NI Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unless otherwise noted, financial amounts are in thousands of dollars. The filing is unaudited.
Business context and reporting period
NI Holdings is a property and casualty insurance holding company formed in connection with Nodak Mutual Insurance Company’s conversion from mutual to stock form, completed March 13, 2017. Its operations include property and casualty, crop, and non-standard auto insurance. The company’s consolidated results include Nodak Insurance and subsidiaries, including American West, Primero, and controlled affiliate Battle Creek. NI Holdings had no operations, assets, or liabilities before the conversion; the comparative operating results primarily reflect the predecessor insurance businesses.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $34,915 | $31,641 |
| Net premiums earned | $32,809 | $30,115 |
| Income before income taxes | $7,031 | $9,702 |
| Net income attributable to NI Holdings | $4,689 | $6,214 |
| Operating cash flow | $6,164 | $5,766 |
| Cash and cash equivalents, March 31 | $106,302 | $18,318 at Dec. 31, 2016 |
| Total cash and investments, March 31 | $305,483 | $207,677 at Dec. 31, 2016 |
| Total assets, March 31 | $374,471 | $278,703 at Dec. 31, 2016 |
| Total liabilities, March 31 | $125,494 | $125,285 at Dec. 31, 2016 |
| Total equity, March 31 | $248,977 | $153,418 at Dec. 31, 2016 |
Revenue increased about 10.3% year over year, led by 8.9% growth in net premiums earned, which management attributed primarily to personal lines growth. Net income attributable to NI Holdings declined about 24.6%, mainly because of higher weather-related claims. The loss and LAE ratio rose to 54.0% from 38.2%; the combined ratio was approximately 85.0% versus 72.9%, calculated from reported underwriting expenses and earned premiums. Underwriting income fell to $4,925 from $8,176.
Net investment income was $1,143, versus $1,133; net realized investment gains were $616, versus $89. Annualized return on average equity after non-controlling interest was 9.3%, compared with 16.1%. The filing does not present a consolidated debt balance as a separate balance-sheet line. It discloses a $3,000 note payable at Battle Creek before consolidation adjustments and an unused $3,000 line of credit expiring October 31, 2017.
Material changes and liquidity
- On March 13, the company completed its IPO of 10.35 million shares at $10 per share and received net proceeds of $93,145. Nodak Mutual Group received 55% of NI Holdings’ outstanding shares in the conversion transactions.
- Financing cash flow was $90,745, reflecting stock issuance proceeds net of the $2,400 ESOP loan. Cash increased by $87,984 to $106,302. Investing cash flow was negative $8,925, primarily reflecting investment of additional surplus.
- At March 31, unearned premiums were $59,734 and unpaid losses and LAE were $57,496. The latter declined from $59,632 at year-end; prior-year claims development was favorable by $2,799 in the quarter.
- Management said operating cash generation, liquid investments, premium collections, investment earnings, and the IPO proceeds support claims and operating needs. Dividends from Nodak Insurance are subject to regulatory limits; approximately $13,900 could be paid without prior regulatory approval based on year-end surplus. No dividend was declared or paid in Q1.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management characterized the broader property and casualty market as potentially hard, with conditions varying by line and geography; crop insurance premiums are influenced largely by planted acreage and crop mix, while rates and policy terms are set by the federal program.
- Management attributed weaker underwriting results to weather losses compared with unusually mild Q1 2016 conditions. It also noted that Q1 2017 expenses benefited from the absence of some holding-company formation costs incurred in Q1 2016.
- Catastrophe retention increased from $5,000 to $10,000 effective January 1, 2017; reinsurance was disclosed up to $74,600 above the prior $5,000 retention. Reinsurance availability, cost, and collectability remain risks.
- Loss reserves involve significant estimates and may develop adversely. A 1% change in net loss and LAE reserves was estimated to affect after-tax income by approximately $315. Weather, inflation, claim severity, legal developments, and reserve adequacy are key uncertainties.
- The company reported no investment impairments in the quarter. Investments included $1,553 of gross unrealized losses at March 31. Management identified interest-rate, credit, liquidity, and market-value risks.
- Management estimated initial Sarbanes-Oxley compliance costs of approximately $350 and ongoing annual Exchange Act and Sarbanes-Oxley cost increases of approximately $300. It reported no material off-balance-sheet arrangements and no material litigation liabilities, while noting ordinary-course litigation.
- Management said disclosure controls were effective and reported no material changes in internal control over financial reporting. It reported no material changes to the risk factors from the 2016 Form 10-K.
Important facts for investors to verify
- Whether the higher Q1 loss ratio reflects a temporary return to normal weather or a sustained change in claims frequency or severity.
- Subsequent loss-reserve development, including whether Q1’s favorable prior-year development persists and whether recent accident-year reserves prove adequate.
- How the IPO proceeds are invested and whether they generate the investment returns management expects; Q1’s reported average-asset return was 1.8%, down from 2.2%.
- The practical impact of the increased catastrophe retention, reinsurance terms, and reinsurer creditworthiness.
- Regulatory limits on subsidiary dividends, the use of capital for acquisitions or expansion, and the expected ongoing costs of public-company compliance.