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State National Companies Reports Third Quarter 2017 Results

BEDFORD, Texas, Oct. 23, 2017 /PRNewswire/ -- State National Companies, Inc. (NASDAQ: SNC), a leading specialty provider of property and casualty insurance services, today reported its financial results for the third quarter ended September 30, 2017.

Commenting on the results, State National's Chairman and Chief Executive Officer, Terry Ledbetter, said, "Our third quarter revenue increase was driven by continued growth in Lender and Program Services with premiums earned and ceding fees both up sequentially and year over year. We believe that the favorable industry trends in both business segments position the company well for future growth and profitability.

As we have previously announced, the definitive agreement under which Markel will acquire all of the outstanding shares of State National remains on track to close in the fourth quarter of 2017."

Total revenues in the third quarter of 2017 were $61.4 million, up 6% from $57.9 million in the third quarter of 2016.  Net income was $14.7 million, or $0.34 per diluted share, in the third quarter of 2017, compared to net income of $15.3 million, or $0.37 per diluted share, for the same period in 2016. Realized investment gains were $1.0 million in the third quarter of 2017, down from $2.0 million in the third quarter of 2016. The impact of the decrease in realized net investment gains and losses (net of tax) for the third quarter of 2017 was $0.02 per diluted share.  The impact of the additional weighted-average shares outstanding for the current quarter accounts for the additional $0.01 of decrease in the earnings per share compared to the same period last year.

Program Services Segment

The Program Services segment provides fronting to general agents and insurance carriers to leverage State National's "A" (Excellent) A.M. Best rating, expansive licenses and trusted reputation to provide access to the U.S. property and casualty insurance market in exchange for ceding fees.  State National issues the policy, and the reinsurer assumes the risk.

In the third quarter of 2017, total revenues from the Program Services segment were $21.7 million, an increase of $2.4 million, or 13%, from the third quarter of 2016.  The growth in revenues was driven by increased ceding fees from both new and existing client programs.

Lender Services Segment

In Lender Services, the collateral protection business is fully vertically integrated as State National manages all aspects of these product offerings for its clients, including policy issuance and administration, underwriting and claims, which we believe is a competitive advantage in the marketplace. Additionally, the Company differentiates itself from competitors by establishing long-term relationships with clients and providing high-quality service and advanced technology. 

In the third quarter of 2017, net premiums written from the Lender Services segment were $42.5 million, an increase of $5.0 million, or 13%, from the third quarter of 2016. Net premiums earned were $35.5 million in the third quarter of 2017, an increase of $1.8 million, or 5%, from the third quarter of 2016. Contributing to this increase in Lender Services premiums are sales of new accounts and loan portfolio growth from existing accounts driven by continued high levels of automobile sales and rising average automobile loan sizes.

Losses and loss adjustment expenses were $15.7 million in the third quarter of 2017, compared to $13.7 million in the same period last year.  The loss ratio increased to 44% in the third quarter from 40% in the third quarter last year, primarily due to increased claim severity. The net expense ratio decreased to approximately 37% in the third quarter 2017 from 38% in the third quarter 2016 due to our ability to effectively leverage fixed costs. The overall result was a net combined ratio for the quarter of 81% compared to 78% in the same period of 2016.

General and Administrative Expenses

General and administrative expenses in the third quarter of 2017 increased to $19.7 million from $17.2 million in the third quarter of 2016, reflecting investment in strategic growth and increased professional fees primarily related to the transaction with Markel.

Balance Sheet

State National's balance sheet reflects low financial leverage with only $43.8 million of debt.  This debt has limited covenant requirements and is interest-only until the early to mid-2030s.

State National's investment portfolio has a short duration and consists primarily of fixed income securities, the majority of which have investment grade ratings. The portfolio is laddered to allow for reinvestment of funds as rates change. 

Approximately $2.9 billion of State National's assets are comprised of reinsurance recoverables that are primarily related to the Program Services segment.  Offsetting these recoverables are unpaid losses, loss adjustment expenses and unearned premium liabilities for the same segment. Recoverables of approximately $1.8 billion are secured by collateral held in trust funds for our benefit or letters of credit.  The remainder is ceded to highly rated, well capitalized reinsurers.

Recent Developments

On July 26, 2017, State National and Markel Corporation entered into a definitive agreement under which Markel Corporation will acquire State National. The transaction, which is subject to the approval of a majority of State National shareholders, approvals by relevant state insurance regulators and other customary closing conditions, is expected to close in the fourth quarter of 2017. State National will not be updating its outlook for fiscal 2017 and will not be holding a conference call to discuss its third quarter 2017 results.

About State National Companies, Inc.

