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, 2022
☐ 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 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, 2022 was 21,179,053. No preferred shares are issued or outstanding.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
2
Part I. - FINANCIAL INFORMATION
3
Item 1. - Financial Statements
Consolidated Balance Sheet – June 30, 2022 (Unaudited) and December 31, 2021
Consolidated Statements of Operations (Unaudited) – Three Months and Six Months Ended June 30, 2022 and 2021
4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three Months and Six Months Ended June 30, 2022 and 2021
5
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Three Months and Six Months Ended June 30, 2022 and 2021
6
Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2022 and 2021
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
42
Item 4. - Controls and Procedures
Part II. - OTHER INFORMATION
43
Item 1. - Legal Proceedings
Item 1A. - Risk Factors
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
44
Item 3. - Defaults upon Senior Securities
45
Item 4. - Mine Safety Disclosures
Item 5. - Other Information
Item 6. - Exhibits
Signatures
46
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 via a surplus note. The terms of the surplus note allow Nodak Insurance to appoint two-thirds of the Battle Creek Board of Directors;
“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, and Direct Auto became a consolidated subsidiary of NI Holdings. 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, and Westminster became a consolidated subsidiary of NI Holdings. 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.
1
This report contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as “may”, “will”, “should”, “likely”, “anticipates”, “expects”, “intends”, “plans”, “projects”, “believes”, “views”, “estimates”, and similar expressions are used to identify these forward-looking statements. These statements include, among other things, the Company’s statements about:
our anticipated operating and financial performance, business plans, and prospects;
strategic reviews, capital allocation objectives, dividends, and share repurchases;
plans for and prospects of acquisitions, dispositions, and other business development activities, and our ability to successfully capitalize on these opportunities;
the impact of COVID-19 or a future pandemic and related economic conditions, including the potential impact on the Company's investments;
our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our agent network;
cyclical changes in the insurance industry, competition, and innovation and emerging technologies;
expectations for impact of or changes to existing or new government regulations or laws;
our ability to anticipate and respond to macroeconomic, geopolitical, health and industry trends, pandemics, acts of war, and other large-scale crises;
developments in general economic conditions, domestic and global financial markets, interest rate, unemployment, or inflation, that could affect the performance of our insurance operations and/or investment portfolio; and
our ability to effectively manage future growth, including additional necessary capital, systems, and personnel.
Given their nature, we cannot assure that any outcome expressed in these or other forward-looking statements will be realized in whole or in part. Actual outcomes may vary materially from past results and those anticipated, estimated, implied, or projected. These forward-looking statements may be affected by underlying assumptions that may prove inaccurate or incomplete, or by known or unknown risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and in the Part I, Item 1A, “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”). The occurrence of any of the risks identified in the Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q or Part I, Item 1A, “Risk Factors” section of the 2021 Annual Report, or other risks currently unknown, could have a material adverse effect on our business, financial condition or results of operations, or we may be required to increase our accruals for contingencies. It is not possible to predict or identify all such factors. Consequently, you should not consider such discussion to be a complete discussion of all potential risks or uncertainties.
Therefore, you are cautioned not to unduly rely on forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities law. You are advised, however, to consult any further disclosures we make on related subjects.
PART I. - FINANCIAL INFORMATION
NI Holdings, Inc.
Consolidated Balance Sheets
(dollar amounts in thousands, except par value)
June 30, 2022
December 31, 2021
(Unaudited)
Assets:
Cash and cash equivalents
$
63,032
70,623
Fixed income securities, at fair value
336,099
364,651
Equity securities, at fair value
63,422
77,690
Other investments
2,005
Total cash and investments
464,558
514,969
Premiums and agents' balances receivable
108,336
51,452
Deferred policy acquisition costs
30,917
24,947
Reinsurance premiums receivable
2,227
-
Reinsurance recoverables on losses
17,041
21,200
Income tax recoverable
8,475
364
Accrued investment income
2,551
2,524
Property and equipment
9,837
9,869
Deferred income taxes
9,025
Goodwill and other intangibles
17,486
17,722
Other assets
11,136
8,735
Total assets
681,589
651,782
Liabilities:
Unpaid losses and loss adjustment expenses
182,876
139,662
Unearned premiums
173,725
127,789
Reinsurance premiums payable
3,140
326
5,506
Payable to Federal Crop Insurance Corporation
7,102
4,962
Westminster consideration payable
6,454
13,020
Accrued expenses and other liabilities
35,681
13,104
Total liabilities
408,978
304,369
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value, authorized: 25,000,000 shares; issued: 23,000,000 shares; and outstanding: 2022 – 21,209,856 shares, 2021 – 21,219,808 shares
230
Preferred stock, without par value, authorized 5,000,000 shares; no shares issued or outstanding
Additional paid-in capital
96,827
98,166
Unearned employee stock ownership plan shares
(1,184
)
Retained earnings
223,217
267,207
Accumulated other comprehensive income (loss), net of income taxes
(22,482
5,237
Treasury stock, at cost, 2022 – 1,671,719 shares, 2021 – 1,661,767 shares
(26,569
(26,452
Non-controlling interest
2,572
4,209
Total shareholders’ equity
272,611
347,413
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations (Unaudited)
(dollar amounts in thousands, except per share data)
Three Months Ended
Six Months Ended
June 30,
2022
2021
Revenues:
Net premiums earned
84,496
76,281
154,083
139,416
Fee and other income
415
520
843
837
Net investment income
2,015
1,710
3,668
3,246
Net investment gains (losses)
(11,136
4,701
(16,664
10,512
Total revenues
75,790
83,212
141,930
154,011
Expenses:
Losses and loss adjustment expenses
108,595
62,918
148,724
99,807
Amortization of deferred policy acquisition costs
16,244
19,886
31,867
33,473
Other underwriting and general expenses
10,002
3,703
17,783
11,354
Total expenses
134,841
86,507
198,374
144,634
Income (loss) before income taxes
(59,051
(3,295
(56,444
9,377
Income tax expense (benefit)
(12,415
(561
(11,847
2,329
Net income (loss)
(46,636
(2,734
(44,597
7,048
Net income (loss) attributable to non-controlling interest
(726
(90
(596
23
Net income (loss) attributable to NI Holdings, Inc.
