UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission file number 001-37973
NI HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NORTH DAKOTA
(State or other jurisdiction of
incorporation or organization)
81-2683619
(IRS Employer
Identification No.)
1101 First Avenue North
Fargo, North Dakota
58102
(Address of principal executive offices)
(Zip Code)
(701) 298-4200
Registrant’s telephone number, including area code
Not applicable
Former name, former address, and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
NODK
Nasdaq Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes No ☐
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes No ☒
The number of shares of Registrant’s common stock outstanding on July 31, 2021 was 21,285,433. No preferred shares are issued or outstanding.
TABLE OF CONTENTS
Part I. - FINANCIAL INFORMATION
3
Item 1. - Financial Statements
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Operations
4
Unaudited Consolidated Statements of Comprehensive Income (Loss)
5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
6
Unaudited Consolidated Statements of Cash Flows
8
Notes to Unaudited Consolidated Financial Statements
9
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
35
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
59
Item 4. - Controls and Procedures
Part II. - OTHER INFORMATION
60
Item 1. - Legal Proceedings
Item 1A. - Risk Factors
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
61
Item 3. - Defaults upon Senior Securities
62
Item 4. - Mine Safety Disclosures
Item 5. - Other Information
Item 6. - Exhibits
Signatures
63
ii
Table of Contents
CERTAIN IMPORTANT INFORMATION
Unless the context otherwise requires, as used in this quarterly report on Form 10-Q:
•
“NI Holdings”, “the Company”, “we”, “us”, and “our” refer to NI Holdings, Inc., together with Nodak Insurance Company and its subsidiaries and its affiliate (Battle Creek Mutual Insurance Company), Direct Auto Insurance Company (acquired August 31, 2018), and Westminster American Insurance Company (acquired January 1, 2020), for periods discussed after completion of the conversion, and for periods discussed prior to completion of the conversion refer to Nodak Mutual Insurance Company and all of its subsidiaries and Battle Creek Mutual Insurance Company;
“Nodak Mutual Group” refers to Nodak Mutual Group, Inc., which is the majority shareholder of NI Holdings;
the “conversion” refers to the series of transactions consummated on March 13, 2017 by which Nodak Mutual Insurance Company converted from a mutual insurance company to a stock insurance company, as Nodak Insurance Company, and became a wholly-owned subsidiary of NI Holdings, an intermediate stock holding company formed on the date of conversion;
“Nodak Mutual” refers to Nodak Mutual Insurance Company, the predecessor company to Nodak Insurance Company prior to the conversion;
“Nodak Insurance” refers to Nodak Insurance Company or Nodak Mutual Insurance Company interchangeably;
“members” refers to the policyholders of Nodak Insurance, who are the named insureds under insurance policies issued by Nodak Insurance;
“Battle Creek” refers to Battle Creek Mutual Insurance Company. Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Battle Creek is controlled by Nodak Insurance as a result of an affiliation agreement between Battle Creek and Nodak Insurance, and is consolidated with Nodak Insurance for financial reporting purposes;
“Direct Auto” refers to Direct Auto Insurance Company. On August 31, 2018, NI Holdings completed the acquisition of 100% of the common stock of Direct Auto from the private shareholders of Direct Auto. Direct Auto became a consolidated subsidiary of NI Holdings on this date. Direct Auto is a property and casualty insurance company specializing in non-standard automobile insurance in the state of Illinois;
“American West” refers to American West Insurance Company. American West is a wholly-owned subsidiary of Nodak Insurance;
“Primero” refers to Primero Insurance Company. Primero is an indirect, wholly-owned subsidiary of Nodak Insurance;
“Westminster” refers to Westminster American Insurance Company. On January 1, 2020, NI Holdings completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster. The financial results of Westminster have been included in the Consolidated Financial Statements herein since January 1, 2020. Westminster is a property and casualty insurance company specializing in commercial multi-peril insurance in the Mid-Atlantic states; and
“Nodak Agency” refers to Nodak Agency, Inc. Nodak Agency is a wholly-owned subsidiary of Nodak Insurance.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, which can be identified by the use of such words as “estimate”, “project”, “believe”, “could”, “may”, “intend”, “anticipate”, “plan”, “seek”, “expect” and similar expressions. These forward-looking statements include:
statements of goals, intentions, and expectations;
statements regarding prospects and business strategy; and
estimates of future costs, benefits, and results.
1
The forward-looking statements are subject to numerous assumptions, risks and uncertainties, including, among other things, the factors discussed under the heading “Risk Factors” in this Quarterly Report and our Annual Report on Form 10-K (“2020 Annual Report”) that could affect the actual outcome of future events.
All of these factors are difficult to predict and many are beyond our control. These important factors include those discussed under “Risk Factors” and those listed below:
material changes to the federal crop insurance program;
future economic conditions in the markets in which we compete that are less favorable than expected;
the effect of legislative, judicial, economic, demographic, and regulatory events in the jurisdictions where we do business;
our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network;
our ability to successfully integrate acquired businesses;
financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio;
heightened competition, including specifically the intensification of price competition, the entry of new competitors, and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products;
changes in general economic conditions, including inflation, unemployment, interest rates, and other factors;
the impact of national or global events, including pandemics, military conflicts, and other wide-spread events;
estimates and adequacy of loss reserves and trends in loss and loss adjustment expenses;
changes in the coverage terms required by state laws with respect to minimum auto liability insurance, including higher minimum limits;
our inability to obtain regulatory approval of, or to implement, premium rate increases;
our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us and to collect amounts that we believe we are entitled to under such reinsurance;
the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Securities and Exchange Commission, the Financial Accounting Standards Board, or other standard-setting bodies;
unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
the potential impact of fraud, operational errors, systems malfunctions, or cybersecurity incidents;
adverse litigation or arbitration results; and
adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products.
Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from that expressed or implied by the forward-looking information.
2
PART I. - FINANCIAL INFORMATION
NI Holdings, Inc.
Consolidated Balance Sheets
(dollar amounts in thousands, except par value)
June 30, 2021
December 31, 2020
(Unaudited)
Assets:
Cash and cash equivalents
$
61,223
101,077
Fixed income securities, at fair value
369,738
320,410
Equity securities, at fair value
78,368
69,952
Other investments
2,071
2,924
Total cash and investments
511,400
494,363
Premiums and agents' balances receivable
84,463
48,523
Deferred policy acquisition costs
29,657
23,968
Reinsurance premiums receivable
-
93
Reinsurance recoverables on losses
24,574
8,710
Income tax recoverable
2,549
Accrued investment income
2,476
2,141
Property and equipment
9,971
9,899
Receivable from Federal Crop Insurance Corporation
17,191
6,646
Goodwill and other intangibles
17,958
18,194
Other assets
8,186
5,066
Total assets
708,425
617,603
Liabilities:
Unpaid losses and loss adjustment expenses
152,340
105,750
Unearned premiums
161,592
119,363
Reinsurance premiums payable
2,646
Income tax payable
754
Deferred income taxes
8,046
8,757
Westminster consideration payable
12,820
19,287
Accrued expenses and other liabilities
20,042
14,820
Total liabilities
357,486
268,731
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value, authorized: 25,000,000 shares;
issued: 23,000,000 shares; and outstanding: 2021 – 21,302,167 shares,
2020 – 21,318,638 shares
230
Preferred stock, without par value, authorized 5,000,000 shares,
no shares issued or outstanding
Additional paid-in capital
96,729
97,911
Unearned employee stock ownership plan shares
(1,427
)
Retained earnings
265,816
258,741
Accumulated other comprehensive income, net of income taxes
9,556
12,840
Treasury stock, at cost, 2021 – 1,555,093 shares, 2020 – 1,538,622 shares
(24,403
(23,968
Non-controlling interest
4,438
4,545
Total shareholders’ equity
350,939
348,872
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
Unaudited Consolidated Statements of Operations
(dollar amounts in thousands, except per share data)
Three Months Ended
Six Months Ended
June 30,
2021
2020
Revenues:
Net premiums earned
76,281
82,006
139,416
140,778
Fee and other income
520
446
837
808
Net investment income
1,710
2,018
3,246
3,989
Net capital gain (loss) on investments
4,701
11,197
10,512
(3,722
Total revenues
83,212
95,667
154,011
141,853
Expenses:
Losses and loss adjustment expenses
62,918
52,364
99,807
82,786
Amortization of deferred policy acquisition costs
19,886
14,829
33,473
24,216
Other underwriting and general expenses
3,703
4,796
11,354
15,568
Total expenses
86,507
71,989
144,634
122,570
Income (loss) before income taxes
(3,295
23,678
9,377
19,283
Income tax expense (benefit)
(561
4,911
2,329
4,071
Net income (loss)
(2,734
18,767
7,048
15,212
Net income (loss) attributable to non-controlling interest
(90
34
23
66
Net income (loss) attributable to NI Holdings, Inc.
(2,644
18,733
7,025
15,146
Earnings (loss) per common share:
Basic
(0.12
0.86
0.33
0.69
Diluted
0.85
0.32
0.68
Share data:
Weighted average common shares outstanding used in basic per common share calculations
21,464,840
21,886,930
21,463,747
22,052,501
Plus: Dilutive securities
138,293
224,312
129,772
Weighted average common shares used in diluted per common share calculations
22,025,223
21,688,059
22,182,273
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(dollar amounts in thousands)
Three Months Ended June 30, 2021
Six Months Ended June 30, 2021
Attributable
to NI
Holdings, Inc.
to Non-
Controlling Interest
Total
Other comprehensive income (loss), before income taxes:
Holding gains (losses) on investments
3,032
128
3,160
(3,731
(165
(3,896
Reclassification adjustment for net realized capital gain included in net income (loss)
(325
(426
Other comprehensive income (loss), before income taxes
2,707
2,835
(4,157
(4,322
Income tax benefit (expense) related to items of other comprehensive income (loss)
(568
(27
(595
873
908
Other comprehensive income (loss), net of income taxes
2,139
101
2,240
(3,284
(130
(3,414
Comprehensive income (loss)
(505
11
(494
3,741
(107
3,634
Three Months Ended June 30, 2020
Six Months Ended June 30, 2020
Net income
Other comprehensive income, before income taxes:
Holding gains on investments
11,269
194
11,463
6,813
108
6,921
Reclassification adjustment for net realized capital gain included in net income
(88
(5
(93
(145
(10
(155
Other comprehensive income, before income taxes
11,181
189
11,370
6,668
98
6,766
Income tax expense related to items of other comprehensive income
(2,348
(40
(2,388
(1,400
(21
(1,421
Other comprehensive income, net of income taxes
8,833
149
8,982
5,268
77
5,345
Comprehensive income
27,566
183
27,749
20,414
143
20,557
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
Common
Stock
Additional
Paid-in
Capital
Unearned
Employee
Ownership
Plan Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income, Net of
Income Taxes
Treasury
Non-Controlling
Interest
Total Shareholders’ Equity
Balance, April 1, 2021
96,511
(1,427)
268,444
7,417
(23,012)
4,427
352,590
Net loss
Purchase of treasury stock
(1,671
(1,671)
Share-based compensation
516
Issuance of vested award shares
(298
16
280
(2
Balance, June 30, 2021
Balance, January 1, 2021
(23,968)
Other comprehensive loss, net of income taxes
(2,267
1,188
(2,370
50
1,832
(488
Balance, April 1, 2020
96,374
214,811
2,047
(13,459
3,459
301,791
(5,281
(5,281)
464
(177
(46
223
Balance, June 30, 2020
96,661
233,498
10,880
(18,517
3,642
324,723
Balance, January 1, 2020
95,961
218,480
5,612
(12,308
3,499
309,803
(6,783
1,177
(477
(128
574
(31
7
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash flows from operating activities:
Net capital (gain) loss on investments
(10,512
3,722
Deferred income tax expense (benefit)
197
(972
Depreciation of property and equipment
341
365
Amortization of intangibles
236
3,711
Deferral of policy acquisition costs
(39,162
(33,021
Net amortization of premiums and discounts on investments
1,024
557
Loss on sale of property and equipment
Changes in operating assets and liabilities:
Premiums and agents’ balances receivable
(35,940
(43,138
Reinsurance premiums receivable / payable
2,739
(2,269
(15,864
(4,203
(335
(10,545
1,936
Income tax recoverable / payable
(3,303
2,142
(3,120
119
46,590
14,196
42,229
31,325
5,420
6,810
Net cash flows from operating activities
21,708
21,803
Cash flows from investing activities:
Proceeds from maturities and sales of fixed income securities
35,483
45,539
Proceeds from sales of equity securities
17,247
9,429
Purchases of fixed income securities
(89,729
(51,944
Purchases of equity securities
(15,559
(11,207
Purchases of property and equipment
(417
(443
Acquisition of Westminster American Insurance Company (cash consideration paid net of cash and cash equivalents acquired)
(703
Proceeds from sale of other investments and other
835
Net cash flows from investing activities
(52,140
(9,263
Cash flows from financing activities:
Purchases of treasury stock
Installment payment on Westminster consideration payable
(6,667
Issuance of restricted stock awards
Net cash flows from financing activities
(9,422
(6,814
Net (decrease) increase in cash and cash equivalents
(39,854
5,726
Cash and cash equivalents at beginning of period
62,132
Cash and cash equivalents at end of period
67,858
Non-cash item: Present value of installment payable issued in connection with acquisition of Westminster American Insurance Company
18,787
Federal and state income taxes paid
5,435
2,900
(dollar amounts in thousands, except per share amounts)
1.Organization
NI Holdings, Inc. (“NI Holdings”) is a North Dakota business corporation that is the stock holding company of Nodak Insurance Company and became such in connection with the conversion of Nodak Mutual Insurance Company from a mutual to stock form of organization and the creation of a mutual holding company. The conversion was consummated on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance Company (the successor to Nodak Mutual Insurance Company) were issued to Nodak Mutual Group, Inc., which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak Insurance Company then became a wholly-owned stock subsidiary of NI Holdings. Prior to completion of the conversion, NI Holdings conducted no business and had no assets or liabilities. As a result of the conversion, NI Holdings became the holding company for Nodak Insurance Company and its existing subsidiaries. The newly issued shares of NI Holdings were available for public trading on March 16, 2017.
