National General Holdings Corp. Reports 2018 Results


  • Fourth quarter 2018 net income of $17.3 million compared to net loss of $9.9 million in the fourth quarter of 2017. Year ended 2018 net income was $174.9 million compared to $74.3 million in the year ended 2017.
  • Fourth quarter 2018 net income per diluted share of $0.16 compared to net loss per diluted share of $0.09 in the fourth quarter of 2017. Year ended 2018 net income per diluted share was $1.59 compared to $0.68 in the year ended 2017.
  • Fourth quarter 2018 operating earnings (non-GAAP)(1) was $33.6 million compared to $30.0 million in the fourth quarter of 2017. Year ended 2018 operating earnings (non-GAAP)(1) was $231.5 million compared to $118.1 million in the year ended 2017.
  • Fourth quarter 2018 operating earnings per share (non-GAAP)(1) was $0.30 compared to $0.28 in the fourth quarter of 2017. Year ended 2018 operating earnings per share (non-GAAP)(1) was $2.09 compared to $1.09 in the year ended 2017.

NEW YORK, Feb. 25, 2019 (GLOBE NEWSWIRE) -- National General Holdings Corp. (Nasdaq:NGHC) reported fourth quarter and full year 2018 results, highlighting the strength of the well-diversified, niche portfolio.

Fourth Quarter 2018 Highlights Versus Fourth Quarter 2017*

  • Gross written premium grew $108.5 million or 10.2% to $1,175.7 million, driven by continued organic growth in our P&C segment of 8.8% and in our A&H segment of 19.2%.

  • In the fourth quarter, our homeowners’ product experienced organic growth of 17.8% driven by continued growth from strategic partnerships and the expansion in our high net worth product offering. Our personal auto product experienced organic growth of 7.8% driven by rate increases and PIF growth.

  • The overall combined ratio(9,13) was 95.9% in the fourth quarter compared to 96.9% in the prior year’s quarter and 92.6% for the full year compared to 96.1% in 2017, excluding non-cash impairment of goodwill and amortization of intangible assets. The P&C segment reported an increase in combined ratio to 100.5% from 98.2% in the prior year’s quarter. The combined ratio includes $59.0 million of losses, or 7.9 P&C loss ratio points, primarily related to Hurricane Michael and November California Fires in the fourth quarter 2018, compared to $52.9 million of losses, or 7.5 P&C loss ratio points, from events in the fourth quarter 2017. The A&H segment reported a combined ratio of 73.6% compared to 89.9% in the prior year’s quarter with the decrease driven by strong operating results in our small group self-funded and individual products.

  • Service and fee income grew 11.0% to $162.2 million, driven by organic growth in both our Accident & Health and Property & Casualty segments.

  • Shareholders’ equity was $2.22 billion and fully diluted book value per share was $15.25 at December 31, 2018, growth of 15.2% and 10.0%, respectively, from December 31, 2017. Our trailing twelve month operating return on average equity (ROE)(14) was 14.6% as of December 31, 2018. In November we completed a 5.75 million share secondary common stock offering.

  • Fourth quarter 2018 operating earnings (non-GAAP)(1) exclude the following items, net of tax: $7.9 million or $0.07 per share of estimated litigation resolution expense, $6.3 million or $0.06 per share of non-cash amortization of intangible assets and $3.7 million or $0.03 per share of net loss on investments.

Barry Karfunkel, National General’s CEO, stated: “I’m pleased to report a year of record earnings for National General despite continued elevated catastrophe losses for the industry. Our diversified approach to niche areas in personal lines insurance is paying dividends, with strength in our Accident and Health segment driving an increasing share of underwriting income. In the quarter, we entered into an agreement to acquire National Farmers Union Insurance. This acquisition brings new competencies to National General through geographic diversification as well as a new distribution partner with the National Farmers Union. I think the strength of the platform that we have built since National General’s founding was evident this year, and I expect it to drive continued out-performance in the coming years.”

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

  • Property & Casualty - Gross written premium grew by 8.8% to $1,012.1 million, net written premium increased by 6.3% to $716.4 million, and net earned premium increased by 5.4% to $747.5 million. P&C gross written premium growth was primarily driven by organic growth of 17.8% from our homeowners’ product and 7.8% from our personal auto product. Service and fee income grew 11.6% to $110.8 million. Excluding non-cash impairment of goodwill and amortization of intangible assets, the combined ratio(9,13) was 100.5% with a loss ratio of 79.6% and an expense ratio(9,12) of 20.9%, versus a prior year combined ratio of 98.2% with a loss ratio of 76.9% and an expense ratio of 21.3%. The loss ratio was impacted by pre-tax catastrophe losses of approximately $59.0 million primarily related to Hurricane Michael and November California Fires in the fourth quarter 2018.
     