(45,910
(2,644
(44,001
7,025
Earnings (loss) per common share:
Basic
(2.15
(0.12
(2.06
0.33
Diluted
0.32
Share data:
Weighted average common shares outstanding used in basic per common share calculations
21,379,803
21,464,840
21,376,298
21,463,747
Plus: Dilutive securities
224,312
Weighted average common shares used in diluted per common share calculations
21,688,059
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollar amounts in thousands)
Three Months Ended June 30, 2022
Six Months Ended June 30, 2022
Attributable
to NI
Holdings, Inc.
to Non-
Controlling Interest
Total
Other comprehensive income (loss), before income taxes:
Holding gains (losses) on investments
(15,738
(650
(16,388
(35,935
(1,347
(37,282
Reclassification adjustment for net realized gain included in net income (loss)
105
62
Other comprehensive income (loss), before income taxes
(15,633
(16,283
(35,873
(37,220
Income tax benefit (expense) related to items of other comprehensive income (loss)
3,553
148
3,701
8,154
306
8,460
Other comprehensive income (loss), net of income taxes
(12,080
(502
(12,582
(27,719
(1,041
(28,760
Comprehensive income (loss)
(57,990
(1,228
(59,218
(71,720
(1,637
(73,357
Three Months Ended June 30, 2021
Six Months Ended June 30, 2021
3,032
128
3,160
(3,731
(165
(3,896
(325
(426
2,707
2,835
(4,157
(4,322
(568
(27
(595
873
908
2,139
101
2,240
(3,284
(130
(3,414
(505
11
(494
3,741
(107
3,634
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
Common
Stock
Additional
Paid-in
Capital
Unearned
Employee
Ownership
Plan Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss), Net of
Income Taxes
Treasury
Non-
Controlling
Interest
Total Shareholders’ Equity
Balance, beginning of period
96,517
269,142
(10,402
(25,825
3,800
332,278
Purchase of treasury stock
(934
Share-based compensation
486
Issuance of vested award shares
(176
(15
190
(1
Balance, end of period
Balance, beginning of period
(1,931
1,051
(2,390
1,814
(565
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
96,511
(1,427
268,444
7,417
(23,012
4,427
352,590
(1,671
516
(298
16
280
(2
96,729
265,816
9,556
(24,403
4,438
350,939
97,911
258,741
12,840
(23,968
4,545
348,872
(2,267
1,188
(2,370
50
1,832
(488
7
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Net investment losses (gains)
16,664
(10,512
Deferred income tax expense (benefit)
(6,069
197
Depreciation of property and equipment
344
341
Amortization of intangibles
236
Deferral of policy acquisition costs
(37,837
(39,162
Net amortization of premiums and discounts on investments
885
1,024
Loss (gain) on sale of property and equipment
(186
Changes in operating assets and liabilities:
Premiums and agents’ balances receivable
(56,884
(35,940
Reinsurance premiums receivable / payable
587
2,739
4,159
(15,864
(335
Federal Crop Insurance Corporation receivable / payable
2,140
(10,545
Income tax recoverable / payable
(8,111
(3,303
(2,401
(3,120
43,214
46,590
45,936
42,229
22,676
5,420
Net cash flows from operating activities
13,647
21,708
Cash flows from investing activities:
Proceeds from maturities and sales of fixed income securities
31,846
35,483
Proceeds from sales of equity securities
7,837
17,247
Purchases of fixed income securities
(41,461
(89,729
Purchases of equity securities
(10,171
(15,559
Purchases of property and equipment
(126
(417
Proceeds from sale of other investments and other
835
Net cash flows from investing activities
(12,075
(52,140
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
(9,163
(9,422
Net decrease in cash and cash equivalents
(7,591
(39,854
Cash and cash equivalents at beginning of period
101,077
Cash and cash equivalents at end of period
61,223
Federal and state income taxes paid
2,360
5,435
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
1.Organization
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 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 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 Unaudited Consolidated Financial Statements include the financial position and results of NI Holdings and seven other entities:
Nodak Insurance Company
Nodak Insurance is the largest domestic property and casualty insurance company in North Dakota, offering private passenger auto, homeowners, farmowners, commercial multi-peril, crop hail, and Federal multi-peril crop insurance coverages through its captive agents in the state.
Nodak Agency, Inc.
Nodak Agency is an inactive shell corporation.
American West Insurance Company
American West 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 Insurance Company
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 Mutual Insurance Company
Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska. 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. Because we have concluded that we control Battle Creek, we consolidate the financial statements of Battle Creek, and Battle Creek’s policyholders’ interest in Battle Creek is reflected as a non-controlling interest in shareholders’ equity in our Unaudited Consolidated Balance Sheets and its net income or loss is excluded from net income or loss attributed to NI Holdings in our Unaudited Consolidated Statements of Operations.
Direct Auto Insurance Company
Direct Auto is a property and casualty insurance 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 American Insurance Company
Westminster is a property and casualty insurance company licensed in seventeen states and the District of Columbia. Westminster 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.
Nodak Insurance markets and distributes its policies through its captive agents, while all other companies utilize the independent agent distribution channel. Additionally, all of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by A.M. Best Company, Inc. (“AM Best”).
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.
2.Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying Unaudited 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. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. 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 2021 Annual Report.
The Consolidated Balance Sheet at December 31, 2021, has been derived from the Audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
The preparation of the interim Unaudited 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 Unaudited 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, 2022, are not necessarily indicative of the results that may be expected for the year ended December 31, 2022.
Our 2021 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 processes described in the 2021 Annual Report were consistently applied to the Unaudited Consolidated Financial Statements as of and for the six months ended June 30, 2022 and 2021.
Recent Accounting Pronouncements
As an emerging growth company (“EGC”), 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 EGCs, as well as whether specific guidance may be adopted early.
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.
10
Notes to Unaudited Consolidated Financial Statements (Unaudited)
The new guidance was effective for annual and interim reporting periods beginning after December 15, 2018, for public business entities. For private companies and EGCs, this guidance is effective for annual reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. We will adopt this guidance in the fourth quarter of the year ended December 31, 2022, as we will lose our EGC status beginning December 31, 2022. 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 liability 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 requires timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The guidance requires 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. The guidance also requires financial institutions and other organizations to use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied prior to adoption of this standard are still permitted, although the inputs to those techniques have changed to reflect the full amount of expected credit losses. Organizations are to 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 was 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 EGCs that did not relinquish private company relief. For all other entities, this guidance will be effective for annual reporting periods beginning after December 15, 2022, and interim periods within those fiscal years. We will adopt this guidance in the fourth quarter of the year ended December 31, 2022, as we will lose our EGC status beginning December 31, 2022. 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 was effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, for public business entities. For private companies and EGCs, the amended guidance will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. We will adopt this guidance in the fourth quarter of the year ended December 31, 2022, as we will lose our EGC status beginning December 31, 2022. 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.
3.Investments
The amortized cost and estimated fair value of fixed income securities as of June 30, 2022, and December 31, 2021, were as follows:
Cost or Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Fixed income securities:
U.S. Government and agencies
13,017
26
(649
12,394
Obligations of states and political subdivisions
65,836
113
(5,177
60,772
Corporate securities
158,812
(13,080
145,778
Residential mortgage-backed securities
43,868
(4,043
39,826
Commercial mortgage-backed securities
34,498
(3,306
31,200
Asset-backed securities
45,831
(3,765
42,069
Redeemable preferred stocks
4,746
(686
4,060
Total fixed income securities
366,608
(30,706
13,118
467
(87
13,498
84,668
2,979
(353
87,294
144,476
4,214
(1,069
147,621
26,190
266
(300
26,156
32,878
815
(161
33,532
52,604
131
(313
52,422
4,008
136
(16
4,128
357,942
9,008
(2,299
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 may have the right to call or prepay these securities.
