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National General Holdings Corp. Reports Second Quarter 2017 Results

NEW YORK, Aug. 07, 2017 (GLOBE NEWSWIRE) -- National General Holdings Corp. (NASDAQ:NGHC) today reported a second quarter 2017 net loss of $5.1 million or $0.05 per diluted share, compared to net income of $44.3 million or $0.41 per diluted share in the second quarter of 2016. Second quarter 2017 operating earnings(1) was $11.9 million or $0.11 per diluted share, compared to $46.4 million or $0.43 per diluted share in the second quarter of 2016.

Second Quarter 2017 Highlights Versus Second Quarter 2016*

  • Net written premium grew $242.4 million or 34.7% to $940.8 million, driven by added premiums from the acquisitions of Direct General, Century-National and Standard Property and Casualty Insurance Company, and organic growth within our P&C business of 15.8%, or 23.1% excluding the decline in lender-placed premiums and continued growth of our A&H segment.

  • The overall combined ratio(10,14) was 96.2% compared to 94.0% in the prior year’s quarter, excluding non-cash amortization of intangible assets. The P&C segment reported an increase in combined ratio to 96.8% from 94.2% in the prior year’s quarter, which was impacted by poor results from National General Lender Services, an increase in estimated losses from first quarter West Coast precipitation and hail events recognized in the second quarter and continued investment in our platform. The A&H segment reported a combined ratio of 93.1% compared to 92.9% in the prior year’s quarter.

  • Total revenues grew by $291.1 million or 36.2% to $1,095.7 million, primarily driven by the aforementioned premium growth, service and fee income growth of $37.9 million or 38.1%, and net investment income growth of $2.3 million or 8.5%.

  • Shareholders’ equity was $1.94 billion and fully diluted book value per share was $13.88 at June 30, 2017, growth of 2.4% and 2.7%, respectively, from December 31, 2016. Our trailing twelve month operating return on average equity (ROE)(16) was 8.0% as of June 30, 2017.

  • Second quarter 2017 operating earnings exclude the following material items, net of tax: $5.4 million or $0.05 per share of net loss on investments and $7.6 million or $0.07 per share of non-cash amortization of intangible assets.

  • Second quarter 2017 operating earnings include approximately $16.1 million or $0.09 per share of losses related to an increase in estimated loss from first quarter West Coast precipitation and hail events that were recognized in the second quarter and $19.3 million or $0.11 per share loss impacting equity method investments related to losses recorded based on our proportionate share of investments in certain real estate joint ventures.

Barry Karfunkel, National General’s President and CEO, stated: “The results this quarter were disappointing due to the poor performance from National General Lender Services and weather losses impacting our home product. Within both our home and auto product lines, we continue to experience tremendous organic growth that is meeting our underwriting return hurdles. We expect the opportunity for profitable growth to continue as we have the scale and underwriting sophistication to compete in a largely fragmented market.

Effective July 1, 2017, we entered into two quota share reinsurance agreements with a group of high quality third-party reinsurance providers, a testament to the value placed on the business that we have built.”

*NOTE: Unless specified otherwise, discussion of our second quarter 2017 and 2016 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 2017 as Compared to Second Quarter 2016

Gross written premium grew 33.8% to $1,035.6 million, net written premium grew 34.7% to $940.8 million, and net earned premium grew 38.8% to $939.5 million. Premium growth was driven by several key factors: underlying organic growth within our P&C segment, continued growth of our A&H segment, and additional premiums from the acquisitions of Direct General, Century-National, and Standard Property and Casualty Insurance Company.

Service and fee income grew 38.1% to $137.6 million, driven by added service and fee income from our recent completed transactions, primarily the Direct General acquisition which contributed an additional $24.4 million in the quarter and additional fees in our A&H segment.

Excluding non-cash amortization of intangible assets, the combined ratio(10,14,15) was 96.2% with a loss ratio(15) of 72.0% and an expense ratio(10,13,15) of 24.2%, compared to a prior year combined ratio of 94.0% with a loss ratio of 67.2% and an expense ratio of 26.8%. In the current year’s quarter, certain costs associated with claims handling were reclassified from general and administrative expenses to loss adjustment expenses when compared with the previous year’s quarter, resulting in an increase in loss and loss adjustment expense ratio and a decrease in expense ratio in corresponding amounts(15).

