NI Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results include Direct Auto, acquired August 31, 2018; year-over-year comparisons therefore are not fully like-for-like. Dollar amounts below are in thousands unless stated otherwise.
Business context
NI Holdings is a property and casualty insurer focused on private passenger auto, non-standard auto, home and farm, crop, and other coverages. Its businesses operate principally in the Midwest, with Direct Auto specializing in non-standard auto in Illinois. Crop premiums and losses are seasonal, and the company says crop premium levels are influenced by commodity prices.
Financial performance
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Net premiums earned | $65,114 | $50,677 | $115,620 | $86,789 |
| Total revenue | $68,648 | $52,920 | $129,220 | $91,247 |
| Underwriting gain (loss) | $(19) | $(1,846) | $7,559 | $3,540 |
| Net income attributable to NI Holdings | $2,478 | $226 | $16,251 | $6,348 |
| Basic and diluted EPS | $0.11 | $0.01 | $0.73 | $0.28 |
| Combined ratio | 100.0% | 103.6% | 93.5% | 95.9% |
Q2 loss and LAE was $48,193 and the combined ratio improved to 100.0%, but underwriting remained slightly unprofitable. For the first half, the 93.5% combined ratio indicates underwriting profit. Net investment income was $1,778 in Q2 and $3,521 for six months. Net capital gains on investments were $1,110 and $8,969, respectively.
Cash from operations was $11,039 for the first half, versus $14,699 a year earlier. Investing activities used $17,390; financing activities used $2,025, primarily for share repurchases. Cash and cash equivalents declined $8,376 to $60,574.
Financial position and liquidity
At June 30, 2019, total assets were $538,155, liabilities $240,841, and equity $297,314. Cash and investments totaled $399,081, including $276,987 of fixed-income securities and $59,606 of equity securities. Unpaid losses and LAE were $98,809; unearned premiums were $121,944. Assets increased 17.4% and liabilities 31.8% from December 31, 2018, reflecting, among other things, seasonal crop business and premium growth.
The company reported no outstanding borrowings on Nodak Insurance’s $5,000 line of credit, which was scheduled to expire December 31, 2019. Battle Creek had a $3,000 surplus note, eliminated in consolidation. Insurance-subsidiary dividends are subject to regulatory restrictions; stated 2019 ordinary dividend capacity without prior approval was approximately $17,588 for Nodak Insurance and $6,653 for Direct Auto. No dividends were declared or paid by either during the first half.
Material changes and management commentary
- Net premiums earned rose 28.5% in Q2 and 33.2% in the first half. Direct Auto contributed $12,269 of Q2 revenue and $24,842 for the first half; its first-half direct earned premiums were $21,991.
- Management attributed growth to Direct Auto, Primero non-standard auto growth and rate increases, and expansion in personal lines. It forecast lower 2019 crop premium than 2018, partly due to lower commodity prices.
- Prior-year reserves developed favorably by $2,701 in Q2 and $7,670 for the first half, primarily reflecting favorable development in Direct Auto. The prior-year reserve adjustment helped reported loss results.
- Equity-security unrealized gains began flowing through earnings on January 1, 2019 under a new accounting requirement. The first-half $8,637 gain from changes in unrealized equity values materially boosted reported net income; management cautioned that the treatment adds short-term earnings volatility. Fixed-income unrealized gains remain in other comprehensive income.
- Management said Nevada’s higher minimum auto liability limits increased Primero’s average claim costs. Rate increases were approved, but could slow or reduce policy growth; the company plans to monitor results.
- Investment income rose with the larger asset base, partly reflecting Direct Auto. Management said cash acquired with Direct Auto was still being invested and expected book yield and duration to increase as investment proceeds.
Outlook, risks, and unusual items
The filing provides no formal earnings or revenue guidance. Management described insurance markets as generally stable and noted that weather frequency and severity, competition, rates, crop conditions and commodity prices affect results. Catastrophe reinsurance covered up to $78,600 above the group’s $10,000 retained risk for 2019; reinsurance does not remove the company’s obligation to policyholders, and reinsurer collectability and availability remain risks.
Key uncertainties include reserve estimation and claims inflation, adverse weather, regulatory or legal changes, ability to obtain approved rate increases and reinsurance on acceptable terms, investment-market and interest-rate movements, and integration and performance of Direct Auto. The filing reports ordinary-course litigation but no litigation considered material, and no material off-balance-sheet arrangements. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of the earnings increase is sustainable underwriting and investment income versus equity-market unrealized gains and favorable prior-year reserve development.
- Whether Nevada rate increases offset higher non-standard auto claim severity without materially impairing policy growth.
- Subsequent loss-reserve development, particularly in non-standard auto and crop, and the adequacy of the $98,809 gross unpaid-loss liability.
- Crop premium and loss outcomes, including collection timing and exposure associated with the $29,668 receivable from the Federal Crop Insurance Corporation.
- Direct Auto’s ongoing underwriting profitability, acquisition integration, and remaining intangible-asset amortization.
- Liquidity available at the holding company after regulatory dividend limits, and the status of the credit line scheduled to expire at year-end 2019.