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National General Holdings Corp (NASDAQ:NGHC)
Q1 2019 Earnings Call
May. 7, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the 1Q 2019 Quarterly Earnings Call. At this time, all participants have been placed on listen-only mode and we will open the floor for your questions and comments after the presentation.

It is now my pleasure to turn the floor over to your host, Christine Worley. Ma'am, the floor is yours.

Christine Worley -- Director of Investor Relations

Thank you. Good morning and welcome to the National General Holdings Corp. first quarter 2019 earnings conference call. My name is Christine Worley, and I'm the Director of Investor Relations at National General.

With me this morning are Barry Karfunkel, Chief Executive Officer; and Mike Weiner, Chief Financial Officer.

Before Mr. Karfunkel and Mr. Weiner review our results, please note the following with respect to forward-looking statements. Members of our management team may include statements other than historical facts in their remarks. Such statements may include the plans and objectives of management for future operations, including those relating to future changes in the Company's business activities and earnings results or potential.

These statements are based on current expectations and involve assumptions that are difficult or impossible to predict accurately, many of which are beyond our control. There can be no assurance that actual developments will be consistent with these assumptions. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including the factors set forth in our filings with the Securities and Exchange Commission. The projections and statements in this presentation speak only as of the date of this presentation, as 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.

Our management will refer to financial statements that are not derived from generally accepted accounting principles or GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and related information is provided in the press release for our first quarter 2019 earnings, which is available in the Investor Relations section of our website at www.nationalgeneral.com.

It is now my pleasure to turn the call over to our CEO, Mr. Barry Karfunkel.

Barry Karfunkel -- Chief Executive Officer

Good morning and thank you for joining our first quarter earnings conference call. I'm pleased to report that our Q1 operating results were the strongest quarterly results in our history. I'd like to provide some added color around the performance of our various lines of business. Our property and casualty segment experienced extremely strong operating result with slowing year-over-year growth in our personal auto line of business, primarily due to a softening market, where we remain disciplined and refused to chase top line growth, offset by the continued expansion of our direct-to-consumer business as well as continued state expansion via the nationwide exclusive agent distribution.

Our homeowners' growth rate has slowed down, driven by underwriting actions being taken in California to response to CAT experience over the past two years as well as non-CAT water losses. Outside of California, we've been growing moderately.

Our lender-placed business experienced a 10% year-over-year top line decrease driven by flat cancel of an account that was acquired. That single account aside, the business is growing nicely and we have a solid pipeline. Our Accident and Health segment continues to report robust earnings. Our individual line grew at a slower pace than we anticipated, partially due to lower year-over-year shopping in both ACA and non-ACA health plans.

Our Group stop loss continues to perform well. Due to the uniqueness of this line of business, we foresee this -- this being business that could grow nicely at solid margins for the years to come. We're looking forward to closing on our acquisition of National Farmers Union Insurance and welcoming their employees to the National General family. I believe that there is a strong opportunity to grow the niche small farm owners business into a strong line for National General, which would greatly benefit from our IT and sophisticated product pricing capabilities going forward.

Overall our Q1 result represents a strong start to 2019. We continue to invest in impressive capabilities that we believe will continue to widen the gap between us and our competitors with operational efficiencies, product sophistication and marketing capabilities. We expect these capabilities to drive top and bottom line results in future quarters.

With that, it's my pleasure to turn the call over to Mike Weiner for a more detailed review of our financial results.

Michael Weiner -- Chief Financial Officer

Thank you, Barry. First quarter 2019 net income was $83.9 million compared to net income of $60.3 million in the first quarter of 2018. Operating earnings were $89.7 million versus $67.6 million in last year's quarter, operating diluted EPS was $0.77 compared to $0.62 in the prior year quarter.

