National General Holdings Corp. Reports Second Quarter 2018 Results

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.

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:

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.

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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.

Investor Contact

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