Market Overview

National General Holdings Corp. Reports Second Quarter 2018 Results

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NEW YORK, Aug. 06, 2018 (GLOBE NEWSWIRE) -- National General Holdings Corp. (NASDAQ:NGHC) today reported second quarter 2018 net income of $36.7 million or $0.34 per diluted share, compared to net income of $5.5 million or $0.05 per diluted share in the second quarter of 2017. Second quarter 2018 operating earnings(1) was $59.5 million or $0.54 per diluted share, compared to $23.7 million or $0.22 per diluted share in the second quarter of 2017. Second quarter 2018 net income was impacted by an $18.7 million net realized loss on investments related to a repositioning of the portfolio.

Second Quarter 2018 Highlights Versus Second Quarter 2017*

  • Gross written premium grew $186.9 million or 18.0% to $1,222.5 million, driven by continued organic growth in our P&C segment of 17.8% and in our A&H segment of 19.7%.
  • In the second quarter, our homeowners' product experienced organic growth of 25.5% driven by strong results from strategic partnerships and the continued expansion in the high net worth market. Our personal auto product experienced organic growth of 22.8% driven by continued rate increases and PIF growth.
  • The overall combined ratio(9,13) was 92.1% compared to 96.3% in the prior year's quarter, excluding non-cash amortization of intangible assets. The P&C segment reported a decrease in combined ratio to 92.9% from 96.8% in the prior year's quarter. The combined ratio includes $20.5 million of losses, or 2.8 P&C loss ratio points, primarily related to spring weather events in the Midwestern and Northeastern parts of the U.S. and hail in Texas in the second quarter 2018, compared to $16.1 million of losses, or 2.0 P&C loss ratio points, from events in the second quarter 2017. The A&H segment reported a combined ratio of 88.6% compared to 93.7% in the prior year's quarter.
  • Service and fee income grew 7.7% to $148.1 million, driven by organic growth in both our Accident & Health and Property & Casualty segments.
  • Shareholders' equity was $1.98 billion and fully diluted book value per share was $14.28 at June 30, 2018, growth of 2.8% and 3.0%, respectively, from December 31, 2017. Our trailing twelve month operating return on average equity (ROE)(14) was 12.1% as of June 30, 2018.
  • Second quarter 2018 operating earnings exclude the following material items, net of tax: $14.8 million or $0.14 net loss on investments and $6.5 million or $0.06 per share of non-cash amortization of intangible assets.

Barry Karfunkel, National General's CEO, stated: "We are pleased to report another quarter with both strong top line growth and underwriting results, despite continued active catastrophe loss activity for the industry.  Our second quarter results reflect the strength and stability of returns the platform we have built is able to generate.  We expect the opportunity for profitable growth across the diversified niche lines of business we have developed to continue as market dynamics in both our P&C and A&H segments remain favorable."

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

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

  • Property & Casualty - Gross written premium grew by 17.8% to $1,065.6 million, net written premium decreased by 16.9% to $683.9 million and net earned premium decreased by 8.7% to $734.9 million. P&C gross written premium growth was primarily driven by organic growth of 25.5% from our homeowners' product and 22.8% from our personal auto product. The decrease in the net premiums written and earned were driven by the home and auto quota shares entered after July 1, 2017.  Service and fee income grew 11.3% to $105.2 million. Excluding non-cash amortization of intangible assets, the combined ratio(9,13) was 92.9% with a loss ratio of 73.5% and an expense ratio(9,12) of 19.4%, versus a prior year combined ratio of 96.8% with a loss ratio of 73.6% and an expense ratio of 23.2%. The decrease in the expense ratio was driven by the impact of the home and auto quota shares.  The loss ratio was impacted by pre-tax catastrophe losses of approximately $20.5 million primarily related to spring weather events in the Midwestern and Northeastern parts of the U.S. and hail in Texas in the second quarter 2018.
     
  • Accident & Health - Gross written premium grew by 19.7% to $156.8 million, net written premium grew by 17.8% to $139.3 million, and net earned premium grew by 15.8% to $156.2 million. The A&H gross written premium increase was driven by the continued growth across the entire book. Service and fee income was $42.9 million compared to $43.0 million in the prior year's quarter. Excluding non-cash amortization of intangible assets, the combined ratio(9,13) was 88.6% with a loss ratio of 56.6% and an expense ratio(9,12) of 32.0%, versus a prior year combined ratio of 93.7% with a loss ratio of 63.4% and an expense ratio of 30.3%.
     
  • Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $118.0 million, net written premium was $66.8 million, and net earned premium was $51.8 million. Reciprocal Exchanges combined ratio(9,13) excluding non-cash amortization of intangible assets was 118.2% with a loss ratio of 80.5% and an expense ratio(9,12) of 37.7%.

