NI Holdings, Inc. — Q2 2018 Form 10-Q
Business context and period. NI Holdings is a property-and-casualty insurer, including personal auto, home and farm, crop, and commercial lines. This unaudited report covers the three and six months ended June 30, 2018; comparisons are to the corresponding 2017 periods unless noted. Dollar amounts below are in thousands, except per-share data and ratios.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net premiums earned | $50,677 | $45,653 | $86,789 | $78,462 |
| Total revenue | $52,920 | $47,616 | $91,247 | $82,387 |
| Net income, consolidated | $256 | $117 | $6,408 | $4,866 |
| Net income attributable to NI Holdings | $226 | $129 | $6,348 | $4,818 |
| Diluted earnings per share | $0.01 | $0.01 | $0.28 | $0.21 |
| Combined ratio | 103.6% | 104.4% | 95.9% | 96.1% |
- Premium growth was broad-based: Q2 net premiums earned rose 11.1%; first-half premiums rose 10.6%. Management cited growth in personal lines outside North Dakota and non-standard auto rate increases.
- Q2 underwriting loss narrowed to $1,846 from $2,002; first-half underwriting gain increased to $3,540 from $3,067. Q2 remained underwriting-unprofitable overall, while the first half was profitable before investment income and taxes.
- Q2 loss and LAE ratio rose to 80.4% from 79.4%; the first-half ratio improved slightly to 68.6% from 68.8%. Q2 home-and-farm loss ratio was 105.8%; the segment’s combined ratio was 138.7%. Crop’s Q2 combined ratio was 68.2%.
- First-half net investment income increased to $2,892 from $2,302, primarily reflecting a larger invested-asset base. Net realized investment gains declined to $719 from $955.
- First-half effective tax rate was 19.9%, versus 30.4% a year earlier; management attributed the lower rate in part to the federal corporate tax rate reduction to 21%.
Financial position, cash flow and liquidity
- At June 30, 2018, total assets were $441,398, liabilities $181,832, and equity $259,566, compared with $376,988, $121,415, and $255,573, respectively, at December 31, 2017.
- Cash and investments totaled $324,301, including cash and cash equivalents of $30,955. Premiums receivable rose to $74,175 from $25,632 and unearned premiums to $99,954 from $63,262, principally reflecting seasonal crop insurance activity.
- Unpaid losses and LAE were $63,376, up from $45,890 at year-end; net unpaid losses after reinsurance recoverables were $59,775. The company recorded $582 of favorable prior-year reserve development in the first half, versus $4,966 in 2017.
- Operating cash flow was $14,699 for the first half, compared with $10,449. Investing activities used $11,338; cash increased $3,361 to $30,955. No financing cash flow was reported for 2018.
- No consolidated borrowings are shown on the balance sheet. Nodak Insurance had no draws on its $3,000 line of credit; it was scheduled to expire November 30, 2018. Insurance-subsidiary dividends are regulated; approximately $15,654 was available from Nodak Insurance without prior regulatory approval based on year-end 2017 surplus. No dividends were paid in the first half.
Changes, outlook and risks
- Investment portfolio fair values reflected market pressure: management attributed the decline in fixed-income values to rising interest rates. First-half other comprehensive loss was $3,150, and total net unrealized investment losses were $3,987 before tax. The company reported no other-than-temporary impairment in the first half of 2018.
- Management described property-and-casualty markets as “firming,” citing increased frequency and severity of weather-related events. It reported a normal level of Q2 claims frequency in private auto, additional late-June storm losses in home and farm, and crop experience near target levels.
- On May 31, 2018, the company agreed to acquire 100% of Direct Auto Insurance Company, an Illinois specialty auto insurer. Closing was expected later in 2018, subject to regulatory approval and customary conditions; no purchase price is stated in the supplied filing text.
- Key exposures include catastrophe and weather losses, crop-program and commodity conditions, loss-reserve estimation, premium-rate approvals and competition, reinsurance availability and collectability, and interest-rate and investment-market movements. The company retained the first $10,000 of weather-catastrophe losses, with reinsurance protection up to $74,600 above that retention.
- Management reported no material changes to previously disclosed risk factors or market-risk disclosures. It said disclosure controls were effective and reported no material change in internal controls. Litigation is described as arising in the ordinary course and not considered material, though outcomes cannot be assured.
- No specific earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Track whether premium growth translates into durable underwriting profitability, especially in home and farm and Q2 private passenger auto.
- Review reserve development, catastrophe claims, and the adequacy and uncertainty of unpaid-loss estimates as claims mature.
- Confirm Direct Auto’s regulatory approval, closing, purchase terms, and subsequent contribution to results.
- Monitor investment fair values and interest-rate sensitivity, including unrealized losses and any impairment recognition.
- Verify crop-season premium collections, receivables, loss experience, and the availability and cost of reinsurance.
- Check the status and terms of the $3,000 credit line scheduled to expire in November 2018, and any changes in insurance-subsidiary dividend capacity.