2% 21.3% 31.3%  37.2%
Combined ratio (Non-GAAP) (10,12) 95.2% 94.4% 95.1%  76.0%  92.0% 93.3% 92.1%  105.7%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (9) 65.4% 77.3% 67.2%  49.2%  59.8% 72.0% 60.8%  68.5%
Operating expense ratio (Non-GAAP) (10,13) 28.8% 15.6% 26.8%  8.1%  31.8% 17.9% 30.7%  30.0%
Combined ratio before amortization and impairment (Non-GAAP) (10,14) 94.2% 92.9% 94.0%  57.3%  91.6% 89.9% 91.5%  98.5%
                            

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

  Six Months Ended June 30,
  2016  2015
  P&C A&H NGHC  Reciprocal Exchanges (1)  P&C A&H NGHC  Reciprocal Exchanges
Gross written premium $1,332,494  $257,748  $1,590,242   $77,170   $974,945  $109,815  $1,084,760   $137,966 
Net written premium 1,208,716  234,190  1,442,906   39,130   867,098  92,934  960,032   49,403 
Net earned premium 1,129,050  202,782  1,331,832   36,028   816,395  67,442  883,837   64,144 
                    
Ceding commission income/(loss) (5,828) 728  (5,100)  14,909   546  553  1,099   13,951 
Service and fee income 124,261  72,312  196,573   1,195   94,905  35,091  129,996   1,742 
Total underwriting revenue $1,247,483  $275,822  $1,523,305   $52,132   $911,846  $103,086  $1,014,932   $79,837 
                    
Loss and loss adjustment expense 708,552  155,120  863,672   17,736   504,033  46,233  550,266   43,249 
Acquisition costs and other 172,950  48,336  221,286   493   152,630  22,911  175,541   10,872 
General and administrative 291,807  61,480  353,287   25,261   190,026  28,178  218,204   25,925 
Total underwriting expenses $1,173,309  $264,936  $1,438,245   $43,490   $846,689  $97,322  $944,011   $80,046 
                    
Underwriting income/(loss) 74,174  10,886  85,060   8,642   65,157  5,764  70,921   (209)
Non-cash impairment of goodwill                   
Non-cash amortization of intangible assets 9,475  3,377  12,852   6,726   3,752  1,931  5,683   3,866 
Underwriting income before amortization and impairment $83,649  $14,263  $97,912   $15,368   $68,909  $7,695  $76,604   $3,657 
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (9) 62.8% 76.5% 64.8%  49.2%  61.7% 68.6% 62.3%  67.4%
Operating expense ratio (Non-GAAP) (10,11) 30.7% 18.1% 28.8%  26.8%  30.3% 22.9% 29.7%  32.9%
Combined ratio (Non-GAAP) (10,12) 93.5% 94.6% 93.6%  76.0%  92.0% 91.5% 92.0%  100.3%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (9) 62.8% 76.5% 64.8%  49.2%  61.7% 68.6% 62.3%  67.4%
Operating expense ratio (Non-GAAP) (10,13) 29.8% 16.5% 27.8%  8.1%  29.8% 20.0% 29.1%  26.9%
Combined ratio before amortization and impairment (Non-GAAP) (10,14) 92.6% 93.0% 92.6%  57.3%  91.5% 88.6% 91.4%  94.3%
                            

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.

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

  Three Months Ended June 30,
  2016  2015
  P&C A&H NGHC  Reciprocal Exchanges  P&C A&H NGHC  Reciprocal Exchanges
Total underwriting expenses $604,297  $135,372  $739,669   $43,490   $427,044  $51,780  $478,824   $34,397 
Less: Loss and loss adjustment expense 375,893  78,729  454,622   17,736   245,454  26,130  271,584   15,245 
Less: Ceding commission income/(loss) (3,564) 359  (3,205)  14,909   (225) 271  46   9,924 
Less: Service and fee income 60,773  38,856  99,629   1,195   49,671  17,672  67,343   947 
Operating expense 171,195  17,428  188,623   9,650   132,144  7,707  139,851   8,281 
Net earned premium $575,002  $101,910  $676,912   $36,028   $410,301  $36,267  $446,568   $22,248 
Operating expense ratio (Non-GAAP) 29.8% 17.1% 27.9%  26.8%  32.2% 21.3% 31.3%  37.2%
                    