These Consolidated Financial Statements of NI Holdings include the financial position and results of NI Holdings and seven other entities:
Nodak Insurance Company (“Nodak Insurance”, formerly Nodak Mutual Insurance Company prior to the conversion);
Nodak Agency, Inc. (“Nodak Agency”);
American West Insurance Company (“American West”);
Primero Insurance Company (“Primero”);
Battle Creek Mutual Insurance Company (“Battle Creek”, an affiliated company with Nodak Insurance);
Direct Auto Insurance Company (“Direct Auto”); and
Westminster American Insurance Company (“Westminster”).
Nodak Insurance is the largest domestic property and casualty insurance company in North Dakota. Nodak Insurance was incorporated on April 15, 1946 under the laws of North Dakota, and benefits from a strong marketing affiliation with the North Dakota Farm Bureau (“NDFB”). Nodak Insurance specializes in providing private passenger auto, homeowners, farmowners, commercial multi-peril, crop hail, and Federal multi-peril crop insurance coverages.
Nodak Agency, a wholly-owned subsidiary of Nodak Insurance, is an inactive shell corporation.
American West, a wholly-owned subsidiary of Nodak Insurance, is a property and casualty insurance company licensed in eight states in the Midwest and Western regions of the United States. American West began writing policies in 2002 and primarily writes personal auto, homeowners, and farm coverages in South Dakota. American West also writes personal auto coverage in North Dakota, as well as crop hail and Federal multi-peril crop insurance coverages in Minnesota and South Dakota.
Primero is a wholly-owned subsidiary of Tri-State, Ltd. Tri-State, Ltd. is an inactive shell corporation 100% owned by Nodak Insurance. Primero is a property and casualty insurance company writing non-standard automobile coverage in the states of Nevada, Arizona, North Dakota and South Dakota.
Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Battle Creek is controlled by Nodak Insurance via a surplus note. The terms of the surplus note allow Nodak Insurance to appoint two-thirds of the Battle Creek Board of Directors. Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska.
Direct Auto, a wholly-owned subsidiary of NI Holdings, is a property and casualty company licensed in Illinois. Direct Auto began writing non-standard automobile coverage in 2007, and was acquired by NI Holdings on August 31, 2018 via a stock purchase agreement.
Westminster, a wholly-owned subsidiary of NI Holdings, is a property and casualty insurance company licensed in seventeen states and the District of Columbia. Westminster is headquartered in Owings Mills, Maryland and underwrites commercial multi-peril insurance in the states of Delaware, Georgia, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia, and the District of Columbia. Westminster was acquired by NI Holdings on January 1, 2020 via a stock purchase agreement. The financial results of Westminster have been included in the Consolidated Financial Statements herein since January 1, 2020. See Note 3.
The same executive management team provides oversight and strategic direction for the entire organization. Nodak Insurance provides common product oversight, pricing practices, and underwriting standards, as well as underwriting and claims administration, to itself, American West, and Battle Creek. Primero, Direct Auto, and Westminster personnel manage the day-to-day operations of their respective companies. The insurance companies share a combined business plan to achieve market penetration and underwriting profitability objectives. Distinctions within the products of the insurance companies generally relate to the states in which the risk is located and specific risk profiles targeted within similar classes of business.
2.Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All material intercompany transactions and balances have been eliminated. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report”).
The preparation of the interim Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim Consolidated Financial Statements and the reported amounts of revenues, claims, and expenses during the reporting period. Actual results could differ from those estimates. Operating results for the interim period ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021.
Our Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries, as well as Battle Creek, an entity we control via contract. The terms “we”, “us”, “our”, or “the Company” as used herein refer to the consolidated entity.
Our 2020 Annual Report describes the accounting policies and estimates that are critical to the understanding of our results of operations, financial condition, and liquidity. The accounting policies and estimation process described in the 2020 Annual Report were consistently applied to the Unaudited Consolidated Financial Statements for the six month period ended June 30, 2021.
Recent Accounting Pronouncements
As an emerging growth company, we have elected to use the extended transition period for complying with any new or revised financial accounting standards from the Financial Accounting Standards Board (“FASB”) pursuant to Section 13(a) of the Exchange Act. The following discussion includes effective dates for both public business entities and emerging growth companies, as well as whether specific guidance may be adopted early.
Adopted
In January 2020, the Company adopted amended guidance from the FASB that shortened the amortization period of premiums on certain fixed income securities held at a premium to the earliest call date rather than through the maturity date of the callable security. The adoption of this guidance did not materially impact the Company’s financial position, results of operations, or cash flows.
In March 2020, the Company adopted modified disclosure requirements from the FASB relating to the fair value of assets and liabilities. The modifications primarily related to Level 3 fair value measurements. The Company does not currently carry any Level 3 assets or liabilities. As a result, there was no impact to the Company’s financial statement disclosures.
Not Yet Adopted
In February 2016, the FASB issued new guidance that requires lessees to recognize leases, including operating leases, on the lessee’s Consolidated Balance Sheet, unless a lease is considered a short-term lease. The new guidance also requires entities to make new judgments to identify leases. In July 2018, the FASB issued additional guidance to allow an optional transition method. An entity may apply the new leases guidance at the beginning of the earliest period presented in the financial statements, or at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The
10
new guidance, which replaces the current lease guidance, is effective for annual and interim reporting periods beginning after December 15, 2018 for public business entities. For private companies and emerging growth companies, this guidance is effective for annual reporting periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted for all entities. We do not expect the adoption of this new guidance to have a significant impact on our financial position, results of operations, or cash flows. Upon adoption, the Company will recognize a right of use asset and operating lease liabilities on its Consolidated Balance Sheet. The cumulative adjustment to retained earnings is not expected to be significant.
In June 2016, the FASB issued a new standard that will require timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The guidance will require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Finally, the guidance amends the accounting for credit losses on available-for-sale fixed income securities and purchased financial assets with credit deterioration. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for filers with the Securities and Exchange Commission (“SEC”) excluding smaller reporting companies, and emerging growth companies that did not relinquish private company relief. For all other entities, this guidance is effective for annual reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted for all entities. Based on our evaluation, adoption of this new standard will not have a significant impact on our financial position, results of operations, and cash flows.
In December 2019, the FASB issued amended guidance to simplify the accounting for income taxes. The amended guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, for public business entities. For private companies and emerging growth companies, this amended guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period. We are evaluating the impact this new guidance will have on our financial position, results of operations, and cash flows.
3.Acquisition of Westminster American Insurance Company
On January 1, 2020, the Company completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster, and Westminster became a consolidated subsidiary of the Company. Westminster is a property and casualty insurance company specializing in commercial multi-peril insurance in nine states and the District of Columbia.
Westminster remains headquartered in Owings Mills, Maryland, and continues to be led by its president and other key management in place at the time of the acquisition. The results of Westminster are included as part of the Company’s commercial business segment following the closing date.
We account for business acquisitions in accordance with the acquisition method of accounting, which requires, among other things, that most assets acquired, liabilities assumed, and contingent consideration be recognized at their fair values as of the acquisition date, which is the closing date for the Westminster transaction. During the measurement period, adjustments to provisional purchase price allocations are recognized if new information is obtained about the facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as it is determined that no more information is obtainable, but in no case shall the measurement period exceed one year from the acquisition date. The measurement period for the Westminster acquisition ended December 31, 2020.
The Company incurred acquisition-related costs of $828 and $83 during the years ended December 31, 2020, and 2019, respectively.
The Company paid $20,000 in cash consideration to the private shareholder of Westminster as of the closing date, with an additional $20,000 to be paid in three equal annual installments. The acquisition of Westminster did not include any contingent consideration other than a provision regarding future changes to federal income tax rates. The following table summarizes the consideration transferred to acquire Westminster and the amounts of identified assets acquired and liabilities assumed at the acquisition date:
Fair Value of Consideration:
Cash consideration transferred
20,000
Present value of future cash consideration
Total cash consideration
38,787
Fair Value of Identifiable Assets Acquired and Liabilities Assumed:
Identifiable net assets:
19,297
Fixed income securities
12,073
Equity securities
2,705
735
8,507
763
70
2,376
Federal income tax recoverable
138
State insurance licenses (included in goodwill and other intangibles)
1,800
Distribution network (included in goodwill and other intangibles)
6,700
Trade name (included in goodwill and other intangibles)
500
Value of business acquired (included in goodwill and other intangibles)
4,750
76
(8,568
(16,611
Deferred income taxes, net
(1,583
(565
(1,132
Total identifiable net assets
32,031
Goodwill
6,756
The fair value of the assets acquired included premiums and agents’ balances receivable of $8,507 and reinsurance
12
recoverables on losses of $763. These are the gross amounts due from policyholders and reinsurers, respectively, none of which are anticipated to be uncollectible. The Company did not acquire any other material receivables as a result of the acquisition of Westminster.
The fair values of the acquired distribution network, state insurance licenses, Westminster trade name, and value of business acquired (“VOBA”) intangible assets were $6,700, $1,800, $500, and $4,750, respectively. The state insurance license intangible has an indefinite life, while the other intangible assets will be amortized over useful lives of up to twenty years. The goodwill is not deductible for income tax purposes.
The first installment of the additional consideration was paid during the first quarter of 2021.
13
4.Investments
The amortized cost and estimated fair value of fixed income securities as of June 30, 2021 and December 31, 2020, were as follows:
Cost or Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Fixed income securities:
U.S. Government and agencies
14,173
664
(80
14,757
Obligations of states and political subdivisions
68,951
3,133
(122
71,962
Corporate securities
154,666
6,543
(441
160,768
Residential mortgage-backed securities
40,992
1,019
41,904
Commercial mortgage-backed securities
29,466
1,367
(14
30,819
Asset-backed securities
49,307
352
(131
49,528
Total fixed income securities
357,555
13,078
(895
13,334
1,055
(6
14,383
61,001
3,278
(35
64,244
119,826
8,755
(147
128,434
35,017
1,478
(1
36,494
23,976
1,700
25,655
50,751
535
(86
51,200
303,905
16,801
(296
The amortized cost and estimated fair value of fixed income securities by contractual maturity are shown below. Actual maturities could differ from contractual maturities because issuers of the securities may have the right to call or prepay certain obligations, which may or may not include call or prepayment penalties.
Amortized Cost
Due to mature:
One year or less
22,016
22,264
After one year through five years
79,331
83,012
After five years through ten years
91,414
94,945
After ten years
45,029
47,266
Mortgage / asset-backed securities
119,765
122,251
17,722
17,933
86,709
91,457
59,408
64,987
30,322
32,684
109,744
113,349
14
Fixed income securities with a fair value of $8,059 at June 30, 2021 and $6,093 at December 31, 2020, were deposited with various state regulatory agencies as required by law. The Company has not pledged any assets to secure any obligations.
The investment category and duration of the Company’s gross unrealized losses on fixed income securities were as follows:
Less than 12 Months
Greater than 12 months
Fair
Value
Unrealized
Losses
2,758
8,264
33,910
(433
405
(8
34,315
11,289
2,140
13,220
(120
1,235
(11
14,455
71,581
(876
1,640
(19
73,221
931
1,806
3,215
(97
734
(50
3,949
68
1,103
5,785
4,188
(55
9,973
12,908
(191
4,922
(105
17,830
Investments with unrealized losses are categorized with a duration of greater than 12 months when all positions of a security have continually been in a loss position for at least 12 months.
We frequently review our investment portfolio for declines in fair value. Our process for identifying declines in the fair value of investments that are other than temporary involves consideration of several factors. These factors include (i) the time period in which there has been a significant decline in value, (ii) an analysis of the liquidity, business prospects, and overall financial condition of the issuer, (iii) the significance of the decline, and (iv) our intent and ability to hold the investment for a sufficient period of time for the value to recover. When our analysis of the above factors results in the conclusion that declines in fair values are other than temporary, the credit loss component of the impairment is reflected in net income (loss) as a realized capital loss on investment if the Company does not intend to sell the security, and the remaining portion of the other-than-temporary loss is recognized in other comprehensive income (loss), net of income taxes. If the Company intends to sell the security, or determines that it is more likely than not that it will be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary loss is recognized in net income (loss).
15
The Company did not record any other-than-temporary impairments during the three or six month periods ended June 30, 2021 and 2020.
As of June 30, 2021, we held 145 fixed income securities with unrealized losses. As of December 31, 2020, we held 67 fixed income securities with unrealized losses. In conjunction with our outside investment advisors, we analyzed the credit ratings of the securities as well as the historical monthly amortized cost to fair value ratio of securities in an unrealized loss position. This analysis yielded no fixed income securities which had fair values less than 80% of amortized cost for the preceding 12-month period.
Net investment income consisted of the following:
Three Months Ended June 30,
2,112
2,281
4,123
4,590
300
545
625
Real estate
157
124
313
270
26
Total gross investment income
2,550
2,711
4,983
5,511
Investment expenses
840
693
1,737
1,522
Net capital gain (loss) on investments consisted of the following:
Gross realized gains:
331
392
441
477
2,605
6,520
2,250
Total gross realized gains
2,936
1,127
6,961
2,727
Gross realized losses, excluding other-than-temporary impairment losses:
(300
(323
(457
(170
(1,019
Total gross realized losses, excluding other-than-temporary impairment losses
(61
(757
(184
(1,342
Net realized gain on investments
2,875
370
6,777
1,385
Change in net unrealized gain on equity securities
1,826
10,827
3,735
(5,107
5.Fair Value Measurements
We maximize the use of observable inputs in our valuation techniques and apply unobservable inputs only to the extent that observable inputs are unavailable. The largest class of assets and liabilities carried at fair value by the Company at June 30, 2021 and December 31, 2020 were fixed income securities.
Prices provided by independent pricing services and independent broker quotes can vary widely, even for the same security.
Our available-for-sale investments are comprised of a variety of different securities, which are classified into levels based on the valuation technique and inputs used in their valuation. The valuation of money market funds classified as cash equivalents and equity securities are generally based on Level I inputs, which use the market approach valuation technique. The valuation of fixed income securities generally incorporates significant Level II inputs using the market and income approach techniques. We may assign a lower level to inputs typically considered to be Level II based on our assessment of liquidity and relative level of uncertainty surrounding inputs. There were no assets or liabilities classified as Level III at June 30, 2021 or December 31, 2020.
