NI Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results include Westminster American Insurance Company from its January 1, 2020 acquisition. Unless stated otherwise, dollar amounts below are in millions.
Business context and financial results
NI Holdings is a U.S. property and casualty insurer, with personal auto, home and farm, crop, and commercial insurance operations. It acquired Westminster, a Mid-Atlantic commercial insurer, for stated consideration of $40.0 million, subject to adjustments; Westminster contributed $6.3 million of revenue and a $0.2 million net loss in the quarter.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net premiums earned | $58.8 | $50.5 | Up 16.4% |
| Total revenues | $46.2 | $60.6 | Down 23.8% |
| Underwriting gain | $8.2 | $7.6 | Up 8.1% |
| Net investment income | $2.0 | $1.7 | Up |
| Net capital gain (loss) on investments | ($14.9) | $7.9 | Declined $22.8 |
| Net income (loss) attributable to NI Holdings | ($3.6) | $13.8 | Turned to loss |
| Diluted earnings (loss) per share | ($0.16) | $0.62 | Turned to loss |
| Operating cash flow | $3.6 | $4.2 | Down |
Net premiums earned grew largely with the addition of Westminster; direct premiums earned from that business were $8.3 million. Commercial premiums also increased with the acquisition. Non-standard auto premiums declined as COVID-19 affected policy counts. Underwriting remained profitable: the combined ratio was 86.1%, compared with 85.0% a year earlier. The overall loss and LAE ratio was 51.8%, versus 51.9%; the expense ratio increased to 34.3% from 33.1%.
Financial position, liquidity and debt
- At March 31, total assets were $536.4 million, total liabilities $234.6 million, and shareholders’ equity $301.8 million. Equity was down $8.0 million from year-end 2019.
- Cash and cash equivalents were $56.6 million; total cash and investments were $417.0 million, compared with $419.9 million at December 31, 2019. The investment portfolio recorded a $20.5 million decrease in net unrealized gains during the quarter.
- Cash decreased $5.5 million to $56.6 million. Operating cash flow was $3.6 million; investing cash outflow was $7.6 million, including $0.7 million paid net of cash acquired for Westminster; financing cash outflow was $1.5 million, primarily share repurchases.
- The filing reports no outstanding balance on Nodak Insurance’s $5.0 million line of credit. It also records $18.8 million as the present value of Westminster’s future installment consideration. Battle Creek had a $3.0 million surplus note, eliminated in consolidation. Insurance-subsidiary dividends are subject to regulatory restrictions.
- Management said operating cash and the investment portfolio were expected to be sufficient for operations, while noting pandemic-related uncertainty. The filing does not provide a formal earnings or revenue forecast.
Material changes, outlook and risks
- The principal reason for the swing to a quarterly loss was a $15.9 million unrealized loss on equity securities, compared with a $7.3 million unrealized gain in Q1 2019. Since 2019, equity-security fair-value changes are recorded in earnings. Fixed-income unrealized losses also increased; the filing reported no other-than-temporary impairments.
- Management attributed market losses to COVID-19 disruption and falling oil prices, including wider credit spreads and price declines in corporate and municipal bonds. It expected further investment volatility.
- Management expected economic contraction to pressure premium growth and investment results, with a potentially larger year-over-year decline in non-standard auto premiums in Q2. Reduced driving could lower auto claim frequency, but the overall pandemic impact remained uncertain. The company also warned that lower premiums could raise its underwriting expense ratio.
- Commercial results included Westminster and elevated acquisition-related expenses. Management noted that state actions could require fee waivers, policy renewals, or delayed premium collection, potentially increasing combined ratios and collection risk.
- Prior-year loss development was $0.5 million unfavorable, versus $5.0 million favorable in Q1 2019. The 2020 unfavorable development was attributed primarily to 2019 multi-peril crop claims. Reserve estimates remain sensitive to claims severity, inflation, legal trends, and reinsurance collectability.
- COVID-19 risks identified include premium declines, possible retroactive insurance-coverage mandates or premium refunds, investment-market losses, credit downgrades and defaults, municipal and mortgage-backed security risks, and inflation-driven claims costs. The company stated that the pandemic’s duration and ultimate effect were unknown.
- Other reported matters: litigation in the ordinary course was not considered material; management reported effective disclosure controls. On May 4, 2020, the board authorized an additional share-repurchase program of up to approximately $10 million.
Important facts for investors to verify
- Whether pandemic-related premium declines, especially in non-standard auto, persist or worsen, and how they affect underwriting expense and combined ratios.
- Subsequent changes in investment fair values, credit quality, and realized or unrealized losses; Q1 equity-market losses were a major driver of the net loss.
- Development of crop and other loss reserves, including the $0.5 million unfavorable prior-year development and sensitivity to inflation and claims severity.
- Westminster integration, commercial underwriting profitability, acquisition-related costs, and the timing and funding of its remaining installment payments.
- Liquidity available at the holding-company level after regulatory dividend limits, share repurchases, and acquisition payments.