Total underwriting expenses $604,297  $135,372  $739,669   $43,490   $427,044  $51,780  $478,824   $34,397 
Less: Loss and loss adjustment expense 375,893  78,729  454,622   17,736   245,454  26,130  271,584   15,245 
Less: Ceding commission income/(loss) (3,564) 359  (3,205)  14,909   (225) 271  46   9,924 
Less: Service and fee income 60,773  38,856  99,629   1,195   49,671  17,672  67,343   947 
Less: Non-cash impairment of goodwill                   
Less: Non-cash amortization of intangible assets 5,628  1,560  7,188   6,726   1,733  1,221  2,954   1,615 
Operating expense before amortization and impairment 165,567  15,868  181,435   2,924   130,411  6,486  136,897   6,666 
Net earned premium $575,002  $101,910  $676,912   $36,028   $410,301  $36,267  446,568   22,248 
Operating expense ratio before amortization and impairment (Non-GAAP) 28.8% 15.6% 26.8%  8.1%  31.8% 17.9% 30.7%  30.0%
                            

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

  Six Months Ended June 30,
  2016  2015
  P&C A&H NGHC  Reciprocal Exchanges  P&C A&H NGHC  Reciprocal Exchanges
Total underwriting expenses $1,173,309  $264,936  $1,438,245   $43,490   $846,689  $97,322  $944,011   $80,046 
Less: Loss and loss adjustment expense 708,552  155,120  863,672   17,736   504,033  46,233  550,266   43,249 
Less: Ceding commission income/(loss) (5,828) 728  (5,100)  14,909   546  553  1,099   13,951 
Less: Service and fee income 124,261  72,312  196,573   1,195   94,905  35,091  129,996   1,742 
Operating expense 346,324  36,776  383,100   9,650   247,205  15,445  262,650   21,104 
Net earned premium $1,129,050  $202,782  $1,331,832   $36,028   $816,395  $67,442  $883,837   $64,144 
Operating expense ratio (Non-GAAP) 30.7% 18.1% 28.8%  26.8%  30.3% 22.9% 29.7%  32.9%
                    
Total underwriting expenses $1,173,309  $264,936  $1,438,245   $43,490   $846,689  $97,322  $944,011   $80,046 
Less: Loss and loss adjustment expense 708,552  155,120  863,672   17,736   504,033  46,233  550,266   43,249 
Less: Ceding commission income/(loss) (5,828) 728  (5,100)  14,909   546  553  1,099   13,951 
Less: Service and fee income 124,261  72,312  196,573   1,195   94,905  35,091  129,996   1,742 
Less: Non-cash impairment of goodwill                   
Less: Non-cash amortization of intangible assets 9,475  3,377  12,852   6,726   3,752  1,931  5,683   3,866 
Operating expense before amortization and impairment 336,849  33,399  370,248   2,924   243,453  13,514  256,967   17,238 
Net earned premium $1,129,050  $202,782  $1,331,832   $36,028   $816,395  $67,442  $883,837   $64,144 
Operating expense ratio before amortization and impairment (Non-GAAP) 29.8% 16.5% 27.8%  8.1%  29.8% 20.0% 29.1%  26.9%
                            

Premiums by Business Line
$ in thousands
(Unaudited)

  Three Months Ended June 30,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2016 2015 Change  2016 2015 Change  2016 2015 Change
Property & Casualty                    
Personal Auto $338,095  $289,264   16.9%  $297,281  $252,406   17.8%  $290,829  $267,112   8.9%
Homeowners 100,717  74,438   35.3%  90,559  75,456   20.0%  81,556  63,227   29.0%
RV/Packaged 46,693  43,096   8.3%  46,421  42,774   8.5%  39,015  37,576   3.8%
Commercial Auto 68,366  50,482   35.4%  62,948  46,258   36.1%  51,470  37,429   37.5%
Lender-placed insurance 108,190    NA  105,385    NA  108,519    NA
Other 9,096  7,214   26.1%  5,348  5,944   (10.0)%  3,613  4,957   (27.1)%
Property & Casualty 671,157  464,494   44.5%  607,942  422,838   43.8%  575,002  410,301   40.1%
                     
Accident & Health 102,891  34,458   198.6%  90,377  25,806   250.2%  101,910  36,267   181.0%
Total National General 774,048  498,952   55.1%  698,319  448,644   55.7%  676,912  446,568   51.6%
                     
Reciprocal Exchanges                    
Personal Auto 23,121  25,773   (10.3)%  13,453  25,696   (47.6)%  12,980  23,541   (44.9)%
Homeowners 51,636  48,752  NA  23,535  2,585  NA  19,604  (2,668) NA
Other 2,413  2,204   9.5%  2,142  2,485   (13.8)%  3,444  1,375   150.5%
Reciprocal Exchanges 77,170  76,729   0.6%  39,130  30,766   27.2%  36,028  22,248   61.9%
                     
Consolidated Total 850,507  575,681   47.7%  737,449  479,410   53.8%  712,940  468,816   52.1%
                                 

NOTE: Consolidated Total includes eliminations of $(711) and $0 within 2016 and 2015 Gross Written Premium, respectively.