Our results this quarter were impacted by $12.1 million of winter weather losses that compares to $14.2 million of losses from events in first quarter of 2018. First quarter 2019 included $16.4 million of favorable reserve development versus $18.6 million of favorable reserve development in first quarter 2018. Our first quarter 2019 P&C result reflect a reduction in our auto quota share session to 7% from 15% and that's as of January 1 of this year. Trailing 12-month operating return on average equity was 14.7% as of March 31, 2019 and our fully diluted book value per share grew at 7.4% sequentially to $16.38 as of quarter end March 31, 2019.

Now I'd like to have some additional details about our two operating segments. First, within our property and casualty segment, gross written premium grew 3.8% to $1.1 billion driven by organic growth in our homeowners product of 7.6% and our auto -- personal auto product of 5.7%, service and fee income grew 8.9% to $119.4 million, driven by underlying premium growth. The property and casualty combined ratio was 90.1% that's versus first quarter of 2018 at 90.9% this excludes amortization of intangible assets. The loss ratio was 69.4% compared to 70.6% in 1Q '18 reflecting lower accident year loss ratio, primarily in our monoline auto book. The P&C loss ratio was also impacted by $5.5 million of favorable development, which compares to $15.2 million of favorable development in 1Q18. The lower favorable development this quarter was driven by lower frequency in our property book as well as slightly favorable development in both 2017 and 2018 CAT events. The expense ratio is 20.7%, which compared to 20.3% in 1Q '18.

Overall, in our auto book, net trend as defined as loss trend divided by premium trend are moderately favorable thereby helping the year-over-year accident year results. We attribute this to continued favorable frequency trends reflecting pricing segmentation and better risk selection from our RAD 5.0 product, which we began to implement roughly two years ago, as well as mix shift. Severity trends are moderately better than industry, which we attribute to a mix shift as well as continued claims initiatives.

Now within our Accident and Health segment. Gross written premium grew 10.6% to $258.5 million, which benefited from strong growth across both our domestic group and individual products. Service and fee income was $61 million versus $45.2 million in first quarter 2018. The growth was driven primarily by third party agency distribution fees as well as group benefit administration. Accident and Health combined ratio was 84.2% versus 90% in 1Q '18, excluding non-cash amortization of intangible assets. The loss ratio was 52.5% versus 59.3% in the prior year quarter. The loss ratio reflects continued improvement in the current accident year loss ratio for both the small groups self funded and individual products. As well as the impact of $10.9 million of favorable development compared to $3.4 million in favorable development in 1Q '18. The expense ratio was 31.7% that's versus 30.7% in the prior year quarter.

I'd like to echo Barry's excitement about our strong quarter, in particular given the similar CAT that happened on year-over-year basis.

I'd now like to turn the call over to the moderator to open the floor for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. (Operator Instructions) And the first question is coming from Matt Carletti. Matt, your line is live. Please announce your affiliation and pose your question.

Matthew Carletti -- JMP Securities -- Analyst

Thanks Matt Carletti with JMP. Good morning. Just a couple of questions, Barry you made a comment in your opening comments about I think short-term medical and some of the NAH products and seeing a little bit less shopping going on than you anticipated, can you expand on that a little bit, kind of what you're seeing and then what you expect going forward?

Barry Karfunkel -- Chief Executive Officer

Yes, So as the government used to market during open enrollment period the various Affordable Care Act plans and that open enrollment was open for business. That's no longer the case. That is definitely driving lower shopping nowadays with most probably the uninsured market growing a bit.

Matthew Carletti -- JMP Securities -- Analyst

Okay.

Barry Karfunkel -- Chief Executive Officer

And as far as how we see that going forward. We've got various marketing efforts as well as marketing assets that we plan on utilizing to drive growth, but that is a macro trend.

Matthew Carletti -- JMP Securities -- Analyst

Okay, great. And then shifting to actually the comments you made on LPI, you mentioned losing a small client and then also a strong pipeline. Can you give a little bit of color there about what happened and what you expect going forward?

Barry Karfunkel -- Chief Executive Officer

Sure. There was a single client that was acquired by another servicer, so that business was canceled at that point in time. And going forward, we've got a nice pipeline, plan on on-boarding a couple of accounts later on this year. As you know the dynamic of floating an account, it takes roughly close to a year for new premium to materialize once a account is on-boarded. So the effect of the P&L impact of loading those clients will be a little further out, but we like the way we're positioned in that business.