Amortized Cost
Due to mature:
One year or less
17,381
17,373
After one year through five years
96,141
92,562
After five years through ten years
80,132
71,557
After ten years
44,011
37,452
Mortgage / asset-backed securities
124,197
113,095
14,457
14,586
82,429
84,760
82,270
84,173
63,106
64,894
111,672
112,110
12
Fixed income securities with a fair value of $6,773 at June 30, 2022, and $7,977 at December 31, 2021, 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 are shown below. 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.
Less than 12 Months
Greater than 12 months
Fair
Value
Unrealized
Losses
9,143
(305
2,350
(344
11,493
45,078
(4,532
(645
48,110
113,527
(9,597
19,931
(3,483
133,458
34,949
(3,266
4,616
(777
39,565
29,073
(3,259
824
(47
29,897
37,725
(3,437
3,500
(328
41,225
273,555
(25,082
34,253
(5,624
307,808
3,125
19,769
(350
222
(3
19,991
46,816
(1,015
1,895
(54
48,711
17,407
(261
1,434
(39
18,841
11,287
(160
216
11,503
28,797
(308
995
(5
29,792
1,493
128,694
(2,197
4,762
(102
133,456
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 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). The Company did not record any other-than-temporary impairments during the three- or six-month periods ending June 30, 2022, or the year ended December 31, 2021.
13
Net investment income consisted of the following:
Three Months Ended June 30,
Fixed income securities
2,406
2,112
4,567
4,123
Equity securities
395
724
545
Real estate
75
157
241
313
Total gross investment income
2,886
2,550
5,544
4,983
Investment expenses
871
840
1,876
1,737
Net investment gains (losses) consisted of the following:
Gross realized gains:
331
51
440
1,196
2,605
2,269
6,521
Total gross realized gains
1,201
2,936
2,320
6,961
Gross realized losses, excluding other-than-temporary impairment losses:
(110
(6
(113
(14
(64
(55
(242
(170
Total gross realized losses, excluding other-than-temporary impairment losses
(174
(61
(355
(184
Net realized gains
1,027
2,875
1,965
6,777
Change in net unrealized gain on equity securities
(12,163
1,826
(18,629
3,735
14
4.Fair Value Measurements
The Company 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, we may be required to record other assets or liabilities 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 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).
The Company 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 the Company or other third-parties, 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 could have been 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.
The Company 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 independent pricing service provides us 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 independent pricing service did not use broker quotes in determining any fair values of the Company’s investments at June 30, 2022, or December 31, 2021.
Should the independent pricing service be unable to provide a fair value estimate, we 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, we would use that estimate. In instances where we would be able to obtain fair value estimates from more than one broker-dealer, we 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, we would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, the Company classifies such a security as a Level III investment.
15
The fair value estimates of the Company’s 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 Investors Service, Inc. or Standard & Poor’s Financial Services LLC. 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 for the six-month period ended June 30, 2022, or the year ended December 31, 2021. The classification within the fair value hierarchy is then confirmed based on the final conclusions from the pricing review.
The valuation of cash equivalents and equity securities are generally based on Level I inputs, which use the market-approach valuation technique. The valuation of our 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 at Level III at June 30, 2022, or December 31, 2021.
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
Redeemable preferred stock
Equity securities:
Common stock
61,573
Non-redeemable preferred stock
1,849
Total equity securities
Cash equivalents
35,142
Total assets at fair value
434,663
98,564
Common Stock
75,143
2,547
45,741
488,082
123,431
There were no liabilities measured at fair value on a recurring basis at June 30, 2022, or December 31, 2021.
17
5.Reinsurance
The Company cedes and assumes certain premiums and losses to and from various companies and associations under a variety of 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 through facultative contracts on substantial individual risks. Reinsurance contracts do not relieve the Company from its obligation to policyholders.
During the six-month period ended June 30, 2022, the Company retained the first $15,000 of weather-related losses from catastrophic events and had reinsurance under various reinsurance agreements up to $125,000 in excess of its $15,000 retained risk. The Company experienced multiple severe weather events during the second quarter of 2022 with none of these events exceeding the retention level during the current quarter.
During the year ended December 31, 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. The Company experienced one catastrophe event during the second quarter of 2021 in excess of the retention level.
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 AM Best ratings of “A” or higher.
18
A reconciliation of direct to net premiums on both a written and an earned basis is as follows:
Premiums Written
Premiums Earned
Direct premium
144,962
94,251
220,495
167,650
Assumed premium
3,226
1,691
5,087
3,552
Ceded premium
(20,175
(11,446
(25,835
(17,119
Net premiums
128,013
199,747
125,552
87,059
197,972
155,802
3,576
3,516
5,026
4,964
(26,203
(14,294
(33,317
(21,350
102,925
169,681
A reconciliation of direct to net losses and loss adjustment expenses is as follows:
Direct losses and loss adjustment expenses
110,670
76,599
156,165
114,177
Assumed losses and loss adjustment expenses
1,535
1,960
1,545
2,908
Ceded losses and loss adjustment expenses
(3,610
(15,641
(8,986
(17,278
Net losses and loss adjustment expenses
If 100% of our ceded reinsurance was cancelled as of June 30, 2022, or December 31, 2021, no ceded commissions would need to be returned to the reinsurers. Reinsurance contracts are typically effective from January 1 through December 31 each year.
6.Deferred Policy Acquisition Costs
Expenses directly related to successfully acquired insurance policies, primarily commissions, premium taxes and underwriting costs, are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation:
26,272
26,575
23,968
20,889
22,968
37,837
39,162
(16,244
(19,886
(31,867
(33,473
29,657
19
7.Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
Balance, beginning of period:
Liability for unpaid losses and loss adjustment expenses
105,750
8,710
Net balance, beginning of period
118,462
97,040
Incurred related to:
Current year
157,214
102,004
Prior years
(8,490
Total incurred
Paid related to:
59,634
40,664
41,717
28,417
Total paid
101,351
69,081
Balance, end of period:
152,340
24,574
Net balance, end of period
165,835
127,766
During the six months ended June 30, 2022, the Company’s reported incurred losses and loss adjustment expenses included $8,490 of net favorable development on prior accident years, primarily attributable to Direct Auto, Battle Creek, and American West. During the six months ended June 30, 2021, the Company’s incurred reported losses and loss adjustment expenses included $2,197 of net favorable development on prior accident years, primarily attributable to Nodak Insurance, Direct Auto, and American West.
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.