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

  • Property & Casualty - Gross written premium grew by 34.8% to $904.6 million, net written premium grew by 35.3% to $822.5 million, and net earned premium grew by 39.9% to $804.6 million. P&C net written premium growth was driven by several key factors: organic growth of 15.8%, or 23.1% excluding the decline in lender-placed premiums, $77.9 million from the Direct General acquisition, $12.2 million from the Standard Property and Casualty Insurance Company acquisition and $31.1 million from the Century-National acquisition, partially offset by a decrease in our lender-placed premiums. Service and fee income grew 55.5% to $94.5 million, driven by increased premium volume in the quarter and the addition of service and fee income from acquisitions completed during the prior year, particularly Direct General. Excluding non-cash amortization of intangible assets, the combined ratio(10,14) was 96.8% with a loss ratio of 73.6% and an expense ratio(10,13) of 23.2%, versus a prior year combined ratio of 94.2% with a loss ratio of 65.4% and an expense ratio of 28.8%. The loss ratio was impacted by pre-tax catastrophe losses of approximately $16.1 million related to an increase in estimated loss from first quarter West Coast precipitation and hail events that were recognized in the second quarter. In the current year’s quarter, the reclassification of certain costs associated with claims handling from general and administrative expenses to loss adjustment expenses impacted both the loss and expense ratios by identical amounts(15).

  • Accident & Health - Gross written premium grew to $131.0 million, net written premium grew to $118.2 million, and net earned premium grew to $134.9 million, from $102.9 million, $90.4 million, and $101.9 million, respectively, in the prior year’s quarter. The A&H net written premium increase was driven by the continued growth across the entire book. Service and fee income was $43.0 million compared to $38.9 million in the prior year’s quarter. The increase in service and fee income primarily relates to continued growth in our book. Excluding non-cash amortization of intangible assets, the combined ratio(10,14) was 93.1% with a loss ratio of 62.8% and an expense ratio(10,13,15) of 30.3%, versus a prior year combined ratio of 92.9% with a loss ratio of 77.3% and an expense ratio of 15.6%. The improvement in our loss ratio reflects the strong performance across our entire book.

  • Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $99.2 million, net written premium was $51.2 million, and net earned premium was $42.3 million. Reciprocal Exchanges combined ratio(10,14,15) excluding non-cash amortization of intangible assets was 114.4% with a loss ratio of 80.0% and an expense ratio(10,13) of 34.4%, which was elevated by weather events recognized in the second quarter. Investment income grew 8.5% to $29.7 million, reflecting an increase in the size of our investment portfolio as compared to the prior year’s quarter. Second quarter 2017 results included $8.4 million of net investment losses compared to a gain of $3.9 million in the second quarter of 2016. Total investments and cash and cash equivalents were $3.8 billion as of June 30, 2017. Accumulated other comprehensive income increased to $32.9 million at June 30, 2017 from $12.7 million at December 31, 2016.

Interest expense was $11.6 million, up from $8.9 million in the prior year’s quarter due to an increased amount of debt on our balance sheet. Debt was $754.7 million at June 30, 2017, up from $678.7 million at June 30, 2016, as a result of debt assumed from our prior acquisitions.

Earnings (losses) of equity investments (predominantly our investment in Life Settlement Entities and alternative investments) was a $18.9 million loss in the second quarter of 2017 versus a $7.4 million gain in the prior year’s quarter.

The second quarter of 2017 provision for income taxes was $5.7 million and the effective tax rate for the quarter was 20.9% compared with incomes taxes of $14.8 million and an effective tax rate of 26.5% in the second quarter of 2016.

National General Holding Corp.’s shareholders’ equity was $1,939.9 million at June 30, 2017, growth of 2.4% from $1,893.8 million at December 31, 2016. Fully diluted book value per share was $13.88 at June 30, 2017, growth of 2.7% from $13.52 at December 31, 2016. Our trailing twelve month operating return on average equity (ROE)(16) was 8.0% as of June 30, 2017.

Year-to-Date P&C Segment Notable Large Losses
2017
Quarter
P&C Notable
Large Losses and
LAE

($ millions)
P&C Loss Ratio
Points*
EPS Impact After
Tax
Q2Hail event $7.0 0.9% $0.04
Q2Increased Loss Estimate from Q1 West Coast Storms $9.1 1.1% $0.05
Q1West Coast Storms $8.9 1.2% $0.05

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

Conference Call

On Tuesday, August 8, 2017 at 11:00 AM ET, President and Chief Executive Officer Barry Karfunkel and Chief Financial Officer Mike Weiner will review results and discuss business conditions via a conference call that may be accessed as follows:

Toll-Free U.S. Dial-in: 888-267-2845
International Dial-in: 973-413-6102
Conference Entry Code: 583127
Webcast Registration: http://ir.nationalgeneral.com/events.cfm

A replay of the conference call will be accessible from 2:00 PM ET on Tuesday, August 8, 2017 to 11:59 PM ET on Tuesday, August 22, 2017 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 583127. In addition, a replay of the webcast can also be retrieved at http://ir.nationalgeneral.com/events.cfm.

About National General Holdings Corp.