State National Companies, Inc. (NASDAQ: SNC) is a leading specialty provider of property and casualty insurance services operating in two niche markets across the United States.  In its Lender Services segment, the Company specializes in providing portfolio protection solutions which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.  In its Program Services segment, the Company leverages its "A" (Excellent) A.M. Best rating, expansive licenses and trusted reputation to provide access to the U.S. property and casualty insurance market in exchange for ceding fees.  To learn more, please visit www.statenational.com.  State National routinely posts important Company information on its website.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS ‎
Various statements contained in this press release are forward-looking statements made pursuant to the ‎Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements ‎may include projections and estimates concerning the timing and success of specific projects and our future ‎production, revenues, income and capital spending. Our forward-looking statements are generally, but not always, ‎accompanied by words such as "estimate," "believe," "expect," "will," "plan," "target," "could" or other words that convey the uncertainty of future events or ‎outcomes.‎

‎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, our ability to recover from our capacity providers, the cost and availability of ‎reinsurance coverage, challenges to our use of issuing carrier or fronting arrangements by regulators or changes ‎in state or federal insurance or other statutes or regulations, our dependence on a limited number of business ‎partners, potential regulatory scrutiny of collateral protection insurance, level of new car sales, availability ‎of credit for vehicle purchases and other factors affecting automobile financing, our ability to compete effectively, ‎a downgrade in the financial strength ratings of our insurance subsidiaries, our ability to accurately underwrite ‎and price our products and to maintain and establish accurate loss reserves, changes in interest rates or other ‎changes in the financial markets, the effects of emerging claim and coverage issues, changes in the demand for our ‎products, the effect of general economic conditions, breaches in data security or other disruptions with our ‎technology, and changes in pricing  or other competitive environments. ‎

Forward-looking statements involve inherent risks and uncertainties that are difficult to predict, many of which are beyond our control. Additional information about these risks and uncertainties is contained in our filings with the ‎Securities and Exchange Commission. The forward-looking statements in this press release speak only as of the ‎date of this release, and we undertake no obligation to publicly 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.

STATE NATIONAL COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

 ($ in thousands, except for share and per share information)











September 30,


December 31,




2017


2016




(Unaudited)





Assets:








Investments:








Fixed-maturity securities – available-for-sale, at fair value (amortized cost – $400,885, $329,994, respectively)


$

406,677


$

332,107


Equity securities – available-for-sale, at fair value (cost – $2,039, $3,271, respectively)



2,116



3,224


Total investments



408,793



335,331










Cash and cash equivalents



64,003



91,698


Restricted cash and investments



25,192



2,958


Accounts receivable from agents, net



145,867



35,964


Reinsurance recoverable on paid losses



1,740



1,430


Deferred acquisition costs



1,348



1,194


Reinsurance recoverables



2,871,500



2,342,864


Property and equipment, net (includes land held for sale – $1,034, $1,034, respectively)



16,999



16,163


Interest receivable



2,319



2,112


Income taxes receivable





329


Deferred income taxes, net



30,900



28,858


Goodwill and intangible assets, net



14,364



12,588


Other assets



7,680



5,248


Total assets


$

3,590,705


$

2,876,737










Liabilities:








Unpaid losses and loss adjustment expenses


$

2,087,941


$

1,703,706


Unearned premiums



828,583



680,691


Allowance for policy cancellations



68,568



66,418


Deferred ceding fees



39,639



32,226


Accounts payable to agents



2,467



2,639


Accounts payable to insurance companies



118,791



14,871


Debt, net



43,815



43,783


Income taxes payable



3,649




Other liabilities



63,454



36,023


Total liabilities



3,256,907



2,580,357










Shareholders' equity:








Common stock, $.001 par value (150,000,000 shares authorized; 42,173,561 and 41,924,440 shares issued at September 30, 2017 and December 31, 2016, respectively)



42



42


Preferred stock, $.001 par value (10,000,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016)






Additional paid-in capital



232,710



229,297


Retained earnings



98,073



66,230


Accumulated other comprehensive income



2,973



811


Total shareholders' equity



333,798



296,380


Total liabilities and shareholders' equity


$

3,590,705


$

2,876,737


 

 

STATE NATIONAL COMPANIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

($ in thousands, except for per share information)















Three Months Ended


Nine Months Ended



September 30,


September 30,


September 30,


September 30,



2017


2016


2017


2016















Revenues:













Premiums earned

$

35,499


$

33,700


$

105,941


$

94,293


Commission income


328



389



926



1,015


Ceding fees


21,697



19,263



60,340



52,424


Net investment income


2,314



2,001



6,753



6,141


Realized net investment gains (losses)


1,010



2,063



3,409



1,707


Other income


597



501



1,658



1,416


Total revenues


61,445



57,917



179,027



156,996















Expenses:













Losses and loss adjustment expenses


15,883



13,755



50,849



42,587


Commissions


1,064



1,408



4,341



4,235


Taxes, licenses, and fees


1,096



960



2,962



2,466


General and administrative


19,666



17,235



57,412



51,377


Interest expense


631



565



1,831



1,655


Total expenses


38,340



33,923



117,395



102,320















Income (loss) before income taxes


23,105



23,994



61,632



54,676















Income taxes:













Current tax expense (benefit)


11,160



10,801



25,420



21,292


Deferred tax expense (benefit)


(2,749)



(2,130)



(3,207)



(1,597)