8.Property and Equipment
Property and equipment consisted of the following:
Estimated Useful Life
Cost:
Land
1,403
indefinite
Building and improvements
13,952
14,193
10–40 years
Electronic data processing equipment
1,554
1,518
5–7 years
Furniture and fixtures
2,321
2,885
Automobiles
1,195
1,228
2–3 years
Gross cost
20,425
21,227
Accumulated depreciation
(10,588
(11,358
Total property and equipment, net
Depreciation expense was $176 and $171 for the three months ended June 30, 2022 and 2021, respectively, and $344 and $341 for the six months ended June 30, 2022 and 2021, respectively.
20
9.Goodwill and Other Intangibles
Goodwill
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
6,756
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
315
433
Distribution network
6,700
931
5,769
Total subject to amortization
7,448
1,246
6,202
Not subject to amortization :
State insurance license
1,900
9,348
8,102
265
483
745
5,955
1,010
6,438
Not subject to amortization:
8,338
Amortization expense was $118 and $118 for the three months ended June 30, 2022 and 2021, respectively, and $236 and $236 for the six months ended June 30, 2022 and 2021, respectively.
Other intangible assets that have finite lives, including trade names and distribution networks, are amortized over their useful lives. As of June 30, 2022, the estimated amortization of other intangible assets with finite lives for the next five years and thereafter is as follows:
Year ending December 31,
Amount
2022 (six months remaining)
2023
455
2024
422
2025
2026
Thereafter
4,245
Total other intangible assets with finite lives
21
10.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 AM 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, 2022, and the year ended December 31, 2021, the pooling share percentages by insurance company were:
Pool Percentage
66.0
%
7.0
3.0
2.0
13.0
9.0
100.0
North Dakota Farm Bureau
We were organized by the North Dakota Farm Bureau (“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 policies. Royalties paid to the NDFB were $405 and $395 during the three months ended June 30, 2022 and 2021, respectively, and $744 and $732 for the six months ended June 30, 2022 and 2021, respectively. Royalty amounts payable of $151 and $144 were accrued as a liability to the NDFB at June 30, 2022, and December 31, 2021, 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, 2021, 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 2022 without the prior approval of the North Dakota Insurance Department is $21,493 based upon the surplus of Nodak Insurance at December 31, 2021. Prior to its payment of any 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, 2022, or the year ended December 31, 2021.
Direct Auto was re-domesticated from Illinois to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Direct Auto to NI Holdings during 2022 without the prior approval of the North Dakota Insurance Department is $3,796 based upon the surplus of Direct Auto at December 31, 2021. No dividends were declared or paid by Direct Auto during the six months ended June 30, 2022, or the year ended December 31, 2021.
22
Westminster was re-domesticated from Maryland to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Westminster to NI Holdings during 2022 without the prior approval of the North Dakota Insurance Department is $2,471 based upon the surplus of Westminster at December 31, 2021. No dividends were declared or paid by Westminster during the six months ended June 30, 2022, or the year ended December 31, 2021.
The following tables illustrates the impact of including Battle Creek in our Unaudited Consolidated Balance Sheets and Statements of Operations prior to intercompany eliminations:
December 31,
1,360
4,398
Investments
11,618
10,610
5,799
5,038
618
499
Reinsurance recoverables on losses (2)
3,121
10,173
57
325
Pooling receivable (1)
6,900
623
142
58
52
30,479
31,288
3,941
2,937
3,458
2,544
Notes payable (1)
3,000
Pooling payable (1)
5,580
Reinsurance losses payable (2)
10,718
12,754
6,790
264
27,907
27,079
Equity:
Total equity
Total liabilities and equity
(1)
Amount fully eliminated in consolidation.
(2)
Amount partially eliminated in consolidation.
1,690
3,082
3,095
Fee and other income (expenses)
(7
27
40
1,715
1,848
3,115
3,116
2,171
1,531
2,974
397
637
669
31
274
147
2,653
1,959
3,885
3,085
(938
(111
(770
(212
(21
11.Benefit Plans
Nodak Insurance sponsors a 401(k) plan with an automatic and matching contribution for eligible employees at Nodak Insurance, Primero, and Direct Auto. Westminster also sponsors a separate 401(k) plan. The Company reported expenses related to the 401(k) plans totaling $242 and $270 during the three months ended June 30, 2022 and 2021, respectively, and $432 and $539 during the six months ended June 30, 2022 and 2021, respectively.
Nodak Insurance also contributes an additional elective amount of employee compensation as a profit-sharing contribution for eligible employees that is invested in a portfolio of investments directed by the Company. The reported expenses related to this profit-sharing contribution were $187 and $175 during the three months ended June 30, 2022 and 2021, respectively, and $335 and $347 during the six months ended June 30, 2022 and 2021, respectively.
All fees associated with the plans are deducted from the eligible employee accounts.
The Company also offers a non-qualified deferred compensation plan to 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 $23 and $149 during the three months ended June 30, 2022 and 2021, respectively, and $127 and $567 during the six months ended June 30, 2022 and 2021, respectively.
In connection with our initial public offering (“IPO”) in March 2017, the Company 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 invests solely in common stock of the Company.
Upon establishment of the plan, Nodak Insurance loaned $2,400 to the ESOP’s related trust (the “ESOP Trust”). The ESOP loan was for a period of ten years, bearing 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 IPO, which resulted 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 makes 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 are released from the suspense account and allocated to participant accounts at the end of the calendar year. This release and allocation occurs on an annual basis over the ten-year term of the ESOP loan. Nodak Insurance has 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.
24
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 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 automatically becomes 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 receive annual reports from the Company showing the number of shares of common stock of the Company allocated to the participants’ accounts 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 establishment of the ESOP, the Company created a contra-equity account on the 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 IPO. As shares are released from the ESOP suspense account, the contra-equity account is credited, which reduces the impact of the contra-equity account on the Company’s Consolidated Balance Sheet over time. The Company records compensation expense related to the shares released, 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 $101 and $117 during the three months ended June 30, 2022 and 2021, respectively, related to the ESOP, and $210 and $226 during the six months ended June 30, 2022 and 2021, respectively.
Through June 30, 2022, and December 31, 2021, the Company had released and allocated 121,575 ESOP shares to participants, with a remainder of 118,425 ESOP shares in suspense at June 30, 2022, and December 31, 2021. Using the Company’s quarter-end market price of $16.43 per share, the fair value of the unearned ESOP shares was $1,946 at June 30, 2022.
12.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, 2022, or the year ended December 31, 2021. This line of credit is scheduled to expire on May 31, 2023.
13.Income Taxes
At June 30, 2022, and December 31, 2021, 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-month periods ended June 30, 2022 or 2021.
At June 30, 2022, and December 31, 2021, the Company, other than Battle Creek and Westminster, had no income tax related carryforwards 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 carryforwards of $3,215 at December 31, 2021. These net operating loss carryforwards began expiring in 2021 and will continue through 2032 due to limitations on their use.
Westminster had a $2,122 net operating loss carryforward at December 31, 2021. This net operating loss carryforward expires in 2023 due to limitations on its use.
As of June 30, 2022, federal income tax years 2018 through 2020 remain open for examination.