  • Accident & Health - Gross written premium grew by 19.2% to $163.5 million, net written premium grew by 11.6% to $140.4 million, and net earned premium grew by 12.9% to $151.0 million. The A&H gross written premium increase was driven by the continued growth across the entire book. Service and fee income was $51.4 million compared to $46.8 million in the prior year’s quarter. Excluding non-cash impairment of goodwill and amortization of intangible assets, the combined ratio(9,13) was 73.6% with a loss ratio of 45.7% and an expense ratio(9,12) of 27.9%, versus a prior year combined ratio of 89.9% with a loss ratio of 59.9% and an expense ratio of 30.0%. The loss ratio reflects continued strong performance in both small group self-funded and individual products.
     
  • Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $111.9 million, net written premium was $51.3 million, and net earned premium was $45.8 million. Reciprocal Exchanges combined ratio(9,13) excluding non-cash amortization of intangible assets was 105.8% with a loss ratio of 79.3% and an expense ratio(9,12) of 26.5%.

Fourth quarter 2018 investment income grew to $37.7 million, compared to $20.6 million in the fourth quarter of 2017, with the increase primarily driven by an improvement in the book yield, increased income from our remaining minority interest life settlement investment and increased investment of cash. Total investments and cash and cash equivalents (including restricted cash) were $4.2 billion as of December 31, 2018. Accumulated other comprehensive income (loss) increased to a $52.1 million loss at December 31, 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 was $12.7 million, up from $12.5 million in the prior year’s quarter. Debt was $675.4 million at December 31, 2018, down from $713.7 million at December 31, 2017.

The fourth quarter of 2018 provision for income taxes was $12.6 million and the effective tax rate for the quarter was 32.5% compared with income taxes of $24.8 million and an effective rate of 81.9% in the fourth quarter of 2017, which was impacted by the re-evaluation of our deferred tax asset related to the Tax Cuts and Jobs Act. The effective tax rate for the year ended December 31, 2018 was 21.6%.

Shareholders’ equity was $2,220.8 million at December 31, 2018, growth of 15.2% from $1,928.6 million at December 31, 2017. Fully diluted book value per share was $15.25 at December 31, 2018, growth of 10.0% from $13.86 at December 31, 2017. Our trailing twelve month operating return on average equity (ROE)(14) was 14.6% as of December 31, 2018.

*NOTE: Unless specified otherwise, discussion of our fourth 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.

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
Q4Hurricane Michael and November California Fires $59.0 7.9% $0.41
Q3California Fires and Hurricane Florence $35.0 4.7% $0.25
Q2Spring Weather-related and Texas Hail Events $20.5 2.8% $0.15
Q1Northeastern 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 Items

  • Auto quota share reduction. Effective January 1, 2019, we reduced the amount ceded under new and renewal auto policies written on or after January 1, 2019 on our auto quota share agreement to 7% from 15%.
  • Revolving credit agreement. On February 25th, 2019, National General entered into a new credit agreement with a $340 million base revolving credit facility with a letter of credit sublimit of $150 million and an expansion feature of up to $50 million, replacing the previous $245 million base revolving credit facility. The credit agreement will bear interest at LIBOR plus 1.75% and a commitment fee of 0.225%, depending on our leverage ratio. There is currently $160 million outstanding under the new credit agreement.
  • Class action lawsuit.  National General is a defendant in a consolidated multi-district class action litigation alleging improper practices in the placement of insurance in the historical and no longer existing collateral protection insurance program for Wells Fargo.  Management believes that the Company’s actions were, at all times, in compliance with applicable requirements and that the Company has a meritorious defense in litigation.  The estimated probable net pre-tax impact to the company to resolve this matter is $10 million.

