NATIONAL GENERAL HOLDINGS CORP. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q.
Note on Forward-Looking Statements
This current report on Form 10-Q 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 us. 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, plans and
expectations related to our proposed merger with The Allstate Corporation
("Allstate"), including anticipated timing for closing of the merger, the
occurrence of any event, change or other circumstances that could give rise to
the termination of the merger agreement with Allstate, the inability to complete
the proposed merger due to the failure to obtain stockholder approval for the
proposed merger or the failure to satisfy other conditions to completion of the
proposed merger, the possibility that competing offers will be made, 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
potential effect of changes in LIBOR reporting practices, the effects of
pandemics or other widespread health problems such as the ongoing COVID-19
pandemic on our business, including our investment portfolio, and the national
and global economy generally, the effect of the performance of financial markets
on our investment portfolio, our ability to accurately underwrite and price our
products and to maintain and establish accurate loss reserves, estimates of the
fair value of investments, development of claims and the effect on loss
reserves, large loss activity including hurricanes and wildfires, the cost and
availability of reinsurance coverage, the effects of emerging claim and coverage
issues, the effect of unpredictable catastrophic losses, changes in the demand
for our products, our degree of success in integrating acquired businesses, the
effect of general economic conditions, state and federal legislation, the
effects of tax reform, regulations and regulatory investigations into industry
practices, risks associated with conducting business outside the United States ,
developments relating to existing agreements, disruptions to our business
relationships with third party vendors or agencies, breaches in data security or
other disruptions involving our technology, heightened competition, changes in
pricing environments, and changes in asset valuations. 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 Item 1A,
"Risk Factors" included in our Annual Report on Form 10-K for the year ended
December 31, 2019 , Part II, Item 1A, "Risk Factors, in this quarterly report on
Form 10-Q, and our other quarterly reports on Form 10-Q. The projections and
statements in this report speak only as of the date of this report and we
undertake no obligation to update or revise any forward-looking statement,
whether as a result of new information, future developments or otherwise, except
as may be required by law.
Overview
We are a specialty personal lines insurance holding company that, through our
subsidiaries, provides a variety of insurance products, including personal and
small business automobile, homeowners, umbrella, recreational vehicle,
motorcycle, lender-placed, supplemental health and other niche insurance
products. We sell insurance products with a focus on underwriting profitability
through a combination of our customized and predictive analytics and our
technology-driven low-cost infrastructure.
46
--------------------------------------------------------------------------------We manage our business in two segments, Property and Casualty ("P&C") and Accident and Health ("A&H"), and conduct business primarily through our twenty-two regulated domestic insurance subsidiaries:
Property and Casualty:
Agent Alliance Insurance Company
Century-National Insurance Company
Direct General Insurance Company
Direct General Insurance Company of Mississippi
Direct Insurance Company
Direct National Insurance Company
Imperial Fire and Casualty Insurance Company
Integon Casualty Insurance Company
Integon General Insurance Corporation
Integon Indemnity Corporation
Integon National Insurance Company
Integon Preferred Insurance Company
MIC General Insurance Corporation
National Farmers Union Property and Casualty Company
National General Assurance Company
National General Insurance Company
National General Insurance Online, Inc.
National General Premier Insurance Company
New South Insurance Company
Standard Property and Casualty Insurance Company
Accident and Health:
Direct General Life Insurance Company
National Health Insurance Company
Our insurance subsidiaries have an "A-" (Excellent) group rating by A.M. Best
Company, Inc. ("A.M. Best"). On July 9, 2020 , A.M. Best placed us and our
subsidiaries under review with positive implications. We currently conduct a
limited amount of business outside the United States , primarily in Bermuda .
Two of our wholly-owned subsidiaries are management companies that act as
attorneys-in-fact for Adirondack Insurance Exchange , a New York reciprocal
insurer, and New Jersey Skylands Insurance Association , a New Jersey reciprocal
insurer (together with Mountain Valley Indemnity Company , a subsidiary of
Adirondack Insurance Exchange , the "Reciprocal Exchanges" or "Exchanges"). We do
not own the Reciprocal Exchanges but are paid a fee to manage their business
operations through our wholly-owned management companies. The Reciprocal
Exchanges are included in our P&C segment.
The operating results of insurance companies are subject to quarterly and yearly
fluctuations due to the effect of competition on pricing, the frequency and
severity of losses, the effect of weather and natural disasters on losses,
general economic conditions, the general regulatory environment in states in
which an insurer operates, state regulation of premium rates, changes in fair
value of investments, and other factors such as changes in tax laws. The
industry has been highly cyclical with periods of high premium rates and
shortages of underwriting capacity followed by periods of severe price
competition and excess capacity. While these cycles can have a large impact on a
company's ability to grow and retain business, we have sought to focus on niche
markets and regions where we are able to maintain premium rates at generally
consistent levels and maintain underwriting discipline throughout these cycles.
We believe that the nature of our insurance products, including their relatively
low limits, the relatively short duration of time between when claims are
reported and when they are settled, and the broad geographic distribution of our
customers, have allowed us to grow and retain our business throughout these
cycles. Also, we have limited
47
--------------------------------------------------------------------------------our exposure to catastrophe losses through reinsurance. With regard to seasonality, we tend to experience higher claims and claims expense in our P&C segment during periods of severe or inclement weather.
Our products in the P&C segment include personal auto, homeowners, RV/Packaged, small business auto, lender-placed insurance, and other products. The personal auto segment includes policies for standard, preferred and nonstandard automobile insurance. The homeowners product includes multiple-peril policies and personal umbrella coverage to the homeowner. The RV/Packaged product offers policies that include RV automatic personal effects coverage, optional replacement cost coverage, RV storage coverage, and full-time liability coverage. The small business auto product offers policies that include liability and physical damage coverage for light-to-medium duty commercial vehicles. The lender-placed insurance product offers fire, home and flood products, as well as collateral protection insurance and guaranteed asset protection products for automobiles. Our products in the A&H segment include group, individual and third-party fees. The group product includes revenue from our small group self-funded product. The individual product line includes revenue from our supplemental products including short-term medical, accident/AD&D, hospital indemnity, cancer/critical illness, dental and term life insurance. Third-party fees include commission and general agent fees for selling policies issued by third-party insurance companies, fees generated through selling our technology products to third parties and fees from our international health insurance offerings. We evaluate our operations by monitoring key measures of growth and profitability, including net combined ratio (non-GAAP) and operating leverage. We target a net combined ratio (non-GAAP) in the low-to-mid 90s while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with ourA.M. Best rating objectives. To achieve our targeted net combined ratio (non-GAAP) we continually seek ways to reduce our operating costs and lower our expense ratio. For the six months endedJune 30, 2020 , our operating leverage (the ratio of net earned premium to average total stockholders' equity) was 1.5x, which was within our planned target operating leverage of between 1.5x and 2.0x. Investment income is also an important part of our business. Because we often do not settle claims until several months or longer after we receive the original policy premiums, we can invest cash from premiums for significant periods. We invest our capital and surplus following state and regulatory guidelines. Our net investment income was$61.4 million and$68.6 million for the six months endedJune 30, 2020 , and 2019, respectively. We held 6.2% and 3.3% of our total invested assets in cash, cash equivalents and restricted cash as ofJune 30, 2020 , andDecember 31, 2019 , respectively. Our most significant balance sheet liability is our unpaid loss and LAE reserves. As ofJune 30, 2020 , andDecember 31, 2019 , our reserves, net of reinsurance recoverable on unpaid losses, were$1.7 billion and$1.8 billion , respectively. We record reserves for estimated losses under insurance policies that we write and for LAE related to the investigation and settlement of policy claims. Our reserves for loss and LAE represent the estimated cost of all reported and unreported loss and LAE incurred and unpaid at any given point in time based on known facts and circumstances. Reserves are based on estimates of the most likely ultimate cost of individual claims. These estimates are inherently uncertain. Judgment is required to determine the relevance of our historical experience and industry information under current facts and circumstances. The interpretation of this historical and industry data can be impacted by external forces, principally frequency and severity of future claims, length of time to achieve ultimate settlement of claims, inflation of medical costs and wages, insurance policy coverage interpretations, jury determinations, and legislative changes. Accordingly, our reserves may prove to be inadequate to cover our actual losses. If we change our estimates, such changes would be reflected in our results of operations during the period in which they are made, with increases in our reserves resulting in decreases in our earnings. InMarch 2020 , the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by theWorld Health Organization . Shortly thereafter, the President ofthe United States declared a National Emergency throughoutthe United States attributable to such outbreak. The outbreak has become increasingly widespread inthe United States , including in the markets in which we operate. The COVID-19 outbreak has had a notable adverse impact on general economic conditions, including adverse impacts on automobile sales and new home sales and increased unemployment, which may decrease customer demand for our 48 -------------------------------------------------------------------------------- insurance products, negatively impact our premium volume, reduce our ability to access capital, and otherwise adversely impact our future results of operations. Additionally, federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, regulatory actions seek to retroactively mandate coverage for losses which various types of insurance policies were not designed or priced to cover or seek to require premium refunds. Regulatory restrictions or requirements also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums or fees. Because of the unprecedented size and breadth of this pandemic, and rapidly evolving situation, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. While we continue to closely monitor the impact of the COVID-19 pandemic and assess its potential effects on our business, the extent to which the COVID-19 outbreak will impact our operations or financial results is uncertain. OnJuly 7, 2020 , the Company, The Allstate Corporation, aDelaware corporation ("Allstate"), andBluebird Acquisition Corp. , aDelaware corporation and an indirect wholly owned subsidiary of Allstate ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Allstate following the receipt of shareholder and regulatory approval and the satisfaction of other customary conditions. The Company expects the Merger to close in the first quarter of 2021. For further discussion regarding the potential impact of COVID-19 and related economic conditions on the Company, and the proposed merger transaction pursuant to which the Company will be acquired by Allstate, see "Part II-Item 1A-Risk Factors."