The following tables set forth our assets which are measured at fair value on a recurring basis by the level within the fair value hierarchy in which fair value measurements fall:
Level I
Level II
Level III
Equity securities:
Basic materials
1,066
Communications
8,033
Consumer, cyclical
11,047
Consumer, non-cyclical
16,298
Energy
2,089
Financial
6,841
Industrial
15,088
Technology
17,809
Utility
97
Total equity securities
Cash equivalents
42,197
Total assets at fair value
490,303
120,565
17
1,285
7,455
9,929
14,633
1,499
6,235
12,733
16,145
38
65,354
455,716
135,306
There were no liabilities measured at fair value on a recurring basis at June 30, 2021 or December 31, 2020.
18
6.Reinsurance
The Company will assume and cede certain premiums and losses to and from various companies and associations under various reinsurance agreements. The Company seeks to limit the maximum net loss that can arise from large risks or risks in concentrated areas of exposure through use of these agreements, either on an automatic basis under general reinsurance contracts known as treaties or by negotiation on substantial individual risks.
Reinsurance contracts do not relieve the Company from its obligation to policyholders. Additionally, failure of reinsurers to honor their obligations could result in significant losses to us. There can be no assurance that reinsurance will continue to be available to us at the same extent, and at the same cost, as it has in the past. The Company may choose in the future to reevaluate the use of reinsurance to increase or decrease the amounts of risk ceded to reinsurers.
As a group, during the six month period ended June 30, 2021, the Company retained the first $10,000 of weather-related losses from catastrophic events and had reinsurance under various reinsurance agreements up to $117,000 in excess of its $10,000 retained risk. During the year ended December 31, 2020, the Company retained the first $10,000 of weather-related losses from catastrophic events and had reinsurance under various reinsurance agreements up to $97,000 in excess of its $10,000 retained risk.
The Company actively monitors and evaluates the financial condition of the reinsurers and develops estimates of the uncollectible amounts due from reinsurers. Such estimates are made based on periodic evaluation of balances due from reinsurers, judgments regarding reinsurers’ solvency, known disputes, reporting characteristics of the underlying reinsured business, historical experience, current economic conditions, and the state of reinsurer relations in general. Collection risk is mitigated from reinsurers by entering into reinsurance arrangements only with reinsurers that have strong credit ratings and statutory surplus above certain levels. The Company’s reinsurance recoverables on paid and unpaid losses were due from reinsurance companies with A.M. Best ratings of “A” or higher.
A reconciliation of direct to net premiums on both a written and an earned basis is as follows:
Premiums Written
Premiums Earned
Direct premium
125,552
87,059
197,972
155,802
Assumed premium
3,576
3,516
5,026
4,964
Ceded premium
(26,203
(14,294
(33,317
(21,350
Net premiums
102,925
169,681
Percentage of assumed earned premium to direct earned premium
4.0%
3.2%
112,759
82,452
175,731
144,845
2,702
2,683
4,302
4,283
(2,731
(3,129
(7,901
(8,350
112,730
172,132
3.3%
3.0%
A reconciliation of direct to net losses and loss adjustment expenses is as follows:
Direct losses and loss adjustment expenses
76,599
59,375
114,177
93,267
Assumed losses and loss adjustment expenses
1,960
794
2,908
1,102
Ceded losses and loss adjustment expenses
(15,641
(7,805
(17,278
(11,583
Net losses and loss adjustment expenses
19
If 100% of our ceded reinsurance was cancelled as of June 30, 2021 or December 31, 2020, no ceded commissions would need to be returned to the reinsurers. Reinsurance contracts are typically effective from January 1 through December 31 each year.
7.Deferred Policy Acquisition Costs
Activity with regards to our deferred policy acquisition costs was as follows:
Balance, beginning of period
26,575
19,164
15,399
22,968
19,869
39,162
33,021
(19,886
(14,829
(33,473
(24,216
Balance, end of period
24,204
8.Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
Balance at beginning of period:
Liability for unpaid losses and loss adjustment expenses
93,250
4,045
Net balance at beginning of period
97,040
89,205
Acquired unpaid losses and loss adjustment expenses related to:
Current year
Prior years
8,568
Total incurred
Incurred related to:
102,004
85,318
(2,197
(2,532
Paid related to:
40,664
33,194
28,417
40,362
Total paid
69,081
73,556
Balance at end of period:
116,014
9,011
Net balance at end of period
127,766
107,003
During the six months ended June 30, 2021, the Company’s reported incurred losses and LAE included $2,197 of net favorable development on prior accident years, compared to $2,532 of net favorable development on prior accident years during the six months ended June 30, 2020. Increases and decreases are generally the result of ongoing analysis of loss development trends. As additional information becomes known regarding individual claims, original estimates are increased or decreased accordingly.
20
9.Property and Equipment
Property and equipment consisted of the following:
Estimated Useful Life
Cost:
15,327
15,313
10-31 years
Electronic data processing equipment
1,547
1,271
5-7 years
Furniture and fixtures
2,867
Automobiles
1,275
2-3 years
Gross cost
21,053
20,726
Accumulated depreciation
(11,082
(10,827
Total property and equipment, net
Depreciation expense was $171 and $178 for the three months ended June 30, 2021 and 2020, respectively, and $341 and $365 for the six months ended June 30, 2021 and 2020, respectively.
10.Goodwill and Other Intangibles
The following table presents the carrying amount of the Company’s goodwill by segment:
Non-standard auto from acquisition of Primero
2,628
Commercial from acquisition of Westminster
9,384
Other Intangible Assets
The following table presents the carrying amount of the Company’s other intangible assets:
Gross Carrying Amount
Accumulated Amortization
Net
Subject to amortization:
Trade names
748
216
532
Distribution network
558
6,142
Total subject to amortization
7,448
774
6,674
Not subject to amortization – state insurance licenses
1,900
9,348
8,574
21
166
582
372
6,328
538
6,910
Not subject to amortization – state insurance license
8,810
Amortization expense was $118 and $1,829 for the three months ended June 30, 2021 and 2020, respectively, and $236 and $3,711 for the six months ended June 30, 2021 and 2020, respectively.
Other intangible assets that have finite lives, including trade names and distribution networks, are amortized over their useful lives. As of June 30, 2021, the estimated amortization of other intangible assets with finite lives for the next five years in the period ended December 31, 2025, and thereafter is as follows:
Year ending December 31,
Amount
2022
472
2023
455
2024
422
2025
Thereafter
4,667
Total other intangible assets with finite lives
11.Related Party Transactions
Intercompany Reinsurance Pooling Arrangement
Effective January 1, 2020, all of our insurance subsidiary and affiliate companies entered into an intercompany reinsurance pooling agreement. This agreement was finalized, approved, and implemented during the fourth quarter of 2020, retroactive to the January 1 effective date. Nodak Insurance is the lead company of the pool, and assumes the net premiums, net losses, and underwriting expenses from each of the other five companies. Nodak Insurance then retrocedes balances back to each company, while retaining its own share of the pool’s net underwriting results, based on individual pool percentages established in the respective pooling agreement. This arrangement allows each insurance company to rely upon the capacity of the pool’s total statutory capital and surplus. As a result, they are evaluated by A.M. Best on a group basis and hold a single combined financial strength rating, long-term issuer credit rating, and financial size category.
In connection with the pooling agreement, the quota share agreement between Battle Creek and Nodak Insurance was cancelled. As a result, the Company’s consolidated financial position and results of operations are impacted by the portion of Battle Creek’s underwriting results that are allocated to the policyholders of Battle Creek rather than the shareholders of NI Holdings.
For the six months ended June 30, 2021 and the year ended December 31, 2020, the pooling share percentages by insurance company subsidiary were:
Pool Percentage
Nodak Insurance Company
66.0
%
American West Insurance Company
7.0
Primero Insurance Company
3.0
Battle Creek Mutual Insurance Company
2.0
Direct Auto Insurance Company
13.0
Westminster American Insurance Company
9.0
100.0
22
North Dakota Farm Bureau
We were organized by the NDFB to provide insurance protection for its members. We have a royalty agreement with the NDFB that recognizes the use of their trademark and provides royalties to the NDFB based on the premiums written on Nodak Insurance’s insurance policies. Royalties paid to the NDFB were $395 and $393 during the three months ended June 30, 2021 and 2020, respectively, and $732 and $729 for the six months ended June 30, 2021 and 2020, respectively. Royalty amounts payable of $144 and $113 were accrued as a liability to the NDFB at June 30, 2021 and December 31, 2020, respectively.
Dividends
State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk-based capital (“RBC”) requirements that may further affect their ability to pay dividends. Our insurance subsidiaries statutory capital and surplus at December 31, 2020 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin.
The amount available for payment of dividends from Nodak Insurance to NI Holdings during 2021 without the prior approval of the North Dakota Insurance Department is $21,628 based upon the surplus of Nodak Insurance at December 31, 2020. Prior to its payment of any extraordinary dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if Nodak Insurance is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Nodak Insurance during the six months ended June 30, 2021. The Board of Directors of Nodak Insurance declared and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2020.
The amount available for payment of dividends from Direct Auto to NI Holdings during 2021 without the prior approval of the Illinois Department of Insurance is $3,582 based upon the surplus of Direct Auto at December 31, 2020. Prior to its payment of any dividend, Direct Auto will be required to provide notice of the dividend to the Illinois Department of Insurance. This notice must be provided to the Illinois Department of Insurance within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Illinois Department of Insurance has the power to limit or prohibit dividend payments if Direct Auto is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Direct Auto during the six months ended June 30, 2021 or the year ended December 31, 2020.
The amount available for payment of dividends from Westminster to NI Holdings during 2021 without the prior approval of the Maryland Insurance Administration is $505 based upon the statutory net investment income of Westminster for the year ended December 31, 2020 and the three preceding years. Prior to its payment of any dividend, Westminster will be required to provide notice of the dividend to the Maryland Insurance Administration. This notice must be provided to the Maryland Insurance Administration within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Maryland Insurance Administration has the power to limit or prohibit dividend payments if Westminster is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Westminster during the six months ended June 30, 2021 or the year ended December 31, 2020.
The following tables illustrates the impact of including Battle Creek in our Consolidated Balance Sheets and Statements of Operations prior to intercompany eliminations:
December 31,
5,427
6,055
Investments
10,656
5,543
5,023
4,738
593
479
Pooling receivable (1)
920
Reinsurance recoverables on losses (2)
6,506
5,646
54
27
Deferred income tax asset
129
337
49
28,768
23,895
3,332
2,445
2,381
Notes payable (1)
3,000
Reinsurance losses payable (2)
10,740
11,221
Pooling payable (1)
4,092
459
303
24,330
19,350
Equity:
Total equity
Total liabilities and equity
(1)
Amount fully eliminated in consolidation.
(2)
Amount partly eliminated in consolidation.
3,095
Fee and other income (expense)
37
Net capital gain on investments
1,848
43
3,116
85
1,531
2,269
397
669
31
147
1,959
3,085
(111
24
12.Benefit Plans
Nodak Insurance sponsors a money purchase plan that covers all eligible employees. Plan costs are funded annually as they are earned. Nodak Insurance reported expenses related to the money purchase plan totaling $270 and $202 during the three months ended June 30, 2021 and 2020, respectively, and $539 and $403 during the six months ended June 30, 2021 and 2020, respectively.
Nodak Insurance also sponsors a 401(k) plan with an automatic contribution to all eligible employees and a matching contribution for eligible employees of 50% up to 3% of eligible compensation. Primero, Direct Auto, and Westminster also sponsor 401(k) plans. The Company reported expenses related to the 401(k) plans totaling $175 and $162 during the three months ended June 30, 2021 and 2020, respectively, and $347 and $325 during the six months ended June 30, 2021 and 2020, respectively. All fees associated with the plans are deducted from the eligible employee accounts.
The Board of Directors has authorized a non-qualified deferred compensation plan covering key executives of the Company (as designated by the Board of Directors). The Company’s policy is to fund the plan by amounts that represent the excess of the maximum contribution allowed by the Employee Retirement Income Security Act (“ERISA”) over the key executives’ allowable 401(k) contribution. The plan also allows employee-directed deferral of key executive’s compensation or incentive payments. The Company reported expenses related to this plan totaling $149 and $14 during the three months ended June 30, 2021 and 2020, respectively, and $567 and $28 during the six months ended June 30, 2021 and 2020, respectively.
The Company has established an Employee Stock Ownership Plan (the “ESOP”). The ESOP is intended to be an employee stock ownership plan within the meaning of Internal Revenue Code Section 4975(e)(7) and will invest solely in common stock of the Company.
In connection with our initial public offering in March 2017, Nodak Insurance loaned $2,400 to the ESOP’s related trust (the “ESOP Trust”). The ESOP loan will be for a period of ten years and bears interest at the long-term Applicable Federal Rate effective on the closing date of the offering (2.79% annually). The ESOP Trust used the proceeds of the loan to purchase shares in our initial public offering, which results in the ESOP Trust owning approximately 1.0% of the Company’s authorized shares. The ESOP has purchased the shares for investment and not for resale.
The shares purchased by the ESOP Trust in the offering are held in a suspense account as collateral for the ESOP loan. Nodak Insurance will make semi-annual cash contributions to the ESOP in amounts no smaller than the amounts required for the ESOP Trust to make its loan payments to Nodak Insurance. While the ESOP makes two loan payments per year, a pre-determined portion of the shares will be released from the suspense account and allocated to participant accounts at the end of the calendar year. This release and allocation will occur on an annual basis over the ten-year term of the ESOP loan. Nodak Insurance will have a lien on the shares of common stock of the Company held by the ESOP to secure repayment of the loan from the ESOP to Nodak Insurance. If the ESOP is terminated as a result of a change in control of the Company, the ESOP may be required to pay the costs of terminating the plan.
It is anticipated that the only assets held by the ESOP will be shares of the Company’s common stock. Participants in the ESOP cannot direct the investment of any assets allocated to their accounts. The initial ESOP participants are employees of Nodak Insurance. The employees of Primero, Direct Auto, and Westminster do not participate in the ESOP. American West and Battle Creek have no employees.