National General Holdings Corp., headquartered in New York City, is a specialty personal lines insurance holding company. National General traces its roots to 1939, has a financial strength rating of A- (excellent) from A.M. Best, and provides personal and commercial automobile, homeowners, umbrella, recreational vehicle, motorcycle, 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 our life settlement contracts, development of claims and the effect on loss reserves, accuracy in projecting loss reserves, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, changes in the demand for our products, our degree of success in integrating acquired businesses, the effect of general economic conditions, state and federal legislation, regulations and regulatory investigations into industry practices, risks associated with conducting business outside the United States, developments relating to existing agreements, disruptions to our business relationships with AmTrust Financial Services, Inc., ACP Re Ltd., Maiden Holdings, Ltd., or third party agencies, breaches in data security or other disruptions involving our technology, heightened competition, changes in pricing environments, and changes in asset valuations. The forward-looking statements contained in this news release are made only as of the date of this release. The Company undertakes no obligation to publicly update any forward-looking statement except as may be required by law. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those projected is contained in the Company’s filings with the Securities and Exchange Commission.

Income Statement - Second Quarter
$ in thousands
(Unaudited)
Three Months Ended June 30,
2017 2016
NGHC Reciprocal
Exchanges
Consolidated NGHC Reciprocal
Exchanges
Consolidated
Revenues:
Gross written premium $1,035,552 $99,157 $1,133,909 (A) $774,048 $77,170 $850,507 (H)
Net written premium 940,757 51,243 992,000 698,319 39,130 737,449
Net earned premium 939,495 42,256 981,751 676,912 36,028 712,940
Ceding commission income (loss) 3,399 18,109 21,508 (3,205) 14,909 11,704
Service and fee income 137,562 1,494 125,176 (B) 99,629 1,195 90,017 (I)
Net investment income 29,680 2,147 29,446 (C) 27,361 2,248 27,528 (J)
Net gain (loss) on investments (8,362) 6,187 (2,175) 3,854 141 3,995
Other income (expense) (6,098) (6,098)
Total revenues $1,095,676 $70,193 $1,149,608 (D) $804,551 $54,521 $846,184 (K)
Expenses:
Loss and loss adjustment expense $676,587 $33,820 $710,407 $454,622 $17,736 $472,358
Acquisition costs and other underwriting expenses 173,255 15,540 188,795 108,387 493 108,874 (L)
General and administrative expenses 206,865 18,509 211,494 (E) 176,660 25,261 191,120 (M)
Interest expense 11,550 2,381 11,550 (F) 8,939 2,081 8,939 (N)
Total expenses $1,068,257 $70,250 $1,122,246 (G) $748,608 $45,571 $781,291 (O)
Income (loss) before provision (benefit) for income taxes and earnings (losses) of equity method investments $27,419 $(57) $27,362 $55,943 $8,950 $64,893
Provision (benefit) for income taxes 5,740 72 5,812 14,825 (274) 14,551
Income (loss) before earnings (losses) of equity method investments 21,679 (129) 21,550 41,118 9,224 50,342
Earnings (losses) of equity method investments (18,915) (18,915) 7,356 7,356
Net income (loss) before non-controlling interest and dividends on preferred shares 2,764 (129) 2,635 48,474 9,224 57,698
Less: net income (loss) attributable to non-controlling interest (30) (129) (159) 4 9,224 9,228
Net income before dividends on preferred shares 2,794 2,794 48,470 48,470
Less: dividends on preferred shares 7,875 7,875 4,125 4,125
Net income (loss) available to common stockholders $(5,081) $ $(5,081) $44,345 $ $44,345

NOTES:
Consolidated column includes eliminations as follows: (A) $(800), (B) $(13,880), (C) $(2,381), (D) $(16,261), (E) $(13,880), (F) $(2,381), (G) $(16,261), (H) $(711), (I) $(10,807), (J) $(2,081), (K) $(12,888), (L) $(6), (M) $(10,801), (N) $(2,081) and (O) $(12,888).

