NI Holdings, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Unless otherwise noted, dollar amounts are in thousands. NI Holdings is a property-and-casualty insurer focused on the Upper Midwest, with crop insurance and non-standard auto operations in additional states. The holding company was formed in the March 13, 2017 conversion of Nodak Mutual to a stock company; its shares began public trading in March. Accordingly, 2017 was its first year as a public company.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Direct premiums written | $195,238 | $180,870 |
| Net premiums written | $185,281 | $156,713 |
| Net premiums earned | $179,464 | $152,756 |
| Total revenue | $189,140 | $163,747 |
| Underwriting gain (loss) | $12,330 | $(4,874) |
| Net income | $15,612 | $4,638 |
| Net income attributable to NI Holdings | $15,991 | $4,551 |
| Basic and diluted EPS | $0.71 | Not available |
| Operating cash flow | $18,425 | $7,307 |
| Total assets | $376,988 | $278,703 |
| Total liabilities | $121,415 | $125,285 |
| Equity | $255,573 | $153,418 |
The loss and LAE ratio improved to 68.4% from 77.6%; the expense ratio was 24.8% versus 25.6%, and the combined ratio improved to 93.1% from 103.2%. The 2017 combined ratio indicates an underwriting profit before investment income and other items. Net investment income rose to $5,031 from $3,644, while realized investment gains declined to $2,997 from $5,681. Return on average equity after non-controlling interest was 7.9%, versus 3.1% in 2016.
Cash and investments totaled $313,885 at year-end, including $27,594 in cash and cash equivalents; cash and investments were $207,677 at year-end 2016. Net cash used in investing was $91,857, principally reflecting investment of IPO proceeds; financing cash flow was $82,708, including IPO proceeds offset by share repurchases and ESOP funding. The filing reports no outstanding balance on a $3,000 line of credit. Battle Creek has a $3,000 surplus note payable to Nodak Insurance, an intercompany balance eliminated in consolidation. No material off-balance-sheet arrangements were disclosed.
Changes versus prior year
- Net premiums earned increased 17.5%; direct premiums written increased about 7.9%. Growth reflected personal lines expansion outside North Dakota and reduced premium cessions under the higher catastrophe retention arrangement.
- Underwriting results turned from a $4,874 loss to a $12,330 gain. The 2016 period had substantial weather-related personal-lines losses; 2017 had fewer such losses, while strategic pricing and underwriting actions also contributed to improvement.
- Prior-year reserves developed favorably by $10,101, compared with $4,756 in 2016. This favorable development contributed to reported results and warrants monitoring.
- Assets and equity increased substantially, primarily reflecting $93,145 in net IPO proceeds. The company repurchased 446,671 shares for $8,037 during 2017.
- Net income increased sharply, but earnings also reflect the change in underwriting experience, favorable reserve development, investment gains, and a $1,274 tax benefit from remeasuring deferred taxes after U.S. tax reform.
Outlook, commentary, and key risks
Management described the market as “firming” in its business and risk discussion, citing higher frequency and severity of weather events; elsewhere in its results discussion it characterized current market conditions as neutral. No numerical earnings or premium guidance was provided. Management’s stated priorities include organic growth, expanding agency relationships and selected geographic markets, and pursuing selective acquisitions, including a commercial writer.
- Catastrophe and concentration exposure: 71.2% of 2017 consolidated direct premiums written came from North Dakota. Catastrophe retention increased from $5,000 to $10,000 effective in 2017; reinsurance coverage was available up to $74,600 above the retained amount. The 2018 retention remained $10,000.
- Crop program dependence: Multi-peril crop business relies on federal program terms, subsidies, rates, and reinsurance. Changes to the federal program could materially affect premiums and results.
- Reserving uncertainty: Loss reserves involve significant estimation. The company reported $41,762 of net unpaid losses and LAE and $10,101 of favorable prior-year development in 2017; adverse future development could reduce earnings.
- Investments and interest rates: The portfolio included $236,758 of fixed-income securities and $47,561 of equity securities at fair value. A modeled 100-basis-point interest-rate increase would reduce fixed-income fair value by $9,599. The company recorded $330 of investment impairment charges in 2017.
- Capital, dividends, and control: No dividends were declared or paid in 2017. Nodak Insurance had $15,654 available for ordinary dividends to the holding company in 2018 without prior regulatory approval, subject to applicable requirements. Nodak Mutual Group owned at least 55% of NI Holdings, giving it voting control over most shareholder matters.
- Other exposures: Risks include reinsurance availability and collectability, competition and pricing, regulatory restrictions, cyber and operational disruptions, acquisition integration, and potential costs from stock-based compensation. The company reported that litigation in the ordinary course was not considered material and that no material contingent liabilities were identified.
Most important facts for investors to verify
- How much of the 2017 earnings improvement is repeatable after accounting for favorable prior-year reserve development, catastrophe experience, and the tax-reform benefit.
- Whether 2017 reserve adequacy and reinsurance protection remain sufficient, particularly given the increased catastrophe retention and concentration in North Dakota.
- Future underwriting performance by segment, especially non-standard auto, which remained unprofitable with a 111.6% combined ratio, and crop, whose results depend on federal program mechanics and seasonal losses.
- How management deploys IPO capital, including acquisition plans, investment risk, and the effect on returns on equity; confirm current dividend intentions and regulatory capacity.
- The distinction between consolidated net income of $15,612 and $15,991 attributable to NI Holdings, reflecting a loss attributable to non-controlling interest, and the first-year public-company share and EPS comparability limitations.
Other filing notes
The independent auditor issued an unqualified opinion on the consolidated financial statements. The company reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to express an opinion on internal-control effectiveness. Litigation in the ordinary course was disclosed, with no matter considered material by management based on information then available.