Each employee of Nodak Insurance will automatically become a participant in the ESOP if such employee is at least 21 years old, has completed a minimum of one thousand hours of service with Nodak Insurance, and has completed an Eligibility Computation Period. Employees are not permitted to make any contributions to the ESOP. Participants in the ESOP will receive annual reports from the Company showing the number of shares of common stock of the Company allocated to the participant’s account and the market value of those shares. The shares are allocated to participants based on compensation as provided for in the ESOP.
In connection with the initial public offering, the Company created a contra-equity account on the Company’s Consolidated Balance Sheet equal to the ESOP’s basis in the shares. The basis of those shares was set at $10.00 per share as part of the initial public offering. As shares are released from the ESOP suspense account, the contra-equity account will be credited, which shall reduce the impact of the contra-equity account on the Company’s Consolidated Balance Sheet. The Company shall record a compensation expense related to the shares released, which compensation expense is equal to the number of shares released from the suspense account multiplied by the average market value of the Company’s stock during the period.
The Company recognized compensation expense of $117 and $83 during the three months ended June 30, 2021 and 2020, respectively, related to the ESOP, and $226 and $172 during the six months ended June 30, 2021 and 2020, respectively.
25
Through June 30, 2021 and December 31, 2020, the Company had released and allocated 97,260 ESOP shares to participants, with a remainder of 142,740 ESOP shares in suspense at June 30, 2021 and December 31, 2020. Using the Company’s quarter-end market price of $19.01 per share, the fair value of the unearned ESOP shares was $2,713 at June 30, 2021.
13.Line of Credit
Nodak Insurance has a $5,000 line of credit with Wells Fargo Bank, N.A. The terms of the line of credit include a floating interest rate with a floor rate of 3.25%. There were no outstanding amounts during the six months ended June 30, 2021, or the year ended December 31, 2020. This line of credit is scheduled to expire on January 30, 2022.
14.Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, and the creation of certain refundable employee retention credits. There has been no impact to the Company’s income taxes due to this legislation.
At June 30, 2021 and December 31, 2020, we had no unrecognized tax benefits, no accrued interest and penalties, and no significant uncertain tax positions. No interest and penalties were recognized during the three or six month periods ended June 30, 2021 or 2020.
At June 30, 2021 and December 31, 2020, the Company, other than Battle Creek and Westminster, had no income tax related carryovers for net operating losses, alternative minimum tax credits, or capital losses.
Battle Creek, which files its income tax returns on a stand-alone basis, had net operating loss carryovers of $3,390 at December 31, 2020. The net operating loss carryforwards expire beginning in 2021 through 2030 due to limitations on the use of these net operating loss carryforwards.
Westminster, which became part of the Company’s consolidated federal income tax return beginning in 2020, had net operating loss carryovers of $2,559 at December 31, 2020. The net operating loss carryforwards expire beginning in 2021 through 2023 due to limitations on the use of these net operating loss carryforwards.
15.Operating Leases
Our Primero subsidiary leases a facility in Spearfish, South Dakota under a non-cancellable operating lease expiring in 2023. Our Direct Auto subsidiary leases a facility in Chicago, Illinois under a non-cancellable operating lease expiring in 2029. Our Nodak Insurance subsidiary leases a facility in Fargo, North Dakota under a non-cancellable operating lease expiring in 2024. There were expenses of $63 and $94 related to these leases during the three months ended June 30, 2021 and 2020, respectively, and $124 and $183 related to these leases during the six months ended June 30, 2021 and 2020, respectively.
As of June 30, 2021, we have minimum future commitments under non-cancellable leases for the next five years in the period ending December 31, 2025, and thereafter as follows:
Estimated Future
Minimum Commitments
125
319
358
320
286
16.Contingencies
We have been named as a defendant in various lawsuits relating to our insurance operations. Contingent liabilities arising from litigation, income taxes, and other matters are not considered to be material to our financial position.
17.Common Stock
Changes in the number of common stock shares outstanding were as follows:
Shares outstanding, beginning of period
21,318,638
22,119,380
Treasury shares repurchased through stock repurchase authorization
(118,531
(519,598
Issuance of treasury shares for vesting of restricted stock units
102,060
31,442
Shares outstanding, end of period
21,302,167
21,631,224
On February 28, 2018, our Board of Directors approved an authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock. We completed the repurchase of 191,265 shares of our common stock for $2,966 during 2018, and an additional 116,034 shares for $2,006 during 2019. During the six months ended June 30, 2020, we completed the repurchase of 402,056 shares of our common stock for $4,996 to close out this authorization.
On May 4, 2020, our Board of Directors approved an additional authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock. During the year ended December 31, 2020, we completed the repurchase of 454,443 shares of our common stock for $7,238 under this new authorization. During the six months ended June 30, 2021, we completed the repurchase of 118,531 shares of our common stock for $2,266.
The cost of this treasury stock is a reduction of shareholders’ equity within our Consolidated Balance Sheets.
18.Stock Based Compensation
At its 2020 Annual Shareholders’ Meeting, the NI Holdings, Inc. 2020 Stock and Incentive Plan (the “Plan”) was approved by shareholders. The purpose of the Plan is to promote the interests of the Company and its shareholders by aiding the Company in attracting and retaining employees, officers, consultants, independent contractors, advisors, and non-employee directors capable of assuring the future success of the Company, to offer such persons incentives to put forth maximum efforts for the success of the Company’s business and to afford such persons an opportunity to acquire an ownership interest in the Company, thereby aligning the interests of such persons with the Company’s shareholders.
The Plan provides for the grant of nonqualified stock options, incentive stock options, restricted stock units (“RSUs”), stock appreciation rights, dividend equivalents, and performance share units (“PSUs”) to employees, officers, consultants, advisors, non-employee directors, and independent contractors designated by the Compensation Committee of the Board of Directors (the “Compensation Committee”). Awards made under the Plan are based upon, among other things, a participant’s level of responsibility and performance within the Company.
The total aggregate number of shares of common stock that awards may be issued under all awards made under the Plan shall not exceed 1,000,000 shares of common stock, subject to adjustments as provided in the Plan. No eligible participant may be granted any awards for more than 100,000 shares in the aggregate in any calendar year, subject to adjustment in accordance with the Plan. The aggregate amount payable pursuant to all performance awards denominated in cash to any eligible person in any calendar year is limited to $1,000 in value. Directors who are not also employees of the Company may not be granted awards denominated in shares that exceed $150 in any calendar year.
Restricted Stock Units
The Compensation Committee has awarded RSUs to non-employee directors and select executives. RSUs are promises to issue actual shares of common stock at the end of a vesting period. The RSUs granted to executives under the Plan were based on salary and vest 20% per year over a five-year period, while RSUs granted to non-employee directors vest 100% on the date of the next
annual meeting of shareholders following the grant date. Dividend equivalents on RSUs are accrued during the vesting period and paid in cash at the end of the vesting period, but are subject to forfeiture until the underlying shares become vested. Participants do not have voting rights with respect to RSUs.
The Company recognizes stock-based compensation costs based on the grant date fair value. The compensation costs are normally expensed over the vesting periods to each vesting date; however, the cost of RSUs granted to executives are expensed immediately if the executive has met certain retirement criteria and the RSUs become non-forfeitable. Estimated forfeitures are included in the determination of compensation costs. No forfeitures are currently estimated.
A summary of the Company’s outstanding and unearned restricted stock units is presented below:
RSUs
Weighted-Average
Grant-Date
Per Share
Units outstanding and unearned at January 1, 2020
96,540
16.47
RSUs granted during 2020
66,000
14.27
RSUs earned during 2020
(46,760
16.33
Units outstanding and unearned at December 31, 2020
115,780
15.27
RSUs granted during 2021
58,700
18.76
RSUs earned during 2021
(60,720
15.73
Units outstanding and unearned at June 30, 2021
113,760
16.83
The following table shows the impact of RSU activity to the Company’s financial results:
RSU compensation expense
229
193
617
613
Income tax benefit
(48
(41
(129
RSU compensation expense, net of income taxes
181
152
487
484
At June 30, 2021, there was $1,166 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 2.08 years.
Performance Stock Units
The Compensation Committee has awarded PSUs to select executives. PSUs are promises to issue actual shares of common stock at the end of a vesting period, if certain performance conditions are met. The PSUs granted to employees under the Plan were based on salary and include a three-year book value cumulative growth target with threshold and stretch goals. They will vest on the third anniversary of the grant date, subject to the participant’s continuous employment through the vesting date and the level of performance achieved. Dividend equivalents on PSUs are accrued and paid in cash at the end of the performance period in accordance with the level of performance achieved, but are subject to forfeiture until the underlying shares become vested. Participants do not have voting rights with respect to PSUs.
The Company recognizes stock-based compensation costs based on the grant date fair value over the performance period of the awards. Estimated forfeitures are included in the determination of compensation costs. The current cost estimate assumes that the cumulative growth targets will be achieved or exceeded.
28
A summary of the Company’s outstanding performance share units is presented below:
PSUs
Units outstanding at January 1, 2020
111,000
PSUs granted during 2020 (at target)
63,600
14.26
Units outstanding at December 31, 2020
174,600
15.15
PSUs granted during 2021 (at target)
64,600
18.64
PSUs earned during 2021
(70,363
16.25
Performance adjustment (1)
24,300
Forfeitures
(2,537
Units outstanding at June 30, 2021
190,600
16.06
(1) Represents the change in PSUs issued based upon the attainment of performance goals established by the Company.
The following table shows the impact of PSU activity to the Company’s financial results:
PSU compensation expense
287
271
571
564
(60
(56
(118
PSU compensation expense, net of income taxes
227
215
451
The PSU grants above represent initial target awards and do not reflect potential increases or decreases resulting from financial performance objectives to be determined at the end of the performance period. The actual number of shares to be issued at the end of the performance period will range from 0% to 150% of the initial target awards.
At June 30, 2021, there was $1,724 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 2.06 years.
29
19.Segment Information
We have five primary reportable operating segments, which consist of private passenger auto insurance, non-standard auto insurance, home and farm insurance, crop insurance, and commercial insurance. A sixth segment captures all other insurance coverages we sell, including our assumed reinsurance lines of business. We operate only in the United States, and no single customer or agent provides 10 percent or more of our revenues. The following tables provide available information of these segments for the three and six month periods ended June 30, 2021 and 2020. For presentation in these tables, “LAE” refers to loss adjustment expenses.
The ratios presented in these tables are non-GAAP financial measures under SEC rules and regulations. While these ratios are used widely in the property and casualty insurance industry, such non-GAAP ratios may not be comparable to similarly-named measures reported by other companies.
The loss and LAE ratio equals losses and loss adjustment expenses divided by net premiums earned. The expense ratio equals amortization of deferred policy acquisition costs and other underwriting and general expenses, divided by net premiums earned. The combined ratio equals losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and other underwriting and general expenses, divided by net premiums earned.
For purposes of evaluating profitability of the non-standard auto segment, management combines the policy fees paid by the insured with the underwriting gain or loss as its primary measure. As a result, these fees are allocated to the non-standard auto segment (included in fee and other income) in the tables below. The remaining fee and other income amounts are not allocated to any segment.
We do not assign or allocate all Consolidated Statement of Operations or Consolidated Balance Sheet line items to our operating segments. Those line items include investment income, net capital gain (loss) on investments, other income excluding non-standard auto insurance fees, and income taxes within the Consolidated Statement of Operations. For the Consolidated Balance Sheet, those items include cash and investments, property and equipment, other assets, accrued expenses, income taxes recoverable or payable, and shareholders’ equity.
30
Private
Passenger
Auto
Non-
Standard
Home and
Farm
Crop
Commercial
All Other
Direct premiums earned
19,012
15,263
20,808
14,574
16,195
1,207
Assumed premiums earned
2,084
1,432
Ceded premiums earned
(944
(365
(2,435
(8,305
(2,175
(70
18,068
14,898
18,373
8,353
14,020
2,569
Direct losses and LAE
15,094
11,490
19,436
8,494
282
Assumed losses and LAE
523
1,437
Ceded losses and LAE
(189
(1,228
(12,994
(1,230
Net losses and LAE
14,905
18,208
9,332
7,264
1,719
Gross margin
3,163
3,408
165
(979
850
13,363
Underwriting and general expenses
4,767
6,525
5,073
1,431
5,177
616
23,589
Underwriting gain (loss)
(1,604
(3,117
(4,908
(2,410
1,579
234
(10,226
361
(2,756
Loss before income taxes
Net loss attributable to non-controlling interest
Net loss attributable to NI Holdings, Inc.
Non-GAAP Ratios:
Loss and LAE ratio
82.5%
77.1%
99.1%
111.7%
51.8%
66.9%
Expense ratio
26.4%
43.8%
27.6%
17.1%
36.9%
24.0%
30.9%
Combined ratio
108.9%
120.9%
126.7%
128.9%
88.7%
90.9%
113.4%
Balances at June 30, 2021:
20,100
9,408
9,739
30,438
14,048
730
6,548
6,368
9,069
6,763
551
Reinsurance recoverables
905
1,600
13,918
5,934
2,217
15,123
Unpaid losses and LAE
26,161
43,727
20,839
23,638
26,812
11,163
30,518
19,968
43,229
27,615
37,047
18,501
13,177
20,215
19,254
10,153
1,152
1,935
(1,115
(43
(2,447
2,363
(1,812
(75
17,386
13,134
17,768
23,552
8,341
1,825
8,624
8,195
11,080
20,247
10,994
235
406
(220
(1,363
(5,757
10,860
19,107
5,237
8,762
4,939
6,908
4,445
3,104
1,484
29,642
4,335
5,146
4,705
1,299
3,624
19,625
(207
2,203
3,146
(520
968
10,017
328
121
Income before income taxes
Income tax expense
Net income attributable to non-controlling interest
Net income attributable to NI Holdings, Inc.