Conference Call

On Tuesday, February 26, 2019 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:
International Dial-in:
Conference Entry Code:
Webcast Registration:
800-346-7359
973-528-0008
986437
http://ir.nationalgeneral.com/events-and-presentations

A replay of the conference call will be accessible from 2:00 PM ET on Tuesday, February 26, 2019 to 11:59 PM ET on Tuesday, March 12, 2019 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 986437. 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 - Fourth Quarter
$ in thousands
(Unaudited)

  Three Months Ended December 31,
  2018  2017 
  NGHC Reciprocal Exchanges Consolidated  NGHC Reciprocal Exchanges Consolidated 
Revenues:              
Gross written premium $1,175,687  $111,902  $1,287,589   $1,067,188  $97,994  $1,164,382 (G)
Net written premium 856,746  51,325  908,071   799,816  39,172  838,988  
Net earned premium 898,479  45,752  944,231   843,034  46,605  889,639  
               
Ceding commission income 48,495  17,226  65,721   19,229  5,623  24,852  
Service and fee income 162,170  1,285  146,270 (A) 146,098  (1,864) 129,283 (H)
Net investment income 37,666  2,182  37,332 (B) 20,615  2,105  20,225 (I)
Net gain (loss) on investments (4,689) (2,100) (6,789)  2,755  (10) 2,745  
Total revenues $1,142,121  $64,345  $1,186,765 (C) $1,031,731  $52,459  $1,066,744 (J)
               
Expenses:              
Loss and loss adjustment expense $664,125  $36,297  $700,422   $625,862  $31,064  $656,926  
Acquisition costs and other underwriting expenses 184,195  9,031  193,226   142,005  3,324  145,329  
General and administrative expenses 242,340  21,724  246,879 (D) 228,601  18,540  232,190 (K)
Interest expense 12,650  2,516  12,650 (E) 12,496  2,495  12,496 (L)
Total expenses $1,103,310  $69,568  $1,153,177 (F) $1,008,964  $55,423  $1,046,941 (M)
               
Income (loss) before provision (benefit) for income taxes $38,811  $(5,223) $33,588   $22,767  $(2,964) $19,803  
Provision (benefit) for income taxes 12,595  2,628  15,223   24,822  (4,300) 20,522  
Net income (loss) before non-controlling interest and dividends on preferred shares 26,216  (7,851) 18,365   (2,055) 1,336  (719) 
Less: net income (loss) attributable to non-controlling interest   (7,851) (7,851)    1,336  1,336  
Net income (loss) before dividends on preferred shares 26,216    26,216   (2,055)   (2,055) 
Less: dividends on preferred shares 8,867    8,867   7,875    7,875  
Net income (loss) available to common stockholders $17,349  $  $17,349   $(9,930) $  $(9,930) 

NOTES: Consolidated column includes eliminations as follows: (A) $(17,185), (B) $(2,516), (C) $(19,701), (D) $(17,185), (E) $(2,516), (F) $(19,701), || (G) $(800), (H) $(14,951), (I) $(2,495), (J) $(17,446), (K) $(14,951), (L) $(2,495) and (M) $(17,446).

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

  Year Ended December 31,
  2018  2017 
  NGHC Reciprocal Exchanges Consolidated  NGHC Reciprocal Exchanges Consolidated 
Revenues:              
Gross written premium $4,969,517  $448,923  $5,416,839 (A) $4,375,414  $383,773  $4,755,985 (H)
Net written premium 3,644,148  183,565  3,827,713   3,401,946  175,649  3,577,595  
Net earned premium 3,545,441  186,761  3,732,202   3,484,305  169,871  3,654,176  
               
Ceding commission income 167,948  56,749  224,697   56,276  60,180  116,456  
Service and fee income 625,463  5,751  561,583 (B) 552,580  5,794  502,927 (I)
Net investment income 119,852  8,875  119,034 (C) 102,229  9,325  101,950 (J)
Net gain (loss) on investments (26,179) (3,366) (29,545)  40,640  6,123  46,763  
Other income (expense)        (198)   (198) 
Total revenues $4,432,525  $254,770  $4,607,971 (D) $4,235,832  $251,293  $4,422,074 (K)
               
Expenses:              
Loss and loss adjustment expense $2,499,508  $162,718  $2,662,226   $2,506,242  $119,840  $2,626,082  
Acquisition costs and other underwriting expenses 693,283  41,983  735,266   622,269  50,160  672,429  
General and administrative expenses 923,921  83,756  938,046 (E) 887,472  80,971  912,996 (L)
Interest expense 51,425  9,693  51,425 (F) 47,086  9,604  47,086 (M)
Total expenses $4,168,137  $298,150  $4,386,963 (G) $4,063,069  $260,575  $4,258,593 (N)
               