Income Statement - Year to Date
$ in thousands
(Unaudited)
Six Months Ended June 30,
2017 2016 (1)
NGHC Reciprocal
Exchanges
Consolidated NGHC Reciprocal
Exchanges
Consolidated
Revenues:
Gross written premium $2,209,206 $181,373 $2,388,978 (A) $1,590,242 $77,170 $1,666,701 (H)
Net written premium 2,025,795 92,944 2,118,739 1,442,906 39,130 1,482,036
Net earned premium 1,820,634 81,288 1,901,922 1,331,832 36,028 1,367,860
Ceding commission income (loss) 6,146 35,356 41,502 (5,100) 14,909 9,809
Service and fee income 273,425 3,574 251,118 (B) 196,573 1,195 186,961 (I)
Net investment income 55,449 5,031 55,836 (C) 49,031 2,248 49,198 (J)
Net gain (loss) on investments (7,874) 6,187 (1,687) 8,172 141 8,313
Other income (expense) 3,703 3,703
Total revenues $2,151,483 $131,436 $2,252,394 (D) $1,580,508 $54,521 $1,622,141 (K)
Expenses:
Loss and loss adjustment expense $1,264,812 $61,920 $1,326,732 $863,672 $17,736 $881,408
Acquisition costs and other underwriting expenses 334,376 29,720 364,096 221,286 493 221,773 (L)
General and administrative expenses 448,948 43,612 466,679 (E) 353,287 25,261 367,747 (M)
Interest expense 23,095 4,644 23,095 (F) 18,080 2,081 18,080 (N)
Total expenses $2,071,231 $139,896 $2,180,602 (G) $1,456,325 $45,571 $1,489,008 (O)
Income (loss) before provision (benefit) for income taxes and earnings (losses) of equity method investments $80,252 $(8,460) $71,792 $124,183 $8,950 $133,133
Provision (benefit) for income taxes 21,506 (2,176) 19,330 32,908 (274) 32,634
Income (loss) before earnings (losses) of equity method investments 58,746 (6,284) 52,462 91,275 9,224 100,499
Earnings (losses) of equity method investments (13,961) (13,961) 14,038 14,038
Net income (loss) before non-controlling interest and dividends on preferred shares 44,785 (6,284) 38,501 105,313 9,224 114,537
Less: net income (loss) attributable to non-controlling interest (6,284) (6,284) 16 9,224 9,240
Net income before dividends on preferred shares 44,785 44,785 105,297 105,297
Less: dividends on preferred shares 15,750 15,750 8,250 8,250
Net income available to common stockholders $29,035 $ $29,035 $97,047 $ $97,047

NOTES:
(1) The Reciprocal Exchanges did not meet the criteria for consolidation under GAAP for the Three Months Ended March 31, 2016.

Consolidated column includes eliminations as follows: (A) $(1,601), (B) $(25,881), (C) $(4,644), (D) $(30,525), (E) $(25,881), (F) $(4,644), (G) $(30,525), (H) $(711), (I) $(10,807), (J) $(2,081), (K) $(12,888), (L) $(6), (M) $(10,801), (N) $(2,081) and (O) $(12,888).

Earnings and Per Share Data
$ in thousands, except shares and per share data
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
Net income (loss) available to common stockholders $(5,081) $44,345 $29,035 $97,047
Basic net income (loss) per common share $(0.05) $0.42 $0.27 $0.92
Diluted net income (loss) per common share $(0.05) $0.41 $0.27 $0.90
Operating earnings attributable to NGHC(1) $11,864 $46,416 $53,149 $100,150
Basic operating earnings per common share(1) $0.11 $0.44 $0.50 $0.95
Diluted operating earnings per common share(1) $0.11 $0.43 $0.49 $0.93
Dividends declared per common share $0.04 $0.03 $0.08 $0.06
Weighted average number of basic shares outstanding 106,560,000 105,803,802 106,514,396 105,700,682
Weighted average number of diluted shares outstanding 109,447,812 108,197,897 109,364,273 107,987,406
Shares outstanding, end of period 106,607,110 105,932,281 106,607,110 105,932,281
Fully diluted shares outstanding, end of period 109,507,711 108,326,376 109,507,711 108,219,006
Book value per share $14.26 $13.75 $14.26 $13.75
Fully diluted book value per share $13.88 $13.45 $13.88 $13.46


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,
2017 2016 2017 2016
Net income (loss) available to common stockholders $(5,081) $44,345 $29,035 $97,047
Add (subtract):
Net (gain) loss on investments 8,362 (3,854) 7,874 (8,172)
Bargain purchase gain 6,098 (3,703)
Equity in (earnings) losses of unconsolidated subsidiaries (other than LSC investment and certain Real Estate investments) (82) (148) (100) 13
Non-cash amortization of intangible assets 11,690 7,188 33,027 12,852
Income tax at 35% (9,123) (1,115) (12,984) (1,590)
Operating earnings attributable to NGHC (1) $11,864 $46,416 $53,149 $100,150
Operating earnings per common share:
Basic operating earnings per common share $0.11 $0.44 $0.50 $0.95
Diluted operating earnings per common share $0.11 $0.43 $0.49 $0.93