49.6%
62.4%
61.1%
81.1%
62.8%
18.7%
63.9%
24.9%
39.2%
26.5%
5.5%
43.4%
28.3%
23.9%
74.5%
101.6%
87.6%
86.6%
106.2%
47.0%
87.8%
Balances at June 30, 2020:
19,825
7,643
10,293
37,864
12,006
705
88,336
5,804
4,968
8,062
1,295
3,607
468
351
1,803
1,384
3,999
1,474
12,294
2,885
16,600
19,485
19,370
42,830
11,217
20,159
13,710
8,728
30,150
17,317
42,636
19,714
24,465
2,930
137,212
32
37,700
28,844
41,391
14,558
30,917
2,392
2,880
(2,134
(688
(5,564
(8,242
(4,559
(163
35,566
28,156
35,827
8,400
26,358
5,109
27,653
16,290
27,324
22,375
19,958
577
2,385
(1,484
(13,005
(2,295
27,159
25,840
9,893
17,663
2,962
8,407
11,866
9,987
(1,493
8,695
2,147
39,609
10,126
10,939
10,684
1,967
9,792
1,319
44,827
(1,719
927
(697
(3,460
(1,097
828
(5,218
1,620
76.4%
57.9%
72.1%
117.8%
67.0%
58.0%
71.6%
28.5%
38.9%
29.8%
23.4%
37.2%
25.8%
32.2%
104.8%
96.7%
101.9%
141.2%
104.2%
83.8%
103.7%
33
36,897
26,371
40,374
19,249
19,658
2,296
2,348
(2,212
(4,985
2,547
(3,464
(150
34,685
26,285
35,389
23,731
16,194
4,494
19,753
14,135
18,748
23,058
16,913
660
714
(1,350
(1,807
(7,961
17,398
21,474
8,952
1,074
14,932
12,150
17,991
2,257
7,242
3,420
57,992
9,145
10,343
9,594
2,001
7,553
1,148
39,784
5,787
1,807
8,397
256
(311
2,272
657
2,464
Net capital loss on investments
56.9%
53.8%
49.2%
90.5%
55.3%
58.8%
39.3%
27.1%
8.4%
46.6%
25.5%
83.3%
93.1%
76.3%
98.9%
49.4%
87.1%
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone. This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.” Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q constitutes forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” and “Part II. Item 1A. Risk Factors” included elsewhere in this Quarterly Report. You should also review “Risk Factors” included in the Company’s 2020 Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.
All dollar amounts included in Item 2 herein are in thousands.
Overview
NI Holdings is a North Dakota business corporation that is the stock holding company of Nodak Insurance and became such in connection with the conversion of Nodak Mutual from a mutual to stock form of organization and the creation of a mutual holding company. The conversion was consummated on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance were issued to Nodak Mutual Group, which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak Insurance then became a wholly-owned stock subsidiary of NI Holdings. Prior to completion of the conversion, NI Holdings conducted no business and had no assets or liabilities. As a result of the conversion, NI Holdings became the holding company for Nodak Insurance and its existing subsidiaries.
These Consolidated Financial Statements of NI Holdings include the financial position and results of operations of NI Holdings and seven other entities:
Nodak Insurance – a wholly-owned subsidiary of NI Holdings;
Nodak Agency – a wholly-owned subsidiary of Nodak Insurance;
American West – a wholly-owned subsidiary of Nodak Insurance;
Primero – an indirect wholly-owned subsidiary of Nodak Insurance;
Battle Creek – an affiliated company of Nodak Insurance;
Direct Auto – a wholly-owned subsidiary of NI Holdings; and
Westminster – a wholly-owned subsidiary of NI Holdings.
Battle Creek is managed by Nodak Insurance under the terms of a surplus note issued by Battle Creek to Nodak Insurance. Nodak Agency is an inactive shell corporation.
On August 31, 2018, NI Holdings completed the acquisition of 100% of the common stock of Direct Auto from private shareholders and Direct Auto became a consolidated subsidiary of the Company. The results of Direct Auto are included as part of the Company’s non-standard auto business segment following the closing date.
On January 1, 2020, NI Holdings completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster and Westminster became a consolidated subsidiary of the Company. The results of Westminster are included as part of the Company’s commercial business segment following the closing date.
Nodak Insurance offers property and casualty insurance, crop hail, and multi-peril crop insurance to members of the North Dakota Farm Bureau through captive agents in North Dakota. American West and Battle Creek offer similar insurance coverage through independent agents in South Dakota and Minnesota, and Nebraska, respectively. Primero offers nonstandard auto insurance coverage in Arizona, Nevada, North Dakota, and South Dakota. Direct Auto offers nonstandard auto insurance coverage in Illinois. Westminster offers commercial multi-peril insurance in the Mid-Atlantic region of the United States. All of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by A.M. Best, which is the third highest out of a possible 15 ratings.
A chart of the corporate structure follows:
ORGANIZATIONAL CHART
Nodak Mutual Group, Inc.
≥ 55%
ownership
100%
Direct Auto Insurance
Company
Affiliation
Nodak Agency, Inc.
Battle Creek Mutual
Insurance Company
Tri-State, Ltd
The following tables provide selected amounts from the Company’s Unaudited Consolidated Statements of Operations and Balance Sheets. Additional information can be found later in this section.
Direct premiums written
Net income (loss) before non-controlling interest
Shareholders’ equity
36
Principal Revenue Items
The Company derives its revenue primarily from net premiums earned, net investment income, and net capital gain (loss) on investments.
Gross and net premiums written
Gross premiums written is equal to direct premiums written and assumed premiums before the effect of ceded reinsurance. Gross premiums written are recognized upon sale of new insurance contracts or renewal of existing contracts. Net premiums written is equal to gross premiums written less premiums ceded or paid to reinsurers (ceded premiums written).
Premiums earned
Premiums earned is the earned portion of net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty policies are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies or, in the case of crop insurance, over the period of risk to the Company. At the end of each accounting period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy or period of risk. The Company’s property and casualty policies, other than some of our auto lines and the non-standard auto policies, typically have a term of twelve months. For example, for an annual policy that is written on July 1, 2021, one-half of the premiums would be earned in 2021 and the other half would be earned in 2022.
Due to the nature of the crop planting and harvesting cycle and the deadlines for filing and processing claims under the federal crop insurance program, insurance premiums for crop insurance are recognized and earned during the period of risk, which usually begins in spring and ends with harvest in the fall. In the case of prevented planting claims, the period of risk is shortened to the date a valid prevented planting claim is filed, as the Company believes the period of risk has ended. Under the federal crop insurance program, farmers must purchase crop insurance with respect to spring planted crops by March 15. By July 15, the farmer must report the number of acres he has planted in each crop. On September 1, the insurer bills the farmer for the insurance premium, which is due and payable by the farmer by October 1. If the farmer does not pay the premium by such date, the insurer must essentially provide a loan to the farmer in an amount equal to the premium at an annual interest rate of 15% because the insurer is required to pay the farmer’s portion of the premium to the Federal Crop Insurance Corporation (“FCIC”) by November 15, regardless of whether the farmer pays the premium to the insurer. Except for claims occurring in the spring (primarily for prevented planting and required replanting claims), claims are required to be filed with the FCIC by December 15. A different cycle exists for crops planted in the fall, such as winter wheat, but the vast majority of crop insurance written by NI Holdings covers crops planted in the spring.
Net investment income and net capital gain (loss) on investments
The Company invests its surplus and the funds supporting its insurance liabilities (including unearned premiums and unpaid losses and loss adjustment expenses) in cash, cash equivalents, equity securities, and fixed income securities. Investment income includes interest and dividends earned on invested assets, and is reported net of investment-related expenses. Net capital gains and losses on investments are reported separately from net investment income. The Company recognizes realized capital gains when investments are sold for an amount greater than their cost or amortized cost (in the case of fixed income securities) and recognizes realized capital losses when investments are written down as a result of an other-than-temporary impairment or sold for an amount less than their cost or amortized cost, as applicable. The Company recognizes changes in unrealized gains and losses on the Company’s investments in equity securities in net income as part of net capital gains and losses on investments. These gains and losses may be significant given the size of the equity securities holdings and the inherent volatility in equity securities prices.
The changes in unrealized gains and losses on fixed income securities are recorded in other comprehensive income (loss), net of income taxes.
The portfolio of investments for NI Holdings and its insurance subsidiaries is managed by Conning, Inc., Disciplined Growth Investors, and CIBC Personal Wealth Management. These investment managers have discretion to buy and sell securities in accordance with the investment policy approved by our Board of Directors.
Principal Expense Items
The Company’s expenses consist primarily of losses and loss adjustment expenses (“LAE”), amortization of deferred policy acquisition costs, other underwriting and general expenses, and income taxes.
Losses and Loss Adjustment Expenses
Losses and LAE represent the largest expense item and include (1) claim payments made, (2) estimates for future claim payments and changes in those estimates from prior periods, and (3) costs associated with investigating, defending, and adjusting claims, including legal fees.
Amortization of deferred policy acquisition costs and other underwriting and general expenses
Expenses incurred to underwrite risks are referred to as policy acquisition costs. Policy acquisition costs consist of commission expenses, state premium taxes, and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Other underwriting and general expenses consist of salaries, professional fees, office supplies, depreciation, and all other operating expenses not otherwise classified separately.
Income taxes
Current income taxes represent amounts paid or payable to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the Company. As noted above, it does not include state premium taxes that are based purely on the collection of policyholder premiums.
NI Holdings uses the asset and liability method of accounting for deferred income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the income tax bases of its assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred income tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date. Total income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts attributed to accumulated other comprehensive income.
Non-GAAP Financial Measures
NI Holdings evaluates its insurance operations in the way it believes will be most meaningful and representative of its business results. Some of these measurements are “non-GAAP financial measures” under SEC rules and regulations. GAAP is the acronym for “accounting principles generally accepted in the United States of America”. While used widely in the property and casualty insurance industry, the non-GAAP financial measures that NI Holdings presents may not be comparable to similarly-named measures reported by other companies. The non-GAAP financial measures described in this section are the expense ratio, loss and LAE ratio, combined ratio, written premiums, ratio of net written premiums to statutory surplus, underwriting gain, and return on average equity.
NI Holdings measures growth by monitoring changes in gross premiums written and net premiums written. The Company measures underwriting profitability by examining its loss and LAE ratio, expense ratio, and combined ratio. It also measures profitability by examining underwriting gain (loss), net income (loss), and return on average equity.
The loss and LAE ratio is the ratio (expressed as a percentage) of losses and LAE incurred to premiums earned. NI Holdings measures the loss and LAE ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures losses and LAE for insured events occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that year. A calendar year loss ratio measures losses and LAE for insured events occurring during a particular year and the change in loss reserves from prior policy years as a percentage of premiums earned during that year.
The expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other underwriting and general expenses (attributable to insurance operations) to premiums earned, and measures our operational efficiency in producing, underwriting, and administering the Company’s insurance business.
The Company’s combined ratio is the ratio (expressed as a percentage) of the sum of losses and LAE incurred and expenses to premiums earned, and measures its overall underwriting profit. Generally, if the combined ratio is below 100%, the Company is making an underwriting profit. If the combined ratio is above 100%, it is not profitable without investment income and may not be profitable if investment income is insufficient.
Premiums written
Premiums written represent a measure of business volume most relevant on an annual basis for the Company’s business model. This measure includes the amount of premium purchased by policyholders as of the policy’s effective date, whereas premiums earned as presented in the Consolidated Statement of Operations matches the amount of premium to the period of risk for those insurance policies. The Company’s insurance policies are sold with a variety of effective periods, including annual, semi-annual, and monthly.
Net premiums written to statutory surplus ratio
The net premiums written to statutory surplus ratio represents the ratio of net premiums written to statutory surplus. This ratio is designed to measure the ability of the Company to absorb above-average losses and the Company’s financial strength. In general, a low premium to surplus ratio is considered a sign of financial strength because the Company has an adequate provision for adverse development of loss reserves within the Company’s current book of business and provides a capacity to write more business. Statutory surplus is determined using accounting principles prescribed or permitted by the insurance subsidiaries’ state of domicile and differs from GAAP equity.
Underwriting gain (loss) measures the pre-tax profitability of insurance operations. It is derived by subtracting losses and LAE, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned. Each of these items is presented as a caption in NI Holdings’ Consolidated Statements of Operations.
Net income (loss) and return on average equity
NI Holdings uses net income (loss) to measure its profit and uses return on average equity to measure its effectiveness in utilizing shareholders’ equity to generate net income. In determining return on average equity for a given period, net income (loss) is divided by the average of the beginning and ending shareholders’ equity for that period.
Critical Accounting Policies
General
The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. NI Holdings is required to make estimates and assumptions in certain circumstances that affect amounts reported in its Consolidated Financial Statements and related footnotes. NI Holdings evaluates these estimates and assumptions on an ongoing basis based on historical developments, market conditions, industry trends, and other information that it believes to be reasonable under the circumstances. There can be no assurance that actual results will conform to its estimates and assumptions and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. The Company believes the following policies are the most sensitive to estimates and judgments.
Unpaid Losses and Loss Adjustment Expenses
How reserves are established
With respect to its traditional property and casualty insurance products, the Company maintains reserves for the payment of claims (indemnity losses) and expenses related to adjusting those claims (LAE). The Company’s liability for unpaid losses and LAE consists of (1) case reserves, which are reserves for claims that have been reported to it, and (2) reserves for claims that have been incurred but have not yet been reported and for the future development of case reserves (“IBNR”).
LAE consist of two components – allocated loss adjustment expenses (“ALAE”) and unallocated loss adjustment expenses (“ULAE”). ALAE are defense and cost containment expenses, including legal fees, court costs, and investigation fees, which are linked to the settlement of specific individual claims or losses. ULAE are expenses that generally cannot be associated with a specific claim, including internal costs such as salaries and other overhead costs, and also represent estimates of future costs to administer claims.
When a claim is reported to one of the insurance companies, its claims personnel establish a case reserve for the estimated amount of the ultimate payment to the extent it can be determined or estimated. The amount of the loss reserve for the reported claim is based primarily upon an evaluation of coverage, liability, damages suffered, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is contested or settled individually based upon its merits, and some property and casualty claims may take years to resolve, especially in the unusual situation that legal action is involved. Case reserves are reviewed on a regular basis and are updated as new information becomes available.
