NI Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; amounts are in $thousands unless otherwise noted. The company writes property and casualty, crop, and non-standard auto insurance. Direct Auto, an Illinois non-standard auto insurer, was acquired on August 31, 2018, so its operating results are included only from that date.
Financial performance and position
- Third quarter: Net premiums earned were $54,136, up 3.1% year over year; total revenue was $64,100, up 13.3%. Net income attributable to NI Holdings was $9,844, versus a $2,733 loss; diluted EPS was $0.44, versus a $0.12 loss.
- Nine months: Net premiums earned were $140,925, up 7.6%; total revenue was $155,347, up 11.8%. Net income attributable to NI Holdings was $16,192, versus $2,085; diluted EPS was $0.72, versus $0.09.
- Underwriting: The consolidated combined ratio was 96.4% for Q3 and 96.1% for the nine months, compared with 113.6% and 103.1%, respectively, in 2017. Underwriting gain was $1,942 for Q3 and $5,482 year to date, versus losses of $7,166 and $4,099. Crop results improved notably; home and farm remained loss-making, with segment combined ratios of 129.6% in Q3 and 112.8% year to date.
- Investment results: Net investment income was $1,629 in Q3 and $4,521 year to date. Realized investment gains were $3,160 and $3,879, respectively. The company recorded $382 of investment impairment losses in the nine-month period.
- Cash flow: Operating activities used $4,712 in the first nine months, compared with $7,795 used in 2017. Investing activities provided $28,778; cash and cash equivalents rose $24,066 to $51,660. Operating cash use reflects, among other items, growth in premium and FCIC receivables.
- Balance sheet and liquidity: At September 30, cash and investments totaled $360,745; total assets were $490,882, liabilities $221,490, and equity $269,392. The $30 million? No: the filing reports a $3,000 line of credit with no amount drawn, scheduled to expire November 30, 2018. Insurance-subsidiary dividends are subject to regulatory limits; disclosed amounts available without prior approval were $15,654 for Nodak Insurance and $1,206 for Direct Auto, based on year-end 2017 surplus.
- Margins and returns: The loss and LAE ratio was 69.2% in Q3 and 68.8% year to date; the expense ratio was 27.2% and 27.3%. Annualized return on average equity after non-controlling interest was 15.1% for Q3 and 8.3% year to date.
Material changes versus prior periods
- Q3 and nine-month earnings improved substantially, driven mainly by lower loss experience—especially crop—and a $4,578 bargain-purchase gain on Direct Auto, included in fee and other income. The acquisition contributed $3,663 in revenue and $260 in net income during September.
- Direct Auto added scale to non-standard auto and increased reported assets and insurance liabilities. Its $17,000 cash purchase price was below the $21,578 fair value of identifiable net assets acquired.
- Premium growth was led by private passenger auto, home and farm, and non-standard auto; crop premiums earned declined year to date, reflecting lower acreage and commodity prices and increased ceding under the federal crop program’s gain-sharing arrangement.
- Expenses increased: nine-month underwriting and general expenses, including deferred acquisition cost amortization, rose 21.8%. Management cited higher premium-related acquisition costs, employee and stock compensation, consulting, and Direct Auto expenses. The expense ratio increased 3.2 percentage points year over year.
- Prior-year reserves developed favorably by $3,165 in the first nine months, less than the $6,649 favorable development in 2017. The reported loss reserve increase also reflects $40,967 of reserves acquired with Direct Auto.
- Net unrealized investment gains fell $4,376 during the first nine months, primarily as rising interest rates reduced fixed-income values. Accumulated other comprehensive income declined to $12,637 from $15,998 at year-end.
Outlook, risks and unusual items
- No quantified earnings or premium guidance is provided. Management described property and casualty markets as “firming,” citing higher frequency and severity of weather-related events, and said 2018 crop conditions had been favorable while noting early snow and cold could affect harvest results.
- Key risks include loss-reserve uncertainty and claims severity, weather and catastrophe exposure, crop-program changes, rate approval and competition, reinsurance availability and collectability, investment-market and interest-rate fluctuations, and successful integration of Direct Auto.
- The company retained the first $10,000 of weather catastrophe losses and disclosed reinsurance protection up to $74,600 in excess of that retention. Reinsurance does not release the company from obligations to policyholders.
- Management stated that litigation contingencies were not material based on information then available; the filing cautions that litigation outcomes remain uncertain. No significant off-balance-sheet arrangements were reported. No material changes to the previously disclosed risk factors were reported.
- Management expects the 2019 adoption of equity-security accounting guidance to move unrealized equity gains through earnings, potentially increasing net-income volatility. The filing estimated $19,826 of pre-tax unrealized equity gains would be reclassified from accumulated other comprehensive income to retained earnings at transition.
Investor verification points
- Separate recurring operating earnings from the $4,578 Direct Auto bargain-purchase gain and assess earnings excluding this item.
- Review Direct Auto integration, subsequent underwriting performance, and final purchase-price valuations; some acquired intangible-asset values remained provisional.
- Track crop loss development, FCIC receivables and gain-sharing, and whether favorable 2018 crop experience persists.
- Monitor reserve adequacy, adverse development, and the concentration of reported reserves in non-standard auto following the acquisition.
- Assess investment portfolio sensitivity to interest rates, unrealized fixed-income losses, and future net-income volatility from equity-security accounting changes.
- Confirm renewal or replacement of the $3,000 credit line scheduled to expire November 30, 2018, and consider regulatory limits on subsidiary dividends as a constraint on holding-company liquidity.