NI Holdings, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Amounts are in thousands of dollars except per-share data. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
NI Holdings is a property and casualty insurance holding company, with significant North Dakota operations and businesses across the Midwest and other states. Its principal lines are private passenger auto, non-standard auto, home and farm, crop, and other insurance. Direct Auto, an Illinois non-standard auto insurer, became a consolidated subsidiary on August 31, 2018; its results are included from that date.
Financial results and condition
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Direct premiums written | $225,223 | $195,238 |
| Net premiums earned | $195,720 | $179,464 |
| Total revenue | $212,370 | $189,140 |
| Underwriting gain | $21,922 | $12,330 |
| Net income attributable to NI Holdings | $31,081 | $15,991 |
| Basic and diluted EPS | $1.39 | $0.71 |
| Operating cash flow | $20,955 | $18,425 |
- Net premiums earned rose 9.1%; direct premiums written rose 15.4%. Net income attributable to the company nearly doubled, while reported earnings included a $4,578 gain from the Direct Auto bargain purchase.
- The total loss and LAE ratio improved to 60.8% from 68.4%; the expense ratio increased to 28.0% from 24.8%. The combined ratio was 88.8%, compared with 93.1% (below 100% indicates underwriting profit under the company’s definition).
- Net investment income was $6,180, up from $5,031; net realized investment gains were $3,974, up from $2,997. Net return on average cash and invested assets was 1.8% in both years. Return on average equity after non-controlling interest was 11.8%, versus 7.9%.
- At year-end, total assets were $458,492, cash and investments $374,371, total liabilities $182,739, and equity $275,753. Cash and cash equivalents were $68,950. No corporate debt is reported on the consolidated balance sheet; a $5,000 bank line of credit was undrawn. Battle Creek has a $3,000 surplus note, eliminated in consolidation.
- Net unpaid losses and LAE were $84,889, versus $41,762 in 2017; the gross liability was $87,121. The increase includes $40,967 of reserves acquired with Direct Auto. Operating cash flow was positive; cash and cash equivalents increased $41,356 during the year.
- Investment portfolio fair value was $303,467, compared with $284,319. Net unrealized investment gains fell by $12,279 during 2018; the year-end balance was a net unrealized gain of $8,034. Equity was also reduced by $9,700 of after-tax other comprehensive loss.
Fourth-quarter results
For Q4 2018, net premiums earned were $54,795, total revenue was $57,023, total expenses were $38,355, and net income before non-controlling interest was $14,959. Basic EPS was $0.67. The comparable Q4 2017 figures were $48,477, $50,187, $32,048, $13,439, and $0.62, respectively.
Material changes, outlook, and risks
- Management attributed improved underwriting chiefly to favorable 2018 crop conditions and improved results in non-standard auto and other business. Crop net premiums earned declined to $28,699 from $43,826, reflecting increased premium ceding under federal crop-program gain-sharing; crop direct premiums were also affected by lower commodity prices and insured acreage.
- Direct Auto contributed $14,178 of revenue and $2,979 of net income from September through December. The acquisition used $17,000 cash consideration and generated the $4,578 bargain-purchase gain. Integration was in progress; management identified growth in Direct Auto and selective acquisitions as strategic priorities.
- Management described insurance markets as generally stable and emphasized disciplined pricing and underwriting. The filing provides no quantified earnings or premium guidance. The board had not set a regular dividend policy; future dividends were uncertain.
- Key risks include weather and catastrophe exposure, geographic concentration (63.8% of 2018 direct premiums were written in North Dakota), crop-program changes, uncertain loss reserves, reinsurance availability and collectability, competition, acquisition integration, investment-market and interest-rate volatility, and cybersecurity and regulatory risks.
- Loss reserves are estimates and may develop adversely. Prior-year favorable reserve development was $589 in 2018, versus $10,101 in 2017. Beginning January 1, 2019, market-value changes in equity securities will flow through net income, increasing reported earnings volatility.
- The company reported no litigation it considered material and no significant off-balance-sheet arrangements. The auditor gave an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The auditor did not provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- How much of the earnings increase reflects recurring underwriting and investment performance versus the $4,578 bargain-purchase gain and Direct Auto’s partial-year contribution.
- Whether Direct Auto’s acquired reserves and subsequent claims experience support the recorded estimates, particularly given the material increase in non-standard auto reserves.
- Whether favorable crop loss experience is sustainable and how federal crop-program terms, commodity prices, and premium ceding affect retained premiums and earnings.
- How the 2019 accounting treatment for equity securities affects net-income volatility, and how the investment portfolio responds to changes in interest rates and equity markets.
- The company’s ability to fund holding-company needs and any future shareholder distributions given insurance-subsidiary dividend limits; no subsidiary dividends were paid in 2018.