Income (loss) before provision (benefit) for income taxes $264,388  $(43,380) $221,008   $172,763  $(9,282) $163,481  
Provision (benefit) for income taxes 57,034  (3,550) 53,484   66,918  (5,645) 61,273  
Net income (loss) before non-controlling interest and dividends on preferred shares 207,354  (39,830) 167,524   105,845  (3,637) 102,208  
Less: net income (loss) attributable to non-controlling interest   (39,830) (39,830)    (3,637) (3,637) 
Net income before dividends on preferred shares 207,354    207,354   105,845    105,845  
Less: dividends on preferred shares 32,492    32,492   31,500    31,500  
Net income available to common stockholders $174,862  $  $174,862   $74,345  $  $74,345  

NOTES: Consolidated column includes eliminations as follows: (A) $(1,601), (B) $(69,631), (C) $(9,693), (D) $(79,324), (E) $(69,631), (F) $(9,693), (G) $(79,324), || (H) $(3,202), (I) $(55,447), (J) $(9,604), (K) $(65,051), (L) $(55,447), (M) $(9,604) and (N) $(65,051).

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

 Three Months Ended December 31, Year Ended
December 31,
 2018 2017 2018 2017
Net income (loss) available to common stockholders$17,349 $(9,930) $174,862 $74,345
Basic net income (loss) per common share$0.16 $(0.09) $1.62 $0.70
Diluted net income (loss) per common share$0.16 $(0.09) $1.59 $0.68
        
Operating earnings attributable to NGHC (non-GAAP)(1)$33,590 $29,974  $231,495 $118,065
Basic operating earnings per common share (non-GAAP)(1)$0.31 $0.28  $2.15 $1.11
Diluted operating earnings per common share (non-GAAP)(1)$0.30 $0.28  $2.09 $1.09
        
Dividends declared per common share$0.04 $0.04  $0.16 $0.16
        
Weighted average number of basic shares outstanding109,782,543 106,682,586  107,659,813 106,588,402
Weighted average number of diluted shares outstanding112,947,180 108,793,184  110,822,056 108,752,262
Shares outstanding, end of period112,940,595 106,697,648     
Fully diluted shares outstanding, end of period116,105,232 108,808,246     
Book value per share$15.68 $14.14     
Fully diluted book value per share$15.25 $13.86     
           

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

 Three Months Ended December 31, Year Ended
December 31,
 2018 2017 2018 2017
Net income (loss) available to common stockholders$17,349  $(9,930) $174,862  $74,345 
Add (subtract):       
Net (gain) loss on investments4,689  (2,755) 26,179  (40,640)
Other (income) expense10,000    10,000  198 
Equity in (earnings) losses of equity method investments(3,144) 7,537  (165) 8,795 
Non-cash impairment of goodwill (non-deductible)  4,884    4,884 
Non-cash amortization of intangible assets7,926  9,428  31,323  51,729 
Income tax expense (benefit)(3,230) (4,973) (10,704) (7,029)
Tax reform impact  25,783    25,783 
Operating earnings attributable to NGHC (non-GAAP)(1)$33,590  $29,974  $231,495  $118,065 
        
Operating earnings per common share (non-GAAP):       
Basic operating earnings per common share (non-GAAP)$0.31  $0.28  $2.15  $1.11 
Diluted operating earnings per common share (non-GAAP)$0.30  $0.28  $2.09  $1.09 
                

Balance Sheet
$ in thousands
(Unaudited)