Critical Accounting Policies
Our discussion and analysis of our results of operations, financial condition, and liquidity are based upon our condensed consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on actual results that may differ materially from these estimates and judgments under different assumptions. We have not made any changes in estimates or judgments that have had a significant effect on the reported amounts as previously disclosed in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
For more information related to recent accounting pronouncements that we adopted
during the six months ended
Principal Revenue and Expense Items
Gross premium written. Gross premium written represents premium from each insurance policy that we write, including as a servicing carrier for assigned risk plans, during a reporting period based on the effective date of the individual policy, before ceding reinsurance to third parties. Premium refunds are recorded against gross premium written.
Net premium written. Net premium written is gross premium written less that portion of premium that we cede to third-party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement.
49
--------------------------------------------------------------------------------Change in unearned premium. Change in unearned premium is the change in the balance of the portion of premium that we have written but have yet to earn during the relevant period because the policy is unexpired.
Net earned premium. Net earned premium is the earned portion of our net premium written. We earn insurance premium on a pro rata basis over the term of the policy. At the end of each reporting period, premium written that is not earned is classified as unearned premium, which is earned in subsequent periods over the remaining term of the policy. Our policies typically have a term of six months or one year. For a six-month policy written onJanuary 1, 2020 , we would earn half of the premium in the first quarter of 2020, and the other half in the second quarter of 2020. Ceding commission income. Ceding commission income is commission we receive based on the earned premium ceded to third-party reinsurers to reimburse us for our acquisition, underwriting and other operating expenses. We earn commissions on reinsurance premium ceded in a manner consistent with the recognition of the earned premium on the underlying insurance policies, on a pro-rata basis over the terms of the policies reinsured. The portion of ceding commission revenue which represents reimbursement of successful acquisition costs related to the underlying policies is recorded as an offset to acquisition costs and other underwriting expenses.
Service and fee income. We also generate policy service and fee income from installment fees, late payment fees, and other finance and processing fees related to policy cancellation, policy reinstatement, and insufficient fund check returns. We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party insurance companies as well as fees generated through selling our technology products to third parties.
Net investment income. We invest our statutory surplus funds and the funds
supporting our insurance liabilities primarily in cash and cash equivalents,
debt and equity securities. Our net investment income includes interest and
dividends earned on our invested assets and earnings or losses on our equity
method investments.
Net gains and losses on investments. Net realized gains occur when we sell our
investment securities for more than their costs or amortized costs, as
applicable; conversely, net realized losses occur when we sell our investment
securities for less than their costs or amortized costs, as applicable, or we
establish a credit loss allowance on our debt securities as a result of specific
credit concerns. For debt securities classified as available-for-sale, other
than the allowance for credit losses, we report net unrealized gains and losses
within accumulated other comprehensive income in our balance sheet. We report
all gains and losses on equity securities within net gains (losses) on
investments in our statement of income. Net gains and losses on investments also
include foreign exchange gains and losses which are generated by the
remeasurement of financial statement balances that are denominated or stated in
another currency into the functional currency.
Loss and loss adjustment expense. Loss and LAE represent our largest expense
item and, for any given reporting period, include estimates of future claim
payments, changes in those estimates from prior reporting periods and costs
associated with investigating, defending, and servicing claims. These expenses
fluctuate based on the amount and types of risks we insure. We record loss and
LAE related to estimates of future claim payments based on case-by-case
valuations and statistical analyses. We seek to establish all reserves at the
most likely ultimate exposure based on our historical claims experience. It is
typical for our more serious bodily injury claims to take several years to
settle, and we revise our estimates as we receive additional information about
the condition of claimants and the costs of their medical treatment. Our ability
to estimate loss and LAE accurately at the time of pricing our insurance
policies is a critical factor in our profitability.
Acquisition costs and other underwriting expenses. Acquisition costs and other
underwriting expenses consist of policy acquisition and marketing expenses,
salaries and benefits expenses. Policy acquisition expenses comprise commissions
attributable to those agents, wholesalers, or brokers that produce premiums
written on our behalf and promotional fees attributable to our affinity
relationships. Acquisition costs also include costs that are related to the
successful acquisition of new or renewal insurance contracts including
comprehensive loss underwriting exchange reports, motor vehicle reports, credit
score checks, and policy issuance costs.
50
--------------------------------------------------------------------------------
General and administrative expenses. General and administrative expenses are
composed of all other operating expenses, including various departmental
salaries and benefits expenses for employees that are involved in the
maintenance of policies, information systems, and accounting for insurance
transactions, and other insurance expenses such as federal excise tax, postage,
telephones and internet access charges, as well as legal and auditing fees and
board and bureau charges. In addition, general and administrative expenses
include those charges that are related to the amortization of tangible and
intangible assets and non-insurance activities in which we engage.
Interest expense. Interest expense represents amounts we incur on our outstanding indebtedness and interest credited on funds held balances at the applicable interest rates.
Income tax expense. We incur federal, state, and local income tax expenses as well as income tax expenses in certain foreign jurisdictions in which we operate.
Net operating expense (non-GAAP). These expenses consist of the sum of general and administrative expenses and acquisition costs and other underwriting expenses less ceding commission income and service and fee income.
Underwriting income. Underwriting income is a measure of an insurance company's overall operating profitability before items such as investment income, interest expense, and income taxes. Underwriting income is calculated as net earned premium plus ceding commission income and service and fee income less loss and LAE, acquisition costs and other underwriting expenses, and general and administrative expenses. Insurance Ratios Net combined ratio (non-GAAP). The net combined ratio (non-GAAP) is a measure of an insurance company's overall underwriting profit. This is the sum of the net loss ratio and net operating expense ratio (non-GAAP). If the net combined ratio (non-GAAP) is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient. Our definition of net loss ratio and net operating expense ratio (non-GAAP) are as follows:
Net loss ratio. The net loss ratio is a measure of the underwriting profitability of an insurance company's business. Expressed as a percentage, this is the ratio of loss and LAE incurred to net earned premium.