39
When a catastrophe occurs, which in the Company’s case usually involves the weather perils of wind and hail, the Company utilizes mapping technology through geographic coding of its property risks to overlay the path of the storm. This enables the Company to establish estimated damage amounts based on the wind speed and size of the hail for case or per claim loss amounts. This process allows the Company to determine within a reasonable time (5 – 7 days) an estimated number of claims and estimated losses from the storm. If the Company estimates the damages to be in excess of its retained catastrophe amount, reinsurers are notified immediately of a potential loss so that the Company can quickly recover reinsurance payments once the retention is exceeded.
In addition to case reserves, the Company maintains estimates of reserves for losses and LAE incurred but not reported. These reserves include estimates for the future development of case reserves. Some claims may not be reported for several years. As a result, the liability for unpaid losses and LAE includes significant estimates for IBNR.
The Company estimates multi-peril crop insurance losses on a quarterly basis based upon historical loss patterns, current crop conditions, current weather patterns, and input from crop loss adjusters. These estimates have proven to be reasonably accurate indicators of the Company’s anticipated losses for this line of business.
The Company utilizes an independent actuary to assist with the estimation of its liability for unpaid losses and LAE. This actuary prepares estimates by first deriving an actuarially based estimate of the ultimate cost of total losses and LAE incurred as of the financial statement date based on established actuarial methods described below. The Company then reduces the estimated ultimate loss and LAE by loss and LAE payments and case reserves carried as of the financial statement date. The actuarially determined estimate is based upon indications from one of the following actuarial methodologies or uses a weighted average of these results. The specific method used to estimate the ultimate losses varies depending on the judgment of the actuary as to what is the most appropriate method for the property and casualty business. The Company’s management reviews these estimates and supplements the actuarial analysis with information not fully incorporated into the actuarially based estimate, such as changes in the external business environment and internal company processes. The Company may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the Consolidated Financial Statements.
The Company accrues its ultimate liability for unpaid losses and LAE by using the following actuarial methodologies:
Bornhuetter-Ferguson Method — The Bornhuetter-Ferguson Method is a blended method that explicitly takes into account both actual loss development to date and expected future loss emergence. This method is applied on both a paid loss basis and an incurred loss basis. This method uses selected loss development patterns to calculate the expected percentage of losses unpaid (or unreported). The expected future loss component of the method is calculated by multiplying earned premium for the given exposure period by a selected a priori (i.e. deductive) loss ratio. The resulting dollars are then multiplied by the expected percentage of unpaid (or unreported) losses described above. This provides an estimate of future paid (or reported) losses that is then added to actual paid (or incurred) loss data to produce the estimated ultimate loss.
Paid and Case Incurred Loss Development Method — The Paid and Case Incurred Loss Development Method utilizes ratios of cumulative paid or case incurred losses or LAE at each age of development as a percent of the preceding development age. Selected ratios are then multiplied together to produce a set of loss development factors which when applied to the most current data value, by accident year, develop the estimated ultimate losses or LAE. Ultimate losses or LAE are then selected for each accident year from the various methods employed.
Ratio of Paid ALAE to Paid Loss Method — The Ratio of Paid ALAE to Paid Loss Method utilizes the ratio of paid ALAE to paid losses and is similar to the Paid and Case Incurred Method described above, except that the data projected are the ratios of paid ALAE to paid losses. The projected ultimate ratio is then multiplied by the selected ultimate losses, by accident year, to yield ultimate ALAE. ALAE reserves are calculated by subtracting paid losses from ultimate ALAE.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, inflation, legal trends, increases in the state-dictated minimum liability limits in the recent cases of nonstandard auto insurance, and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation is also affected by the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. NI Holdings continually refines its estimates of unpaid losses and LAE in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. NI Holdings considers all significant facts and circumstances known at the time the liabilities for unpaid losses and LAE are established.
40
There is an inherent amount of uncertainty in the establishment of liabilities for unpaid losses and LAE. This uncertainty is greatest in the current and most recent accident years due to the relative newness of the claims being reported and the relatively small percentage of these claims that have been reported, investigated, and adjusted by the Company’s claims staff. Therefore, the reserves carried in these more recent accident years are generally more conservative than those carried for older accident years. As the Company has the opportunity to investigate and adjust the reported claims, both the case and IBNR reserves are adjusted to more closely reflect the ultimate expected loss.
Other factors that have or can have an impact on the Company’s case and IBNR reserves include but are not limited to those described below.
Changes in liability law and public attitudes regarding damage awards
Laws governing liability claims and judicial interpretations thereof can change over time, which can expand the scope of coverage anticipated by insurers when initially establishing reserves for claims. In addition, public attitudes regarding damage awards can result in judges and juries granting higher recoveries for damages than expected by claims personnel when claims are presented. In addition, these changes can result in both increased claim frequency and severity as both plaintiffs and their legal counsel perceive the opportunity for higher damage awards. Reserves established for claims that occurred in prior years would not have anticipated these legal changes and, therefore, could prove to be inadequate for the ultimate losses paid by the Company, causing the Company to experience adverse development and higher loss payments in future years.
Change in claims handling and/or setting case reserves
Changes in Company personnel and/or the approach to how claims are reported, adjusted, and reserved may affect the reserves established by the Company. As discussed above, the setting of IBNR reserves is not an exact science and involves the expert judgment of an actuary. One actuary’s reserve opinion may differ slightly from another actuary’s opinion. This is the primary reason why the IBNR reserve estimate is customarily reported as a range by a company’s actuary, which provides a company with an acceptable “range” to use in establishing its best estimate for IBNR reserves.
Economic inflation
A sudden and extreme increase in the economic inflation rate could have a significant impact on the Company’s case and IBNR reserves. When establishing case reserves, claims personnel generally establish an amount that in their opinion will provide a conservative amount to settle the loss. If the time to settle the claim extends over a period of years, the initial reserve may not anticipate an economic inflation rate that is significantly higher than the current inflation rate. This can also apply to IBNR reserves. Should the economic inflation rate increase significantly, it is likely that the Company may not anticipate the need to adjust the IBNR reserves accordingly, which could lead to the Company being deficient in its IBNR reserves.
Increases or decreases in claim severity for reasons other than inflation
Factors exist that can drive the cost to settle claims for reasons other than standard inflation. For example, demand surge caused by a very large catastrophe (as in the case of Hurricane Katrina) has an impact on not only the availability and cost of building materials such as roofing and other materials, but also on the availability and cost of labor. Other factors such as increased vehicle traffic in an area not designed to handle the increased congestion and increased speed limits on busy roads are examples of changes that could cause claim severity to increase beyond what the Company’s historic reserves would reflect. In addition, unexpected increases in the labor costs and healthcare costs that underlie insured risks, changes in costs of building materials, or changes in commodity prices for insured crops may cause fluctuations in the ultimate development of the case reserves. During 2018, the state of Nevada mandated the incorporation of higher minimum liabilities for nonstandard auto insurance policies written in the state. Similar mandates became effective in July 2020 in the state of Arizona. While it is certain that these actions increase the average claim cost experienced in the state, the actual amount is subject to judgement until further claim experience is obtained.
Actual settlement experience different from historical data trends
When establishing IBNR reserves, the Company’s actuary takes into account many of the factors discussed above. One of the more important factors that is considered when setting reserves is the past or historical claim settlement experience. Our actuary considers factors such as the number of files entering litigation, payment patterns, length of time it takes Company claims personnel to settle the claims, and average payment amounts when estimating reserve amounts. Should future settlement patterns change due to the legal environment, Company claims handling philosophy, or personnel, it may have an impact on the future claims payments, which could cause existing reserves to either be redundant (excessive) or deficient (below) compared to the actual loss amount.
41
Change in Reporting Lag
As discussed above, the Company and its actuary utilize historical patterns to provide an accurate estimate of what will take place in the future. Should we experience an unexpected delay in reporting time (claims are slower to be reported than in the past), our actuary or we may underestimate the anticipated number of future claims, which could cause the ultimate loss we may experience to be underestimated. A lag in reporting may be caused by changes in how claims are reported (online vs. through company personnel), the type of business or lines of business the Company is writing, the Company’s distribution system (direct writer, independent agent, or captive agent), and the geographic area where the Company chooses to insure risk.
Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for unpaid losses and LAE may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. The Company reflects adjustments to the liability for unpaid losses and LAE in the results of operations during the period in which the estimates are changed.
42
Actuarial Loss Reserves
NI Holdings’ liabilities for unpaid losses and LAE are summarized below:
Case reserves
131,273
89,903
IBNR reserves
21,067
15,847
Liability for unpaid losses and LAE
Net unpaid losses and LAE
The following table provides case and IBNR reserves for unpaid losses and LAE by segment.
Case Reserves
IBNR Reserves
Total Reserves
Private passenger auto
18,940
7,221
Non-standard auto
51,709
(7,982
Home and farm
15,395
5,444
23,154
16,764
10,048
All other
5,311
5,852
20,883
3,691
110,390
17,376
14,984
5,327
20,311
50,702
(7,366
43,336
7,705
4,032
11,737
756
771
10,749
8,340
19,089
5,007
5,499
10,506
5,102
3,608
84,801
12,239
Sensitivity of Major Assumptions Underlying the Liabilities for Unpaid Losses and Loss Adjustment Expenses
Management has identified the impact on earnings of various factors used in establishing loss reserves so that users of the Company’s financial statements can better understand how development on prior years’ reserves might impact the Company’s results of operations.
As of June 30, 2021, the impact of a 1% change in our estimate for unpaid losses and LAE, net of reinsurance recoverables, on our net income, after federal income taxes of 21%, would be approximately $1,009.
Inflation
Inflation is not explicitly selected in the loss reserve analysis. However, historical inflation is embedded in the estimated loss development factors. The following table displays the impact on 2020 net income, after federal income taxes of 21%, resulting from various changes from the inflation factor implicitly embedded in the estimated payment pattern in place as of December 31, 2020. A change in inflation may or may not fully impact loss payments in the future because some of the underlying expenses have already been paid. The table below assumes that any change in inflation will be fully reflected in future loss payments. This variance in future IBNR emergence could occur in one year or over multiple years, depending when the change is recognized.
Change in Inflation
Impact on After-Tax Earnings
-1%
(1,392
1%
1,429
3%
4,402
5%
7,540
Inflation includes actual inflation as well as social inflation which includes future emergence of new classes of losses or types of losses, change in judicial awards, and any other changes beyond assumed levels that impact the cost of claims.
When a claim is reported, claims personnel establish a case reserve for the estimated amount of the ultimate payment to the extent it can be determined or estimated. It is possible that the level of adequacy in the case reserve may differ from historical levels and/or the claims reporting pattern may change. The following table displays the impact on 2020 net income, after federal income taxes of 21%, resulting from various changes to the level of case reserves as of December 31, 2020. This variance in future IBNR emergence could occur in one year or over multiple years, depending when the change is recognized.
Change in Case Reserves
-10%
7,102
-5%
3,551
-2%
1,420
+2%
(1,420
+5%
(3,551
+10%
(7,102
NI Holdings’ fixed income securities and equity securities are classified as available-for-sale and carried at estimated fair value as determined by management based upon quoted market prices or a recognized pricing service at the reporting date for those or similar investments. Changes in unrealized investment gains or losses on the fixed income securities, net of applicable income taxes, are reflected directly in shareholders’ equity as a component of other comprehensive income (loss) and, accordingly, have no effect on net income (loss). Changes in unrealized investment gains or losses on equity securities are recorded in net income (loss). Investment income is recognized when earned, and realized capital gains and losses on investments are recognized when investments are sold, or an other-than-temporary impairment (“OTTI”) is recognized.
NI Holdings evaluates fixed income securities for OTTI at least on a quarterly basis. NI Holdings assesses whether OTTI is present when the fair value of a security is less than its amortized cost. OTTI is considered to have occurred with respect to fixed income securities if (1) an entity intends to sell the security, (2) it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis, or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. When assessing whether the cost or amortized cost basis of the security will be recovered, the Company compares the present value of the expected cash flows likely to be collected, based on an evaluation of all available information
44
relevant to the collectability of the security, to the cost or amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the cost of amortized cost basis is referred to as the “credit loss”. If there is a credit loss, the impairment is considered to be other-than-temporary. If NI Holdings identifies that an OTTI loss has occurred, it then determines whether it intends to sell the security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the cost or amortized cost basis less any current-period credit losses. If NI Holdings determines that it does not intend to sell, and it is not more likely than not that it will be required to sell the security, the amount of the impairment loss related to the credit loss will be recorded in earnings, and the remaining portion of the OTTI loss will be recognized in other comprehensive income (loss), net of income taxes. If NI Holdings determines that it intends to sell the security, or that it is more likely than not that it will be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the OTTI will be recognized in earnings.
Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates that generally translate, respectively, into decreases and increases in fair values of fixed income securities. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions.
For the six months ended June 30, 2021, NI Holdings’ investment portfolio experienced a decrease in net unrealized gains of $587.
Change
Gross unrealized gains
(3,723
Gross unrealized losses
(599
Net fixed income unrealized gains
12,183
16,505
32,177
29,139
3,038
(693
(1,390
697
Net equity unrealized gains
31,484
Net unrealized gains
43,667
44,254
(587
Net unrealized gains in the fixed income portfolio decreased $4,322 during the six months ended June 30, 2021, in comparison with a decrease of $7,157 at the end of the first quarter. U.S Treasury yields declined in the second quarter, with the 10-year yield falling from 1.74% to 1.47%, driving up overall valuations across the portfolio in contrast with the steepening yield curve and increasing yields experienced during the first quarter. The net unrealized gains of $12,183 as of June 30, 2021 are reported as accumulated other comprehensive income within shareholders’ equity on the Company’s Consolidated Balance Sheets.
Net unrealized gains in the equity portfolio increased $3,735 during the six months ended June 30, 2021, driven by the continued strong performance for U.S. equities across most sectors with the S&P 500 reaching a new all-time high in late June. The net increase is included in net capital gain (loss) on investments on the Company’s Consolidated Statements of Operations.
NI Holdings has evaluated each security and taken into account the severity and duration of any impairment, the current rating on the security (if any), and the outlook for the issuer according to independent analysts. The Company’s fixed income portfolio is managed by Conning Asset Management, who specializes in the handling of insurance company investment portfolios and participates in this evaluation.
For the six months ended June 30, 2021, NI Holdings did not recognize any OTTIs of its investment securities. For the year ended December 31, 2020, NI Holdings did not recognize any OTTIs of its investment securities. Adverse investment market conditions, in addition to poor operating results of underlying investments, could result in impairment charges in the future.