  December 31, 2018  December 31, 2017 
ASSETS NGHC Reciprocal Exchanges Consolidated  NGHC Reciprocal Exchanges Consolidated 
Total investments (2) $4,013,699  $314,411  $4,226,806 (A) $3,411,730  $327,213  $3,649,788 (H)
Cash and cash equivalents, including restricted cash 233,383  200  233,583   351,433  6,051  357,484  
Premiums and other receivables, net 1,338,485  61,327  1,399,812   1,268,330  56,792  1,324,321 (I)
Reinsurance activity (3) 2,023,911  253,501  2,277,412   1,616,103  195,184  1,811,287  
Intangible assets, net 376,532  3,405  379,937   400,385  3,685  404,070  
Goodwill 180,183    180,183   174,153    174,153  
Other (4) 739,068  27,879  741,547 (B) 705,321  29,174  718,640 (J)
Total assets $8,905,261  $660,723  $9,439,280 (C) $7,927,455  $618,099  $8,439,743 (K)
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Liabilities:              
Unpaid loss and loss adjustment expense reserves $2,778,689  $178,470  $2,957,159   $2,520,204  $143,353  $2,663,557  
Unearned premiums and other revenue 2,014,965  265,763  2,280,728   1,807,210  225,395  2,032,605  
Reinsurance payable 615,872  40,393  656,265   329,772  69,076  398,047 (L)
Accounts payable and accrued expenses (5) 390,338  33,120  398,058 (D) 390,507  24,682  399,334 (M)
Debt 675,449  101,304  675,449 (E) 713,710  89,155  713,710 (N)
Other 209,110  61,640  270,750   237,483  41,582  279,065  
Total liabilities $6,684,423  $680,690  $7,238,409 (F) $5,998,886  $593,243  $6,486,318 (O)
Stockholders’ equity:              
Common stock (6) $1,129  $  $1,129   $1,067  $  $1,067  
Preferred stock (7) 450,000    450,000   420,000    420,000  
Additional paid-in capital 1,057,783    1,057,783   917,751    917,751  
Accumulated other comprehensive income (loss) (52,130)   (52,130)  (8,112)   (8,112) 
Retained earnings 764,056    764,056   597,863    597,863  
Total National General Holdings Corp. stockholders’ equity 2,220,838    2,220,838   1,928,569    1,928,569  
Non-controlling interest   (19,967) (19,967)    24,856  24,856  
Total stockholders’ equity $2,220,838  $(19,967) $2,200,871   $1,928,569  $24,856  $1,953,425  
Total liabilities and stockholders’ equity $8,905,261  $660,723  $9,439,280 (G) $7,927,455  $618,099  $8,439,743 (P)

NOTES: Consolidated column includes eliminations as follows: (A) $(101,304), (B) $(25,400), (C) $(126,704), (D) $(25,400), (E) $(101,304), (F) $(126,704), (G) $(126,704), || (H) $(89,155), (I) $(801), (J) $(15,855), (K) $(105,811), (L) $(801), (M) $(15,855), (N) $(89,155), (O) $(105,811) and (P) $(105,811).

Segment Information - Fourth Quarter
$ in thousands
(Unaudited)

  Three Months Ended December 31,
  2018  2017
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal Exchanges
Gross written premium $1,012,138  $163,549  $1,175,687   $111,902   $929,981  $137,207  $1,067,188   $97,994 
Net written premium 716,394  140,352  856,746   51,325   674,080  125,736  799,816   39,172 
Net earned premium 747,457  151,022  898,479   45,752   709,256  133,778  843,034   46,605 
                    
Ceding commission income 42,281  6,214  48,495   17,226   19,000  229  19,229   5,623 
Service and fee income 110,776  51,394  162,170   1,285   99,292  46,806  146,098   (1,864)
Total underwriting revenues $900,514  $208,630  $1,109,144   $64,263   $827,548  $180,813  $1,008,361   $50,364 
                    
Loss and loss adjustment expense (A) 595,144  68,981  664,125   36,297   545,726  80,136  625,862   31,064 
Acquisition costs and other underwriting expenses 135,968  48,227  184,195   9,031   99,201  42,804  142,005   3,324 
General and administrative expenses (B) 178,797  53,543  232,340   21,724   179,622  48,979  228,601   18,540 
Total underwriting expenses $909,909  $170,751  $1,080,660   $67,052   $824,549  $171,919  $996,468   $52,928 
                    
Underwriting income (loss) (9,395) 37,879  28,484   (2,789)  2,999  8,894  11,893   (2,564)
Non-cash impairment of goodwill           4,884    4,884    
Non-cash amortization of intangible assets 5,835  2,091  7,926   111   4,852  4,576  9,428   (27)
Underwriting income (loss) before amortization and impairment $(3,560) $39,970  $36,410   $(2,678)  $12,735  $13,470  $26,205   $(2,591)
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (8) 79.6% 45.7% 73.9%  79.3%  76.9% 59.9% 74.2%  66.7%
Operating expense ratio (Non-GAAP) (9,10) 21.6% 29.2% 22.9%  26.8%  22.6% 33.4% 24.4%  38.8%
Combined ratio (Non-GAAP) (9,11) 101.2% 74.9% 96.8%  106.1%  99.5% 93.3% 98.6%  105.5%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (8) 79.6% 45.7% 73.9%  79.3%  76.9% 59.9% 74.2%  66.7%
Operating expense ratio (Non-GAAP) (9,12) 20.9% 27.9% 22.0%  26.5%  21.3% 30.0% 22.7%  38.9%
Combined ratio before amortization and impairment (Non-GAAP) (9,13) 100.5% 73.6% 95.9%  105.8%  98.2% 89.9% 96.9%  105.6%

NOTE: (A) Loss and loss adjustment expenses for the three months ended December 31, 2018 included $8,558 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $6,354 of favorable development in the A&H segment, versus $8,096 of unfavorable development in the P&C segment, and $1,280 of unfavorable development in the A&H segment for the three months ended December 31, 2017. (B) General and administrative expenses includes expenses allocated to segments only.