Michael Weiner -- Chief Financial Officer

Yes, I would just say that also LPI, the rights kind of tag along with the servicing rights. So in this particular circumstance the servicing company was procured by another company. So those tag along servicing LPI rights went with that.

Matthew Carletti -- JMP Securities -- Analyst

All right, great. And then last one, actually a bigger piece of the business. Just can you just update us on what you're seeing in the non-standard auto market from a competitive standpoint kind of from others in the market and how that's impacting you?

Barry Karfunkel -- Chief Executive Officer

Sure. So there are couple of markets that are extremely soft. For example, Florida has historically been one of the hardest markets and now it's got to be the most probably one of the softest markets in the US. Low year-over-year increases -- rate increases or decreases from carriers, actually I'm stemming shopping activity, which is really felt by the independent agency community. So as year-over-year new business is call it a little more challenging to combine than it's been in years past. That being said, we remain vigilant with our underwriting, with our pricing. The seeds of every hard market ROEs planted in a soft market. So we are not going to -- we are definitely going to hold by our discipline.

Matthew Carletti -- JMP Securities -- Analyst

Great, thank you. Very nice start to the year and best of luck going forward.

Operator

Thank you. And the next question is coming from Randy Binner. Randy your line is live, please announce your affiliation and pose your question,

Randy Binner -- FBR Capital Markets & Co. -- Analyst

Good morning. B Riley is the firm, and so I guess maybe to pickup on a similar line of questioning the, it's the California your -- where would you say you are in the process of trimming exposure and reunderwriting books there. As it relates to natural catastrophes in fire loss, but also I think you mentioned that there were some attritional loss out there, if I heard it right in the call. So can you kind of dimension where that process is because I do like California is a pretty significant marginal kind of driver for top line. So it would be nice to understand the dynamic out there better?

Barry Karfunkel -- Chief Executive Officer

Sure. So we started non-renewing book of business, I believe perhaps in the Q4 beginning of Q1 over there, which should last 12 months from -- from time at which the process has started. And I believe overall California is the first or second largest state for our property business and so yeah, overall it's has impact of keeping our overall growth, much lower than what it's been in the past. California business is growing, but at a moderate level and we are and I guess, that's the way it's playing out in the first quarter.

Michael Weiner -- Chief Financial Officer

Yes. Can I just add two -- two really quick points on that. Point one is that, also in the first quarter, this is not Nat Gen specific, first quarter we had a lot of raining -- rain activity there. They're not really classified as large PCs CATs, it is a very wet first quarter, as they kind of drove up some of the attritional or non-large CAT there. But we've seen -- the actions we've taken, I think we're early on versus a lot of the competitors with regard to the reunderwriting or non-renewable in California and that's in order to benefit for us and we just in (inaudible) tower on very favorable terms on a year-over-year basis and we got a lot of credit for that. So we feel good.

Randy Binner -- FBR Capital Markets & Co. -- Analyst

Yeah I guess the -- thanks for all those comments. I guess I'm -- just trying to level set where we wish is this the right level of production in California we saw in the first quarter or would it keep kind of going down in the second quarter? I'm just trying to get a sense of kind of how to think about the timing.

Barry Karfunkel -- Chief Executive Officer

Sure. So our -- most probably our new business production is going to most probably stay flat for the rest of the year. As it has in Q1, our renewal block will definitely be impacted by our non-renewal actions that we're taken for the year and we're going to focus on allocating our capital to areas that we believe we could get attractive returns on.

Randy Binner -- FBR Capital Markets & Co. -- Analyst

Okay. And that would be non-California. So there's pocket in other parts of the country where homeowners are still attractive on price and competition?

Barry Karfunkel -- Chief Executive Officer

Yes, definitely.

