NI Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial amounts below are in thousands of dollars, except per-share data. NI Holdings was formed as the holding company in the March 13, 2017 mutual-to-stock conversion; comparative operating results largely reflect the predecessor insurance business.
Business context
The company writes property and casualty, crop, and non-standard auto insurance, primarily in the Midwest and western United States. Its principal lines are multi-peril crop and hail, non-standard auto, and other property and casualty coverage. Nodak Insurance is affiliated with the North Dakota Farm Bureau; Battle Creek policies are 100% reinsured by Nodak Insurance.
Financial performance and position
- Q2 revenue: $47.8 million, up 22.6% from $39.0 million. Net premiums earned rose 22.9% to $45.7 million; net investment income was $1.4 million and realized investment gains were $0.3 million.
- Q2 earnings: Net income attributable to NI Holdings was $129,000, or $0.01 per share, compared with a $1.8 million loss in Q2 2016. Pre-tax loss improved to $39,000 from $2.7 million. Underwriting loss was $2.1 million; the combined ratio was approximately 104.7% (loss ratio 79.4%, expense ratio 25.3%).
- First-half revenue and earnings: Total revenue was $82.7 million, up 17.1%; net premiums earned increased 16.7% to $78.5 million. Net income was $4.9 million, compared with $4.4 million, while income attributable to NI Holdings was $4.8 million versus $4.5 million. Pre-tax income was nearly flat at $7.0 million. Underwriting income was $2.8 million; the combined ratio was approximately 96.5% (loss ratio 68.8%, expense ratio 27.7%).
- Cash flow: First-half operating cash flow was $10.4 million, versus $8.1 million. Investing used $93.3 million, largely reflecting purchases of investments; financing provided $82.7 million, principally from the stock offering. Cash and cash equivalents ended at $18.1 million.
- Balance sheet and liquidity: At June 30, cash and investments totaled $303.5 million, total assets $429.7 million, liabilities $186.9 million, and equity $242.8 million. Assets and equity rose substantially from year-end, primarily due to the IPO. Management says operating cash flow and liquid investments support claims and operating needs.
- Debt: The company reported no outstanding balance on its $3.0 million line of credit, which expires October 31, 2017. No material consolidated debt balance is identified; a $3.0 million Battle Creek note is eliminated in consolidation.
Material changes and unusual items
- Q2 premium growth reflected personal-lines growth and higher retention of multi-peril crop premiums. Crop premiums earned increased to $12.8 million from $6.9 million for the quarter.
- Q2 loss performance improved from 2016, which had higher weather-related personal-lines losses. For the first half, however, the loss ratio increased to 68.8% from 63.3%, attributed to higher catastrophe retention and increased expected crop losses.
- Effective January 1, 2017, catastrophe retention increased from $5 million to $10 million, while reinsurance coverage remained up to $74.6 million above the retention. Reinsurance does not discharge the company’s obligation to policyholders, and reinsurer collectability remains a risk.
- Prior-period loss development was favorable by $4.966 million in the first half; the filing notes that estimates remain uncertain. The reported net unpaid losses and LAE were $62.2 million, supported by $10.4 million of reinsurance recoverables. A 1% change in estimated net reserves would affect after-tax income by approximately $404,000.
- The company completed an IPO of 10.35 million shares at $10 per share and reported net proceeds of $93.145 million. It repurchased 446,671 shares for $8.037 million at an average $17.99 per share under an authorization of up to $8 million.
- Investment portfolio fair value rose to $283.4 million from $187.4 million at year-end, reflecting purchases and market movements. First-half other-than-temporary investment impairments were $206,000; unrealized gains and losses affect equity, not current net income, unless realized or impaired.
Outlook, risks, and contingencies
No quantified earnings or premium guidance is provided. Management described property and casualty conditions as potentially a hard market, with conditions varying by product and geography. It cited a dry start to the 2017 growing season and higher expected multi-peril crop losses, alongside greater premium retention under the federal risk-sharing arrangement.
Key disclosed risks include loss-reserve estimation and claim severity, weather and catastrophe exposure, changes to federal crop insurance programs and commodity prices, investment-market and interest-rate movements, competition and rate approvals, reinsurance availability and collectability, regulation, litigation, and operational or cybersecurity incidents. Management reported no material change in risk factors from its 2016 Form 10-K. The company is party to ordinary-course litigation but does not consider it material based on information currently available. It reported no significant off-balance-sheet arrangements or material unrecorded contingencies. Disclosure controls were assessed as effective, with no material changes in internal control reported.
Important facts for investors to verify
- Whether current crop conditions, second-half claims, and the higher $10 million catastrophe retention alter full-year underwriting results.
- Reserve adequacy and the drivers of the large favorable prior-year development; compare later development with the reported $62.2 million net reserve.
- Reinsurance protection, collectability, and the effect of the 2017 retention change on net catastrophe exposure.
- Actual use of IPO proceeds, the purpose and terms of the share repurchase, and why reported repurchases of $8.037 million exceeded the stated $8 million authorization.
- Investment portfolio allocation, impairment experience, and the effect of market changes on fair value and equity.
- Restrictions on dividends from regulated insurance subsidiaries; management cited approximately $13.9 million available from Nodak Insurance without prior regulatory approval, subject to applicable limits.