Net operating expense ratio (non-GAAP). The net operating expense ratio (non-GAAP) is one component of an insurance company's operational efficiency in administering its business. Expressed as a percentage, this is the ratio of net operating expense to net earned premium. Net combined ratio before amortization and impairment (non-GAAP). The net combined ratio before amortization and impairment (non-GAAP) is a measure of an insurance company's overall underwriting profit. This is the sum of the net loss ratio and net operating expense ratio before amortization and impairment (non-GAAP). Management believes that this measure of underwriting profitability provides a more useful comparison to the combined ratio of other insurance companies involved in fewer acquisitions. Our definition of net operating expense ratio before amortization and impairment is as follows: Net operating expense ratio before amortization and impairment (non-GAAP). The net operating expense ratio before amortization and impairment (non-GAAP) is one component of an insurance company's operational efficiency in administering its business. Expressed as a percentage, this is the ratio of net operating expense before non-cash amortization of intangible assets and non-cash impairment of goodwill to net earned premium. Net operating expense ratio, net operating expense ratio before amortization and impairment, net combined ratio and net combined ratio before amortization and impairment are considered non-GAAP financial measures under applicableSEC rules because a component of those ratios, net operating expense, is calculated by offsetting acquisition costs and other underwriting expenses and general and administrative expenses by ceding commission income and service and fee income, and is therefore a non-GAAP measure. We use net operating expense ratio (non- 51 -------------------------------------------------------------------------------- GAAP), net operating expense ratio before amortization and impairment (non-GAAP), net combined ratio (non-GAAP) and net combined ratio before amortization and impairment (non-GAAP) to evaluate financial performance against historical results and establish targets on a consolidated basis. We believe 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 us. For a reconciliation of net operating expense, see "Results of Operations - Consolidated Results of Operations for the Three and Six Months EndedJune 30, 2020 , and 2019, (Unaudited)" below. 52 --------------------------------------------------------------------------------
Results of Operations
Consolidated Results of Operations for the Three Months EndedJune 30, 2020 , and 2019, (Unaudited) Three Months Ended June 30, 2020 2019 Reciprocal Reciprocal NGHC Exchanges Eliminations Total NGHC Exchanges Eliminations Total Underwriting revenues: (amounts in thousands) Gross premium written$ 1,243,165 $ 98,436 $
- $ 1,341,601 $ 1,192,762 $ 121,146 $ - $ 1,313,908
Ceded premiums (285,525) (41,168) - (326,693) (253,584) (64,926) - (318,510)
Net premium written $ 957,640 $ 57,268 $
-
$ -$ 995,398 Change in unearned premium 53,142 (2,483) - 50,659 44,843 (9,590) - 35,253 Net earned premium$ 1,010,782 $ 54,785 $
-
$ -$ 1,030,651 Ceding commission income 35,530 11,110 - 46,640 43,346 16,846 - 60,192 Service and fee income 192,023 2,336 (13,767) 180,592 166,049 1,516 (18,657) 148,908
Total underwriting revenues
(13,767)
$ (18,657) $ 1,239,751 Underwriting expenses: Loss and loss adjustment expense 570,439 30,007 - 600,446 680,246 35,289 - 715,535 Acquisition costs and other underwriting expenses 219,278 10,100 - 229,378 185,951 8,175 - 194,126 General and administrative expenses 257,318 18,858 (13,767) 262,409 244,827 21,597 (18,657) 247,767
Total underwriting expenses
(13,767)
$ (18,657) $ 1,157,428 Underwriting income (loss)$ 191,300 $ 9,266 $ -$ 200,566 $ 82,392 $ (69) $ -$ 82,323 Net investment income 30,523 2,012 (1,360) 31,175 35,949 2,124 (2,942) 35,131 Net gain (loss) on investments 5,511 (353) - 5,158 (5,274) 44 - (5,230) Interest expense (11,779) (1,360) 1,360 (11,779) (12,925) (2,942) 2,942 (12,925) Income (loss) before provision (benefit) for income taxes$ 215,555 $ 9,565 $
-
$ -$ 99,299 Provision (benefit) for income taxes 48,981 1,526 - 50,507 22,266 (25) - 22,241 Net income (loss)$ 166,574 $ 8,039 $ -$ 174,613 $ 77,876 $ (818) $ -$ 77,058 Net (income) loss attributable to noncontrolling interest - (8,039) - (8,039) - 818 - 818
Net income attributable to NGHC
-
$ - $ 77,876
Dividends on preferred stock (8,925) - - (8,925) (8,925) - - (8,925)
Net income attributable to NGHC
common stockholders $ 157,649 $ - $ - $ 157,649 $ 68,951 $ - $ - $ 68,951
53--------------------------------------------------------------------------------
Three Months Ended June 30,
2020 2019
Reciprocal Reciprocal
NGHC Exchanges Eliminations Total NGHC Exchanges Eliminations Total
Underwriting ratios: (amounts in thousands, except percentages)
Net loss ratio 56.4 % 54.8 % - % 56.3 % 69.1 % 75.7 % - % 69.4 %
Net operating expense ratio
(non-GAAP) 24.6 % 28.3 % - % 24.8 % 22.5 % 24.5 % - % 22.6 %
Net combined ratio (non-GAAP) 81.0 % 83.1 % - % 81.1 % 91.6 % 100.2 % - % 92.0 %
Underwriting ratios before
amortization and impairment
(non-GAAP):
Net loss ratio 56.4 % 54.8 % - % 56.3 % 69.1 % 75.7 % - % 69.4 %
Net operating expense ratio
before amortization and
impairment (non-GAAP) 24.1 % 28.3 % - % 24.3 % 21.8 % 24.4 % - % 21.9 %
Net combined ratio before
amortization and impairment
(non-GAAP) 80.5 % 83.1 % - % 80.6 % 90.9 % 100.1 % - % 91.3 %
Reconciliation of net
operating expense ratio
(non-GAAP):
Total expenses $ 1,058,814 $ 60,325 $
(15,127)
$ (21,599) $ 1,170,353 Less: Loss and loss adjustment expense 570,439 30,007 - 600,446 680,246 35,289 - 715,535 Less: Interest expense 11,779 1,360 (1,360) 11,779 12,925 2,942 (2,942) 12,925 Less: Ceding commission income 35,530 11,110 - 46,640 43,346 16,846 - 60,192 Less: Service and fee income 192,023 2,336 (13,767) 180,592 166,049 1,516 (18,657) 148,908
Net operating expense
-
$ -$ 232,793 Net earned premium$ 1,010,782 $ 54,785 $ -$ 1,065,567 $ 984,021 $ 46,630 $ -$ 1,030,651 Net operating expense ratio (non-GAAP) 24.6 % 28.3 % - % 24.8 % 22.5 % 24.5 % - % 22.6 % Net operating expense$ 249,043 $ 15,512 $
-
$ -
Less: Non-cash amortization of intangible assets 5,343 30 - 5,373 7,089 12 - 7,101 Net operating expense before amortization and impairment$ 243,700 $ 15,482 $ -$ 259,182 $ 214,294 $ 11,398 $ -$ 225,692 Net earned premium$ 1,010,782 $ 54,785 $ -$ 1,065,567 $ 984,021 $ 46,630 $ -$ 1,030,651 Net operating expense ratio before amortization and impairment (non-GAAP) 24.1 % 28.3 % - % 24.3 % 21.8 % 24.4 % - % 21.9 % 54
-------------------------------------------------------------------------------- Consolidated Results of Operations for the Six Months EndedJune 30, 2020 , and 2019, (Unaudited) Six Months Ended June 30, 2020 2019 Reciprocal Reciprocal NGHC Exchanges Eliminations Total NGHC Exchanges Eliminations Total Underwriting revenues: (amounts in thousands) Gross premium written$ 2,627,866 $ 190,289 $ -$ 2,818,155 $ 2,596,971 $ 226,715 $ -$ 2,823,686 Ceded premiums (515,918) (77,726) - (593,644) (542,084) (121,540) - (663,624) Net premium written$ 2,111,948 $ 112,563 $
-
$ -$ 2,160,062 Change in unearned premium (83,558) (180) - (83,738) (152,367) (12,887) - (165,254) Net earned premium$ 2,028,390 $ 112,383 $
-
$ -$ 1,994,808 Ceding commission income 72,121 24,824 - 96,945 94,346 35,380 - 129,726 Service and fee income 383,180 3,493 (26,640) 360,033 346,437 2,886 (34,908) 314,415 Total underwriting revenues$ 2,483,691 $ 140,700 $
(26,640)
$ (34,908) $ 2,438,949 Underwriting expenses: Loss and loss adjustment expense 1,220,070 72,374 - 1,292,444 1,290,030 77,314 - 1,367,344 Acquisition costs and other underwriting expenses 437,023 20,597 - 457,620 389,284 16,760 - 406,044 General and administrative expenses 518,197 38,421 (26,640) 529,978 487,660 43,109 (34,908) 495,861 Total underwriting expenses$ 2,175,290 $ 131,392 $
(26,640)
$ (34,908) $ 2,269,249 Underwriting income (loss)$ 308,401 $ 9,308 $ -$ 317,709 $ 176,329 $ (6,629) $ -$ 169,700 Net investment income 60,270 4,195 (3,047) 61,418 70,232 4,294 (5,950) 68,576 Net loss on investments (557) (1,146) - (1,703) (4,508) (700) - (5,208) Interest expense (23,559) (3,047) 3,047 (23,559) (25,924) (5,950) 5,950 (25,924) Income (loss) before provision (benefit) for income taxes$ 344,555 $ 9,310 $