Randy Binner -- FBR Capital Markets & Co. -- Analyst

Hey, let me thank you for that. Then on A&H, what's the -- what is the nature of the marketing that you're going to do to drive growth there? And could you -- is your platform have the ability to maybe toggle to other supplemental products that might be more in demand or easier to sell, given kind of lower foot traffic around these government exchanges?

Barry Karfunkel -- Chief Executive Officer

Sure. So we obviously on-boarded a significant direct-to-consumer marketing capability when we acquired Direct General, which is going to be a significant which is -- which we plan on leveraging to drive future growth. We've acquired -- for example a lead generation company that has a couple of lead generation assets that we've integrated thus far into our marketing efforts. We do have a very significant we are most probably one of the Top 3 insurance -- individual health insurance agencies in the country with by owning our Velapoint Health Solutions team and other brokerage assets that we've got that market our individual products. As far as the actual product goes and what we could sell our core products in the individual health insurance space is going -- is our short-term medical to a lesser extent, there is a little bit of fixed Indemnity limited medical plans in the other supplemental -- in the other supplemental products that help bridge the gap. As far as those deductibles in the event of accidents critical illnesses et cetera. We've been spending time upgrading the sophistication of our products and introducing new benefits to our core major medical products, but that's what we're going to battle with.

Randy Binner -- FBR Capital Markets & Co. -- Analyst

Very good. Thank you.

Operator

Thank you. And the next question is coming from Yaron Kinar. Yaron, your line is live, please announce your affiliation and pose your question.

Yaron Kinar -- Goldman Sachs & Co. -- Analyst

Thank you very much. Yaron Kinar with Goldman Sachs. Mike, I just want make sure I understood a comment you made earlier correctly, did you say that you're in relatively early stages of reunderwriting or trimming your California homeowners business relative to your peers?

Michael Weiner -- Chief Financial Officer

It started toward the end -- the non-renewal activity started at the end of Q4 or beginning of Q1. So I guess, being that those actions take 12 months to non-renewal block of business we are in beginning of that, yeah.

Yaron Kinar -- Goldman Sachs & Co. -- Analyst

I guess my question was specifically on where you are relative to peers, not so much on where you are relative to your kind of process?

Michael Weiner -- Chief Financial Officer

From our from our indications out there and talking to some of our sales folks. We communicated I think relatively early on with our agents -- our agent task force out there and I think we're one of the earlier leaders in doing such starting that in the fourth quarter.

Yaron Kinar -- Goldman Sachs & Co. -- Analyst

Got it. So actually, you're ahead of peers.

Michael Weiner -- Chief Financial Officer

Again no great metric for, but we just go out, we talk to our agents and we did a large communication and plan with them in explaining what they are doing and they were very, very pleased with how we communicated it.

Yaron Kinar -- Goldman Sachs & Co. -- Analyst

Got it. Then my next question is on, we heard a lot of or we have seen a lot of headlines around Universal Medicare, Universal Healthcare, can you maybe talk about how you're seeing that and what impact they would have on your business, should it actually go through?

Barry Karfunkel -- Chief Executive Officer

Obviously, it would have a impact on our core major -- on our core medical products, I believe that supplemental lines of business, obviously assuming that we go full Universal Medicare, no deductibles and the government starts eating the expenses from $1, I don't foresee that happening but you never know. So there is always going to be products, I believe to pivot to and being that we own such a significant insurance agency. We have the added benefit of really hearing directly from the consumers, what they need, what they want and crafting our products appropriately.

Michael Weiner -- Chief Financial Officer

We also own a small business in Sweden that provides many of these type of products to a more nationalized system. We think we can lean on their experiences as well as if we needed to pivot into other products there. So I think if one thing we've shown over the last couple of years in this space as the healthcare space continues to change, Nat Gen is able to change very quickly in their products and services out there to meet the consumer needs within the regulatory framework.

Yaron Kinar -- Goldman Sachs & Co. -- Analyst

Got it. And maybe one final one before I requeue. Can you talk about the rationale for adding the quota share agreement and this, I'm assuming it's a Swedish operations?