Second quarter 2018 investment income decreased to $26.2 million, compared to $27.8 million in the second quarter of 2017, reflecting our decision to increase credit quality of the portfolio in the second half of 2017. Total investments and cash and cash equivalents (including restricted cash) were $3.8 billion as of June 30, 2018. Accumulated other comprehensive income (loss) increased to a $55.7 million loss at June 30, 2018 from a $8.1 million loss at December 31, 2017, primarily due to the impact of higher interest rates which negatively impacted bond valuations.

Interest expense, which includes interest credited on funds held balances, was $15.0 million and debt was $705.1 million at June 30, 2018, and $713.7 million at December 31, 2017.

The second quarter of 2018 provision for income taxes was $9.4 million and the effective tax rate for the quarter was 17.5%.  The effective tax rate for the first half of 2018 was 19.9%.

Shareholders' equity was $1,982.2 million at June 30, 2018, growth of 2.8% from $1,928.6 million at December 31, 2017. Fully diluted book value per share was $14.28 at June 30, 2018, growth of 3.0% from $13.86 at December 31, 2017. Our trailing twelve month operating return on average equity (ROE)(14) was 12.1% as of June 30, 2018.

Year-to-Date P&C Segment Notable Large Losses
2018
Quarter
    P&C Notable
Large Losses
and LAE

($ millions)
  P&C Loss Ratio
Points*
  EPS Impact
After Tax
Q2 Spring Weather-related and Texas Hail Events   $20.5   2.8 %   $0.15
Q1 Northeastern Winter Weather   $14.2   2.0 %   $0.10
 
* Loss ratio points related to P&C net earned premium in quarter the loss event was recorded.
 

Additional Item

  • National General Enters into Business Collaboration Agreement with Aioi Nissay Dowa Insurance Co., Ltd. - On July 11, 2018, we entered into a collaboration agreement among Aioi Nissay Dowa Insurance Co., Ltd. (AD), part of MS&AD Insurance Group and Aioi Nissay Dowa Insurance Services USA Corp. (AIS), a subsidiary of AD. In conjunction with the collaboration agreement, we issued AD $30 million aggregate liquidation preference of our Series D Fixed/Floating Rate Non-Cumulative Convertible Preferred Stock. Holders of the Preferred Stock will be entitled to receive noncumulative cash dividends, if and when declared by the board of directors, at a rate of 7% per annum, subject to adjustment to a floating rate following July 15, 2023. The Series D Preferred Stock is convertible at the holder's option, on or after July 15, 2023 to shares of the Company's common stock at an initial conversion price of $38 per share. We may, at our option, redeem the Series D Preferred Stock on or after July 15, 2023, with the redemption price being at the liquidation preference, unless certain premium thresholds are met under the collaboration agreement.

Conference Call

On Tuesday, August 7, 2018 at 9:30 AM ET, Chief Executive Officer Barry Karfunkel and Chief Financial Officer Mike Weiner will review results and discuss business conditions via a conference call that may be accessed as follows:

Toll-Free U.S. Dial-in: 888-267-2845
International Dial-in: 973-413-6102
Conference Entry Code: 226472
Webcast Registration: http://ir.nationalgeneral.com/events-and-presentations 
   

A replay of the conference call will be accessible from 2:00 PM ET on Tuesday, August 7, 2018 to 11:59 PM ET on Tuesday, August 21, 2018 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 226472. In addition, a replay of the webcast can also be retrieved at http://ir.nationalgeneral.com/events-and-presentations

About National General Holdings Corp.

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

Forward Looking Statements

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

Income Statement - Second Quarter
$ in thousands
(Unaudited)

    Three Months Ended June 30,
    2018     2017  
    NGHC   Reciprocal
Exchanges
  Consolidated     NGHC   Reciprocal
Exchanges
  Consolidated  
Revenues:                            
Gross written premium   $ 1,222,468     $ 117,981     $ 1,340,449       $ 1,035,552     $ 99,157     $ 1,133,909   (G)
Net written premium   823,127     66,848     889,975       940,757     51,243     992,000    
Net earned premium   891,103     51,803     942,906       939,495     42,256     981,751    
                             
Ceding commission income   41,982     13,426     55,408       3,399     18,109     21,508    
Service and fee income   148,108     445     130,501   (A)   137,562     1,494     125,176   (H)
Net investment income   26,183     2,205     25,995   (B)   27,765     2,147     27,531   (I)
Net gain (loss) on investments   (18,736 )   (968 )   (19,704 )     (8,362 )   6,187     (2,175 )  
Other income (expense)                 (6,098 )       (6,098 )  
Total revenues   $ 1,088,640     $ 66,911     $ 1,135,106   (C)   $ 1,093,761     $ 70,193     $ 1,147,693   (J)
                             
