NI Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless noted otherwise, dollar amounts are in thousands. NI Holdings is a property and casualty insurer; its operations include Nodak Insurance, other regional insurers, and Direct Auto, acquired August 31, 2018.
Financial performance and position
- Revenue: Total revenue was $60,572, up from $38,327 in Q1 2018. Net premiums earned rose 39.9% to $50,506; direct premiums written were $55,653 versus $39,274.
- Profit: Net income attributable to NI Holdings was $13,773, compared with $6,122; diluted EPS was $0.62 versus $0.27. Income before taxes was $17,644, compared with $7,601.
- Underwriting and margins: Underwriting gain increased to $7,578 from $5,386. The consolidated combined ratio was 85.0%, versus 85.1%; loss and LAE ratio was 51.9%, versus 52.2%, and expense ratio was 33.1%, versus 32.9%. A combined ratio below 100% indicates an underwriting profit.
- Cash flow: Operating cash flow was $4,231, compared with $4,339. Investing activities used $3,032; cash and cash equivalents increased $1,177 to $70,127.
- Liquidity and capital: Cash and investments totaled $389,971; total assets were $477,287, liabilities $183,832, and equity $293,455. The company reported no borrowings on Nodak Insurance’s $5,000 line of credit. Insurer dividends to the holding company are subject to regulatory limits; no dividends were paid by Nodak Insurance or Direct Auto in the quarter.
Material changes versus the prior period
- Direct Auto contributed $12,573 of revenue and $4,134 of net income in Q1 2019. Its acquisition materially expanded non-standard auto premiums; reported Q1 2018 results did not include Direct Auto. Pro forma results assuming the acquisition had occurred earlier showed Q1 2018 revenue of $48,666 and NI Holdings-attributable net income of $6,876.
- The largest contributor to the earnings increase was a $7,300 unrealized gain on equity securities, included in net income following an accounting change effective January 1, 2019. Net capital gains on investments were $7,859, compared with $469 in Q1 2018. Management cautioned that this presentation will increase reported earnings volatility.
- Prior-year loss reserves developed favorably by $4,969, compared with $76 of unfavorable development in Q1 2018; management attributed the 2019 result primarily to favorable development in Direct Auto.
- Net premiums earned in non-standard auto rose to $14,591 from $2,991, reflecting Direct Auto, Primero growth, and rate increases. Home and farm underwriting gain declined to $3,585 from $4,842, with management citing winter snowfall and early spring flooding in Nebraska.
Outlook, commentary, and risks
- The filing provides no quantitative earnings or revenue guidance. Management described the property and casualty market as generally stable and expects investment book yield and duration to rise as Direct Auto cash is invested. Crop insurance is seasonal, with most premiums written and earned later in the year.
- Management said Primero experienced higher average claims following Nevada’s minimum liability-limit increases and intends to address this through additional rate increases. Rate increases require regulatory approval.
- Key uncertainties include loss-reserve adequacy, claims severity and inflation, weather and catastrophe losses, crop-program changes, competition, investment-market and interest-rate movements, reinsurance availability and collectability, and successful integration and growth of Direct Auto.
- At March 31, 2019, the company retained the first $10,000 of weather-related catastrophe losses and had reinsurance protection up to $78,600 above that retention. Reinsurance does not relieve the company of its obligations to policyholders.
- The company reported no material change in risk factors or market-risk disclosures, no material off-balance-sheet arrangements, and no litigation considered material. Management reported disclosure controls as effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth persists absent the $7,300 unrealized equity gain and favorable prior-year reserve development.
- Direct Auto’s ongoing underwriting performance and integration, and Primero’s response to higher Nevada claim costs.
- Loss-reserve adequacy and the sensitivity of earnings to reserve assumptions; the filing estimates that a 1% change in net unpaid losses and LAE would affect after-tax net income by approximately $651.
- Investment portfolio performance and resulting earnings volatility under the new equity-security accounting treatment.
- Availability of cash at the holding-company level, considering dividend restrictions on insurance subsidiaries and reinsurance counterparty exposure.