Michael Weiner -- Chief Financial Officer

Sure. Really for volatility protection in capital and some capital relief, the business has grown nicely over there. So with some of the Solvency II metrics out there just a more effective way to reduce volatility and capitalize that business in Sweden.

Yaron Kinar -- Goldman Sachs & Co. -- Analyst

Got it. Thank you very much.

Operator

Thank you. And the next question is coming from Bijan Moazami. Bijan, your line is live. Please announce your affiliation and pose your question.

Bijan Moazami -- Compass Point -- Analyst

Good morning, it is Bijan Moazami, Compass Point Research. Couple of questions, first, if you guys can comment about your acquisition pipelines, in particular what kind of opportunities you see, your sister company after sold a number of entities, including their crop business, was there anything there that was of interest to you?

Barry Karfunkel -- Chief Executive Officer

No. There is nothing of interest. Just as reminder, we're a independent publicly traded company and we are -- the overall M&A activity is quieter now than it's usually been. We maintain dialog with individuals in the marketplace, but things are quite generally and any acquisition activities are really focused on enhancing the current lines of business as opposed to really seeking new entry points to other lines of business.

Michael Weiner -- Chief Financial Officer

A nice example of that was what we're doing with National Farmers Union, which we hope to close relatively shortly, really deepening our penetration in the property and the package space.

Bijan Moazami -- Compass Point -- Analyst

Are you guys still looking to be buying agencies and distribution for A&H?

Barry Karfunkel -- Chief Executive Officer

Yes. Those agencies are a little bolt-on acquisitions that we will make all the time and aren't even worthy of communication, Direct General acquirers agencies, all the time. We've acquired marketing assets from A&H. Those are just a little tuck-in acquisitions that are normal course of business for us.

Michael Weiner -- Chief Financial Officer

Also you might -- you might also notice Bijan in our disclosure this quarter, in our press release, we breakout our fee-based income where some of those revenues associated with that comes you will see a third-party fee component of that really bifurcated out of service and fee income in our A&H business and you kind of see where that all flows through.

Bijan Moazami -- Compass Point -- Analyst

Thank you. Also on the auto line, could you comment a little bit about the kind of frequency and severity trends that you're seeing in the marketplace? And also if you could talk a little bit about the exclusive agency distribution that you're using, how many of those you have and what we should be expecting?

Michael Weiner -- Chief Financial Officer

I'll do the -- I'll talk about frequency and severity and you can talk about the distribution, Barry. So yes, we are continuing to see favorable frequency trends us -- even better than looking at industry fast track data. Again, it really relates to just better risk selection of our new products that we've rolled out about two years ago and quarter-after-quarter, we are getting better risk selection in terms of what we're mix, what we're doing.

Severity, continue to be -- moderately better than industry trends. Again, we look at either on a sequential trailing 12-months, rolling multiple year basis and on the severity stuff that we're seeing, some of it is the mix shift in the businesses that we've written, but some of it is also some of the early claim settlement practices we've continued to implement over the last couple of quarters and that's really helped us, really create a strong accident year results.

Barry Karfunkel -- Chief Executive Officer

What was the question, can you please repeat question regarding the...

Bijan Moazami -- Compass Point -- Analyst

Yes, you mentioned a little bit about exclusive agents, that are selling products for you, if you could just comment a little bit there. I don't know much about that particular distribution channel in particular, how many of those agencies you might have?

Barry Karfunkel -- Chief Executive Officer

Okay. Sure. So we've what I talked about with respect to exclusive agents is toward into December of 2016 we acquired renewal rates to our nationwide's non-standard book of business, as result of that we are the primary non-standard option many nationwide exclusive agencies. So we've been expanding our state footprint within AE, call it relatively a sheltered distribution point for us as well as leveraging our own direct-to-consumer capabilities via Direct General.

Bijan Moazami -- Compass Point -- Analyst

Thank you.

