National General Holdings Corp. Reports Second Quarter 2016 Results

NEW YORK, Aug. 01, 2016 (GLOBE NEWSWIRE) -- National General Holdings Corp. (NASDAQ:NGHC) today reported second quarter 2016 net income of $44.3 million or $0.41 per diluted share, compared to $33.8 million or $0.35 per diluted share in the second quarter of 2015. Second quarter 2016 operating earnings⁽¹⁾ was $46.4 million or $0.43 per diluted share, compared to $36.1 million or $0.38 per diluted share in the second quarter of 2015.

Second Quarter 2016 Highlights Versus Second Quarter 2015*

• Net written premium grew $249.7 million or 55.7% to $698.3 million, driven by added premiums from the acquisition of Century-National which closed on June 1, 2016, the National General Lender Services (formerly QBE Lender-Placed Insurance) and Assurant Health transactions which both closed on October 1, 2015, the addition of Assigned Risk Solutions (ARS) premium volume which is now written on National General paper, underlying organic growth within our P&C business, and continued expansion of our A&H segment.
• The overall combined ratio^{(10, 14)} was 94.0% compared to 91.5% in the prior year's quarter, excluding non-cash amortization of intangible assets. The P&C segment reported an increase in combined ratio to 94.2% from 91.6% in the prior year’s quarter, while the A&H segment reported a combined ratio of 92.9% compared to 89.9% in the prior year’s quarter.
• Total revenues grew by $274.9 million or 51.9% to $804.6 million, driven by the aforementioned premium growth, service and fee income growth of $32.3 million or 47.9%, and net investment income growth of $11.2 million or 69.4%, partially offset by a $3.3 million decline in ceding commission income.
• Shareholders' equity was $1.68 billion and fully diluted book value per share was $13.45 at June 30, 2016, growth of 30.0% and 21.1%, respectively, from June 30, 2015. Annualized operating return on average equity (ROE)⁽¹⁵⁾ was 13.2% and 14.6% for the second quarter of 2016 and the six months ended June 30, 2016, respectively.
• Second quarter 2016 operating earnings exclude the following items, net of tax: $2.8 million or $0.03 per share of realized investment gains, $0.3 million or less than $0.01 per share of foreign exchange loss, $0.1 million or less than $0.01 per share of equity in earnings of unconsolidated subsidiaries (other than LSC Entities and Real Estate investments), and $4.7 million or $0.04 per share of non-cash amortization of intangible assets.
• Second quarter 2016 operating earnings include approximately $18.4 million or $0.11 per share of losses related to hail storms that occurred in San Antonio and Dallas, Texas in April 2016.

Barry Karfunkel, National General's President and CEO, stated: "Our second quarter results reflect the strength of our business model and the progress we have made developing National General’s diversified capabilities. We continued to produce significant top line growth and strong underwriting profitability. From a development standpoint a number of exciting events happened in the quarter. We closed on the Century-National acquisition which expands our preferred home and auto premium on the west coast and announced the acquisition of Direct General Insurance which, upon closing, will add a direct marketing distribution channel to our core non-standard auto business."

*NOTE: Unless specified otherwise, discussion of our second quarter 2016 and 2015 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. Attorney-in-Fact management fees referenced within this release are eliminated in consolidated financial results.

Overview of Second Quarter 2016 as Compared to Second Quarter 2015

Gross written premium grew 55.1% to $774.0 million, net written premium grew 55.7% to $698.3 million, and net earned premium grew 51.6% to $676.9 million. Premium growth was driven by several key factors: underlying organic growth within our P&C business, continued expansion of our A&H segment, additional premiums from the acquisition of Century-National which closed on June 1, 2016, the National General Lender Services (formerly QBE Lender-Placed Insurance) and Assurant Health transactions which both closed on October 1, 2015, and added premium volume from Assigned Risk Solutions (ARS), which we began writing on National General paper in the first quarter of 2016.