8,411



8,671



22,213



19,695


Net income (loss)

$

14,694


$

15,323


$

39,419


$

34,981















Net income (loss) per share attributable to common shareholders:













Basic earnings per share

$

0.35


$

0.37


$

0.95


$

0.83


Diluted earnings per share


0.34



0.37



0.92



0.83















Dividends, per share

$

0.06


$

0.06


$

0.18


$

0.18















Weighted-average common shares outstanding – basic


41,683,695



41,937,467



41,655,636



42,196,075


Weighted-average common shares outstanding – diluted


43,412,902



41,940,918



42,967,302



42,215,846


 

Program Services Segment — Results of Operations

Unaudited
















Three Months Ended


Nine Months Ended



September 30,


September 30,

($ in thousands)


2017


2016


2017


2016














Revenues:













Premiums earned


$


$

3


$


$

3

Ceding fees



21,697



19,263



60,340



52,424

Total revenues



21,697



19,266



60,340



52,427














Expenses:













Losses and loss adjustment expenses



187



96



17



1,001

Commissions



4



2



8



5

Taxes, licenses, and fees



17



2



62



13

General and administrative



3,794



3,681



12,290



10,800

Total expenses



4,002



3,781



12,377



11,819














Income (loss) before income taxes


$

17,695


$

15,485


$

47,963


$

40,608














Gross premiums written


$

426,098


$

350,541


$

1,253,939


$

957,962

Gross premiums earned


$

393,303


$

311,463


$

1,110,189


$

872,090

 

Lender Services Segment — Results of Operations

Unaudited

















Three Months Ended


Nine Months Ended




September 30,


September 30,


($ in thousands)


2017


2016


2017


2016
















Revenues:














Premiums earned


$

35,499


$

33,697


$

105,941


$

94,290


Commission income



328



389



926



1,015


Other income



554



491



1,627



1,410


Total revenues



36,381



34,577



108,494



96,715
















Expenses:














Losses and loss adjustment expenses



15,696



13,659



50,832



41,586


Commissions



1,060



1,406



4,333



4,230


Taxes, licenses, and fees



1,079



958



2,900



2,453


General and administrative



10,878



10,262



33,577



31,397


Total expenses



28,713



26,285



91,642



79,666
















Income (loss) before income taxes


$

7,668


$

8,292


$

16,852


$

17,049
















Net loss ratio



44.2

%


40.5

%


48.0

%


44.1

%

Net expense ratio



36.7

%


37.5

%


38.5

%


40.4

%

Net combined ratio



80.9

%


78.0

%


86.5

%


84.5

%















Gross premiums written


$

52,947


$

45,746


$

134,766


$

114,688


Net premiums written


$

42,469


$

37,517


$

109,093


$

94,433





Corporate Segment — Results of Operations

Unaudited

















Three Months Ended


Nine Months Ended



September 30,


September 30,


($ in thousands)


2017


2016


2017


2016
















Revenues:














Net investment income


$

2,314


$

2,001


$

6,753


$

6,141


Realized net investment gains (losses)



1,010



2,063



3,409



1,707


Other income



43



10



31



6


Total revenues



3,367



4,074



10,193



7,854
















Expenses:














General and administrative



4,994



3,292



11,545



9,180


Interest expense



631



565



1,831



1,655


Total expenses



5,625



3,857



13,376



10,835
















Income (loss) before income taxes



(2,258)



217



(3,183)



(2,981)
















Income tax expense (benefit)



8,411



8,671



22,213



19,695
















Net income (loss)


$

(10,669)


$

(8,454)


$

(25,396)


$

(22,676)


Non-GAAP Reconciliation
The accompanying information provides a reconciliation of this non-GAAP financial measure to its most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP").  This non-GAAP financial measure should not be considered as an alternative to GAAP measures such as net income, earnings per share, return on equity or any other GAAP measure of liquidity or financial performance.

Earnings before interest, taxes, depreciation and amortization or EBITDA, is considered a non-GAAP financial measure because it reflects adjustments to net income for interest expense, income tax expense, and depreciation and amortization.  Management believes this measure is helpful to investors because it provides a supplemental measure of evaluating core financial performance between periods. 

State National Companies, Inc.

Reconciliation of Non-GAAP Financial Measures

(unaudited)

($ in thousands)

















Three Months Ended


Nine Months Ended



September 30,


September 30,




2017


2016


2017


2016
















EBITDA


$

24,727


$

25,633


$

66,285


$

59,430


Reconciliation of EBITDA:














Net income


$

14,694


$

15,323


$

39,419


$

34,981


Plus: Interest expense



631



565



1,831



1,655


Plus: Income tax expense



8,411



8,671



22,213



19,695


Plus: Depreciation and amortization



991



1,074



2,822



3,099


EBITDA


$

24,727


$

25,633


$

66,285


$

59,430


 

CONTACTS:

State National Companies, Inc.


David Hale, COO & CFO


817-265-2000




Dennard ▪ Lascar Associates


Rick Black


713-529-6600

 

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SOURCE State National Companies, Inc.