National General Holdings Corp. Reports Third Quarter 2019 Results

NEW YORK, Oct. 30, 2019 (GLOBE NEWSWIRE) -- National General Holdings Corp. NGHC reported third quarter 2019 net income of $63.3 million or $0.54 per diluted share, compared to net income of $60.5 million or $0.55 per diluted share in the third quarter of 2018. Third quarter 2019 operating earnings (non-GAAP)⁽¹⁾ was $68.2 million or $0.59 per diluted share compared to $70.8 million or $0.65 per diluted share in the third quarter of 2018.

Third Quarter 2019 Highlights versus Third Quarter 2018*

• Gross written premium grew $82.6 million or 6.7% to $1,316.9 million driven by continued underlying organic growth in our P&C segment of 3.1% and the acquisition of National Farmers Union Property and Casualty Company ("Farmers Union Insurance") which closed on August 1, 2019, and continued organic growth in our A&H segment of 12.9%.
• The overall combined ratio^(12,13) was 92.5% compared to 91.3% in the prior year's quarter, excluding non-cash amortization of intangible assets. The P&C segment reported an increase in combined ratio to 97.0% from 94.4% in the prior year's quarter. The combined ratio includes prior year unfavorable development of $14.9 million compared to $7.2 million unfavorable in the prior year's quarter, higher non-catastrophe weather losses predominantly in the Midwest, and $11.5 million of catastrophe losses related to weather-related events compared to $35.0 million of catastrophe losses in the prior year's quarter. The A&H segment reported a decrease in combined ratio to 70.2% from 77.0% in the prior year's quarter, driven by strong operating results in our small group self-funded and individual products and higher third party fees.
• Service and fee income grew 11.8% to $179.3 million, driven by organic growth primarily in our group administration fees and third party technology services fees within our A&H segment.
• Stockholders' equity was $2.56 billion and fully diluted book value per share was $18.16 at September 30, 2019, growth of 15.3% and 19.1%, respectively, from December 31, 2018. Our trailing twelve-month operating return on average equity (ROE)⁽¹⁴⁾ was 14.5% as of September 30, 2019.
• Third quarter 2019 operating earnings (non-GAAP)⁽¹⁾ excludes the following, net of tax: $1.0 million or $0.01 per share loss on equity method investments, $0.3 million of net loss on investments, $5.4 million or $0.05 per share of non-cash amortization of intangible assets and $1.7 million or $0.01 per share bargain purchase gain on the acquisition of Farmers Union Insurance.

Barry Karfunkel, National General's CEO, stated: "Our third quarter 2019 results generated a 92.5% combined ratio which highlights the diverse capabilities of our platform. While our P&C segment earnings were negatively impacted by non-catastrophe weather events within our homeowners product line and reserve strengthening within our small business auto product line, our personal auto line continued its strong performance via both our independent agency and direct to consumer distribution channels. Our A&H segment reported record profitability and growth in the quarter, utilizing our suite of products and owned distribution. I am pleased with the continued execution of our strategy of focused underwriting discipline and long term growth initiatives."

*NOTE: Unless specified otherwise, discussion of our third quarter 2019 and 2018 results do not include financial results from the Reciprocal Exchanges, which are presented within our consolidated financial results within this release but are not included in net income available to NGHC common stockholders.

Overview of Third Quarter 2019 as Compared to Third Quarter 2018

• Property & Casualty - Gross written premium grew by 5.9% to $1,154.3 million, net written premium increased by 4.5% to $820.0 million, and net earned premium increased by 11.7% to $827.6 million. P&C gross written premium growth was primarily driven by organic growth of 3.1% and $29.9 million or 2.8% of added premiums from the acquisition of Farmers Union Insurance. Service and fee income was $115.6 million compared to $114.0 million in the prior year's quarter. Excluding non-cash amortization of intangible assets, the combined ratio^(12,13) was 97.0% with a loss and LAE ratio of 75.8% and an expense ratio^(11,13) of 21.2%, versus a prior year combined ratio of 94.4% with a loss and LAE ratio of 73.5% and an expense ratio of 20.9%. The loss and LAE ratio was impacted by pre-tax catastrophe losses of approximately $11.5 million primarily related to weather-related events in the third quarter 2019, compared to $35.0 million of losses in the third quarter 2018 and higher non-catastrophe weather losses. Unfavorable loss development was $14.9 million in the third quarter 2019 primarily driven by small business auto, compared to unfavorable loss development of $7.2 million in the third quarter 2018.
   
• Accident & Health - Gross written premium grew by 12.9% to $162.6 million, net written premium grew by 19.2% to $147.3 million, and net earned premium grew by 8.7% to $168.9 million. The A&H gross written premium increase was driven by continued growth in our domestic A&H business. Service and fee income grew 37.2% to $63.7 million compared to $46.5 million in the prior year's quarter, primarily driven by group administration fees and third party technology services fees which included a $5.8 million pre-tax sale of a software license to a third party. Excluding non-cash amortization of intangible assets, the combined ratio^(12,13) was 70.2% with a loss and LAE ratio of 41.8% and an expense ratio^(11,13) of 28.4%, versus a prior year combined ratio of 77.0% with a loss and LAE ratio of 46.8% and an expense ratio of 30.2%. The loss and LAE ratio reflects continued strong performance in both small group self-funded and individual products. Favorable loss development was $18.8 million in the third quarter 2019, compared to favorable loss development of $13.2 million in the third quarter 2018.
   
• Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $118.3 million, net written premium was $67.3 million, and net earned premium was $57.1 million. Reciprocal Exchanges combined ratio^(12,13) excluding non-cash amortization of intangible assets was 123.8% with a loss and LAE ratio of 82.8% and an expense ratio^(11,13) of 41.0%.The loss and LAE ratio was impacted by higher non-catastrophe weather losses.

Third quarter 2019 investment income grew to $33.5 million, compared to $31.0 million in the third quarter of 2018. Total investments and cash and cash equivalents (including restricted cash) were $4.8 billion as of September 30, 2019. Accumulated other comprehensive income (loss) increased to a $80.4 million gain at September 30, 2019 from a $52.1 million loss at December 31, 2018, primarily due to the impact of lower interest rates which positively impacted bond valuations.

Interest expense was $12.9 million, up from $12.6 million in the prior year's quarter. Debt was $688.0 million at September 30, 2019, down from $705.8 million at December 31, 2018.

On August 1, 2019, we closed the acquisition of all of the issued and outstanding shares of capital stock of Farmers Union Insurance from a subsidiary of QBE Insurance Group. The purchase price for the transaction was $52.8 million, subject to customary post-closing adjustments. The net assets acquired exceeded the amount paid by the Company and, as a result, we recorded a pre-tax bargain purchase gain of $2.1 million.

The third quarter of 2019 provision for income taxes was $19.3 million and the effective tax rate for the quarter was 21.3% compared with income taxes of $16.4 million and an effective rate of 19.4% in the third quarter of 2018.

Stockholders' equity was $2,559.8 million at September 30, 2019, growth of 15.3% from $2,220.8 million at December 31, 2018. Fully diluted book value per share was $18.16 at September 30, 2019, growth of 19.1% from $15.25 at December 31, 2018. Our trailing twelve-month operating return on average equity (ROE)⁽¹⁴⁾ was 14.5% as of September 30, 2019.

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

Additional Item

• National General Enters into Business Share Purchase Agreement with an Investor Group Arranged by Impilo AB. - On August 30, 2019, we entered into a share purchase agreement, pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, we agreed to sell our Euro Accident Health and Care Insurance Sweden operation, to an investor group arranged by Impilo AB, a Swedish investment company focused on Nordic healthcare investments. The estimated sale price for this transaction is $138 million. Since this transaction is based on Swedish Krona (SEK) and will reflect certain closing adjustments, the final price will vary accordingly. The transaction is expected to close in late 2019 or early 2020, subject to customary closing conditions and regulatory approvals.

Conference Call

On Thursday, October 31, 2019 at 9:00 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:

A replay of the conference call will be accessible from 2:00 PM ET on Thursday, October 31, 2019 to 11:59 PM ET on Thursday, November 14, 2019 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 313533. 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 vendors or agencies, breaches in data security or other disruptions involving our technology, heightened competition, changes in pricing environments, and changes in asset valuations. The forward-looking statements contained in this news release are made only as of the date of this release. The Company undertakes no obligation to publicly update any forward-looking statement except as may be required by law. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those projected is contained in the Company's filings with the Securities and Exchange Commission.

Income Statement - Third Quarter
$ in thousands
(Unaudited)

NOTES: Consolidated column includes eliminations as follows: (A) $(19,252), (B) $(1,871), (C) $(21,123), (D) $(19,252), (E) $(1,871), (F) $(21,123) || (G) $(19,310), (H) $(2,632), (I) $(21,942), (J) $(19,310), (K) $(2,632) and (L) $(21,942).

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

NOTES: Consolidated column includes eliminations as follows: (A) $(54,160), (B) $(7,821), (C) $(61,981), (D) $(54,160), (E) $(7,821), (F) $(61,981) || (G) $(1,601), (H) $(52,446), (I) $(7,177), (J) $(59,623), (K) $(52,446), (L) $(7,177) and (M) $(59,623).

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

Reconciliation of Net Income to Operating Earnings (Non-GAAP)^(1)(14)
$ in thousands, except per share data
(Unaudited)

Balance Sheet
$ in thousands
(Unaudited)

NOTES: Consolidated column includes eliminations as follows: (A) $(107,418), (B) $(33,107), (C) $(140,525), (D) $(33,107), (E) $(107,418), (F) $(140,525), (G) $(140,525) || (H) $(101,304), (I) $(25,400), (J) $(126,704), (K) $(25,400), (L) $(101,304), (M) $(126,704) and (N) $(126,704).

Segment Information - Third Quarter
$ in thousands
(Unaudited)

NOTE: Loss and loss adjustment expenses for the three months ended September 30, 2019 included $14,909 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $18,788 of favorable development in the A&H segment, versus $7,234 of unfavorable development in the P&C segment, and $13,200 of favorable development in the A&H segment for the three months ended September 30, 2018.

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

NOTE: Loss and loss adjustment expenses for the nine months ended September 30, 2019 included $19,791 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $37,775 of favorable development in the A&H segment, versus $13,318 of favorable development in the P&C segment, and $24,623 of favorable development in the A&H segment for the nine months ended September 30, 2018.

Reconciliation of Operating Expense Ratio (Non-GAAP)^(9,11,13)
$ in thousands
(Unaudited)

Reconciliation of Operating Expense Ratio (Non-GAAP)^(9,11,13)
$ in thousands
(Unaudited)

Premiums by Product Line
$ in thousands
(Unaudited)

nm - not meaningful

Premiums by Product Line
$ in thousands
(Unaudited)