25
14.Operating Leases
Primero leases a facility in Spearfish, South Dakota under a non-cancellable operating lease expiring in 2023 and leases a facility in Las Vegas, Nevada on a month-to-month basis. Direct Auto leases a facility in Chicago, Illinois under a non-cancellable operating lease expiring in 2029. Nodak Insurance leases a facility in Fargo, North Dakota under a non-cancellable operating lease expiring in 2024. There were expenses of $69 and $63 related to these leases during the three months ended June 30, 2022 and 2021, respectively, and $137 and $124 related to these leases during the six months ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, we have minimum future commitments under non-cancellable leases for the next five years and thereafter as follows:
Estimated Future
Minimum
Commitments
192
358
320
286
291
775
Total minimum future commitments
2,222
15.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.
16.Common Stock
Changes in the number of common stock shares outstanding are as follows:
Shares outstanding, beginning of period
21,219,808
21,318,638
Treasury shares repurchased through stock repurchase authorization
(111,244
(118,531
Issuance of treasury shares for vesting of restricted stock units
101,292
102,060
Shares outstanding, end of period
21,209,856
21,302,167
The changes in the number of common shares outstanding excludes certain non-forfeitable stock award shares that are included in the weighted average common shares outstanding used in basic earnings per common share calculations. In addition, the net loss per diluted common share for the three- and six-month periods ended June 30, 2022, excluded the weighted average effects of 176,037 and 207,424 shares of stock awards, respectively, since the impacts of these potential shares of common stock were anti-dilutive.
On May 4, 2020, our Board of Directors approved an 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 authorization. During the nine months ended September 30, 2021, we completed the repurchase of 144,110 shares of our common stock for $2,762 to close out this authorization.
On August 11, 2021, our Board of Directors approved an authorization for the repurchase of up to approximately $5,000 of the Company’s outstanding common stock. During the year ended December 31, 2021, we completed the repurchase of 81,095 shares of our common stock for $1,554 under this authorization. During the three months ended June 30, 2022, we completed the repurchase of 56,372 shares of our common stock for $935. During the six months ended June 30, 2022, we completed the repurchase of 111,244 shares of our common stock for $1,932.
On May 9, 2022, our Board of Directors approved an authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock in addition to the $1,514 remaining from the August 11, 2021, repurchase authorization as of June 30, 2022. No shares were repurchased as part of the May 9, 2022, authorization during the six months ended June 30, 2022.
The cost of this treasury stock is a reduction of shareholders’ equity within our Unaudited Consolidated Balance Sheets.
17.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 may be issued under the Plan shall not exceed 1,000,000 shares, 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 RSUs is presented below:
RSUs
Weighted-Average
Grant-Date
Per Share
Units outstanding and unearned at January 1, 2021
115,780
15.27
RSUs granted during 2021
58,700
18.76
RSUs earned during 2021
(66,100
15.77
Units outstanding and unearned at December 31, 2021
108,380
16.86
RSUs granted during 2022
59,600
17.61
RSUs earned during 2022
(52,620
17.39
Units outstanding and unearned at June 30, 2022
115,360
17.00
The following table shows the impact of RSU activity to the Company’s financial results:
RSU compensation expense
225
229
498
617
Income tax benefit
(51
(48
RSU compensation expense, net of income taxes
174
181
385
487
At June 30, 2022, there was $1,270 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 2.05 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 PSUs is presented below:
PSUs
Units outstanding at January 1, 2021
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 December 31, 2021
190,600
16.06
PSUs granted during 2022 (at target)
61,800
18.10
PSUs earned during 2022
(86,684
15.21
(6,916
Units outstanding at June 30, 2022
190,000
(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
262
287
523
571
(60
(119
(120
PSU compensation expense, net of income taxes
202
227
404
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. At the end of the performance period, the Company will reflect a performance adjustment, which may be either an increase or decrease from the initial target awards. 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, 2022, there was $1,656 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 2.10 years.
29
18.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, 2022 and 2021.
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 line items in our Unaudited Consolidated Statement of Operations or Unaudited Consolidated Balance Sheet to our operating segments. Those line items include investment income, net investment gains (losses), other income excluding non-standard auto insurance fees, and income taxes within the Unaudited Consolidated Statement of Operations. For the Unaudited 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
Standard
Home and
Farm
Crop
Commercial
All Other
Direct premiums earned
19,824
15,577
21,703
17,709
18,161
1,277
Assumed premiums earned
491
1,200
Ceded premiums earned
(559
(65
(1,748
(5,905
(3,130
19,265
15,512
19,955
12,295
15,031
2,438
16,866
4,133
62,188
13,237
13,081
1,165
244
1,291
(12
(357
(3,151
16,854
61,831
10,330
12,991
2,456
Gross margin
2,411
11,379
(41,876
2,040
(18
(24,099
Underwriting and general expenses
5,553
6,867
6,056
1,609
5,576
585
26,246
Underwriting gain (loss)
(3,142
4,512
(47,932
356
(3,536
(603
(50,345
254
4,766
Net investment losses
Loss before income taxes
Net loss
Net loss attributable to non-controlling interest
Net loss attributable to NI Holdings, Inc.
Operating Ratios:
Loss and loss adjustment expense ratio
87.5%
26.6%
309.9%
84.0%
86.4%
100.7%
128.5%
Expense ratio
28.8%
44.3%
30.3%
13.1%
37.1%
24.0%
31.1%
Combined ratio
116.3%
70.9%
340.2%
97.1%
123.5%
124.7%
159.6%
Balances at June 30, 2022:
21,287
16,678
10,468
42,905
16,175
823
5,427
8,201
7,838
1,060
7,929
462
591
2,766
1,976
10,960
2,786
14,700
29,105
38,689
49,052
12,755
43,876
9,399
31,885
24,030
45,942
26,205
42,379
3,284
19,012
15,263
20,808
14,574
16,195
1,207
2,084
1,432
(944
(365
(2,435
(8,305
(2,175
(70
18,068
14,898
18,373
8,353
14,020
2,569
15,094
11,490
19,436
21,803
8,494
282
1,437
(189
(12,994
(1,230
14,905
18,208
9,332
7,264
1,719
3,163
3,408
165
(979
850
13,363
4,767
6,525
5,073
1,431
5,177
616
23,589
(1,604
(3,117
(4,908
(2,410
1,579
234
(10,226
361
(2,756
Net investment gains
82.5%
77.1%
99.1%
111.7%
51.8%
66.9%
26.4%
43.8%
27.6%
17.1%
36.9%
30.9%
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
84,463
6,548
6,368
9,069
6,763
551
905
1,600
13,918
5,934
2,217
Receivable from Federal Crop Insurance Corporation
17,191
15,123
17,958
26,161
43,727
20,839
23,638
26,812
11,163
30,518
19,968
43,229
27,615
37,047
3,215
161,592
32
39,125
30,019
42,882
17,692
35,391
2,541
3,061
(1,118
(129
(3,715
(5,901
(6,172
(84
38,007
29,890
39,167
12,282
29,219
5,518
31,392
12,624
69,380
13,134
28,144
1,491
1,301
173
(709
(3,214
(5,136
(100
31,565
68,671
10,164
23,008
2,692
6,442
17,266
(29,504
2,118
6,211
2,826
5,359
11,321
12,958
12,029
1,057
10,912
1,373
49,650
(4,879
4,308
(41,533
1,061
(4,701
1,453
(44,291
642
4,950
Loss before income taxes
83.1%
42.2%
175.3%
82.8%
78.7%
48.8%
96.5%
29.8%
43.4%
30.7%
8.6%
37.3%
24.9%
32.2%
112.8%
85.6%
206.0%
91.4%
116.1%
73.7%
128.7%
33
37,700
28,844
41,391
14,558
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
693
1,620
Income before income taxes
Income tax expense
Net income
Net income attributable to non-controlling interest
Net income attributable to NI Holdings, Inc.