For more information on the Company’s investments, see Note 4 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
Fair Value Measurements
NI Holdings uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Investment securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, NI Holdings may be required to record other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Accounting guidance on fair
45
value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level I:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level II:Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level II includes fixed income securities with quoted prices that are traded less frequently than exchange traded instruments. Valuation techniques include matrix pricing which is a mathematical technique used widely in the industry to value fixed income securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
Level III:Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
NI Holdings bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the estimates of NI Holdings or other third-parties, and are often calculated based on the characteristics of the asset, the economic and competitive environment, and other such factors. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts which NI Holdings could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-end and have not been re-evaluated or updated for purposes of our financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. Additionally, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.
NI Holdings uses quoted values and other data provided by an independent pricing service in its process for determining fair values of its investments. The evaluations of such pricing services represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. This pricing service provides NI Holdings with one quote per instrument. For fixed income securities that have quoted prices in active markets, market quotations are provided. For fixed income securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing service utilizes may include (listed in order of priority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an option-adjusted spread model to develop prepayment and interest rate scenarios. The pricing service did not use broker quotes in determining any fair values of the Company’s investments at June 30, 2021 or December 31, 2020.
Should the independent pricing service be unable to provide a fair value estimate, NI Holdings would attempt to obtain a non-binding fair value estimate from a number of broker-dealers and would review this estimate in conjunction with a fair value estimate reported by an independent business news service or other sources. In instances where only one broker-dealer provides a fair value for a fixed income security, NI Holdings would use that estimate. In instances where NI Holdings would be able to obtain fair value estimates from more than one broker-dealer, the Company would review the range of estimates and select the most appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, NI Holdings would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, NI Holdings classifies such a security as a Level III investment.
The fair value estimates of NI Holdings’ investments provided by the independent pricing service at each period-end were utilized, among other resources, in reaching a conclusion as to the fair value of its investments.
Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. Management reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in common sectors, durations, and credit ratings. This review will also include all fixed income securities rated lower than “A” by Moody’s or Standard & Poor’s. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. In its review, management did not identify any such discrepancies, and no adjustments were made to the estimates provided by the pricing service,
46
for the six month period ended June 30, 2021, or the year ended December 31, 2020. The classification within the fair value hierarchy is then confirmed based on the final conclusions from the pricing review.
For more information on the Company’s fair value measurements, see Note 5 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
Deferred Policy Acquisition Costs and Value of Business Acquired
Certain direct policy acquisition costs consisting of commissions, state premium taxes, and other direct underwriting expenses that vary with and are primarily related to the production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned.
As in the case of previous acquisitions, no deferred policy acquisition costs (“DAC”) were recorded in the acquisition of Westminster in accordance with purchase accounting guidance. Rather, a separate intangible asset representing the value of business acquired (“VOBA”) was valued at $4,750 and established at the closing date. This VOBA intangible asset was amortized into expense as the acquired unearned premiums are reported into income, in the same way as DAC, and was fully amortized at December 31, 2020. Policy acquisition costs relating to new business written by Westminster were deferred following the closing date. The release of the VOBA asset and the establishment of new DAC generally offset each other over the twelve months following the acquisition of Westminster.
At June 30, 2021 and December 31, 2020, deferred policy acquisition costs and the related liability for unearned premiums were as follows:
Liability for unearned premiums
The method followed in computing DAC limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and LAE, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected losses and LAE, may require adjustments to DAC. If the estimation of net realizable value indicates that DAC are not recoverable, they would be written off or a premium deficiency reserve would be established.
Current income taxes represent amounts paid to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the Company. NI Holdings uses the asset and liability method of accounting for deferred income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the income tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred income tax asset will not be realized. Total income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts attributed to accumulated other comprehensive income.
NI Holdings had gross deferred income tax assets of $10,146 at June 30, 2021 and $8,603 at December 31, 2020, arising primarily from unearned premiums, loss reserve discounting, and net operating loss carryforwards. A valuation allowance is required to be established for any portion of the deferred income tax asset for which the Company believes it is more likely than not that it will not be realized. A valuation allowance of $931 was maintained at June 30, 2021 and December 31, 2020.
NI Holdings had gross deferred income tax liabilities of $17,261 at June 30, 2021 and $16,429 at December 31, 2020, arising primarily from deferred policy acquisition costs, net unrealized capital gains on investments, and other intangible assets.
NI Holdings exercises significant judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments require NI Holdings to make projections of future taxable income. The judgments and estimates the Company makes in determining its deferred income tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require the Company to record a valuation allowance against its deferred income tax assets.
As of June 30, 2021, NI Holdings had no material unrecognized income tax benefits or accrued interest and penalties. Federal income tax years 2017 through 2019 are open for examination.
47
Results of Operations
NI Holdings’ results of operations are influenced by factors affecting the property and casualty insurance and crop insurance industries in general. The operating results of the United States property and casualty industry and crop insurance industry are subject to significant variations due to competition, weather, catastrophic events, changes in regulation, general economic conditions, rising medical expenses, judicial trends, fluctuations in interest rates, and other changes in the investment environment.
NI Holdings premium levels and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced business. During a hard market cycle, it is more likely that insurers will be able to increase their rates or profit margins. A hard market typically has a positive effect on premium growth. The markets that NI Holdings serve are diversified, which requires management to regularly monitor the Company’s performance and competitive position by line of business and geographic market to schedule appropriate rate actions.
Premiums in the multi-peril crop insurance business are primarily influenced by the number of acres, commodity prices, and types of crops insured because the rates are established by the RMA rather than individual insurance carriers. The expected loss experience of the multi-peril crop insurance business for the calendar year may also significantly affect the reported net earned premiums and losses due to the risk-sharing arrangement with the federal government. Multi-peril crop insurance premiums are generally written in the second quarter, and earned ratably over the period of risk, which extends into the fourth quarter. However, as was the case in 2020, if the Company experiences a higher than average number of claims early in the risk period, recognition of earned premiums may be accelerated due to the shortened risk period.
Premiums in the crop hail insurance business are also generally written in the second quarter, but earned over a shorter period of risk than multi-peril crop insurance.
Premiums in the personal lines of business (private passenger auto and home and farm) are generally written and earned throughout the year based on their coverage periods. Losses on this business are also incurred throughout the year, but usually are more frequent and/or severe during periods of weather-related activity.
Premiums in the commercial lines of business are generally written and earned throughout the year. Losses on this business are also incurred throughout the year.
For more information on the Company’s results of operations by segment, see Note 19 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
Beginning in March 2020, the global pandemic associated with COVID-19 and related economic conditions began to impact the Company’s results. The immediate financial impact to the Company was volatility in our investment portfolio and significant declines in fair value on the Company’s equity investments, attributable to the disruption in global financial markets. The Company’s underwriting results, especially in the private passenger auto and non-standard auto segments, were impacted during the second and third quarters of 2020 as a result of fewer miles being driven and the increased unemployment rate in our Chicago and Las Vegas markets.
During the first six months of 2021, we have continued to see a reduced impact from COVID-19 as economic activity has returned to near pre-pandemic levels. However, a possible resurgence of COVID-19 could impact our results.
48
Three and Six Months ended June 30, 2021 and 2020
The consolidated net loss for NI Holdings was $2,734 for the three months ended June 30, 2021, compared to net income of $18,767 for the three months ended June 30, 2020. The consolidated net income for NI Holdings was $7,048 for the six months ended June 30, 2021, compared to net income of $15,212 for the six months ended June 30, 2020.
The major components of NI Holdings’ operating revenues and net income (loss) for the two periods were as follows:
Components of net income:
Net Premiums Earned
NI Holdings’ net premiums earned for the three months ended June 30, 2021 decreased $5,725, or 7.0%, compared to the three months ended June 30, 2020. Net premiums earned for the six months ended June 30, 2021 decreased $1,362, or 1.0%, compared to the six months ended June 30, 2020.
Net premiums earned:
Total net premiums earned
Direct premiums earned for the second quarter of 2021 increased $4,607, or 5.6%, from the second quarter of 2020. Direct premiums earned for the first half of 2021 increased $10,957, or 7.6%, from the first half of 2020. The increase in both periods was primarily driven by growth in our Westminster commercial business, and to a lesser extent our non-standard auto business, and partially offset by less earned premium recognized in multi-peril crop compared to a year ago. The growth in our Westminster commercial business was driven primarily by a continuation of favorable market conditions, the positive impact of Westminster’s financial size category, and the A.M. Best rating upgrade. Our non-standard auto business has benefited from the improved economic environment, especially in the Chicago market where our non-standard auto business is concentrated. The decrease in multi-peril crop was a result of accelerated earning of premium during 2020 from prevented planting claims, whereas premiums earned during 2021 are being recognized over the normal period of risk.
Assumed premiums earned increased modestly related to our participation in the assumed domestic and international business in our all other segment. Ceded premiums earned increased $11,165 in the second quarter of 2021 from the second quarter of 2020, and increased $13,000 in the first half of 2021 from the first half of 2020. The increase in both periods was primarily due to the anticipated loss experience of our multi-peril crop business, an increase in our overall reinsurance coverage limits, and the growth in our business. The increase in ceded premiums related to our multi-peril crop business was the result of losses expected from this year’s extreme drought conditions across North and South Dakota, as we anticipate that crop yields will be significantly impacted. We placed a higher number of multi-peril crop policies in the assigned risk fund of the Standard Reinsurance Agreement for 2021, resulting in higher levels of premiums and losses being ceded to the federal government.
Direct premiums written for the three months ended June 30, 2021 were $125,552, compared to $112,759 a year ago. Direct premiums written for the first half of 2021 were $197,972, compared to $175,731 for the first half of 2020. The increase in both periods was driven by growth in our Westminster commercial business, our non-standard auto business, and multi-peril crop insurance as a result of higher commodity prices. We anticipate that commercial written premium growth will remain strong over the remainder of 2021, while continued growth in the non-standard auto business is more unpredictable due to the factors associated with the current market conditions.
Losses and LAE
NI Holdings’ net losses and LAE for the three months ended June 30, 2021 increased $10,554, or 20.2%, compared to the three months ended June 30, 2020. Net losses and LAE for the six months ended June 30, 2021 increased $17,021, or 20.6%, compared to the six months ended June 30, 2020.
Net losses and LAE:
Total net losses and LAE
Loss and LAE ratio:
Total loss and LAE ratio
The Company’s year-to-date loss and LAE experience increased year-over-year across all segments of the Company.
Losses increased year-over-year in our private passenger auto and non-standard auto segments. Loss experience in both lines of business was favorable during the second quarter of 2020 due to reduced miles driven by our insureds while pandemic-related restrictions were in place. Loss experience in private passenger auto during the second quarter of 2021 has been adversely impacted by an increased frequency of uninsured/underinsured motorist liability claims.
In home and farm, losses and LAE increased as weather-related losses returned to normal levels during June. Those losses included a large hail storm in North Dakota which is expected to exceed our catastrophe reinsurance limit. In our “all other” segment, loss experience from the assumed business increased after favorable experience during the second quarter of 2020.
Losses in the commercial segment increased from a year ago, but the loss ratio improved due to a higher level of premiums earned.
In the crop segment, we continue to monitor the impact of this year’s extreme drought conditions across North and South Dakota on our multi-peril crop business. We expect that crop yields will be significantly reduced and will have an adverse impact on our anticipated multi-peril crop losses. In anticipation of the dry weather, we placed a higher number of multi-peril crop policies in the assigned risk fund of the Standard Reinsurance Agreement for 2021, resulting in higher levels of premiums and losses being ceded to the federal government. Even though we expect the direct loss ratio to be much greater than 100%, our net losses will be limited.
51
During the three months ended June 30, 2021, reported losses and LAE included $4,750 of net favorable development on prior accident years, compared to $3,042 of net favorable development on prior accident years during the three months ended June 30, 2020. During the six months ended June 30, 2021, reported losses and LAE included $2,197 of net favorable development on prior accident years, compared to $2,532 of net favorable development on prior accident years during the six months ended June 30, 2020. Net favorable development is the result of prior years’ claims settling for less than originally estimated, while net unfavorable development is the result of prior years’ claims settling for more than originally estimated. Adjustments to our original estimates resulting from claims are not made until the period in which there is reasonable evidence that an adjustment to the reserve is appropriate.
Amortization of Deferred Policy Acquisition Costs and Other Underwriting and General Expenses
Total underwriting and general expenses, including amortization of deferred policy acquisition costs, increased $7,167, or 36.5%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. These expenses increased $8,246, or 20.7%, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Underlying expenses
26,671
24,665
50,516
48,589
(22,968
(19,869
Total reported expenses
Underlying expenses were $2,006 higher in the three months ended June 30, 2021 compared to a year ago. Acquisition costs related to the increase in direct written premiums were partially offset by reduced amortization of other intangibles. Underlying expenses were $1,927 higher in the six months ended June 30, 2021 compared to a year ago. Acquisition costs related to the increase in direct written premiums were offset by reduced consulting fees and amortization of other intangibles.
Expense deferrals were $3,099 higher in the three months ended June 30, 2021 compared to 2020, while amortization of those costs was $5,057 higher in 2021. Expense deferrals were $6,141 higher in the six months ended June 30, 2021 compared to 2020, while amortization of those costs was $9,257 higher in 2021. These increases were primarily due to strong year-over-year growth in our commercial and non-standard auto segments which generally pay higher agent commissions than our other lines. As our mix of business has shifted and these premiums continue to be earned, the related deferral and amortization of expenses have increased.
52
Underwriting Gain (Loss)
Underwriting gain (loss) measures the pretax profitability of a company’s insurance business. It is derived by subtracting losses and LAE, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned.
Underwriting gain (loss):
Total underwriting gain (loss)
Combined ratio:
The results from underwriting operations for the three months ended June 30, 2021 decreased $20,243 when compared to 2020. The results from underwriting operations for the six months ended June 30, 2021 decreased $23,426 when compared to 2020.