Ceding commission income was a loss of $3.2 million reflecting a sliding scale adjustment related to third-party quota share which was terminated in 2013. Service and fee income grew 47.9% to $99.6 million, driven by added service and fee income from our recently completed transactions, primarily National General Lender Services and Assurant Health, and underlying growth within our A&H segment.

Excluding non-cash amortization of intangible assets, the combined ratio was 94.0% with a loss ratio of 67.2% and an expense ratio^{(10, 13)} of 26.8%, compared to a prior year combined ratio of 91.5% with a loss ratio of 60.8% and an expense ratio of 30.7%.

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

• Property & Casualty - Gross written premium grew by 44.5% to $671.2 million, net written premium grew by 43.8% to $607.9 million, and net earned premium grew by 40.1% to $575.0 million. P&C premium growth was driven by several key factors: underlying organic growth of approximately 8.6%, the addition of $17.8 million of net written premium from the Century-National acquisition, the addition of $105.4 million of net written premium from the National General Lender Services transaction, and the addition of $25.7 million of net written premium from ARS, which we began writing on National General paper during the first quarter. Ceding commission income was a loss of $3.6 million compared to $0.2 million of loss in the prior year's quarter, with the current quarter reflecting a sliding scale adjustment related to our terminated third-party quota share. Service and fee income grew 22.4% to $60.8 million, driven by increased premium volume in the quarter, the addition of service and fee income from acquisitions completed during the past year (including ARS and National General Lender Services), and $10.8 million of fees earned by the Attorneys-in-Fact that manage the Reciprocal Exchanges, compared to $10.7 million in the prior year’s quarter. Excluding non-cash amortization of intangible assets, the combined ratio was 94.2% with a loss ratio of 65.4% and an expense ratio of 28.8%, versus a prior year combined ratio of 91.6% with a loss ratio of 59.8% and an expense ratio of 31.8%. The loss ratio was impacted by losses of approximately $18.4 million related to hail storms that occurred in San Antonio and Dallas, Texas in April 2016.
   
• Accident & Health - Gross written premium grew to $102.9 million, net written premium grew to $90.4 million, and net earned premium grew to $101.9 million, from $34.5 million, $25.8 million, and $36.3 million, respectively, in the prior year's quarter. A&H premium growth was driven by the addition of $47.3 million of net written premium from the Assurant Health transaction, as well as continued growth from both our domestic and international businesses, with $30.0 million in net written premium at our U.S. underwriting subsidiaries compared to $15.9 million in the prior year’s quarter, and $13.0 million of premium from EuroAccident (our Swedish group life and health MGA) compared to $10.0 million in the prior year’s quarter. Service and fee income grew to $38.9 million from $17.7 million in the prior year’s quarter, driven by the addition of service and fee income from the Assurant Health transaction and strong growth at VelaPoint. Excluding non-cash amortization of intangible assets, the combined ratio was 92.9% with a loss ratio of 77.3% and an expense ratio of 15.6%, versus a prior year combined ratio of 89.9% with a loss ratio of 72.0% and an expense ratio of 17.9%. The increased loss ratio reflects a higher level of losses within our legacy small group self-funded product, as well as a higher proportion of this product following the closing of the Assurant Health transaction, while the reduced expense ratio reflects the continued maturation of the A&H business coupled with increased service and fee income.
   
• Reciprocal Exchanges - Results for the Reciprocal Exchanges are not included in net income available to NGHC common stockholders. Gross written premium was $77.2 million, net written premium was $39.1 million, and net earned premium was $36.0 million. Reciprocal Exchanges combined ratio^{(10, 12)} was 76.0% with a loss ratio of 49.2% and an expense ratio^{(10, 11)} of 26.8%.

Investment income grew 69.4% to $27.4 million, reflecting an increase in the size of our investment portfolio as compared to the prior year’s quarter. Second quarter 2016 results included $4.2 million of net realized investment gains compared with a gain of $2.4 million in the second quarter of 2015. The second quarter of 2016 included no other than temporary impairment losses versus other than temporary impairment losses of $1.5 million in the prior year’s quarter. Total investments and cash equivalents were $3.3 billion as of June 30, 2016. Accumulated other comprehensive income (loss) increased to $44.7 million at June 30, 2016 from $(19.4) million at December 31, 2015.