76.4%
57.9%
72.1%
117.8%
67.0%
58.0%
71.6%
28.5%
38.9%
23.4%
37.2%
25.8%
104.8%
96.7%
101.9%
141.2%
104.2%
83.8%
103.7%
34
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 on Form 10-Q. You should also review Part I, Item 1A, “Risk Factors” included in the Company’s 2021 Annual Report for a discussion of important factors, including COVID-19 or a future pandemic, and changing climate conditions, 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.
Results of Operations
The consolidated net loss for the Company was $46,636 for the three months ended June, 2022, compared to net loss of $2,734 for the three months ended June, 2021. The consolidated net loss for NI Holdings was $44,597 for the six months ended June 30, 2022, compared to net income of $7,048 for the six months ended June 30, 2021.
The major components of the Company’s operating revenues and net income were as follows:
Components of net income:
Amortization of deferred policy acquisition costs and other underwriting and general expenses
Underwriting loss
Net Premiums Earned
Net premiums earned:
Total net premiums earned
The Company’s net premiums earned for the three months ended June 30, 2022, increased $8,215, or 10.8%, compared to the three months ended June 30, 2021. Net premiums earned for the six months ended June 30, 2022, increased $14,667, or 10.5%, compared to the six months ended June 30, 2021.
Private passenger auto
Non-standard auto
Home and farm
All other
Below are comments regarding net premiums earned by business segment:
Private passenger auto – Net premiums earned for the second quarter of 2022 increased $1,197, or 6.6%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased $2,441, or 6.9% from the first six months of 2021. Results were driven by continued new business growth and rate increases in South Dakota and Nebraska.
Non-standard auto – Net premiums earned for the second quarter of 2022 increased $614, or 4.1%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased $1,734, or 6.2% from the first six months of 2021. Results were driven by new business growth and recent rate increases in the Chicago market where our non-standard auto business is concentrated.
Home and farm – Net premiums earned for the second quarter of 2022 increased $1,582, or 8.6%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased $3,340, or 9.3% from the first six months of 2021. Results were driven by increasing insured property values as a result of increased inflationary factors.
Crop – Net premiums earned for the second quarter of 2022 increased $3,942, or 47.2%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased $3,882, or 46.2% from the first six months of 2021. This increase was driven by a 20.4% increase in direct written premium for multi-peril crop insurance due to higher commodity prices. In addition, earned premiums increased as a result of ceding significantly less multi-peril crop insurance business into the Assigned Risk fund in 2022 compared to the prior year.
36
Commercial – Net premiums earned for the second quarter of 2022 increased $1,011, or 7.2%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased $2,861, or 10.9% from the first six months of 2021. These increases were primarily driven by increasing insured values as a result of inflationary factors as well as continued increases in both price and new business production.
All other – Net premiums earned for the second quarter of 2022 decreased $131, or 5.1%, from the second quarter of 2021 as a result of the Company’s decision to non-renew its participation in an assumed domestic and international reinsurance pool of business as of January 1, 2022. Net premiums earned for the first six months of 2022 increased $409, or 8.0% from the first six months of 2021 as a result of our increased participation during 2021 in the assumed domestic and international reinsurance pool of business. These results are communicated to the Company one to three months following the end of the reporting period. Accordingly, these results are generally reflected in the Company’s financial statements on a quarter lag basis, and as a result, the first quarter of 2022 continued to be impacted by our participation in these pools.
Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses:
Total net losses and loss adjustment expenses
The Company’s net losses and loss adjustment expenses for the three months ended June 30, 2022, increased $45,677, or 72.6%, compared to the three months ended June 30, 2021. The Company’s net losses and loss adjustment expenses for the six months ended June 30, 2022, increased $48,917, or 49.0%, compared to the six months ended June 30, 2021.
Loss and loss adjustment expenses ratio:
Total loss and loss adjustment expenses ratio
Below are comments regarding significant changes in the net losses and loss adjustment expenses, and the net loss and loss adjustment expense ratios, by business segment:
Private passenger auto – The net loss and loss adjustment expense ratio increased 5.0 percentage points and 6.7 percentage points in the three- and six-month periods ended June 30, 2022, compared to the same periods in 2021. These increases were driven by elevated loss severity due to inflationary factors and increased weather-related comprehensive losses in Nebraska and South Dakota. We are addressing the increasing frequency and severity through aggressive underwriting actions and planned rate increases.
Non-standard auto – The net loss and loss adjustment expense ratio decreased 50.5 percentage points and 15.7 percentage points in the three- and six-month periods ended June 30, 2022, compared to the same periods in 2021. These decreases were driven by favorable prior year reserve development in second quarter of 2022 along with other successful strategic underwriting initiatives taken in our Las Vegas market, partially offset by elevated loss severity as a result of inflationary factors. Continued rate increases will be necessary to combat the increasing severity as a result of the inflationary factors.
Home and farm – The net loss and loss adjustment expense ratio increased 210.8 percentage points and 103.2 percentage points in the three- and six-month periods ended June 30, 2022, compared to the same periods in 2021. These increases were driven by catastrophe losses in Nebraska and South Dakota during second quarter of 2022. Catastrophe losses for the Home and Farm segment in the second quarters of 2022 and 2021 accounted for 211.6 percentage points and 41.8 percentage points, respectively, of the net loss and loss adjustment expense ratio.
Crop – The net loss and loss adjustment expense ratio decreased 27.7 percentage points and 35.0 percentage points in the three- and six-month periods ended June 30, 2022, compared to the same periods in 2021. This improvement was due to improved crop growing conditions in 2022 in comparison to the extreme drought conditions faced in 2021.
37
Commercial – The net loss and loss adjustment expense ratio increased 34.6 percentage points and 11.7 percentage points in the three- and six-month periods ended June 30, 2022, compared to the same periods in 2021. These increases were driven by increased frequency and severity of fire losses in the Westminster book of business during second quarter of 2022. The remaining portion of the Commercial segment also produced unprofitable results due to severe weather during the current quarter.
