NI Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. NI Holdings is a U.S. property and casualty insurer. Unless noted otherwise, financial amounts below are in millions of dollars; financial statements are unaudited. Westminster, acquired January 1, 2020, is included in 2020 results but not in reported 2019 results.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net premiums earned | $73.3 | $67.1 | $214.1 | $182.7 |
| Total revenues | $80.9 | $70.2 | $222.7 | $199.5 |
| Net income attributable to NI Holdings | $3.7 | $(7.0) | $18.8 | $9.3 |
| Diluted EPS | $0.17 | $(0.31) | $0.85 | $0.42 |
| Combined ratio | 103.6% | 117.5% | 92.7% | 102.3% |
Q3 underwriting loss was $2.6 million, versus $11.7 million a year earlier; nine-month underwriting gain was $15.6 million, versus a $4.2 million loss. The combined ratio is a non-GAAP measure: below 100% generally indicates an underwriting profit. Q3 net investment income was $1.9 million, down from $2.0 million; nine-month net investment income was $5.9 million, up from $5.5 million. Net capital gains were $5.1 million in Q3 and $1.4 million for nine months, compared with $0.6 million and $9.6 million, respectively, in 2019. Equity-market value changes contributed materially to this volatility.
At September 30, cash and investments totaled $462.4 million, total assets $630.0 million, and shareholders’ equity $325.5 million. Cash and cash equivalents were $71.3 million. Operating cash flow was $30.9 million for the first nine months, compared with cash used of $1.5 million in 2019. The company reported no outstanding borrowings under its $5 million line of credit. It owes the Westminster seller a further $20 million in three annual installments; the present value recorded at acquisition was $18.8 million.
Changes and key drivers
- Premiums earned rose 9.3% in Q3 and 17.2% for nine months. Westminster contributed $24.1 million of nine-month revenue and $1.1 million of net income; its addition substantially increased commercial premiums and expenses.
- Improved loss experience drove much of the earnings recovery: Q3 losses and loss-adjustment expenses fell 12.6% year over year, and the nine-month total was nearly flat despite higher premiums. Favorable prior-year reserve development was $1.7 million in Q3 and $4.3 million for nine months.
- Crop results were a notable offset. Nine-month crop losses included $3.8 million of unfavorable development on 2019 claims; the crop combined ratio increased to 102.4% from 90.7%. The company also reported elevated 2020 prevented-planting claims and accelerated recognition of related premiums.
- For nine months, equity-security unrealized changes reduced net capital gains by $0.6 million, compared with an $8.3 million gain in 2019. Q3 included a $4.5 million unrealized equity gain, compared with a $0.4 million loss in Q3 2019. Fixed-income unrealized gains increased and are recorded in other comprehensive income.
- Shareholders’ equity increased 5.1% from year-end, with earnings and investment gains partly offset by $11.4 million of share repurchases. Shares outstanding declined to 21.35 million from 22.12 million.
Outlook, risks and unusual items
Management provided no specific earnings or premium guidance. It said the pandemic reduced activity and premium growth, especially in non-standard auto, while lower driving and claims frequency benefited auto results earlier in the year; claims frequency was returning toward normal in Q3. Management said the pandemic’s longer-term effects remain uncertain and could pressure premiums and investment performance. It also cited possible investment losses, lower reinvestment yields, credit deterioration, inflation and higher claims costs.
Other risks include weather and catastrophe losses, crop claims and federal crop-program changes, competition and pricing, regulatory actions, reserve-estimation uncertainty, and reinsurer performance. The company retained the first $10 million of weather-related catastrophe losses, with reinsurance coverage stated to extend up to $97 million above that retention. Insurance-subsidiary dividends are subject to regulatory restrictions. Management reported that litigation in the ordinary course was not considered material, and that it had no material unrecorded contingencies. No impairment of goodwill or other intangibles was recorded.
Important facts for investors to verify
- How much earnings improvement reflects sustainable underwriting performance versus favorable reserve development and volatile investment gains.
- Westminster’s ongoing contribution to commercial growth, profitability, acquisition integration and remaining installment payments.
- Crop loss development and the ultimate impact of 2019 unharvested acreage and 2020 prevented-planting claims.
- Whether auto policy counts, premium trends and loss frequency recover or remain affected by pandemic conditions and competition.
- Investment portfolio valuation, credit quality and sensitivity to market volatility, interest rates and municipal or mortgage-backed security risks.
- Regulatory limits on subsidiary dividends and the effect of repurchases on capital and liquidity.