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State National Companies Reports Third Quarter 2017 Results

October 23, 2017 4:15 PM EDT

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 ReconciliationThe 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.



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