NI Holdings, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing was submitted by NI Holdings, but the 2016 financial statements primarily report Nodak Mutual Insurance Company and its consolidated insurance affiliates. NI Holdings had no operations, assets, or liabilities before the mutual-to-stock conversion on March 13, 2017.
Business context
The insurance group writes property and casualty coverage, including personal and commercial lines, crop hail and federal multi-peril crop insurance, and nonstandard auto insurance. North Dakota is its principal market; approximately 74.7% of Nodak Mutual’s 2016 consolidated premiums came from that state. The group reported $180.9 million of direct premiums written and operated with an “A” A.M. Best rating for Nodak Mutual and Battle Creek and “A-” for American West.
Financial results and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Net premiums earned | $152.8 million | $139.5 million |
| Total revenue | $164.3 million | $146.3 million |
| Underwriting income (loss) | $(5.5) million | $19.0 million |
| Net income attributable to Nodak Mutual | $4.6 million | $17.5 million |
| Operating cash flow | $7.3 million | $17.2 million |
| Total assets at year-end | $278.7 million | $258.6 million |
| Total equity at year-end | $153.4 million | $149.9 million |
- Premium growth was supported primarily by personal-lines expansion outside North Dakota. Net premiums earned increased 9.5%.
- The loss and loss adjustment expense ratio rose to 77.6% from 60.1%, and the combined ratio was 103.5%, indicating an underwriting loss before investment income. The expense ratio was 26.0%.
- Management attributed the deterioration in underwriting results mainly to higher weather-related losses, including multiple events in the second quarter. Prior-year claims nevertheless developed favorably by $4.8 million, versus $8.9 million in 2015.
- Net realized investment gains rose to $5.7 million from $0.8 million and helped support earnings. Net investment income was $4.2 million; return on average invested assets slipped to 2.1% from 2.2%.
- At year-end, cash and investments totaled $207.7 million. Liabilities were $125.3 million, including $59.6 million of unpaid losses and adjustment expenses and $57.4 million of unearned premiums. The filing reports no outstanding balance on the $3.0 million line of credit; Battle Creek has a $3.0 million surplus note from Nodak Mutual.
- Operating cash flow declined to $7.3 million, primarily due to increased claim payments. Investing activities used $3.5 million; cash and cash equivalents increased by $3.8 million.
Material changes and fourth-quarter data
- Compared with 2015, 2016 revenue grew, but net income attributable to Nodak Mutual fell about 74%, reflecting materially higher losses and expenses. Total liabilities increased $16.6 million, principally because of higher unpaid-loss reserves and unearned premiums.
- Unaudited fourth-quarter 2016 results were net premiums earned of $32.9 million, total revenue of $34.5 million, total expenses of $32.8 million, and net income of $1.2 million. Fourth-quarter 2015 net income was $7.0 million.
- After year-end, the March 2017 conversion made Nodak Insurance Company a wholly owned NI Holdings subsidiary. The March IPO sold 10.35 million shares at $10 per share and generated $93.4 million net proceeds; Nodak Mutual Group retained 55% ownership. Pro forma NI Holdings equity after conversion and the offering was reported at $247.0 million.
Outlook, risks, and unusual items
- Management described the property and casualty market as transitioning toward a hard market and cited opportunities for organic growth and selective acquisitions. The filing gives no specific earnings, premium-growth, or margin guidance.
- Management intends to pursue growth in core markets, expand producer relationships and technology, and consider acquisitions that could diversify products or geography. These plans depend on maintaining underwriting discipline and successful execution.
- Key risks include weather and catastrophe losses, North Dakota concentration, crop-insurance program or subsidy changes, competition and rate regulation, reserve-estimation uncertainty, reinsurance availability and collectability, investment-market and interest-rate exposure, and operational or cybersecurity disruptions.
- Loss reserves are a significant estimate: net unpaid losses and adjustment expenses were $52.4 million, up from $40.2 million. The filing notes that adverse reserve development could materially affect earnings, liquidity, and financial condition.
- Interest-rate sensitivity analysis estimated that a 100-basis-point increase would reduce fixed-income fair value by approximately $7.5 million. The company reported no 2016 other-than-temporary investment impairments.
- The company expects public-company compliance costs and ESOP-related compensation expense; first-year ESOP and planned equity-plan expenses were estimated at approximately $240,000. A regular dividend policy was contemplated, but timing and amounts were undecided. Subsidiary dividends are subject to insurance regulation; approximately $13.9 million was available from Nodak Insurance Company in 2017 without prior regulatory approval.
- Ordinary-course litigation was described as not material based on information available, and no significant off-balance-sheet arrangements were reported. The auditor issued an unqualified opinion on the consolidated financial statements; no internal-control audit opinion was provided.
Important facts for investors to verify
- How much of the 2016 underwriting deterioration reflects unusual weather losses, and whether pricing and reinsurance adequately address future catastrophe exposure.
- Whether the increase in loss reserves proves adequate as claims develop, including the effects of prior-year favorable development and recent claim trends.
- The sustainability of earnings excluding the $5.7 million of realized investment gains, and the sensitivity of investment income and portfolio values to market changes.
- Post-IPO capital deployment, acquisition plans, resulting expenses, and the effect of the conversion on comparable future financial statements.
- Actual dividend capacity and policyholder-subsidiary cash upstreaming, given statutory limits and the mutual holding company’s majority ownership.
- Progress in meeting public-company control and reporting obligations; management’s internal-control evaluation did not include an auditor attestation.