-
$ -$ 207,144 Provision (benefit) for income taxes 77,222 1,457 - 78,679 46,495 (1,748) - 44,747 Net income (loss)$ 267,333 $ 7,853 $ -$ 275,186 $ 169,634 $ (7,237) $ -$ 162,397 Net (income) loss attributable to noncontrolling interest - (7,853) - (7,853) - 7,237 - 7,237 Net income attributable to NGHC$ 267,333 $ - $
-
$ - $ 169,634
Dividends on preferred stock (16,800) - - (16,800) (16,800) - - (16,800)
Net income attributable to NGHC
common stockholders $ 250,533 $ - $ - $ 250,533 $ 152,834 $ - $ - $ 152,834
55--------------------------------------------------------------------------------
Six Months Ended June 30,
2020 2019
Reciprocal Reciprocal
NGHC Exchanges Eliminations Total NGHC Exchanges Eliminations Total
Underwriting ratios: (amounts in thousands, except percentages)
Net loss ratio 60.1 % 64.4 % - % 60.4 % 67.8 % 83.8 % - % 68.5 %
Net operating expense ratio
(non-GAAP) 24.6 % 27.3 % - % 24.8 % 22.9 % 23.4 % - % 22.9 %
Net combined ratio (non-GAAP) 84.7 % 91.7 % - % 85.2 % 90.7 % 107.2 % - % 91.4 %
Underwriting ratios before
amortization and impairment
(non-GAAP):
Net loss ratio 60.1 % 64.4 % - % 60.4 % 67.8 % 83.8 % - % 68.5 %
Net operating expense ratio
before amortization and
impairment (non-GAAP) 24.1 % 27.3 % - % 24.2 % 22.2 % 23.4 % - % 22.2 %
Net combined ratio before
amortization and impairment
(non-GAAP) 84.2 % 91.7 % - % 84.6 % 90.0 % 107.2 % - % 90.7 %
Reconciliation of net
operating expense ratio
(non-GAAP):
Total expenses $ 2,198,849 $ 134,439 $
(29,687)
$ (40,858) $ 2,295,173 Less: Loss and loss adjustment expense 1,220,070 72,374 - 1,292,444 1,290,030 77,314 - 1,367,344 Less: Interest expense 23,559 3,047 (3,047) 23,559 25,924 5,950 (5,950) 25,924 Less: Ceding commission income 72,121 24,824 - 96,945 94,346 35,380 - 129,726 Less: Service and fee income 383,180 3,493 (26,640) 360,033 346,437 2,886 (34,908) 314,415 Net operating expense$ 499,919 $ 30,701 $
-
$ -$ 457,764 Net earned premium$ 2,028,390 $ 112,383 $
-
$ -$ 1,994,808 Net operating expense ratio (non-GAAP) 24.6 % 27.3 % - % 24.8 % 22.9 % 23.4 % - % 22.9 % Net operating expense$ 499,919 $ 30,701 $
-
$ -
Less: Non-cash amortization of intangible assets 11,845 60 - 11,905 14,305 23 - 14,328 Net operating expense before amortization and impairment$ 488,074 $ 30,641 $
-
$ -$ 443,436 Net earned premium$ 2,028,390 $ 112,383 $
-
$ -$ 1,994,808 Net operating expense ratio before amortization and impairment (non-GAAP) 24.1 % 27.3 % - % 24.2 % 22.2 % 23.4 % - % 22.2 % 56
-------------------------------------------------------------------------------- In 2017, we entered into auto and homeowners quota share agreements (collectively, the "Quota Shares"). EffectiveJanuary 1, 2020 , we cede 5.0% of net liability under new and renewal auto policies written, compared to 7.0% and 10.0% of net liability ceded effectiveJanuary 1, 2019 , andJuly 1, 2019 , respectively. Under our homeowners' quota share agreement we continue to cede 40.0% of net liability under homeowners policies. InAugust 2019 , we completed the acquisition ofNational Farmers Union Property and Casualty Company ("Farmers Union Insurance "). InDecember 2019 , we sold our Euro Accident Health and Care Insurance Sweden operation ("Euroaccident"). OnApril 23, 2020 , we announced a 15.0% credit on April premiums for personal auto insurance customers with a policy in force as ofApril 30, 2020 , which was automatically credited to their policy. As a result of these transactions, comparisons between the results for the three and six months endedJune 30, 2020 , and 2019, will be less meaningful. The Quota Shares,Farmers Union Insurance and the credit relief impacted our P&C segment. The sale of Euroaccident impacted our A&H segment.
Consolidated Results of Operations for the Three Months Ended
Gross premium written. Gross premium written increased by$27.7 million , or 2.1%, from$1,313.9 million for the three months endedJune 30, 2019 , to$1,341.6 million for the three months endedJune 30, 2020 . The P&C segment increased by$9.7 million , as a result of the acquisition ofFarmers Union Insurance ($47.7 million ), offset by a decrease in the Reciprocal Exchanges ($22.7 million ). The P&C segment was also impacted by the refund of premiums related to COVID-19. The A&H segment increased by$18.0 million , due to an increase in the small group self-funded and individual products ($31.8 million ), partially offset by the sale of Euroaccident in 2019 ($13.8 million ). Net premium written. Net premium written increased by$19.5 million , or 2.0%, from$995.4 million for the three months endedJune 30, 2019 , to$1,014.9 million for the three months endedJune 30, 2020 . Net premium written for the P&C segment increased by$4.0 million for the three months endedJune 30, 2020 , compared to the same period in 2019. Net premium written for the A&H segment increased by$15.5 million for the three months endedJune 30, 2020 , compared to the same period in 2019, due to an increase in the small group self-funded and individual products ($27.6 million ), partially offset by the sale of Euroaccident in 2019 ($12.1 million ). Net earned premium. Net earned premium increased by$34.9 million , or 3.4%, from$1,030.7 million for the three months endedJune 30, 2019 , to$1,065.6 million for the three months endedJune 30, 2020 . The change by segment was: P&C increased by$32.2 million and A&H increased by$2.7 million . The increase in the P&C segment was attributable to higher written premium volume in the prior periods that were earned in this period, a decrease in ceded premium to the Quota Shares ($13.6 million ) and an increase in the Reciprocal Exchanges ($8.2 million ). The increase in the A&H segment was attributable to an increase in the small group self-funded and individual products ($26.9 million ), offset by the sale of Euroaccident in 2019 ($24.2 million ). Ceding commission income. Ceding commission income decreased by$13.6 million , or 22.5%, from$60.2 million for the three months endedJune 30, 2019 , to$46.6 million for the three months endedJune 30, 2020 , primarily driven by a decrease in ceded earned premium to the Quota Shares and in the Reciprocal Exchanges. Service and fee income. Service and fee income increased by$31.7 million , or 21.3%, from$148.9 million for the three months endedJune 30, 2019 , to$180.6 million for the three months endedJune 30, 2020 , primarily due to an increase of$27.1 million in the A&H segment related to growth in the group administration fees and third party technology fees. 57 --------------------------------------------------------------------------------
The components of service and fee income are as follows:
Three Months Ended June 30,
2020 2019 Change % Change
(amounts in thousands)
Commission revenue $ 42,270 $ 35,623 $ 6,647 18.7 %
Group health administrative fees 30,536 24,548 5,988 24.4 %
Finance and processing fees 30,391 33,031 (2,640) (8.0) %
Installment fees 26,405 25,148 1,257 5.0 %
Late payment fees 7,761 8,607 (846) (9.8) %
Other service and fee income 43,229 21,951 21,278 96.9 %
Total $ 180,592 $ 148,908 $ 31,684 21.3 %
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by
$115.1 million , from $715.5 million for the three months ended June 30, 2019 , to
$600.4 million for the three months ended June 30, 2020 , reflecting lower claims
frequency ($129.8 million ) and the sale of Euroaccident in 2019 ($12.9 million ),
offset by the acquisition of Farmers Union Insurance ($29.7 million ). The
changes by segment were: P&C decreased by $95.4 million and A&H decreased by
$19.7 million .
Loss and LAE for the three months ended June 30, 2020 , included $3.1 million of
favorable loss development on prior accident year loss and LAE reserves. This
loss development was composed of $8.3 million of unfavorable loss development in
the P&C segment, driven by small business auto, and $11.4 million of favorable
loss development in the A&H segment, driven by the small group self-funded
business and short term medical. Loss and LAE for the three months ended June
30, 2019 , included $1.6 million of unfavorable loss development on prior
accident year loss and LAE reserves. This loss development was composed of $9.7
million of unfavorable loss development in the P&C segment, primarily driven by
auto liability, and $8.1 million of favorable loss development in the A&H
segment, driven by the small group self-funded business and short term medical.
