NI Holdings, Inc. — 2019 Third-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. NI Holdings is a property and casualty insurer, including crop, personal auto, home and farm, commercial, and non-standard auto businesses. Direct Auto, acquired in August 2018, is included in 2019 results and only partially in the 2018 comparative periods. Unless stated otherwise, dollar amounts below are in millions.
Financial and operating metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net premiums earned | $67.1 | $54.1 | $182.7 | $140.9 |
| Total revenues | $70.2 | $64.1 | $199.5 | $155.3 |
| Net income (loss), consolidated | $(7.0) | $9.9 | $9.4 | $16.3 |
| Net income (loss) attributable to NI Holdings | $(7.0) | $9.8 | $9.3 | $16.2 |
| Diluted EPS | $(0.31) | $0.44 | $0.42 | $0.72 |
| Combined ratio | 117.5% | 96.4% | 102.3% | 96.1% |
Q3 underwriting loss was $11.7 million, versus underwriting gain of $1.9 million a year earlier. The loss and LAE ratio rose to 91.7% from 69.2%; the expense ratio was 25.8%, versus 27.2%. For nine months, underwriting loss was $4.2 million versus a $5.5 million gain, with loss and LAE ratio of 74.4% versus 68.8% and expense ratio of 27.9% versus 27.3%.
At September 30, total assets were $529.1 million, liabilities $236.8 million, and equity $292.3 million. Cash and cash equivalents were $25.2 million and total cash and investments $388.7 million. Unpaid losses and LAE were $117.4 million; unearned premiums were $101.4 million. No material external borrowing is disclosed; Nodak Insurance’s $5 million credit line was undrawn and scheduled to expire December 31, 2019. Battle Creek showed a $3 million note payable before consolidation eliminations.
For the first nine months, operating cash flow was negative $1.5 million, investing cash flow negative $40.2 million, and financing cash flow negative $2.0 million. Cash declined $43.7 million to $25.2 million, primarily as cash was invested in securities; the prior-year investing inflow included cash acquired with Direct Auto. The filing reports $5.5 million of net investment income and $9.6 million of net capital gains for the nine-month period.
Material changes and management commentary
- Net premiums earned grew 24.0% in Q3 and 29.7% year to date. Direct Auto materially increased non-standard auto premium; personal lines also grew. Ceded crop premiums were lower, reflecting federal crop-program gain-sharing changes.
- Management attributed weaker underwriting to higher weather-related claims, less favorable crop conditions, and more frequent and severe private passenger auto liability claims. Wet, cool growing and harvest conditions weighed on 2019 crop results.
- Q3 results included $1.2 million of unfavorable prior-year loss development, compared with $2.6 million favorable development in Q3 2018. For nine months, prior-year development was favorable by $6.4 million, compared with $3.2 million favorable in 2018; management attributed much of the 2019 favorable development to Direct Auto.
- Non-standard auto remained profitable overall. Direct Auto’s favorable experience partly offset Primero’s higher claim costs following Nevada’s increased minimum liability limits; management said rate increases were implemented and results would be monitored.
- Fee and other income fell to $0.5 million in Q3 from $5.2 million and to $1.6 million year to date from $6.0 million. The prior-year comparisons included a $4.6 million bargain-purchase gain on Direct Auto.
- Effective January 1, 2019, unrealized equity-security gains and losses began flowing through earnings. The nine-month net capital gain included $8.3 million of unrealized equity gains; management cautioned that this accounting change increases reported earnings volatility. No investment impairments were recorded in 2019.
Outlook, risks and contingencies
The filing provides no specific earnings, premium, or combined-ratio guidance. Management described insurance markets as generally stable. Principal uncertainties include catastrophe and crop losses, loss-reserve estimation, inflation and claim severity, regulatory rate approvals and minimum auto limits, competition, investment-market movements, and reinsurer availability and collectability. The company retained the first $10 million of weather-catastrophe losses and had reinsurance protection up to $78.6 million above that retention. Insurance-subsidiary dividends are regulatorily restricted; 2019 amounts available without prior approval were approximately $17.6 million from Nodak Insurance and $6.7 million from Direct Auto. No dividends were declared or paid in the nine months. Ordinary-course litigation was reported as not material, though outcomes cannot be assured.
On October 28, 2019, the company agreed to acquire Westminster American Insurance Company, subject to customary conditions and regulatory approval, with closing expected early in 2020. Terms include $20 million at closing and approximately $6.7 million annually for three years, subject to adjustment, plus a $5 million retention bonus for its president payable over five years. The company also reported no material change in its risk factors, market-risk disclosures, or internal control over financial reporting.
Most important facts for investors to verify
- Whether elevated weather, auto liability, and crop losses persist, and how the reported combined ratio and underwriting results develop.
- Loss-reserve adequacy and the effect of prior-year development; management estimates that a 1% change in net reserves would affect after-tax income by approximately $0.9 million.
- Cash generation and liquidity, including the shift of cash into investments, crop-related receivables, and restrictions on upstream dividends from regulated subsidiaries.
- The contribution and underwriting performance of Direct Auto and Primero, including the impact of Nevada’s liability-limit changes and rate increases.
- Equity-market effects on earnings under the new accounting treatment, and the costs, financing, regulatory approvals, and closing progress for the Westminster American acquisition.