Expenses:                            
Loss and loss adjustment expense   $ 628,650     $ 41,678     $ 670,328       $ 677,374     $ 33,820     $ 711,194    
Acquisition costs and other underwriting expenses   171,300     10,560     181,860       173,255     15,540     188,795    
General and administrative expenses   219,662     22,819     224,429   (D)   206,865     18,509     211,494   (K)
Interest expense   15,038     2,393     15,038   (E)   11,550     2,381     11,550   (L)
Total expenses   $ 1,034,650     $ 77,450     $ 1,091,655   (F)   $ 1,069,044     $ 70,250     $ 1,123,033   (M)
                             
Income (loss) before provision (benefit) for income taxes   $ 53,990     $ (10,539 )   $ 43,451       $ 24,717     $ (57 )   $ 24,660    
Provision (benefit) for income taxes   9,442     (2,901 )   6,541       11,415     72     11,487    
Net income (loss) before non-controlling interest and dividends on preferred shares   44,548     (7,638 )   36,910       13,302     (129 )   13,173    
Less: net income (loss) attributable to non-controlling interest       (7,638 )   (7,638 )     (30 )   (129 )   (159 )  
Net income before dividends on preferred shares   44,548         44,548       13,332         13,332    
Less: dividends on preferred shares   7,875         7,875       7,875         7,875    
Net income available to common stockholders   $ 36,673     $     $ 36,673       $ 5,457     $     $ 5,457    
 
NOTES: Consolidated column includes eliminations as follows: (A) $(18,052), (B) $(2,393), (C) $(20,445), (D) $(18,052), (E) $(2,393), (F) $(20,445), (G) $(800), (H) $(13,880), (I) $(2,381), (J) $(16,261), (K) $(13,880), (L) $(2,381) and (M) $(16,261).
 


Income Statement - Year to Date

$ in thousands
(Unaudited)

    Six Months Ended June 30,
    2018     2017  
    NGHC   Reciprocal
Exchanges
  Consolidated     NGHC   Reciprocal
Exchanges
  Consolidated  
Revenues:                            
Gross written premium   $ 2,559,510     $ 215,670     $ 2,773,579   (A)   $ 2,207,520     $ 181,373     $ 2,387,292   (H)
Net written premium   1,879,192     117,426     1,996,618       2,024,109     92,944     2,117,053    
Net earned premium   1,750,586     97,858     1,848,444       1,818,948     81,288     1,900,236    
                             
Ceding commission income   74,940     24,936     99,876       6,146     35,356     41,502    
Service and fee income   302,868     2,891     272,623   (B)   273,425     3,574     251,118   (I)
Net investment income   51,202     4,349     51,006   (C)   56,188     5,031     56,575   (J)
Net gain (loss) on investments   (18,487 )   (1,099 )   (19,586 )     (9,774 )   6,187     (3,587 )  
Other income                 3,703         3,703    
Total revenues   $ 2,161,109     $ 128,935     $ 2,252,363   (D)   $ 2,148,636     $ 131,436     $ 2,249,547   (K)
                             
Expenses:                            
Loss and loss adjustment expense   $ 1,218,285     $ 86,209     $ 1,304,494       $ 1,268,091     $ 61,920     $ 1,330,011    
Acquisition costs and other underwriting expenses   328,908     21,662     350,570       333,795     29,720     363,515    
General and administrative expenses   446,955     41,615     455,434   (E)   448,948     43,612     466,679   (L)
Interest expense   26,192     4,545     26,192   (F)   23,095     4,644     23,095   (M)
Total expenses   $ 2,020,340     $ 154,031     $ 2,136,690   (G)   $ 2,073,929     $ 139,896     $ 2,183,300   (N)
                             
Income (loss) before provision (benefit) for income taxes   $ 140,769     $ (25,096 )   $ 115,673       $ 74,707     $ (8,460 )   $ 66,247    
Provision (benefit) for income taxes   28,013     (5,270 )   22,743       24,452     (2,176 )   22,276    
Net income (loss) before non-controlling interest and dividends on preferred shares   112,756     (19,826 )   92,930       50,255     (6,284 )   43,971    
Less: net income (loss) attributable to non-controlling interest       (19,826 )   (19,826 )         (6,284 )   (6,284 )  
Net income before dividends on preferred shares   112,756         112,756       50,255         50,255    
Less: dividends on preferred shares   15,750         15,750       15,750         15,750    
Net income available to common stockholders   $ 97,006     $     $ 97,006       $ 34,505     $     $ 34,505    
 
NOTES: Consolidated column includes eliminations as follows: (A) $(1,601), (B) $(33,136), (C) $(4,545), (D) $(37,681), (E) $(33,136), (F) $(4,545), (G) $(37,681), (H) $(1,601), (I) $(25,881), (J) $(4,644), (K) $(30,525), (L) $(25,881), (M) $(4,644) and (N) $(30,525).
 