Our consolidated net loss ratio decreased from 69.4% for the three months ended
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by$35.3 million , or 18.2%, from$194.1 million for the three months endedJune 30, 2019 , to$229.4 million for the three months endedJune 30, 2020 , due to an increase of$16.4 million in the P&C segment, primarily due to the acquisition ofFarmers Union Insurance ; and an increase of$18.9 million in the A&H segment, primarily due to the costs of selling policies issued by third-party insurance companies. General and administrative expenses. General and administrative expenses increased by$14.6 million , from$247.8 million for the three months endedJune 30, 2019 , to$262.4 million for the three months endedJune 30, 2020 , due to an increase of$17.9 million in the P&C segment, primarily due to organic growth and the acquisition ofFarmers Union Insurance ; and a decrease of$3.3 million in the A&H segment. Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased by$31.8 million , from$232.8 million for the three months endedJune 30, 2019 , to$264.6 million for the three months endedJune 30, 2020 , due to an increase of$39.8 million from the P&C segment, offset by a decrease of$8.1 million from the A&H segment. The consolidated net operating expense ratio increased from 22.6% for the three months endedJune 30, 2019 , to 24.8% for the three months endedJune 30, 2020 . Excluding the Reciprocal Exchanges, the net operating expense ratio was 24.6% and 22.5% for the three months endedJune 30, 2020 , and 2019, respectively. The Reciprocal Exchanges' net operating expense ratio was 28.3% and 24.5% for the three months endedJune 30, 2020 , and 2019, respectively. 58 --------------------------------------------------------------------------------
Consolidated Results of Operations for the Six Months Ended
Gross premium written. Gross premium written decreased by$5.5 million , from$2,823.7 million for the six months endedJune 30, 2019 , to$2,818.2 million for the six months endedJune 30 , 2020.The P&C segment increased by$48.0 million , as a result of the acquisition ofFarmers Union Insurance ($96.6 million ), offset by a decrease in the Reciprocal Exchanges ($36.4 million ). The P&C segment was also impacted by the refund of premiums related to COVID-19. The A&H segment decreased by$53.5 million , due to the sale of Euroaccident in 2019 ($123.3 million ), offset by an increase in the small group self-funded and individual products ($69.7 million ). Net premium written. Net premium written increased by$64.4 million , or 3.0%, from$2,160.1 million for the six months endedJune 30, 2019 , to$2,224.5 million for the six months endedJune 30, 2020 . Net premium written for the P&C segment increased by$80.9 million for the six months endedJune 30, 2020 , compared to the same period in 2019, due to the increase in gross premium written and a reduction in ceded premium to the Auto Quota Share. Net premium written for the A&H segment decreased by$16.5 million for the six months endedJune 30, 2020 , compared to the same period in 2019, due to the sale of Euroaccident in 2019 ($74.2 million ), offset by an increase in the small group self-funded and individual products ($57.7 million ). Net earned premium. Net earned premium increased by$146.0 million , or 7.3%, from$1,994.8 million for the six months endedJune 30, 2019 , to$2,140.8 million for the six months endedJune 30, 2020 . The change by segment was: P&C increased by$140.1 million and A&H increased by$5.9 million . The increase in the P&C segment was attributable to the increase in net premium written, a decrease in ceded earned premium to the Quota Shares ($32.4 million ) and an increase in the Reciprocal Exchanges ($20.1 million ). The increase in the A&H segment was attributable to an increase in the small group self-funded and individual products ($55.4 million ), offset by the sale of Euroaccident in 2019 ($49.6 million ).
Ceding commission income. Ceding commission income decreased by
Service and fee income. Service and fee income increased by
The components of service and fee income are as follows:
Six Months Ended June 30,
2020 2019 Change % Change
(amounts in thousands)
Commission revenue $ 90,653 $ 87,604 $ 3,049 3.5 %
Finance and processing fees 68,651 67,491 1,160 1.7 %
Group health administrative fees 60,511 48,053 12,458 25.9 %
Installment fees 51,493 49,318 2,175 4.4 %
Late payment fees 15,606 16,987 (1,381) (8.1) %
Other service and fee income 73,119 44,962 28,157 62.6 %
Total $ 360,033 $ 314,415 $ 45,618 14.5 %
59-------------------------------------------------------------------------------- Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by$74.9 million , from$1,367.3 million for the six months endedJune 30, 2019 , to$1,292.4 million for the six months endedJune 30, 2020 , reflecting lower claims frequency ($118.1 million ) and the sale of Euroaccident in 2019 ($30.0 million ), offset by the acquisition ofFarmers Union Insurance ($48.6 million ) and a decrease in losses ceded to Quota Shares ($22.3 million ). The changes by segment were: P&C decreased by$52.1 million and A&H decreased by$22.8 million . Loss and LAE for the six months endedJune 30, 2020 , included$2.5 million of favorable loss development on prior accident year loss and LAE reserves. This loss development was composed of$13.7 million of unfavorable loss development in the P&C segment, driven by small business auto, and$16.2 million of favorable loss development in the A&H segment, driven by the small group self-funded business and short term medical. Loss and LAE for the six months endedJune 30, 2019 , included$12.7 million of favorable loss development on prior accident year loss and LAE reserves. This loss development was composed of$6.3 million of unfavorable loss development in the P&C segment, driven by auto liability, and$19.0 million of favorable loss development in the A&H segment, driven by the small group self-funded business and short term medical.
The consolidated net loss ratio decreased from 68.5% for the six months ended
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by$51.6 million , or 12.7%, from$406.0 million for the six months endedJune 30, 2019 , to$457.6 million for the six months endedJune 30, 2020 , due to an increase of$22.1 million in the P&C segment, primarily due to the acquisition ofFarmers Union Insurance ; and an increase of$29.5 million in the A&H segment, primarily due to the costs of selling policies issued by third-party insurance companies. General and administrative expenses. General and administrative expenses increased by$34.1 million , from$495.9 million for the six months endedJune 30, 2019 , to$530.0 million for the six months endedJune 30, 2020 , due to an increase of$36.3 million in the P&C segment, primarily due to organic growth and the acquisition ofFarmers Union Insurance ; and a decrease of$2.2 million in the A&H segment. Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased by$72.9 million , from$457.8 million for the six months endedJune 30, 2019 , to$530.6 million for the six months endedJune 30, 2020 , due to an increase of$86.7 million from the P&C segment, offset by a decrease of$13.8 million from the A&H segment. The consolidated net operating expense ratio increased from 22.9% for the six months endedJune 30, 2019 , to 24.8% for the six months endedJune 30, 2020 . Excluding the Reciprocal Exchanges, the net operating expense ratio was 24.6% and 22.9% for the six months endedJune 30, 2020 , and 2019, respectively. The Reciprocal Exchanges' net operating expense ratio was 27.3% and 23.4% for the six months endedJune 30, 2020 , and 2019, respectively. 60 --------------------------------------------------------------------------------
P&C Segment - Results of Operations for the Three Months Ended
Three Months Ended June 30,
2020 2019
Reciprocal Reciprocal
NGHC Exchanges Eliminations Total NGHC Exchanges Eliminations Total
Underwriting revenues: (amounts in thousands)
Gross premium written $ 1,053,508 $ 98,436 $
- $ 1,151,944 $ 1,021,090 $ 121,146 $ - $ 1,142,236