Other revenue was a loss of $0.4 million in the second quarter of 2016 compared to a loss of $1.4 million in the prior year’s quarter, with the current quarter driven by foreign exchange loss from currency fluctuations within our European subsidiaries.

Interest expense was $8.9 million, up from $4.8 million in the prior year’s quarter due to an increased amount of debt on our balance sheet. Debt was $678.7 million at June 30, 2016, up from $250.3 million at June 30, 2015 as a result of our August 2015 issuance of $100.0 million of subordinated notes, our October 2015 issuance of $100.0 million of senior unsecured notes, our May 2016 borrowing of $50.0 million under our credit facility, and our June 2016 promissory note of $176.4 million for the acquisition of Century-National.

Equity in earnings of unconsolidated subsidiaries (predominantly our investment in Life Settlement Entities and Real Estate investments) was a $7.4 million gain in the second quarter of 2016 versus a $1.7 million gain in the prior year's quarter, reflecting fair value adjustments on life settlement contracts and income from our real estate investments.

The second quarter of 2016 provision for income taxes was $14.8 million and the effective tax rate for the quarter was 26.5%. Included in the second quarter of 2016 provision for income taxes was a $7.5 million benefit attributable to a reduction of the deferred tax liability associated with the equalization reserves of our Luxembourg Reinsurance Company (LRC) subsidiaries. As of June 30, 2016, the remaining DTL associated with our LRC subsidiaries was $4.5 million.

National General Holding Corp.'s shareholders' equity was $1,677.0 million at June 30, 2016, growth of 30.0% from $1,289.7 million at June 30, 2015. Fully diluted book value per share was $13.45 at June 30, 2016, growth of 21.1% from $11.11 at June 30, 2015. Annualized operating return on average equity (ROE) was 13.2% and 14.6% for the second quarter of 2016 and the six months ended June 30, 2016, respectively.

Additional Items

• Issuance of Preferred Stock - On July 7, 2016, we closed an underwritten public offering of 8 million depositary shares (including the underwriters' over-allotment option), each representing a 1/40th interest in a share of 7.50% Non-Cumulative Preferred Stock, Series C at a public offering price of $25 per depositary share, for gross proceeds of $200.0 million. Total net proceeds of the offering were $193.5 million, after deducting the underwriting discount and offering expenses.
• Direct General Acquisition - On June 24, 2016, we agreed to acquire Elara Holdings, Inc., the parent company of Direct General Corporation, a Tennessee based P&C insurance company that predominantly writes non-standard auto business in the Southeastern United States. The estimated purchase price for the transaction is approximately $165.0 million, subject to customary post-closing adjustments. The transaction is expected to close in the fourth quarter of 2016, subject to customary closing conditions and regulatory approvals.
• Century-National Insurance Company Acquisition - On June 1, 2016, we closed the acquisition of Century-National Insurance Company, a California based property and casualty underwriter and Western General Agency, Inc. The purchase price for the transaction was approximately $318.0 million, subject to an adjustment based on the final closing balance sheet. The purchase price equates to a $50.0 million premium to tangible book value, and includes an upfront cash payment of approximately $141.6 million with the remaining balance of $176.4 million payable over a period of two years pursuant to a promissory note.

Conference Call

On Tuesday, August 2, 2016 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:

A replay of the conference call will be accessible from 2:00 PM ET on Tuesday, August 2, 2016 to 11:59 PM ET on Tuesday, August 16, 2016 by dialing either 800-332-6854 (toll-free) within the U.S. or 973-528-0005 outside the U.S. and entering passcode 337409. 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, 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 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)

NOTE : Consolidated column includes eliminations as follows: (A) $(711), (B) $711, (C) $(10,807), (D) $(2,081), (E) $(12,888), (F) $(6), (G) $(10,801), (H) $(2,081), (I) $(12,888), (J) $(10,732), (K) $(10,732), (L) $(21), (M) $(10,711), and (N) $(10,732).