The combined ratio for the private passenger auto segment increased 34.4 percentage points for the three months ended June 30, 2021 compared to 2020. The combined ratio for the private passenger auto segment increased 21.5 percentage points for the six months ended June 30, 2021 compared to 2020. Losses and LAE experience increased due to a return to average frequency of auto damage claims, a higher level of uninsured/underinsured motorist liability claims, and unfavorable loss reserve development. Non-standard auto’s combined ratio increased due to a return to normal claims frequency and unfavorable loss reserve development.
The combined ratio for the home and farm segment deteriorated due to increased weather-related activity in 2021, including a large hail storm in June. The commercial segment combined ratio improved as a result of favorable loss experience compared to 2020.
Fee and Other Income
NI Holdings had fee and other income of $520 for the three months ended June 30, 2021, compared to $446 for the three months ended June 30, 2020. Fee income attributable to the non-standard auto segment is a key component in measuring its profitability. Fee income on this business increased slightly to $361 for the three months ended June 30, 2021 from $328 for the three months ended June 30, 2020.
NI Holdings had fee and other income of $837 for the six months ended June 30, 2021, compared to $808 for the six months ended June 30, 2020. Fee income on the non-standard auto business increased slightly to $693 for the six months ended June 30, 2021 from $657 for the six months ended June 30, 2020.
53
Net Investment Income
The following table sets forth our average cash and invested assets, net investment income, and return on average cash and invested assets for the reported periods:
Average cash and invested assets
503,433
434,515
500,409
429,651
Gross investment income
Gross return on average cash and invested assets
2.0%
2.5%
2.6%
Net return on average cash and invested assets
1.4%
1.9%
1.3%
Investment income, net of investment expense, decreased $308 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Investment income, net of investment expense, decreased $743 for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These decreases were primarily driven by the continued impact of lower reinvestment rates in the fixed income portfolio.
The Company's fixed-income portfolio book yield declined 35 basis points year-over-year, from 2.82% at June 30, 2020 to 2.47% at June 30, 2021. This was driven by a combination of factors, including a persistent low reinvestment rate environment, ongoing maturities of existing holdings with higher embedded yields, and significant cash inflows to the investment portfolio from the Company's business operations. The dividend yield of the equity portfolio also declined as the ongoing rally in U.S. equity markets has not resulted in corresponding changes to dividend payment patterns.
Net Capital Gain (Loss) on Investments
NI Holdings had realized capital gains on investment of $2,875 and $6,777 for the three and six months ended June 30, 2021, respectively, compared to gains of $370 and $1,385 for the three and six months ended June 30, 2020, respectively.
NI Holdings reported net gains of $1,826 and $3,735 attributed to the change in unrealized appreciation of its equity securities for the three and six months ended June 30, 2021, respectively, compared to a net gain of $10,827 and a net loss of $5,107 for the three and six months ended June 30, 2020, respectively. The reduction in net gain compared to the prior year quarter was due to higher than normal unrealized gains in the equity portfolio in the second quarter of 2020 at the height of the post COVID-19 lockdown economic recovery following severe first quarter 2020 declines. From a year-to-date comparison perspective, the net gain increased in 2021 due to the continued strong performance in the U.S. equity markets which increased unrealized gains significantly in comparison with the first half of 2020.
NI Holdings has evaluated each fixed income security in a loss position and taken into account the severity and duration of any potential impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. The Company recorded no OTTIs in the three or six months ended June 30, 2021 and 2020.
The Company’s fixed income securities and equity securities are classified as available for sale because we will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. At June 30, 2021, the Company had net unrealized gains on fixed income securities of $12,183 and net unrealized gains on equity securities of $31,484. At December 31, 2020, the Company had net unrealized gains on fixed income securities of $16,505 and net unrealized gains on equity securities of $27,749.
Income (Loss) before Income Taxes
For the three months ended June 30, 2021, NI Holdings had pre-tax loss of $3,295 compared to pre-tax income of $23,678 for the three months ended June 30, 2020. The decrease in pre-tax results was largely attributable to reduced underwriting profitability.
For the six months ended June 30, 2021, NI Holdings had pre-tax income of $9,377 compared to pre-tax income of $19,283 for the six months ended June 30, 2020. The decrease in pre-tax results was largely attributable to reduced underwriting profitability, partially offset by the increase in net capital gain (loss) on investments.
Income Tax Expense (Benefit)
NI Holdings recorded income tax benefit of $561 for the three months ended June 30, 2021, compared to income tax expense of $4,911 for the three months ended June 30, 2020. Our effective tax rate for the second quarter of 2021 was 17.0% compared to an effective tax rate of 20.7% for the second quarter of 2020.
NI Holdings recorded income tax expense of $2,329 for the six months ended June 30, 2021, compared to income tax expense of $4,071 for the six months ended June 30, 2020. Our effective tax rate for the first half of 2021 was 24.8% compared to an effective tax rate of 21.1% for the first half of 2020.
A portion of income taxes, and the effective tax rates, relates to state income taxes primarily for the state of Illinois.
Net Income (Loss)
For the three months ended June 30, 2021, NI Holdings had net loss before non-controlling interest of $2,734 compared to net income of $18,767 for the three months ended June 30, 2020. This decrease was primarily attributable to reduced underwriting profitability.
For the six months ended June 30, 2021, NI Holdings had net income before non-controlling interest of $7,048 compared to net income of $15,212 for the six months ended June 30, 2020. This decrease in net income was primarily attributable to reduced underwriting profitability, partially offset by the increase in net capital gain (loss) on investments.
Return on Average Equity
For the three months ended June 30, 2021, NI Holdings had annualized return on average equity, after non-controlling interest, of -3.0% compared to annualized return on average equity, after non-controlling interest, of 24.2% for the three months ended June 30, 2020.
For the six months ended June 30, 2021, NI Holdings had annualized return on average equity, after non-controlling interest, of 4.1% compared to annualized return on average equity, after non-controlling interest, of 9.7% for the six months ended June 30, 2020.
Average equity is calculated as the average between beginning and ending equity excluding non-controlling interest for the period.
55
Financial Position
The major components of NI Holdings’ financial position are as follows:
Cash and investments
13,211
7,300
Other liabilities
22,688
15,574
At June 30, 2021, NI Holdings’ total assets increased by $90,822, or 14.7%, from December 31, 2020. Cash and investments increased due to normal operations. Premiums and agents’ balances receivable increased due to the recognition of crop insurance written premiums. Reinsurance recoverables on losses and the receivable from the Federal Crop Insurance Corporation increased due to the anticipated ceding of multi-peril crop business losses to the federal government. Deferred policy acquisition costs increased due to the growth across all non-crop segments.
At June 30, 2021, total liabilities increased by $88,755, or 33.0%, from December 31, 2020. Unpaid losses and loss adjustment expenses increased due to higher loss experience during the first six months of 2021, especially the multi-peril crop business. Unearned premiums increased due to an increase in direct written premiums in all segments including the multi-peril crop business. The first installment of $6,667 was paid to the former shareholder of Westminster during the first quarter of 2021. Other liabilities increased due to commission and processing fee accruals.
Total shareholders’ equity increased by $2,067 during the six months ended June 30, 2021. The increase in shareholders’ equity reflects a consolidated net income of $7,048 for the six-month period, share repurchases of $2,267, and a decrease in the fair market value of our fixed income portfolio.
56
Liquidity and Capital Resources
NI Holdings generates sufficient funds from its operations and maintains a high degree of liquidity in its investment portfolio to meet the demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings, and maturing investments. In 2017, we raised $93,145 in net proceeds from our initial public offering (“IPO”), which we planned to use for strategic acquisitions.
In 2018, we used $17,000 for the acquisition of Direct Auto. On January 1, 2020, we acquired Westminster for $40,000. We paid $20,000 at the time of closing. The terms of the acquisition agreement included payment of the remaining $20,000, subject to certain adjustments, in three equal installments on each of the first and second anniversaries of the closing, and on the first business day of the month preceding the third anniversary of the closing. The first installment was paid during the first quarter of 2021.
We currently anticipate that cash generated from our operations and available from our investment portfolio, along with the remaining IPO net proceeds, will be sufficient to fund our operations.
The Company’s philosophy is to provide sufficient cash flows from operations to meet its obligations in order to minimize the forced sales of investments. The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds.
The change in cash and cash equivalents for the six months ended June 30, 2021 and 2020 were as follows:
Net increase (decrease) in cash and cash equivalents
For the six months ended June 30, 2021, net cash provided by operating activities totaled $21,708 compared to $21,803 a year ago. Consolidated net income of $7,048 for the six months ended June 30, 2021 compared to consolidated net income of $15,212 for the same period a year ago. The decrease in consolidated net income, along with changes in net capital gain (loss) on investments, reinsurance recoverables on losses, and the receivable from the Federal Crop Insurance Corporation, were offset by the changes in unpaid losses and LAE and unearned premiums.
For the six months ended June 30, 2021, net cash used by investing activities totaled $52,140 compared to $9,263 a year ago. In the first half of 2021, the Company invested excess cash generated from operations and the implementation of the intercompany reinsurance pooling agreement into longer term investments.
For the six months ended June 30, 2021, net cash used by financing activities totaled $9,422 compared to $6,814 a year ago. The Company paid the first installment of $6,667 of the additional consideration for Westminster during the first quarter of 2021. The Company repurchased shares of its own common stock for $2,267 during the first half of 2021, compared to $6,783 during 2020.
As a standalone entity, and outside of the net proceeds from the IPO, NI Holdings’ principal source of long-term liquidity will be dividend payments from its directly-owned subsidiaries.
Nodak Insurance is restricted by the insurance laws of North Dakota as to the amount of dividends or other distributions it may pay to NI Holdings. North Dakota law sets the maximum amount of dividends that may be paid by Nodak Insurance during any twelve-month period after notice to, but without prior approval of, the North Dakota Insurance Department. This amount cannot exceed the lesser of (i) 10% of the Company’s surplus as regards policyholders as of the preceding December 31, or (ii) the Company’s statutory net income for the preceding calendar year (excluding realized capital gains), less any prior dividends paid during such twelve-month period. In addition, any insurance company other than a life insurance company may carry forward net income from the preceding two calendar years, not including realized capital gains, less any dividends actually paid during those two calendar years. Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the North Dakota Insurance Department.
The amount available for payment of dividends from Nodak Insurance to us during 2021 without the prior approval of the North Dakota Insurance Department is approximately $21,628 based upon the surplus of Nodak Insurance at December 31, 2020. Prior to its payment of any extraordinary dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has
57
the power to limit or prohibit dividend payments if an insurance company is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Nodak Insurance during the six months ended June 30, 2021. The Nodak Insurance Board of Directors declared and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2020.
Direct Auto is restricted by the insurance laws of Illinois as to the amount of dividends or other distributions it may pay to NI Holdings. Illinois law sets the maximum amount of dividends that may be paid by Direct Auto during any twelve-month period after notice to, but without prior approval of, the Illinois Department of Insurance. This amount cannot exceed the greater of (i) 10% of the Company’s surplus as regards policyholders as of the preceding December 31, or (ii) the Company’s statutory net income for the preceding calendar year (excluding realized capital gains). Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the Illinois Department of Insurance.
Off-Balance Sheet Arrangements
NI Holdings has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital reserves.
For a discussion of recent accounting pronouncements, see Note 2 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
58
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
The Company’s assessment of market risk as of June 30, 2021 indicates there have been no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC.
Item 4. - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-15(b)) as of June 30, 2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective.
Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2021, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II. - OTHER INFORMATION
We are party to litigation in the normal course of business. Based upon information presently available to us, we do not consider any litigation to be material. However, given the uncertainties attendant to litigation, we cannot assure you that our results of operations and financial condition will not be materially adversely affected by any litigation.
Item 1A. - Risk Factors
There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
All dollar amounts included in Item 2 herein, except per share amounts, are in thousands.
The Company has not sold any unregistered securities within the past three years.
On January 17, 2017, the SEC declared effective our registration statement on Form S-1 registering our common stock. On March 13, 2017, the Company completed the IPO of 10,350,000 shares of common stock at a price of $10.00 per share. The Company received net proceeds of $93,145 from the offering, after deducting underwriting discounts and offering expenses. Griffin Financial Group, LLC acted as our placement agent in connection with the IPO.
Direct Auto was acquired on August 31, 2018 with $17,000 of the net proceeds from the IPO.
Westminster was acquired on January 1, 2020 for a purchase price of $40,000, subject to certain adjustments. The Company paid $20,000 from the net proceeds from the IPO at time of closing. The terms of the acquisition agreement included payment of the remaining $20,000, subject to certain adjustments, in three equal installments on each of the first and second anniversaries of the closing, and on the first business day of the month preceding the third anniversary of the closing. The first installment was paid during the first quarter of 2021. The Company anticipates using the net proceeds from the IPO to satisfy these obligations.
From time to time, the Company may also repurchase its own stock. These repurchases may be used to satisfy its obligations under the equity incentive plans or may be done for other reasons. To date, the Company has used the net proceeds from the IPO to fund these buyback programs.
There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 17, 2017.
On May 4, 2020, our Board of Directors approved an additional authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock. During the year ended December 31, 2020, we completed the repurchase of 454,443 shares of our common stock for $7,238 under this new authorization. During the six months ended June 30, 2021, we repurchased an additional 118,531 shares of our common stock for $2,266.
Period in 2021
Total Number of
Shares
Purchased
Average Price
Paid
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
Maximum Dollar Value
of Shares That May Yet
Be Purchased Under the
Plans or Programs (1)
(in thousands)
April 1-30, 2021
34,813
19.31
1,494
May 1-31, 2021
20,280
19.26
June 1-30, 2021
31,112
19.55
495
86,205
19.39
Shares purchased pursuant to the May 4, 2020 publicly announced share repurchase authorization of up to approximately $10,000 of the Company’s outstanding common stock.
Item 3. - Defaults upon Senior Securities
Not Applicable
Item 4. - Mine Safety Disclosures
Item 5. - Other Information
None
Item 6. - Exhibits
Exhibit
Number
Description
31.1
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Linkbase Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 4, 2021.
/s/ Michael J. Alexander
Michael J. Alexander
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Seth C. Daggett
Seth C. Daggett
Chief Financial Officer
(Principal Financial Officer)
/s/ Timothy J. Milius
Timothy J. Milius
Chief Accounting Officer
(Principal Accounting Officer)