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

  Year Ended December 31,
  2018  2017
  P&C A&H NGHC  Reciprocal
Exchanges
  P&C A&H NGHC  Reciprocal Exchanges
Gross written premium $4,271,408  $698,109  $4,969,517   $448,923   $3,794,012  $581,402  $4,375,414   $383,773 
Net written premium 3,017,609  626,539  3,644,148   183,565   2,866,650  535,296  3,401,946   175,649 
Net earned premium 2,929,028  616,413  3,545,441   186,761   2,951,022  533,283  3,484,305   169,871 
                    
Ceding commission income 160,945  7,003  167,948   56,749   55,263  1,013  56,276   60,180 
Service and fee income 439,483  185,980  625,463   5,751   397,966  154,614  552,580   5,794 
Total underwriting revenues $3,529,456  $809,396  $4,338,852   $249,261   $3,404,251  $688,910  $4,093,161   $235,845 
                    
Loss and loss adjustment expense (A) 2,178,163  321,345  2,499,508   162,718   2,187,779  318,463  2,506,242   119,840 
Acquisition costs and other underwriting expenses 508,557  184,726  693,283   41,983   467,390  154,879  622,269   50,160 
General and administrative expenses (B) 712,113  201,808  913,921   83,756   715,975  171,497  887,472   80,971 
Total underwriting expenses $3,398,833  $707,879  $4,106,712   $288,457   $3,371,144  $644,839  $4,015,983   $250,971 
                    
Underwriting income (loss) 130,623  101,517  232,140   (39,196)  33,107  44,071  77,178   (15,126)
Non-cash impairment of goodwill           4,884    4,884    
Non-cash amortization of intangible assets 23,960  7,363  31,323   44   42,858  8,871  51,729   6,882 
Underwriting income (loss) before amortization and impairment $154,583  $108,880  $263,463   $(39,152)  $80,849  $52,942  $133,791   $(8,244)
                    
Underwriting ratios                   
Loss and loss adjustment expense ratio (8) 74.4% 52.1% 70.5%  87.1%  74.1% 59.7% 71.9%  70.5%
Operating expense ratio (Non-GAAP) (9,10) 21.2% 31.4% 23.0%  33.9%  24.7% 32.0% 25.9%  38.4%
Combined ratio (Non-GAAP) (9,11) 95.6% 83.5% 93.5%  121.0%  98.8% 91.7% 97.8%  108.9%
                    
Underwriting ratios (before amortization and impairment)                   
Loss and loss adjustment expense ratio (8) 74.4% 52.1% 70.5%  87.1%  74.1% 59.7% 71.9%  70.5%
Operating expense ratio (Non-GAAP) (9,12) 20.4% 30.2% 22.1%  33.8%  23.1% 30.4% 24.2%  34.3%
Combined ratio before amortization and impairment (Non-GAAP) (9,13) 94.8% 82.3% 92.6%  120.9%  97.2% 90.1% 96.1%  104.8%

NOTE: (A) Loss and loss adjustment expenses for the year ended December 31, 2018 included $4,760 of favorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $30,977 of favorable development in the A&H segment, versus $15,273 of unfavorable development in the P&C segment, and $8,826 of favorable development in the A&H segment for the year ended December 31, 2017.
(B) General and administrative expenses includes expenses allocated to segments only.

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

  Three Months Ended December 31,
  2018  2017
  P&C A&H NGHC  Reciprocal Exchanges  P&C A&H NGHC  Reciprocal Exchanges
Total underwriting expenses $909,909  $170,751  $1,080,660   $67,052   $824,549  $171,919  $996,468   $52,928 
Less: Loss and loss adjustment expense 595,144  68,981  664,125   36,297   545,726  80,136  625,862   31,064 
Less: Ceding commission income 42,281  6,214  48,495   17,226   19,000  229  19,229   5,623 
Less: Service and fee income 110,776  51,394  162,170   1,285   99,292  46,806  146,098   (1,864)
Operating expense 161,708  44,162  205,870   12,244   160,531  44,748  205,279   18,105 
Net earned premium $747,457  $151,022  $898,479   $45,752   $709,256  $133,778  $843,034   $46,605 
Operating expense ratio (Non-GAAP) 21.6% 29.2% 22.9%  26.8%  22.6% 33.4% 24.4%  38.8%
                    