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

NOTES : Consolidated column includes eliminations as follows: (A) $(711), (B) $711, (C) $(10,807), (D) $(2,081), (E) $(12,888), (F) $(6), (G) $(10,801), (H) $(2,081), (I) $(12,888), (J) $(3,590), (K) $3,590, (L) $(19,310), (M) $(19,310), (N) $(26), (O) $(19,284), and (P) $(19,310).

(1) Consolidated column for the six months ended June 30, 2016 excludes Reciprocal Exchanges' operating results from January 1, 2016 to March 31, 2016.

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

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

Balance Sheets
$ in thousands

NOTE : Consolidated column includes eliminations as follows: (A) $(88,936), (B) $(712), (C) $(7,676), (D) $(97,324), (E) $(712), (F) $(2,044), (G) $(88,936), (H) $(5,632), (I) $(97,324), and (J) $(97,324).

Segment Information - Second Quarter
$ in thousands
(Unaudited)

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

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.

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

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

Premiums by Business Line
$ in thousands
(Unaudited)

NOTE : Consolidated Total includes eliminations of $(711) and $0 within 2016 and 2015 Gross Written Premium, respectively.

NOTES : Consolidated Total includes eliminations of $(711) and $(3,590) within 2016 and 2015 Gross Written Premium, respectively.

(1) Reciprocal Exchanges for the six months ended June 30, 2016 excludes its operating results from January 1, 2016 to March 31, 2016.

Additional Disclosures

(1) References to operating earnings and basic and diluted operating EPS are non-GAAP financial measures defined by the Company as net income and basic earnings per share excluding after-tax net realized investment gain or loss on securities, other than temporary impairment losses, foreign exchange gain or loss, equity in earnings or losses of unconsolidated subsidiaries (other than LSC Entities and Real Estate investment gains or losses), non-cash amortization of intangible assets, and non-cash impairment of goodwill. The Company believes operating earnings and basic and diluted operating EPS are more 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) Premiums and other receivables, net (NGHC) includes $32,362 and $62,306 from related parties at June 30, 2016 and December 31, 2015, respectively.

(3) Reinsurance recoverable on unpaid losses (NGHC) includes $33,746 and $42,774 from related parties at June 30, 2016 and December 31, 2015, respectively.

(4) Reinsurance payable (NGHC) includes $31,511 and $31,923 due to related parties at June 30, 2016 and December 31, 2015, respectively.

(5) Accounts payable and accrued expenses (NGHC) includes $27,930 and $51,755 to related parties at June 30, 2016 and December 31, 2015, respectively.

(6) Debt includes $0 and $45,476 owed to related party at June 30, 2016 and December 31, 2015, respectively.

(7) Common stock: $0.01 par value - authorized 150,000,000 shares, issued and outstanding 105,932,281 shares - June 30, 2016; authorized 150,000,000 shares, issued and outstanding 105,554,331 shares - December 31, 2015.

(8) Preferred stock: $0.01 par value - authorized 10,000,000 shares, issued and outstanding 2,365,000 shares - June 30, 2016; authorized 10,000,000 shares, issued and outstanding 2,365,000 shares - December 31, 2015.

(9) Loss and loss adjustment expense ratio is calculated by dividing loss and loss adjustment expenses 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 expense 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 expense 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. 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) 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 expense 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) Annualized operating return on average equity is the ratio of annualized operating earnings less preferred dividends to average shareholders' equity for the periods presented. Annualized operating earnings is (a) the sum of operating earnings less preferred dividends for the periods presented and (b) for partial years in the period presented, dividing by the number of quarters in that partial year and multiplying by four to annualize the operating earnings. Average shareholders' equity is (a) the sum of the shareholders' equity excluding preferred stock at the beginning and end of each quarter for the period presented divided by (b) the number of quarters in the period presented times 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 these non-GAAP measures to the most directly comparable GAAP measure.

Investor Contact

Investor Relations Department
Phone: 212-380-9462
Email: Investors@ngic.com

08/01/2016 17:15

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