NI Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Dollar amounts are in thousands unless stated otherwise. NI Holdings became the holding company for Nodak Insurance upon the March 13, 2017 mutual-to-stock conversion; the company completed an IPO and its shares began trading March 16, 2017. The prior-year comparisons reflect the predecessor insurance operations, so the holding-company structure and capital base differ.
Financial performance
| Metric | Three months 2017 | Three months 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net premiums earned | $52,525 | $52,639 | $130,987 | $119,890 |
| Total revenues | $56,711 | $59,286 | $139,386 | $129,883 |
| Underwriting income (loss) | $(7,311) | $(9,208) | $(4,532) | $(5,518) |
| Net income (loss), before non-controlling interest | $(2,693) | $(999) | $2,173 | $3,401 |
| Net income (loss) attributable to NI Holdings | $(2,733) | $(997) | $2,085 | $3,455 |
| Net investment income | $1,549 | $971 | $4,139 | $3,286 |
| Net realized investment gains | $1,885 | $4,996 | $2,840 | $5,215 |
- Underwriting and margins: Q3 loss and LAE ratio was 94.4% and expense ratio 19.5% (combined ratio approximately 113.9%). For the first nine months, the ratios were 79.1% and 24.4% (combined approximately 103.5%). Underwriting remained loss-making in both periods.
- Cash flow: Nine-month operating cash use was $7,795, versus $19,005 in 2016. Investing activities used $90,247, chiefly reflecting purchases of securities; financing provided $82,708, principally from the IPO. Cash and cash equivalents fell to $2,984 from $18,318 at year-end 2016.
- Balance sheet and liquidity: At September 30, total assets were $418,707, liabilities $178,795, and equity $239,912. Cash and investments totaled $286,182, including $237,389 of fixed-income securities and $43,837 of equities. Premiums and agents’ balances receivable were $72,573. The filing reports no consolidated debt; a $3,000 Battle Creek note payable is eliminated in consolidation. A $3,000 bank line of credit had no balance outstanding and was renewed through October 31, 2018.
Changes and management commentary
- Nine-month net premiums earned rose 9.3%, primarily on growth in personal lines and higher retention of multi-peril crop premiums. Q3 premiums were essentially flat year over year, as personal-lines growth was offset by lower crop premiums.
- Nine-month earnings attributable to NI Holdings declined to $2,085 from $3,455, mainly because realized investment gains were lower and income tax expense was higher. Q3’s larger net loss also reflected lower realized gains and $568 of tax expense related to conversion and IPO expenses; improved personal-lines loss experience partly offset these items.
- Management cited a very dry start to the 2017 growing season and higher expected multi-peril crop losses, as well as hurricane-related impacts to assumed business. Catastrophe reinsurance retention increased from $5,000 to $10,000 effective January 1, 2017, with coverage maintained up to $74,600 above the retention.
- Prior-year loss reserves developed favorably by $6,649 during the first nine months. The company reported $85,427 of unpaid losses and LAE, including $76,747 net of reinsurance recoverables; management cautions that reserve estimates are inherently uncertain.
- Cash and investments increased from year-end largely due to $93,145 of net IPO proceeds. The company repurchased 446,671 shares for $8,037. Management said the capital is available for liquidity and may support acquisitions and diversification. No formal earnings or premium guidance was provided; management characterized the broader P&C market as potentially hard, with variation by line and geography.
Risks, contingencies, and other items
- Key risks include crop and weather losses, changes to the federal crop insurance program, competition and pricing, reserve adequacy, investment-market and interest-rate movements, reinsurance availability and collectability, regulatory approvals for rate increases, and litigation, operational, and cybersecurity events.
- Net realized investment gains included other-than-temporary impairment charges of $124 in Q3 and $330 year to date. Unrealized investment gains are recorded in other comprehensive income; the portfolio had $1,249 of gross unrealized losses at September 30.
- Insurance-subsidiary dividends are restricted by North Dakota law. The company estimated approximately $13,900 could be paid by Nodak Insurance without prior regulatory approval, based on year-end 2016 surplus; no dividends were declared or paid during the period.
- The company reported ordinary-course litigation that it did not consider material, no material changes to previously disclosed risk factors, and no significant off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether crop conditions, catastrophe experience, and the higher reinsurance retention drive further changes in loss ratios and earnings.
- How favorable prior-year reserve development compares with future claim emergence, including the adequacy of the reported reserves.
- The sustainability of underwriting results excluding realized investment gains and the impact of investment-market changes on portfolio value and income.
- Collections and timing for crop-related receivables, operating cash generation, and the practical availability of subsidiary dividends subject to regulatory limits.
- The effects of the IPO, mutual-to-stock conversion, share repurchases, and ongoing public-company costs on per-share results and capital allocation.