Ceded premiums (264,080) (41,168) - (305,248) (234,619) (64,926) - (299,545)
Net premium written $ 789,428 $ 57,268 $
-
$ -$ 842,691 Change in unearned premium 52,557 (2,483) - 50,074 31,501 (9,590) - 21,911 Net earned premium$ 841,985 $ 54,785 $ -$ 896,770 $ 817,972 $ 46,630 $ -$ 864,602 Ceding commission income 35,059 11,110 - 46,169 39,418 16,846 - 56,264 Service and fee income 111,955 2,336 (13,767) 100,524 113,112 1,516 (18,657) 95,971
Total underwriting revenues
(13,767)
$ (18,657) $ 1,016,837 Underwriting expenses: Loss and loss adjustment expense 503,784 30,007 - 533,791 593,922 35,289 - 629,211 Acquisition costs and other underwriting expenses 152,384 10,100 - 162,484 137,950 8,175 - 146,125 General and administrative expenses 199,327 18,858 (13,767) 204,418 183,535 21,597 (18,657) 186,475
Total underwriting expenses
(13,767)
$ (18,657) $ 961,811 Underwriting income (loss)$ 133,504 $ 9,266 $ -$ 142,770 $ 55,095 $ (69) $ -$ 55,026 61
--------------------------------------------------------------------------------
Three Months Ended June 30,
2020 2019
Reciprocal Reciprocal
NGHC Exchanges Eliminations Total NGHC Exchanges Eliminations Total
Underwriting ratios: (amounts in thousands, except percentages)
Net loss ratio 59.8 % 54.8 % - % 59.5 % 72.6 % 75.7 % - % 72.8 %
Net operating expense ratio
(non-GAAP) 24.3 % 28.3 % - % 24.6 % 20.7 % 24.5 % - % 20.9 %
Net combined ratio (non-GAAP) 84.1 % 83.1 % - % 84.1 % 93.3 % 100.2 % - % 93.7 %
Underwriting ratios before
amortization and impairment
(non-GAAP):
Net loss ratio 59.8 % 54.8 % - % 59.5 % 72.6 % 75.7 % - % 72.8 %
Net operating expense ratio
before amortization and
impairment (non-GAAP) 23.8 % 28.3 % - % 24.1 % 20.0 % 24.4 % - % 20.2 %
Net combined ratio before
amortization and impairment
(non-GAAP) 83.6 % 83.1 % - % 83.6 % 92.6 % 100.1 % - % 93.0 %
Reconciliation of net
operating expense ratio
(non-GAAP):
Total underwriting expenses $ 855,495 $ 58,965 $ (13,767) $ 900,693 $ 915,407 $ 65,061 $ (18,657) $ 961,811
Less: Loss and loss adjustment
expense 503,784 30,007 - 533,791 593,922 35,289 - 629,211
Less: Ceding commission income 35,059 11,110 - 46,169 39,418 16,846 - 56,264
Less: Service and fee income 111,955 2,336 (13,767) 100,524 113,112 1,516 (18,657) 95,971
Net operating expense
-
- $ 180,365
Net earned premium $ 841,985 $ 54,785 $ - $ 896,770 $ 817,972 $ 46,630 $ - $ 864,602
Net operating expense ratio
(non-GAAP) 24.3 % 28.3 % - % 24.6 % 20.7 % 24.5 % - % 20.9 %
Net operating expense
-
-
Less: Non-cash amortization of intangible assets 4,041 30 - 4,071 5,412 12 - 5,424 Net operating expense before amortization and impairment$ 200,656 $ 15,482 $ -$ 216,138 $ 163,543 $ 11,398 $ -$ 174,941 Net earned premium$ 841,985 $ 54,785 $ -$ 896,770 $ 817,972 $ 46,630 $ -$ 864,602 Net operating expense ratio before amortization and impairment (non-GAAP) 23.8 % 28.3 % - % 24.1 % 20.0 % 24.4 % - % 20.2 % 62
-------------------------------------------------------------------------------- P&C Segment - Results of Operations for the Six Months EndedJune 30, 2020 , and 2019, (Unaudited) Six Months Ended June 30, 2020 2019 Reciprocal Reciprocal NGHC Exchanges Eliminations Total NGHC Exchanges Eliminations Total Underwriting revenues: (amounts in thousands) Gross premium written$ 2,251,184 $ 190,289 $
- $ 2,441,473 $ 2,166,755 $ 226,715 $ - $ 2,393,470
Ceded premiums (475,664) (77,726) - (553,390) (464,756) (121,540) - (586,296)
Net premium written $ 1,775,520 $ 112,563 $
-
$ -$ 1,807,174 Change in unearned premium (80,633) (180) - (80,813) (127,108) (12,887) - (139,995) Net earned premium$ 1,694,887 $ 112,383 $
-
$ -$ 1,667,179 Ceding commission income 71,090 24,824 - 95,914 87,827 35,380 - 123,207 Service and fee income 222,588 3,493 (26,640) 199,441 232,488 2,886 (34,908) 200,466 Total underwriting revenues$ 1,988,565 $ 140,700 $
(26,640)
$ (34,908) $ 1,990,852 Underwriting expenses: Loss and loss adjustment expense 1,071,814 72,374 - 1,144,188 1,118,957 77,314 - 1,196,271 Acquisition costs and other underwriting expenses 301,658 20,597 - 322,255 283,435 16,760 - 300,195 General and administrative expenses 400,454 38,421 (26,640) 412,235 367,730 43,109 (34,908) 375,931 Total underwriting expenses$ 1,773,926 $ 131,392 $
(26,640)
$ (34,908) $ 1,872,397 Underwriting income (loss)$ 214,639 $ 9,308 $ -$ 223,947 $ 125,084 $ (6,629) $ -$ 118,455 63
--------------------------------------------------------------------------------
Six Months Ended June 30,
2020 2019
Reciprocal Reciprocal
NGHC Exchanges Eliminations Total NGHC Exchanges Eliminations Total
Underwriting ratios: (amounts in thousands, except percentages)
Net loss ratio 63.2 % 64.4 % - % 63.3 % 71.0 % 83.8 % - % 71.8 %
Net operating expense ratio
(non-GAAP) 24.1 % 27.3 % - % 24.3 % 21.0 % 23.4 % - % 21.1 %
Net combined ratio (non-GAAP) 87.3 % 91.7 % - % 87.6 % 92.0 % 107.2 % - % 92.9 %
Underwriting ratios before
amortization and impairment
(non-GAAP):
Net loss ratio 63.2 % 64.4 % - % 63.3 % 71.0 % 83.8 % - % 71.8 %
Net operating expense ratio before
amortization and impairment
(non-GAAP) 23.6 % 27.3 % - % 23.8 % 20.3 % 23.4 % - % 20.5 %
Net combined ratio before
amortization and impairment
(non-GAAP) 86.8 % 91.7 % - % 87.1 % 91.3 % 107.2 % - % 92.3 %
Reconciliation of net operating
expense ratio (non-GAAP):
Total underwriting expenses $ 1,773,926 $ 131,392 $ (34,908) $ 1,872,397 Less: Loss and loss adjustment expense 1,071,814 72,374 - 1,144,188 1,118,957 77,314 - 1,196,271 Less: Ceding commission income 71,090 24,824 - 95,914 87,827 35,380 - 123,207 Less: Service and fee income 222,588 3,493 (26,640) 199,441 232,488 2,886 (34,908) 200,466 Net operating expense$ 408,434 $ 30,701 $ -$ 439,135 $ 330,850 $ 21,603 $ -$ 352,453 Net earned premium$ 1,694,887 $ 112,383 $ -$ 1,807,270 $ 1,574,891 $ 92,288 $ -$ 1,667,179 Net operating expense ratio (non-GAAP) 24.1 % 27.3 % - % 24.3 % 21.0 % 23.4 % - % 21.1 % Net operating expense$ 408,434 $ 30,701 $ -$ 439,135 $ 330,850 $ 21,603 $ -$ 352,453 Less: Non-cash amortization of intangible assets 9,228 60 - 9,288 10,897 23 - 10,920 Net operating expense before amortization and impairment$ 399,206 $ 30,641 $ -$ 429,847 $ 319,953 $ 21,580 $ -$ 341,533 Net earned premium$ 1,694,887 $ 112,383 $ -$ 1,807,270 $ 1,574,891 $ 92,288 $ -$ 1,667,179 Net operating expense ratio before amortization and impairment (non-GAAP) 23.6 % 27.3 % - % 23.8 % 20.3 % 23.4 % - % 20.5 %
P&C Segment Results of Operations for the Three Months Ended
Gross premium written. Gross premium written increased by$9.7 million , from$1,142.2 million for the three months endedJune 30, 2019 , to$1,151.9 million for the three months endedJune 30, 2020 , as a result of the acquisition ofFarmers Union Insurance ($47.7 million ), offset by a decrease in the Reciprocal Exchanges ($22.7 million ). The P&C segment was also impacted by the refund of premiums related to COVID-19. Net premium written. Net premium written increased by$4.0 million , from$842.7 million for the three months endedJune 30, 2019 to$846.7 million for the three months endedJune 30, 2020 . Net earned premium. Net earned premium increased by$32.2 million , or 3.7%, from$864.6 million for the three months endedJune 30, 2019 , to$896.8 million for the three months endedJune 30, 2020 , attributable to higher written premium volume in the prior periods that were earned in this period, a decrease in ceded premium to the Quota Shares ($13.6 million ) and an increase in the Reciprocal Exchanges ($8.2 million ). 64 -------------------------------------------------------------------------------- Ceding commission income. Ceding commission income decreased by$10.1 million , or 17.9%, from$56.3 million for the three months endedJune 30, 2019 , to$46.2 million for the three months endedJune 30, 2020 , primarily driven by a decrease in ceded earned premium to the Quota Shares and in the Reciprocal Exchanges. Service and fee income. Service and fee income increased by$4.6 million , from$96.0 million for the three months endedJune 30, 2019 , to$100.5 million for the three months endedJune 30, 2020 .