Earnings and Per Share Data

$ in thousands, except shares and per share data
(Unaudited)

    Three Months Ended June 30,   Six Months Ended June 30,
    2018   2017   2018   2017
Net income available to common stockholders   $ 36,673     $ 5,457     $ 97,006     $ 34,505  
Basic net income per common share   $ 0.34     $ 0.05     $ 0.91     $ 0.32  
Diluted net income per common share   $ 0.34     $ 0.05     $ 0.89     $ 0.32  
                 
Operating earnings attributable to NGHC(1)   $ 59,484     $ 23,699     $ 127,107     $ 59,438  
Basic operating earnings per common share(1)   $ 0.56     $ 0.22     $ 1.19     $ 0.56  
Diluted operating earnings per common share(1)   $ 0.54     $ 0.22     $ 1.16     $ 0.54  
                 
Dividends declared per common share   $ 0.04     $ 0.04     $ 0.08     $ 0.08  
                 
Weighted average number of basic shares outstanding   106,969,134     106,560,000     106,864,469     106,514,396  
Weighted average number of diluted shares outstanding   109,402,465     109,447,812     109,181,041     109,364,273  
Shares outstanding, end of period   107,057,771     106,607,110          
Fully diluted shares outstanding, end of period   109,374,343     109,507,711          
Book value per share   $ 14.59     $ 14.24          
Fully diluted book value per share   $ 14.28     $ 13.86          
 


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,
    2018   2017   2018   2017
Net income available to common stockholders   $ 36,673     $ 5,457     $ 97,006     $ 34,505  
Add (subtract):                
Net loss on investments   18,736     8,362     18,487     9,774  
Other (income) expense       6,098         (3,703 )
Equity in (earnings) losses of equity method investments   834     1,915     2,303     (739 )
Non-cash amortization of intangible assets   8,217     11,690     15,137     33,027  
Income tax expense (benefit)   (4,976 )   (9,823 )   (5,826 )   (13,426 )
Operating earnings attributable to NGHC (1)   $ 59,484     $ 23,699     $ 127,107     $ 59,438  
                 
Operating earnings per common share:                
Basic operating earnings per common share   $ 0.56     $ 0.22     $ 1.19     $ 0.56  
Diluted operating earnings per common share   $ 0.54     $ 0.22     $ 1.16     $ 0.54  
 


Balance Sheet
$ in thousands

    June 30, 2018 (unaudited)     December 31, 2017 (audited)  
ASSETS   NGHC   Reciprocal
Exchanges
  Consolidated     NGHC   Reciprocal
Exchanges
  Consolidated  
Total investments (2)   $ 3,415,421     $ 322,114     $ 3,636,306   (A)   $ 3,411,730     $ 327,213     $ 3,649,788   (J)
Cash and cash equivalents, including restricted cash   399,484     1,844     401,328       351,433     6,051     357,484    
Premiums and other receivables, net   1,634,837     59,426     1,692,662   (B)   1,268,330     56,792     1,324,321   (K)
Reinsurance activity (3)   1,856,515     200,967     2,057,482       1,616,103     195,184     1,811,287    
Intangible assets, net   386,258     3,595     389,853       400,385     3,685     404,070    
Goodwill   181,827         181,827       174,153         174,153    
Other (4)   718,608     31,994     730,276   (C)   705,321     29,174     718,640   (L)
Total assets   $ 8,592,950     $ 619,940     $ 9,089,734   (D)   $ 7,927,455     $ 618,099     $ 8,439,743   (M)
LIABILITIES AND STOCKHOLDERS' EQUITY                            
Liabilities:                            
Unpaid loss and loss adjustment expense reserves   $ 2,560,233     $ 167,256     $ 2,727,489       $ 2,520,204     $ 143,353     $ 2,663,557    
Unearned premiums and other revenue   2,055,260     246,763     2,302,023       1,807,210     225,395     2,032,605    
Reinsurance payable   546,300     36,455     581,154   (E)   329,772     69,076     398,047   (N)
Accounts payable and accrued expenses (5)   659,704     25,456     664,834   (F)   423,054     24,682     431,881   (O)
Debt   705,077     101,229     705,077   (G)   713,710     89,155     713,710   (P)
Other   84,160     43,722     127,882       204,936     41,582     246,518    
Total liabilities   $ 6,610,734     $ 620,881     $ 7,108,459   (H)   $ 5,998,886     $ 593,243     $ 6,486,318   (Q)
Stockholders' equity:                            
Common stock (6)   $ 1,071     $     $ 1,071       $ 1,067     $     $ 1,067    
Preferred stock (7)   420,000         420,000       420,000         420,000    
Additional paid-in capital   921,744         921,744       917,751         917,751    
Accumulated other comprehensive income (loss)   (55,698 )       (55,698 )     (8,112 )       (8,112 )  
Retained earnings   695,099         695,099       597,863         597,863    
Total National General Holdings Corp. stockholders' equity   1,982,216         1,982,216       1,928,569         1,928,569    
Non-controlling interest       (941 )   (941 )         24,856     24,856    
Total stockholders' equity   $ 1,982,216     $ (941 )   $ 1,981,275       $ 1,928,569     $ 24,856     $ 1,953,425    
Total liabilities and stockholders' equity   $ 8,592,950     $ 619,940     $ 9,089,734   (I)   $ 7,927,455     $ 618,099     $ 8,439,743   (R)
 