Balance Sheet
$ in thousands
June 30, 2017 (unaudited) December 31, 2016 (audited)
ASSETS NGHC Reciprocal
Exchanges
Consolidated NGHC Reciprocal
Exchanges
Consolidated
Total investments (2) $3,606,723 $389,017 $3,906,659 (A) $3,456,112 $306,345 $3,673,449 (J)
Cash and cash equivalents 237,815 4,023 241,838 212,894 7,405 220,299
Premiums and other receivables, net 1,284,584 48,911 1,332,694 (B) 1,044,272 47,198 1,090,669 (K)
Reinsurance recoverable (3) 900,456 68,625 969,081 892,264 55,972 948,236
Intangible assets, net 406,880 3,775 410,655 456,695 11,025 467,720
Goodwill 189,587 189,587 155,290 155,290
Other (4) 639,600 107,987 736,618 (C) 621,679 89,764 689,318 (L)
Total assets $7,265,645 $622,338 $7,787,132 (D) $6,839,206 $517,709 $7,244,981 (M)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid loss and loss adjustment expense reserves $2,220,251 $139,905 $2,360,156 $2,127,997 $137,075 $2,265,072
Unearned premiums 1,698,598 182,874 1,881,472 1,472,299 163,326 1,635,625
Reinsurance payable (5) 101,510 27,317 128,026 (E) 78,949 20,662 98,810 (N)
Accounts payable and accrued expenses (6) 397,164 81,855 468,050 (F) 330,210 13,179 336,991 (O)
Debt 754,736 89,081 754,736 (G) 752,001 89,008 752,001 (P)
Other 153,485 78,239 231,724 183,921 62,784 230,978 (Q)
Total liabilities $5,325,744 $599,271 $5,824,164 (H) $4,945,377 $486,034 $5,319,477 (R)
Stockholders’ equity:
Common stock (7) $1,066 $ $1,066 $1,064 $ $1,064
Preferred stock (8) 420,000 420,000 420,000 420,000
Additional paid-in capital 920,310 920,310 914,706 914,706
Accumulated other comprehensive income 32,876 32,876 12,710 12,710
Retained earnings 565,649 565,649 545,106 545,106
Total National General Holdings Corp. stockholders’ equity 1,939,901 1,939,901 1,893,586 1,893,586
Non-controlling interest 23,067 23,067 243 31,675 31,918
Total stockholders’ equity $1,939,901 $23,067 $1,962,968 $1,893,829 $31,675 $1,925,504
Total liabilities and stockholders’ equity $7,265,645 $622,338 $7,787,132 (I) $6,839,206 $517,709 $7,244,981 (S)

NOTES:
Consolidated column includes eliminations as follows: (A) $(89,081), (B) $(801), (C) $(10,969), (D) $(100,851), (E) $(801), (F) $(10,969), (G) $(89,081), (H) $(100,851), (I) $(100,851), (J) $(89,008), (K) $(801), (L) $(22,125), (M) $(111,934), (N) $(801), (O) $(6,398), (P) $(89,008), (Q) $(15,727), (R) $(111,934) and (S) $(111,934).

Segment Information - Second Quarter
$ in thousands
(Unaudited)
Three Months Ended June 30,
2017 2016
P&C A&H NGHC Reciprocal
Exchanges
P&C A&H NGHC Reciprocal
Exchanges
Gross written premium $904,578 $130,974 $1,035,552 $99,157 $671,157 $102,891 $774,048 $77,170
Net written premium 822,508 118,249 940,757 51,243 607,942 90,377 698,319 39,130
Net earned premium 804,643 134,852 939,495 42,256 575,002 101,910 676,912 36,028
Ceding commission income (loss) 3,128 271 3,399 18,109 (3,564) 359 (3,205) 14,909
Service and fee income 94,519 43,043 137,562 1,494 60,773 38,856 99,629 1,195
Total underwriting revenues $902,290 $178,166 $1,080,456 $61,859 $632,211 $141,125 $773,336 $52,132
Loss and loss adjustment expense 591,844 84,743 676,587 33,820 375,893 78,729 454,622 17,736
Acquisition costs and other 126,496 46,759 173,255 15,540 81,291 27,096 108,387 493
General and administrative 168,023 38,842 206,865 18,509 147,113 29,547 176,660 25,261
Total underwriting expenses $886,363 $170,344 $1,056,707 $67,869 $604,297 $135,372 $739,669 $43,490
Underwriting income (loss) 15,927 7,822 23,749 (6,010) 27,914 5,753 33,667 8,642
Non-cash amortization of intangible assets 10,278 1,412 11,690 (91) 5,628 1,560 7,188 6,726
Underwriting income (loss) before amortization and impairment $26,205 $9,234 $35,439 $(6,101) $33,542 $7,313 $40,855 $15,368
Underwriting ratios
Loss and loss adjustment expense ratio (9) 73.6% 62.8% 72.0% 80.0% 65.4% 77.3% 67.2% 49.2%
Operating expense ratio (Non-GAAP) (10,11) 24.5% 31.4% 25.5% 34.2% 29.8% 17.1% 27.9% 26.8%
Combined ratio (Non-GAAP) (10,12) 98.1% 94.2% 97.5% 114.2% 95.2% 94.4% 95.1% 76.0%
Underwriting ratios (before amortization and impairment)
Loss and loss adjustment expense ratio (9) 73.6% 62.8% 72.0% 80.0% 65.4% 77.3% 67.2% 49.2%
Operating expense ratio (Non-GAAP) (10,13) 23.2% 30.3% 24.2% 34.4% 28.8% 15.6% 26.8% 8.1%
Combined ratio before amortization and impairment (Non-GAAP) (10,14) 96.8% 93.1% 96.2% 114.4% 94.2% 92.9% 94.0% 57.3%

Note: Loss and loss adjustment expenses for the three months ended June 30, 2017 included $6,570 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $4,524 of favorable development in the A&H segment, versus $6,756 of favorable development in the P&C segment, and $4,350 of unfavorable development in the A&H segment for the three months ended June 30, 2016.