  Six Months Ended June 30,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2016 2015 Change  2016 2015 Change  2016 2015 Change
Property & Casualty                    
Personal Auto $723,293  $628,598   15.1%  $632,607  $547,649   15.5%  $562,826  $534,643   5.3%
Homeowners 171,018  162,262   5.4%  156,435  145,846   7.3%  155,995  127,350   22.5%
RV/Packaged 86,296  80,646   7.0%  85,877  79,668   7.8%  76,534  73,552   4.1%
Commercial Auto 118,517  91,828   29.1%  107,941  84,251   28.1%  95,314  72,051   32.3%
Lender-placed insurance 220,187    NA  217,382    NA  231,325    NA
Other 13,183  11,611   13.5%  8,474  9,684   (12.5)%  7,056  8,799   (19.8)%
Property & Casualty 1,332,494  974,945   36.7%  1,208,716  867,098   39.4%  1,129,050  816,395   38.3%
                     
Accident & Health 257,748  109,815   134.7%  234,190  92,934   152.0%  202,782  67,442   200.7%
Total National General 1,590,242  1,084,760   46.6%  1,442,906  960,032   50.3%  1,331,832  883,837   50.7%
                     
Reciprocal Exchanges                    
Personal Auto 23,121  43,464  NA  13,453  42,302  NA  12,980  46,471  NA
Homeowners 51,636  90,365  NA  23,535  2,549  NA  19,604  15,048  NA
Other 2,413  4,137  NA  2,142  4,552  NA  3,444  2,625  NA
Reciprocal Exchanges (1) 77,170  137,966  NA  39,130  49,403  NA  36,028  64,144  NA
                     
Consolidated Total 1,666,701  1,219,136   36.7%  1,482,036  1,009,435   46.8%  1,367,860  947,981   44.3%
                                 

NOTES: Consolidated Total includes eliminations of $(711) and $(3,590) within 2016 and 2015 Gross Written Premium, respectively.

(1) Reciprocal Exchanges for the six months ended June 30, 2016 excludes its operating results from January 1, 2016 to March 31, 2016.

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 realized investment gain or loss on securities, other than temporary impairment losses, foreign exchange gain or loss, equity in earnings or losses of unconsolidated subsidiaries (other than LSC Entities and Real Estate investment gains or losses), non-cash amortization of intangible assets, and non-cash impairment of goodwill. The Company believes operating earnings and basic and diluted operating EPS are more 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) Premiums and other receivables, net (NGHC) includes $32,362 and $62,306 from related parties at June 30, 2016 and December 31, 2015, respectively.

(3) Reinsurance recoverable on unpaid losses (NGHC) includes $33,746 and $42,774 from related parties at June 30, 2016 and December 31, 2015, respectively.

(4) Reinsurance payable (NGHC) includes $31,511 and $31,923 due to related parties at June 30, 2016 and December 31, 2015, respectively.

(5) Accounts payable and accrued expenses (NGHC) includes $27,930 and $51,755 to related parties at June 30, 2016 and December 31, 2015, respectively.

(6) Debt includes $0 and $45,476 owed to related party at June 30, 2016 and December 31, 2015, respectively.

(7) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 105,932,281 shares - June 30, 2016; authorized 150,000,000 shares, issued and outstanding 105,554,331 shares - December 31, 2015.

(8) Preferred stock: $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,365,000 shares - June 30, 2016; authorized 10,000,000 shares, issued and outstanding 2,365,000 shares - December 31, 2015.

(9) Loss and loss adjustment expense ratio is calculated by dividing loss and loss adjustment expenses 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 expense 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 expense 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. 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) 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 expense 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) Annualized operating return on average equity is the ratio of annualized operating earnings less preferred dividends to average shareholders' equity for the periods presented. Annualized operating earnings is (a) the sum of operating earnings less preferred dividends for the periods presented and (b) for partial years in the period presented, dividing by the number of quarters in that partial year and multiplying by four to annualize the operating earnings. Average shareholders' equity is (a) the sum of the shareholders' equity excluding preferred stock at the beginning and end of each quarter for the period presented divided by (b) the number of quarters in the period presented times 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 these non-GAAP measures to the most directly comparable GAAP measure.

Investor Contact

Investor Relations Department
Phone: 212-380-9462
Email: Investors@ngic.com