Total underwriting expenses $909,909  $170,751  $1,080,660   $67,052   $824,549  $171,919  $996,468   $52,928 
Less: Loss and loss adjustment expense 595,144  68,981  664,125   36,297   545,726  80,136  625,862   31,064 
Less: Ceding commission income 42,281  6,214  48,495   17,226   19,000  229  19,229   5,623 
Less: Service and fee income 110,776  51,394  162,170   1,285   99,292  46,806  146,098   (1,864)
Less: Non-cash impairment of goodwill           4,884    4,884    
Less: Non-cash amortization of intangible assets 5,835  2,091  7,926   111   4,852  4,576  9,428   (27)
Operating expense before amortization and impairment 155,873  42,071  197,944   12,133   150,795  40,172  190,967   18,132 
Net earned premium $747,457  $151,022  $898,479   $45,752   $709,256  $133,778  $843,034   $46,605 
Operating expense ratio before amortization and impairment (Non-GAAP) 20.9% 27.9% 22.0%  26.5%  21.3% 30.0% 22.7%  38.9%
                            

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

  Year Ended December 31,
  2018  2017
  P&C A&H NGHC  Reciprocal Exchanges  P&C A&H NGHC  Reciprocal Exchanges
Total underwriting expenses $3,398,833  $707,879  $4,106,712   $288,457   $3,371,144  $644,839  $4,015,983   $250,971 
Less: Loss and loss adjustment expense 2,178,163  321,345  2,499,508   162,718   2,187,779  318,463  2,506,242   119,840 
Less: Ceding commission income 160,945  7,003  167,948   56,749   55,263  1,013  56,276   60,180 
Less: Service and fee income 439,483  185,980  625,463   5,751   397,966  154,614  552,580   5,794 
Operating expense 620,242  193,551  813,793   63,239   730,136  170,749  900,885   65,157 
Net earned premium $2,929,028  $616,413  $3,545,441   $186,761   $2,951,022  $533,283  $3,484,305   $169,871 
Operating expense ratio (Non-GAAP) 21.2% 31.4% 23.0%  33.9%  24.7% 32.0% 25.9%  38.4%
                    
Total underwriting expenses $3,398,833  $707,879  $4,106,712   $288,457   $3,371,144  $644,839  $4,015,983   $250,971 
Less: Loss and loss adjustment expense 2,178,163  321,345  2,499,508   162,718   2,187,779  318,463  2,506,242   119,840 
Less: Ceding commission income 160,945  7,003  167,948   56,749   55,263  1,013  56,276   60,180 
Less: Service and fee income 439,483  185,980  625,463   5,751   397,966  154,614  552,580   5,794 
Less: Non-cash impairment of goodwill           4,884    4,884    
Less: Non-cash amortization of intangible assets 23,960  7,363  31,323   44   42,858  8,871  51,729   6,882 
Operating expense before amortization and impairment 596,282  186,188  782,470   63,195   682,394  161,878  844,272   58,275 
Net earned premium $2,929,028  $616,413  $3,545,441   $186,761   $2,951,022  $533,283  $3,484,305   $169,871 
Operating expense ratio before amortization and impairment (Non-GAAP) 20.4% 30.2% 22.1%  33.8%  23.1% 30.4% 24.2%  34.3%
                            

Premiums by Business Line
$ in thousands
(Unaudited)

  Three Months Ended December 31,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2018 2017 Change  2018 2017 Change  2018 2017 Change
Property & Casualty                    
Personal Auto $619,180  $574,179  7.8%  $474,173  $437,908  8.3%  $490,874  $450,552  8.9%
Homeowners 164,698  139,848  17.8%  75,830  57,423  32.1%  87,689  66,968  30.9%
RV/Packaged 43,967  40,195  9.4%  43,806  39,737  10.2%  51,347  46,182  11.2%
Small Business Auto 72,851  70,396  3.5%  52,142  50,495  3.3%  59,285  57,998  2.2%
Lender-placed insurance 103,061  94,263  9.3%  67,439  83,186  (18.9)%  53,182  80,005  (33.5)%
Other 8,381  11,100  (24.5)%  3,004  5,331  (43.7)%  5,080  7,551  (32.7)%
Property & Casualty 1,012,138  929,981  8.8%  716,394  674,080  6.3%  747,457  709,256  5.4%
                     