Segment Information - Year to Date
$ in thousands
(Unaudited)
Six Months Ended June 30,
2017 2016
P&C A&H NGHC Reciprocal
Exchanges
P&C A&H NGHC Reciprocal
Exchanges (1)
Gross written premium $1,886,277 $322,929 $2,209,206 $181,373 $1,332,494 $257,748 $1,590,242 $77,170
Net written premium 1,726,432 299,363 2,025,795 92,944 1,208,716 234,190 1,442,906 39,130
Net earned premium 1,556,856 263,778 1,820,634 81,288 1,129,050 202,782 1,331,832 36,028
Ceding commission income (loss) 5,588 558 6,146 35,356 (5,828) 728 (5,100) 14,909
Service and fee income 198,109 75,316 273,425 3,574 124,261 72,312 196,573 1,195
Total underwriting revenues $1,760,553 $339,652 $2,100,205 $120,218 $1,247,483 $275,822 $1,523,305 $52,132
Loss and loss adjustment expense 1,113,178 151,634 1,264,812 61,920 708,552 155,120 863,672 17,736
Acquisition costs and other 256,127 78,249 334,376 29,720 172,950 48,336 221,286 493
General and administrative 364,893 84,055 448,948 43,612 291,807 61,480 353,287 25,261
Total underwriting expenses $1,734,198 $313,938 $2,048,136 $135,252 $1,173,309 $264,936 $1,438,245 $43,490
Underwriting income (loss) 26,355 25,714 52,069 (15,034) 74,174 10,886 85,060 8,642
Non-cash amortization of intangible assets 30,012 3,015 33,027 6,978 9,475 3,377 12,852 6,726
Underwriting income (loss) before amortization and impairment $56,367 $28,729 $85,096 $(8,056) $83,649 $14,263 $97,912 $15,368
Underwriting ratios
Loss and loss adjustment expense ratio (9) 71.5% 57.5% 69.5% 76.2% 62.8% 76.5% 64.8% 49.2%
Operating expense ratio (Non-GAAP) (10,11) 26.8% 32.8% 27.7% 42.3% 30.7% 18.1% 28.8% 26.8%
Combined ratio (Non-GAAP) (10,12) 98.3% 90.3% 97.2% 118.5% 93.5% 94.6% 93.6% 76.0%
Underwriting ratios (before amortization and impairment)
Loss and loss adjustment expense ratio (9) 71.5% 57.5% 69.5% 76.2% 62.8% 76.5% 64.8% 49.2%
Operating expense ratio (Non-GAAP) (10,13) 24.9% 31.6% 25.9% 33.7% 29.8% 16.5% 27.8% 8.1%
Combined ratio before amortization and impairment (Non-GAAP) (10,14) 96.4% 89.1% 95.4% 109.9% 92.6% 93.0% 92.6% 57.3%

Note: (1) Reciprocal Exchanges' column for the six months ended June 30, 2016 excludes its operating results from January 1, 2016 to March 31, 2016.
Loss and loss adjustment expenses for the six months ended June 30, 2017 included $2,216 of unfavorable development on prior accident year loss and loss adjustment expense reserves in the P&C segment, and $12,844 of favorable development in the A&H segment, versus $7,334 of favorable development in the P&C segment, and $3,584 of unfavorable development in the A&H segment for the six months ended June 30, 2016.

Reconciliation of Operating Expense Ratio (Non-GAAP)
$ in thousands
(Unaudited)
Three Months Ended June 30,
2017 2016
P&C A&H NGHC Reciprocal
Exchanges
P&C A&H NGHC Reciprocal
Exchanges
Total underwriting expenses $886,363 $170,344 $1,056,707 $67,869 $604,297 $135,372 $739,669 $43,490
Less: Loss and loss adjustment expense 591,844 84,743 676,587 33,820 375,893 78,729 454,622 17,736
Less: Ceding commission income (loss) 3,128 271 3,399 18,109 (3,564) 359 (3,205) 14,909
Less: Service and fee income 94,519 43,043 137,562 1,494 60,773 38,856 99,629 1,195
Operating expense 196,872 42,287 239,159 14,446 171,195 17,428 188,623 9,650
Net earned premium $804,643 $134,852 $939,495 $42,256 $575,002 $101,910 $676,912 $36,028
Operating expense ratio (Non-GAAP) 24.5% 31.4% 25.5% 34.2% 29.8% 17.1% 27.9% 26.8%
Total underwriting expenses $886,363 $170,344 $1,056,707 $67,869 $604,297 $135,372 $739,669 $43,490
Less: Loss and loss adjustment expense 591,844 84,743 676,587 33,820 375,893 78,729 454,622 17,736
Less: Ceding commission income (loss) 3,128 271 3,399 18,109 (3,564) 359 (3,205) 14,909
Less: Service and fee income 94,519 43,043 137,562 1,494 60,773 38,856 99,629 1,195
Less: Non-cash amortization of intangible assets 10,278 1,412 11,690 (91) 5,628 1,560 7,188 6,726
Operating expense before amortization and impairment 186,594 40,875 227,469 14,537 165,567 15,868 181,435 2,924
Net earned premium $804,643 $134,852 $939,495 $42,256 $575,002 $101,910 $676,912 $36,028
Operating expense ratio before amortization and impairment (Non-GAAP) 23.2% 30.3% 24.2% 34.4% 28.8% 15.6% 26.8% 8.1%