NOTES: Consolidated column includes eliminations as follows: (A) $(101,229), (B) $(1,601), (C) $(20,326), (D) $(123,156), (E) $(1,601), (F) $(20,326), (G) $(101,229), (H) $(123,156), (I) $(123,156), (J) $(89,155), (K) $(801), (L) $(15,855), (M) $(105,811), (N) $(801), (O) $(15,855), (P) $(89,155), (Q) $(105,811) and (R) $(105,811).


Segment Information - Second Quarter

$ in thousands
(Unaudited)

    Three Months Ended June 30,
    2018     2017
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal
Exchanges
Gross written premium   $ 1,065,632     $ 156,836     $ 1,222,468       $ 117,981       $ 904,578     $ 130,974     $ 1,035,552       $ 99,157  
Net written premium   683,869     139,258     823,127       66,848       822,508     118,249     940,757       51,243  
Net earned premium   734,934     156,169     891,103       51,803       804,643     134,852     939,495       42,256  
                                       
Ceding commission income   41,720     262     41,982       13,426       3,128     271     3,399       18,109  
Service and fee income   105,167     42,941     148,108       445       94,519     43,043     137,562       1,494  
Total underwriting revenues   $ 881,821     $ 199,372     $ 1,081,193       $ 65,674       $ 902,290     $ 178,166     $ 1,080,456       $ 61,859  
                                       
Loss and loss adjustment expense   540,216     88,434     628,650       41,678       591,844     85,530     677,374       33,820  
Acquisition costs and other   123,183     48,117     171,300       10,560       126,496     46,759     173,255       15,540  
General and administrative   172,530     47,132     219,662       22,819       168,023     38,842     206,865       18,509  
Total underwriting expenses   $ 835,929     $ 183,683     $ 1,019,612       $ 75,057       $ 886,363     $ 171,131     $ 1,057,494       $ 67,869  
                                       
Underwriting income (loss)   45,892     15,689     61,581       (9,383 )     15,927     7,035     22,962       (6,010 )
Non-cash amortization of intangible assets   6,179     2,038     8,217       (26 )     10,278     1,412     11,690       (91 )
Underwriting income (loss) before amortization and impairment   $ 52,071     $ 17,727     $ 69,798       $ (9,409 )     $ 26,205     $ 8,447     $ 34,652       $ (6,101 )
                                       
Underwriting ratios                                      
Loss and loss adjustment expense ratio (8)   73.5 %   56.6 %   70.5 %     80.5 %     73.6 %   63.4 %   72.1 %     80.0 %
Operating expense ratio (Non-GAAP) (9,10)   20.3 %   33.3 %   22.5 %     37.7 %     24.5 %   31.4 %   25.5 %     34.2 %
Combined ratio (Non-GAAP) (9,11)   93.8 %   89.9 %   93.0 %     118.2 %     98.1 %   94.8 %   97.6 %     114.2 %
                                       
Underwriting ratios (before amortization and impairment)                                      
Loss and loss adjustment expense ratio (8)   73.5 %   56.6 %   70.5 %     80.5 %     73.6 %   63.4 %   72.1 %     80.0 %
Operating expense ratio (Non-GAAP) (9,12)   19.4 %   32.0 %   21.6 %     37.7 %     23.2 %   30.3 %   24.2 %     34.4 %
Combined ratio before amortization and impairment (Non-GAAP) (9,13)   92.9 %   88.6 %   92.1 %     118.2 %     96.8 %   93.7 %   96.3 %     114.4 %
 
NOTE: Loss and loss adjustment expenses for the three months ended June 30, 2018 included $5,383 of favorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $8,040 of favorable development in the A&H segment, versus $6,570 of unfavorable development in the P&C segment, and $4,524 of favorable development in the A&H segment for the three months ended June 30, 2017.
 


