NI Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Dollar amounts are in thousands unless otherwise stated. NI Holdings is a property and casualty insurer, with personal auto, home and farm, crop, and other insurance operations concentrated in the Midwest and western United States.
Financial performance and position
- Revenue: Total revenue was $38,327, up 10.2% from $34,771. Net premiums earned increased 10.1% to $36,112; net investment income rose to $1,369 from $999. Net realized investment gains were $469, versus $616.
- Profit: Net income was $6,152, compared with $4,749; net income attributable to NI Holdings was $6,122, or $0.27 per basic and diluted share, versus $4,689, or $0.21 per share. Pretax income was $7,601 versus $7,031. The effective tax rate fell to 19.1% from 32.5%, primarily reflecting the lower federal corporate tax rate.
- Underwriting and margins: Underwriting gain increased to $5,386 from $5,069. The combined ratio was 85.1% versus 84.5%; loss and LAE ratio improved to 52.2% from 54.0%, while the expense ratio increased to 32.9% from 30.5%. A combined ratio below 100% indicates an underwriting profit.
- Cash flow: Operating cash flow was $4,339, compared with $6,164. Investing activities used $6,724; financing cash flow was zero. Cash and cash equivalents ended the quarter at $25,209, down from $27,594 at year-end 2017.
- Balance sheet and liquidity: Total assets were $376,124 and equity was $258,649 at March 31, 2018. Cash and investments totaled $313,731. Unpaid losses and LAE were $43,863 and unearned premiums were $65,388. The company reported no outstanding balance on its $3,000 line of credit; the filing does not report material external debt for the consolidated company.
Material changes versus the prior comparable period
- Premium growth was led by private passenger auto and home and farm; management also cited growth in non-standard auto following Nevada rate increases. Net premiums earned in crop insurance were much lower in Q1, consistent with its seasonal earning pattern.
- Private passenger auto and non-standard auto underwriting results improved following pricing and underwriting actions. The overall loss ratio improved, but the expense ratio rose with higher commissions and share-based compensation.
- Prior-year loss development was unfavorable by $76 in Q1 2018, compared with favorable development of $2,799 in Q1 2017. Management said Q1 crop results are not meaningful given minimal earned premiums at that time of year.
- Investment fair values reduced accumulated other comprehensive income: the company reported a $3,532 after-tax other comprehensive loss for the quarter. It recorded no other-than-temporary investment impairments.
- Equity increased by $3,076 from year-end, principally from net income, partly offset by lower unrealized investment gains. The company authorized up to approximately $10 million in share repurchases in February; none had been made by March 31.
Outlook, risks and unusual items
- Management described property and casualty markets as “firming,” citing increased frequency and severity of weather-related events. It provided no specific financial guidance or quantified outlook.
- Key risks include catastrophe and weather losses, crop-program changes and seasonal volatility, loss-reserve estimation and adverse development, pricing competition and rate-approval constraints, investment-market and interest-rate movements, and reinsurer availability and collectability.
- Reinsurance limits were unchanged: the company retained the first $10,000 of weather-related catastrophe losses and had coverage up to $74,600 in excess of that retention. Reinsurance does not remove its obligation to policyholders if a reinsurer fails to pay.
- Management said litigation in the ordinary course was not considered material and reported no material unrecorded contingencies. Insurance-subsidiary dividends are subject to regulatory limits; approximately $15,654 was available from Nodak Insurance without prior regulatory approval based on year-end 2017 surplus. No dividends were declared or paid in Q1.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It stated that risk factors had not materially changed from its 2017 Form 10-K.
Important facts for investors to verify
- Reconcile operating cash flow: the financial statements report $4,339, while MD&A narrative text also states $4,439 in one passage; MD&A’s summary table reports $4,339.
- Track reserve development: Q1 prior-year development shifted from $2,799 favorable in 2017 to $76 unfavorable in 2018, and reserves remain dependent on actuarial estimates.
- Assess underwriting quality by segment, particularly the exceptionally high Q1 crop loss and combined ratios, which management attributes to seasonality and minimal earned premiums.
- Monitor unrealized investment losses and their effect on equity, alongside the company’s assessment that declines were temporary and no impairment was required.
- Verify subsequent share-repurchase activity, regulatory capacity for subsidiary dividends, and the company’s ability to maintain reinsurance coverage on acceptable terms.