Reconciliation of Operating Expense Ratio (Non-GAAP)
$ in thousands
(Unaudited)
Six Months Ended June 30,
2017 2016
P&C A&H NGHC Reciprocal
Exchanges
P&C A&H NGHC Reciprocal
Exchanges
Total underwriting expenses $1,734,198 $313,938 $2,048,136 $135,252 $1,173,309 $264,936 $1,438,245 $43,490
Less: Loss and loss adjustment expense 1,113,178 151,634 1,264,812 61,920 708,552 155,120 863,672 17,736
Less: Ceding commission income (loss) 5,588 558 6,146 35,356 (5,828) 728 (5,100) 14,909
Less: Service and fee income 198,109 75,316 273,425 3,574 124,261 72,312 196,573 1,195
Operating expense 417,323 86,430 503,753 34,402 346,324 36,776 383,100 9,650
Net earned premium $1,556,856 $263,778 $1,820,634 $81,288 $1,129,050 $202,782 $1,331,832 $36,028
Operating expense ratio (Non-GAAP) 26.8% 32.8% 27.7% 42.3% 30.7% 18.1% 28.8% 26.8%
Total underwriting expenses $1,734,198 $313,938 $2,048,136 $135,252 $1,173,309 $264,936 $1,438,245 $43,490
Less: Loss and loss adjustment expense 1,113,178 151,634 1,264,812 61,920 708,552 155,120 863,672 17,736
Less: Ceding commission income (loss) 5,588 558 6,146 35,356 (5,828) 728 (5,100) 14,909
Less: Service and fee income 198,109 75,316 273,425 3,574 124,261 72,312 196,573 1,195
Less: Non-cash amortization of intangible assets 30,012 3,015 33,027 6,978 9,475 3,377 12,852 6,726
Operating expense before amortization and impairment 387,311 83,415 470,726 27,424 336,849 33,399 370,248 2,924
Net earned premium $1,556,856 $263,778 $1,820,634 $81,288 $1,129,050 $202,782 $1,331,832 $36,028
Operating expense ratio before amortization and impairment (Non-GAAP) 24.9% 31.6% 25.9% 33.7% 29.8% 16.5% 27.8% 8.1%


Premiums by Business Line
$ in thousands
(Unaudited)
Three Months Ended June 30,
Gross Written Premium Net Written Premium Net Earned Premium
2017 2016 Change 2017 2016 Change 2017 2016 Change
Property & Casualty
Personal Auto $514,990 $338,095 52.3% $471,372 $297,281 58.6% $495,225 $290,829 70.3%
Homeowners 151,984 100,717 50.9% 131,926 90,559 45.7% 110,570 81,556 35.6%
RV/Packaged 52,598 46,693 12.6% 52,190 46,421 12.4% 43,314 39,015 11.0%
Small Business Auto 80,890 68,366 18.3% 72,864 62,948 15.8% 70,324 51,470 36.6%
Lender-placed insurance 90,374 108,190 (16.5)% 86,525 105,385 (17.9)% 79,201 108,519 (27.0)%
Other 13,742 9,096 51.1% 7,631 5,348 42.7% 6,009 3,613 66.3%
Property & Casualty 904,578 671,157 34.8% 822,508 607,942 35.3% 804,643 575,002 39.9%
Accident & Health 130,974 102,891 27.3% 118,249 90,377 30.8% 134,852 101,910 32.3%
Total National General $1,035,552 $774,048 33.8% $940,757 $698,319 34.7% $939,495 $676,912 38.8%
Reciprocal Exchanges
Personal Auto $35,221 $23,121 52.3% $21,601 $13,453 60.6% $17,239 $12,980 32.8%
Homeowners 63,049 51,636 22.1% 29,174 23,535 24.0% 24,613 19,604 25.6%
Other 887 2,413 (63.2)% 468 2,142 (78.2)% 404 3,444 (88.3)%
Reciprocal Exchanges $99,157 $77,170 28.5% $51,243 $39,130 31.0% $42,256 $36,028 17.3%
Consolidated Total (A) $1,133,909 $850,507 33.3% $992,000 $737,449 34.5% $981,751 $712,940 37.7%

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, and $(220) in Personal Auto and $(491) in Homeowners Gross Written Premium in 2016, respectively.