The components of service and fee income are as follows:
Three Months Ended June 30,
2020 2019 Change % Change
(amounts in thousands)
Finance and processing fees $ 28,186 $ 32,145 $ (3,959) (12.3) %
Installment fees 26,405 25,148 1,257 5.0 %
Commission revenue 17,916 19,650 (1,734) (8.8) %
Late payment fees 7,748 8,517 (769) (9.0) %
Other service and fee income 20,269 10,511 9,758 92.8 %
Total $ 100,524 $ 95,971 $ 4,553 4.7 %
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by
$95.4 million , from $629.2 million for the three months ended June 30, 2019 , to
$533.8 million for the three months ended June 30, 2020 , reflecting lower claims
frequency ($129.8 million ), offset by the acquisition of Farmers Union Insurance
($29.7 million ).
The P&C segment net loss ratio, which includes the Reciprocal Exchanges,
decreased from 72.8% for the three months ended June 30, 2019 , to 59.5% for the
three months ended June 30, 2020 . Excluding the Reciprocal Exchanges, the net
loss ratio was 59.8% and 72.6% for the three months ended June 30, 2020 , and
2019, respectively. The Reciprocal Exchanges' net loss ratio was 54.8% and 75.7%
for the three months ended June 30, 2020 , and 2019, respectively. Net loss ratio
decreased reflecting lower claims frequency.
Acquisition costs and other underwriting expenses. Acquisition costs and other
underwriting expenses increased by $16.4 million , or 11.2%, from $146.1 million
for the three months ended June 30, 2019 , to $162.5 million for the three months
ended June 30, 2020 , primarily due to the acquisition of Farmers Union
Insurance .
General and administrative expenses. General and administrative expenses
increased by $17.9 million , from $186.5 million for the three months ended June
30, 2019 , to $204.4 million for the three months ended June 30, 2020 , primarily
due to organic growth and the acquisition of Farmers Union Insurance .
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net
operating expense increased by $39.8 million , from $180.4 million for the three
months ended June 30, 2019 , to $220.2 million for the three months ended June
30, 2020 . The P&C segment net operating expense ratio increased from 20.9% for
the three months ended June 30, 2019 , to 24.6% for the three months ended June
30, 2020 . The increases in net operating expense and net operating expense ratio
were primarily due to organic growth, the acquisition of Farmers Union
Insurance , and to a lesser extent a decrease in ceding commission income from
the Quota Shares.
65
--------------------------------------------------------------------------------
Underwriting income; net combined ratio (non-GAAP). Underwriting income
increased by $87.7 million , from $55.0 million for the three months ended June
30, 2019 , to $142.8 million for the three months ended June 30, 2020 . The P&C
segment net combined ratio decreased from 93.7% for the three months ended June
30, 2019 , to 84.1% for the three months ended June 30, 2020 . The increase in
underwriting income and the decrease in the net combined ratio were primarily
due to lower claims, including the recent decline in miles driven due to the
Covid-19 pandemic, offset by higher expenses due to organic growth and the
acquisition of Farmers Union Insurance , and to a lesser extent a decrease in
ceding commission income from the Quota Shares.
P&C Segment Results of Operations for the Six Months Ended
Gross premium written. Gross premium written increased by$48.0 million , or 2.0%, from$2,393.5 million for the six months endedJune 30, 2019 , to$2,441.5 million for the six months endedJune 30, 2020 , as a result of the acquisition ofFarmers Union Insurance ($96.6 million ), offset by a decrease in the Reciprocal Exchanges ($36.4 million ). The P&C segment was also impacted by the refund of premiums related to COVID-19. Net premium written. Net premium written increased by$80.9 million , or 4.5%, from$1,807.2 million for the six months endedJune 30, 2019 , to$1,888.1 million for the six months endedJune 30, 2020 , due to the increase in gross premium written and a reduction in ceded premium to the Auto Quota Share. Net earned premium. Net earned premium increased by$140.1 million , or 8.4%, from$1,667.2 million for the six months endedJune 30, 2019 , to$1,807.3 million for the six months endedJune 30, 2020 , attributable to the increase in net premium written, a decrease in ceded earned premium to the Quota Shares ($32.4 million ) and an increase in the Reciprocal Exchanges ($20.1 million ).
Ceding commission income. Ceding commission income decreased by
Service and fee income. Service and fee income decreased by$1.0 million , from$200.5 million for the six months endedJune 30, 2019 , to$199.4 million for the six months endedJune 30, 2020 .
The components of service and fee income are as follows:
Six Months Ended June 30,
2020 2019 Change % Change
(amounts in thousands)
Finance and processing fees $ 63,975 $ 64,581 $ (606) (0.9) %
Installment fees 51,493 49,318 2,175 4.4 %
Commission revenue 36,667 46,860 (10,193) (21.8) %
Late payment fees 15,581 16,810 (1,229) (7.3) %
Other service and fee income 31,725 22,897 8,828 38.6 %
Total $ 199,441 $ 200,466 $ (1,025) (0.5) %
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by
$52.1 million , from $1,196.3 million for the six months ended June 30, 2019 , to
$1,144.2 million for the six months ended June 30, 2020 , reflecting lower claims
frequency ($118.1 million ), offset by the acquisition of Farmers Union Insurance
($48.6 million ) and a decrease in losses ceded to Quota Shares ($22.3 million ).
The P&C segment net loss ratio, which includes the Reciprocal Exchanges,
decreased from 71.8% for the six months ended June 30, 2019 , to 63.3% for the
six months ended June 30, 2020 . Excluding the Reciprocal Exchanges, the net loss
ratio was 63.2% and 71.0% for the six months ended June 30, 2020 , and 2019,
respectively.
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The Reciprocal Exchanges' net loss ratio was 64.4% and 83.8% for the six months
ended June 30, 2020 , and 2019, respectively. Net loss ratio decreased reflecting
lower claims frequency.
Acquisition costs and other underwriting expenses. Acquisition costs and other
underwriting expenses increased by $22.1 million , or 7.3%, from $300.2 million
for the six months ended June 30, 2019 , to $322.3 million for the six months
ended June 30, 2020 , primarily due to the acquisition of Farmers Union
Insurance .
General and administrative expenses. General and administrative expenses
increased by $36.3 million , from $375.9 million for the six months ended June
30, 2019 , to $412.2 million for the six months ended June 30, 2020 , primarily
due to organic growth and the acquisition of Farmers Union Insurance .
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net
operating expense increased by $86.7 million , from $352.5 million for the six
months ended June 30, 2019 , to $439.1 million for the six months ended June 30,
2020 . The P&C segment net operating expense ratio increased from 21.1% for the
six months ended June 30, 2019 , to 24.3% for the six months ended June 30, 2020 .
The increases in net operating expense and net operating expense ratio were
primarily due to organic growth, the acquisition of Farmers Union Insurance , and
a decrease in ceding commission income from the Quota Shares.
Underwriting income; net combined ratio (non-GAAP). Underwriting income
increased by $105.5 million , from $118.5 million for the six months ended June
30, 2019 , to $223.9 million for the six months ended June 30, 2020 . The P&C
segment net combined ratio decreased from 92.9% for the six months ended June
30, 2019 , to 87.6% for the six months ended June 30, 2020 . The increase in
underwriting income and the decrease in the net combined ratio were primarily
due to lower claims, including the recent decline in miles driven due to the
Covid-19 pandemic, offset by higher expenses due to organic growth and the
acquisition of Farmers Union Insurance , and a decrease in ceding commission
income from the Quota Shares.