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

    Six Months Ended June 30,
    2018     2017
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal
Exchanges
Gross written premium   $ 2,168,898     $ 390,612     $ 2,559,510       $ 215,670       $ 1,884,591     $ 322,929     $ 2,207,520       $ 181,373  
Net written premium   1,516,581     362,611     1,879,192       117,426       1,724,746     299,363     2,024,109       92,944  
Net earned premium   1,440,541     310,045     1,750,586       97,858       1,555,170     263,778     1,818,948       81,288  
                                       
Ceding commission income   74,420     520     74,940       24,936       5,588     558     6,146       35,356  
Service and fee income   214,740     88,128     302,868       2,891       198,109     75,316     273,425       3,574  
Total underwriting revenues   $ 1,729,701     $ 398,693     $ 2,128,394       $ 125,685       $ 1,758,867     $ 339,652     $ 2,098,519       $ 120,218  
                                       
Loss and loss adjustment expense   1,038,573     179,712     1,218,285       86,209       1,113,178     154,913     1,268,091       61,920  
Acquisition costs and other   237,183     91,725     328,908       21,662       255,546     78,249     333,795       29,720  
General and administrative   349,215     97,740     446,955       41,615       364,893     84,055     448,948       43,612  
Total underwriting expenses   $ 1,624,971     $ 369,177     $ 1,994,148       $ 149,486       $ 1,733,617     $ 317,217     $ 2,050,834       $ 135,252  
                                       
Underwriting income (loss)   104,730     29,516     134,246       (23,801 )     25,250     22,435     47,685       (15,034 )
Non-cash amortization of intangible assets   11,579     3,558     15,137       (53 )     30,012     3,015     33,027       6,978  
Underwriting income (loss) before amortization and impairment   $ 116,309     $ 33,074     $ 149,383       $ (23,854 )     $ 55,262     $ 25,450     $ 80,712       $ (8,056 )
                                       
Underwriting ratios                                      
Loss and loss adjustment expense ratio (8)   72.1 %   58.0 %   69.6 %     88.1 %     71.6 %   58.7 %   69.7 %     76.2 %
Operating expense ratio (Non-GAAP) (9,10)   20.6 %   32.5 %   22.7 %     36.2 %     26.8 %   32.8 %   27.7 %     42.3 %
Combined ratio (Non-GAAP) (9,11)   92.7 %   90.5 %   92.3 %     124.3 %     98.4 %   91.5 %   97.4 %     118.5 %
                                       
Underwriting ratios (before amortization and impairment)                                      
Loss and loss adjustment expense ratio (8)   72.1 %   58.0 %   69.6 %     88.1 %     71.6 %   58.7 %   69.7 %     76.2 %
Operating expense ratio (Non-GAAP) (9,12)   19.8 %   31.4 %   21.9 %     36.3 %     24.9 %   31.6 %   25.8 %     33.7 %
Combined ratio before amortization and impairment (Non-GAAP) (9,13)   91.9 %   89.4 %   91.5 %     124.4 %     96.5 %   90.3 %   95.5 %     109.9 %
 
NOTE: Loss and loss adjustment expenses for the six months ended June 30, 2018 included $20,552 of favorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $11,423 of favorable development in the A&H segment, versus $2,216 of unfavorable development in the P&C segment, and $12,844 of favorable development in the A&H segment for the six months ended June 30, 2017.
 


Reconciliation of Operating Expense Ratio (Non-GAAP)

$ in thousands
(Unaudited)

    Three Months Ended June 30,
    2018     2017
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal
Exchanges
Total underwriting expenses   $ 835,929     $ 183,683     $ 1,019,612       $ 75,057       $ 886,363     $ 171,131     $ 1,057,494       $ 67,869  
Less: Loss and loss adjustment expense   540,216     88,434     628,650       41,678       591,844     85,530     677,374       33,820  
Less: Ceding commission income   41,720     262     41,982       13,426       3,128     271     3,399       18,109  
Less: Service and fee income   105,167     42,941     148,108       445       94,519     43,043     137,562       1,494  
Operating expense   148,826     52,046     200,872       19,508       196,872     42,287     239,159       14,446  
Net earned premium   $ 734,934     $ 156,169     $ 891,103       $ 51,803       $ 804,643     $ 134,852     $ 939,495       $ 42,256  
Operating expense ratio (Non-GAAP)   20.3 %   33.3 %   22.5 %     37.7 %     24.5 %   31.4 %   25.5 %     34.2 %
                                       