Operator

Thank you. And the next question is coming from Sean Reitenbach. Sean, your line is live. Please announce your affiliation and pose your question.

Sean Reitenbach -- KBW -- Analyst

Sean Reitenbach, KBW. Looking at the segment expense ratios, it looks like the acquisition cost ratios increased year-over-year in both P&C and more significantly in A&H, what drove the year-over-year higher acquisition costs ratios and where do you see them going forward?

Michael Weiner -- Chief Financial Officer

Yeah. Both of those -- a few things going on there. Both those acquisition expense ratio is really driven by mix. So you'll notice in the P&C, we've had a higher disproportionate amount of growth and our higher commission businesses, that was certainly the property businesses as well as the continued mix shift in the A&H side. So you will see where that -- there'll be a slight percentage increase on a year-over-year basis on that.

Sean Reitenbach -- KBW -- Analyst

Okay, great. Thank you. And then in A&H, growth slowed a little bit in 1Q19, is that mostly related to the individual line growth or is there some other headwinds in other parts of the, the book that you weren't expecting and also what does the A&H pricing environment look like for NGHC's lines of businesses?

Barry Karfunkel -- Chief Executive Officer

Sure. As I mentioned in my prepared remarks the overall shopping for individual product has slowed this open enrollment due to what we attribute to lack of marketing by the federal government for open enrollment period. As far as pricing abilities remains robust, we feel confident with our -- with our products with the way they are priced and feel good about the continued margins from our accident and health segment.

Michael Weiner -- Chief Financial Officer

Yeah. And if you actually look we're actually now giving you a little bit more detail in terms of the bifurcated premium. So if you look at Page 11 of our press release, we have it out there as well for historical periods, you can look at the growth in premium. So our Group business grew about approximately 16%, our individual products grew at 12% and our international business grew about 6%. So pretty good growth rates just not what they were historically been very strong.

Sean Reitenbach -- KBW -- Analyst

Thank you very much. That's all.

Operator

Thank you. And the next question is coming from Adam Klauber. Adam, your line is live. Please answer your situation and pose your question.

Adam Klauber -- William Blair & Company, LLC -- Analyst

Thanks. Follow-up on the non-standard, you mentioned that Ford has gotten more competitive, is the competition coming from more non-standard dedicated companies, MGAs or standard carriers and then are other states getting more competitive also non-standard?

Barry Karfunkel -- Chief Executive Officer

Sure. The competition is really coming from across the board and specifically from an focused distribution that we see and Florida was just an example. There are many state that are seeing a lot of market softness as well.

Adam Klauber -- William Blair & Company, LLC -- Analyst

Okay. And then on the A&H business is the combined ratio on 85, is that a pretty -- within a range, is that a pretty good combined ratio should expect for this business?

Michael Weiner -- Chief Financial Officer

No, I think it's probably on the low side. So the way I kind of think about if you subtract the PPD, that we had in this current quarter and you kind of spread it out throughout the year a little, so it's hard to predict those kind of things, you get to about a 90. So that gets us back to really more of what we're targeting for that business. We've had some continued favorable results in that business, but in terms of our pricing and going forward, we think the business should be running at about 5 points higher than it is now.

Adam Klauber -- William Blair & Company, LLC -- Analyst

Okay. Thank you very much.

Operator

Thank you. And there were no further questions from the queue.

Christine Worley -- Director of Investor Relations

Thank you very much for joining us on this earnings call. We look forward to speaking with you next quarter.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Duration: 34 minutes

Call participants:

Christine Worley -- Director of Investor Relations

Barry Karfunkel -- Chief Executive Officer

Michael Weiner -- Chief Financial Officer

Matthew Carletti -- JMP Securities -- Analyst

Randy Binner -- FBR Capital Markets & Co. -- Analyst

Yaron Kinar -- Goldman Sachs & Co. -- Analyst

Bijan Moazami -- Compass Point -- Analyst

Sean Reitenbach -- KBW -- Analyst

Adam Klauber -- William Blair & Company, LLC -- Analyst

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