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A&H Segment - Results of Operations for the Three and Six Months Ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Underwriting revenues: (amounts in thousands, except percentages)
Gross premium written $ 189,657 $ 171,672 $ 376,682 $ 430,216
Ceded premiums (21,445) (18,965) (40,254) (77,328)
Net premium written $ 168,212 $ 152,707 $ 336,428 $ 352,888
Change in unearned premium 585 13,342 (2,925) (25,259)
Net earned premium $ 168,797 $ 166,049 $ 333,503 $ 327,629
Ceding commission income 471 3,928 1,031 6,519
Service and fee income 80,068 52,937 160,592 113,949
Total underwriting revenues $ 249,336 $ 222,914 $ 495,126 $ 448,097
Underwriting expenses:
Loss and loss adjustment expense 66,655 86,324 148,256 171,073
Acquisition costs and other
underwriting expenses 66,894 48,001 135,365 105,849
General and administrative expenses 57,991 61,292 117,743 119,930
Total underwriting expenses $ 191,540 $ 195,617 $ 401,364 $ 396,852
Underwriting income $ 57,796 $ 27,297 $ 93,762 $ 51,245
Underwriting ratios:
Net loss ratio 39.5 % 52.0 % 44.5 % 52.2 %
Net operating expense ratio (non-GAAP) 26.3 % 31.6 % 27.4 % 32.1 %
Net combined ratio (non-GAAP) 65.8 % 83.6 % 71.9 % 84.3 %
Underwriting ratios before amortization
and impairment (non-GAAP):
Net loss ratio 39.5 % 52.0 % 44.5 % 52.2 %
Net operating expense ratio before
amortization and impairment (non-GAAP) 25.5 % 30.6 % 26.6 % 31.1 %
Net combined ratio before amortization
and impairment (non-GAAP) 65.0 % 82.6 % 71.1 % 83.3 %
Reconciliation of net operating expense
ratio (non-GAAP):
Total underwriting expenses $ 191,540 $ 195,617 $ 401,364 $ 396,852
Less: Loss and loss adjustment expense 66,655 86,324 148,256 171,073
Less: Ceding commission income 471 3,928 1,031 6,519
Less: Service and fee income 80,068 52,937 160,592 113,949
Net operating expense $ 44,346 $ 52,428 $ 91,485 $ 105,311
Net earned premium $ 168,797 $ 166,049 $ 333,503 $ 327,629
Net operating expense ratio (non-GAAP) 26.3 % 31.6 % 27.4 % 32.1 %
Net operating expense $ 44,346 $ 52,428 $ 91,485 $ 105,311
Less: Non-cash amortization of
intangible assets 1,302 1,677 2,617 3,408
Net operating expense before
amortization and impairment $ 43,044 $ 50,751 $ 88,868 $ 101,903
Net earned premium $ 168,797 $ 166,049 $ 333,503 $ 327,629
Net operating expense ratio before
amortization and impairment (non-GAAP) 25.5 % 30.6 % 26.6 % 31.1 %
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A&H Segment Results of Operations for the Three Months Ended
Gross premium written. Gross premium written increased by
Net premium written. Net premium written increased by$15.5 million , or 10.2%, from$152.7 million for the three months endedJune 30, 2019 , to$168.2 million for the three months endedJune 30, 2020 , due to an increase in the small group self-funded and individual products ($27.6 million ), partially offset by the sale of Euroaccident in 2019 ($12.1 million ). Net earned premium. Net earned premium increased by$2.7 million , or 1.7%, from$166.0 million for the three months endedJune 30, 2019 , to$168.8 million for the three months endedJune 30, 2020 , attributable to an increase in the small group self-funded and individual products ($26.9 million ), offset by the sale of Euroaccident in 2019 ($24.2 million ). Service and fee income. Service and fee income increased by$27.1 million , or 51.3%, from$52.9 million for the three months endedJune 30, 2019 , to$80.1 million for the three months endedJune 30, 2020 , related to growth in the group administration fees and third party technology fees.
The components of service and fee income are as follows:
Three Months Ended June 30,
2020 2019 Change % Change
(amounts in thousands)
Group health administrative fees $ 30,536 $ 24,548 $ 5,988 24.4 %
Commission revenue 24,354 15,973 8,381 52.5 %
Finance and processing fees 2,205 886 1,319 148.9 %
Other service and fee income 22,973 11,530 11,443 99.2 %
Total $ 80,068 $ 52,937 $ 27,131 51.3 %
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by
$19.7 million , from $86.3 million for the three months ended June 30, 2019 , to
$66.7 million for the three months ended June 30, 2020 , primarily due to the
sale of Euroaccident in 2019 ($12.9 million ). The A&H net loss ratio decreased
from 52.0% for the three months ended June 30, 2019 , to 39.5% for the three
months ended June 30, 2020 . The net loss ratio decrease was due to improved
performance in the small group self-funded and individual products and the sale
of Euroaccident in 2019.
Acquisition costs and other underwriting expenses. Acquisition costs and other
underwriting expenses increased by $18.9 million , or 39.4%, from $48.0 million
for the three months ended June 30, 2019 , to $66.9 million for the three months
ended June 30, 2020 , primarily due to the costs of selling policies issued by
third-party insurance companies.
General and administrative expenses. General and administrative expenses
decreased by $3.3 million , or 5.4%, from $61.3 million for the three months
ended June 30, 2019 , to $58.0 million for the three months ended June 30, 2020 ,
primarily due to organic growth completely offset by the sale of Euroaccident in
2019.
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Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net
operating expense decreased by $8.1 million , from $52.4 million for the three
months ended June 30, 2019 , to $44.3 million for the three months ended June 30,
2020 . The A&H net operating expense ratio decreased from 31.6% for the three
months ended June 30, 2019 , to 26.3% for the three months ended June 30, 2020 .
The decreases in net operating expense and net operating ratio were primarily
due to increased net earned premium in 2020 and the sale of Euroaccident in
2019.
Underwriting income; net combined ratio (non-GAAP). Underwriting income
increased by $30.5 million , from $27.3 million for the three months ended June
30, 2019 , to $57.8 million for the three months ended June 30, 2020 . The A&H net
combined ratio decreased from 83.6% for the three months ended June 30, 2019 , to
65.8% for the three months ended June 30, 2020 . The increase in underwriting
income and decrease in the net combined ratio were primarily due to increased
net earned premium and lower loss experience in the small group self-funded and
individual products in 2020, and the sale of Euroaccident in 2019.
A&H Segment Results of Operations for the Six Months Ended
Gross premium written. Gross premium written decreased by
Net premium written. Net premium written decreased by$16.5 million , or 4.7%, from$352.9 million for the six months endedJune 30, 2019 , to$336.4 million for the six months endedJune 30, 2020 , due to the sale of Euroaccident in 2019 ($74.2 million ), offset by an increase in the small group self-funded and individual products ($57.7 million ). Net earned premium. Net earned premium increased by$5.9 million , or 1.8%, from$327.6 million for the six months endedJune 30, 2019 , to$333.5 million for the six months endedJune 30, 2020 , attributable to an increase in the small group self-funded and individual products ($55.4 million ), offset by the sale of Euroaccident in 2019 ($49.6 million ).
Service and fee income. Service and fee income increased by
The components of service and fee income are as follows:
Six Months Ended June 30,
2020 2019 Change % Change
(amounts in thousands)
Group health administrative fees $ 60,511 $ 48,053 $ 12,458 25.9 %
Commission revenue 53,986 40,744 13,242 32.5 %
Finance and processing fees 4,676 2,910 1,766 60.7 %
Other service and fee income 41,419 22,242 19,177 86.2 %
Total $ 160,592 $ 113,949 $ 46,643 40.9 %
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by
$22.8 million , from $171.1 million for the six months ended June 30, 2019 , to
$148.3 million for the six months ended June 30, 2020 , primarily due to the sale
of Euroaccident in 2019 ($30.0 million ). The A&H net loss ratio decreased from
52.2% for the six months ended June 30, 2019 , to 44.5% for the six months ended
June 30, 2020 . The net loss ratio decrease was due to improved performance in
the small group self-funded and individual products and the sale of Euroaccident
in 2019.
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Acquisition costs and other underwriting expenses. Acquisition costs and other
underwriting expenses increased by $29.5 million , or 27.9%, from $105.8 million
for the six months ended June 30, 2019 , to $135.4 million for the six months
ended June 30, 2020 , primarily due to the costs of selling policies issued by
third-party insurance companies.
General and administrative expenses. General and administrative expenses
decreased by $2.2 million , or 1.8%, from $119.9 million for the six months ended
June 30, 2019 , to $117.7 million for the six months ended June 30, 2020 ,
primarily due to organic growth completely offset by the sale of Euroaccident in
2019.
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net
operating expense decreased by $13.8 million , from $105.3 million for the six
months ended June 30, 2019 , to $91.5 million for the six months ended June 30,
2020 . The A&H net operating expense ratio decreased from 32.1% for the six
months ended June 30, 2019 , to 27.4% for the six months ended June 30, 2020 . The
decreases in net operating expense and net operating expense ratio were
primarily due to increased net earned premium in 2020 and the sale of
Euroaccident in 2019.
Underwriting income; net combined ratio (non-GAAP). Underwriting income
increased by $42.5 million , from $51.2 million for the six months ended June 30,
2019 , to $93.8 million for the six months ended June 30, 2020 . The A&H net
combined ratio decreased from 84.3% for the six months ended June 30, 2019 , to
71.9% for the six months ended June 30, 2020 . The increase in underwriting
income and decrease in the net combined ratio were primarily due to increased
net earned premium and lower loss experience in the small group self-funded and
individual products in 2020, and the sale of Euroaccident in 2019.
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