Total underwriting expenses   $ 835,929     $ 183,683     $ 1,019,612       $ 75,057       $ 886,363     $ 171,131     $ 1,057,494       $ 67,869  
Less: Loss and loss adjustment expense   540,216     88,434     628,650       41,678       591,844     85,530     677,374       33,820  
Less: Ceding commission income   41,720     262     41,982       13,426       3,128     271     3,399       18,109  
Less: Service and fee income   105,167     42,941     148,108       445       94,519     43,043     137,562       1,494  
Less: Non-cash amortization of intangible assets   6,179     2,038     8,217       (26 )     10,278     1,412     11,690       (91 )
Operating expense before amortization and impairment   142,647     50,008     192,655       19,534       186,594     40,875     227,469       14,537  
Net earned premium   $ 734,934     $ 156,169     $ 891,103       $ 51,803       $ 804,643     $ 134,852     $ 939,495       $ 42,256  
Operating expense ratio before amortization and impairment (Non-GAAP)   19.4 %   32.0 %   21.6 %     37.7 %     23.2 %   30.3 %   24.2 %     34.4 %
 

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

    Six Months Ended June 30,
    2018     2017
    P&C   A&H   NGHC     Reciprocal
Exchanges
    P&C   A&H   NGHC     Reciprocal
Exchanges
Total underwriting expenses   $ 1,624,971     $ 369,177     $ 1,994,148       $ 149,486       $ 1,733,617     $ 317,217     $ 2,050,834       $ 135,252  
Less: Loss and loss adjustment expense   1,038,573     179,712     1,218,285       86,209       1,113,178     154,913     1,268,091       61,920  
Less: Ceding commission income   74,420     520     74,940       24,936       5,588     558     6,146       35,356  
Less: Service and fee income   214,740     88,128     302,868       2,891       198,109     75,316     273,425       3,574  
Operating expense   297,238     100,817     398,055       35,450       416,742     86,430     503,172       34,402  
Net earned premium   $ 1,440,541     $ 310,045     $ 1,750,586       $ 97,858       $ 1,555,170     $ 263,778     $ 1,818,948       $ 81,288  
Operating expense ratio (Non-GAAP)   20.6 %   32.5 %   22.7 %     36.2 %     26.8 %   32.8 %   27.7 %     42.3 %
                                       
Total underwriting expenses   $ 1,624,971     $ 369,177     $ 1,994,148       $ 149,486       $ 1,733,617     $ 317,217     $ 2,050,834       $ 135,252  
Less: Loss and loss adjustment expense   1,038,573     179,712     1,218,285       86,209       1,113,178     154,913     1,268,091       61,920  
Less: Ceding commission income   74,420     520     74,940       24,936       5,588     558     6,146       35,356  
Less: Service and fee income   214,740     88,128     302,868       2,891       198,109     75,316     273,425       3,574  
Less: Non-cash amortization of intangible assets   11,579     3,558     15,137       (53 )     30,012     3,015     33,027       6,978  
Operating expense before amortization and impairment   285,659     97,259     382,918       35,503       386,730     83,415     470,145       27,424  
Net earned premium   $ 1,440,541     $ 310,045     $ 1,750,586       $ 97,858       $ 1,555,170     $ 263,778     $ 1,818,948       $ 81,288  
Operating expense ratio before amortization and impairment (Non-GAAP)   19.8 %   31.4 %   21.9 %     36.3 %     24.9 %   31.6 %   25.8 %     33.7 %
 


Premiums by Business Line

$ in thousands
(Unaudited)

    Three Months Ended June 30,
    Gross Written Premium     Net Written Premium     Net Earned Premium
    2018   2017   Change     2018   2017   Change     2018   2017   Change
Property & Casualty                                        
Personal Auto   $ 632,225     $ 514,990     22.8 %     $ 485,724     $ 471,372     3.0 %     $ 486,438     $ 495,225     (1.8 )%
Homeowners   190,706     151,984     25.5 %     50,304     131,926     (61.9 )%     79,658     110,570     (28.0 )%
RV/Packaged   59,999     52,598     14.1 %     59,118     52,190     13.3 %     48,993     43,314     13.1 %
Small Business Auto   84,986     80,890     5.1 %     63,432     72,864     (12.9 )%     60,104     70,324     (14.5 )%
Lender-placed insurance   80,599     90,374     (10.8 )%     14,887     86,525     (82.8 )%     53,694     79,201     (32.2 )%
Other   17,117     13,742     24.6 %     10,404     7,631     36.3 %     6,047     6,009     0.6 %
Property & Casualty   1,065,632     904,578     17.8 %     683,869     822,508     (16.9 )%     734,934     804,643     (8.7 )%
                                         
Accident & Health   156,836     130,974     19.7 %     139,258     118,249     17.8 %     156,169     134,852     15.8 %
Total National General   $ 1,222,468     $ 1,035,552     18.0 %     $ 823,127     $ 940,757     (12.5 )%     $ 891,103     $ 939,495     (5.2 )%
                                         
Reciprocal Exchanges                                        
Personal Auto   $ 42,065     $ 35,221     19.4 %     $ 14,520     $ 21,601     (32.8 )%     $ 12,462     $ 17,239     (27.7 )%
Homeowners   74,895     63,049     18.8 %     52,016     29,174     78.3 %     39,109     24,613     58.9 %
Other   1,021     887     15.1 %     312     468     (33.3 )%     232     404     (42.6 )%
Reciprocal Exchanges   $ 117,981     $ 99,157     19.0 %     $ 66,848     $ 51,243     30.5 %     $ 51,803     $ 42,256     22.6 %
                                         
Consolidated Total (A)   $ 1,340,449     $ 1,133,909     18.2 %     $ 889,975     $ 992,000     (10.3 )%     $ 942,906     $ 981,751     (4.0 )%
 
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.
 