All other – The net loss and loss adjustment expense ratio increased 33.8 percentage points in the three-month period ended June 30, 2022, compared to the same period for 2021. The increase for the second quarter of 2022 was driven by our share of a significant catastrophe loss occurrence within a reciprocal catastrophe pool that we participate in. The net loss and loss adjustment expense ratio decreased 9.2 percentage points in the six-month period ended June 30, 2022 compared to the same period for 2021. The year-to-date loss and loss adjustment expense ratio was also impacted by favorable prior year development in our assumed domestic and international reinsurance pool of business.
Amortization of Deferred Policy Acquisition Costs
Amortization of deferred policy acquisition costs decreased $3,642, or 18.3%, in the three months ended June 30, 2022, compared to the same period in 2021, and decreased $1,606, or 4.8%, in the six months ended June 30, 2022 compared to the same period in 2021. These decreases are the result of the Company refining the methodology for calculating deferred policy acquisition costs and the related amortization during the third quarter of 2021 and the impact of the previous methodology on the first six months of 2021. The effects of the change in methodology are partially offset by premium growth and the related deferrable policy acquisition costs.
Other Underwriting and General Expenses
Other underwriting and general expenses increased $6,299, or 170.1%, in the three months ended June 30, 2022, compared to the same period in 2021, and increased $6,429, or 56.6%, in the six months ended June 30, 2022 compared to the same period in 2021. These increases are the result of the Company refining the methodology for calculating deferred policy acquisition costs and the related amortization during the third quarter of 2021. Utilizing the previous methodology resulted in higher deferrable expenses for the first six months of 2021 and lower other underwriting and general expenses.
Underwriting Gain (Loss) and Combined Ratio
Underwriting gain (loss):
Total underwriting gain (loss)
Combined ratio:
Underwriting gain (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned. The combined ratio represents the sum of these losses and expenses as a percentage of net premiums earned, and measures our overall underwriting profit.
The total underwriting loss increased $40,119, or 392.3%, for the three-month period ended June 30, 2022, compared to the same period in 2021. The total underwriting loss increased $39,073, or 748.8%, for the six-month period ended June 30, 2022, compared to the same period in 2021. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses section above.
The overall combined ratio increased 46.2 percentage points in the three-month period ended June 30, 2022, compared to the same periods in 2021. The overall combined ratio increased 25.0 percentage points in the six-month period ended June 30, 2022, compared to the same periods in 2021. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses section above.
Fee and Other Income
The Company had fee and other income of $415 for the three months ended June 30, 2022, compared to $520 for the three months ended June 30, 2021. Fee income attributable to the non-standard auto segment is a key component in measuring its profitability. Fee income on this business decreased to $254 for the three months ended June 30, 2022, from $361 for the three months ended June 30, 2021, due to a reduction in policies that generate fee income.
The Company had fee and other income of $843 for the six months ended June 30, 2022, compared to $837 for the six months ended June 30, 2021. Fee income on the non-standard auto business decreased slightly to $642 for the six months ended June 30, 2022, from $693 for the six months ended June 30, 2021, due to a reduction in policies that generate fee income.
Net Investment Income
38
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
474,133
503,433
487,745
500,409
Gross return on average cash and invested assets
2.4%
2.0%
2.3%
Net return on average cash and invested assets
1.7%
1.4%
1.5%
1.3%
Net investment income increased $305 for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. Net investment income increased $422 for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. These increases were primarily driven by an increase in the overall portfolio book value (measured at cost or amortized cost) as well as a higher allocation of invested assets to private placement securities and high dividend yield equities.
The Company’s net return on average cash and invested assets increased year-over-year, driven by a decrease in average cash and invested assets (measured at fair value) as a result of unfavorable market conditions for both fixed income and equity securities as well as higher net investment income.
Net Investment Gains (Losses)
Gross realized gains
Gross realized losses, excluding other-than-temporary impairment losses
Change in net unrealized gains on equity securities
The Company had net realized gains of $1,027 and $1,965 for the three and six months ended June 30, 2022, compared to gains of $2,875 and $6,777 for the three and six months ended June 30, 2021. The Company reported no other-than-temporary losses during any of the periods presented.
The Company experienced a decrease in net unrealized gains on equity securities of $12,163 and $18,629 during the three and six months ended June 30, 2022, respectively, driven by the impact of changes in fair value attributable to unfavorable equity markets. The Company experienced an increase in net unrealized gains on equity securities of $1,826 and $3,735 during the three and six months ended June 30, 2021, respectively, driven by the impact of changes in fair value attributable to favorable equity markets. In addition to the impact of the overall equity markets, the Company’s sales activity (and resulting gains and losses) will impact the level and direction of the change in the net unrealized gain or loss of its equity securities portfolio. During the three and six months ended June 30, 2022, the Company had net realized gains on its equity securities of $1,132 and $2,027, respectively, compared to net realized gains of $2,550 and $6,351 during the three and six months ended June 30, 2021.
The Company’s fixed income securities are classified as available for sale because it will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. The fixed income portion of the portfolio experienced net unrealized losses of $16,283 and $37,220 during the three and six months ended June 30, 2022, respectively, compared to net unrealized gains (losses) of $2,835 and $(4,322) during the three and six months ended June 30, 2021. The changes were primarily the result of changes in U.S. interest rates. The change in the fair value of fixed income securities is not reflected in net income; rather it is reflected as a separate component (net of income taxes) of other comprehensive income.
Income (Loss) before Income Taxes
For the three months ended June 30, 2022, the Company had a pre-tax loss of $59,051 compared to a pre-tax loss of $3,295 for the three months ended June 30, 2021. The increase in pre-tax loss was largely attributable to the significant catastrophe losses in Nebraska and South Dakota during the quarter, along with the change in net investment gains/losses attributable to the impact of equity markets on the Company’s equity securities portfolio.
For the six months ended June 30, 2022, the Company had a pre-tax loss of $56,444 compared to pre-tax income of $9,377 for the six months ended June 30, 2021. The decrease in pre-tax income was largely attributable to the significant catastrophe losses in Nebraska and South Dakota during the second quarter of 2022, along with the change in net investment gains/losses attributable to the impact of equity markets on the Company’s equity securities portfolio.
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Income Tax Expense (Benefit)
The Company recorded an income tax benefit of $12,415 for the three months ended June 30, 2022, compared to an income tax benefit of $561 for the three months ended June 30, 2021. Our effective tax rate for the second quarter of 2022 was 21.0% compared to an effective tax rate of 17.0% for the second quarter of 2021.
The Company recorded an income tax benefit of $11,847 for the six months ended June 30, 2022, compared to income tax expense of $2,329 for the six months ended June 30, 2021. Our effective tax rate for the first six months of 2022 was 21.0% compared to an effective tax rate of 24.8% for the first six months of 2021.