Premiums by Business Line
$ in thousands
(Unaudited)
Six Months Ended June 30,
Gross Written Premium Net Written Premium Net Earned Premium
2017 2016 Change 2017 2016 Change 2017 2016 Change
Property & Casualty
Personal Auto $1,162,171 $723,293 60.7% $1,068,251 $632,607 68.9% $949,640 $562,826 68.7%
Homeowners 266,709 171,018 56.0% 236,471 156,435 51.2% 214,699 155,995 37.6%
RV/Packaged 97,352 86,296 12.8% 96,709 85,877 12.6% 83,964 76,534 9.7%
Small Business Auto 167,266 118,517 41.1% 152,072 107,941 40.9% 133,565 95,314 40.1%
Lender-placed insurance 166,644 220,187 (24.3)% 159,357 217,382 (26.7)% 162,942 231,325 (29.6)%
Other 26,135 13,183 98.2% 13,572 8,474 60.2% 12,046 7,056 70.7%
Property & Casualty 1,886,277 1,332,494 41.6% 1,726,432 1,208,716 42.8% 1,556,856 1,129,050 37.9%
Accident & Health 322,929 257,748 25.3% 299,363 234,190 27.8% 263,778 202,782 30.1%
Total National General $2,209,206 $1,590,242 38.9% $2,025,795 $1,442,906 40.4% $1,820,634 $1,331,832 36.7%
Reciprocal Exchanges
Personal Auto $63,380 $23,121 NA $38,707 $13,453 NA $33,356 $12,980 NA
Homeowners 116,376 51,636 NA 53,390 23,535 NA 47,151 19,604 NA
Other 1,617 2,413 NA 847 2,142 NA 781 3,444 NA
Reciprocal Exchanges (A) $181,373 $77,170 NA $92,944 $39,130 NA $81,288 $36,028 NA
Consolidated Total (B) $2,388,978 $1,666,701 43.3% $2,118,739 $1,482,036 43.0% $1,901,922 $1,367,860 39.0%

NOTES:
(A) The Reciprocal Exchanges did not meet the criteria for consolidation under GAAP for the Three Months Ended March 31, 2016.
(B) Consolidated Total includes eliminations between National General and the Reciprocal Exchanges of $(564) in Personal Auto and $(1,037) in Homeowners Gross Written Premium in 2017, respectively, and $(220) in Personal Auto and $(491) in Homeowners Gross Written Premium in 2016, 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 of operating equity method investments (800 Superior, LLC and 4455 LBJ Freeway, LLC), 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 $400,064 and $390,688 in related parties at June 30, 2017 and December 31, 2016, respectively.

(3) Reinsurance recoverable includes $38,750 and $37,046 from related parties at June 30, 2017 and December 31, 2016, respectively.

(4) Other includes $2,320 and $1,298 from related parties at June 30, 2017 and December 31, 2016, respectively.

(5) Reinsurance payable includes $33,476 and $33,419 due to related parties at June 30, 2017 and December 31, 2016, respectively.

(6) Accounts payable and accrued expenses includes $34,857 and $29,271 to related parties at June 30, 2017 and December 31, 2016, respectively.

(7) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 106,607,110 shares - June 30, 2017; authorized 150,000,000 shares, issued and outstanding 106,428,092 shares - December 31, 2016.

(8) Preferred stock: $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - June 30, 2017; authorized 10,000,000 shares, issued and outstanding 2,565,000 shares - December 31, 2016.

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

(10) Operating expense ratio and combined ratio are considered non-GAAP financial measures under applicable SEC rules because a component of those ratios, operating expense, is calculated by offsetting acquisition and other underwriting costs and general and administrative 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.

(11) Operating expense ratio is a non-GAAP measure defined by the Company, that is commonly used in the insurance industry. The Company calculates the ratio by dividing operating expense by net earned premium. Operating expense consists of the sum of acquisition and other underwriting costs and general and administrative 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.

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

(13) Operating expense ratio before amortization and impairment is a non-GAAP measure defined by the Company, that is commonly used in the insurance industry. The Company calculates the ratio by dividing the operating expense before amortization and impairment by net earned premium. Operating expense before amortization and impairment consists of the sum of acquisition and other underwriting costs and general and administrative 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.

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

(15) In the current year’s quarter, certain costs associated with claims handling were prospectively reclassified from general and administrative expenses to loss adjustment expenses. In the year-ago quarter, the corresponding change to the Property and Casualty segment would have been $26.1 million, negligible in the Accident and Health segment and $3.9 million in the Reciprocal Exchange.

(16) 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.

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

Source:National General Holdings Corp.

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