Accident & Health 163,549  137,207  19.2%  140,352  125,736  11.6%  151,022  133,778  12.9%
Total National General $1,175,687  $1,067,188  10.2%  $856,746  $799,816  7.1%  $898,479  $843,034  6.6%
                     
Reciprocal Exchanges                    
Personal Auto $36,527  $30,424  20.1%  $20,899  $17,052  22.6%  $21,111  $18,042  17.0%
Homeowners 74,421  66,844  11.3%  30,049  21,649  38.8%  24,228  28,115  (13.8)%
Other 954  726  31.4%  377  471  (20.0)%  413  448  (7.8)%
Reciprocal Exchanges $111,902  $97,994  14.2%  $51,325  $39,172  31.0%  $45,752  $46,605  (1.8)%
                     
Consolidated Total (A) $1,287,589  $1,164,382  10.6%  $908,071  $838,988  8.2%  $944,231  $889,639  6.1%

NOTES: (A) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(254) in Personal Auto and $(546) in Homeowners Gross Written Premium in 2017, respectively.

Premiums by Business Line
$ in thousands
(Unaudited)

  Year Ended December 31,
  Gross Written Premium  Net Written Premium  Net Earned Premium
  2018 2017 Change  2018 2017 Change  2018 2017 Change
Property & Casualty                    
Personal Auto $2,637,743  $2,335,958  12.9%  $2,016,858  $1,824,932  10.5%  $1,927,667  $1,828,304  5.4%
Homeowners 689,040  560,909  22.8%  331,120  275,013  20.4%  329,850  349,709  (5.7)%
RV/Packaged 208,394  187,475  11.2%  206,740  185,993  11.2%  197,258  175,888  12.1%
Small Business Auto 319,299  316,958  0.7%  233,456  246,072  (5.1)%  237,587  251,576  (5.6)%
Lender-placed insurance 363,056  345,354  5.1%  202,069  313,124  (35.5)%  215,811  321,995  (33.0)%
Other 53,876  47,358  13.8%  27,366  21,516  27.2%  20,855  23,550  (11.4)%
Property & Casualty 4,271,408  3,794,012  12.6%  3,017,609  2,866,650  5.3%  2,929,028  2,951,022  (0.7)%
                     
Accident & Health 698,109  581,402  20.1%  626,539  535,296  17.0%  616,413  533,283  15.6%
Total National General $4,969,517  $4,375,414  13.6%  $3,644,148  $3,401,946  7.1%  $3,545,441  $3,484,305  1.8%
                     
Reciprocal Exchanges                    
Personal Auto $153,129  $132,844  15.3%  $61,759  $68,292  (9.6)%  $59,923  $66,565  (10.0)%
Homeowners 291,907  247,460  18.0%  120,875  105,536  14.5%  125,806  101,648  23.8%
Other 3,887  3,469  12.0%  931  1,821  (48.9)%  1,032  1,658  (37.8)%
Reciprocal Exchanges $448,923  $383,773  17.0%  $183,565  $175,649  4.5%  $186,761  $169,871  9.9%
                     
Consolidated Total (A) $5,416,839  $4,755,985  13.9%  $3,827,713  $3,577,595  7.0%  $3,732,202  $3,654,176  2.1%

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 $(1,120) in Personal Auto and $(2,082) 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, 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, and any significant non-recurring or infrequent items that may not be indicative of ongoing operations. 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 $233,723 and $347,548 in related parties at December 31, 2018 and December 31, 2017, respectively.

(3) Reinsurance activity includes $7,425 and $15,688 from related parties at December 31, 2018 and December 31, 2017, respectively.

(4) Other includes $2,362 and $2,334 from related parties at December 31, 2018 and December 31, 2017, respectively.

(5) Accounts payable and accrued expenses includes $69,874 and $140,057 to related parties at December 31, 2018 and December 31, 2017, respectively.

(6) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 112,940,595 shares - December 31, 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 2,565,120 shares - December 31, 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, service and fee income and significant corporate litigation expenses. 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, service and fee income and significant corporate litigation expenses. 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, service and fee income and significant corporate litigation expenses 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 (non-GAAP) 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 Q4'18 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 $59.0 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.

  Q4'18 Combined Ratio Impact of Q4'18 Weather-related Events Q4'18 Combined Ratio Excluding Weather-related Events
P&C Segment 100.5% 7.9% 92.6%
       
Overall NGHC 95.9% 6.6% 89.3%

Investor Contact

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