A portion of the effective tax rate is attributable to Illinois state income taxes.
Net Income (Loss)
For the three months ended June 30, 2022, the Company had a net loss before non-controlling interest of $46,636 compared to net loss of $2,734 for the three months ended June 30, 2021. The decrease was largely attributable to the significant catastrophe losses in Nebraska and South Dakota during the quarter, along with the change in net investment gains/losses attributable to the impact of equity markets on the Company’s equity securities portfolio.
For the six months ended June 30, 2022, the Company had a net loss before non-controlling interest of $44,597 compared to net income of $7,048 for the six months ended June 30, 2021. The decrease was largely attributable to the significant catastrophe losses in Nebraska and South Dakota during the second quarter of 2022, along with the change in net investment gains/losses attributable to the impact of equity markets on the Company’s equity securities portfolio.
Return on Average Equity
For the three months ended June 30, 2022, the Company had annualized return on average equity, after non-controlling interest, of (61.4)% compared to annualized return on average equity, after non-controlling interest, of (3.0)% for the three months ended June 30, 2021.
For the six months ended June 30, 2022, the Company had annualized return on average equity, after non-controlling interest, of (28.7)% compared to annualized return on average equity, after non-controlling interest, of 4.3% for the six months ended June 30, 2021.
Average equity is calculated as the average between beginning and ending shareholders’ equity, excluding non-controlling interest for the period.
Critical Accounting Policies
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. The Company is required to make estimates and assumptions in certain circumstances that affect amounts reported in the Unaudited Consolidated Financial Statements and related footnotes. We evaluate these estimates and assumptions on an ongoing basis based on historical developments, market conditions, industry trends, and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to these estimates and assumptions or that reported results of operations will not be materially and adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. Our critical accounting policies are more fully described in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” presented in our 2021 Annual Report. There have been no changes in our critical accounting policies from December 31, 2021.
Liquidity and Capital Resources
The Company 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 IPO, which we planned to use for strategic acquisitions.
In 2018, we used $17,000 for the acquisition of Direct Auto, which was paid in cash at closing. 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 two installments were paid in January 2021 and January 2022. The Company anticipates using the net proceeds from the IPO to satisfy the remaining obligation in December 2022.
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, 2022, and 2021, were as follows:
For the six months ended June 30, 2022, net cash provided by operating activities totaled $13,647 compared to $21,708 a year ago. This decrease was primarily driven by higher claim payments related to catastrophe losses during the current quarter, lower realized investment gains, and higher levels of premiums and agents’ balances receivable, which were partially offset by an increase in payments received on reinsurances recoverables on losses.
For the six months ended June 30, 2022, net cash used by investing activities totaled $12,075 compared to $52,140 a year ago. This decrease in cash used was attributable to the significant catastrophe losses in Nebraska and South Dakota during the current quarter, which resulted in less available cash for investment purchases. The decrease was also attributable to the Company investing a higher level of excess cash during the first quarter of 2021.
For the six months ended June 30, 2022, net cash used by financing activities totaled $9,163 compared to $9,422 a year ago. This decrease was primarily attributable to the Company repurchasing shares of its own common stock for $1,931 during the first half of 2022, compared to $2,267 during the first half of 2021.
As a standalone entity, and outside of the net proceeds from the IPO, the Company’s 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 2022 without the prior approval of the North Dakota Insurance Department is approximately $21,493 based upon the surplus of Nodak Insurance at December 31, 2021. Prior to its payment of any 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 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, 2022, or the year ended December 31, 2021.
Direct Auto re-domesticated from Illinois to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Direct Auto to us during 2022 without the prior approval of the North Dakota Insurance Department is approximately $3,796 based upon the surplus of Direct Auto at December 31, 2021. No dividends were declared or paid by Direct Auto during the six months ended June 30, 2022, or the year ended December 31, 2021.
Westminster re-domesticated from Maryland to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Westminster to us during 2022 without the prior approval of the North Dakota Insurance Department is approximately $2,471 based upon the surplus of Westminster at December 31, 2021. No dividends were declared or paid by Westminster during the six months ended June 30, 2022, or the year ended December 31, 2021.
For a discussion of recent accounting pronouncements, see Part I, Item 1, Note 2, “Basis of Presentation and Accounting Policies--Recent Accounting Pronouncements” in this Quarterly Report on Form 10-Q.
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Item 3. - Quantitative and Qualitative Disclosures about Market Risk
The Company’s assessment of market risk as of June 30, 2022, indicates there have been no material changes in the quantitative and qualitative disclosures from those in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our 2021 Annual Report 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, 2022. 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
In the ordinary course of business, we periodically review our system of internal control over financial reporting to identify opportunities to improve our controls and increase efficiency, while ensuring that we maintain an effective internal control environment. In addition, when we acquire new businesses, we incorporate our controls and procedures into the acquired business as part of our integration activities. Since 2018, we have invested significant resources to comprehensively document and analyze our system of internal control over financial reporting. We have identified areas requiring improvement, and continue to make selected improvements to processes and controls to address issues identified through this review. These improvements may include such activities as implementing new, more efficient systems, automating manual processes, formalizing policies and procedures, increasing monitoring controls, and updating existing systems. We plan to continue this initiative as well as prepare for the first audit of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 for the annual period ending December 31, 2022, which may result in changes to our internal control over financial reporting.
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, 2022, 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 Part I, Item 1A, “Risk Factors” in our 2021 Annual Report.
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, our registration statement on Form S-1 registering our common stock was declared effective by the SEC. 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.
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 two installments were paid in January 2021 and January 2022. The Company anticipates using the net proceeds from the IPO to satisfy the remaining obligation in December 2022.
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 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 authorization. During the nine months ended September 30, 2021, we repurchased an additional 144,110 shares of our common stock for $2,762 to close out this authorization.
On August 11, 2021, our Board of Directors approved an additional authorization for the repurchase of up to approximately $5,000 of the Company’s outstanding common stock. During the six months ended December 31, 2021, we completed the repurchase of 81,095 shares of our common stock for $1,554 under this authorization. During the six months ended June 30, 2022, we completed the repurchase of 111,244 shares of our common stock for $1,932 under this authorization.
On May 9, 2022, our Board of Directors approved an additional authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock.
Period in 2022
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 (2)
(in thousands)
April 1-30, 2022
20,466
16.40
2,111
May 1-31, 2022
20,596
16.39
11,772
June 1-30, 2022
15,310
16.88
11,514
56,372
16.58
Shares purchased pursuant to the August 11, 2021 publicly announced share repurchase authorization of up to approximately $5,000 of the Company’s outstanding common stock.
Maximum dollar value of shares that may yet be purchased consist of up to approximately $1,514 under the August 11, 2021, publicly announced repurchase authorization and up to approximately $10,000 under the May 9, 2022, publicly announced share repurchase authorization.
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, 2022.
/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 and Principal Accounting Officer)