Premiums by Business Line

$ in thousands
(Unaudited)

    Six Months Ended June 30,
    Gross Written Premium     Net Written Premium     Net Earned Premium
    2018   2017   Change     2018   2017   Change     2018   2017   Change
Property & Casualty                                        
Personal Auto   $ 1,357,437     $ 1,162,171     16.8 %     $ 1,039,721     $ 1,068,251     (2.7 )%     $ 940,654     $ 949,640     (0.9 )%
Homeowners   331,993     266,709     24.5 %     142,900     236,471     (39.6 )%     161,853     214,699     (24.6 )%
RV/Packaged   109,463     97,352     12.4 %     108,307     96,709     12.0 %     94,682     83,964     12.8 %
Small Business Auto   171,230     167,266     2.4 %     128,159     152,072     (15.7 )%     118,666     133,565     (11.2 )%
Lender-placed insurance   165,533     166,644     (0.7 )%     78,101     159,357     (51.0 )%     114,163     162,942     (29.9 )%
Other   33,242     24,449     36.0 %     19,393     11,886     63.2 %     10,523     10,360     1.6 %
Property & Casualty   2,168,898     1,884,591     15.1 %     1,516,581     1,724,746     (12.1 )%     1,440,541     1,555,170     (7.4 )%
                                         
Accident & Health   390,612     322,929     21.0 %     362,611     299,363     21.1 %     310,045     263,778     17.5 %
Total National General   $ 2,559,510     $ 2,207,520     15.9 %     $ 1,879,192     $ 2,024,109     (7.2 )%     $ 1,750,586     $ 1,818,948     (3.8 )%
                                         
Reciprocal Exchanges                                        
Personal Auto   $ 76,362     $ 63,380     20.5 %     $ 28,015     $ 38,707     (27.6 )%     $ 25,459     $ 33,356     (23.7 )%
Homeowners   137,416     116,376     18.1 %     88,824     53,390     66.4 %     71,880     47,151     52.4 %
Other   1,892     1,617     17.0 %     587     847     (30.7 )%     519     781     (33.5 )%
Reciprocal Exchanges   $ 215,670     $ 181,373     18.9 %     $ 117,426     $ 92,944     26.3 %     $ 97,858     $ 81,288     20.4 %
                                         
Consolidated Total (A)   $ 2,773,579     $ 2,387,292     16.2 %     $ 1,996,618     $ 2,117,053     (5.7 )%     $ 1,848,444     $ 1,900,236     (2.7 )%
 
NOTES: (A) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(567) in Personal Auto and $(1,034) in Homeowners Gross Written Premium in 2018, respectively, and $(564) in Personal Auto and $(1,037) in Homeowners Gross Written Premium in 2017, respectively.
 

Additional Disclosures

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

(2) Total investments includes $233,092 and $347,548 in related parties at June 30, 2018 and December 31, 2017, respectively.

(3) Reinsurance activity includes $9,891 and $15,688 from related parties at June 30, 2018 and December 31, 2017, respectively.

(4) Other includes $2,348 and $2,334 from related parties at June 30, 2018 and December 31, 2017, respectively.

(5) Accounts payable and accrued expenses includes $72,415 and $140,057 to related parties at June 30, 2018 and December 31, 2017, respectively.

(6) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 107,057,771 shares - June 30, 2018; authorized 150,000,000 shares, issued and outstanding 106,697,648 shares - December 31, 2017.

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

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

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

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

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

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

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

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

(15) Combined ratio excluding losses from various Q2'18 weather-related events, and is calculated by taking the combined ratio as defined in Note 13, and adjusting it to exclude the total net losses of $20.5 million from these events. The company believes this measure enhances investors' understanding of our results by eliminating what we believe are volatile and unusual events.

    Q2'18 Combined
Ratio
  Impact of Q2'18
Weather-related
Events
  Q2'18 Combined
Ratio Excluding
Weather-related
Events
P&C Segment   92.9%   2.8%   90.1%
             
Overall NGHC   92.1%   2.3%   89.8%

Investor Contact

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

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